Insolvency

• What is insolvency?

  It is when an individual or organisation is not solvent

  • company is not able to pay its debts as and when they become due and payable
  • Assets are not sufficient in amount to cover all the liabilities
• what act is insolvency goverened by?

  Coporations Act 2001
• Can directors trade after company is insolvent?

  It is the legal duty of the directors to ensure a company does not continue to trade after they become aware that it is insolvent.

  • Main aim: provide fair and orderly process for dealing with financial affairs of insolvent companies
• Factors taken in account when a court decides whether a company is insolvent?

  When are the company's debts due and payable?

  Liquidity of company assets and how quickly they can be sold to pay debts

  Expected net cash flow from ongoing business activities

  What arrangements have been made with company's bankers, shareholders to determine likelihood of future finance (debt or capital) raising to assist with liquidity problem
• Duties of company director?

  Act in good faith and in best interests of the company

  • Carry out their duties with due diligence and care
  • To not use their position for personal gain or advantage
  • To not use company information for personal gain or advantage
• Consequences for a director to continue trading the company whilst insolvent?

  Personally liable, either taken to court and charged with a criminal offence.

  • fined with $200 000 and sent to jail up to 5 years

  1. If found guilty of criminal negligence, will not be able to manage other companies or be a director of company
  2. Face bankruptcy with creditors suing for compensation
• who are the stakeholders?

  shareholders directors creditors
• implications for directors?

  Forced to explain to shareholders and a creditors the implication of their investment in the company, and how company became insolvent

  • each director could be prosecuted by each creditor, or as a class action if they were found to be criminally negligent
• Implications for shareholders?

  Values of their shares may decrease, affecting their personal wealth

  May not be able to sell their shares, as company was halted from further trading on ASX; stuck with worthless shares

  Last in order of priority to get anything back from company's assets