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Your Insolvency Questions, Answered
What is insolvency?
Insolvency is when a person or a company is not able to pay all of their debts as and when due. Insolvency often results in a person becoming bankrupt, or a company going into administration or liquidation.
How do I know if my business is insolvent?
Your business may be insolvent if you are not able to pay your debts before they become overdue and are not able to access further finance or other assets to meet your debt obligations (and cannot see this position improving very quickly). Often this may include creditors of your business chasing you for debts that you are not able pay.
What do I do if my business is insolvent?
If your business in insolvent, you should seek advice from an insolvency professional to advise you on potential options, which may include seeking finance, negotiating plans with creditors or considering a restructure of the business if it can be made viable moving forward. Otherwise, it may be necessary to consider the appointment of an administrator or liquidator to your company (or a bankruptcy trustee for a person).
What's the difference between business insolvency and corporate insolvency?
Business insolvency can include personal bankruptcy for sole trader businesses as well as administration or liquidation for company businesses that become insolvent. Corporate insolvency only relates to companies that become insolvent. The Bankruptcy Act 1966 (Cth) applies to personal bankruptcy and the Corporations Act 2001 (Cth) applies to corporate insolvency, each containing some similar overall rules but also with a number of differences given their respective application to natural persons and companies.
Will I be affected if the company I work for becomes insolvent?
Potentially yes. If a company goes into liquidation, that will usually result in the closure of the business, but there is also a government scheme (FEG) for payment of certain outstanding employee entitlements upon a liquidation. If a company goes into administration and is restructured so the business continues, it is possible that may not significantly affect your employment (but you may need to be involved in the administration process).
I am a business owner. Will I lose everything if my company becomes insolvent?
Not necessarily. Often a liquidation will result in the closure of a business and sale of its assets by the liquidator. Creditors of the business will be paid in priority to shareholders from the available net assets obtained by the liquidator. With that said, a viable business may be able to be restructured to preserve the value of the business and achieve a better outcome for creditors and the business owner than would be the case in a liquidation. This may be achieved via negotiations with creditors, specialised finance options, voluntary administration or a deed of company arrangement (DOCA) or other restructuring options depending on your business.
Can I still trade my business if it has become insolvent?
If you trade your business after it has it is no longer able to pay its debts as and when due, the directors of the business may be personally liable for insolvent trading if the company later goes into liquidation. This may require the directors to personally pay any outstanding debts of the company that were incurred after it became insolvent. It is important to seek professional advice if you are concerned that your business may be insolvent (or is likely to become insolvent in the future), to try to best protect your business and your personal position.
Once an administrator or liquidator has been appointed to a company, the decision making power and control for trading of the company is given to the administrator or liquidator (not the director). With that said, the new small business restructuring measures announced by the Federal Government, to commence in January 2021, may allow for certain small business owners to retain control of a company and to continue trading it during a formal restructure process (click here for more information about that scheme).
For a sole-trader in bankruptcy, the bankrupt person can continue to run a sole-trader business or work as an employee, but will be subject to the relevant bankruptcy laws and regulations when doing so. Professional advice should be sought to assist in ensuring compliance if trading a business as a bankrupt person.
Is there an insolvency expert in my area?
At RCR we have lawyers based in Brisbane and Sydney that work nationally and are specialised in bankruptcy and corporate insolvency.
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Call us now on (07) 3067 6317 or request a call back for a completely free, no-obligation consultation from one of our experienced insolvency lawyers, who can discuss your circumstance and put you back on the right track. You've got nothing to lose and everything to gain.