Frequently Asked Questions
Things can be complicated when facing debt problems. We have compiled frequently asked questions to help.
What is insolvency?
Insolvency is when a person or company cannot pay debts when they are due.
What causes insolvency?
Insolvency can occur rapidly to individuals or businesses through sudden changes in environment, employment, divorce or business partnership separations. Insolvency can occur after longer periods of time where debts are left unpaid due to cashflow issues, poor management of a business, stacking credit card bills or ongoing business losses.
What is debt?
Debt is a sum of money or monies that due or owing to creditors.
What is a creditor?
A person, business, company or entity that is owed money. A creditor could be a supplier, the Australian Taxation Office or a family member. There are two types of creditors, secured and unsecured.
What is a secured creditor?
A secured creditor is an interested party that is owed money that has a security interest over some or all of the company’s assets. An example of a secured creditor may be a financial institution through a mortgage or loan.
What is an unsecured creditor?
An unsecured creditor has no security interest over the assets of a company.
What is a debtor?
A debtor is a person, business, company or entity that owes money.
Business Debt FAQs
What is insolvent trading?
Insolvent trading occurs when a company continues to trade when being unable to pay its debts. The company is in a state of insolvency. There are penalties and consequences for insolvent trading. Some consequences of insolvent trading are criminal charges, civil penalties and compensation. The Australian Securities and Investments Commission outline the full consequences of insolvent trading.
How do I know if I am insolvent trading?
If you are a director of a company and you are unable to pay your debts when they are due, you are insolvent trading. It is important to seek immediate professional advice if you are insolvent trading.
How do I know what insolvency option is right for my business?
This is an important question and if you are wondering what the answer is, it is time to speak to our team. We rarely have business owners that know what insolvency options are available or right for their business. This is because each business and its financial situation is different. We understand this and that is why there is not one solution for all. It is important however, that you know your options.
Is an employee a secured or unsecured creditor?
An employee is an unsecured creditor. Employees of companies are considered to be in a special category, where they are prioritised over other unsecured creditors within a liquidation process.
Do I have obligations as a Company Director?
Yes, as a company director you have duties and obligations under Australian Laws (Corporations Act 2001). It is for this reason before you decide to become a company director, that you are completely aware of all your duties and obligations and are dedicated to the handling of the company’s affairs.
What are the duties of a Company Director?
It is important to know that even if you appoint a third party to look after your company’s affairs, you still must comply with your legal obligations. Under the Corporations Act 2001, being unaware of what is happening in/with your company is not an exemption to the law.
As a Director, you must be fully aware of the state of your company’s affairs, financial position and be involved in the management and operations. You must ensure that you act in good faith and in the best interests of the company. It is also your duty to have full knowledge of each decision’s impact on the company’s performance (including financial implications).
As a Company Director, what if I hire someone to look after my finances? Do I still need to be aware of my company’s financial position?
Yes. As a company director you must be aware of the status of your company’s financial performance and if it can pay all its debts on time. This is even if you employ a financial officer or accountant to do your books. If you are unaware of your company’s financial position, it is important you seek independent professional financial advice. The Australian Securities and Investments Commission states the duties of a Company Director.
What if I know or suspect that my company cannot pay its debts?
You may be trading insolvent if this is the case and there may be legal consequences. You need to seek immediate advice from a qualified professional, such as Insolvency Options.
What is a Director Identification Number (Director ID)?
Newly implemented in Australian law, a Director Identification Number is a unique 15 digit set that verifies a company director. It is a permanent ID issued once to a company director by the Australian Government (via myGovID).
Why do I need a Director Identification Number?
The Identification Number helps prevent fraud and illegal activities such as Illegal Phoenix Activity. It also assists with quickly identifying director relationships with companies over time, particularly from a regulator’s perspective. For more information on Director Identification Numbers visit the Australian Business Registry Services.
Small Business Restructuring FAQs
What is a Small Business Restructuring Plan?
