The terms bankruptcy and liquidation are often used erroneously. Put simply, bankruptcy relates to an individual and liquidation relates to a company. In Australia bankruptcy is a legal process for an individual (rather than a corporate entity) when they are unable to repay their debts.  The Bankruptcy Act 1966 covers insolvency for individuals. Perhaps the reason that terms are used incorrectly arises from the USA where “bankruptcy” is commonly used for a company which is insolvent (the inability to pay its debts when they are due) and companies can file for bankruptcy.

In Australia corporations that are insolvent or may become insolvent in the future usually enter into Voluntary Administration or Liquidation.  The Corporations Act 2001 covers insolvency for companies.

Detailed below are some of the options available for individuals and companies who are experiencing financial distress.

1. Personal Insolvency

1.1 Bankruptcy

As discussed above Bankruptcy is a legal process for individuals who are unable to pay their outstanding debts. Bankruptcy imposes certain obligations and restrictions on the individual but immediately releases the individual from the debts owing to their creditors Assets such as a car worth less than $8,000, household furniture, clothes, sentimental personal effects and superannuation can be retained by the individual but all other material assets are recovered by the Bankruptcy Trustee.

1.2 Debt Agreement

A debt agreement (also known as Park IX agreement) may be a suitable alternative to bankruptcy and is a legally binding agreement between the individual and their creditors.  The individual will come to an arrangement with their creditors to pay a percentage of the combined debt over a period of time without becoming bankrupt.

2. Corporate Insolvency

2.1 Small Business Restructuring

On 1 January 2021, the Government introduced some core structural changes to the reconstruction and insolvency regime which included Debtor in Possession restructuring process for small businesses, whereby a company can avoid liquidation and appoint a Restructuring Practitioner.

To find out more including eligibility criteria please follow the link below:

https://www.rodgersreidy.com.au/small-business-restructuring-sbr

2.2 Voluntary Administration

The company’s director(s) or a secured creditor with a security interest over most of the company’s assets can appoint a Voluntary Administrator.

The Voluntary Administration allows for the company to still operate as a going concern under the control of a Voluntary Administrator, if they deem it necessary and relevant, and/or for a proposal for a Deed of Company Arrangement (“DOCA”) to be put to the creditors of the company for their consideration at a formal meeting of creditors.

The Administrator will prepare a detailed report to creditors which details their investigations into the company’s business, property, affairs and financial circumstances and their opinion and recommendation of the following options:

• Voluntary Administration to end and control of the company to revert to the directors;
• The company to execute a DOCA;
• To place the company into Liquidation.Creditors vote on the company’s future at a meeting of creditors.2.3 Creditors Voluntary Liquidation

Creditors Voluntary Liquidation (CVL) is commenced by a resolution of the Company’s directors and shareholders. This legal process is appropriate where a company is unable to pay its debts as and when they fall due, or cannot continue to trade viably.

2.4 Simple Creditors Voluntary Liquidation

Simple Creditors Voluntary Liquidation is a new streamlined liquidation pathway enacted by the Federal Government on 1 January 2021 which is intended to reduce time and cost in the CVL process and aims to ensure better returns for creditors.

Should you be experiencing personal financial distress or as a director of a company which is  in financial please feel free to contact any of the directors of Rodgers Reidy who are available to provide expert advice and discuss the options available to you. Initial consultations are free.