Credit Matters

Insolvency and Bankruptcy

Question

What is a Provisional Liquidator?

A Provisional Liquidator is appointed by the Court upon an application by a creditor who believes that the assets of the company may be at risk if left in the control of the directors.  The courts will only act if they believe that immediate action needs to be taken to take control of the Company.

To appoint a provisional Liquidator, a winding up application must already be on foot.

The Provisional Liquidator will take control of the company's affairs pending the hearing of a winding-up order or the outcome of an appeal against a winding-up.

The company usually continues trading with the provisional liquidator in a caretaker role.

Question

What is a Receiver or Receiver and Manager?

A Receiver or Receiver and Manager (also known as a Controller) is appointed by a secured creditor who holds a charge over all or part of the company’s assets.

The Receiver and Manager takes control of the company's business and assets from the directors. The role of a Receiver and Manager is to collect and sell enough of the secured assets to repay the debt owed to the  secured creditor (by either selling company assets or its business).

The Receiver's primary obligation is to the company’s secured creditor.

Question

What is a Voluntary Administration (VA)?

If a company is in financial difficulties, the Directors can place the company under the control of an independent person called the Administrator. The aim of a VA is to maximise the chances of the company, or as much as possible of its business, continuing in existence.

Once the administrator has been appointed, all debts incurred by the company before the date of appointment cannot be enforced. Any legal action undertaken or contemplated must remain on hold until the creditors decide whether to support a compromise proposal by the directors or wind-up the Company.

Question

Can shareholders put their own company in to Liquidation?

Yes, when shareholders believe the company cannot pay all of its debts as and when they fall due.

The shareholders can initiate a voluntary liquidation by passing a special resolution deciding to wind-up the company’s affairs. Certain procedures must be undertaken before this can happen.

The liquidator will then call a creditors meeting to advise the creditors about the liquidation and the circumstances of the appointment. At that meeting the creditors have the opportunity of replacing the liquidator chosen by the shareholders with someone else nominated by a creditor.

Question

I received a 459E Statutory Demand the other day from one of my suppliers. Should I be concerned?

As a company director or manager, YES, you should be very concerned.

A 459E requires your company to pay the debt in full or make arrangements to pay within 21 days of service. If the debt is not paid or arrangements made as per the Statutory Demand, your supplier (the Creditor) can ask for winding-up application to be submitted to the Courts to wind up your company.

Question

Is there a quick test of insolvency?

As a general rule, if there are insufficient current assets (assets able to be realised in a short period of time) available to pay current liabilities (debts that are due in a short period of time) as they become due and payable, the company or person is insolvent. This is referred to as the balance sheet test of insolvency and is only an indicator of insolvency.

Question

When does a Company become insolvent?

Section 95A of the Corporations Act 2001 defines an insolvent company as “... a company who is not solvent is insolvent.”

By definition a solvent person or Company is ‘... a person or entity who is able to pay all their debts as and when they become due and payable.” A Company therefore becomes insolvent when it is unable to pay all of its debts as and when they became due and payable.

Question

What is the difference between various types of External Administrations?

A very simple explanation is that when a Company becomes insolvent it enters Liquidation or voluntary administration and when a Person becomes insolvent they enter Bankruptcy.

Each type of External Administration, whether it be Company or Personal, has its own special rules on how to deal with the insolvency, as set out in the Corporations Act 2001 or Bankruptcy Act respectively.

Question

What is insolvency?

Insolvency is when company (or a person) is unable to pay all of its debts as and when they become due and payable.

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