Personal Bankruptcy and Company Liquidation: What to Know

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Personal Bankruptcy and Company Liquidation: Understanding the Differences and Your Obligations

When financial difficulties arise, you must know the difference between personal bankruptcy and company liquidation. Many business owners confuse the two, yet each process operates under separate laws and carries very different consequences. This blog explains how they work, when they apply, and what you must do if you face either.

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What Is Personal Bankruptcy?

Personal bankruptcy applies to individuals who cannot pay their debts. It is a legal process where a trustee takes control of your finances and assets. Bankruptcy lasts for a set period, usually three years, and comes with strict rules and consequences.

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Key Features of Bankruptcy

• Covers personal debts, including credit cards, loans, and unpaid bills.
• A trustee takes control of your assets and manages repayment.
• Some property is protected, but valuable assets may be sold.
• Income contributions may apply if you earn above a set threshold.
• Bankruptcy is recorded on the National Personal Insolvency Index.

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How Bankruptcy Begins

• Voluntary bankruptcy: you lodge a debtor’s petition.
• Forced bankruptcy: a creditor takes court action if you owe more than the legal threshold.

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Consequences of Bankruptcy

• Restricted access to credit.
• Restrictions on travel outside Australia without permission.
• Possible investigation into your financial affairs.
• Long-term impact on your ability to obtain finance or run a business.

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What Is Company Liquidation?

Company liquidation applies to companies, not individuals. It occurs when a company is insolvent and cannot pay its debts. A liquidator is appointed to wind up the company’s affairs.

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Key Features of Liquidation

• The liquidator sells company assets and distributes proceeds to creditors.
• The company stops trading.
• Employees may lose their jobs.
• Directors lose control of the company.

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How Liquidation Begins

• Voluntary liquidation: directors and shareholders decide the company is insolvent and appoint a liquidator.
• Court-ordered liquidation: a creditor applies to the court to wind up the company.

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Consequences of Liquidation

• The company is deregistered once liquidation is complete.
• Directors may face investigation for insolvent trading or misconduct.
• Personal liability may apply if directors gave personal guarantees or breached duties.

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How Bankruptcy and Liquidation Differ

Although both involve financial collapse, the differences are clear.

FeatureBankruptcyLiquidationApplies toIndividualsCompaniesOverseen byTrusteeLiquidatorDurationTypically 3 yearsUntil finalisedMain aimRepay debts or release from themWind up company affairsImpactPersonal finances, assets, incomeCompany assets, employees, trading

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When Personal Bankruptcy and Company Liquidation Overlap

In many cases, directors and business owners may face both processes. For example:

• If you gave a personal guarantee for company debts, you may become personally liable.
• If your company traded while insolvent, you may be pursued personally for debts.
• If your business collapses, you may need both company liquidation and personal bankruptcy.

Each case depends on the type of debt, how your company was structured, and whether directors followed their legal duties.

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Director Duties and Insolvent Trading

As a director, you must not allow your company to trade while insolvent. If you do, you risk:

• Personal liability for company debts.
• Legal action by the liquidator.
• Disqualification from managing companies in the future.

Understanding your obligations as a director is critical. Many directors mistakenly believe their liability ends with the company. In reality, you may still be exposed.

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Personal Guarantees and Liability

When directors sign personal guarantees for loans or supplier accounts, they become liable for those debts if the company fails. Even if the company is liquidated, the creditor can pursue the director personally. This often leads individuals into bankruptcy after liquidation.

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The Bankruptcy Process in Detail

Step 1: Filing for Bankruptcy

You or your creditor apply to make you bankrupt.

Step 2: Trustee Appointment

A trustee is appointed to manage your affairs.

Step 3: Asset Management

The trustee sells non-protected assets to repay creditors.

Step 4: Income Contributions

If you earn above a threshold, you must pay part of your income.

Step 5: Discharge

Most bankruptcies end after three years, releasing you from debts.

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The Liquidation Process in Detail

Step 1: Appointment of Liquidator

Directors, shareholders, or the court appoint a liquidator.

Step 2: Asset Realisation

The liquidator sells company property and distributes proceeds.

Step 3: Creditor Meetings

Creditors are informed and may influence the process.

Step 4: Investigations

The liquidator investigates company conduct and possible breaches.

Step 5: Deregistration

The company is formally closed after debts are settled.

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Practical Impacts for Business Owners

• If your business is a sole trader structure, you face bankruptcy, not liquidation.
• If your business is a company, the company faces liquidation, and you may face personal liability.
• Many business owners must navigate both processes if they have mixed business and personal debts.

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How to Minimise Risk

• Avoid signing unnecessary personal guarantees.
• Keep accurate company records.
• Monitor cash flow and solvency.
• Act early if you see signs of insolvency.
• Seek advice from accountants and insolvency professionals.

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Trinity Accounting Practice: How We Help

At Trinity Accounting Practice, we support individuals and businesses through financial distress. We assist with:

• Reviewing your personal and business debts.
• Identifying risks of bankruptcy or liquidation.
• Preparing compliance reports and records.
• Working with trustees or liquidators.
• Developing strategies to prevent insolvency where possible.

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FAQs

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What is the main difference between bankruptcy and liquidation?
Bankruptcy applies to individuals, while liquidation applies to companies.

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Can I be made bankrupt if my company is liquidated?
Yes, if you are personally liable through guarantees or insolvent trading.

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Will bankruptcy wipe out my company debts?
No, company debts belong to the company. Bankruptcy only addresses your personal debts.

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Can I run a company while bankrupt?
Bankrupt individuals are restricted from managing companies without court approval.

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What should I do if I face both bankruptcy and liquidation?
Seek professional advice immediately. The right plan reduces risk and ensures compliance.

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Final Word

Personal bankruptcy and company liquidation are complex processes with major consequences. Knowing the difference is essential if you run a business. The earlier you act, the better your chance of protecting yourself and planning for the future.

For expert guidance, contact us today.

👉 Trinity Accounting Practice
✅ Accounting Firm in Beverly Hills
☎️ 02 9543 6804
📍 159 Stoney Creek Road Beverly Hills NSW 2209
🌐 www.trinitygroup.com.au
📅 Weekend & after-hours appointments available!
📅 Booking Link https://calendly.com/ramy-hanna

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