Insolvency Facts and Misconceptions

Liquidators get paid first

Insolvency practitioners DO NOT always get paid first and often DO NOT get paid at all.

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

Often there are no assets available to be realised and no other recovery actions capable of being pursued. However a liquidator still has statutory obligations which they must attend to although there are no funds available for a liquidator’s remuneration and disbursements.

If my company goes into liquidation I will also go bankrupt

The personal financial affairs of a director are separate from those of the company and although bankruptcy may be inevitable it is not automatic. This will to a large extent  depend upon the director’s own financial position and the extent to which they may have guaranteed liabilities of the company.

The Australian Taxation Office receives priority

The Australian Taxation Office (ATO) priority ceased in 1993 and 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.

Liquidators work for the directors

Although an insolvency practitioner is appointed by the directors of a company (for example in a voluntary administration), the appointed liquidator is bound to act in accordance with the Corporations Act and must act in the interests of all creditors.

This is in contrast to a receivership where the appointed receiver is working for the appointor such as a bank or other creditors.

A bankrupt loses everything

There is certain property which a bankrupt is entitled to retain which is known as a non-divisible property.

In addition to being able to retain household furniture, a bankrupt is entitled to retain tools of trade and motor vehicles with certain values.

Other property which is non-divisible (subject to certain criteria being met) includes superannuation and the proceeds from personal injury claims.

A bankrupt can operate a business

A bankrupt can operate a business whilst they are bankrupt. The main restrictions are that the bankrupt must trade under their own name or if they trade under an alternative name, the bankrupt must inform all third parties with whom they deal; that they are bankrupt. The consent of the Trustee is also required. A bankrupt can however still be employed although excess income is paid to a bankrupt’s Trustee (see article on this Website “Income Contributions by a Bankrupt”)

Whilst there is no restriction on a bankrupt applying for and incurring credit when they are bankrupt, they are obliged to disclose their bankruptcy to a prospective credit provider if the amount involved exceeds a prescribed limit.

Being a director of a company in liquidation restricts that director from being a director of other companies

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

The Corporation Act provides for the automatic disqualification of a person 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 the Bankruptcy Act. These automatic disqualifications apply unless the person has obtained the leave of the Court to manage a corporation.

As soon as a person is discharged from bankruptcy they can again be a director.

In addition to be being automatically disqualified as set out above,  The Australian Securities and Investments Commission has the power to seek a “banning order” against a person from managing corporations where such a person has been involved in two or more failed companies.

For further information please contact Trevor Rosenthal on telephone (03) 8680 5555 or email trosenthal@battensacks.com.au.

Please note that the advice in this communication is general advice only and you should not rely on this advice unless you obtain legal advice specific to your own requirements.