Australia’s challenging business conditions combined with our love affair with credit sees thousands of hard working Aussies declaring bankruptcy each year. Similarly, thousands of Australian companies facing financial problems enter liquidation. So what is the difference between bankruptcy, insolvency and liquidation?
Firstly, What is Insolvency?
Insolvency describes the financial status of a person or business when they are unable to repay their debts when they fall due. Generally, personal insolvency tends to lead to Bankruptcy or a Debt Agreement. If a company is found to be insolvent, it is possible that it will lead to liquidation, should a company turnaround or an administration not be successful or feasible.
WARNING: Signs of personal insolvency
- You are receiving late fees on bills and repayments
- You are unable to keep up with repayments
- You have been rejected for credit applications
- Harassing phone calls from debt collectors
- You have considered a “pay day loan” to repay debts
WARNING: Signs of business insolvency include:
- Continuing monthly losses
- Overdue or unpaid superannuation or taxes
- Creditors paid outside trading terms, or payments made in lump sums not reconcilable to specific creditor invoices
- The cancellation of credit from suppliers or special payment demands made before supply may be resumed
- Payment arrangements needed with select creditors
- Solicitors’ letters, summons, judgments or warrants including a Directors Penalty Notice issued by the ATO
- Directors and/or shareholders constantly contributing funds to support business cashflow
- No additional finance options available for the business or in the case of a company no additional capital raising options
If your business is experiencing any of the above signs, make sure you access insolvency advice early. This will mitigate the risk of falling further into financial crisis, and ultimately bankruptcy or liquidation. In the case of a company, there are various duties placed on company directors. This requires that they act in the best interests of their company, and its creditors.
Bankruptcy and Personal Insolvency
In Australia, bankruptcy refers to a legal process undertaken if an individual cannot pay their debts. Bankruptcy in Australia is governed by the Bankruptcy Act 1966 and is regulated by the Australian Financial Security Authority (AFSA).
A person can apply to become bankrupt voluntarily, or a creditor could also force bankruptcy if $5000 or more is owed. A creditor does this by filing a creditor’s petition with the court. The bankruptcy process generally lasts three years but can be extended for up to eight years.
Once you are officially bankrupt, you relinquish control of your finances and assets to a Bankruptcy Trustee. This protects you from any further legal action being taken against you by creditors.
The Bankruptcy Trustee will assess your assets for value, and could sell them in order to repay creditors. The Bankruptcy Trustee is also responsible for assessing the individual’s liability for income contributions.
Although bankruptcy is often considered undesirable, in Australia, bankruptcy is a way to eliminate your debt and relieve yourself from financial stress. Lanyana Financial Group are bankruptcy specialists and can help individuals clear their debts and alleviate the associated financial stress.
Liquidation and Corporate Insolvency
Liquidation is the process by which an insolvent company has its assets sold in order to pay creditors. Often referred to as 'winding up', the company's assets are sold and the funds received are distributed to pay creditors and/or shareholders. The company is then closed and deregistered.
Company liquidation involves the distribution of assets to creditors in a way that is fair and legally correct. A liquidator, registered with the Australian Securities & Investments Commission (ASIC), is appointed to the company to carry out the liquidation.
There are other strategies such as Business Turnaround and Voluntary Administration which could potentially save your business. We can also provide professional debt relief strategies and action plans, tailored specifically in the best interests of your company.
To recap, both bankruptcy and liquidation are methods of dealing with insolvency. The term bankruptcy specifically applies to individuals (not companies), whereas liquidation conversely applies only to companies.
There are fundamental differences between bankruptcy, insolvency and liquidation, particularly when a business faces financial issues. For business owners, being aware of insolvency options is paramount. Act early and seek professional advice at Lanyana Financial Group to avoid the ramifications that come with personal bankruptcy or company liquidation.
First published on Revive Financial.