What do insolvency notices mean?
Whether you are currently doing work with a customer or looking to potentially take on a new one, it’s important to know whether those customers are undergoing insolvency problems.
Under the Corporations Act, a company is insolvent when it’s unable to pay all of its debts, as and when they become due and payable. Note this is different to a situation when a company can pay its debts but won’t. As such, an insolvency notice usually comes up when a company enters some level of financial hardship.
Not all insolvency notices are the same, though. When a business enters an “insolvency phase” it means it has entered into one of the below stages:
The best way to describe administration is when a company is given a “pause” on its usual business operations. Companies normally enter administration when everyone involved believes the business might be able to keep operating long term but in the meantime it needs help getting on top of its debts. The person who comes in to fix the situation is called an administrator.
An administrator can be voluntarily appointed by the company or can be appointed by creditors (entities the company owes money to), the courts or even a liquidator (see below).
When appointed, the Administrator takes over key parts of the operation of the business from the existing directors and tries to either create an agreement with creditors about how their debts will be paid, moves the business into liquidation or in some rare cases returns full control back to the directors.
When the company goes deeper into default and an Administrator fails to get the company's payments in order, creditors may send out Receivers or official representatives to collect the debt.
Receivers usually represent “secured creditors” such as banks and their priority is to make sure the debt of these secured creditors are fulfilled. The company’s assets will be sold by the receiver and only after paying their debts can a company recommence operations or move up into administration.
ASIC has a guide for creditors when a company goes into receivership - HERE
The process usually follows a court order which requires the company to start handling its affairs in preparation to terminate the business. The company has failed to pay its debts, there’s no likelihood that it will ever be able to and it’s time to fully liquidate all its assets to ensure those owed money recover as much of those debts as possible.
Still within the stage of winding up, liquidation is the final step where a company now sells its assets so that creditors can at least salvage some form of repayment from the company. Liquidators come in to make an asset sale and the proceeds are then entitled to creditors based on priority.
ASIC has a guide for creditors when a company goes into liquidation - HERE