Bankruptcy

Bankruptcy is available to people who can’t pay their debts, or who are suffering financial hardship.

How Does a Person Go Bankrupt

A person who can’t pay their debts may voluntarily file for bankruptcy by filing a Debtor’s Petition with the Official Receiver from the Australian Financial Security Authority (“AFSA“).  AFSA is a Commonwealth Government agency. A person filing for bankruptcy may appoint the Official Trustee from AFSA to act as their trustee, or they may appoint a private trustee, such as those at Pearce & Heers.

Creditors can also apply to Court to make a person who is unable to pay their debts bankrupt. To do this a creditor must generally have a judgment against the person for over $5,000 and have issued a Bankruptcy Notice. A creditor who applies to Court in order to bankrupt someone may elect to have the Court appoint a private trustee or they can arrange for the Court to appoint the Official Trustee.

What are the Consequences of Bankruptcy

If a person becomes bankrupt:

• The person is released from their provable debts;
• An independent party (the bankruptcy trustee) is appointed to arrange for the sale of the person’s divisible property;
• The funds realised by the bankruptcy trustee are distributed towards payment of costs and then to the bankrupt’s creditors.

The divisible property which will be sold or realised in bankruptcy may include a person’s interest in any real property, shares, cash at bank or motor vehicles or tools of trade over a certain value. However, it does not include (subject to certain exceptions), superannuation, household furniture and belongings and other excluded assets including tools of trade and motor vehicles valued at less than the statutory limit.

Some of the other common consequences of bankruptcy are:-

• There will be a permanent record of a person’s bankruptcy on the National Personal Insolvency Index, which is a register maintained by AFSA of people who have become bankrupt or been a party to other types of insolvency proceedings;
• A person must prepare and lodge a Statement of Affairs with AFSA at the time of filing a Debtor’s Petition for bankruptcy or a person made bankrupt by the Court must provide their trustee with a Statement of Affairs within 14 days of being notified of their bankruptcy;

A person who is bankrupt cannot act as a company director, or trade a business other than under their own name;

Undischarged bankrupts are not entitled to incur credit over a certain statutory limit without advising the person that they are dealing with that they are bankrupt;

• A person who is bankrupt is required to pay income contributions to their trustee if their net after tax income exceeds a certain statutory limit; and
• A person who is bankrupt must deliver their passport to their trustee and must not travel overseas without their trustee’s written consent.

Information and Advice Regarding Bankruptcy

If you would like to obtain further general information regarding bankruptcy you may wish to view our Bankruptcy FAQs Page. You may use our Income Contribution Calculator to estimate the income contributions you are liable for.

If you are seeking advice regarding bankruptcy please contact our Brisbane or Gold Coast office and our experienced staff will be able to assist you.

General Advice and Assistance

At Pearce & Heers we commonly provide pre insolvency advice and other assistance to company directors and individuals facing financial difficulties. Some of the areas in which we specialise in providing advice and assistance are:-

Advice and Assistance to Accountants

Pearce & Heers specialises in providing advice and assistance to accountants regarding their client’s financial affairs. We are often contacted by accountants whose clients are in financial difficulty who either want to generally discuss their client’s circumstances and issues or who may wish to arrange a meeting with us where we can formally review an individual or company’s position and discuss the options which may be available.

We will generally have an initial discussion or consultation with an accountant at no cost to their client and will be up front with any costs which we may charge for any additional or specific work which we may perform for their client in the future.

General Meetings, Discussions and Advice

If you are the director of a company or an individual facing financial difficulty Pearce & Heers can review your circumstances and advise on options available, including any risks which may arise, future strategies and possible formal or informal insolvency appointments.

We can then, if necessary, either provide further assistance in dealing with financial problems or, should it be your desired course of action, administer a personal or corporate insolvency appointment.

Pre Insolvency Advice – Liquidation

Pearce & Heers provides pre insolvency advice to directors of insolvency companies regarding the liquidation process, matters that a liquidator will attend to and any risks associated with placing a company in liquidation. In circumstances where we provide advice to a director which we consider excludes us from acting as liquidators of a company we will, if required, assist the director in arrange for another insolvency practitioner from a third party firm to be appointed.

Pre Insolvency Advice – Bankruptcy

Pearce & Heers also provides pre insolvency advice to individuals who wish to file for bankruptcy. We can then assist individuals file Debtor’s Petitions either appointing trustees from Pearce & Heers or appointing the Official Trustee from the Australian Financial Security Authority.

