Insolvency vs Bankruptcy vs Liquidation – What’s the Difference?
For many business owners facing financial distress, terms like insolvency, bankruptcy, and liquidation are often used interchangeably—but they refer to distinct concepts with different legal implications.
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Insolvency is the broadest term. It means an individual or business is unable to pay debts as they fall due. Insolvency is a cash flow test. The fact that a business’s liabilities may exceed its assets is often a factor in insolvency, but taken in isolation, doesn’t necessarily mean it’s insolvent. The test is whether it can pay its debts as and when they fall due.
Insolvency can affect both companies and individuals, and it’s the financial state that may trigger formal recovery or wind-up procedures.
Bankruptcy applies only to individuals (not companies) in Australia. It’s a legal process initiated when a person is insolvent and cannot meet their debt obligations. Bankruptcy is governed by the Bankruptcy Act 1966 and involves appointing a trustee to manage the individual’s assets and debts. It typically lasts three years.
Liquidation, on the other hand, is the process of winding up a company’s affairs when it is insolvent or no longer trading. A liquidator is appointed to sell the company’s assets, investigate its affairs, and distribute any funds to creditors in a set order of priority.
In summary:
- Insolvency = inability to pay debts as and when they fall due.
- Bankruptcy = the process for individuals.
- Liquidation = the process for companies.
If you’re unsure which process applies to your situation, speak with one of our experienced consultants who can guide you through your options and obligations.
Our Approach to Helping Insolvent Businesses
At IRT Advisory, we know how stressful it can feel when your business is under financial pressure. Many directors worry about what will happen next, but the first step is simply getting a clear picture of the situation. That’s where we come in.
We start by reviewing your business finances and obligations, then explain—in plain language—what your options are. Often, there are pathways to restructure and steady the business. We also guide you through your legal responsibilities, so you can feel confident that you’re doing the right thing.
Every business is different, and so are the solutions. Sometimes the answer is working with creditors to give the company a chance to recover; other times, it may mean winding things down in an orderly way. Either way, you’ll have a team that stays calm under pressure and helps you move forward.
Our role is to make a difficult situation more manageable—giving directors the clarity and support they need to take control again.
Why Choose IRT Advisory for Insolvency Support?
When your business is under pressure, you need more than technical advice—you need a trusted insolvency advisor who understands both the law and the realities of running a business. At IRT Advisory, we bring years of experience helping companies navigate insolvency with clarity and confidence.
As business insolvency experts, we respond quickly and focus on what matters most: giving directors clear options and practical steps to reduce uncertainty. Our approach is client-first—taking the time to understand your circumstances and tailoring solutions that balance compliance with commercial reality.
Ethics are at the core of how we work. We provide honest guidance, even when the answers are difficult, so you can trust that our advice is grounded in integrity and focused on the best possible outcome for stakeholders.
What sets us apart is our calm, steady approach in challenging situations. We know insolvency is stressful, and our role is to simplify the process, explain your options, and help you make decisions with confidence.
With IRT Advisory, you’ll have an experienced, responsive partner to guide you through uncertain times.
Director Obligations & Legal Risks
- Personal guarantees– banks or suppliers may call on them if the company defaults. If the directors have agreed to a charging clause over personal assets in the credit agreement, the supplier may lodge a caveat over land and buildings personally owned by the directors to protect their position.
- Tax and employee entitlements– unpaid PAYG, superannuation and GST can create personal exposure if the ATO issues Director Penalty Notices.
- Trading while insolvent– directors can be held personally liable if the business continues to take on debts it can’t repay.
There are protections available. The safe harbour provisions allow directors to focus on a turnaround plan without fear of insolvent trading liability, provided they are taking genuine steps to restructure, keeping records in order, and meeting employee entitlements.
The good news is that by acting early and seeking advice, directors can often reduce their personal risk and give the business the best chance of survival.
Frequently Asked
Questions
What happens when a business becomes insolvent?
When a business can’t pay its debts as they fall due and there’s no early resolution in sight, it is considered insolvent. At this point, directors have legal obligations to act responsibly and avoid making the situation worse. Professional advice helps you understand the options—such as restructuring or liquidation.
Can I still trade while insolvent?
No. Trading while insolvent is against the law and can expose directors to personal liability. That’s why it’s so important to act early—there are often options to restructure or negotiate with creditors before it reaches that point.
Will I automatically lose my business if it becomes insolvent?
Not necessarily. In many cases, a restructuring process can allow the business to continue trading under a formal plan with creditors. The right advice can make the difference between recovery and closure.
What are my obligations as a director in insolvency?
Directors must act in the best interests of the company and its creditors once insolvency is suspected. This means avoiding new debts the business can’t repay and seeking advice quickly to stay compliant with their duties.
Is restructuring a realistic option?
Yes. The Small Business Restructuring process and other formal tools are designed to give viable businesses a chance to survive. Even outside formal processes, creditors will sometimes work with directors who are proactive and transparent.
Will I be personally liable for company debts?
Directors are generally protected by limited liability, but there are exceptions. Personal guarantees, unpaid tax obligations which prompt the issue of Director Penalty Notices by the ATO, or trading while insolvent can expose you to personal risk. Early action reduces these risks.
How long does an insolvency process take?
It varies. Some restructures can be implemented in weeks, while liquidations may take months or longer. Acting early helps keep the process efficient and reduces disruption and costs.
When should I seek help?
As soon as you suspect trouble. Early advice gives you more choices and better outcomes. Waiting too long can limit your options and increase personal risks.
