Company insolvencies are on the rise and have dominated news headlines this year for the frequency at which so many have occurred.
According to corporate watchdog ASIC, there has been an overall increase in company insolvencies, with the construction sector remaining by far the single largest category of insolvency. There were 2832 construction industry insolvency appointments for the 2024 financial year until June 16, an increase of 28% on the 2213 insolvencies over the previous financial year. Read more here.
No matter what industry your business is in, if you think your company is in financial difficulty, it’s important to seek professional advice as soon as possible. This gives your company the best chance of surviving and avoiding further debt.
If your company is insolvent, it’s imperative you act fast. If it’s unlikely you’ll get funding to make your company viable, you need to move to appointing a voluntary administrator or liquidator.
While insolvent, a company must not trade or continue conducting business as usual.
Insolvency
Do you know the difference between solvency and insolvency in Corporate Law?
According to section 95A of The Corporations Act 2001, it states that “A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.” It also states that “a person who is not solvent is insolvent.” In this instance a “person” includes a company.
Insolvency is typically decided on a case by case basis as there is no halfway point between being solvent and insolvent in the eyes of the law. Generally speaking the courts use a cash-flow test to help determine insolvency.
If directors of a company suspect their company is insolvent or may become insolvent, and they continue trading their business accruing more debt, they may be breaching their duty as a company director according to The Corporations Act 2001.
Trading while insolvent can result in civil penalties or criminal charges under the Corporations Act.
This means you need be aware of your company’s financial position at all times.
Voluntary Administration
Voluntary administration tries to resolve the company’s insolvency in the best way possible. A qualified person (they must be a registered liquidator) is appointed as voluntary administrator to try and bring the company back to solvency.
If it’s not possible to save the company, then the voluntary administrator’s job is to decide the best course of action. This can lead to a better return than if the company was put into liquidation.
Liquidation
Liquidation involves a registered liquidator taking control of the insolvent company. The liquidator has an obligation to ensure that creditors are treated fairly as part of the liquidation.
With both of the aforementioned scenarios, it’s best to seek advice from a professional. A Commercial Lawyer can assist you with the best course of action for your business.
What About Employees?
When a business shuts down due to insolvency or liquidation, this can mean employees lose their jobs and sometimes their entitlements and wages they’re owed.
If this is the case, employees can get help through the Fair Entitlements Guarantee (FEG). The FEG was previously known as the General Employee Entitlements and Redundancy Scheme or GEERS.
The FEG is available to eligible employees and can help them get their unpaid entitlements which can include:
+ Wages – up to 13 weeks of unpaid wages (capped at the FEG maximum weekly wage)
+ Annual leave
+ Long service leave
+ Payment in lieu of notice of termination – maximum of 5 weeks
+ Redundancy pay – up to 4 weeks per full year of service.
It doesn’t include:
+ Superannuation
+ Reimbursement payments
+ One-off or irregular payments
+ Bonus payments
+ Non-ongoing or irregular commissions.
To find out more about eligibility and how to make a claim, visit the Department of Employment and Workplace Relations website here.
Statutory Demand
A statutory demand is a document which requests payment of a debt. If a company is served with a statutory demand and fails to respond, the company may be wound up.
There are certain laws which govern when statutory demands can be used, what they must contain, and how they may be served.
If a statutory demand is not consistent with these laws, the company may make an application to the court to set aside the statutory demand. If the company is successful in its application to set aside the statutory demand, the court may order the creditor to pay the company’s legal costs in relation to the application.
If you need assistance with winding up an insolvent company, we can help. Contact Litton Legal on hello@littonlegal.com.au and head to the ASIC website for more information here.
