Laws that apply if you go broke
'Going broke' means you are financially unable to continue your business and, in legal terms, may be heading for bankruptcy.
Companies that are going broke may be in receivership, administration or going into liquidation.
Bankruptcy can occur in one of two ways.
- An individual can file for bankruptcy by submitting a debtor’s petition to the Official Receiver in Bankruptcy.
- One or more creditors can petition the Federal Court for an individual to be declared bankrupt.
As an alternative to bankruptcy, creditors will sometimes agree to a deed of arrangement with the debtor. This involves the debtor ‘handing over’ the management of their affairs to a trustee who will work to provide a better return to creditors. This arrangement is also beneficial to the debtor because it avoids the cost, trauma and stigma of bankruptcy.
Bankruptcy usually lasts for three years. After this time, the bankruptcy is dissolved, freeing the bankrupt of their original debts and allowing a fresh start to be made.
Should you be facing bankruptcy at any time, you should consult a lawyer for advice and assistance.
The Insolvency Trustee Service Australia (ITSA) is the Commonwealth body responsible for personal bankruptcy and insolvency law and practice.
Companies that go broke
Companies are not made bankrupt in the same way as people. Instead, they may enter into a form of external management by way of a deed of arrangement with their creditors, receivership or liquidation. The Corporations Law sets out provisions for each of these forms of management.
If you are involved with a company that is in, or likely to enter, external administration, you should seek legal advice on your responsibilities.