Liquidation and Insolvency Advice for Directors

If you’re a director of a company experiencing financial difficulty, it is important to understand what insolvency is, the effects of insolvency, and your obligations when your company is insolvent. Otherwise, you and your company may face some severe consequences.

 

WHEN IS A COMPANY CONSIDERED INSOLVENT?

Determining when a company is insolvent is very important, as corporate insolvency can and does have serious consequences for company directors under insolvency law. However, it can be difficult to determine whether a company is insolvent, as there are a variety of different tests to determine insolvency within a legal context.

While insolvency is not defined under legislation, the term solvent is defined. By inference to the definition of solvent, we can determine what insolvency is. Legislation defines solvent as a person who is able to pay all their debts when they become due and payable. A person who cannot pay debts is, in turn, insolvent. Case law has established that a factual assessment of the circumstances of a company will determine when debts become due and payable.

 

INDICATIONS THAT YOUR COMPANY MAY BE INSOLVENT

There are a few recognised indicators of insolvency that we have observed in case law. These include but are not limited to:

• Consistent losses
• Incomplete or missing financial records
• No or lack of cash flow and budgets
• Increasing debts with creditors
• The company receiving letters of demands, warrants, summons etc.
• The company is unable to obtain finance
• The company is unable to raise funds from shareholders
• Disputes between directors, the board, management staff
• Complaints from suppliers regarding non-payment

If any of these indicators resonate with your business, we urge you to contact our office immediately so we can assist you in assessing your situation.

 

WHAT HAPPENS WHEN YOUR COMPANY IS FOUND TO BE INSOLVENT?

When a company is found to be insolvent, generally an external administrator will be appointed to the company. This may be a receiver, a liquidator, or a voluntary administrator. When this happens, the company director will have additional duties imposed upon them. Such duties include the duty to consider the interests of creditors of the company, and the duty to prevent the company from insolvent trading. GLG Legal Brisbane strongly advises you to seek legal advice if you are a director of a company that is insolvent or near insolvent. We can assist with your cases, so contact our office on (07) 3161 9555.

 

WHAT IS LIQUIDATION?

Liquidation refers to the process in which a specialist accountant (i.e., the liquidator) is appointed to a company to wind up the company’s affairs, realise the company’s assets, distribute the proceeds to the creditors in accordance with the statutory provisions, and deregister the company.

 

HOW DOES A COMPANY GO INTO LIQUIDATION?

If the company cannot pay its debts, and you cannot pay your debts either, the company could go into liquidation and you may become bankrupt. A company may appoint a liquidator by a member’s voluntary winding up, while solvent. If a company is insolvent, a registered liquidator will be appointed by a creditors’ voluntary winding up. 

Liquidators can also be appointed by court order on the application of a creditor after non-compliance with a compulsory winding-up order (i.e., a statutory demand).

If the insolvent company is nearing the end of voluntary administration and the continuation of the company is not financially feasible, creditors can resolve to have the company wound up by appointing a liquidator.

 

WHAT DOES THE LIQUIDATOR DO?

The liquidator has many responsibilities during the liquidation process to ensure that its objectives are achieved. Such responsibilities include:

• Gathering and realising the company’s assets.
• Reverse all, if any, unfair transactions of the company prior to liquidation and recover the funds of such transactions.
• Ensure that the distribution of the sale proceeds and any recoveries to creditors are in proportion to their debts.
• Investigate the circumstances that led to the liquidation.
• De-register or wind down the company.

 

CONSEQUENCES OF LIQUIDATION

The appointment of a liquidator has the following immediate consequences for the company:

• The company’s business will have to cease carrying on.
• Directors and officers will have their powers suspended during the liquidation.
• Shareholders may be liable to pay any amounts unpaid on their shares.
• Employees may be terminated or continued for a short period until the company liquidation has wound up.

 

HOW DOES GLG LEGAL HELP?

When facing company debts or threats of insolvency, it is essential to understand your options and protect the interests of your company. With an experienced GLG Legal liquidation and insolvency lawyer, we’ll make sure you do.

Our lawyers guide you through every process, including entering a company arrangement or voluntary administration. If insolvent trading nears, potentially leading to personal liability, our legal team will advise on director duties, helping you make informed decisions that protect your personal and company assets.

Together, we will create a clear strategy to pay your company’s debts, including debt restructuring and negotiating with your secured creditor to help your company regain its financial footing. We also provide advice on debt management and financial planning to help you steer clear of future debt or financial burdens. 

GLG Legal can offer legal support to protect the rights and interests of your company’s shareholders during insolvency proceedings, ensuring their voices are heard and their investments are safeguarded in times of financial hardship.

 

CONCLUSION

It is vital to understand and be aware of the signs that indicate insolvency and the consequences insolvency may cause to you and your company. If you are in financial distress and believe that your company may be insolvent or is heading towards insolvency, we urge you to contact one of our experienced lawyers today (by calling (07) 3161 9555), who will be able to provide professional advice and guide you through the process of insolvency and liquidation and your obligations during this time.