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Bookkeeping – Insolvency & Liquidation meaning and solutions - Australia
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Published on Thursday, 09 May 2024 11:13
Corporate insolvency occurs when a company is unable to meet its financial obligations to creditors on time. It is crucial for company directors to prevent the company from trading while insolvent, as this can lead to severe consequences such as civil penalties, compensation proceedings and criminal charges. There are 12 warning signs that indicate a company may be approaching insolvency, and it is essential to seek advice promptly if any of these signs are identified.
And if my company is insolvent? It is crucial to seek early guidance from a reliable advisor to improve the chances of the company's survival. Adopting an approach of ignoring the situation and hoping for improvement is not an effective strategy. Allowing a company to trade while insolvent or violating directors' fiduciary and statutory duties can lead to severe penalties and consequences.
Corporate insolvency procedures encompass several options, including:
- Early intervention choices such as Voluntary Administration, Safe Harbour and Business Restructure;
- Company wind-up options like Voluntary Liquidation;
- Creditor enforcement options such as Receivership or Court-ordered Liquidation.
Voluntary Administration, Safe Harbour and Business Restructure are intended for viable businesses facing financial distress, providing directors with the opportunity to repay creditors and restore the company's financial health. On the other hand, Liquidation and Receivership are procedures primarily focused on repaying creditors, typically leading to the eventual winding up of the company.
Business Life Cycle
The ideal scenario involves appointing a registered Small Business Restructuring Practitioner ("SBRP") and striving to rejuvenate the company.
Small Business Debt Restructuring
The federal government's debt restructuring process for eligible incorporated small businesses with liabilities of less than $1 million was implemented on January 1, 2021. Get the fact sheet HERE.
Under this new process, known as a "debtor in control" model, the director will maintain control of the company, while the Small Business Restructuring Practitioner ("SBRP") will serve as an agent for the company, working in collaboration with the director to devise a plan for restructuring the company's debts.
Simplified Liquidation – if Rebirth is not possible
The federal government's proposed Simplified Liquidation allows an insolvent company placed into Voluntary Liquidation, which meets specific eligibility criteria, to request the Liquidator to utilize the Simplified Liquidation provisions. These provisions are being considered as a potential solution to address the perceived limitations of the current one-size-fits-all system permitted under the existing Voluntary Liquidation provisions. It is advisable to seek legal advice for further clarification.
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