Bankruptcy
The objectives of bankruptcy include the following:
- The distribution of the bankrupt’s property to creditors;
- Relief to the bankrupt from the burden of paying creditors’ debts and providing an opportunity for a fresh start;
- To ensure an independent investigation is undertaken into the bankrupt’s dealings, transaction, property and affairs.
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Liquidation
The objectives of liquidation are to:
- provide a means to terminate or wind up the affairs of a company including its business;
- prescribe a procedure for an orderly realisation of a company’s assets;
- ensure the fair and equitable distribution of a company’s assets to creditors and where a surplus exists, to the company’s shareholders;
- permit an independent investigation of the company’s activities and the conduct of its directors with regard to the circumstances that lead to the company’s liquidation;
- undertake the final step of ending the company’s existence by attending to its dissolution (termination).
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Voluntary Administration
A company may avoid liquidation by entering into voluntary administration.
The administrator’s objective is to manage the business, property and affairs of an insolvent company in a way that:
- maximises the chances of the company, or as much as possible of its business to continue in existence; or
- if the business cannot be saved, realise a better return to the company’s creditors than would result from an immediate liquidation.
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Signs of Insolvency
The classic symptoms of insolvency include the following:
- Trading losses
- Net asset deficiency
- Failure to pay statutory debts including, GST, PAYG, superannuation
- Delayed payment to non essential creditors
- Part payments and instalment plans with essential creditors
- Dishonoured cheques
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Alternatives to Bankruptcy
To avoid bankruptcy a person may voluntarily enter into a statutory alternative to bankruptcy known as a Personal Insolvency Agreement or Part X (ten) arrangement.
A Personal Insolvency Arrangement is a binding agreement between a person and their creditors that provides new terms for the repayment of existing debts. The new terms may include the following:
- Full release from current debts.
- An undertaking to repay a new, mutually agreed, smaller debt to creditors.
Example say 20 - 80 cents in the dollar in full and final repayment of existing debt.
- A moratorium of payments.
Example: Creditors agree to a 6 month period without repayments.
- Repayment of new mutually agreed smaller debt by periodic payments to a trustee.
Example: Insolvent debtor makes monthly repayments into a fund held by a trustee who pays creditors when the new agreed reduced debt is paid.
- Creditors offered assets not available in bankruptcy.
- A combination of the above.
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