EVERYTHING YOU NEED TO KNOW (UPDATED 2023)
Understanding and recognising insolvency is a key concept in the business world. All directors need to be able to recognise insolvency. In this guide, we explain everything you need to know about recognising and dealing with insolvency. With this information on hand, you’ll be able to navigate the issues and understand the best course of action.
What is Insolvency?
Insolvency is easy to define but much harder to identify and understand in practice. The law defines it in reverse: A person or a company is solvent if they are able to pay all their debts as and when they become due and payable. A person or company that is not solvent is insolvent. That is the starting point. But there are many twists on that theme and variations for people, companies, accountants, businesses, and financiers. We explain them below.
- What is insolvency?
- How the law defines insolvency
- What is personal insolvency?
- What is corporate insolvency?
- What is insolvency in accounting?
- What is cash flow insolvency?
- What is balance sheet insolvency?
- “Insolvent”, “bankrupt”, “bust”, “broke” – is there a difference?
- What does “due and payable” mean in insolvency?
- Insolvency – the legal framework
- How does a person or company know they’re insolvent?
- Is “go into insolvency” a thing?
- What to do if your company is insolvent?
- What to do if you are an insolvent individual?
- Who are the key players in the insolvency world?
- What is an insolvency practitioner?
- What is the Association of Independent Insolvency Practitioners
- What is a registered liquidator?
- What is a voluntary administrator?
- What is a trustee in bankruptcy?
- Lawyers & courts in insolvency
- What is a pre-insolvency advisor?
- What is ASIC’s role in insolvency?
- What is AFSA’s role in insolvency?
- What is the official receiver?
- What DIRECTORS need to know about insolvency
- What CREDITORS need to know about insolvency
- What EMPLOYEES need to know about insolvency
- What SHAREHOLDERS need to know about insolvency
- Does Directors and Officers Insurance cover directors for insolvency?
How the law defines insolvency
The basic definition of insolvency stated above comes from Corporations Act at Section 95A. But that is a simple statement and when the business world and the courts get specific it becomes quite complicated. There are more detailed definitions, checklist, case law, and warning signs. We detail the most useful below.
What is personal insolvency?
Personal insolvency is simply insolvency as it relates to a person, as opposed to a company. There are specific formal appointment options to assist a person in dealing with personal insolvency: bankruptcy, debt agreements, personal insolvency agreements.
What is corporate insolvency?
Corporate insolvency is insolvency as it relates to a company, as opposed to a person. There are specific types of formal appointment options that can assist an insolvent company: liquidation, voluntary administration, safe harbour, small business restructuring.
What is insolvency in accounting?
In the accounting world, the concept of insolvency does not focus heavily on the legal definition. Whilst the ability to pay debts as and when they fall due is the ultimate idea, in practice accountants like to look at numbers on a page and so look at two practical tests: cash flow test and the balance sheet test which are explained below.
What is cash flow insolvency?
A cash flow test and cash flow insolvency is a review of expected future cash receipts and cash payments. That is often done using a cash flow forecast. To be cash flow solvent it would be expected that the cash flow forecast shows a positive net cash flow (the cash at the end of the period) in each forecast period. If a specific period indicates a negative net cash flow balance, it does not mean that the company or person is cash flow insolvent, but it does mean that there is work to do.
By way of example, it may be that a company’s cash flow forecast shows that in three months there will be negative cash at bank. In that case, the company needs to do something: delay some expenses, obtain an equity contribution, obtain bank finance, focus on debtor collections, agree to defer some creditor payments. If those actions do not bring the cash flow forecast back to positive then it is likely the company is cash flow insolvent.
What is balance sheet insolvency?
Balance sheet insolvency is when a person or company’s total assets are less than total liabilities. So that test is done by looking at the traditional accounting balance sheet in the case of a company, or simply a list of assets and liabilities for a person.
“Insolvent”, “bankrupt”, “bust”, “broke” – is there a difference?
