Insolvency Law

The worst you can do if facing financial difficulty, either personally or as a company director, is to ignore the situation. Despite the stress of a possible bankruptcy or insolvency, obtaining specialist advice early about your legal rights and options may help mitigate loss and increase the chances of financial recovery.

A company is considered insolvent if it cannot pay its debts when they are due. Company directors must be mindful of their duty to prevent insolvent trading during difficult financial periods as they may be personally liable for continuing to incur debt when it is reasonably foreseeable that the company is, or likely to become, insolvent.

Certain defences may be available to directors who breach their duty to avoid insolvent trading. Additionally, safe harbour provisions have developed to help directors avoid personal liability if they take certain action considered reasonably likely to lead to a better outcome for the company than administration or liquidation. Understanding these provisions if a company is facing financial stress is essential.

A company facing insolvency may be liquidated either voluntarily or involuntarily. A liquidator is appointed for the sole purpose of identifying, salvaging and liquidating any available assets to pay creditors and winding up the company. The company ceases to operate, and the directors no longer have control or authority over its affairs.

As an alternative to liquidation, a company in financial difficulty may resolve to appoint an administrator which may result in better outcomes for the company, its members and creditors.

The administrator investigates the company’s affairs and may allow it to continue trading in an effort to sustain it, or at least maximise the return to creditors. The administrator may negotiate a deed of company arrangement with creditors setting out a proposal for reconstruction or amalgamation with the objective of minimising loss and generally trading out of the company’s financial difficulties. If accepted by the creditors, the company may avoid liquidation.

Receivership occurs when a secured creditor appoints an external person to collect and sell the company’s assets, after the company has defaulted on its contract either through non-payment or breach of other terms. The receiver acts in the interests of the secured creditor to ensure the debt is repaid.

A person is considered bankrupt when he or she is unable to pay his or her debts. A trustee is appointed to manage the bankrupt’s financial resources and assets. The bankrupt is protected from being sued by creditors however faces the adverse consequences of poor credit ratings, limited opportunities to borrow funds in the future, the obligation to disclose the bankruptcy in various dealings and transactions and disqualification from holding certain positions.

There are significant consequences of being declared bankrupt and it is important to identify possible alternative options before taking this step. For example, a lawyer may assist in negotiating and preparing a debt agreement which may provide a better outcome and avoid the pitfalls of bankruptcy.

Experiencing financial hardship can be stressful and humiliating but it is certainly not uncommon. Our lawyers have assisted many individuals, businesses and companies to work through tough financial times, negotiate with creditors, and implement strategies to achieve the best possible outcome in difficult circumstances.

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