1. What is insolvency?

Insolvency occurs when an individual or a company is unable to meet their financial obligations as they become due. In a business context, this usually means the company can’t pay its debts when they’re due.

2. How is insolvency different from bankruptcy?

Insolvency is a financial state of being – where liabilities exceed assets or an inability to pay debts exists. Bankruptcy, on the other hand, is a legal process that a person undergoes when they are insolvent. For companies, the equivalent process is called ‘liquidation’ or ‘administration’.

3. What are the signs of a company approaching insolvency?

Common signs include consistent cash flow problems, ongoing losses, overdue taxes, unpaid creditors, legal action against your company by creditors, and maxed-out credit limits.

4. What should I do if my company is facing insolvency?

Seek professional advice immediately, either from an insolvency practitioner, financial advisor, or lawyer. They can guide you on the best course of action, whether it’s restructuring, negotiating with creditors, or entering into formal insolvency procedures.

5. What are some options for an insolvent company in Australia?

Options include voluntary administration, liquidation, or a creditors’ voluntary winding up. Each option has different implications and processes, so professional advice is crucial.

6. What is voluntary administration?

Voluntary administration is a process where an insolvent company is placed under the administration of an appointed insolvency practitioner. The aim is to resolve the company’s future direction quickly – either by saving the business, selling it, or going into liquidation.

7. What happens during liquidation?

During liquidation, a company stops all operations and goes completely out of business. A liquidator is appointed to sell the company’s assets and distribute the proceeds to creditors.

8. Can directors be held personally liable for a company’s insolvency?

In certain circumstances, yes. Particularly if they continued to trade while the company was insolvent, or if they breached their legal obligations as directors.

9. What is a Director’s Penalty Notice (DPN)?

A DPN is a notice from the Australian Taxation Office (ATO) that can make directors personally liable for certain company tax debts, especially if the company has failed to meet its reporting and payment obligations.

10. How does insolvency affect employees?

 Employees are considered priority creditors in a liquidation. They may be entitled to outstanding wages, superannuation, and leave entitlements. However, their claims will be subject to the available assets and the hierarchy of creditors.

11. What is the role of an insolvency practitioner?

An insolvency practitioner manages the insolvency process, whether it’s administration, receivership, or liquidation. They work to achieve the best possible outcome for creditors and ensure legal compliance throughout the process.

12. Can a company recover from insolvency?

Recovery depends on many factors, including the company’s financial situation, market conditions, and the effectiveness of any restructuring plans. In some cases, companies can recover and return to profitability.

Remember, this is a general guide and it’s important to seek professional advice tailored to your specific circumstances if facing insolvency.