Your company may be insolvent if there isn’t sufficient cash available to pay debts in full as and when they fall due.

Symptoms of insolvency can include being unable to afford to pay all creditors as per their trading terms, entering into instalment repayment agreements, ongoing trading losses, an inability to borrow funds, being issued demand notices from creditors, having cheques dishonoured, or an inability to produce accurate financial records.

If your company is insolvent, it is important to prevent any further activity that would allow it to incur further debt. You will then need to determine the most appropriate course of action, like a suitable insolvency option like voluntary administration or company liquidation. However, you may also be able to restructure, refinance or obtain equity funding to recapitalise your company.

Liquidators and administrators will investigate an insolvent company’s financial affairs and ascertain whether or not it has a future. Liquidators will often investigate improper or illegal transactions which include actions such as void transactions or preferential payments, insolvent trading or offences committed by company officers.

They will also thoroughly investigate a company’s books and records – a responsibility governed by the Corporations Act 2001 (Cth), ASIC Regulations and Professional Standards. Usually an investigation will delve into the possibility of insolvent trading, whether the directors committed any offences, whether there are any recoverable payments to particular creditors, whether there are any hidden assets to be recovered or if there are any other legal actions to consider.

Liquidation can be broken into three separate types:

Creditors Voluntary Liquidation – When shareholders agree under a special resolution that the company must be wound up because it cannot pay debts as they fall due. This is the most common type as it represents a decision made when it is clear a company is insolvent.

Members Voluntary Liquidation – When company executives meet with company members to collectively agree to wind up the company, even though it is still solvent. Whether the company has simply reached the end of its usefulness or the directors and members believe that now is an ideal time go their separate ways, a company that is able to meet its financial obligations may decide to wind up for numerous reasons.

Court Liquidation – When court orders a company into liquidation as a result of an application made by creditors. Once creditors convince the court that the company is insolvent, an official liquidator is appointed on behalf of the company.

Corporations legislation makes it an offence for directors to trade and incur debt if their company is insolvent. Doing so may result in heavy fines or criminal charges. A liquidator (or other eligible parties) can also seek monetary compensation from a director equivalent to the loss suffered by insolvent trading. There are defences stipulated in the legislation which directors may be able to avail themselves of. It is always prudent for company directors to seek their own independent legal advice about any potential personal ramifications of a potential external administration appointment.

A DOCA, or Deed Of Company Arrangement, is one of the methods available to save an insolvent company from completely going under. It is an agreement between a company and its creditors which binds all parties to a particular strategy for dealing with the company’s affairs. The point of entering into a DOCA is to provide a better return for creditors than an immediate winding up of an insolvent company or to give to company the best possible chance of continuing its business. A DOCA must include, amongst other important details, the extent to which the company will be released from its debts, details of the claims which led to the DOCA, and the order in which any proceeds of the company’s assets are to be distributed.

Directors whose companies enter into voluntary administration lose their power to the administrators. Administrators take control of the insolvent company’s affairs during the process, which protects directors from insolvent trading or any actions that might cause further financial damage to the company.

However, directors still have a number of responsibilities. During the voluntary administration process, directors must assist the administrator by providing all necessary information regarding company books and records, properties or commercial assets, and any other relevant financial holdings or dealings.