Author
Gavin KingDirector, ASIC Registered Liquidator & AFSA Registered Bankruptcy Trustee
(02) 9220 7125
Businesses are launched with the best intentions, but even the most astute plans can be undone by financial stress caused by changes in the business environment, consumer tastes, rising costs, or cash flow problems.
Personal insolvency could also have a big impact, as your personal and business obligations are often closely intertwined.
What is personal insolvency in Australia?
Personal insolvency is when an individual cannot pay their debts as and when they fall due. The definition is the same for corporate entities. Notably, personal insolvency is limited to unsecured debts such as:
- Credit cards
- Unsecured personal loans
- Overdrawn bank accounts
- Unpaid rent or utility bills
- Outstanding legal, medical, and accounting fees.
Contrary to popular belief, a failure to meet financial commitments does not have to result in bankruptcy. Individual debtors may be eligible for a range of solutions — let's explore your options and how to utilise them.
Insolvency options
There are a number of options that are available to an individual facing personal insolvency.
Temporary Debt Protection (TDP)
Provides individuals with protection from unsecured creditors initiating action for a period of 21 days. This relief is so that you can seek advice and how best to proceed.
Personal Insolvency Agreements
Personal Insolvency Agreements are a legally-binding agreement between you and your creditors that allows you to flexibly settle your debts without declaring bankruptcy.
- A Registered Trustee reviews your situation and outlines the terms of the agreement.
- Creditors are then required to vote on the proposed Personal Insolvency Agreement. If accepted, certain restrictions related to bankruptcy can potentially be avoided.
- PIAs are listed on the National Personal Insolvency Index (NPII), a public record that outlines the details of all insolvency proceedings in Australia.
- Personal insolvency normally releases you from being pursued by creditors to repay most kinds of unsecured debts upon completion of obligations under the agreement.
Debt Agreements
For eligible individuals, debt agreements offer a way to avoid bankruptcy by consolidating debts into a single 3–5-year repayment plan with interest paused. Most importantly, all interest charges are paused for the duration of the agreement, making it easier to repay any debts owed.
To be eligible you must meet the following criteria:
- You are unable to pay debts and legally insolvent.
- Have not been declared bankrupt or entered into a debt agreement in the last decade.
- Classify your debts and establish which are applicable. Limited to unsecured debt with any fines being deemed ineligible.
- Meet Australian Financial Security Authority (AFSA) criteria for unsecured debts.
While a debt agreement isn’t the same as bankruptcy, it’s still considered an ‘act of bankruptcy’ and can seriously impact your credit rating — so it’s vital to explore all other options first.
Bankruptcy
Bankruptcy is the process of being legally declared unable to pay your debts under the Bankruptcy Act. Personal insolvency, also known as Part X under the Bankruptcy Act, involves the appointment of a Trustee who would take charge of your properties and manage your creditors, making them offers of payment to settle your unmanageable debts either through instalments or in a lump sum.
Is personal insolvency the same as bankruptcy?
There are many differences between personal insolvency and bankruptcy.
Personal insolvency is a legal alternative to bankruptcy and does not impose the same restrictions. Bankruptcy is when you legally declare that you cannot repay any debts owed. It should always be a last resort due to the consequences associated with it as it may affect your income, employment, and ability to obtain future credit among other things.
As a result, there is a growing interest in alternatives to bankruptcy which include personal insolvency agreements (PIA) and debt arrangements. The Bankruptcy Act 1966 (Cth) outlines the threshold for each option and any limitations.
How does personal insolvency impact a business?
It is common for individuals to operate their business through a company to avoid the prospect of being held personally liable for the debts accumulated by the company. However, personal insolvency does have an impact on business.
- A person who is declared bankrupt would not be able to hold a position as the director of a company.
- Entering into a personal insolvency agreement involves the appointment of a controlling trustee to manage your debts and coordinate with your creditors. This means that the trustee assumes responsibility for your debts as well as any shares that you may hold of your company, which essentially makes you forego control of your company’s shares along with any form of ownership of the company.
- It is the trustee’s responsibility to act in the common interests of creditors, and the trustee could take actions as deemed appropriate, such as placing your company under liquidation or selling your company shares if that would help pay off the money due to your creditors.
- If the trustee estimates that selling your company’s shares or placing your company into liquidation would not yield sufficient value to settle your debts, it would be up to the creditors to approach the court to place your company into liquidation.
- Insolvent debtors may find themselves locked out of key business decisions or positions, especially where regulatory compliance or licensing is involved.
Any of these actions on the part of the trustee or the creditors could have serious consequences for you and for your company, which warrants professional advice before personal insolvency decisions are made.
For further information, financial counsellors or consumer advocates can help evaluate what’s best for your situation.
Responsibilities of a director during personal insolvency
If you’re a company owner facing personal insolvency, it’s important to understand your legal responsibilities and what happens next. Key obligations include:
- If you are personally insolvent, you must immediately appoint a trustee to manage your affairs, debts, and creditors.
- As a company owner who is bankrupt or under a personal insolvency agreement, you are required to provide your trustee with full details of the company, including its assets and value.
- The trustee replaces you as the shareholder and you must relinquish control of the company and cease acting as director under the Corporations Act.
- The trustee will assess the company’s assets and repay creditors by realising the value of the bankrupt estate and placing the company into liquidation.
- All claims against the director become claims in their bankrupt estate.
- If a liquidator is appointed to the company, you must assist them in resolving the company’s affairs as the former director.
What’s the difference between a debt agreement and a personal insolvency agreement?
The most significant difference between a debt agreement and a personal insolvency agreement (PIA) lies in the eligibility criteria. Also known as a Part X Personal Insolvency Agreement, there is no cap for a Part X. This means that individuals with high debt amounts are still able to propose them, including those who are classified as high-income earners.
Personal insolvency agreements (PIA) are more complex in that they require a registered trustee rather than an administrator. Moreover, you will also be unable to act as the Director of a company if you have entered into a personal insolvency agreement.
Take action
If you are concerned that your personal finances may affect your business, particularly if you are facing personal insolvency and you are a company director or business owner, it’s important to take action.
The first step is to speak to the experts and find out exactly what is at stake. Chat with the team at Mackay Goodwin today to discuss your personal financial situation and the business interests you hold. Together, we can determine which actions should be taken to protect your company’s best interests.
Get in touch
Speak to one of our experts now for a free consultation. Enter your details below or call 1300 750 599.