Australia: Seven Insolvency myths and misconceptions debunked

Last Updated: 19 November 2012

Insolvency Myth #1 – The ATO get priority for tax debts

This is one which we still hear quite often, despite the Australian Taxation Office's (ATO) priority ceasing in 1993! Since then all debts due to the ATO rank equally with other unsecured creditors.

The only claim for which the ATO has a priority is in respect of unpaid superannuation guarantee charge.

Insolvency Myth #2 – Insolvency practitioners always get paid first

Contrary to what some believe, insolvency practitioners don't always get paid first, and often we don't get paid at all!

In court liquidations and bankruptcies, petitioning creditor's costs rank ahead of most other claims including an insolvency practitioner's remuneration. The extent of secured creditors in an administration will also have a bearing on the funds available to meet remuneration.

Often there are no assets available to be realised and no other recovery actions capable of being pursued. In those cases we still have many statutory obligations which we must attend to notwithstanding that there are no funds available to meet our remuneration and disbursements.

Insolvency Myth #3 – If my company goes into liquidation I will go bankrupt too

Some company directors are under the impression that the liquidation of their company means that they are also made bankrupt.

The personal financial affairs of the director are separate and distinct from those of the company of which they have been a director and whilst bankruptcy may be inevitable in some cases, is it not automatic and will depend upon the director's own financial position and the extent to which they may have guaranteed any liabilities of their company.

Insolvency Myth #4 – Administrators and Liquidators work for the directors

Although an insolvency practitioner may be appointed by the directors of a company (as may occur in a voluntary administration), or the company's shareholders (such as a voluntary liquidation), the appointed practitioner is bound to act in accordance with the Corporations Act and must act in the interests of all creditors.

This is to be contrasted with a receivership where the appointed receiver is generally working for their appointor such as a bank or other financier.

Insolvency Myth #5 – If I go bankrupt I will lose everything

Despite what some may think when they first seek advice from us regarding bankruptcy, they will not lose everything they own as there is certain property which a bankrupt is entitled to retain. This is known as non-divisible property.

In addition to being able to retain normal household furniture, clothing etc, a bankrupt is entitled to retain tools of trade and motor vehicles up to certain prescribed values.

The Bankruptcy Act also restricts other property from being divisible, subject to certain criteria being met, including superannuation and the proceeds from personal injury claims.

Insolvency Myth #6 – Being a director of a company in liquidation restricts me from being a director of other companies

Generally a person can be a director of as many companies as they wish subject to restrictions within the Corporations Act which specifically disqualify persons from managing a corporation.

The Corporations Act provides for the automatic disqualification of persons from managing corporations where a person has been convicted of certain offences relating to contraventions of the Act or dishonesty, they are an undischarged bankrupt or they are subject to a Personal Insolvency Agreement under Part X of the Bankruptcy Act. These automatic disqualifications apply unless the person has obtained the leave of the Court to manage a corporation.

Once a person is discharged from bankruptcy they can be a director again. Similarly, once a person subject to a Personal Insolvency Agreement has fully complied with the terms of the agreement they can be a director again.

In addition to being automatically disqualified in the circumstances mentioned above, the Australian Securities & Investments Commission has the power to seek a banning order against a person from managing corporations where they have been involved in two or more failed companies.

Insolvency Myth #7 – A bankrupt cannot operate a business

It is possible for a bankrupt to operate a business whilst they are bankrupt. The main restrictions in relation to operating a business include that the bankrupt must trade under their own name or if they trade under an alternative name, they must inform everyone that they deal with that they are bankrupt.

In addition, whilst there is no restriction on a bankrupt incurring credit when they are bankrupt, they are obliged to disclose their bankruptcy status to any prospective credit provider if the amount involved exceeds a prescribed limit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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