What to do if Your Company cannot pay its Debts

October 24, 2016

Company insolvency is always a vexed question for the directors. If they determine that the company cannot meet its debts and is insolvent, they have to decide whether to wind up the company. But there is an alternative which is not used frequently enough. That is, a deed of company arrangement. We are familiar with the Chapter 11 procedure in the United States where great companies have been allowed to trade out of their difficulties. There is a procedure in Australia which has some similarities to that philosophy that it may be better to keep a company going. Under our Corporations Act, the directors can appoint an administrator, who will investigate and report to the creditors as to the state of the company and whether there is a reasonable prospect of its trading out of its financial predicament. That proposal is the voted on by creditors. The creditors are given the advice whether they will be better off by accepting the arrangement or whether the company should be wound up. These arrangements are not always welcomed by creditors, especially if there have been untoward activities by the directors which will go un-investigated if the arrangement is accepted. Also, because the arrangement proposal can be whatever the administrator thinks appropriate, it may mean that some creditors can be required to accept a reduced amount and/or paid over an extended period. Any creditor who feels that the arrangement is unfair can apply to the Court to have it terminated. The Court will require credible evidence of wrongdoing before intervening.
The lesson is that all is not lost when a company experiences financial difficulty. Winding up the company is not the only option.

The above commentary is general and depends on the individual circumstances. It should not be relied on without specific legal advice.

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