Question

QUESTION 1 -

Mira is director of a company that is selling flowers at Waterfront, Casuarina and Palmerston. The flower company has had three years of poor trading and is now unable to pay its debts when they fall due. Mira seeks your advice on the options available in the circumstances. She is concerned the company may be insolvent but is hopeful that the NT economy will improve, and her business will flourish soon.

REQUIRED:

1. Explain the options available to Mira if she suspects the company is insolvent. What would be the potential benefit to her if she appoints a Voluntary Administrator?
2. What sort of risks could Mira face if she borrows more money to help the company but then can’t pay it back?

Answer 1

a) The options available with Mira in chance company turns insolvent are :

• Sell all the assets of the company and then clear all the debts and borrowings of the company by the amount received. If still some US left with the company after clearing all its debts, the remaining amount should be distributed among the owners.
• The other option is of the owner thinks there is hope that company could again flourish, then it can adopt the voluntary administration process. In this a voluntary administrator is being appointed by the company fir a fixed period once company is detected to be insolvent.

The benefit from appointing voluntary administrator is : the administrator would judge the situation and make decisions on how the insolvency situation should be dealt. If he founds that the company can regain its position, he will suggest ways as to how they can make a comeback. As mentioned above, Mira is sure that company could improve, thus this voluntary administration process would be best for the company.

She would be guided as to how to work on bringing the company back in its working state. This will save the company frombeung closed down or turn to be insolvent.

Thus, we can say that this will benefit the company.

b) If Mira borrows more money, then she will be in more debts and with time, the company will increase its liabilities and can reach to a level where it would be impossible to save the company from being insolvent. This would lead to closing down og company and selling all the assets of te company, if she is not able to repay back the debts.

This would ultimately lead to turning company to insolvent. Thus, borrowing more money would have a huge impact on the company and would increase the risk of insolvency in the company in chance not repaid back.