How do you show a company is insolvent?

The definition of insolvency is when a company “cannot pay it debts as and when they fall due for payment”.

This test of insolvency is based purely on cash flow of the company. So if the company “is asset rich but cash flow poor” then the assets of the company will need to be sold urgently or financed to pay the outstanding debts of the company.

A company may also be deemed to be insolvent if it fails to comply with any statutory demand issued against it. Usually, a company will be deemed insolvent if it fails to comply with a statutory demand issued under Section 459E of the Corporations Act. A company may also be deemed to be insolvent if it has failed to maintain proper books and records.

What is Insolvent Trading?

A director must not allow a company to incur debts when they know, or should be aware that the company cannot pay its debts as and when they fall due for payment. If the company is wound up and it can be established that there has been insolvent trading, the directors can be held personally liable to compensate the company for the amount “incurred whilst it was insolvent”. Both the liquidator and the creditors (with the liquidator’s permission) can sue a director for insolvent trading.

Who controls the liquidation process?

Liquidations are controlled by liquidators who are registered company liquidators with the Australian Securities and Investments Commission.

What are the liquidator’s powers?

The powers of a registered company liquidator are extensive and are set out in the Corporations Act. Briefly, the liquidator has all the powers that the directors formerly had together with additional powers to investigate and examine the affairs of the company and realize the company assets for the benefit of creditors. In addition, liquidators have additional powers to exam the directors and others persons associated with the company. A liquidator can also commence proceedings to recover monies for:

  • unfair preferences
  • uncommercial transactions
  • unreasonable director related transaction

Call us today if you would like to discuss if your company is insolvent on our toll FREE advice line on  1800 210 073.