For most individuals or companies in Australia, the idea of bankruptcy or insolvency is not a thought that is happily entertained. However, understanding the process towards being declared bankrupt or insolvent will help you understand the alternatives to repaying a debt.

So what is bankruptcy? Bankruptcy can be described as an arrangement where a debtor allows a creditor to control their assets or financial affairs in order to pay off a debt. A trustee is usually appointed to administer a debtor’s finances, sell property or carry on business.

Bankruptcy is the term used for individuals. Because sole traders and partners have personal liability for their debts, they can be declared bankrupt. Companies are legal entities and liability for debt remains within the company. Companies cannot be declared bankrupt, but insolvent.

Individuals

A creditor can make someone bankrupt for an unpaid debt over $5,000. The process begins with a creditor’s petition to the Federal Court or the Federal Circuit Court. The Court has the jurisdiction to make a judgment for the debt.

Once judgment has been made, a bankruptcy notice is prepared. This notice is a demand to pay the debt within a given time period. Debtors are usually provided with 21 days to repay the debt. A debtor can avoid being declared bankrupt if payment has been made within this timeframe.

If repayment is not made, an act of bankruptcy is made. At this stage, the creditor can apply to the Federal Court or the Federal Circuit Court once more to declare someone bankrupt.

The matter goes to a hearing where the debtor is given an opportunity to convince the Court that the debt can be paid in a reasonable time. If the Court is not satisfied that the debt can be repaid, a debtor may be declared bankrupt. The Court order declaring this is called a sequestration order.

Individuals can also become bankrupt voluntarily or enter into informal arrangements or formal agreements to repay a debt.

Companies

Company insolvency is a little more complicated because it is not only creditors who have an interest in the matter, but shareholders, directors and employees too. There are three common types of corporate insolvency: voluntary administration, receivership and liquidation.

Liquidation is the process at which business operations are put to a halt and all assets are sold to pay creditors. A company can go into liquidation in two ways: court liquidation and voluntary liquidation.

Voluntary liquidation can be initiated by creditors or members of the company. Court liquidation begins due to a court order. A creditor must send a statutory demand to a debtor. If a debt still remains unpaid 21 days after service, an application for a winding up order can be made to the Federal Court or Federal Circuit Court. A directions hearing will be held in order for the Court to determine whether a winding up order is appropriate.

In practice, liquidation is usually the last step. Before a company reaches that stage, they usually go through voluntary administration or receivership. A secured creditor is someone who has a charge in some or all of a company’s assets. Receivership begins when a secured creditor appoints a receiver to sell assets to repay a debt owed to them. Voluntary administration involves the appointment of an external administrator to investigate a company’s financial affairs. The administrator makes a recommendation on whether the company can enter a deed of company arrangement, be returned to the directors or if it should go into liquidation.

Conclusion

There are so many aspects of bankruptcy and insolvency. An individual or a company can be declared bankrupt or insolvent by a court, but often there are arrangements or agreements that can be made to help creditors and debtors meet on common ground. If you are running a business, it’s important to know your liability for debts incurred and the pathways for repaying your debt before being declared bankrupt or insolvent by the Court.

If you need assistance in relation to insolvency, just fill out the form on this page or call us on 1300 544 755. LegalVision’s business lawyers would be delighted to assist.

Lachlan McKnight

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