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Insolvency – The Need to Know

Interview with Daniel Bycroft from Merton Lawyers

Interviewed by Anastasia Misarvidis-Tyshing – currently studying a Bachelor of Arts/Law at Monash University.

Covid-19 has had a material impact on the Australian economy. Due to continuing lockdowns, businesses in particular have suffered. When your business no longer has the funds to properly trade, it may be time to think about whether an insolvency process is appropriate or necessary. Businesses that are insolvent may still be saved with early and tailored legal advice.

What is insolvency?

The definition of insolvency is when an entity or person is unable to pay its debts as and when they become due and payable.

In Australia, the motive behind the insolvency process is one of rejuvenation rather than retribution. Unfortunately, many people who are owed money view the insolvency process as a way of punishing the person or entity, and often, reputationally at least, it is.

However, as Australia is a capitalist country, consecutive governments have legislated towards encouraging entrepreneurial behaviour – meaning insolvency is designed to support the regrowth of businesses rather than any punitive purpose.

When is a business insolvent?

When a business feels it cannot properly trade due to its financial position, insolvency options should be considered. Many businesses flow in and out of being technically insolvent, so just because there are some cash flow issues doesn’t mean you necessarily have to call it quits. What it does mean is that your business is likely in need of further support. When facing these issues, it is important to proactively seek advice from your accountant or lawyer.

The most likely indicator of whether a business is insolvent is if the business can no longer see a realistic way to get back on top of its current debts within 90 days. While this is not a strict rule, many accounting and legal professionals use it as an indicator of the health of a business.

What is the difference between liquidation and bankruptcy?

Bankruptcy is for natural persons (alive and dead), and liquidation (as well as a number of other options), are for companies. Not every insolvent entity becomes bankrupt or goes into liquidation. A state of insolvency is common and will only lead to other outcomes if those outcomes are initiated by the entity or a creditor of that entity.

How do you file for insolvency?

There are a huge number of insolvency options and depending on which option you select; the filing process is different. Generally, AFSA looks after personal insolvency and ASIC looks after corporate insolvency. If you are unsure of the process, or which type of insolvency is best for your company, it is recommended that you consult with a professional in the area.

What are the advantages of insolvency?

If you take early advice yourself, you are able to lead the process rather than having an external creditor seeking Court orders against you or forcing liquidation or bankruptcy upon you. Being able to appoint your own insolvency practitioner not only allows the business to plan for what’s ahead but makes early meetings with that practitioner and communication surrounding insolvency much easier. Taking early advice is crucial in order to make the process as painless as possible.

When liquidators are appointed by the court the creditor is able to choose their own liquidator. This means the liquidator may be more aggressive or be pushed by the petitioning creditor to try to recover what they can from the company, dragging directors and other related entities into the process.

How can a lawyer help me through this process?

The main thing a lawyer can do is provide you with plain English advice about the process of insolvency and give guidance on the best possible way to ensure you come out the other side, in the best possible position to attempt to recover in the future.

At the end of the day, the decision to commence an insolvency process will vary on different people’s appetites for risk and tolerance. There can be stigma associated with becoming bankrupt or having your company liquidated, which may impact future business. Ultimately, it is crucial to talk to a professional and seek legal advice regarding your particular scenario when considering your options, to ensure the most successful outcome for your business.