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Insolvency & Bankruptcy
Pace Adelaide Legal have over 23 years of experience in the field of insolvency and bankruptcy.
If you have run into difficulty with debt you ought to urgently seek expert advice.
Trading Insolvent
If you have a business and are having difficulty paying your debts as and when they fall due, you are likely trading insolvent under the definitions in our insolvency laws.
If a director allows a new debt to be incurred knowing the company is insolvent and unable to pay those debts as and when they fall due for payment, the director may be held personally liable for those company debts. That means the director’s personal assets can then become under siege.
Trading Insolvent is a contravention of the law.
What are the penalties for insolvent trading?
A director or business owner may face civil and or criminal charges for breaches of insolvent trading laws.
Resolving Financial Stress
Small Business Restructuring Process
Introduced in 2021 in response to the COVID-19 pandemic, the small business restructuring process allows the directors and management of a company to remain in control. It gives them the opportunity to propose a plan to deal with the company’s debt within a 3 year period and is available to eligible companies.
Contact Pace Adelaide Legal to find out if your company is eligible.
Business Turnaround Management
The Turnaround Management process allows a full review of the business with the opportunity to identify underlying issues and reasons for declined performance or financial stress. It also provides for identifying strengths of the business and the development of a turnaround plan to help the business get back on track.
You should speak to your accountant in conjunction with an experienced insolvency practitioner at Pace Adelaide Legal in relation to developing a plan that works for your business.
Safe Harbour
Safe Harbour is a process which allows directors a defence against liability for debts of the company business and is codified in Section 588GA of the Corporations Act. It only applies, however, under certain circumstances.
The crucial elements are:
- When a director starts to suspect a company may be insolvent or is at risk of becoming insolvent, they start developing one or more courses of action that are reasonably likely to lead to a better outcome for the company;
- The debt is incurred directly or indirectly in connection with that course of action and during a specified time period.
Section 588GA(2) lists some guiding factors in determining whether a course of action is reasonably likely to lead to a better outcome for the company than an immediate voluntary administration or liquidation. These factors are whether the director is:
- properly informing himself or herself of the company’s financial position; or
- taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all of its debts; or
- taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company; or
- obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or
- developing or implementing a plan for restructuring the company to improve its financial position.
Directors should bear in mind that the safe harbour protection will not apply if a debt is incurred by an insolvent company when it is not substantially complying with payment of employee entitlements (including superannuation) as and when they fall due and or its taxation compliance obligations.
The options for insolvent businesses or individuals
There are several options for the insolvent business or individual.
Insolvent Companies
Common insolvency procedures for an insolvent company are either liquidation, entering into a Deed of Company Administration, voluntary administration or receivership.
Administration
A company with financial problems may be placed into administration. This can be either voluntary, or involuntarily. Voluntary administration is chosen by the directors, whereas involuntary administration is driven by creditors that are owed money for goods or services provided to the company.
Liquidation
An independent and registered person called a liquidator takes control of the company so that its affairs can be wound up in a structured and fair way for the benefit of all creditors.
Personal Insolvency
The insolvency procedures for an insolvent individual are bankruptcy and personal insolvency agreements.
Receivership
When a company is experiencing financial difficulty and is unable to meet its debt, a secured creditor (such as a bank) may put the company into receivership.
In this case an independent, qualified person called a receiver is appointed by a secured creditor, or in special circumstances by a court. They will take control of some or all of the company’s assets.
What will the receiver do?
- collect and sell a sufficient amount of the company’s assets to repay the debt owed to the secured creditor;
- Use the money collected to pay creditors, in the order of priority required by law;
- report any offences or irregularities they discover during this process to ASIC.
Bankruptcy
Bankruptcy occurs when an individual is unable to pay their debts and a trustee is appointed to take over their finances. From then on, the trustee will be the point of contact for your debtors and will usually sell the property of your estate (with some exceptions) to pay your debts. The law governing bankruptcy is the Bankruptcy Act 1966 which applies Australia wide. This act stipulates that a bankruptcy case can be heard by the Federal Court of Australia and the Federal Circuit Court of Australia. The body responsible for personal bankruptcy and insolvency law is the AFSA or the Australian Financial Security Authority.
Bankruptcy typically lasts for three years, after which the bankrupt individual is released from their prior debts and able to make a new start.
Bankruptcy can have long term legal ramifications. If you find yourself facing bankruptcy, get in touch with Pace Adelaide Lawyers today. One of our very helpful lawyers can help to guide you through your options.
How Do I Go Bankrupt?
There are two ways in which a person can go bankrupt:
Voluntary Bankruptcy
An individual can file for bankruptcy by filing a debtor’s petition with the Official Receiver in Bankruptcy.