Yes, there is a technical difference. “Insolvent” or “insolvency” refers to the concept of a person or company being unable to pay their debts as they fall due. “Bankrupt” or “bankruptcy” is actually a technical term that is when a person, not a company, enters the legal status of “bankruptcy”, which in Australia is usually for three years.
In practice, the terms can refer colloquially to a situation where a person or company can’t pay their debts, similar to a number of other colloquial terms such as: bust, broke, skint, down-on-their-luck.
What does “due and payable” mean in insolvency?
The law says that if a person or company can’t pay their debts when they are due and payable, then they are insolvent. To be clear, you don’t have to be able to pay ALL of your debts now. You need to be able to pay the ones that are falling due.
By way of example, you may have a loan agreement that requires you to pay $1000 a month for twelve months – as long as you are able to pay the $1000 each month you are paying that debt as it is due and payable. You don’t need to be able to pay $12,000 now.
Insolvency – the legal framework
When a person or company is insolvent, it usually means that someone is going to suffer a financial loss. There is not enough money to go around. As a result, there is a bundle of laws that tell the financial world how matters will be dealt with. Those laws have led to a wide range of practices, case law, and professionals who deal with insolvent people and companies. The laws and practices have the following objectives:
- to allow insolvent debtors and their creditors to resolve the situation
- to provide for the repayment of debts to creditors in whole or in part
- to ensure that payments to creditors are shared fairly
- to allow for an examination of the insolvent debtor’s financial affairs
- to provide a mechanism for viable but financially distressed businesses to turn around and continue trading
- to release insolvent debtors from debt and allows them a fresh start.
How does a person or company know they’re insolvent?
In the majority of situations, a person or company will know they are insolvent – they may not want to admit it, but a simple cash flow test or balance sheet test (see above) will reveal insolvency. There are also many cases where the situation is not at all clear.
People and companies under financial stress will often be confused, have inadequate information, and be swamped by fire-fighting the immediate issues. However, it can be crucial to determine insolvency. Somewhat surprisingly, the law, and a few specific legal cases, are very helpful.
We have detailed below some warning signs of insolvency and also provide a link to a simple online test.
Warning signs of insolvency
A court case in 2003 provided a very handy list of warning signs of insolvency:
- continuing trading losses
- a liquidity ratio below one, that is, more short-term debt than short-term liquid assets
- unpaid and overdue taxes
- a poor relationship with the bank
- an inability to borrow further funds from the bank or other financiers
- an inability to raise new equity funds
- trade suppliers demanding special payments before resuming supply or placing the company on cash-on-delivery (COD) terms
- creditors being unpaid outside stated and agreed trading terms
- the issuing of post-dated cheques
- dishonoured EFT and cheque payments
- special payment arrangements with specific, crucial creditors
- numerous solicitors’ letters, summonses, or court judgments against the person or company
- payments to creditors of round amounts indicating a drip-feed for creditors rather than payment of specific invoices
- an inability to produce timely and accurate financial information to establish trading performance, financial position, and forecast position.
Is my company insolvent – take an online test
If you are concerned that you or your company might be insolvent, we also provide a handy online assessment tool available at Is My Company Insolvent.
Is “go into insolvency” a thing?
No. “Insolvency” is a circumstance or state you are in. When insolvent, if you’re a company you might “go into” liquidation, voluntary administration or small business restructuring. If you’re an individual you might “go into” bankruptcy or a debt agreement. There are more details below.
What to do if your company is insolvent?
When a company is insolvent, the directors must deal with the situation. These are often difficult choices but there are set paths and set solutions to assist insolvent companies. Outlined below is a link to a decision tree to assist in identifying the likely best solution for an insolvent company and then we explain the various formal options.
Insolvency Solutions Guide 2023 for companies
The last couple of years has been chaotic for many businesses. With the direct and indirect impacts of COVID, along with varying levels of government assistance, many businesses are now facing uncertainty. At the end of 2020, with the expectation that a potential wave of business insolvency was approaching, the government introduced new legislation to simplify liquidation and restructuring processes.
