Worrells

Are You Insolvent?

The simplest answer is: if you have debts that you should pay, but do not have the money to pay them, you are probably insolvent. If your creditors (the people that you owe money to) are sending demands for payment, final notices and starting legal action against you, you almost certainly are insolvent.

Some people do not think about whether they may be insolvent - or are heading in that direction - until the demands start arriving, or worst, when a liquidator or bankruptcy trustee knocks on their door. But some people look for the signs of insolvency and take some action or seek advice early to limit the potential consequences.

Caught early enough, solvency problems may be able to be resolved. But once a bankruptcy trustee or liquidator is appointed, it is generally too late to fix the problem.

Signs of Insolvency

There are a number of signs of insolvency. These signs are mainly aimed at business owners and company directors, but most also apply to people with consumer debt (personal loans, credit cards etc). They are:

1. Continued Trading Losses - Any business that is not making profits will eventually run out of money (working capital), just as consumers whose income is less than their expenses will eventually run out of savings.

2. Overdue GST, PAYG or income tax debts - Tax debts are generally the first debts to go unpaid when businesses have financial problems and are a common sign of insolvency. The same may be said for individuals. If it is a decision between paying a tax bill and the electricity account, most people will not pay the ATO.

3. Poor Relationship with Banks and Creditors - An inability to arrange any long term finance to boost cash flow and creditors will not provide increased levels of credit. If your creditors will no longer deal with you - civilly anyway - because you owed them money, you should examine why you cannot pay them.

4. Creditors only supply on COD or other terms - Creditors cease providing credit or require repayment of their debts through some formal arrangement.

5. Post Dated or Dishonored Cheques - This is a strong sign of insolvency as creditors require payment but there are insufficient funds to meet the cheques when they are either written or presented.

6. Demands, Summons and Judgments - Receiving these types of documents means that you are almost certainly insolvent, unless you have a genuine dispute with the debt.

The Choices Available

Company directors, business owners and consumers all have at least two options available to them - enter into a formal arrangement to satisfy debts or rely on the insolvency laws to relieve you of your financial problems.

Choices Available - for Company Directors

This is a process designed to assist companies that are unable to pay their debts, by allowing it to either come to a formal arrangement with its creditors through a deed of company arrangement, or be quickly and inexpensively placed into liquidation.

Liquidation is a process for the winding up of a company's affairs in order to provide for an orderly dismantling of a company's affairs and making a fair distribution to creditors. Liquidation is the only way to fully wind up the affairs of a company.

Choices Available - for Business Owners and Consumers

Part X (Part 10) is a part of the Bankruptcy Act that allows a person to enter into a formal arrangement (a Personal Insolvency Agreement) with their creditors to satisfy their debts without being made bankrupt.

Bankruptcy is the process where a trustee administers a person's affairs to provide a fair distribution of that person's assets to their creditors. A bankrupt is protected from being pursued by his or her creditors and, with limited exceptions, is released from his or her debts at the conclusion of the bankruptcy. It gives a person a fresh start on their discharge from bankruptcy.

What should you do?

Financial problems are best solved as early as possible.

Company directors may face civil or criminal liability for insolvent trading if they allow an insolvent company to continue to incur debts, or other breaches of duties. Business owners place personal assets - including their family home - at risk by allowing their financial problems to increase.

Usually the sooner people act, the better their chances of financial survival.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

Last Updated: 9.2.2010