Forced bankruptcy
You can also be made bankrupt when one or creditors successfully petition the Federal Court for a bankruptcy order over your personal estate. This is called a sequestration order.
If you find yourself in a situation where your debt becomes unmanageable, the first step you should take is to seek financial advice. Bankruptcy should only be considered if you cannot reach an arrangement that will suit.
Sometimes other arrangements can be reached with your creditors. In the case of a “Deed of Arrangement” the debtor will hand over their affairs to a trustee who will work to provide returns to the creditor. Informal agreements can also be reached with your creditors that can help with your debts.
The Pro’s and Con’s of Bankruptcy
Pro’s
The key advantage of bankruptcy is being released from most debts. Your creditors will also not be able to contact you and will have to deal with your trustee.
Not all of your assets can be sold to meet your debts. You will be able to keep:
- A motor vehicle (to a certain value)
- Tools for your trade (to a certain value)
- Superannuation (although an income stream may be assessed for contributions and payments are not covered if they are made prior to your bankruptcy)
- Payments, money and assets purchased with money from any personal injury or compensation claims
- Household items
Con’s
Any property you own will vest in the trustee and be sold to meet your debts. Other assets will be taken as well unless exempt (as outlined above).
Your bankruptcy will appear on your credit record, which will affect your future ability to borrow money.
You will not be able to be the director or manager of a company.
Some occupational licenses will be affected and you will have restricted ability to travel internationally.
Not all debts are released. You will still have to pay the following:
- Child support
- Court imposed penalties and fines
- Student assistance/loans
- Centrelink debts (if the payments proved to be fraudulent)
- Council and water rates
- Secured debts, such as mortgage
It is important to take an in-depth review of the situation before delving into the many options available in the bankruptcy context as your family members may also be affected by your bankruptcy.
We understand these are some of the most stressful times you may go through and we are here to use our skill and expertise in this area to assist.
Get in touch with us if you have any questions.
Expert Insolvency Lawyers
For 23 years, Pace Adelaide Legal has provided advice and representation on all manner of insolvency issues, including:
- liquidator and trustee recoveries such as unfair preference recoveries and defences thereof;
- uncommercial transactions;
- breach of director’s duties claims;
- Director’s insolvent trading claims and
- Claims brought by liquidators and or trustees against assets of family members.
We are highly experienced in litigation involving bankruptcy notices, sequestration and winding up orders and applications to set the same aside.
We are instructed by directors, creditors, family members and insolvency practices in relation to these various actions and claims. In particular, we are skilled at successful resolution of claims before court proceedings ensue.
FAQs
A company is likely trading insolvent when it cannot pay its debts as and when they fall due, yet continues to incur new debts. Directors who allow a company to trade while insolvent can be held personally liable for some company debts and may face civil or criminal penalties.
Directors who breach insolvent trading laws may face civil penalties, orders to personally compensate creditors and, in serious cases, criminal charges. Early advice can help directors understand their exposure and the options available to reduce risk.
The small business restructuring process, introduced in 2021, allows eligible companies to remain under the control of their directors while a restructuring practitioner helps develop a plan to deal with debts over a set period. It is designed to give viable but distressed businesses a chance to continue trading while addressing their liabilities.
Safe harbour is a defence for directors against insolvent trading liability where, after suspecting insolvency, they develop and take a course of action that is reasonably likely to lead to a better outcome for the company than immediate administration or liquidation. Directors must meet ongoing obligations, including paying employee entitlements and tax, for safe harbour to apply.
Common options for an insolvent company include voluntary administration, entering into a deed of company arrangement, liquidation or receivership initiated by a secured creditor. The right approach depends on the company’s assets, liabilities and prospects and should be discussed with an insolvency lawyer and your accountant.
Bankruptcy is a legal process for individuals who cannot pay their debts, where a trustee is appointed to manage their financial affairs, realise certain assets and distribute funds to creditors. In most cases bankruptcy lasts three years, after which the person is released from many of their pre bankruptcy debts, although some obligations remain.
The key benefit of bankruptcy is being released from most unsecured debts and stopping creditor contact, allowing a fresh start. However, some assets may be sold, your ability to obtain credit and travel may be restricted, you cannot be a company director while bankrupt and some debts such as child support, fines and certain government debts are not released.
If your debts are becoming unmanageable, you should seek advice as early as possible. An insolvency and bankruptcy lawyer can review your position, explain options such as restructuring, payment arrangements, deeds of arrangement or bankruptcy and help you choose the path that best protects you, your family and your business where possible.
Serina Pace
Managing Director & Legal Director
Alyssa Pace
Law Clerk
Sofia Butenko
Law Clerk