04. Insolvency

Question 1

What is the definition of Insolvency as per the Corporations Act 2001?

Answer 1

Insolvency is defined as ‘a person is solvent if and only if the person is able to pay all the person’s debts, as and when they become due and payable. A person who is not solvent is insolvent.’

Question 2

What are 3 Actions a company can take in the event of Insolvency?

Answer 2

• Receivership
• Voluntary Administration
• Liquidation

Question 3

What is the definition of a Receivership?

Answer 3

A secured creditor is appointed as a receiver who will then sell the company’s assets until the debt is paid off. (initiated by creditor)

Question 4

What are some Outcomes of a Receivership?

Answer 4

• director remains in charge of the business
• if assets are payed off then business returns to normal operations
• if assets are not payed off then business must appoint an administrator

Question 5

What is the definition of Voluntary Administration?

Answer 5

a business seeks external management (the administrator) to assist them to pay their debts to avoid liquidation

Question 6

What are some Outcomes of Voluntary Administration?

Answer 6

• administrator is responsible for deciding best solution to pay debts and if possible continue trading

Question 7

What is the definition of Liquidation?

Answer 7

When the company is unable to continue operating and must wind up and de register the company.

Question 8

What is the outcome of Liquidation?

Answer 8

• if liquidated, the company will cease to exist, as the appointed liquidator will sell assets to pay the company’s debts in order of priority and wind down the company

Question 9

What is the order of repayment in the event of Insolvency?

Answer 9

1. Liquidator fee
2. Secured Creditors
3. Employee Entitlements
4. Unsecured Creditors
5. Shareholders