Amanda and Emilia do not know what to do. Is their company insolvent? If it is what action would you advise them to take

Question - Amanda and Emilia are co-directors and members of Griffin Pty Ltd, which imports widgets from Vietnam and sells them in various hardware stores in regional NSW. Griffin has a medium-sized warehouse where it stocks goods, and from which it distributes products.

Griffin recently signed a contract to supply a large hardware store in Orange and Dubbo with widgets. So the company ordered 10 pallets of widgets from its Vietnamese supplier and also paid a substantial deposit. A shipping company who carries goods into Australia has already brought the pallets into the country and has sent their bill to Griffin.

After a couple of deliveries to the hardware store, a safety issue is discovered with the widgets and the government bans the sale of the widgets. The hardware store cancels all further orders of the widgets.

Now, Griffin has no future revenue and its remaining stock of widgets cannot be sold. The shipping company is demanding payment of its invoice; there are also several outstanding bills to the ATO, staff and other suppliers.

Amanda and Emilia do not know what to do. Is their company insolvent? If it is, what action would you advise them to take?

Answer -

Insolvency is a situation wherein the company is unable to pay back its' debts in a specified time period. This is possible if the company is into losses or has issues regarding financial irregularities. As per section 436A, once the company is declared to be insolvent, an external administrator is appointed. The administrator can either assist the company with certain cost cutting practises, changing of the management of the company, or such other way. If in case the performance of the company does not get better with the involvement of an external administrator, it might lead to liquidation of the company.

The external administrator in this case shall help in liquidating the assets of the company to pay the balance to the creditors. His/her role also includes distribution of the proceeds to specific stakeholders. In this scenario the directors Amanda and Emilia might appoint a voluntary administrator which requires a majority approval from board of directors and a resolution has to be passed.

If the administrator decides not to liquidate the company and that the company has a potential viability, reorganisation of the company can take place in order to restore the profits of the company and bring back the business to its' stability. As per section 436B, a liquidator or a provisional liquidator can also be appointed if the company is insolvent or likely to be insolvent. As per section 436C, the creditors of the company can appoint a chargee.

During this process, the company's property is given protection. As per section 440B, restrictions are also imposed on third party rights. Recovery of the property by the owners also isn't possible. Also, as per section 440D, without the court's leave or the administrator's written consent, the proceedings in the court cannot begin. Section 440F will protect the company against forceful takeovers as the company's property cannot be enforce without court's leave or imposed terms by the court. In this case, the voluntary administrator will take the appointment and held creditor's meetings to decide whether the company should be wound up or can continue.

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