Post Liquidation or Bankruptcy Advice

We commonly assist company directors or bankrupts deal with issues which may arise with a third party liquidator or trustee who has been appointed. This may include:-

• Assisting with preparation of required statutory documents such as Reports as to Affairs and Statements of Affairs;
• Providing advice and assistance in conducting meetings with a liquidator or trustee;
• Reviewing claims which may be pursued against an insolvent’s related entities; and
• Assisting with the resolution of claims or issues which may be brought or raised by a liquidator or trustee.

Director Penalty Notices

We have advised numerous company directors who have received director penalty notices regarding the options available to them, including placing the company in administration or liquidation, entering into a payment arrangement with the ATO, or other options for Director Penalty liabilities which cannot be avoided. Find out more.

Negotiations with the Australian Taxation Office

We are experienced in conducting negotiations with the ATO regarding payment arrangements for individuals and companies and we negotiate numerous payment arrangements with the ATO each year.

Solvency Reviews

We are often engaged by a company, commonly via its accountant, to review the company’s circumstances and provide either general or formal advice on the company’s current solvency and risks to its ongoing solvency. In circumstances where we take on such an engagement we can also advise company directors in relation to future strategies which may be implemented to improve a company’s financial performance or deal with creditor claims which a company cannot immediately pay.

Assisting with Claims by Creditors

Pearce & Heers can provide general advice and assistance to companies or individuals who are subject to large claims by creditors which they cannot pay. This will generally involve us reviewing relevant circumstances and financial information and determining a strategy which may seeking to negotiate an informal settlement or payment arrangement or assisting an individual file for bankruptcy or a director place a company into liquidation.

Assisting with Statutory Demands and Winding Up Applications

In circumstances where a creditor has taken formal recovery action by issuing a company with a Statutory Demand and possibly subsequently a Winding up Application, Pearce & Heers can also provide assistance with reviewing a company’s financial position, considering risks to the company’s director and formulating a strategy to deal with the claim being pursued. Such a strategy may include seeking to negotiate a payment arrangement such that the creditor adjourns or withdraws the Winding up Application, appointing a voluntary administrator, or letting the company be wound up if there is limited or no prospect of the company continuing trading.

Information and Advice

If you are seeking advice or assistance regarding Director Penalty Notices, please contact our Brisbane or Gold Coast office for an initial obligation free consultation.

Informal Arrangements and Settlements

Informal Arrangements

In some circumstances individuals or companies that are unable to pay all amounts which they owe to creditors may be able to negotiate debt settlements or arrangements with some or all of their creditors in order to avoid bankruptcy or liquidation.

Pearce & Heers specialises in assisting to negotiate these types of debt settlements and informal  arrangements. The approach we commonly adopt is we provide creditors with a full summary of an individual’s or company’s financial position often with an estimate of the position should that party enter into a formal insolvency appointment, which assists creditors understand that a person or company cannot pay their debt in full. We will then generally make an offer of settlement to creditors on that person’s or company’s behalf and subsequently liaise with their creditors regarding the offer, any counter-offer received and if negotiations are successful in preparation of a settlement agreement.

When creditors understand an entity’s financial position and the prospects of recovery should that entity enter into a formal insolvency appointment, they may often be open to negotiating a settlement of their debt for a lower amount, reducing the interest on their debt for a period, or allowing deferred payment of their debt.

Informal arrangements can be proposed quickly and efficiently, however they require acceptance of the proposed settlement offer by each of a person’s or company’s creditors (or possibly the vast majority of creditors) to be successful. If one or more creditors reject a proposed offer the informal arrangement may not be able to proceed. Consequently, proposing such arrangements is more difficult as the number of creditors increases.

Additionally it is generally more likely for this process to be successful if a person or company is able to make an offer to creditors for a significant portion of their debts, although this may not always be necessary.

In considering whether to undertake this process, company directors and individuals must be aware that not all such informal matters will result in a successful outcome, however, it may be a better strategy than an immediate formal insolvency appointment.

If you would like to discuss the options available to you, including negotiating informal settlement arrangements, please contact us for an initial obligation free consultation.

Dispute Resolution and Debt Settlements

We are often approached by individuals or companies that are subject to legal claims or proceedings, or those parties’ solicitors, in circumstances where the individual or company is unable to continue funding the litigation or meet the amount of any judgment which has been obtained or which may be obtained in the future.

