Insolvency & Bankruptcy FAQs

Date: April 19, 2008

Authors: LAC Lawyers

Q. Should I declare myself bankrupt as I can no longer pay my bills?

A. The simple answer is that bankruptcy is not a cure for the problem and it is a serious step about which proper legal advice should be obtained before it is taken.  Most people think they will obtain a discharge from bankruptcy at the expiration of three years.  This does not necessarily follow, as an extended period may be required before a discharge is obtained.   Bankruptcy has serious consequences personally as well as financially all of which need to be considered before such a step is taken.    By consulting a lawyer, there are forms of protection available to debtors which do not involve bankruptcy about which they can advise you.

Q. What is insolvency?

A. The Corporations Act defines insolvency as an inability to pay debts as they fall due out of the debtor company's own money.

Q. How can insolvency be proved?

A. To determine whether a company is insolvent, the court will take into account the company's entire financial position and not just evidence of a temporary liquidity problem. Thus proving insolvency at the relevant time can therefore be quite difficult for a creditor. To assist the liquidator in proving that the company was insolvent at the time the transaction occurred, the Corporations Act provides the following presumptions: -

• company will be presumed insolvent during any period where accounting records are inadequate
• if a company is shown to be insolvent at any time within 12 months before the relation back date then the company is presumed to be insolvent at all times thereafter.

These presumptions can be rebutted by actual proof of solvency at the time of the transaction and the responsibility for rebutting the presumptions lies with the beneficiary of the transaction

Q. What is bankruptcy?

A. Bankruptcy is process where an application is made to the Federal Court ("the court") to obtain an order that the debtor (an individual) be declared bankrupt.

Q. What laws govern Bankruptcy?

A. The applicable legislation is the Bankruptcy Act 1966, which is a Commonwealth Act. This means that the bankruptcy law is the same Australia-wide and the powers of the courts are not limited by state boundaries.

Q. What happens when a person is declared Bankrupt?

A.  On a debtor being declared bankrupt, the creditor no longer deals with the debtor personally. A trustee in bankruptcy is appointed. Property of the debtor vests in the trustee who will take steps to sell the property and divide the proceeds among creditors. In addition to collecting in the property of the bankrupt and selling it, the trustee also investigates certain types of transactions that the bankrupt may have entered into and then see if those transactions can be set aside. An example of such a transaction is if the bankrupt had given away property to friends or relatives in order to avoid that property being available to pay creditors.

Q. How long does Bankruptcy last?

A. It normally lasts for three years but can be extended to five or eight years if the bankrupt has been unhelpful, has hidden assets from the trustee in bankruptcy, or has been guilty of breaches under the Bankruptcy Act 1966.

Q. Can a bankrupt leave Australia?

A. A bankrupt can leave Australia while still a bankrupt but must obtain the trustee's written consent before leaving. The trustee will need to be satisfied that the bankrupt has legitimate reasons for the proposed travel e.g.: as a condition of employment, for compassionate reasons. Written conditions may be imposed by the trustee when giving permission such as: the period or duration of travel, the date the bankrupt is required to return to Australia, that the bankrupt pay any contributions that he has been assessed to pay. (Contributions are sums of money that a bankrupt person is required to regularly pay to the trustee from their income.)

Q. Does trading as an incorporated company give automatic protection against creditors?

A.  This is simply not the case when dealing with major creditors such as the financial institutions, major suppliers or the Australian Tax Office for failure to remit taxation deductions from employees or other taxation obligations.

Q.  Are employee entitlements given any special protection under the Corporations Act?

A.  Yes. A number of guides have been prepared for employees for the different situations their employer may be facing including voluntary administration, liquidation and receivership.

Q.  Are directors of an insolvent company protected from personal bankruptcy proceedings?

A.  No. In many cases, the insolvency of the company under the corporations law, gives rise to the bankruptcy proceedings for the directors or owners, if negligence in their duties to creditors is proven or by virtue of personal commitments on guarantees given to the company or lenders and creditors to the company.

You can be sued for your own assets and the company's assets, and you can face criminal prosecution (including fines and jail terms). It may mean you are not allowed to take part in the management of another company in the future.

Directors can also be held personally liable for unpaid taxes and debts incurred while trading, when there are reasonable grounds for suspecting that the company is insolvent, or may become insolvent.

Q. My company cannot pay its existing debts as and when they fall due. What does this mean?

A. This means that your company is insolvent and that you must stop trading. If you let the company trade while insolvent, you'd be breaking the law. We can provide you with professional advice.

Q.  Can I avoid bankruptcy?

A.  A person who is insolvent may avoid bankruptcy by reaching an understanding with creditors for the satisfaction of their claims:

• by assigning all divisible property to a Trustee for the benefit of creditors
• by offering, in the form of money or other property, whether by installments or otherwise, less than the full amount due to creditors in full satisfaction of their claims
• by coming to some other mutually acceptable arrangement

A person who is insolvent may avoid bankruptcy proceedings voluntarily by lodging their debtor's petition. A person can also be made bankrupt on the petition of a creditor.

Q. I am currently experiencing difficulty in paying my debts and am wondering if I can obtain a Part X arrangement will I be listed on the ITSA website? 

• Insolvency & Bankruptcy