Dealing with insolvent companies
When a company can’t pay its debts when they are due, it becomes insolvent. Find out what to do if you are an employee, shareholder, investor, customer or creditor of an insolvent company.
- What happens when a company becomes insolvent?
- ASIC’s role in insolvency
- Employees owed money by insolvent companies
- Customers owed money by insolvent companies
- Companies owed money by insolvent companies
- Shareholders and investors in insolvent companies
What happens when a company becomes insolvent?
A company becomes insolvent when it is unable to pay its debts when they are due.
If a company is in financial difficulty, the company’s director or a creditor may appoint an external administrator. An external administrator’s job is to take control of the company so that its affairs can be administered in an orderly and fair way for the benefit of creditors. You can find out if the company is in external administration by searching the insolvency notices on ASIC’s Published Notices website.
If the company is in external administration, you can contact the external administrator to register as a creditor and receive updates.
There are different types of external administration such as voluntary administration, receivership and liquidation. Find out more about external administration.
The amount of money you get back from the company depends on the amount an external administrator recovers from finding and selling the company’s assets. After paying the costs of the external administration, creditors will share the remaining money and some creditors will get paid before others.
Another way a director or business owner may close a company is to simply stop trading or transfer the business to another company, which as known as phoenix activity.
These are unacceptable ways to close a business, particularly where creditors or employees have not been paid and the company’s affairs haven’t been dealt with prior to closure.
ASIC’s role in insolvency
ASIC cannot act on behalf of individual creditors, but works to protect the interests of all creditors by:
- registering external administrators and receivers and ensuring they comply with the law
- supervising registered liquidators
- providing up-to-date information about insolvent companies on the ASIC Published Notices website
- implementing insolvency reforms and initiatives.
Employees owed money by insolvent companies
If you are an employee and are owed money for unpaid wages or other entitlements, you are also an unsecured creditor. Employees fall into a special class of unsecured creditors, so your outstanding entitlements will usually be paid before the claims of other unsecured creditors.
Find out more about your rights as an employee when your employer goes into external administration.
Customers owed money by insolvent companies
If you have paid for a product you have not yet received, paid a deposit, or have a credit note or a gift card from an insolvent company, you may be owed money from the company.
Find out if the company is insolvent
To find out if a company has become insolvent check the news media or the insolvency notices on ASIC’s Published Notices website. If they are insolvent and an administrator has been appointed you can register with them as an unsecured creditor. The insolvency process will determine whether you are entitled to any refund.
Make a chargeback claim
If you have a gift card from an insolvent company or paid them a deposit using a credit card, you may have chargeback rights. This means you may be able to get your money back from your credit card issuer. Contact the credit card issuer straight away as there are conditions and time limits on making a chargeback claim.
Redeeming gift cards, deposits or credit notes
Sometimes a retailer will continue trading under the control of an administrator and will honour credit notes, lay-bys, deposits or gift cards. The administrator may place new conditions on the use of gift cards, like requiring you to spend an additional dollar for every dollar you redeem. You will need to decide if it is worth taking up the offer.
Companies owed money by insolvent companies
You should raise your concerns with the company if you suspect that they are in financial difficulty and there has been no external administrator appointed. Warning signs of financial difficulty could be that they are paying invoices late, their payments are dishonoured or they are issuing post-dated cheques. If your discussions with the company fails to resolve the issue you can review ongoing trading arrangements or seek legal advice.
If you suspect the company has been deliberately liquidated to avoid paying outstanding debts you should report this to Australian Taxation Office. Find out more about what to do if you are concerned about illegal phoenix activity.
If the insolvent business you are dealing with is a sole trader or is not a registered company you can make a complaint to the Australian Financial Security Authority.
Shareholders and investors in insolvent companies
If you have invested in a company that has gone into external administration find out your rights as an investor or shareholder.
- Voluntary administration: a guide for creditors (INFO 74)
- Closing a company
- Cancelling a business name
- What happens when a company is deregistered?
- Trouble with debt – help for your personal finances