Insolvency and Bankruptcy

Navigating Insolvency & Bankruptcy

When you or your business is unable to pay its debts, or when debts become unmanageable, there are legal avenues available to manage or resolve the situation.

For businesses, insolvency can lead to winding up of the company, voluntary administration, liquidation, or other formal insolvency procedures where an external administrator is appointed to manage the company’s affairs.

For individuals, insolvency can lead to bankruptcy or personal insolvency agreements.

What is Corporate Insolvency?

A company is considered insolvent when it cannot pay its debts as and when they fall due. When this happens, directors must act quickly and responsibly as continuing to trade while insolvent can lead to serious legal consequences, including personal liability for directors. If winding up proceedings are pursued, a company is placed into liquidation by the court and a liquidator is appointed to the company. Therefore, it is crucial for directors to understand their duties and option.

Corporate Insolvency Procedures

When a business faces insolvency, several formal processes can be applied:

Voluntary Administration

Voluntary Administration is a temporary process where an independent external administrator is appointed to take control of the company. This is often initiated by the company’s directors but may also be triggered by a secured creditor or a liquidator.

The administrator’s primary task is to investigate the company’s affairs thoroughly. Following this investigation, a report and recommendation are provided to the creditors, recommending one of three outcomes:

The company proceeds to liquidation;
It enters into a Deed of Company Arrangement (DOCA); or
It returns to the directors’ control.

Voluntary administration is often used to restructure the business or maximise returns for creditors.

Liquidation

Liquidation is the formal process of winding up a company’s affairs. There are typically three types of liquidation:

Court-ordered liquidation: Initiated by a court order, often following an unpaid debt or insolvency notice.
Creditors’ Voluntary Liquidation: Initiated by the company itself after declaring insolvency.
Members’ Voluntary Liquidation: Used for solvent companies that wish to cease operations.

During the liquidation process, a registered liquidator is appointed. This liquidator has a primary duty to all creditors of the company. The company’s assets are realised (sold), and its operations are ceased. The proceeds from these realisations are then distributed among the company’s creditors according to a statutory order of priority, with any surplus shared among shareholders.

Receivership

Receivership occurs when a secured creditor appoints a receiver to recover amounts owed to them. The receiver’s role is limited to realising certain secured assets to repay that creditor. The company may continue to operate under directors or other administrators for other business functions not affected by the receiver’s control.

Small Business Restructuring (SBR)

This is a formal insolvency process ito help small businesses with unmanageable debts restructure and potentially avoid liquidation. It allows eligible companies to develop a plan to compromise with creditors while remaining under the control of their directors. The company must meet the definition of a small business under the Corporations Act (generally, less than $1 million in liabilities, excluding employee entitlements).

What is Bankruptcy?

For individuals, bankruptcy means being unable to pay debts when they are due. There are formal processes available under the Bankruptcy Act 1966 (Cth) to help resolve personal debt issues.

When you’re declared bankrupt, most types of creditor must stop taking any action against you to get you to pay what you owe. However, there are other options.

Bankruptcy Options

For individuals unable to meet their debt obligations, several formal options exist under the Bankruptcy Act:

Declaration of Intention to Present a Debtor’s Petition (DOI)

A Declaration of Intention (DOI) provides temporary relief for 21 days. During this period, unsecured creditors are generally not allowed to take any actions to recover the debts. This interim period allows the individual to decide whether to proceed with bankruptcy or explore another insolvency option.

Debt Agreement

A Debt Agreement is a legally binding agreement between the individual and their creditors. The arrangement under the agreement is usually managed by a registered debt agreement administrator. Under this agreement, creditors agree to settle the debts under the term that the bankrupt individual:

Repay a percentage of the debt;
Pay in instalments over time; or
Under alternative terms

Personal Insolvency Agreement (PIA)

A Personal Insolvency Agreement (PIA) is a more flexible agreement with creditors to settle the debts in full or in part. It involves a controlling trustee who proposes an agreement to creditors, often involving assets sales, lump sum payments, or structured payment arrangements with the creditors. Creditors vote on whether to accept the controlling trustee’s proposal.

Declaration of Bankruptcy

Declaring bankruptcy is generally considered the last option available for an individual who cannot manage their unpaid debt. A person can become bankrupt either voluntarily (by filing a debtor’s petition) or involuntarily (by obtaining a sequestration order by a creditor’s petition). Once bankrupt:

A trustee is appointed,
Non-exempt assets can be sold to repay creditors,
Certain income thresholds and contributions may apply,
Travel and business restrictions are imposed,
The bankruptcy typically lasts 3 years and 1 day, though extensions are possible.
Bankruptcy remains on the individual’s credit record for up to 5 years, or longer in some cases.

Once a person is bankrupt, creditors cannot pursue you for debts incurred prior to bankruptcy, such as engaging in debt recovery or commencing legal proceedings action against you, unless they get leave from the court.

Need Legal Advice?

Navigating insolvency and bankruptcy can be incredibly complex and emotionally challenging. If you are facing any problems related to unpaid debt, corporate insolvency, personal bankruptcy, or any other aspect of insolvency law, our lawyers at Citilawyers are here to help and advise you. We provide strategic, compassionate, and effective guidance to help you find a clear path forward.