Insolvency Law FAQ

Bankruptcy applies to individuals under the Bankruptcy Act 1966. Liquidation (winding up) applies to companies under the Corporations Act 2001. The two regimes have different regulators, processes, and outcomes — AFSA and trustees handle bankruptcy, ASIC and liquidators handle corporate insolvency.

Bankruptcy typically lasts 3 years and 1 day from the date the statement of affairs is accepted by AFSA. Bankruptcy can be extended to 5 or 8 years where the bankrupt has not cooperated with the trustee or has failed to disclose assets.

Bankrupts can retain protected property including ordinary household furniture, tools of trade up to a prescribed limit, a vehicle up to a prescribed value, and superannuation. All other divisible property vests in the trustee for the benefit of creditors.

A debt agreement is a formal alternative to bankruptcy available to people with debts, income, and assets under prescribed thresholds. It binds unsecured creditors to a proposal administered by a registered debt agreement administrator.

A personal insolvency agreement is a formal arrangement between a debtor and their creditors under Part X of the Bankruptcy Act. It can involve payment in full, partial payment, or the transfer of property, and is used where debt levels or assets exceed debt agreement thresholds.

Voluntary administration is a corporate insolvency process designed to give a company breathing space while an administrator investigates its affairs and proposes a deed of company arrangement (DOCA) or recommends liquidation. It is started by directors, a secured creditor, or a liquidator.

Voluntary administration is a short process. The administrator must convene a first meeting of creditors within 8 business days and a second meeting within 20-25 business days (extendable by the court). Creditors then vote on the company's future.

A DOCA is a binding agreement between a company and its creditors that sets out how the company's affairs will be dealt with — for example a reduced payment, restructure, or sale of assets. A DOCA is typically voted on at the second creditors' meeting in voluntary administration.

Liquidation is the process of winding up a company by realising its assets, investigating its affairs, and distributing proceeds to creditors in order of priority. It can be voluntary (members' or creditors') or compulsory by court order.

Receivership is where a secured creditor (or the court) appoints a receiver to take control of specific secured assets and realise them to repay the secured debt. It is distinct from liquidation but may run in parallel with other insolvency processes.

Insolvent trading occurs where a director allows a company to incur a debt while there are reasonable grounds to suspect the company is insolvent. Directors can be personally liable for those debts, subject to defences and the safe harbour provisions.

The safe harbour in section 588GA protects directors from personal liability for insolvent trading while they are developing one or more courses of action reasonably likely to lead to a better outcome than immediate liquidation, subject to conditions including payment of employee entitlements and tax obligations.

An unfair preference is a payment or transaction in the 6 months before winding up that gives a creditor more than they would receive in liquidation. Liquidators can claw back unfair preferences from creditors, subject to defences including good faith and no reasonable grounds for suspicion.

An uncommercial transaction is one a reasonable person in the company's circumstances would not have entered into, considering the benefits and detriments. Liquidators can apply to set aside uncommercial transactions entered into within 2 years before the relation-back day.

The basic priority is: secured creditors (to the extent of security), then costs of liquidation, employee entitlements (wages, super, leave, redundancy), then unsecured creditors pari passu. Shareholders rank last. Various statutory priorities and circulating security interests complicate this in practice.

A statutory demand under section 459E is a formal written demand by a creditor for payment of a debt of at least the statutory minimum ($4,000 as of 2024). Failure to comply or set aside creates a presumption of insolvency that supports a winding-up application.

An application to set aside a statutory demand must be made within 21 days of service — this period cannot be extended. Grounds include a genuine dispute about the debt, an offsetting claim, a defect causing substantial injustice, or some other reason.

Small business restructuring is a debtor-in-possession process for incorporated small businesses with liabilities under the prescribed threshold (currently $1 million). It allows directors to propose a restructuring plan with the assistance of a small business restructuring practitioner.

A director penalty notice is a notice from the ATO making directors personally liable for certain unpaid tax obligations of the company, including PAYG withholding, GST, and superannuation guarantee. Lockdown DPNs remove the ability to cancel the liability by placing the company into administration.

An initial consultation with an insolvency lawyer or registered practitioner is often free or fixed-fee. Formal processes are paid from the estate in priority to unsecured creditors. Director defence work for examinations and recovery actions is usually charged on time-cost basis.