What does an Insolvent Company look like?

Transcript of Video

Hi & welcome to the Insolvency Experts — I’m Steven Kugel

So what does an Insolvent company look like? Well, a typical scenario would be that a company has $100,000 of assets but against that has $150,000 of liabilities.

Clearly there is an issue worthy of the director seeking advice at this point in time and based on that, the expectation would be that the director should take some positive action to either

return the company to a position of solvency;
ensure the insolvency does not worsen
cease trading the business
Now what you actually find in practice is that the director facing this situation may go into survival mode as he sees he has everything committed to the business and on that basis will battle on rather than face up to the insolvency, and continue on often for 6 months all the way through to a few years and at the end of that time, you might find the company entering liquidation with assets of $100,000 but liabilities have ballooned out to $300,000.

So the liability position has been worsened by $150,000 due to the directors desire to trade on.

Insolvent Trading
Now, in context of the issue of insolvent trading, the creditors who feel angered that they have been taken for a ride, would hope to visit their loss upon the director and his personal assets — and this is the possibility of a successful insolvent trading claim.

Now, the reason why the claim in this example is only the worsened position of $150,000 and not $300,000 is that it was probably reasonable for the director to trade up to the point where liabilities only exceeded assets by $50,000 but past that point, a reasonable person in the shoes of the director would have ensured the position would not worsen, either by ceasing to trade or returning the company to solvency perhaps by injecting personal assets into the company.

Again, you cannot incur debt at a time when you cannot form the reasonable expectation that you can repay that debt otherwise, that damage you cause may be visited upon you and your personal assets.