After years of working to build your business from the ground up, the thought of losing it all because your personal finances are dire is a nightmare. It is still possible to keep trading as a sole trader if you are bankrupt or personally insolvent. We expose how to save your business when things are tough!
When a company enters a form of insolvent administration, it is either successfully turned around, sold as a going concern or closed down by the administrator/liquidator. Unlike companies, there are still ways to run your business while bankrupt.
Whilst you cannot manage a company as an undischarged bankrupt, you may be able to continue to trade during bankruptcy with minimal interference by a Bankruptcy Trustee.
The Bankruptcy Trustee and your Business
A Bankruptcy Trustee is in charge of administering a Bankruptcy Estate, and is regulated by the Australian Financial Security Authority (AFSA).
How a trustee deals with a bankrupt’s business will depend on:
1) the business structure: whether you are a sole trader or in a partnership,
2) the size and value of the business; and
3) whether there is benefit to the bankrupt estate from selling the business versus allowing the bankrupt to retain and trade the business.
If you are considering bankruptcy and are concerned for your business, make sure you are aware of the process and consequences of bankruptcy.
What will happen to my business if I am bankrupt?
The main consideration of declaring bankruptcy when you have a business, is the worth of the business itself. The business and its assets will be controlled by the Trustee; which means the Trustee could sell the business and/or its assets. However, usually a Trustee would only sell the business if it has significant value.
The trustee would obtain the financial records of the business and review the net asset and income positions to determine whether there is any value for the bankrupt estate. The trustee would then consider whether the business:
• could continue to trade to sufficiently annul the bankruptcy
• sell the business as a going concern
• sell the business assets
• close down the business, also known as winding up or liquidation in the case of a company
• or do nothing.
However, if you are a sole trader such as a painter or carpenter, it would be unlikely for a trustee to do anything with the business. This is because the business is likely to have minimal assets. In addition, the income earned would not be sufficient for the trustee to continue to trade to raise sufficient funds to annul the bankruptcy.
In these circumstances, there would be no benefit for creditors to sell the business or take the business over. There would also be no benefit for the trustee to close the business down either and as such, the trustee would allow the bankrupt to continue to trade.
What happens when a business partner goes bankrupt?
If you have a business partnership and you both go bankrupt, the above considerations apply. However, if only one partner declares bankruptcy, there are some further considerations:
1. Upon entering the term of bankruptcy, the existing partnership will be dissolved and the non-bankrupt partner must account to the Trustee for the interest held in the partnership. The options are:
• The non-bankrupt partner could purchase the trustees’ interest in the business;
• The trustee could sell his interest to a third party
• The trustee and the non-bankrupt partner could jointly sell the business
• If the non-bankrupt partner refuses to co-operate, and the trustee believes there is value in the business, the trustee could apply to the Court to sell his/her interest in the business.
2. When there is no value in the partnership, the trustee may renounce his interest in the business and allow the bankrupt partner to continue to trade the business with the current partner.
If you are aware of your personal financial concerns, you may consider withdrawing from the partnership prior to going bankrupt. Under these circumstances you could sell your interest in the partnership for market value prior to declaring bankruptcy. This alleviates the need to involve the trustee with the business.
Disclosure of your status as a bankrupt
There are instances when you will need to disclose your status as a bankrupt whilst continuing to trade your business:
When dealing with your suppliers and customers, an undischarged bankrupt must, for amounts above the statutory limit (currently $5,703) disclose their status as a bankrupt when seeking to obtain goods or services:
• on credit,
• by hire purchase or cheque,
• when leasing,
• hiring or promising to pay for goods and services, or
• when seeking to obtain an amount by promising to supply goods or render services.
You do not need to disclose your bankruptcy status if you trade your business under your own name.
Failing to disclose your status when necessary is an offence.
Personal liability for debts incurred after bankruptcy
Be aware that you remain responsible to pay all liabilities incurred after the date of your bankruptcy. New debt is not included in your bankruptcy. This is also the case with your trading creditors and suppliers. You will continue to be liable to pay these creditors and your trustee will not be liable for these debts, even if your trustee has allowed you to continue to trade the business.
What will happen to the business income?
Keep your Books up to date and accurate
You MUST keep accurate books and accounts and be able to justify any income and expenditure for the period of your bankruptcy. It is an offence not to.
Accurate books and accounts include (at the very least):
• Bank statements
• General ledger
• Profit and loss statement
• Balance sheet
• Income tax returns
Money owed for pre-bankruptcy work
If, prior to declaring bankruptcy, you have completed work but are yet to be paid for it by your customers, the money that you’re entitled to will not be collected by your bankruptcy trustee. Instead, it will be deemed as income and included in your income assessment when collected.
Profits from the business
Your profits are retained by you and cannot be claimed by your trustee. Instead, your business net profits are deemed as income for income assessment purposes.
The Trustee will review all income received from the bankrupt and assess the amount the must be paid to the bankruptcy estate. A threshold is deducted (increased by the number of dependants) from the after-tax amount and one-half of the difference is paid to the bankrupt estate.
Declaring bankruptcy does not mean the end of your business. If you are considering bankruptcy and are concerned as to how it will affect your business, please contact one of our experts at Revive Financial. We will be able to lead you in the right direction and save your business!