When a company can no longer pay its debts or continue operations for some reason, one option is to call it quits. It cannot just close down and walk away, however. In Australia, it has to file for company insolvency as stated in the Corporations Act of 2001.
How common is it?
A company in financial trouble is quite common anywhere in the world. Many factors can lead to company insolvency, such as poor management or lack of supplies. It doesn’t mean the business was not a good one; it only means it did not work out as well as it should have.
To avoid getting into deeper trouble, when you have no other source of funds, your only option is insolvency. In Western Australia alone, 769 companies were in the same situation from July to September. They are now in the process of insolvency. Just to make it clear, insolvency is the same as bankruptcy in other countries. In Australia, bankruptcy is for people, not companies.
How does it work?
The main purpose of insolvency is to assure creditors of payment in an orderly and equitable manner. All efforts aim at making sure all creditors get something, even if they don’t get full payment. It also protects you because the creditors cannot sue your company for the unpaid debt.
Your personal assets will also get protection. However, you will lose control of your company.
When you put your company in voluntary administration, you have to appoint a qualified third party to take over as administrator. The administrator, usually an insolvency law firm, takes control of the company and tries to work out some way to save the business. This can be by negotiating for lower rates or waiver of penalties and late fees.
What is liquidation?
When the administrator does everything possible and the company is still in trouble, the next step is liquidation. This is when the company sells off its assets, such as real estate property, equipment and inventory, to get money to pay creditors.
It’s sad when a company goes bust, but it happens. The best thing you can do when all else fails is to declare insolvency, and start all over again.