Bankrupt Company

What happens to a company when it becomes bankrupt?

When a company becomes insolvent or bankrupt, it can do a few different things. It can enter into a deed of company arragnement which is where it can continue to trade to see if it can trade out of its insolvency or it can go into liquidation. When a company goes into to liquidation it is termed ‘winding up’. Winding up can be ordered by a court if a company is found to have become insolvent. This can happend if it has failed to comply with a statutory demand or a financial report has been done which indicates that it is insolvent. Winding up for failure to comply with a statutory demand is done under s.459E of the Corporations Act 2001 (Cth).

What should I do if I involved in a bankrupt company?

If you are the director of a company which you suspect is insolvent, you should seek legal advice immediately. There can be very serious consequences as a director of an insolvent company if you are found to have allowed a company to trade while it was insolvent. This can lead to prosecution by ASIC. When a company is insolvent, there is usually a large fight over who is owed what because there will be a llong line of creditors who are owed money and not enough assets or cash to pay them with. This can lead to serious disputes between trade creditors, the tax office, employees, shareholders and anyone who is owed money by the company. If you think that you company is going to become insolvent soon, it is wise to wind up the company while it is still solvent as there are none of the potential legal claims that can result from this.

Also, there is an area known as preference payments. There is a natural order of priority which is accorded to the payment of creditors in a bankrutpcy of a company if this order is not followed then you need to look at if the payment has been distributed unfairly. Liquidators have an obligation to make sure that payments are distributed to secured creditor’s first and then unsecurred creditors. If you are a creditor, you must lodge a proof of debt with the liquidator in order to have a chance or voting at the creditor’s meetings and to ensure you are given a say in what the otucomes of the liquidation process is or, if the company enters into a deed of company arrangement, how the deed of company arrangement is structured.

All of these issues in insolvency are deeply technical and you need to examine them in detail to secure your rights. Each person’s particular situation is different as well and this must be taken into account when assessing how to interact with each specific rule about the insolvency of a company. For this reason, it is recommended that you seek legal advice in relation to this matter urgently if you are involved in a company which you think may be insolvent in any way shape or form.

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