An insolvent association is one that is unable to pay its debts when due for payment. An insolvent association cannot apply for cancellation or be wound up voluntarily. It may only be wound up by the Supreme Court.
If there is a concern that an association may be insolvent, it is recommended that no further debt be incurred until the financial position of the association has been established and appropriate action taken to address the issue.
If it is not possible to restructure, refinance or obtain additional funding it may be necessary to appoint a voluntary administrator or contact a liquidator.
Liquidation is the orderly winding up of an organisation’s affairs. It involves realising the organisation’s assets, cessation or sale of operations and distributing to the creditors.
Voluntary administration involves an external administrator investigating the organisation’s affairs and providing a recommendation to the creditors.
If the association is unsure where to begin it is recommended to do the following:
- make a list of all possible creditors and how much is owed to each.
- arrange to have the association’s accounts audited.
- contact creditors and see if an agreement can be reached regarding the debt.
- discuss the situation with a finance professional or a lawyer.
Any association that may be insolvent is encouraged to seek professional advice to determine its rights, obligations and options.
Where a management committee resolves that the association is insolvent, or likely to become insolvent, they may appoint an administrator. The administrator takes control of the association’s affairs and may perform any function, and exercise any power, that the association or any of its officers could perform or exercise if the association were not under administration.
Voluntary administration seeks to maximise the chances of an association continuing to operate or, if the association cannot continue, achieve a better return for creditors and the association when winding up its affairs.
As soon as practicable, the administrator must investigate the association’s circumstances and make a recommendation on its future. The management committee is required to assist the administrator by delivering all books in their possession and reporting on the association’s affairs and financial circumstances.