Bankruptcy is where an order is made by a Court against a person on the application of a creditor, or a person takes their own action to declare themself bankrupt because they are unable to pay money they owe. Usually this means that the person is insolvent.
For a person to become bankrupt, a creditor to who you owe money can apply to the Court to have you declared bankrupt (known as a creditors petition) or you may become bankrupt voluntarily by lodging your own debtor’s petition with the Australian Financial Security Authority (“AFSA”) website
If you consider a debtor’s petition is right for you then you will be required to complete a Bankruptcy form which is located on the AFSA website, or contact a Registered Trustee.
The Bankruptcy form requires a summary of the following information:
The details provided in your Bankruptcy form must be true and correct as there are severe penalties which include imprisonment should you fail to disclose and/or unlawfully dispose of any property.
Once your bankruptcy forms have been lodged and processed by AFSA, you will be declared bankrupt and receive a letter which sets out your duties and obligations whilst bankrupt.
Yes, a creditor can apply to make you bankrupt through the Federal Court or the Federal Circuit Court, this is called a Creditor’s Petition. In order to make you bankrupt, the creditors needs to be able to prove you have committed an act of bankruptcy.
In ordinary circumstances, a bankrupt will be automatically discharged from bankruptcy three (3) years from the date the Bankruptcy forms were accepted by the Official Receiver This period may be extended by an objection submitted by the Trustee. Objections may extend the bankruptcy to either 5 years or 8 years depending on the reason for the objection.
Once made bankrupt, the following details will be made available on the National Personal Insolvency Index (“NPII”) which is a publicly available permanent register for personal insolvency proceedings in Australia:
The following debts are not provable in a bankruptcy:-
Upon discharge from your bankruptcy, you will be released from your provable debts other than any liabilities you may have under a maintenance agreement of maintenance order.
There are different classes of creditors which are explained below:
Unsecured Creditors:
This type of creditor does not have security of the assets, property or any possessions acquired with the credit they provided to you. i.e credit card debt. Any legal action entered into such as recovery action by the Sheriff or summons must cease. Once you are bankrupt, you are not required to continue to pay the debt owing.
Secured Creditors:
A secured debt is tied to specific property, such as a mortgage, a car loan or a hire purchase or rent to buy. This type of creditor has rights in relation to taking possession of the property if the debt is not paid in accordance with the agreement entered into.
The Trustee will investigate your affairs and realise assets and income which vests in the Trustee to generate funds to cover the costs of the administration and make payment in accordance with the Bankruptcy Act 1966 which is referred to as a dividend.
Assets refer to any items of value which you own at the date of bankruptcy in addition to anything you may acquire before the end of your bankruptcy.
Motor vehicles which are used mainly for transport and tools of trade used to earn an income are protected to a limit set by the Act from time to time.
Further to the above, various assets are protected under the Bankruptcy Act which includes, general personal effects and household items. Additionally, the Act has a provision of protecting life insurance and superannuation policies.
Any assets you acquire whilst bankrupt, including lottery winnings or an inheritance from a deceased estate will vest in the bankrupt estate and become available to creditors. Dependant on the amount of funds, the Trustee may be in a position to pay all of your creditors and terminate your bankruptcy.
When you become bankrupt, the Trustee becomes the owner of your share of any house or property you own. The property may include:-
The Trustee determines how to deal with your property. They may investigate the following:-
If the Trustee determines that there is equity in the property then steps will be taken to realise that equity. If the property is owned jointly then an approach may be made to the joint owner to sell the share held by the bankrupt, based on a current valuation. If no agreement can be reached the property may have to be sold.
If a property has no equity then the Trustee may take no steps. However, if that situation changes (over time) then the equity may still be realised at that time. Accordingly, it is best to reach an agreement up front to resolve any ownership interest.
No, your employer is not notified of your bankruptcy. However, if your employer is a creditor in your bankruptcy, they will be informed along with all other creditors.
Additionally, if you’re liable to pay income contributions and fail to pay, the Trustee may issue a notice to your employer requiring them to pay the liability directly to the Estate.
Yes, you can travel overseas but you will require written permission from your Trustee to enable you to leave Australia.
You should put your request in writing (in advance to the departure date) detailing your travel plans. Please be advised it is an offence to depart Australia without obtaining written permission from your Trustee and the Trustee may object to your discharge.
