Insolvency, bankruptcy, personal insolvency agreement, debt agreement, liquidation and voluntary administration – these might be terms you’ve heard before, but what do they actually mean? In this blog – we explain what these terms mean for you, and how to tell the difference.
Insolvency is the financial status of a person or business in financial trouble, and the inability to pay their debts when they fall due.
Both an individual (who may become bankrupt) or a business (which may enter liquidation) can be insolvent.
There are lots of ways to become insolvent, often causing significant stress. If you are worried that you or your business is insolvent, act now! What are the signs? Late payment of superannuation or tax debts, struggling to pay your suppliers or getting knocked back for extra finance when cash is tight are just a few. Leaving it too late to act or seek help may mean bankruptcy or liquidation become inevitable.
When a person or business suspects that they may be insolvent, there are various duties upon them to act in the best interests of their creditors (the people they owe debts to). It is therefore recommended that they seek professional help.
To help work out if your company may be insolvent, or to get more information about possible indicators, get in touch with one of our qualified independent practitioners today.
In Australia, bankruptcy is a legal process for an individual (not a company) who is unable to pay their outstanding debts.
An independent person known as a bankruptcy trustee, or alternatively the Australian Financial Securities Authority (AFSA – the Government bankruptcy authority) is appointed to manage a person’s financial affairs.
This official will determine whether a bankrupt person owns any assets that may be sold or has disposed of any property that may be recovered. They will assess the individual’s liability for income contributions and also provide information and, (if sufficient funds are realised) pay dividends to their creditors.
The bankruptcy process generally lasts three years and can be initiated in one of two ways.
A person can apply to become bankrupt voluntarily by filing a Debtor’s Petition and Statement of Affairs with AFSA. Either AFSA or a bankruptcy trustee at an insolvency firm will be their trustee.
Personal Insolvency Agreement
A personal insolvency agreement (PIA) is an alternative to bankruptcy to deal with debts you’re struggling with. A PIA is similar to a voluntary administration, except it is for individuals.
You may propose a PIA to the people you owe money to under Part X of the Bankruptcy Act if you:
- Are insolvent (unable to pay your debts as and when they fall due)
- Have not proposed a PIA in the last six months.
Just like a voluntary administration you should be putting forward a proposal to creditors that will give them a better return than if you went bankrupt.
As the name states, this option involves a formal agreement with your creditors to pay a portion of the debts you owe and your creditors vote on whether to accept it or not. A majority need to vote in favour for it to be accepted. If accepted, you will pay instalments over time which will be distributed to creditors by your deed administrator. Debt agreements can last for up to 5 years. While this option avoids bankruptcy, it is still a formal insolvency appointment and will be recorded on the National Personal Insolvency Index and your credit report.
Liquidation is the process of winding up a company’s business: selling its assets, investigating its affairs, recovering any legal claims, and distributing the funds received to creditors and/or shareholders.
A liquidator, registered with the Australian Securities & Investments Commission (ASIC), will be appointed to the company to carry out the liquidation. The Insolve panel are all registered liquidators.
Understanding the difference between liquidation, bankruptcy, and insolvency allows people and businesses to better identify their situation when problems arise. It also helps them understand how they can get assistance with their financial matters in order to avoid bankruptcy or liquidation.
Voluntary administration is an alternative to liquidation for dealing with an insolvent company’s financial difficulties. It’s a process that provides an opportunity for a company’s business, property and affairs to be administered in a way that:
- Maximises the chances of a company and/or its business continuing, or if this is not possible;
- Results in a better return for the company’s creditors than would result from just winding up the company.
Usually there will be a month or two where the company continues to trade under the control of the administrators. A proposal (Deed of Company Arrangement or “DOCA”) will then be presented to creditors to vote on as an alternative to the company going into liquidation.
If you suspect your business is insolvent or you can’t pay your debts, get help early to avoid liquidation and bankruptcy.