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FAQs: insolvency

This page is intended to provide general information. You should obtain appropriate professional advice if you are experiencing financial difficulty or have a specific question about insolvency law.

What is the difference between bankruptcy and insolvency?

What alternatives are there to bankruptcy?

Are there advantages in seeking bankruptcy?

Is there a quick and easy test that I can give myself to determine if I am insolvent?

What are the implications for the directors when a company becomes insolvent?

Why would I refer one of my clients to Tenbensel & Dee?

What is the difference between bankruptcy and insolvency?

Bankruptcy occurs when either a debtor's petition has been accepted by the Insolvency and Trustee Service Australia, or the Federal Court or the Federal Magistrate's Court has made an order declaring a person bankrupt after hearing the petition of a creditor.

A person is insolvent if they cannot pay their debts (that is their bills) as and when they fall due. It is quite possible for a person to be insolvent without being bankrupt.

If you are insolvent, you should seek advice from an appropriately qualified person as soon as you possibly can.

The earlier you seek advice, the more alternatives are likely to be available to you.

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What alternatives are there to bankruptcy?

There are a number of alternatives to bankruptcy:

1. Make informal arrangements with your creditors.
This may work if you only have a few creditors and can come to a satisfactory arrangement with each of them. The difficulty is keeping all of your creditors happy all of the time until you return to a sound financial position.

2. Enter into a Debt Agreement
The legal requirements relating to debt agreements can be found in Part IX of the Bankruptcy Act. Debt agreements enable you to make a binding arrangement with your creditors. They can be extremely flexible: the important thing is that the arrangement is one that you can honour and that the required majority of your creditors agree to it.
Not everyone can take advantage of a debt agreement: they are only available for people with debts and income below prescribed threshold amounts. Further information about debt agreements is available from the Insolvency and Trustee Service Australia.

3. Enter into a Part X Agreement
The legal requirements relating to these agreements are found in Part X of the Bankruptcy Act. The process starts with a debtor approaching a Registered Trustee in Bankruptcy, the Official Trustee or a solicitor and:

• giving them a completed Statement of Affairs
• providing them with a proposal outlining how the debtor wishes to deal with his or her affairs, including a draft Personal Insolvency Agreement
• signing an authority under section 188 of the Bankruptcy Act.

Provided the Registered Trustee, the Official Trustee or the solicitor consents, they become what is known as a controlling trustee.

The job of the controlling trustee is to take control of the debtor's property, conduct an investigation into the debtor’s affairs, prepare a report on the debtor's proposal and call a meeting of the debtor’s creditors at which the debtor’s proposal will be considered.

At the meeting, the creditors will vote on whether or not to accept the proposal put by the debtor. The proposal becomes binding on all creditors provided the prescribed majority vote in favour of it at the meeting. There are two other options available to creditors at these meetings: effectively to do nothing, or to ask the debtor to present his or her petition in bankruptcy.

Further information on the available alternatives to bankruptcy can be obtained from the Insolvency and Trustee Service Australia’s web site.

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Are there advantages in seeking bankruptcy?

Yes there are.

If you are a debtor, the advantages include getting a fresh start financially and the cessation of legal action (including garnishees) against you for most debts you had before becoming a bankrupt. However, you should be fully aware of the consequences of being a bankrupt before you present a debtor's petition.

If you are a creditor, the advantages include a fair distribution of any available assets and an investigation into the debtor’s affairs where this is warranted.

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Is there a quick and easy test that I can give myself to determine if I am insolvent?

The thing to do is to ask yourself, honestly and carefully, whether you can pay all your bills -- on time and in full -- when they are supposed to be paid. If the answer to this is yes then you are solvent. If the answer to this is no, you are insolvent and you should consider seeking advice from a financial counsellor or an insolvency practitioner.

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What are the implications for the directors when a company becomes insolvent?

The responsibility for the day-to-day running of a company belongs to its directors. If the company cannot pay its bills as and when they fall due (that is, the company is insolvent) it is the directors who may become personally liable for debts incurred by the company if they allow it to continue to trade.

The directors of a company that cannot pay its bills when they fall due should obtain immediate advice on the options available to the company. It may be possible to restructure, or to refinance, so that the company can continue to trade. It may be appropriate to appoint a registered liquidator as administrator of the company, or to put the company into liquidation.

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Why would I refer one of my clients to Tenbensel & Dee?

If you are an accountant or lawyer with a client that might be insolvent we would urge you to refer them to us. We understand that people in financial difficulty are under considerable stress and our personal and cooperative approach can help make a fairly traumatic experience a little easier. While we must represent the interests of creditors in an insolvency administration we find a reasonable and personable approach can lead to better outcomes for all concerned.

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