Insolvency: Australian Legal Definition & Meaning

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What is Insolvency?

An individual or business is considered ‘insolvent’ when they are unable to pay their debts as and when they fall due. By comparison, if an individual or business has cash flow available to meet their financial obligations, they are considered ‘solvent’.

Insolvency can strike at any time for a number of reasons, some within your control and some outside of your control, for example, a rise in suppliers' costs, market trends, changed government regulations and other factors causing loss of business.

Understanding Corporate Insolvency in Australia

Corporate insolvency in Australia is a multifaceted process, allowing businesses in financial distress to explore different avenues depending on their specific situations.

Types of Insolvency

Insolvency can occur in various forms, depending on the circumstances surrounding a business or individual’s financial situation.

Understanding the different types of insolvency is crucial for determining the best course of action and ensuring compliance with legal requirements. Below are the main types of insolvency that may apply:

Corporate Insolvency

Corporate insolvency refers to the situation where a company is unable to pay its debts as they become due, leading to financial distress. There are two primary procedures used to address corporate insolvency:
- Liquidation: This process involves the complete winding up of the company’s affairs, selling off assets to pay creditors, and ultimately dissolving the company. Liquidation is often considered when the business is no longer viable.
- Administration: In an administration, a company is placed under the control of an appointed administrator with the goal of rescuing the business, restructuring its debt, and ensuring that the company’s creditors are paid. This approach provides a temporary relief from creditor actions, offering a potential path to recovery.
Personal Insolvency

When an individual is unable to meet their financial obligations, they may file for personal insolvency. Common types of personal insolvency include:
- Bankruptcy: Bankruptcy is a formal declaration that an individual is unable to repay their debts. It typically involves the liquidation of assets to repay creditors, with the remaining unsecured debts discharged. Bankruptcy is a last resort for individuals seeking relief from overwhelming debt.
- Debt Agreements: A debt agreement is an alternative to bankruptcy, where an individual enters into a legally binding arrangement with creditors to repay a portion of their debts over a set period. This option can help individuals avoid bankruptcy and the associated stigma while still addressing their financial obligations.
Voluntary vs. Involuntary Insolvency
- Voluntary Insolvency: Voluntary insolvency occurs when a company or individual seeks insolvency proceedings voluntarily, typically in an effort to address unsustainable financial issues and take proactive steps toward resolution.
- Involuntary Insolvency: In contrast, involuntary insolvency is initiated by creditors who file a petition to force a company or individual into insolvency proceedings due to unpaid debts. This can happen when creditors believe they are unlikely to recover their outstanding payments.
Cross-Border Insolvency

Cross-border insolvency occurs when a company or individual has assets or liabilities in multiple countries. The legal complexities of cross-border insolvency require careful navigation of international laws and cooperation between jurisdictions.

Businesses involved in cross-border insolvency often require specialized legal representation to manage complex legal proceedings and protect their interests.

Insolvency Procedures

External Administration:At its core, external administration encompasses various procedures including administrations, receivership, and liquidations.A company usually enters this phase due to debts owed to creditors. This can be initiated by the company's directors voluntarily or by creditors involuntarily.
Voluntary Administration:This method is not a liquidation but is aimed at addressing the company's debt issues swiftly. An independent third party, the Administrator, takes over the directorial roles temporarily to assess potential solutions and outcomes for creditors.The main objective is either to ensure the company continues its operations or to achieve better returns for the company's creditors and members.
Liquidation:
This involves winding up a company's affairs, typically by a liquidator, to give creditors a fair opportunity to recoup their debts. Two primary forms of liquidation are:
1. Creditors' Voluntary Liquidation(CVL): Initiated when a company's shareholders deem the company insolvent or nearing insolvency, leading to an orderly asset realisation and distribution among creditors.
2. Court Liquidation: Triggered when a creditor (or several) makes an application to the court, mostly after exhausting other payment avenues, leading to an organised asset realisation and distribution to the creditors.

Receivership:
This comes into play when a secured creditor wants to reclaim their loan or when an interested party, like a director or shareholder, intervenes.Receivers, appointed by the court or the secured creditor, take control to ensure the creditor's repayment from the sale of assets. This process ends once all or sufficient assets are sold, and the company, if not under any other external administration, reverts to its directors.