The Small Business Restructuring Plan was introduced by the Australian Federal Government in 2021. It is for businesses that are facing financial hardship or insolvency. The plan is an alternative to liquidation for eligible businesses. The Small Business Restructuring Plan allows the time for a proposal to be presented to creditors to pay off a business’ debts, either in full or in part. The Plan is administered by a Restructuring Practitioner and details how all debts will be paid within a 3 year period.
What are the steps involved in a Small Business Restructuring Plan?
There are a few steps involved to conduct a Small Business Restructuring Plan. These will be explained in more detail throughout your consultation. The first stage is ensuring that the business meets the necessary eligibility requirements. The directors of the company must decide that the company is insolvent or likely to become insolvent. A Restructuring Practitioner is then appointed, along with the agreed remuneration amount that will be fixed for the proposal period. The Restructuring Practitioner advises the company about the restructure and assists in preparing a restructuring plan.
The restructuring plan is circulated to creditors for their vote and if approved, the company can continue to trade. The Restructuring Practitioner administers the implementation of the plan, giving breathing space from creditors whilst strategies are in place to pay debts. Once the restructuring plan terms are satisfied, the plan is then terminated.
How long is the Small Business Restructuring Plan process?
The planning development period occurs within 20 business days commencing on the day the restructuring begins. The timing may be extended by no more than 10 business days, subject to conditions.
What is the outcome of the Small Business Restructuring Plan?
The objective of the plan is to fulfill the obligations of all parties associated with the plan and all admissible debts have been dealt with. The outcome is for the business to continue trading without debts that were causing its insolvency.
What is the eligibility criteria for a Small Business Restructuring Plan?
- The business is unable to pay its debts when they fall due (insolvent or likely to become insolvent)
- The business must be operated by a company
- Total liabilities must be less than $1 million to creditors (excluding employees entitlements)
- All employee entitlements including superannuation are up to date
- All tax lodgements are up to date
- The business must not have previously undergone a Small Business Restructure or a Simplified Liquidation process in the past 7 years
- Both the current and former company directors acting within the past 12 months must not have been a director of a company that has utilised a Small Business Restructuring Plan or a Simplified Liquidation process in the past 7 years
What happens if my business does not meet the eligibility criteria of a Small Business Restructuring Plan?
There are options available for businesses that are suffering with debts. Our friendly team will go through these options with you in a free consultation. It is important to seek financial advice as soon as possible if you are facing unmanageable debts.
What is a Restructuring Practitioner?
A Restructuring Practitioner is a qualified professional that acts as the company’s agent during a Small Business Restructuring Plan. A person that is registered with the Australian Securities and Investments Commission as a ‘Registered Liquidator’ is authorised to act as a Restructuring Practitioner. It is the responsibility of the Restructuring Practitioner to provide the necessary advice about the company’s restructuring and assist with developing the plan.
Voluntary Administration FAQs
Deed of Company Arrangement FAQs
What is a Voluntary Administration?
A Voluntary Administration is a type of formal insolvency process for insolvent businesses that have the desire to continue trading. Once a business enters a voluntary administration, a registered liquidator takes full control of the business to deal with its affairs.
What happens to a business during a Voluntary Administration?
Upon commencement of a Voluntary Administration, full control is given to the Liquidator and a meeting with all creditors is held. The Liquidator investigates all the company’s affairs and financial situation and provides a report back to creditors with options. These options essentially determine the future outcome for the company.
What happens to creditors during a Voluntary Administration?
A Voluntary Administration allows a company breathing space from its creditors. This means during this administration process, the Liquidator acts as the liaison or spokesperson on the company director’s behalf. Creditors are unable to pursue claims against the company or commence court proceedings during this time. This includes protection from parties trying to recover their leased property.
What is the purpose of a Voluntary Administration?
The purpose of a Voluntary Administration is to resolve a company’s debts and affairs in order for the business to continue trading. This type of administration is typically successful when company directors acquire professional advice from a liquidator when first seeing signs of insolvency.
Can a Voluntary Administration turn into a Liquidation?
Yes, if creditors decide to place the company into liquidation. However, this decision to liquidate a company will happen after the Liquidator provides their investigations and resolutions to creditors. This allows creditors to make an informed decision.
