The term “insolvency” might come across as a somewhat foreign language to those individuals who may have missed out on their Commercial Law 101 class. And while the word “bankruptcy” may ring a bell for most people, a solid definition is often just beyond most fingertips. These two words, however, are part of a family of commercial law jargon that we, at Boston Commercial Service Pty, believe essential for every individual in business to understand. We have therefore compiled this list of Insolvency Legal FAQs that are sure to help you understand this concept better. The FAQs will be discussed over two blogs to help clarify these points as much as possible.
So, let’s get started.
1. What is insolvency?
Insolvency is a broad term that refers to the state of an individual or a company when he/she/it is unable to pay their debts when they are due. A person or company that is unable to pay their debt is referred to as an insolvent, according to corporation Act 2001 s.95A (2).
2. How is the insolvency of a company or individual determined?
When determining the insolvency of a company, one must ask the following question: Does the company have the ability to fully pay off all of their debt when it’s due? The following should be taken into consideration while answering this question:
- Presence of cash reserves and what will be available when the debt is due
- Venture capital, current cash flow and projected cash flow
- Access to funding sources
- The borrowing capacity of the firm.
- Available assets for sale i.e. the realisation of cash
- Flexibility of the debt due date
It’s of utmost importance to note that it is illegal for the directors of an insolvent company to continue operating and incurring more debt.
3. What are the early indicators that a company might be moving towards insolvency?
Insolvency often happens over an extended period. It’s therefore essential to look out for signs that may indicate a company’s degeneration to a state of insolvency. These may include inadequate internal accounting procedures, sketchy financial records, a marked drop in annual cash flow, as well as continued engagement in activities that result in losses.
Also, having an unmanageable number of debtors could be a sign that an individual or company may not be running with an adequate cash turnover to keep afloat. In this case, the company or individual should hire a debt collection agency who can accrue their debts efficiently and professionally.
Other signs that may serve as red flags include defaults on loans, low credit scores, loss of key employees (such as managers) and involvement of financiers. If you have noticed any of these signs in your company, please contact Boston Commercial Services Pty Ltd on 1300 668 699 for professional advice on the best way forward.
That is all for part one. Read part two to know more about insolvency, bankruptcy and the steps that one should take if they are caught up in a financial crisis.