The current inquiries and debates about whether we should reduce our period of bankruptcy in Australia from three years to one have revealed some lack of understanding of the rather straightforward division between personal insolvency, of an individual, and corporate insolvency, of a company, and the respective consequences of each.
Here is how the law works, using the examples of Donald the director and Belinda the bankrupt.
The corporate entrepreneur
Don G Drake runs his retail business through a company, 123 Pty Ltd, which he owns and of which he is the sole director. The business fails largely through ineptitude, and 123 Pty Ltd goes into liquidation, with creditors owed $3m, and no moneys to pay them. Don suffers no real financial consequences – he retains his income and his assets.
Unperturbed, Don can and does start a new business the next day, and sets up 456 Pty Ltd, in another retail field. To avoid the embarrassment of his first failure, he uses a variation on his name, Geoffrey Drake.
The individual entrepreneur
Belinda Barnes runs a business in her own name – Belinda’s Plumbing. The business also fails, through unpaid work done for a failed developer, and she is made bankrupt. Her creditors total $100k. A restriction is placed on her plumber’s licence; while she can work, she can only find a job in retail plumbing supplies. She realises she should have operated through a company but cannot do so for another 3 years. She must also pay income contributions and she loses all her assets, including her home. She is required to verify her name as Belinda Barnes and hand over her passport.
The consequences, respectively
Meanwhile, Don fails to provide the required statement of assets and liabilities of 123 to the liquidator, the ‘report as to affairs’. The maximum penalty, if imposed, is $10,500, but penalties are generally around $500. Nothing happens.
Belinda also fails to provide a statement of affairs to her trustee. The penalty is also a maximum of $10,500, if imposed, but the real penalty is automatic, an indefinite extension of the period of her bankruptcy.
Meanwhile, Don, or Geoffrey, falls on hard times and enters a debt agreement under Part IX of the Bankruptcy Act. He becomes an ‘insolvent under administration’ but, despite this, he can and does remain as a director of 345 Pty Ltd, though he lets that company fall into deregistration, debts and all.
As an ‘experienced company director’, now known as Drake Donald, he sets up 678 Pty Ltd, through which he turns his hand as a corporate pre-insolvency adviser, for which no licence is required.
But, deciding that the law needs reforming, to support entrepreneurs, Drake seeks pre-selection as a member of parliament for a federal electorate. His Part IX debt agreement passes the restriction under s 44(iii) of the Australian Constitution which, relevantly, applies only to a person who “is an undischarged bankrupt or insolvent”.
Belinda also wants to make a difference – she tries for local government, but her bankruptcy prevents her.
These examples should clarify and explain the respective legal outcomes.