Finding your way through the various options is difficult. The 2023 Insolvency Solutions Guide Whitepaper provides a handy decision tree to help find the right solution.
Insolvency option – Liquidation
Liquidation is the process of winding up and finalising a company’s affairs. A liquidation is conducted under the Corporations Act. It usually involves the collection of assets, the undertaking of investigations, and the distribution of funds to creditors and then shareholders.
Directors often choose to liquidate a company so as to get protection from Insolvent Trading laws, a Director Penalty Notice from the ATO, and to bring a company’s affairs to an end. There is a lot to know about liquidation and we have a guide: Company Liquidation: Everything you need to know (updated 2023).
Restructuring option – Voluntary administration
Voluntary Administration is an excellent solution for a company in financial difficulty. Voluntary Administration can help a director keep creditors at bay to give time to sell or save a viable business.
There is a lot to know about voluntary administration and we have a comprehensive guide: What is Voluntary Administration.
Restructuring option – Small Business Restructuring
Small Business Restructuring (SBR) was introduced in 2021 to assist small businesses in financial difficulty. SBR allows a small business to propose a Plan to its creditors to restructure its debts while the directors remain in control of the business. The previous “one-size-fits-all” approach of Voluntary Administration is often criticized for being too costly for small businesses, and it can be too daunting for small business owners to hand over control of their businesses.
The new process aims to fix those criticisms. There is a comprehensive guide: What is the Small Business Restructuring process.
Receivership is a legal process where an external party is appointed to sell or safeguard the assets of a company or business. The external party is called a Receiver if the role is simply to sell assets, or a Receiver and Manager if the role is extended to managing a business. The Receiver can be appointed by a Secured Creditor, usually a Bank, or the Courts.
The receiver’s primary role is to collect and sell enough company property to repay the debt owed to the secured creditor. The court may also appoint a receiver over a company’s assets. There is a comprehensive guide: Receivership.
Are there different insolvency solutions for SMEs & large companies?
Yes. Until recently, the law didn’t distinguish between the treatment of insolvency for small and large companies. It now does. All companies can access liquidation, voluntary administration, and safe harbour. But the law now provides other options for smaller companies, being Simplified Liquidation and Small Business Restructuring. By “smaller” we mean a company must have total debts of no more than $1 million.
What to do if you are an insolvent individual?
When a person is insolvent then it is best to actively deal with the situation. Most people don’t realise that the solutions available to an insolvent person are there primarily for the benefit of the insolvent person so that they do not need to work endlessly to pay off debts from past mistakes. That is, the solutions, such as bankruptcy, are not there as a punishment – they are designed to help the insolvent person.
Outlined below is a summary of the main three solutions for insolvent people.
Bankruptcy is a legal process for insolvent persons – so not companies. It is designed to allow an individual to become clear of their debts whilst also providing creditors an opportunity for repayment. An individual can apply for their own bankruptcy, or a creditor can apply to the courts to make a person bankrupt if they have failed to pay specific demands.
Bankruptcy’s primary purpose is to “draw a line in the sand” regarding a person’s debts so as to allow that person to start again. When a person becomes a bankrupt, either a Trustee in Bankruptcy or the Official Receiver is appointed to what is called the “bankrupt estate”.
The Trustee will collect some assets (but also allow the person to keep assets needed for a normal life) and pay creditors if there are sufficient funds available. A Trustee will also collect income contributions from the bankrupt for a period of three years if they earn over a specific amount. After three years, the person is free of the debts that existed at the time they entered bankruptcy.
A Debt Agreement is an alternative to bankruptcy. It is a legally binding agreement an insolvent person can reach with their creditors. The financial terms of a debt agreement are flexible but will usually be an arrangement for an insolvent person to pay an agreed amount, that they can afford, over a period. The time frame varies but is usually 3, 4 or 5 years.
Debt Agreements are often perceived as being less severe than bankruptcy because the person can keep their assets, is able to travel and can continue as a Company Director. However, Debt Agreements are ruled by the Bankruptcy Act, and the person’s name is still published on the National Personal Insolvency Index. In many cases, a person will voluntarily make contributions under a Debt Agreement, whereas if they had declared bankruptcy, no contribution would need to be made.
