Trustees and Insolvency Practitioners Australia is currently within its worst cost of living crisis on record. In light of record-high interest rates, price increases of almost all commodities and continued supply chain issues, Australia is seeing the number of  personal insolvencies rise consistently. As the general populace struggles with rising costs, insolvency practitioners and bankruptcy trustees can provide professional guidance on insolvency laws, procedures and regulations.

Before we discuss the role of bankruptcy trustees and insolvency practitioners, let’s look closely at what these terms mean.

What is bankruptcy (personal insolvency)?

Bankruptcy in Australia refers to an individual who is unable to repay outstanding debts or financial obligations as and when they become due. This is also known as personal insolvency. In Australia, bankruptcy or personal insolvency is governed by the Bankruptcy Act 1966, which allows persons under extreme financial stress to declare bankruptcy, restructure their debts and realise their assets to distribute among creditors.

There are two main types of bankruptcy: voluntary and involuntary bankruptcy. Voluntary bankruptcy refers to applying to become bankrupt yourself, whereas involuntary bankruptcy occurs when a creditor whose debt is $5,000 or above files a petition in court to declare you bankrupt, commonly referred to as a sequestration order.

Bankruptcy typically lasts for 3 years and 1 day.

What is liquidation (corporate insolvency)?

Liquidation  in Australia relates to a Company. 

Like bankruptcy, liquidation occurs when a company is unable to pay its debts and the Company enters a formal process to be wound up. 

What is the role of a bankruptcy trustee?

A personal insolvency or bankruptcy trustee in Australia plays a pivotal role in assisting individuals facing severe financial distress and considering options such as bankruptcy or personal insolvency agreements (PIAs)

Once you have been declared bankrupt, you can choose a bankruptcy trustee, or one will be appointed to you by the Australian Financial Security Authority (AFSA). A bankruptcy trustee is responsible for the following:

• Assessing assets: A bankruptcy trustee will assess all the assets the bankrupt individual owns. They may take the help of a bankruptcy accountant to accurately take stock of all assets that may be used to repay creditors.

• Controlling assets: Next, they will take immediate control of the bankrupt individual’s assets, including property, bank accounts and major personal possessions like antiques and artworks, luxury electronic items, inheritance, tax refund or winnings and money in your account that exceeds $1,000.

• Assessing claims: The bankruptcy trustee will assess claims from creditors whom the individual owes money.

• Protecting assets: The trustee will also ensure the bankrupt estate’s assets are protected from being dissipated or disposed of improperly.

• Realising assets: The trustee is also responsible for selling or realising the value of the assets to repay the creditors.

• Investigating: The trustee may also conduct investigations into the financial affairs of the bankrupt individual, including their financial transactions leading up to bankruptcy. This is to ensure there was no fraudulent or dishonest conduct.

• Completing bankruptcy: Once the bankruptcy process is complete and all assets have been distributed to creditors, the trustee finalises the bankruptcy, and the individual is discharged from bankruptcy at the end of their 3-year, 1-day period.

What is the role of an insolvency practitioner?

A registered liquidator can manage various forms of corporate  insolvency, including liquidation, administration or receiverships:

• Assessment and diagnosis: An IP will analyse the financial situation of an insolvent person or corporation to determine the most appropriate course of action, which could include liquidation or voluntary administration.

• Liquidation: If it is found that liquidation is the most appropriate course of action, an IP will be appointed as a liquidator by shareholders, creditors or the court to wind up the insolvent entities’ affairs.

• Voluntary administration: If voluntary administration is the best course of action, an IP will develop a Deed of Company Arrangement (DOCA) to allow the company to avoid liquidation and continue trading.

• Asset realisation: In the event of liquidation, an IP will identify, realise, and distribute assets to creditors, ensuring a fair and legal distribution.

• Employee entitlements: An IP will prioritise the payment of employee entitlements, including wages, superannuation and redundancy pay.

• Reporting: An IP will prepare comprehensive reports to document the insolvency process, including financial statements, creditors reports and reports to the Australian Securities and Investments Commission (ASIC).

Once a business has become insolvent, it has three possible options: liquidation, voluntary administration or receivership. If you fear your company is likely to become insolvent in the future, it is imperative to take action now and appoint a business recovery specialist to help you reorganise your business dealings to make them profitable.