Bankruptcy and insolvency
When your business runs into financial trouble, it is important to seek advice and support as soon as possible to understand what options are available. Bankruptcy or liquidation should be a last resort.
Bankruptcy and liquidation
Bankruptcy and liquidation are ways of dealing with debt that can't be repaid.
Bankruptcy only applies to individuals (not companies). When you become bankrupt, you are declared by law to be unable to pay your debts. It will get rid of most of your debts and debt collectors will stop contacting you. Bankruptcy lasts for three years and can affect your financial future, so it should be considered as a last resort.
Liquidation only applies to companies. When a company can't pay its debts and goes into liquidation, it stops operating. Company assets are sold in an attempt to pay off the debts.
If your business is struggling and you are considering your options, the Australian Taxation Offices’ business viability assessment tool may help you determine whether your business is viable. It you have concerns about the results, you should seek professional advice to discuss your options.
Dealing with debt for sole traders and partnerships
If you operate your business as a sole trader or partnership, you or your partners can become bankrupt as individuals (the business itself doesn't become bankrupt).
If your business has a lot of debt, it is important to seek help straight away from an accountant or free financial counsellor. They will assess your situation and provide advice on how to manage your debt.
There are four options for dealing with debt under the Bankruptcy Act 1966 that your financial advisor or counsellor may talk to you about:
Dealing with debt for companies
If you operate your business as a company and it has unmanageable debt (known as being insolvent), it cannot continue operating.
As a first step, it is important to seek help straight away from an accountant or free financial counsellor. They will assess your situation and provide advice on how to manage your debt.
The three most common options are voluntary administration, liquidation and receivership.
- Voluntary administration
If your company goes into voluntary administration, an administrator is appointed to take control of it. The administrator must not be a part of your company. They'll try to either save your company or your company's business, or put your company in a position where it can best pay off its debts, without going straight into liquidation.
If your company isn't saved by the voluntary administrator, it will go into liquidation. Liquidation involves winding up the company so that it can repay debts (even if it can't pay the full amount). A person who isn't a part of your company will be appointed to take care of the winding up process.
Your company may go into receivership if a secured creditor decides to appoint someone (known as a receiver) to collect and sell the company's assets, in order to pay off the debt the company owes them. A secured creditor is someone who has secured a debt owed by the company through a claim to company assets.
Different conditions may apply depending on the agreement with the secured creditor (for example, in some agreements, they are only allowed to sell certain assets of the company to pay off the debt).
Your company can be in receivership and voluntary administration at the same time.
If your business has closed due to liquidation or bankruptcy, there may not be enough funds to pay your employees their entitlements.
Under the Fair Entitlements Guarantee, eligible employees may be able to claim certain unpaid entitlements such as wages, leave, and redundancy pay.
Advice and support
If your business is struggling with debt, it may feel like bankruptcy or closing your business is the only option.
It is important to seek advice from a professional before you make any decisions. They can suggest different ways of repaying your debt that don't involve bankruptcy or closing your business.
If you don't have an accountant or a financial advisor, try calling a free financial counsellor in your area.