What is a Deed of Company Arrangement?
A Deed of Company Arrangement (DOCA) is a legally binding agreement between the company and its creditors. The agreement proposes how the company’s affairs will be dealt with to provide a resolution to all creditors. A Deed of Company Arrangement happens shortly after the company enters Voluntary Administration.
What is the purpose of a Deed of Company Arrangement?
The Deed of Company Arrangement intends to increase the company’s chances of survival. It also maximises the returns to creditors in comparison to placing the company into liquidation. The Arrangement’s purpose is to benefit all stakeholders by paying off part or all debts over a period of time.
Who instigates a Deed of Company Arrangement?
It is typically proposed by the company director/s with consultation of the Liquidator. The Liquidator (Deed Administrator) administers the process.
Can a Deed of Company Arrangement fail?
Yes. If the Deed of Company Arrangement is not signed by the company within 15 business days following a second creditors’ meeting. The company will automatically enter liquidation. Alternatively, if creditors vote that the company should be liquidated under the circumstances that there is a breach of the Deed or if the terms cannot be fulfilled. A Deed of Company Arrangement can also be terminated if an application is made to the Court and the Court is satisfied that there are grounds to terminate.
How do I know if I am insolvent trading?
If you are a director of a company and you are unable to pay your debts when they are due, you are insolvent trading. It is important to seek immediate professional advice if you are insolvent trading.
Creditors’ Voluntary Liquidation and Court Liquidation FAQs
What is Liquidation?
Liquidation (or winding up) is a term used when a company is being wound up. There are three types of Liquidation:
i) Creditors’ Voluntary Liquidation – insolvent winding up initiated by the Company,
ii) Court Liquidation – insolvent winding up initiated by a creditor,
iii) Members’ Voluntary Liquidation – solvent winding up.
What is a Creditors’ Voluntary Liquidation?
A Creditors’ Voluntary Liquidation is a type of formal insolvency appointment. This type of insolvency happens when a company’s shareholders agree that the company can no longer pay its debts and they intend to wind up the affairs. When this happens, they appoint a Liquidator. Once the liquidation is finalised the company is deregistered.
What is a Liquidator?
A Liquidator is a qualified person that is appointed to wind up a company’s affairs. They are registered through the Australian Securities and Investments Commission and have a responsibility to all creditors.
When does a company enter a Creditors’ Voluntary Liquidation?
A Creditor’s Voluntary Liquidation commences when a Liquidator is appointed to a company. This may occur as a result of the creditors decision during a meeting in the Voluntary Administration process. It also may occur at the termination of a Deed of Company Arrangement.
What happens to creditors in a Creditors’ Voluntary Liquidation?
When a company enters into liquidation, creditors are unable to pursue legal proceedings against the company (unless permitted by the Courts). Once a Liquidator is appointed, creditors are informed through Liquidator’s reports of their rights and the financial position of the company. This includes reporting to creditors on assets, liabilities, the cause of the company’s insolvency and the likelihood of the financial return to creditors (dividends).
Do creditors receive a payout if a company goes into Creditors’ Voluntary Liquidation?
Once the Liquidator has performed their investigations into the company’s affairs, sold the assets and paid any Liquidator’s fees, expenses and employee entitlements, the creditors have rights to be paid what is owed to them. This is called a dividend. It is important to note that this does not mean that creditors will receive their full payment of their debt. Creditors will also need to submit a Proof of Debt form to prove how much debt the company owes you.
What happens to employees during a Creditors’ Voluntary (or Court) Liquidation?
Employees are terminated when a company has entered the liquidation process. As the company is deemed ‘insolvent’, it means it can no longer pay its debts and its financial obligations to creditors.
Do employees receive any of their entitlements after a company goes into Creditors’ Voluntary (or Court) Liquidation?
Employees are treated in priority over unsecured creditors when it comes to any debts that can be recovered. If there are recoverable funds after liquidator’s fees and expenses are paid, employees have rights to be paid their entitlements. Their entitlements are categorised in a priority order; outstanding wages and superannuation, outstanding leave entitlements, retrenchment or redundancy pay.
