Many people think that being a bankrupt means that they are no longer able to run a business. That is simply not the case, albeit with certain restrictions.
So, what can and can’t a bankrupt do when it comes to running a business?
A bankrupt cannot be a company director
Under the Corporations Act, a bankrupt is excluded from being a company director. An existing director who has been made a bankrupt cannot continue being a director and must cease immediately. There are no exceptions to this. ASIC will be able to identify a director who has been made a bankrupt though data matching systems. When a bankrupt director is identified, ASIC will write to the bankrupt confirming that the bankrupt will be removed from all existing directorships.
A bankrupt can run a business as a sole trader
Notwithstanding the above, a bankrupt can still run a business as a sole trader. This includes employing staff to help with the business. There are however certain restrictions in place for a bankrupt sole trader:
- A bankrupt must trade in his or her own name.
- A bankrupt sole trader cannot incur debts to trade suppliers and creditors above a certain limit as set by the Australian Financial Security Authority (AFSA). This is known as the indexed amount and it increases every year. The exception to this is where the bankrupt informs the other party that he or she is a bankrupt.
- A bankrupt has to keep proper books and records. This should not be something new as the Corporations Act imposes the same duty on directors.
- While there is no limit as to how much a bankrupt can earn, 50% of a bankrupt’s income will be subject to income contributions. The threshold of income before a bankrupt is liable for income contributions is again set by AFSA.
- It is also possible that the bankruptcy Trustee can make a claim against certain assets acquired by a bankrupt’s business. And if you are considering running a business while bankrupt you should obtain advice about this.
Ways to avoid these restrictions
A bankruptcy generally lasts for 3 years and this may be a long time for an individual who cannot reasonably run a business with the restrictions.
The best way to avoid these restrictions of course is to avoid bankruptcy in the first place. You may do so by either:
- Entering into an informal arrangement with your creditors. For example, we have previously helped a sole trader avoid bankruptcy by negotiating with their creditors in an informal arrangement; or
- Entering into a Personal Insolvency Agreement, which is a formal process where a payment offer is made to creditors and if accepted, avoids bankruptcy. This however will still prevent you from being a director for the duration of the agreement, which is usually at least three months.
If you are already bankrupt however, you can put forward a proposal to your creditors for a Section 73 Composition. It involves you making an offer (usually lower than what is actually owed) to your creditors, and if accepted, you will be released from bankruptcy.
Contact us for assistance
It is important that you speak to a professional before you go bankrupt (if you are a director) or start a business (if you are already a bankrupt). This is to ensure that you understand the restrictions in place to help better protect your assets. Depending on your individual circumstances, bankruptcy may not be the best option.
We at Cactus Consulting have decades of experience and will be able to provide you with the assistance required to avoid or minimise risks that are associated with running a business as a bankrupt.
So, contact us now either by phone, email or chat for a free, no obligation consultation.