If you’re worried about debts that you can’t pay, understanding insolvency and bankruptcy is an important first step.
Insolvency is being unable to pay debts when they are due. This applies to individuals, companies and businesses.
Bankruptcy is a legal process that applies specifically to individuals who are insolvent.
Companies and businesses cannot be declared bankrupt, instead, they undergo corporate insolvency procedures like voluntary administration or liquidation .
What these terms mean and how they may apply to you or your business:
When a business is deemed insolvent it means that they are unable to pay their debts when they are due.
When this happens, there are usually three choices available:
Liquidation – selling off the business assets to pay debts.
Voluntary administration – when an independent administrator is appointed to assess the business’s future.
Receivership – a secured creditor such as a bank, who has a mortgage over assets, may appoint a receiver and manager to take over the business and pay outstanding debts. Receivership is typically focused on recovering money for secured creditors, meaning unsecured creditors are paid last, if at all.
Warning signs for insolvency
It’s important to recognise the early signs that your business may be in financial trouble. Acting quickly provides you with more options and a better chance of financial recovery.
Common warning signs include:
Ongoing cash flow problems – struggling to pay bills, wages or suppliers on time.
Overdue tax or superannuation payments – falling behind on obligations to the Australian Taxation Office or employee entitlements.
Legal action or threats from creditors – receiving payment demands, default notices or court documents.
Relying on new borrowing to cover regular expenses – such as using credit to pay rent, wages or for stock.
As soon as you identify any of these warning signs, it's a good idea to speak with a financial advisor, your accountant, or a business support service.
The sooner you act, the more options you’ll have to turn things around or exit the business in an orderly way.
Director responsibilities during insolvency
If your company is insolvent, or you believe it might be, it's important to act quickly and responsibly.
Company directors have a legal duty to prevent the business from incurring further debt if it cannot pay its existing debts when they are due. Continuing to trade while insolvent can have serious consequences.
If a director allows their company to take on new debts knowing it can’t pay its bills, they may be held personally liable for those debts under Australia’s insolvent trading laws.
If you’re not sure about your company’s financial position, seek advice from a qualified accountant, insolvency practitioner, or legal advisor as soon as possible.
Taking early action can help to protect your business and restrict your personal liability.
Bankruptcy is a legal process that individuals can apply for when they are unable to pay their outstanding debts to their creditors.
It can help by releasing you from most of your debts and stop debt collectors from contacting you.
Bankruptcy only applies to individuals, not companies and can have major long-term consequences for your financial future.
If you operate your business as a sole trader or partnership, you or your partners can become bankrupt as individuals. The business itself does not become bankrupt.
You can become bankrupt in two ways:
You can volunteer to become bankrupt.
Your creditors (the people or businesses that you owe money to) can apply for you to be declared bankrupt.
Bankruptcy usually lasts for three years but this can be extended under certain conditions, such as a failure to cooperate.
After this time, the bankruptcy is dissolved, freeing the individual of their original debts and allowing you to make a fresh start.