Sometimes a company or a person might not be able to pay the outstanding debt. This article will describe what actions may be taken when a company or person enters into insolvency.
A company is insolvent when it cannot pay its debts when they are due for payment. Voluntary administration, liquidation and receivership are the most common procedures for an insolvent company. When a company enters into insolvency actions must be taken; if a director allows the company to trade while insolvent, the director may face serious penalties.
Voluntary administration is a procedure where an external administrator is appointed by the director of the company or a secured creditor with charge over most of the company’s assets. A liquidator or a provisional liquidator may also appoint an administrator, however it is most common for the director to appoint the administrator. The administrator is called ‘voluntary administrator’, and his or her task is to investigate the company’s affairs. The result from the investigation should then be reported back to the creditors with a recommendation whether the company should be liquidated, enter into a company arrangement or be returned to the directors.
Liquidation means the winding up of a company’s affairs. There are three types of liquidation, which are liquidation as a result of a court order, liquidation initiated by the company, called creditors’ voluntary, and member’s voluntary. The liquidation of the company is taken care of by a liquidator, who has a duty to all of the company’s creditors.
During the process of liquidation, the company’s assets are realised and its operations are ceased or sold. The earnings from the realisation are distributed among the company’s creditors and the shareholders share the surplus.
The third process, receivership, is usually commenced after a secured creditor with security over some or all of the company’s assets appoints a receiver. The receiver’s task is to collect and sell as much of the company’s assets to cover the debts owed to the secured creditor.
If a person is not able to manage his or her unpaid debt, there are several options available to solve the financial situation. The first step is to contact the creditors directly and try and negotiate about the payment details in a more informal way. If that is not possible or enough, one of the four formal options available may be considered. The options are to present a declaration of intention (DOI), a debt agreement, a personal insolvency agreement (PIA) or to file for bankruptcy.
DOI is a temporary relief for 21 day, during which period unsecured creditors are not allowed to take any actions to recover the debts. The period is for the person to decide whether to proceed with bankruptcy or if another option is more preferable.
A debt agreement is a binding agreement between the person and the creditors. In the agreement, the creditors will accept a sum of money based on the person’s capacity to pay.
A PIA is an arrangement with the creditors to settle the debts in a way in which the creditors will be paid full or in part. The PIA may include a lump sum payment, transfer of assets or payment for the sale of assets or a payment arrangements with the creditors. An appointed controlling trustee overlook the proposed PIA in regards to the person’s financial situation and makes a recommendation to the creditors whether it is in their interest to accept the PIA or not.
Bankruptcy is the last option available for a person who cannot manage his or her unpaid debt. A person can become bankrupt either voluntarily or after a creditor’s application. Bankruptcy has serious consequences, and several restrictions and obligations will be placed upon the person. For example, the person’s assets may be sold, he or she might be required to pay a certain amount of his or her income to the creditors and he or she might need to surrender his or her passport. The possibility to obtain credit in the future might furthermore be affected. To administer the bankruptcy, a trustee is appointed.
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If you are facing any problems related to insolvency, our experienced solicitors may help and advise you what further actions may be taken: call us on (02) 9233 7776 or email us.