What happens to the company directors during a Creditors’ Voluntary (or Court) Liquidation?
After the appointment of a Liquidator, the Directors of a company have no director powers. They must assist the Liquidator in disclosing all properties, assets, books and records and any other records regarding the company’s affairs. A director must provide full disclosure of the company’s affairs to the Liquidator.
When does a Creditors’ Voluntary (or Court) Liquidation end?
After the Liquidator has realised (accounted for and sold) the company’s assets and distributed proceeds back to interested parties. The Liquidator will report back to the Australian Securities and Investments Commission (ASIC). The company will then be deregistered three months after the Liquidator has lodged their final receipts and payments to ASIC.
Members Voluntary Liquidation FAQs
What is a Members' Voluntary Liquidation?
A Members’ Voluntary Liquidation is a formal process where a company’s outstanding matters are settled, all assets are realised, all statutory clearances are obtained and the company becomes deregistered.
When does a Members' Voluntary Liquidation occur?
A Members’ Voluntary Liquidation occurs when directors of a solvent company intend to wind up the company and its affairs.
Can a Members' Voluntary Liquidation occur with an insolvent company?
No. A Members’ Voluntary Liquidation is only applicable for solvent companies. When company directors intend to wind up an insolvent company, this is known as a Creditors Voluntary Liquidation.
Are there requirements for a Members' Voluntary Liquidation?
Yes. The company directors must sign a declaration that the company is solvent. This declaration confirms that the company is able to pay off its debts in full within 12 months of the commencement of the Members’ Voluntary Liquidation process.
What if I am unsure if my company is solvent (or insolvent)?
If you are unsure whether your company is solvent, it is likely you need a professional (such as Insolvency Options) to make the assessment. It is advised that you call our team to discuss your company’s financial situation.
What happens after the declaration of solvency is signed?
Once the declaration is signed (and lodged with ASIC), the company members must pass a special resolution to wind up the company. The company must appoint a liquidator to wind up the company and its affairs from when the special resolution is passed.
What happens after the liquidation period is complete?
After the liquidator has finalised the winding up process, the company will be deregistered three months after the final forms have been lodged.
Tax Debt FAQs
What happens if my company has tax debts?
If your company does not meet its tax obligations, you may face serious penalties and consequences by the Australian Taxation Office. As a company director you are personally liable for outstanding taxation debts including Pay As You Go (PAYG), Goods and Services Tax (GST) and Super Guarantee Charge (SGC) obligations. If you do have these tax debts outstanding, the Australian Taxation Office may pursue you personally for recovery of these debts.
What if I cannot pay my tax debts?
It is critical that you communicate this with the Australian Taxation Office (ATO). Tax debts that are ignored can lead to serious consequences. The best solution is to address this situation immediately. The ATO is likely to pursue you with debt recovery actions that can often lead to further consequences, particularly if you do not have the funds to cover the debts.
What are the consequences of unpaid tax (related to my company)?
The ATO will take steps to notify you of your tax debts and consequences of unpaid tax debts. These will include the types of recovery actions that the ATO can use to pursue the debt. This notification is called a Director Penalty Notice (DPN). The ATO may also issue a Statutory Demand.
What is a Director Penalty Notice (DPN)?
A Director Penalty Notice is issued by the Australian Taxation Office (ATO) to a company director/s outlining unpaid taxation amounts, penalties and consequences.
What is a Statutory Demand?
A Statutory Demand is a legal notice issued by the Australian Taxation Office (ATO) to a company demanding payments for unpaid tax debts. It requires the company to either pay the tax debt in full or enter a payment plan with the ATO within a 21 day period. If a company ignores the Statutory Demand, the ATO can make the reasonable assumption (based on non-payment) that the company is insolvent and apply to the Federal Court to liquidate the company.
What are the recovery actions that the Australian Taxation Office (ATO) will use to pursue tax debts?
