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:

• Continuing losses

• 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.

Voluntary Administration

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.

Receivership

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).

Liquidation

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.