In a business, money only runs in two ways: into the company and out of the company. You can only earn money and spend money. When the spent money is much less than the earned money, your business is thriving and profiting. When your spent money is much more than your earned money, however, you get debts. What happens when you cannot pay your debts on time?
Spending More than You Can Earn
Debts can pile up fast if the company is not careful with money. When your company experiences financial troubles, the company may become insolvent. Insolvency is a state when a company can’t pay its debts.
Insolvency vs. Bankruptcy
Insolvency is different from bankruptcy. Insolvency is what causes bankruptcy. A company files for bankruptcy as a legal declaration of its insolvency. In Australia, it is illegal for a business to continue to operate despite its insolvency or else it may gain more debts it cannot pay.
A Way Out of Insolvency
Now, bankruptcy is one of the ways you can get help to pay off your debts. Other options include liquidation and reconstruction. In liquidation, your company gets a Liquidator, and the company’s assets are sold off. The money you get from these sold assets, you can use to pay the company debts.
Another Escape Plan
Hardies Lawyers discussed restructuring as a way out. In restructuring, you can sell off your whole company to a new company. The new company is not just any other company; it is a company formed for the sole purpose of replacing the sold one. All the assets and liabilities of the old company will be carried on over to the new one. The shareholders of the old company will also be the shareholders of the new one. After reconstruction, the old company will be liquidated.
Prevention is Always Better
One great way to avoid falling into insolvency is to hire accounting and legal advice. For one, you can go to a reconstruction and insolvency law firm in Perth, among many other legal choices.
Insolvency does not have to be a problem as long as you get the help you need early. You can kiss insolvency goodbye.