Dealing with insolvency
A corporation is insolvent if it cannot pay its debts when they are due.
Being insolvent does not necessarily mean the corporation has run out of money completely. A corporation may own valuable assets but still be insolvent if it cannot pay its bills on time.
What directors should do?
If you have concerns that your corporation may be insolvent, nearing insolvency, or a creditor is chasing payment from your corporation you must act early, get good financial information, seek advice and take steps to improve the corporation's financial position.
There are serious consequences if you do not do these things.
- Act quickly
- Discuss the situation at a board meeting.
- Make insolvency a priority.
- Do not take on new debts
- Be very careful about ordering goods, signing contracts or borrowing money unless the corporation can pay for them.
- Making commitments that the corporation may not be able to meet may make the situation worse.
- Get up-to-date financial information
- Review available cash, bank balances, debts and unpaid bills, expected income, cash flow forecasts.
- Find out exactly how much money is owed and when payments are due.
- Seek professional advice
- Talk to the corporation's accountant, auditor, bookkeeper or a qualified insolvency adviser about whether the corporation is insolvent, available recovery options, and legal obligations and risks.
- Continue monitoring finances closely
- Review financial reports more frequently.
- Keep track of whether the corporation can pay its debts when they fall due.
- Reduce spending
- Delay non-essential spending.
- Look for ways to reduce costs.
- Improve cash flow
- Collect money owed to the corporation.
- Review funding opportunities and other sources of income.
- Talk to creditors
- Contact suppliers, lenders and other creditors early.
- Discuss payment arrangements if necessary.
- Consider all options
- Depending on the circumstances, options could include restructuring operations, seeking additional funding, selling assets, or obtaining specialist insolvency advice.
Who to ask for help
If you are concerned that your corporation may be insolvent, or is at risk of becoming insolvent, seek professional advice as early as possible.
Insolvency advice is best obtained from a qualified professional who can assess your corporation's specific circumstances and explain the options available. You may wish to contact:
- a registered liquidator
- a specialist insolvency accountant
- a lawyer experienced in insolvency and corporate law
- a financial advice service.
If you are unsure about your duties and responsibilities as a director when a corporation may be insolvent, you should seek independent legal advice. Early legal advice can help directors understand their obligations, make informed decisions and reduce the risk of breaching their duties.
ORIC cannot provide legal or financial advice about whether a corporation is insolvent, the options available to address insolvency, or a director's personal legal obligations. Directors should obtain independent professional advice if they have concerns about the corporation's financial position or their responsibilities under the law.
Can insolvency be addressed?
There is no single solution to insolvency. Depending on the circumstances, a corporation may be able to improve its financial position by:
- reducing costs
- increasing income
- collecting overdue debts
- negotiating payment arrangements with creditors
- restructuring its operations
- selling assets that are no longer needed
Professional advice can help directors determine which options may be appropriate.
Formal insolvency options
If a corporation cannot recover financially, professional advice may recommend formal insolvency processes such as:
Each process has different purposes and consequences.