A company is ‘insolvent’ when it cannot pay all its debts on time.
The options for an insolvent company include voluntary administration and liquidation.
Voluntary administration allows time to find a way to save the company or its business, if possible.
Liquidation is when a company’s affairs are wound up in an orderly and fair way to benefit creditors. This includes selling its assets to pay any debts.
Once the liquidation is complete, the company is deregistered.
Obligation to prevent insolvent trading
Company directors have a legal obligation to prevent insolvent trading. There can be serious consequences if you allow your company to incur debt when it is insolvent.
A company is insolvent if it cannot pay all of its debts as and when they become due.
There may be warning signs that a company is in financial difficulty. For example, the company may keep making losses, have poor cash flow, and cannot pay suppliers on time.
The best course of action is to contact a registered liquidator, accountant or lawyer as soon as you think your company is in financial difficulty. You can find a registered liquidator on our registered liquidator lists. You can then see their full details using our professional registers search.
Insolvent companies can go into voluntary administration to quickly resolve the company’s future.
Some insolvent companies may choose to restructure. To do this, the company must meet certain criteria. For example, their total debt must not exceed $1 million. This process allows the directors to create a plan to restructure the company. For more information, see Small business restructuring and the restructuring plan.
Voluntary administration
Voluntary administration tries to resolve the company’s insolvency in the best way possible.
When the directors resolve that the company is insolvent or will become insolvent, the company can appoint a registered liquidator in writing, also known as a ‘voluntary administrator’.
The voluntary administrator takes control of the company. They review the company’s situation and report back to the creditors about the company’s business, property, affairs and financial situation. The report will also include the three options available to creditors:
the voluntary administration ends, and the company be returned to the directors
enter into a deed of company arrangement (DOCA)
go into liquidation.
The voluntary administrator must give an opinion on each option and recommend which option is in the best interests of the creditors. The creditors then make a decision based on the administrator’s report.
A DOCA is a binding agreement between the creditors and the company. It aims to maximise the chances of the company continuing and/or to get a better return for the creditors.
Liquidation
Liquidation is when the liquidator takes control of the company so its affairs can be wound up in an orderly and fair way to benefit creditors. This includes selling assets and repaying any debts.
This is the most common type of liquidation of an insolvent company. The company resolves by special resolution that it be wound up and a liquidator appointed. Or it can go into liquidation following a voluntary administration or a terminated DOCA.
The liquidator takes control of the insolvent company. Their responsibilities include collecting, selling the company’s assets and repaying creditors using any proceeds from the sale. The company is then deregistered after its affairs are fully wound up.
Simplified liquidation for small business
Some companies may be eligible for simplified liquidation. They must have less than $1 million of debt. Find out more about simplified liquidation.
Another type of liquidation is ‘court liquidation’. A creditor can apply to a court and seek an order to appoint a liquidator and wind up the company.
Some companies may be eligible for simplified liquidation. They must have less than $1 million of debt. Find out more about simplified liquidation.
ASIC deregisters companies that are wound up after the liquidator lodges the relevant form with ASIC.
The company will be deregistered 3 months after the relevant form is lodged. After a company is wound up and deregistered, it no longer exists
ASIC’s role in insolvency
ASIC cannot act on behalf of an individual creditor. Our role is to protect the interests of all creditors by:
Directors have a legal obligation not to allow a company to trade while insolvent. Even once they have left a company, a director can be held responsible if they allowed it to trade while insolvent when they were a director.
You should see an insolvency practitioner if you think a company you were a director of is now insolvent. They can provide advice on the company’s situation and the available options.
Personal bankruptcy of a director
A director’s personal bankruptcy is not related to a company’s solvency. If you are bankrupt, you cannot be a director of a company under the Corporations Act.
