Insolvency Law

When does insolvency occur?

Sometimes people make poor financial decisions.  Sometimes financial disasters occur that overwhelm the most prepared person.  In extreme circumstances, a person may be in such a financial mess that they can't pay back their debts as and when they fall due.  In these circumstances, a person (or a company) is insolvent.
The test of insolvency is not whether their liabilities are greater than their assets.  Rather, the test is whether they can pay their debts as and when they fall due.

What is the effect of insolvency?

Many years ago a person who owed someone else money ("debtor") and did not pay could be arrested and imprisoned until the debt was paid - perhaps by a sympathetic family member.  In some circumstances (notably fraud) this can still happen.  In general, however, this option is not open to a person who is owed money by a debtor ("creditor").  Instead, the creditor can seek the assistance of the Court to be repaid from assets or income of the debtor.  

This can be a stressful exercise for all concerned sometimes resulting in the debtor being rendered bankrupt.  All their assets and income are disclosed to a trustee who, after allowing the bankrupt person enough money to survive, will apply that money toward the creditors.  After a period of usually three years, the debts of the bankrupt person automatically end and the bankrupt person cannot be required to repay their debts.

What are the negative effects of insolvency?

There are a number of "downsides" to being a bankrupt person including:
  • the confiscation of passports;
  • the impact upon their credit standing;
  • they cannot act as directors of a company; and
  • for many people a sense of shame and failure.
A company that is insolvent is no longer permitted to continue trading and should be placed into liquidation ("wound up").

There are a number of alternatives to bankruptcy of a person or liquidation of a company.  Many of these involve a process under which the debtor "does a deal" with their creditors to pay a limited amount of the debt rather than pay all of their debt.

Who gets what?

In general, the law requires all creditors of a bankrupt debtor to receive the same proportion of their debt.  Sometimes people gain an advantage, perhaps because they are employees ("preferred creditors").  Often lenders such as banks require securities such as mortgages or charges or guarantees by other people to be provided before they will lend any money ("secured lenders").  The position of a secured creditor is almost always far better than being an unsecured lender.  Holley Nethercote therefore strongly recommends that any person or entity which is considering providing credit in any form to another person should seek to give themselves the best possible prospects of payment by seeking appropriate security.

We can help!

If you would like assistance with an insolvency issue, email Tim.

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