Therefore, insolvent people should assess the options carefully before entering a Debt Agreement. Like Bankruptcy, at the end of the Debt Agreement process, the person is free of the debts they had before the Debt Agreement. To qualify for a Debt Agreement, a person must:
- be insolvent
- have not been Bankrupt, entered into a Debt Agreement or Personal Insolvency Agreement in the last 10 years
- have unsecured debts, assets, and after-tax income less than set amounts
Personal insolvency agreements
A Personal Insolvency Agreement is sometimes called a PIA or a Part 10 Agreement. It is a legally binding agreement between an insolvent person, so not a company, and their creditors. A PIA can be a flexible way to come to an agreement between an insolvent person and their creditors. Whereas Debt Agreements have relatively low limits on income and creditor amounts, PIAs have no limits. As a result, they are a little more complicated and thorough than a Debt Agreement. A PIA involves the following:
- An insolvent person appoints a trustee to take control of their property to make an offer to creditors.
- The offer may be to pay part or all the creditors by installments or lump sum.
- The length of a PIA can vary and is negotiable.
- The person may retain their assets such as a house or car.
Who are the key players in the insolvency world?
The world of insolvency is very broad and there are a number of professionals who adopt roles and a number of organisations that supervise the processes and the professionals. The main players are discussed below.
What is an insolvency practitioner?
Insolvency Practitioner, sometimes referred to as an IP, is the term given to professionals who are licensed by government authorities to manage insolvency procedures. Insolvency practitioners are highly educated and must have years of experience before they are licensed. They are highly regulated by various government bodies and bound by legal duties. Insolvency Practitioners include the following:
- Registered Liquidator (RL)
- Small Business Restructuring Practitioner (SBRP)
- Trustee in Bankruptcy (Trustee)
- Registered Debt Agreement Administrator (RDAA)
What is the Association of Independent Insolvency Practitioners
The Association of Independent Insolvency Practitioners (AIIP) is a non-profit professional organisation for Insolvency Practitioners. To be a Member of AIIP, the person must be either a Registered Liquidator or Trustee in Bankruptcy. If you are dealing with an AIIP member, you are dealing with a fully qualified and government-registered insolvency practitioner.
What is a registered liquidator?
Registered Liquidators are experienced professionals, usually accountants, who are registered as a liquidator under the Corporations Act 2001. They are appointed to manage the process of winding up insolvent or failed companies. A Registered Liquidator can also be appointed to wind up the affairs of a solvent company.
A Registered Liquidator has a wide range of duties to perform, including selling assets, investigating the affairs of the company, and paying a dividend to creditors. When a liquidator is appointed to a company, the director’s powers are suspended, and the liquidator assumes control of all of the company’s affairs.
To become eligible to be a Registered Liquidator, an individual must:
- be a member of a recognised Australian accounting industry body or an international equivalent
- meet approved competency standards and be able to demonstrate significant practical experience
- be an Australian resident
- provide proof of sufficient indemnity insurance
- have not been convicted of an offence involving fraud or dishonesty in the previous 10 years
- have not been disqualified from managing corporations
- be capable of performing the duties of a liquidator
- be a fit and proper person to be registered as a liquidator
What is a voluntary administrator?
A voluntary administrator is a person appointed to run a voluntary administration. To be a voluntary administrator a person must be a Registered Liquidator. So, there is no actual legal designation of a person being a voluntary administrator – it is a registered liquidator acting in that role. In running a voluntary administration, the voluntary administrator has several things to do:
- to take control of the company
- to investigate and report to creditors about the company’s business, property, affairs and financial circumstances
- to report and recommend on three options available to creditors, being to end the voluntary administration, approve a Deed of Company Arrangement (DOCA) through which the company will pay all or part of its debts, or appoint a liquidator
- to report to ASIC on possible offences committed by people involved with the company.
What is a trustee in bankruptcy?
