Financial strains could lead to insolvency or bankruptcy and both are very different from each other. Insolvent refers to the state of companies/ individuals going through financial distress. In many cases insolvency is temporary and can be correctible. Insolvency arises when a person/ company is unable to pay their debt on time.
They would settle the debt either by borrowing money, selling few assets, negotiating a debt settlement plan with creditors or increasing their income. When none of these options would help you out of the financial mess, bankruptcy comes into the picture, which involves compulsory liquidation of assets.
Insolvency and bankruptcy laws in Australia:
In Australia bankruptcy is applicable to only individuals (and not companies) who can’t pay their debts on time. Depending on the insolvency/ bankruptcy situation, different pieces of legislation apply. The members involved may opt for restructuring the company or if the situation is out of hand, voluntary liquidation or involuntary liquidation may be done.
Getting caught up in sort of financial crisis is stressful. Seeking expert help would guide you in wading through the process. Australian residents can get it touch with Insolvency Experts. They are one of the top insolvency practitioners in the country. Their experienced team will help you in choosing the right course of action if you are facing financial difficulties.
What next if you are facing insolvency?
A lot of situations are indicators of a company being insolvent including continuing losses, no access to alternative finance, liquidity ratio below 1, dishonoured cheques and overdue Commonwealth and state taxes.
The two types of insolvency include ‘cash-flow solvency’ which arises when a debtor doesn’t have sufficient cash to pay off the debts and ‘balance-sheet’ insolvency when the debtor’s debts exceed their assets but it is still possible to pay the debts. Depending on the situation there are following options available.
- Voluntary administration: The Company’s director or a secured creditor appoints a voluntary administrator to assess the company’s financial situation. The administrator decides the next course of action.
- Receivership: A secured creditor initiates the receivership process. An appointed receiver sells some/ all assets to settle the debt owed to the creditor.
- Deed of Company Arrangement: This formal binding about the company’s director and creditors includes a plan of how the company will successfully continue further trading operations without incurring more debts.
- Liquidation: The Company’s assets are sold to pay off the debts. Either the company agrees on voluntary liquidation or the court orders liquidation based on insolvency claims raised by a creditor.
What next if a company director declares bankruptcy?
The director registers bankruptcy with the Australian Financial Security Authority and he/she will cease to be the director/ alternate director/ secretary henceforth unless the court orders otherwise. If the director continues to manage corporations, he/ she could be facing penalty up to $ 8500 and/or one-year imprisonment.
Get the help of financial advisors if you are facing bankruptcy/ insolvency. A reputable and experienced practitioner would help you effectively sort out the situation.