If a company is insolvent (that is, unable to pay its debts as and when they fall due), the company may be dealt with in a number of ways by its directors. It is incumbent on directors to keep themselves informed of a company’s financial state and ensure that there is sufficient cashflow available to pay all creditors, or act in a way to prevent further debt being incurred by an insolvent company. It may be a breach of a director's duties to the company if the director allows the company to trade whilst the company is insolvent, and a breach of that duty may result a claim against the director.
There is information regarding the options open to a director when a company is in financial difficulty on the ASIC website. Depending on the size of the company, again specialist accounting and legal advice should be sought to ensure that the correct procedure is followed.
The directors may decide to appoint a voluntary administrator in an effort to save the company and the business. An administrator will take control of the company and investigate its financial position, consult with creditors and put forward a proposal to deal with debt if the company can be saved or advise that the company is placed into liquidation.
Creditors also may apply to a Court to wind up an insolvent company, usually based on an unsatisfied statutory demand issued under S459E of the Corporations Act 2001 (Cth). The process is technical and the cost may outweigh the benefit to the individual creditor, and specialist legal advice should be sought to prepare the correct documents and conduct Court proceedings.
If a company is wound up byt the Court, a registered liquidator is appointed to collect in assets and distribute them fairly amongst creditors. Certain debts, such as employee entitlements and costs incurred in winding the company up and getting in assets are ranked ahead of general creditors.
A liquidator is also able to make certain claims on behalf of the company when there have been insolvent or uncommercial transactions, or unfair preferences.
Further useful information is available for creditors, employees, shareholders and investors can be found on the ASIC website.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.