Types of Insolvency
Accounting (Year 12) - Insolvency & CSR
What is Insolvency?
Insolvency occurs when a business cannot pay its debts as they fall due. The case of ASIC vs Plymin (2003) defined 14 key indicators of insolvency.
The main indicators relevant to this unit include:
Liquidity ratios below 1
Overdue and unpaid taxes
Ongoing negative net assets - i.e. liabilities exceed assets
Creditors unpaid outside trading terms - i.e. taking too long to pay creditors
Unrecoverable loans - i.e. debts to parties with little or no sign of repayments
Inability to obtain finance from banks, related parties or shareholders - i.e. unable to take further credit or raise cash in a share capital raise.
A voluntary administration is where a qualified person takes control of the Company to quickly determine a future direction that best meets the interests of its creditors.
An administrator will best try to save the company, with three possible outcomes concluding from a voluntary administration:
Control is returned to the Company.
A Deed of Company Arrangement is arranged where part or all of its debts are paid subject to certain conditions.
Administrator appoints a liquidator to sell the assets of the Company.
A receivership is where a qualified person is appointed by a secured creditor, or in special cases by the court, to take control of some or all of the assets of a business to sell and return the money owed to a creditor.
Any surplus money is paid in order of priority (next page).
When a Company's debts are too severe, creditors or the court can appoint for the Company to be wound up. This involves a liquidator to take control of the business and sell all of its assets, providing a return to creditors in order of priority.
After the business' assets are sold, the liquidator formally closes the company, engaging in activities such as deregistering the business.