Definition of Insolvency 

What is the definition of insolvency under Australian law? This article will explore the legislation that defines insolvency and the different types of insolvency in Australia.

When a business or individual in Australia is unable to pay their debts, they are considered to be insolvent. This can be a difficult and stressful situation, but it is essential to remember that options are available.

Insolvency law in Australia is designed to help both creditors and debtors. For creditors, it provides a way to recover their debts. For debtors, it provides a way to manage their debts and, in some cases, to get a fresh start.

Definition of Insolvency: Relevant Legislation in Australia

Three laws in Australia govern insolvency matters:

Corporate Insolvency: Corporations Act 2001 (Cth)

The fundamental source for, among other things, the registration, insolvency, and reorganisation of businesses registered in Australia is the Corporations Act 2001 (Cth) (the Corporations Act). The Corporations Act specifies how an Australian corporation can begin a formal insolvency process and how its assets are finally divided to creditors in the context of insolvency. The definition of insolvency under this Act pertains to a situation where a person is unable to pay all his or her debts as and when they become due and payable.

Personal Insolvency: Bankruptcy Act of 1966 (Cth)

The Bankruptcy Act of 1966 (Cth) (the Bankruptcy Act), which specifies how a person may engage in a personal insolvency agreement, debt agreement, or a formal bankruptcy proceeding, establishes the legal foundation for personal insolvency. In Australia, bankruptcy only refers to an individual’s insolvency, unlike in some other countries.

Under the Act, bankruptcy is a legal status that a person may have. Once they are declared bankrupt, creditors are prohibited from further pursuing them for payment. Also, their property is made available through a trustee for distribution among creditors, with some exceptions, such as household furniture, personal injury settlements, and certain vehicles.

The definition of insolvency under the Corporations Act is the same with that of the Bankruptcy Act.

What Are the Options Available to Debtors?

When a debtor is insolvent in Australia, there are several options available to them:

  1. Bankruptcy. Bankruptcy is a formal option under the Bankruptcy Act 1966. A debtor can file for bankruptcy and have their debts managed by a trustee. A debtor can choose a specific registered trustee to administer their estate.
  2. Temporary Debt Protection. TDP is another formal option under the Act which provides temporary relief from unsecured debts for up to 21 days.
  3. Debt Agreements. A debt agreement is a legally binding agreement between a debtor and their creditors to repay their debts over a set period of time.
  4. Personal Insolvency Agreements (PIA). PIAs are a formal option under the Bankruptcy Act 1966. They are a legally binding agreement between a debtor and their creditors to repay their debts over a set period of time.
  5. Liquidation. If a company is in financial difficulty, it can be put under the control of an independent external administrator (liquidator or voluntary administrator) or receiver. There are two types of liquidation for an insolvent company – creditors’ voluntary liquidation and court liquidation.

6. Debt Counselling Services. Debt counselling services may provide an alternative to a bankruptcy filing. These services can help debtors negotiate with their creditors to reduce their debts or change the terms of their debt.

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JB Solicitors is a law firm based in Sydney CBD offering legal services across a range of areas including family law, commercial law, immigration law, property law and employment law among others.

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