Generally, a company is insolvent if it is unable to pay all of its debts, as and when they become due and payable.
A company can be wound through several different legal mechanisms.
There are various penalties that may be imposed for insolvent trading against directors and we can provide you with advice regarding your duties.
We can provide you with advice regarding insolvency matters. Alternatively, if you are a creditor seeking payment from a company, we can provide advice regarding the best way to recover outstanding monies.
Liquidating a Company
Liquidation is the only way to fully wind up the affairs of a company and end its existence.
A company can either be wound up by the court, or voluntarily.
If a company is wound up by the court, the applicant must demonstrate to the court that the company is insolvent or can be deemed to be insolvent. The court will then appoint a liquidator.
A voluntary liquidation is a method whereby the liquidator is appointed voluntarily by the company. A voluntary liquidation can occur in 2 ways, either by way of what is known as a ‘creditors’ voluntary winding up’ or through the mechanism of a ‘voluntary administration’.
Creditors Voluntary Winding Up
The directors determine that the company is insolvent and the directors and members resolve that the company be placed into liquidation. This method of appointment is not available where an application to wind up the company has been filed, or where the court has ordered the company be wound up.
It is possible that a company may be wound up voluntarily through the voluntary administration process. In summary, under this process the directors will resolve to appoint voluntary administrators to the company.
What is Insolvent Trading?
Insolvent trading can have serious consequences for directors. There are various penalties that directors can be liable for if they are continuing to trade and incurring debts when the company is insolvent and unable to pay its debts when they become due and payable.
There is a positive duty on directors to ensure that their company does not continue to incur debts at a time when it is insolvent. If the director breaches that duty, the liquidator of the company can bring an action against them for recovery of the amount of debts incurred during the period that the company was insolvent.
Personal Liability of Directors
The Corporations Act imposes certain duties on directors and officers of companies. If a director breaches their duty, they may be held personally liable.
The areas of potential liability include:
1. Insolvent trading compensation claims
The Corporations Act provides that directors have a duty to prevent a company from insolvent trading. Insolvent trading occurs when a company incurs a debt that it cannot and does not pay, at a time when the director knew or should have known that the company was insolvent.
The Australian Securities and Investments Commission can make a director liable to pay an amount of compensation pursuant to the Corporations Act.
2. Unreasonable director related transactions
The directors will be liable to compensate the company for losses if they cause the company to enter into a transaction that may be classified as a director related transaction and was ‘unreasonable’ when considering the benefit of the transaction to the company.
3. Taxation debts and superannuation contributions
Directors can be personally liable if the company fails to remit PAYG withholding tax or superannuation contributions by the due date, however the personal liability can be remitted in certain circumstances. Directors may also become liable if the ATO has to refund monies to the liquidator under the unfair preference provisions.
4. Personal guarantees
A personal guarantee is a separate third party agreement between the director (the guarantor) and the creditor, where the guarantor agrees to pay the debts of the company in the case of non-payment, typically in the full amount. The debt is enforceable against the director personally regardless of the liquidation of the company.
What is the Difference between a Secured and Unsecured Creditor?
A secured creditor is someone who has a ‘charge’, such as a mortgage, over some or all of the company’s assets, to secure a debt owed by the company. Lenders usually require a charge over company assets when they provide a loan. Secured creditors can continue to enforce their charge and compel a sale of charged assets even if a liquidator is appointed.
An unsecured creditor is a creditor who does not have a charge over the company’s assets and may receive a dividend from the liquidator if any funds are recovered.
What is a Preferential Payment?
These are payments or transfers of assets that gives a creditor a preference or advantage over other creditors. Any payments or transfers made to a creditor prior to the liquidation may be recovered by liquidators in certain circumstances. Preferences are usually payments of money, though a variety of transactions could be deemed preferential.
What does a Liquidator do?
The liquidator will:
- *Find and protect the assets of the company
- *Realise those assets
- *Conduct investigations into the financial affairs of the company and any
- suspicious transactions
- *Make appropriate recoveries
- *Issue reports to ASIC and creditors
- *Make a distribution to creditors
- *Make a distribution to shareholders (if a surplus exists)
- *Apply to ASIC to deregister the company so that it no longer exists
Alternatives to Liquidating a Company – Deed of Company Arrangement
A deed of company arrangement (DOCA) is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration. It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up of the company, or both.
Please do not hesitate to contact us if you require advice regarding any insolvency matter.