Pearce & Heers specialises in assisting individuals and companies resolve litigation and disputes with a commercially-minded approach, which may often benefit both parties to the dispute. As with the negotiation of general informal arrangements with creditors, we commonly do this by providing the other side to a dispute with a summary of an entitles financial position, along with details of any estimated future costs to that entity of defending claims against it and a summary of estimated outcomes should the entity we are acting for be forced to make a formal insolvency appointment.

Whilst there is obviously no certainty of achieving a settlement through this process it provides a further option for parties who are subject to litigation to consider in circumstances where they cannot afford to continue to fund the litigation or meet the amount of any claim against them and it may result in settlement of disputes on commercial terms.

Examples of Arrangements and Debt Settlements we Have Assisted with

We have recently successfully assisted numerous individuals and companies enter into informal arrangements and settlements with their creditors, including in respect of the following matters:

• Assisting a large transport company negotiate its 9th payment arrangement with the ATO in respect of debts totalling several hundred thousand dollars, which included the ATO writing off a portion of the interest and penalties which it had charged the company.
• Assisting a group of civil contracting companies negotiate a payment arrangement with the ATO which resulted in the ATO withdrawing a winding up application which the ATO had filed against one of the companies.
• Assisting a company’s directors negotiate a payment arrangement (from the company) with the ATO in respect of amounts claimed by the ATO, totalling several hundred thousand dollars, which the ATO was claiming against the company and its directors as a result of Director Penalty Notices issued.
• Assisting three partners of a partnership negotiate settlements with their former landlord, substantial supplier and one other creditor.
• Assisting a company and its director negotiate a settlement with the company’s former landlord in respect of a debt owed to the company’s landlord which was for an amount of several hundred thousand dollars and which the director had personally guaranteed.
• Assisting a number of parties negotiate settlements in respect of legal claims being pursued against them, which the parties could not continue to defend given the significant legal costs involved.
• Assisting a debtor negotiate a settlement with a creditor who had commenced bankruptcy proceedings against them for a debt which the debtor could not pay.
• Assisting a number of parties negotiate settlements with their banks in respect of shortfalls suffered by the banks upon sale of properties subject to their securities.
• Assisting a number of property developers in negotiations with secured creditors such that the secured creditors agreed to stay enforcement action to give the development companies time to conduct an orderly sale of properties subject to security.

Advice and Assistance

If you are seeking advice or assistance regarding these types of matters please contact our Brisbane or Gold Coast office for an initial obligation free consultation.

Part IX Debt Agreements

A Part IX Debt Agreement is an option available to an individual debtor as an alternative to bankruptcy.

In order to avoid bankruptcy, a person who has net assets, creditors and income under a certain statutory limit, may put forward a proposal for a Part IX Debt Agreement. Such a proposal will usually involve a person agreeing to pay a certain amount in a lump sum or by installments over time (which is generally less than the total amount owed to creditors). If the proposal is accepted by the person’s creditors, then it is binding on all unsecured creditors and the administrator of the agreement will collect the amount(s) payable by the person and distribute the funds received to creditors on an equal pro rata basis.

However, a Part IX Debt Agreement is not available to all people in financial difficulties and such an arrangement is only available to debtors who have assets, liabilities and income less than prescribed thresholds.

Benefits of a Part IX Debt Agreement

The benefits of a Part IX Debt Agreement, include avoiding bankruptcy and the restrictions to which a bankrupt is subject including certain travel restrictions and restrictions on acting as a company director. The person is only required to make payments to the administrator of the agreement and they no longer have to deal with or make payments to individual creditors who are to participate in the distribution of funds (such as the ATO, credit cards and loans).

Provided the Part IX Debt Agreement is complied with, most debts owed to creditors are released, although there are some exceptions as there are certain types of debts which are not released by either a Part IX Debt Agreement or by bankruptcy.

Advice Regarding Part IX Debt Agreements

If you are seeking advice regarding the possibility of putting forward a proposal for a Part IX Debt Agreement, please contact our Brisbane or Gold Coast office and our experienced staff will be able to assist you.

Personal Insolvency Agreements

A Personal Insolvency Agreement (“PIA“) is an alternative to bankruptcy.

In order to avoid bankruptcy, a person who is unable to pay their debts, or who is suffering financial hardship, can put forward a proposal to their creditors for a PIA.

