top of page

Insolvency & CSR

Accounting (Year 12)

Types of Insolvency

Content Writers

Christian Bien - Bloom Photo (1).jpeg

Christian Bien

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.


Menu

You have pages remaining today.

Consider signing up, it's free!

bottom of page