07 Apr What is Corporate Insolvency?
A company is insolvent if it cannot pay its debts as and when they fall due. Even if the company has a surplus of assets but is unable to sell or realise those assets, it may still be insolvent.
A solvent company can be wound up voluntarily by the Court on an application of its directors or members, in circumstances where there is a dispute about the control of the company and the directors cannot agree on a resolution to the dispute.
Once a company is wound up and a liquidator appointed, the companys directors cease to have any power, and the control of the companys assets, any business and other financial affairs of the company are transferred to the liquidator.
A liquidator, whether appointed voluntarily or by order if the Court has all of the powers once held by the directors as well as:
- Investigate the affairs of the company.
- Conduct and sell any business of the company.
- Realise, or sell, the companys assets.
- Examine the companys directors, and others, under oath about the companys affairs.
- Identify transaction of the company that are void and seek the recovery of funds from the parties to those transactions.
A liquidator can bring an action against the director(s) personally for the recovery of debts incurred by the company during the period in which the company was insolvent. In circumstances where the directors knew, or ought to have known, that the company was insolvent, and continued to allow the company to incur debts, the directors may be personally liable to compensate the company for those debts. Insolvent trading may also be an offence, leading to criminal prosecution.
A person commits an offence if:
1.The person was a director of the company when it incurs a debt.
2.The company is insolvent at that time, or becomes insolvent by incurring that debt.
3.The person suspected or knew that when the company incurred the debt it was insolvent or would become insolvent as a result of incurring the debt.
4.The persons failure to prevent the company incurring the debt was dishonest.
In a corporate insolvency, the liquidators main role is to distribute the companys assets between its creditors in an equal manner, according to the value of the creditors debts in relation to the total debts of the company. Where a creditor has received a payment from the company which results in the creditor receiving a greater sum than the creditor would have received in the companys liquidation, the liquidator may recover the preferential payment from that creditor.
The time period for the recovery of a preferential payment can vary depending on whether the recipient is related to the company, and also depending on the intention of the directors of the company. The time period begins on the date on which the liquidation is deemed to have commenced and can extend from 6 months prior to that date for non-related parties to up to 10 years if there is evidence that the transaction was designed to defeat, delay or interfere with the rights of creditors.
ARTICLE CONTRIBUTED BY HARRY KAY
Harry Kay is one of the few lawyers to have completed the Insolvency Education Program with ARITA (Australian restructuring insolvency and turnaround association). Harry specialises in insolvency, bankruptcy, litigation and debt recovery.