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What you need to know about corporate insolvency

As everyone knows, when someone gets into financial trouble, they have the option of declaring bankruptcy. This doesn’t bode well for their credit rating, but it does allow them to clear their debts without incurring any legal action. For businesses, the law is quite different. Instead of bankruptcy, companies can encounter what is known as corporate insolvency. A company is deemed to be insolvent when it is unable to cover its debts when they are due to be paid. As with personal bankruptcy, there are multiple types. There are three kinds of insolvency procedure that a business can choose.

1. Voluntary administration

This type of insolvency is where a secured creditor who has control of the assets or the company’s directors choose to appoint someone to be a voluntary administrator for the business. This person will be tasked with conducting an investigation of all the affairs of the company. This investigation will give the administrator a good idea of where the financial troubles lie and what should be done. Once the investigation is complete, the administrator will then report their findings to the creditors.

Based on those findings, the administrator will give a recommendation as to what the next steps should be. They could decide to place the business into a company arrangement deed or they could choose to move the company into liquidation. For this he contact with Business Lawyers Brisbane. A deed of company arrangement is essentially an agreement between the creditors and the company as to how the affairs of the company will be handled. It’s a binding agreement, and it improves the chances that the company will continue its operations. The third option is to return control back to the directors. Typically, company directors will appoint a voluntary admininistrator when they feel their business might be moving towards insolvency as a means of prevention.

2. Liquidation

This option is something companies try very hard to avoid, but unfortunately it does sometimes become a necessity. This process involves selling the company’s assets and subsequently distributing the proceeds to any creditors the company owes. Any surplus that remains will then be split among the shareholders. Liquidation can be initiated either by the company due to debts or because the owner wishes to retire or step down and doesn’t have anyone to replace him or her. Liquidation can also take place as a result of a court order.

3. Receivership

This form of liquidation involves a different type of appointment. In this case, a secured creditor who has control over all or some of the assets of a company will choose someone to act as a receiver. That person will then work to collect and sell the assets of the company until enough capital is raised to be able to pay the full debt that the secured creditor is owed. This form of liquidation is not as desirable as voluntary administration, but it is a far better alternative than liquidation as the company does have the chance to keep on doing business after the debts are handled.

christielawyersWhat you need to know about corporate insolvency