The insolvency process is a fundamental element of the business environment in Australia. This process essentially acts as a safety net, providing a structured path for businesses that, for one reason or another, find themselves unable to fulfill their financial obligations. The complexity inherent in this process is notable, hence as a business owner, it’s paramount to understand its intricacies. In this discussion, we’ll delve into the key aspects of this process in Australia.
Insolvency typically begins when a company’s directors recognise that their company is unable to pay its debts as and when they fall due. In such circumstances, the directors might decide to put the company into voluntary administration, a move that isn’t punitive in nature but rather designed to explore all available options either to salvage the company or to ensure that the creditors receive a higher return than they would from an immediate liquidation.
The linchpin of voluntary administration is the appointment of an independent expert known as a voluntary administrator. This individual takes over the reins of the company, assuming full control of its operations. The voluntary administrator’s powers are extensive, enabling them to probe into the company’s affairs to uncover all necessary information. The ultimate goal here is to generate a thorough report to the company’s creditors, outlining one of three possible paths: a Deed of Company Arrangement (DOCA), liquidation, or returning control of the company to the directors.
A DOCA represents a legally binding arrangement between a company and its creditors, delineating how the company’s affairs will be dealt with moving forward. It is typically employed when the voluntary administrator determines that the company can be saved or that the creditors may receive a better return than they would through liquidation.
Should a DOCA prove infeasible or inappropriate, the company may be placed into liquidation. In this stage, a liquidator is appointed to wind up the company’s affairs. This process entails selling off the company’s assets and using the proceeds to repay the company’s creditors. Simultaneously, the Sydney liquidator is responsible for conducting an investigation into the company’s financial dealings and reporting any potential offences to the Australian Securities and Investments Commission (ASIC).
Beyond voluntary administration, there exist alternative routes to liquidation, specifically creditors’ voluntary liquidation and court liquidation. The former is initiated by the creditors, while the latter is instigated by the court. Both these processes bear considerable similarity to the insolvency process that follows voluntary administration, with a liquidator assuming control and winding up the company’s affairs.
The landscape shifts when the insolvent entity is an individual rather than a company. In this case, the process transitions to one of bankruptcy. An individual can opt to declare bankruptcy voluntarily, or a creditor owed a minimum of $5,000 can apply to have the individual declared bankrupt. The duration of bankruptcy is typically three years, during which a trustee assumes control of the bankrupt’s assets and income to discharge the individual’s debts.
What’s more, the trustee carries out investigations to ascertain the cause of the bankruptcy and can object to the discharge of the bankrupt if they uncover misconduct. An undischarged bankrupt faces several restrictions, including limitations on overseas travel and the ability to act as a company director. These restrictions aim to protect the public from reckless or fraudulent business activities.
During the bankruptcy period, income contributions may be required from the bankrupt if their income exceeds a certain threshold. These contributions help repay creditors and cover the cost of administering the bankruptcy.
Furthermore, secured creditors, or those who hold a security interest over a particular asset, retain the right to repossess and sell the asset if the bankrupt fails to meet the terms of their agreement.