The Trustee’s remuneration is to be paid for the necessary work they have completed. All creditors have an interest in the amount of remuneration and costs as these will be paid from the estate prior to any dividend being paid to creditors. The funds will be paid to the Trustee directly from the estate (usually out of asset realisations) rather than being paid directly by the bankrupt or creditors.
Being bankrupt does not generally hinder you from working and there is no limit to the income you can earn. Additionally, there is no limit on the amount you can save during your bankruptcy.
You may be required to make income contributions to your bankrupt estate if you exceed a set threshold. This set threshold is determined by how many dependants you have.
The income contributions are calculated as at 50% of your after tax income which is above the set threshold.
Your Trustee will issue a notice advising of the amount and payment plan.
A liquidation is a process of winding up and finalising a company’s affairs and is conducted in line with the provisions as prescribed under the Corporations Act. This process involves the following:-
Voluntary administration is when an Insolvency Practitioner takes full control of the company, to allow the director and/or third party time to find a way, if possible to save the company.
If the director and/or third party is unable to prepare a plan, the voluntary administrator, if possible, will administer the company’s affairs to obtain a better return/payment to creditors than if the company had been immediately placed into liquidation. One way to achieve this, is by entering into a Deed of Company Arrangement (‘DOCA’).
A company director(s) appoints a voluntary administrator when they determine the company is likely to become insolvent or is already insolvent. Additionally, a secured creditor may also appoint a voluntary administrator.
A DOCA is a binding arrangement, between creditors and the company, governing how the company’s affairs are to be dealt with. This arrangement is entered into after the company has entered voluntary administration and after creditors have voted by resolution to approve the arrangement. The DOCA is administered by aDeed Administrator, who is usually the insolvency practitioner who was administering the voluntary administration.
A creditor’s voluntary liquidation also referred to as a CVL occurs when a company’s members, and directors resolve that the company is unable to satisfy its debts and is likely to be insolvent or become insolvent. A CVL allows for the realisation of the company’s assets and investigations into the company’s affairs, causes of failure and an orderly distribution of the company’s assets among creditors.
Members of the company must pass a resolution for the company to be wound up and a liquidator be appointed over the company. A CVL may also begin as a result of the creditors resolution at meeting of creditors following a voluntary administration.
A receivership can occur when:
After the above occurs, the appointed receiver will attend to realising the company’s assets and disburse the monies. The receiver is then discharged by the secured creditor or resigns as receiver once all duties have been completed and enough assets have been realised to pay the secured creditor.
The simplified liquidation process is a new addition to the insolvency legislation which was introduced during the COVID – 19 pandemic. This is a process which has been designed to minimise cost and time involved in the liquidation process.
For your company to be eligible, the company must meet the following criteria:-
In addition to the above, all directors of the company are required to provide a declaration within 5 business days of the commencement of the liquidation confirming they believe they meet all the above criteria.
The small business restructuring process allows an eligible company to retain control of the company property, business and all affairs of the company whilst a plan is formulated to restructure all of the affairs of the company with the assistance of a restructuring practitioner. The plan is then entered into with the company’s creditors.
A company is considered insolvent when it isunable to pay its debts when they fall due and payable.
If you suspect your company is insolvent or suffering financial difficulty, contact a qualified registered liquidator who may be able to conduct a solvency review of your company and advise the options available to you which may include the following options:
Insolvent trading occurs when a company is insolvent and a director allows the company to incur further debt. If the company does incur debt whilst trading insolvent, the directors may be held personally liable for the new debts which have been incurred under Section 588G of the Corporations Act.
If you are the director of a liquidated company, you will not necessarily be banned from being a director of another company. Some companies fail for reasons out of the director’s control and ASIC is aware of this. Pursuant to Section 206F of the Corporations Act, a person can be disqualified from managing a corporation for up to 5 years if the person has been an officer of two or more companies that have entered liquidation within the previous seven years. The Liquidator or regulator must consider various indicia to determine whether a person should be banned from being a director.
A director penalty notice also referred to as a DPN is issued by the ATO when a company does not meet its pay as you go (“PAYG”) withholding, goods and services tax (“GST”) or super guarantee charge (“SGC”) obligations.
a. What do I Need to do if I receive one?
There are various statutory defences to a DPN, which are as follows:
The defences must be submitted to the ATO in writing outlining which defence is being relied on and providing any supporting documentation in relation tothe defence.
As a new director, you will not be liable for the director penalties for amounts due before your appointment if, within 30 days starting on the date of your appointment, the company does one the following: -