When an insolvent person becomes a bankrupt, a Trustee in Bankruptcy is appointed. They are often referred to as just “trustee”. They are the person or body who manages the bankruptcy. To become a trustee, an individual must apply to the AFSA and demonstrate the required knowledge, skills, qualifications and experience to effectively carry out the important duties of the role.
Trustees have a number of tasks to perform:
- to collect some of the assets of the bankrupt
- to collect information from the bankrupt
- to investigate issues
- to report to creditors
- If funds are available, to pay a dividend to the creditors
Lawyers & courts in insolvency
Most insolvency practitioners are not lawyers. However, insolvency is a field that results in many legal actions. Insolvency practitioners will refer many matters to their lawyers and some of those matters will end up in court. Also, insolvency is an area where many stakeholders have lost money, so litigation is very common. Some of that litigation may be against the insolvency practitioner.
What is a pre-insolvency advisor?
When a business is facing insolvency there are often public indicators of those problems such as court actions against the company, public complaints about service, and wind-up petitions lodged in court. Some advisers watch for those indicators and contact directors. The advisors will offer assistance to the director.
While not all advisers do the wrong thing, some suggest actions that could be illegal. If a pre-insolvency advisor contacts a director, it is best to seek an opinion from a qualified and regulated advisor, such as a solicitor, an accountant, or an appropriately qualified specialist insolvency practitioner such as a registered liquidator.
What is ASIC’s role in insolvency?
ASIC is the Australian Securities & Investment Commission. It is a government department with a wide-ranging role in the Australian business world. Part of its function is an unexpectedly large role in insolvency including the following:
- registering external administrators and receivers and ensuring they comply with the law
- collecting $5 million to $7 million a year from registered liquidators, which is then spent on supervising the roughly 650 registered liquidators in Australia
- providing up-to-date information about insolvent companies on the ASIC Published Notices website
- implementing insolvency reforms and initiatives.
What is AFSA’s role in insolvency?
AFSA is the Australian Financial Security Authority. AFSA is the government department responsible for the overall management of bankruptcy law and practice. AFSA manages both the appointment and regulation of trustees and the administration of the broader personal insolvency system.
What is the official receiver?
AFSA has an office called the “Official Trustee in Bankruptcy” which contains staff and resources to act as the government version of a Trustee in Bankruptcy. It is necessary to have an official receiver because many bankruptcies have no assets and so private trustees are unwilling to accept the appointment.
What DIRECTORS need to know about insolvency
It is important for company directors to have an understanding of insolvency mainly because there can be severe consequences for a director personally if they breach a range of laws. Below we have provided some general information on insolvency for directors whose companies may be insolvent.
Who is considered a director of an insolvent company?
A director is someone who is listed as a director either on the ASIC Company Register or in a Company’s Register. But a director is not just a person formally appointed to that role. A person may also be regarded as a director, even if they are not formally appointed, but act in that role, or if the company’s directors act in accordance with that person’s instructions. This is often referred to as a “shadow director”.
Directors’ duties when a company is insolvent
When a company is insolvent, a director’s primary duty is to the company’s shareholders. A director is also required to continue to comply with the general laws applying to operating a company. However, if a company is insolvent, or there is a real risk of insolvency, a director’s duties expand to include the company’s creditors. There is a whole raft of director duties and we have explained the major ones below.
General duties in insolvency
The general duties of directors include the duties to:
- act with care and diligence
- ensure they are informed about the company’s financial position
- ensure the company does not trade if it is insolvent
- exercise their powers in good faith and in the company’s best interests
- not improperly use their position to gain an advantage or to cause detriment to the company
- not improperly use information to gain an advantage.
Duty to prevent creditor-defeating dispositions
A director of a company that is insolvent has a duty to prevent their company from entering a transaction that is what is called a “creditor-defeating disposition”. That is a transaction that disposes of company property for less than its market value or that prevents property from becoming available to company creditors.
