Australian insolvency law can be divided into two categories. Each is administered by a different legislation.

The Corporation Act deals mainly with companies and other incorporated entities and the Bankruptcy Act deals with individuals and unincorporated entities.

The great majority of businesses operating in Australia are small to medium in nature. They are loosely called “SMEs” and they could be administered under either of the above.

Concentrating on the SME that is a corporate entity, creditors who are owed money by the entity may have different types of security. For instance, they may be “secured” which means they have a valid charge or registration securing payment under what is known as Personal Property Securities Act 2009. Although this does not guarantee payment, it puts the creditor in a better position generally.

Secondly, a creditor may have a personal guarantee from a Director of the company or others, which means that assets that the Director has may be at risk for the Director.

Insolvency-2

Generally, most creditors of SMEs do not have any security or guarantees. These “unsecured creditors” generally end up with little or nothing in a liquidation of the company.

Tips

  • If you are going to extend credit to a company seek to register a charge under the PPSA. Your lawyer or accountant can advise.
  • Seek one or more of the Directors to sign personal guarantees for the debt.
  • Be careful not to extend too much credit.

Simon Coad,
Turnarounds & Insolvency | Forensic Accounting | Business Revitalisation

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