Insolvent

If you are insolvent, you are unable to repay your debts when they fall due or your liabilities are greater than your assets. Businesses may be considered insolvent, or in danger of becoming insolvent, if they:

• Suffer ongoing losses

• Have poor cash flow

• Have increasing debt with liabilities exceeding their assets

• Cannot pay suppliers or other creditors within the usual timeframe.

If a company becomes insolvent, then there are special obligations that directors must adhere to. These include restrictions on trading.

For businesses that are insolvent, or in danger of becoming insolvent, there are three basic actions that may be implemented. These include:

• Voluntary administration

• Liquidation, and

• Receivership.

Voluntary administration is where a business is in danger of becoming insolvent and has an administrator appointed in order to try to improve the financial viability of the business and to come to an agreement with creditors.

Liquidation is where the business is wound up and the assets sold in order to settle outstanding liabilities.

Receivership is where a business has a receiver appointed by creditors or the Courts to take charge of the affairs of the business. Unlike liquidation, the business may not necessarily be wound up.