Many Australians believe that Insolvency and Bankruptcy are the same. However, in reality, they are not. Both are financial situations caused due to lack of financial stability. However, the reasons, consequences, and proceedings of these two financial situations are different.

Here is everything you need to know about the differences between them.

Definition

Insolvency is a term used for those who are unable to pay their due debt. According to Australian law, it can be applicable to both individuals and companies who fail to pay their debt. According to Australian law, bankruptcy is a legal procedure against those who are unable to pay their due debts on time. In Australia, the bankruptcy process only applies to individuals.

Amanda Young Arnautovic -Legal differences between bankruptcy and insolvency

In Australia, two different pieces of legislation are created for bankruptcy and insolvency situations. The Bankruptcy Act 1966 covers insolvency for individuals whereas, the insolvency for companies is governed by the Corporations Act 2001.

Reasons behind insolvency and bankruptcy

The reasons for insolvency and bankruptcy are almost the same. When an entity is unable to pay its debts or raise enough finance for working capital to cover basic operations of the company, it can declare insolvency. A company can be declared insolvent and a company director can declare bankruptcy.

How to forecast when a company going toward Insolvency?

Company insolvent is not a new phenomenon. In the past, many companies became insolvent when they fail the pay back their creditors. This does not happen overnight. Good management can forecast insolvency very much earlier. Here are 10 signs which will help you to forecast when a company is going towards the path of insolvency

Continue losses over multiple quarters Liquidity ratios dip below 1 Overdue government taxes and unable to create a payment plan for the taxes Fail to gather alternative finance for working capital Unable to raise capital from the equity market Unable to pay off suppliers or creditors and failed installment payments over the debt When the company issues multiple post-dated cheques When issued cheques get dishonored in the bank If the court issues warrant against the company for due payment When a company fails to disclose accurate financial information to the shareholders.

What happens when a company goes insolvent in Australia?

Under the Corporations Act 2001, the ASIC (Australian Securities and Investments Commission) administers the insolvency process. According Amanda young arnautovic the debt and the financial situation of the company the commission can recommend different insolvency procedures. It may include.

Voluntary Administration

Deed of Company Arrangement (DOCA)

Receivership

Liquidation

The implication of bankruptcy and insolvency

When a company goes insolvent, its stakeholders including the director are usually safe unless they have personally insured or guaranteed themselves for any of the debts. In the same manner, when an individual (like the director of the company) goes bankrupt, the company that he manages will remain unaffected. However, he would be asked to step down from the management of the company.

Just like a responsible individual, you can manage your company professionally and avoid the issue of insolvency. Every company goes through a tough time. But with determination and hard work of Amanda young arnautovic, anyone can overcome a financial rut. Here are some tips that you can follow to avoid insolvency.

Reduce your debt as much as possible. Raise capital from the equity market to improve cash flow. Always maintain healthy communication with the creditors. Make a profit from your business and pay the creditors on time. Take advice from professional financial advisors. Before signing any document read fine prints. Take advice from legal experts.

Thank you for reading the article -Amanda Young Arnautovic