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Businesses are launched with the best intentions, but even the most astute plans can be undone by changes in the business environment or competitive landscape, consumer tastes, rising costs, or cash flow problems.

Personal insolvency could also have a big impact, as your personal and business obligations are often closely intertwined.

What is personal insolvency?

Personal insolvency is when you as an individual are unable to pay your debts as and when they fall due. The definition is the same as it is for Corporate entities.

There are number of options that are available to an individual facing Personal Insolvency these are briefly discussed below

Personal Insolvency Agreements are a legally-binding agreement between you and your creditors that allows you to flexibly settle your debts without declaring bankruptcy.

Bankruptcy is the process of being legally declared unable to pay your debts under the Bankruptcy Act. Personal insolvency, also known as Part X under the Bankruptcy Act, involves the appointment of a Trustee who would take charge of your properties and manage your creditors, making them offers of payment to settle your debts either through instalments or in a lump sum.

Personal insolvency normally releases you from being pursued by creditors to repay most kinds of unsecured debts upon completion of obligations under the agreement. An unsecured debt is one that has not been secured with collaterals such as properties, as in the case of credit cards, personal loans, utility bills, unpaid rent or medical, legal and accounting fees.

It is important to understand that entering into personal insolvency agreement is equivalent to committing an act of bankruptcy, which involves serious consequences. Since personal bankruptcy agreements come with obligations and tend to be legally binding, it is important to seek personal advice from a financial counsellor before entering into formal agreements with creditors.

How does personal insolvency impact a business?

It is common for individuals to operate their business through a company to avoid prospects of their being held personally liable for the debts accumulated by the company. However, personal insolvency does have an impact on business.

For example, a person who is declared bankrupt would not be able to hold position as the director of a company. Entering into a personal insolvency agreement involves appointment of a trustee to manage your debts and coordinate with your creditors. This means that the trustee assumes responsibility for your debts as well as any shares that you may hold of your company, which essentially makes you forego control of your company’s shares along with any form of ownership of the company.

It is the trustee’s responsibility to act in the common interests of creditors, and the trustee could take actions as deemed appropriate, such as placing your company under liquidation or selling your company shares if that would help pay off the money due to your creditors.

If the trustee estimates that selling your company’s shares or placing your company into liquidation would not yield sufficient value to settle your debts, it would be up to the creditors to approach the court to place your company into liquidation. Any of these actions on the part of the trustee or the creditors could have serious consequences for you and for your company, which warrants professional advice before personal insolvency decisions are made.

Responsibilities of a business director /owner if they are personally insolvent

It becomes the obligation of someone who is personally insolvent to immediately appoint a trustee to manage the affairs of the company, their debt, and creditors. As a company owner who is declared bankrupt or one who has entered into personal insolvency agreements, it is imperative that you provide all information about your company, its assets and its values, to your trustee.

The trustee would replace you as the shareholder of the company, and it is your responsibility to give up all control of the company and cease to perform in the capacity of the director of the company under the provisions of the Corporations Act. The trustee evaluates the company’s assets and repays creditors by realising the value of the bankrupt estate and by placing the company into liquidation.

All claims against the director of the company become claims in their bankrupt estate. If a liquidator is appointed to the company, it is your responsibility, as a former director, to assist the liquidator in sorting out the company’s affairs.

What should your next step be?

If you are concerned that your personal finances may affect your business, particularly if you are facing personal insolvency and you are a company director or business owner, it’s important to take action.

The first step is to speak to the experts and find out exactly what is at stake. You can chat with the team at Mackay Goodwin today to discuss your personal financial situation and the business interests you hold, and then together you can determine which actions should be taken to protect your company’s best interest.

You can contact us on 1300 750 599, or through our website here.