Appointment of Controlling Trustee in Order to Put Forward a Proposal for a Personal Insolvency Agreement

In order to put forward a proposal for a PIA a person must appoint a controlling trustee who will review the person’s circumstances and provide a report to the person’s creditors, which will include (among other matters):-

• Brief details of the person’s financial affairs;
• A summary of the person’s assets (if any);
• Details of the person’s creditors;
• A summary of the estimated returns should the person go bankrupt or if the proposal for a PIA is accepted; and
• A recommendation as to whether or not creditors should accept the proposal for a PIA.

The controlling trustee will then convene a meeting of creditors at which creditors will vote on the PIA proposal.   At the meeting of creditors for the proposal for a PIA to be accepted it must be approved by a special resolution of creditors, being approval by a majority in number and more than 75% of the value of creditors voting at the meeting. If the proposal is accepted then it is binding on all creditors and subject to compliance the person making the proposal will avoid bankruptcy. If the proposal for a PIA is not accepted then the person making the proposal does not automatically become bankrupt, however, it is common that they will in the future.

Possible Form of a Proposal for a Personal Insolvency Agreement

A proposal for a PIA may take many forms, however, it may commonly involve:

• The sale of certain assets which a person owns; and/or
• Payment of a lump sum amount by a relative or associate of the debtor; and/or
• Payment of amounts over time by instalments by the debtor; and/or
• Certain creditors associated with the debtor agreeing not to claim for a dividend if the proposal is accepted.

Possible Benefits of Entering into a Personal Insolvency Agreement

The benefits of entering into a PIA, may include:

• Avoiding bankruptcy, which lasts for at least three years;
• A person being released from their provable debts which they owe to creditors;
• Certain assets not being sold, which would otherwise be sold in bankruptcy;
• Some of the restrictions placed upon a bankrupt not applying, including restrictions relating to travel, trading businesses and incurring debts; and
• There is no requirement to pay income contributions under a PIA, which may be required to be paid in bankruptcy.

Advice Regarding Personal Insolvency Agreements

If you are seeking advice regarding the possibility of appointing a controlling trustee and putting forward a proposal for a PIA, please contact our Brisbane or Gold Coast office and our experienced staff will be able to assist you.

If you are considering Bankruptcy, you may use our Income Contribution Calculator to estimate the income contributions you are liable for.

Section 73 Compositions

A bankrupt may put a proposal to his or her creditors pursuant to Section 73 of the Bankruptcy Act 1966 (Cth) (“Section 73 Proposal”) to satisfy creditors’ debts and ultimately have the bankruptcy annulled. The proposal will generally result in creditors receiving a greater return on their debts which would be received if the bankrupt’s bankruptcy continued.

A Section 73 Proposal may take many forms, however, it may commonly involve:

• Payment of a lump sum amount by a relative or associate of the bankrupt; and/or
• Payment of amounts over time by instalments by the bankrupt; and/or
• Certain creditors associated with the bankrupt agreeing not to claim for a dividend if the proposal is accepted.

A bankrupt will generally also have to make arrangements with their trustee to pay their trustee’s remuneration and expenses associated with reporting on the bankrupt’s Section 73 Proposal and convening and holding a meeting of the bankrupt’s creditors to consider the proposal.

Once a Section 73 Proposal has been made, a trustee will convene a meeting of the bankrupt’s creditors to consider the proposal. The trustee must also recommend to creditors whether or not the trustee considers that the proposal should be accepted, however, creditors are under no obligation to follow the trustee’s advice.

At the meeting of creditors for the Section 73 Proposal to be accepted it must be approved by a special resolution of creditors, being approval by a majority in number and more than 75% of the value of creditors voting at the meeting. If the proposal is accepted the bankruptcy is immediately annulled, however, if the proposal is not accepted by special resolution then the bankruptcy will continue.

If the Section 73 Proposal is accepted a trustee will administer the composition or scheme of arrangement under the proposal, collect any funds payable as a result of the proposal and distribute funds received in accordance with the provisions of the Bankruptcy Act 1966 (Cth) including paying a dividend to the bankrupt’s creditors.

Once the terms of the Section 73 Proposal have been fully complied with and all funds disbursed the trustee will finalise the administration of the composition or scheme of arrangement under the proposal and will notify the Australian Financial Security Authority that matter has been finalised.

Advice Regarding Section 73 Compositions and Schemes of Arrangement

If you are seeking advice regarding the possibility of putting forward a Section 73 Proposal either in a bankrupt estate which Pearce & Heers are administering or a bankrupt estate administered by another trustee, please contact our Brisbane or Gold Coast office and our experienced staff will be able to assist you.