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Corporations → Corporate insolvency and restructuring → Introduction to insolvency
Overview — Introduction to insolvency
Updated by Samantha Wong, LexisNexis
Clifford Chance
Australia has a modern and efficient corporate insolvency framework providing stakeholders of a distressed company with a range of legislative insolvency procedures in addition to the informal restructuring options available to them.
This topic provides a general outline of the three most common insolvency procedures, being:
in addition to briefly considering schemes of arrangement in the context of:
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corporate financial distress;
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personal liability of directors;
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voidable transactions; and
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recognition of foreign insolvency proceedings.
The Corporations Act 2001 (Cth) as supplemented by the Corporations Regulations 2001 (Cth) contain the primary legislation in concerning corporate insolvency and the references in this guide to section will be to the Corporations Act unless otherwise indicated.
Bespoke insolvency regimes also exist for certain specific types of companies/entities, for example insurance companies (Life Insurance Act 1995 (Cth) and Insurance Act 1973 (Cth)) and banks (Banking Act 1959 (Cth)). Such special regimes, in addition to the personal insolvency framework under the Bankruptcy Act 1966 (Cth) are beyond the scope of this guidance note.
Test of insolvency
Under the Corporations Act 2001 (Cth), a key event for a company in financial distress is whether it has become "insolvent". Should insolvency arise, there are serious penalties for a director who allows a company to continue to trade.
A company is insolvent if it is unable to pay its debts as and when they become due and payable. Insolvency is typically established where a company has failed to comply with a statutory demand served on it by a creditor with respect to a debt of at least $2000 within 21 days
See Test of insolvency.
Insolvency Law Reform Act 2016 (Cth)
The Insolvency Law Reform Act 2016 (Cth) (ILRA) amends the Bankruptcy Act 1968 (Cth), Corporations Act 2001 (Cth) and the ASIC Act 2001 (Cth) to introduce a new regulatory regime for both personal and corporate insolvency. This is achieved through the introduction of a harmonised insolvency practice schedule to both the Bankruptcy Act and Corporations Act in their respective sch 2.
The ILRA commences in two stages, the majority of amendments on 1 March 2017 with the remainder on 1 September 2017.
The ILRA also provides for the creation of implementing rules and accordingly, the Insolvency Practice Rules (Corporations) 2016 (Cth) and Insolvency Practice Rules (Bankruptcy) 2016 (Cth) were released in December 2016.
See Insolvency Law Reform Act 2016 (Cth).
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