The Starting Point 

Last updated: 22 January 2024

Not sure where to start in dealing with your financial issues?  Australian insolvency laws a bit confusing? This episode is designed to be the starting point for you to find out about all things Australian insolvency.

Australia has two main laws to deal with insolvency. The Bankruptcy Act for individuals, and the Corporations Act for companies. And whilst the options to solve your financial issues are similar the terminology and how they work are different so it’s important to understand which options apply to your situation.

I often speak to people who say to me:

• ‘I’m here about my company’, but when we do this exercise it turns out the director is the one with problems; or
• ‘Both my spouse and I need to go bankrupt’, but it turns out if they didn’t have to pay the debts of one then they could pay the debts of the other and therefore we’re only talking about one person’s insolvency options.

So let’s gets started

I want you to start by creating piles of assets and liabilities for each entity who owes money.  eg. piles for the director, the director’s spouse, and the company.

If you’re not too sure of all of your entities then check out the I don’t know my structure episode.

The piles don’t have to be physical piles of bills you could just write them down, but it is always good to get the bills, see who they are addressed to, and figure out who actually owes them.

Some tips as you go through this process:

Personal liability for company debt

Now if you’re a director of a company you’re not automatically liable for the company’s debts.  The most common times a director is liable for a company debt is when you:

• sign a personal guarantee (sometimes called a director’s guarantee).
• breach a director’s duty. ie. did something wrong by the company that caused it loss.
• become liable under the ATO’s director penalty regime.

When looking at company debts, don’t assume that because something is used for the company the account is in the company’s name.  I once did the liquidation of a painting company.  Just after the liquidation started the director called and swore (literally) black and blue that the telephone account was in his name and was not happy that we’d cut off his phone.  We explained that we didn’t do anything other than advise the telephone firms that the company was in liquidation, so if his telephone was cut off then the account must have been in the company’s name.  He didn’t agree, and it was only after we told him to talk to Telstra that he found out that the account had always been in the company’s name even though the bill was addressed to him. 

So you can see that finding out who owes what to whom, and who can pay their debts sometimes reveals things you don’t expect.

Sole Trader

If you’re a sole trader then your business debts (eg. suppliers) and personal debts (eg. personal loan) go on the same pile.  The law doesn’t treat them differently.  You can’t do a formal insolvency like bankruptcy just for your sole trader business debts if you owe personal debts at the same time. Both types of debts are owed personally and and are therefore dealt with at the same time in a formal insolvency process.

Trusts

If you operate through a trust then the trustee is the one who owes the debt because whilst accountants, lawyers, and the tax office treat trusts as separate entities they’re not really.  The party that is sued or sues is the trustee.  So if your trustee is a company, put the debt on the company pile.  If the trustee is a person, put the debt on the personal pile.

If you’re not sure who the trustee is, then ask your accountant, or look at the trust deed (bound document that came when the trust was started) as the trustee is usually listed in the scheduled at the back of the document.

The I don’t know my structure episode has some more information trusts if you’re still a little confused.

Credit Cards

When looking at credit cards remember that in some cases one person may have an additional card.  In that case it is usually only the primary card holder who is liable for the debt, not both of you.  Even if it’s a credit card attached to a joint home loan, the card is usually in one spouse’s name and while the other spouse may have an additional card they’re not liable for the debt.  Grab a credit card statement and check out who it is addressed to because that is usually the person liable for the debt.

Business Assets

When you’re considering business assets (eg. equipment, cars, etc.) you need to look at who paid for the asset.  I had a liquidation of a company once where the director was adamant that he owned a Toyota personally because the car was registered in his name.  However, our investigations showed that the company had finance on the vehicle, the company had paid a deposit to buy the vehicle and the monthly payments to the financier, and the car was in the company’s balance sheet and depreciation schedule.  So even though the car was registered in the director’s personal name, the company clearly owned the Toyota and the director had to hand it over.

Who is in financial trouble?

Once you’ve finished the piles then add up the totals of the assets and liabilities and go through them to figure out who has the financial problem and whether you should be considering corporate or personal insolvency, or both. eg. if your company owes debt it can’t pay, but you can pay the debts in your personal pile, then you should check out the company episodes. Alternatively, if your spouse has lots of debt, but you and your company are fine, then have a look at the episodes under the personal section.

The legal stuff

Australian insolvency laws are complex and understanding them can be difficult. Hence this blogpost! I’m trying to simplify everything to help you make an informed decision. A decision that’s not based upon what someone said at a bbq!

Just remember that I don’t know your financial circumstances, so what’s in this blogpost is intended as general information only. Before taking any action you should seek professional advice that takes into account your individual circumstances.