Insolvency
Advice on liquidation, administration, receivership and personal bankruptcy in NSW, for creditors and directors.
Insolvency arises when a company or individual cannot pay their debts as and when they fall due, triggering options such as statutory demands, voluntary administration, liquidation or personal bankruptcy under the Corporations Act 2001 (Cth) and the Bankruptcy Act 1966 (Cth). Vamp Law advises both creditors and directors on these processes.
What is insolvency under Australian law?
A company is insolvent when it cannot pay its debts as and when they fall due, a test set out in the Corporations Act 2001 (Cth). An individual is insolvent, or bankrupt, when they cannot meet their debts and either enter voluntary bankruptcy or are made bankrupt on a creditor's petition under the Bankruptcy Act 1966 (Cth). Vamp Law advises both creditors and directors when a business relationship reaches this point.
In practice, insolvency is usually assessed using a cash flow test: whether a company can pay its debts as they fall due using cash reasonably available to it, rather than a strict balance sheet comparison of total assets against total liabilities. A company can have assets on paper and still be insolvent if those assets cannot be turned into cash quickly enough to meet its immediate obligations.
Insolvency is rarely a single event. It is usually the end point of a longer period of financial pressure, and the options available, whether voluntary administration, liquidation, receivership or informal restructuring, depend heavily on how early advice is sought. A creditor who understands this timeline can often negotiate a better outcome by acting while the company still has some room to move, rather than waiting until liquidation is the only option left.
How does Vamp Law act for creditors facing an insolvent debtor?
A creditor whose debtor is showing signs of insolvency has fewer options the longer they wait. Vamp Law advises creditors on statutory demands, on lodging a proof of debt once a company is in liquidation or administration, and, where appropriate, on opposing or supporting a winding up application. Once a company is in liquidation, an individual creditor generally cannot sue it directly, so early action matters. Creditors are not limited to formal insolvency processes either: sometimes negotiating a payment plan directly with a company under financial pressure, before it reaches formal insolvency, produces a better outcome than waiting for a liquidation dividend that may be a small fraction of the debt.
How does Vamp Law advise directors facing insolvency?
Directors carry personal duties under the Corporations Act 2001 (Cth), including a duty not to allow a company to trade while insolvent. A director who continues incurring debts after the company can no longer pay them risks personal liability for insolvent trading under section 588G, unless a specific statutory defence applies. Directors are often surprised to learn that resigning from a company does not end their exposure for insolvent trading that occurred while they were still a director; liability for that period generally continues to attach to them personally even after they step down.
Vamp Law advises directors on their duties, on the practical steps available when a company is under financial pressure, such as voluntary administration or a small business restructuring process, and on the kind of record-keeping that supports a director's position if a liquidator later reviews the company's affairs. Board minutes that record why a decision to keep trading was reasonable at the time, based on the financial information available then, are often the single most useful record if a liquidator later questions a director's conduct. This is general information about how these processes work, not advice on a specific company's position; every director's circumstances need individual assessment.
What is a small business restructuring process?
A small business restructuring (SBR) is a formal process under Part 5.3B of the Corporations Act 2001 (Cth) that lets an eligible small company propose a restructuring plan to creditors while a restructuring practitioner oversees the process, with the directors generally remaining in control of day-to-day trading. It was introduced specifically to give smaller companies a lower cost alternative to full voluntary administration.
Eligibility depends on factors including the company's total liabilities and its history of prior insolvency processes, and creditors vote on whether to accept the proposed plan. Vamp Law advises directors on whether their company is eligible for this pathway and what a realistic plan would need to include to gain creditor support, and advises creditors asked to vote on a restructuring plan proposed by a debtor company.
What is a deed of company arrangement?
A deed of company arrangement (DOCA) is an agreement between an insolvent company and its creditors, negotiated during voluntary administration, that sets out how the company's affairs will be dealt with, often allowing it to continue trading under new terms rather than being wound up. Creditors vote on whether to accept a proposed DOCA at the second creditors' meeting.
Vamp Law advises creditors on assessing a proposed deed, including what it is likely to pay compared with the alternative of liquidation, and advises directors on proposing a deed that has a realistic prospect of creditor support.
Frequently asked questions
An insolvent company cannot pay its debts as and when they fall due, which can lead to voluntary administration, liquidation or receivership depending on who acts and why.
Directors, creditors and Vamp Law's clients each have different rights and obligations once that point is reached.
A director can be personally liable under section 588G of the Corporations Act 2001 (Cth) for debts incurred while the company was insolvent, unless a defence such as reasonable expectation of solvency applies.
This is general information only; your specific position needs individual advice from a lawyer who has reviewed your company's circumstances.
Voluntary administration is a temporary process aimed at working out whether a company can be saved or should be wound up, while liquidation ends the company's operations and distributes its remaining assets to creditors.
The two often follow one another, with administration ending in either a deed of company arrangement or liquidation.
Once a company is in liquidation, individual creditors generally cannot sue it directly and instead lodge a proof of debt with the liquidator, ranking behind secured creditors and certain priority claims.
Vamp Law advises creditors on how to protect their position and what a realistic recovery might look like.
A director who suspects the company may become insolvent should get advice promptly, keep clear financial records of decisions made, and avoid incurring new debts the company cannot pay, since delay can increase personal exposure.
Directors' personal liability insurance sometimes responds to these situations too, and reviewing what cover is in place is worth doing before any dispute arises, not after. This is general guidance, not advice on a specific company's position.
A proof of debt is the formal document a creditor lodges with a liquidator or administrator to establish the amount it is owed and its priority in the distribution of a company's remaining assets.
Vamp Law prepares and lodges proofs of debt for creditor clients, and reviews the evidence needed to support the claimed amount, since an inadequately supported proof can be rejected or reduced by the liquidator.
Generally, yes, though the administrator takes control of the company and its affairs during this period, and any significant transactions typically need the administrator's consent.
The administrator's role is to assess whether trading on preserves or destroys value for creditors, and to report to creditors with a recommendation before the process moves to a deed of company arrangement or liquidation.
Ready to discuss an insolvency matter?
Creditors owed money by a company in difficulty, and directors trying to understand their obligations, can make an enquiry or call +61 431 569 686 to speak with Kyra Pastrovic.
More on insolvency
What Happens When a Company Becomes Insolvent?
When an Australian company becomes insolvent, it can no longer pay its debts as and when they fall due, which usually leads to voluntary administration, liquidation or receivership. Directors, creditors and employees are each affected differently depending on which process applies.
Read moreAm I Personally Liable for Insolvent Trading?
A director can be personally liable for insolvent trading under the Corporations Act 2001 (Cth) if the company incurs a debt while insolvent and the director knew, or a reasonable person in their position would have known, that the company was insolvent at the time.
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