Duty to keep books & records
A director is always required to keep adequate financial records to correctly record and explain the company’s transactions, its financial position and performance. This duty is often only tested after a company enters liquidation. Where it can be shown that a company failed to keep adequate financial records for a period, it will be assumed that the company was insolvent the whole time that records were inadequate.
What is insolvent trading?
Continuing to incur new debts whilst a company is insolvent can lead to the company’s directors becoming personally liable for those debts. Insolvent trading is the law under the Corporations Act that says that if a company is insolvent and a director allows the company to incur a new debt, then the director can be personally liable for the new debts incurred.
The law makes directors responsible for ensuring that their company does not trade while insolvent. This is in addition to their general duties outlined above. There is a lot to know about insolvent trading and we have a comprehensive guide called Insolvent Trading: Everything you need to know 2023.
What is a director penalty notice?
A Director Penalty Notice (DPN) is a Notice that the Australian Tax Office (ATO) can send a director that can make that director personally liable for three types of tax debts of a company – Pay as You Go (PAYG), Superannuation Guarantee Charge (SGC) liabilities and Goods and Services Tax (GST). After 2 years of no activity, the ATO has started issuing Director Penalty Notices again. There are two types of Director Penalty Notices. The first is the traditional Director Penalty Notice which gives a director 21 days to take certain actions to avoid personal liability.
The second type of DPN, often referred to as a “Lockdown DPN”, can make a director automatically personally liable if company tax returns are not lodged within 3 months of their due date – there is no opportunity to avoid that liability once the DPN is served on the director. There is a lot to know about this topic and we have a comprehensive guide at Director Penalty Notice.
Consequences of insolvency appointments on a director
There is a range of consequences for a director when a company goes into liquidation, voluntary administration, or small business restructuring. We detail the main ones below.
Directors lose control of the company when the company enters voluntary administration or liquidation. Often, when a company goes from voluntary administration into a DOCA the director’s powers are restored, but that depends on the DOCA’s terms. In a receivership, the powers retained by a director will depend on the powers of the receiver, and the extent of the assets over which the receiver is appointed. In a small business restructuring, the big advantage is that a director retains power and control over the company whilst the process is underway.
Directors must assist a liquidator or voluntary administrator. The things a director must do for a liquidator or voluntary administrator include:
- telling them the location of the company’s assets
- providing the company’s books and records
- completing a form called a Report on Company Activities and Property (ROCAP)
- meeting with them if required.
Creditor meetings are often held in both liquidations and voluntary administrations. A voluntary administrator and liquidator can require a director to attend those meetings.
A voluntary administrator and liquidator have the power to apply to the court to conduct a public examination of a director in court. This most commonly occurs in liquidations when the liquidator is interested in a director’s personal financial position or is seeking details about assets or transactions of the company.
If a director has been a director of two or more companies that have gone into liquidation within the last seven years and paid their creditors less than 50 cents in the dollar, ASIC may disqualify them from being a director for up to five years. In practice, there are 50 to 100 director bannings a year.
What CREDITORS need to know about insolvency
When a company or person is insolvent then unfortunately, if you are owed money, you are unlikely to receive payment. In most cases, creditors will receive little or no return from a liquidation, voluntary administration, or bankruptcy. However, there are also cases where creditors are paid in full over a period of time.
Many of the laws around insolvency do attempt to provide protections for creditors, or at the least, require that creditors be provided with information about what caused the insolvency. Outlined below are some of the rights creditors have in insolvency.
Do insolvency practitioners report to creditors?
Yes. Liquidators, voluntary administrators, and bankruptcy trustees are all required to provide reports to creditors. The requirements vary for each but in general, creditors can expect to receive:
- an initial report with information about the appointment and details of creditors’ rights
- a much more detailed report sometime later which will include details of assets realised, the likelihood of a dividend, whether any offences were committed, the fees of the insolvency practitioner, the likely timeframe for completion
- other reports as the insolvency practitioner considers appropriate or as creditors request.
Do creditors get a say in insolvency proceedings?