The ATO can pursue unpaid tax debt through several means, including Garnishee Notices, offsetting any tax credits against the existing penalties and/or further legal proceedings. These legal proceedings can often lead to a company being liquidated.
What is a Garnishee Notice?
A garnishee notice is issued by the ATO as a form of tax debt recovery action. It is a notice that can be provided to a person or business that currently holds or will hold money for you. This garnishee notice legally requires them to pay the ATO directly instead of paying any money to you. An example of this in a company’s situation is if the ATO issues a garnishee notice to your financial institution. That financial institution must legally pay the ATO for the stated nominated amount (by the ATO) to reduce your tax debt.
What if I am not a company director and I have tax debt?
If you do not own a business and you are acting as an individual with tax debts, you may also face serious consequences. It is important that you communicate your situation to the ATO immediately.
What is Illegal Phoenix Activity?
Illegal Phoenix Activity occurs when a company is liquidated (or wound up) to avoid paying its debts, while a new company is created to continue the same operations. Illegal phoenix activity is treated as a serious offense under the Corporations Act 2001 and there are harsh penalties and legal consequences of this conduct. For more information on Illegal Phoenix Activity, visit the Australian Securities and Investments Commission.
What are the consequences for individuals that have tax debts?
Firstly, interest will be added to any amounts that are not paid by the due date. At this time you will also receive communication from the Australian Taxation Office (ATO) notifying you of your unpaid tax. If these attempts are ignored, further actions are likely to be taken including using any credits to offset debts or a bankruptcy notice. A bankruptcy notice issued by the ATO allows the individual 21 days to pay the debt in full or enter a payment plan with the ATO. If the bankruptcy notice is ignored, the ATO will take further action and apply to the Federal Court to bankrupt the individual.
Debt Agreement FAQs
What is a Debt Agreement?
A Debt Agreement is a legally binding agreement between an individual with debt and their creditors, in order to settle their debts over a period of time.
What is a Debt Agreement used for?
A Debt Agreement is used for a person that fits the eligibility criteria that wants to settle their debts with their creditors in order to avoid bankruptcy. Typically it can benefit your creditors more than if you would if you entered into a bankruptcy.
What are the consequences of a Debt Agreement?
Most types of insolvency come with consequences. It is important to speak to our team about the benefits and consequences of each option. By entering into a Debt Agreement, it may affect your credit score (with credit bureaus) and your ability to apply for credit in the future. A record of the Debt Agreement will also be recorded and listed on the National Personal Insolvency Index (NPII). This NPII is a public and permanent record of all personal insolvency proceedings in Australia.
How long does a Debt Agreement last for?
A Debt Agreement can exist as a payment arrangement between you and your creditors for up to 3 years. This can be extended if you have a substantial asset such as owning your own home. A Debt Agreement may also be terminated early should the debt obligations be fulfilled earlier than 3 years.
What is a Registered Debt Agreement Administrator?
A Debt Agreement Administrator is registered with the Australian Financial Security Authority (AFSA). They are a qualified professional that administers the entire process of the Debt Agreement and is there to act on your behalf to your creditors. Insolvency Options have a Registered Debt Agreement Administrator with many years of experience in all types of insolvencies.
Can I do a Debt Agreement myself (without a professional or Registered Debt Agreement Administrator)?
No, as it is a formal process, you need a professional such as Insolvency Options to administer the Debt Agreement. It is to ensure that the formal agreement is legal and adhered to so all parties are satisfied with the obligations being met within the agreement.
Personal Insolvency Agreement FAQs
What is a Personal Insolvency Agreement?
A Personal Insolvency Agreement (also known as a Part X) is a legally binding agreement formed between you and your creditors to settle debts owed.
When does a Personal Insolvency Agreement end?
Pending on your circumstances, the amount of debts you owe and what is negotiated and discussed between you and your Trustee (the individual that administers the Agreement).
Can I do a Personal Insolvency Agreement myself without a Trustee?
No. A Personal Insolvency Agreement is a formal act of insolvency and legally requires a Trustee to administer the process.
What is a Trustee or Registered Trustee?
