Economics Title

Types of Insolvency

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Priya Kaur

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Christian Bien

Learning Objectives

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What is Insolvency?
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Insolvency occurs when a business cannot pay its debts as they fall due. The case of ASIC vs Plymin (2003) defined 14 key indicators of insolvency. 


The main indicators relevant to this unit include: 

  1. Continuing losses 

  2. Liquidity ratios below 1 

  3.  Overdue and unpaid taxes 

  4. Ongoing negative net assets - i.e. liabilities exceed assets 

  5. Creditors unpaid outside trading terms - i.e. taking too long to pay creditors 

  6. Unrecoverable loans - i.e. debts to parties with little or no sign of repayments 

  7. Inability to obtain finance from banks, related parties or shareholders - i.e. unable to take further credit or raise cash in a share capital raise.

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Voluntary Administration
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A voluntary administration is where a qualified person takes control of the Company to quickly determine a future direction that best meets the interests of its creditors. 


An administrator will best try to save the company, with three possible outcomes concluding from a voluntary administration: 

  1. Control is returned to the Company. 

  2. A Deed of Company Arrangement is arranged where part or all of its debts are paid subject to certain conditions. 

  3. Administrator appoints a liquidator to sell the assets of the Company.

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Receivership
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A receivership is where a qualified person is appointed by a secured creditor, or in special cases by the court, to take control of some or all of the assets of a business to sell and return the money owed to a creditor. 

Any surplus money is paid in order of priority (next page).

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Liquidation
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When a Company's debts are too severe, creditors or the court can appoint for the Company to be wound up. This involves a liquidator to take control of the business and sell all of its assets, providing a return to creditors in order of priority. 

After the business' assets are sold, the liquidator formally closes the company, engaging in activities such as deregistering the business.

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