A bit but not a lot! Creditors can request information and get to vote at Creditors Meetings on matters such as the insolvency practitioners’ fees and the approval of some other matters. Generally, the principle is that creditors can’t tell a liquidator, voluntary administrator, or bankruptcy trustee what to do because the appointees are the individuals who must take responsibility for outcomes and, occasionally, bear the results of poor decisions.
By way of example, a liquidator will have to decide whether to take a legal action against a director. If the liquidator decides to do so and then loses the case, it may be that the liquidator is personally liable for the legal costs of both sides. In that situation, it would not be equitable for a creditor to be able to instruct a liquidator to take a legal action.
What rights do creditors have in insolvency?
So, if a creditor can’t tell a liquidator, voluntary administrator, or bankruptcy trustee what to do, what are their rights? The main right is to receive information and if a creditor is unhappy about the actions or outcome, they have a variety of avenues of complaint such as lodging a complaint with ASIC or AFSA, or applying to a court.
What EMPLOYEES need to know about insolvency
When a business is insolvent then employees can regard themselves as falling into two categories. Firstly, they are a creditor of the company in that they are owed money. Secondly, they are an employee and will have certain rights as an employee. But bear in mind that a highly likely outcome is that an employee will lose their job.
However, the law attempts to ensure that employees are looked after in the event of an employer’s insolvency. Some of those protections are:
- Employee entitlements such as unpaid wages, superannuation, annual leave, long service leave, and retrenchment pay are paid before the company’s other creditors.
- The government’s Fair Entitlement Guarantee scheme (FEG) will usually step in and pay employees some or all of their entitlements if there are no funds available from the liquidation of a company to pay employees.
- If the directors have abandoned the company and you are owed employee entitlements, then ASIC might step in and wind up the company for you, which would then allow an employee to access the FEG scheme.
What should employees do if they suspect their employer is insolvent?
If an employee suspects that their employer is insolvent, they should:
- check whether their superannuation has been paid to their Superannuation Fund – often one of the first things not paid by an insolvent employer is superannuation
- raise their concerns with the employer
- lodge a complaint with the ATO regarding unpaid superannuation
- contact their local union representative
- lodge a complaint with ASIC
- If the employer is in liquidation, contact the liquidator and also lodge a claim with FEG for any unpaid employee entitlements.
What if the directors have abandoned the company and employees are owed money?
Directors sometimes see no point in dealing with an insolvent company and will simply stop playing any role. They may also not want to incur the costs of paying for a liquidation to finalise a company’s affairs. So, some companies become “zombie companies”. In that situation, employees are not able to access the FEG scheme to have their employee entitlements paid.
ASIC can help in that situation. An employee can lodge a request with ASIC to wind up the company. ASIC will often assist but has also been known to decline to help. ASIC will generally not wind up an abandoned company where the total amount of outstanding employee entitlements is less than $15,000.
What SHAREHOLDERS need to know about insolvency
If a company is insolvent then a liquidator will realise the assets of the company and then pay fees, priority creditors, and ordinary creditors in a cascading order. Paid last are shareholders. In the vast majority of situations, the shareholders of an insolvent company will receive no return on their investment.
Do insolvency practitioners report to shareholders?
A liquidator or voluntary administrator is not required to report to shareholders on the progress or outcome of the external administration. A liquidator or voluntary administrator must keep books that provide a record of the administration of the company’s affairs, and shareholders are entitled to inspect these books at the external administrator’s office. However, it would be rare for a shareholder to bother to do so.
Financial reporting and AGMs in insolvency
The law requires detailed financial reporting obligations for listed and very large companies. However, those obligations do not apply if the company is in liquidation.
Does Directors and Officers Insurance cover directors for insolvency?
Yes, it can. Directors and Officers (D&O) insurance is a form of insurance that can cover some, if not all, losses of directors if sued as well as legal fees. It is primarily intended to protect directors from personal losses. However, the extent of coverage will vary with different policies. Some policies do not cover events arising from insolvency.
At Insolvency Solutions Group, we have a long history of advising directors and companies facing financial distress.
Contact our experts for an obligation-free phone call today.