A company is insolvent if it is unable to pay its debts when as they fall due, known as corporate insolvency. The three most common corporate insolvency processes are administration, liquidation and receivership. Directors may also be personally liable for the insolvent trading of a company.
Administration can be voluntary or involuntary. If an administration is ‘voluntary’, the administrator is appointed by the company rather than by the court.
An administrator may be appointed to take control of the company’s affairs and meet with creditors to determine the future of the company. The company’s directors will have their power suspended as a result of the administration. After meeting with creditors and investigating the financial status of the company, the administrator will report to creditors and either make a proposal to save the company, liquidate the company, or cancel the administration. If the creditors agree with a proposal to save the company, the parties will enter into a Deed of Company Arrangement.
Liquidation is the process of winding up the company’s affairs. This could include distributing payment to creditors, liquifying assets to distribute for cash and the final ceasing of trade. The liquidation can be commenced voluntarily by shareholders or creditors, or by court order.
If the company does not have the funds to pay the liquidator for their fees, creditors may choose to reimburse the cost of the investigations in the hope that further assets are recovered for the benefit of the creditors. If additional assets are recovered, the creditors can apply to the court to be compensated for funding the liquidator’s recovery investigation.
A company is in receivership when a receiver is appointed by a creditor or the court to take control of the company’s assets. A company can be in receivership at the same time as being in either provisional liquidation, liquidation, voluntary administration or subject to a deed of company arrangement.
Corporate insolvency is a complex area and it is important you consult a team of professionals. If you believe your company is about to become insolvent or is currently in the middle of the process, you should seek advice a soon as possible. Please do not hesitate to contact our experienced team at Butlers Business Lawyers on (02) 4929 7002 or email us at email@example.com for personalised legal advice.
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