A Trustee is an individual that administers a Personal Insolvency Agreement or Bankruptcy. They are qualified and registered with the Australian Financial Security Authority (AFSA).
Are there consequences of entering a Personal Insolvency Agreement?
With all types of insolvency options, it is important that you consult a professional to understand the consequences. By entering into a Personal Insolvency Agreement, there may be impacts to your employment or business, your credit file and your name will be listed permanently on the National Personal Insolvency Index (NPII). More information on consequences of Personal Insolvency Agreements can be found on the Australian Financial Security Authority (AFSA). We recommend you speak to our team in a confidential consultation to understand the consequences of a Personal Insolvency Agreement (or any type of insolvency option).
What is Bankruptcy?
Bankruptcy is a form of insolvency and legal process where you are declared unable to pay your debts.
How do I declare bankruptcy?
As Bankruptcy is a formal process, it is best to speak to our professional team that will refer you to a qualified Trustee to handle your bankruptcy. Declaring bankruptcy is part of the formal administration process and resides with the Trustee as part of their obligations to the Bankrupt and creditors.
How do I know if Bankruptcy is right for me?
As each individual’s situation is different, Bankruptcy may or may not be the best course of action for you. Our team of professionals will assess your situation and discuss your options to see whether Bankruptcy is the best solution.
What happens to my assets if I declare bankruptcy?
During bankruptcy, your assets may be sold to pay off your creditors. The types of assets that are subject to being sold pend on your situation and their value or their purpose. An example of this is your vehicle used for work. You may be able to keep your vehicle if it is valued under a certain threshold amount. Other assets that may be impacted (not limited to) are your house, other properties and cash.
Are there eligibility requirements to declare bankruptcy?
Yes, there are two requirements you need to satisfy before you can declare bankruptcy. The first of the two is that you must not be able to pay your debts when they fall due (you must be insolvent). The second requirement is that you are present in Australia or have a residential or business connection with Australia. These are the only two requirements of entering Bankruptcy.
What happens to my creditors if I am bankrupt?
A Trustee’s responsibility is to inform your creditors of your bankruptcy. The Trustee acts on your behalf and communicates with your creditors. For most people in stressful situations this can be a relief. After your Trustee evaluates your financial situation, your (applicable) assets are sold in order to pay creditors part or all of your debts.
What happens to my credit card debts, loans and other unpaid bills when (or after) bankruptcy?
Most debts are unsecured, meaning there is no tie to a security interest (such as a house ie. mortgage). Examples of unsecured debts include credit cards, unsecured loans, electricity and internet bills. In most cases, bankruptcy will free you from these unsecured debts.
What if I am bankrupt and have a debt with the Australian Taxation Office (ATO)?
If you are an individual and have tax debts, bankruptcy may or may not clear you of these debts. For example, debts that are not cleared as a result of bankruptcy are HECS or HELP debts (Government education loans) or child support payments. Call our friendly team to discuss your debts and if they are covered in bankruptcy.
How long does Bankruptcy last for?
Bankruptcy typically lasts for 3 years and 1 day.
How do I know when my Bankruptcy has ended?
Your Trustee will communicate with you during your bankruptcy and at the time you are released from bankruptcy. After your bankruptcy period you will be discharged. It is important to know that the bankruptcy period can be extended pending on the bankrupt’s conduct. This will be communicated to you if that becomes the case.
Business Debt Solutions
If you have unmanageable debt, we can help. Explore our business debt solutions.
Personal Debt Solutions
If your debt is causing you stress. We can help. Find out more about our personal debt solutions and how we can help.
Other Business Solutions
We know business. Learn more on how our services can benefit your business.
Our Free Consulation Service
We know taking the first step to call for help is not easy.
Our initial step in your consultation is to listen to best try and understand your situation. Your confidentiality is just as important to us as it is to you.
Our consultation also covers what your options are; the benefits, considerations, costs and expected outcomes of each option. Anything that you have disclosed to us during this consultation is kept completely confidential.
Find out what you should expect from our free consultation service. Speak to our business recovery and debt solutions experts today.