Insolvency Procedures	Key Facts
External Administration	Refers to insolvency appointments: administrations, receiverships, liquidations. Can be initiated voluntarily by directors or by creditors.
Voluntary Administration (VA)	Company appoints an independent third party (Administrator) due to financial hardship. Aim: save the company, not liquidate. Process usually lasts between 2530 business days.
Creditors’ Voluntary Liquidation (CVL)	Initiated when a company can't meet its debts. Allows for orderly asset realisation, investigations, and distribution among creditors.
Court Liquidation	Occurs when a creditor seeks to windup a company in court. Follows company's failure to respond to a creditor's statutory demand.
Receivership	Appointed by secured creditors or an interested party like a shareholder or director. Aim: recover loans or assets to repay the secured creditor. Ends once receiver collects and sells enough assets or resigns/is discharged.

For any company navigating these complex insolvency paths, it's paramount to consult with professionals, such as Macmillan Lawyers and Advisors, to ensure a proper understanding and to receive the best advice tailored to the company's situation.

Signs of Corporate Insolvency

Common causes and signs of insolvency include:

Persistent losses across multiple financial reports
Challenges in obtaining loans or securing financial assistance
Outstanding tax liabilities (overdue tax debt with the ATO)
Unfavourable liquidity ratios
Failure to provide prompt and precise data on the company's financials
Frequent instances of bounced and post-dated cheques
Special agreements with selected creditors
Liquidation of non-current assets such as land or equipment to ease working capital shortages
Failure to fulfil employee payroll commitments, including superannuation contributions
Abandoning fixed payment terms with creditors, adopting an arbitrary approach to settling debts
Lack of a comprehensive financial strategy or budget
Operational inefficiencies brought on by lack of cash liquidity

Personal Insolvency and Bankruptcy

Bankruptcy is a complex legal procedure designed for individuals facing insolvency, which means they cannot meet their financial obligations as they fall due. It serves as a protective measure both for debtors and creditors.

When someone declares bankruptcy, a Registered Trustee takes control of their finances and assets, ensuring balanced protection for all parties involved. The trustee's primary role is to dissect the debtor's financial situation, manage asset distribution to the creditors, and ensure the debtor is shielded from any further legal pursuits by most creditors. This process ensures that the bankrupt individual is relieved from the majority of their debts while ensuring that creditors have a fair opportunity to recoup what they are owed.

Voluntary vs Forced bankruptcy

Entering into bankruptcy can either be voluntary or forced. An individual can opt for voluntary bankruptcy by submitting a Debtor’s Petition along with a Statement of Affairs to the Official Receiver or a Registered Trustee. This route is commonly taken when personal debts become unmanageable, personal guarantees on company debts are invoked, or when the individual faces escalating demands from creditors.

Conversely, a creditor can enforce bankruptcy upon a debtor through the Federal Court. This is initiated with a Creditor’s Petition, which can be launched if a debt of at least $5,000 remains unpaid, among other criteria.

The consequences of bankruptcy

If an individual does opt for self-declared bankruptcy, it's not a decision to be taken lightly. The procedure and subsequent consequences are significant. Before making this significant decision, consulting with an insolvency lawyer is paramount. Contact Macmillan Lawyers and Advisors for a free 30-minute phone consultation.

While the duration of a bankruptcy is typically set at 3 years and 1 day, certain non-compliance issues can extend this period. Post-bankruptcy, the individual's details are permanently registered on the National Personal Insolvency Index (NPII), a public ledger. Furthermore, credit reporting agencies maintain bankruptcy records for at least 5 years.

Considering the implications and the permanence of some bankruptcy records, seeking professional advice, such as from firms like Macmillan Lawyers and Advisors, is crucial if you are considering bankruptcy.

Seeking Insolvency Lawyers and Advisors?

Our experienced insolvency lawyers are available nationwide, and we have a significant presence in several major cities. These cities include:

Call us at (07) 3518 8030 or email us at [email protected] for personalised guidance, expert advice, and a chance to rebuild with Australia's highly-rated insolvency team, holding a stellar 5.0 rating based on 44 Google reviews.