Insolvency and liquidation

Insolvency

A company is insolvent if it is unable to pay its debts as and when they become due and payable. This is sometimes called the “cash flow test”.

A company may be insolvent even if the value of its assets exceeds its liabilities if the assets are not easily realisable to allow payment of its debts as and when they fall due.

Insolvency is typically established where a company has failed to comply with a statutory demand served on it by a creditor with respect to a debt of at least $2000 within 21 days.

If a company becomes insolvent, there are serious penalties for a Director who allows the company to continue trading whilst insolvent (hence the term “insolvent trading”).

Liquidation

Liquidation is what can happen when a company becomes insolvent.

There are 2 types of liquidation:

• compulsory winding-up (ordered by the Court); and
• voluntary winding-up (usually initiated by the company’s members).

The Court can order a company to be wound up if it is insolvent, or, if the Court finds that it is just and equitable that the company be wound up.

An application for compulsory winding-up can be made by the company, a creditor, or members or Directors of the company.

A company can be voluntarily wound up by its members through the passing of a special resolution. This typically occurs while the company is still solvent.

A company can also be voluntarily wound up by its creditors if the company is insolvent.

When a company is wound up, a liquidator is usually appointed (by the company, its members, its creditors or the Court), to oversee the winding-up process. The company must cease carrying on business (unless the liquidator decides the company needs to continue trading to facilitate its winding-up) and the liquidator effectively becomes the company’s agent to take custody of and dispose of its property.

While a company is in liquidation no proceedings against it or its property may be brought or progressed except with the leave of the Court.