What effect does a sequestration order have on a small business owner?

What effect does a sequestration order have on a small business owner?

Every person starting a business has aspirations for their endeavour to be highly successful and oftentimes will also put a significant amount of their financial assets into their business venture. Unfortunately, not all businesses succeed, and many small business owners have to deal with the issue of bankruptcy. Upon the issuing of a sequestration order by the Federal or Federal Magistrates Court, the business owner will be considered a bankrupt until he or she is discharged. The legal effect of a sequestration order means that all property of the bankrupt is vested in the trustee for the benefit of creditors.

There are a number of restrictions associated with bankruptcy, such as:


  • the bankrupt cannot take part in the management of a company;
  • the bankrupt must surrender their passport to the trustee and cannot travel overseas without the trustee’s consent;
  • the bankrupt cannot purchase goods or services either by credit or cheque over $5043 without disclosing their bankrupt status.


It should also be pointed out, that it is an offence for a bankrupt to obtain, or attempt to obtain credit under certain circumstances, and a trustee can lodge an objection if a bankrupt seeks to obtain credit over the $5043 limit.

The position of creditors after bankruptcy

Once a sequestration order has been made and accepted creditors may no longer pursue a debtor for any debts owing. However, creditors are able to share in any assets and property of the bankrupt if they are entitled to as a trustee. For a creditor to demonstrate their entitlement to the distributable property, they must send a proof of debt form to a trustee as prescribed by s 82 of the Bankruptcy Act 1966 (Cth) (the Act).

What property may be paid from the estate of a bankrupt?

Section 82(1) of the Act provides that all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

However, there are a number of liabilities that may not be provable in bankruptcy, and may not be pursued, such as:

  • maintenance agreements;
  • certain claims for unliquidated damages;
  • court imposed penalties or fines in respect to any offences;
  • student assistance or supplement loans;
  • cost orders.

What happens after bankruptcy?

Within 14 days upon receiving the sequestration order, the bankrupt must file a statement of their financial affairs with Insolvency and Trustee Service Australia (ITSA), and all relevant business documents must be delivered.

After the filing of a statement, the trustee can begin to administer the estate and call meetings with creditors whenever:

  • the creditors so direct via resolution;
  • a request is made in writing by at least a quarter of the creditors in value;
  • a request is made by a creditor or creditors of less than this value when security is lodged for the costs incurred from the meeting.

Additionally, trustees of a bankrupt’s estate can apply to the Official Receiver for a public examination of the bankrupt, and under such a circumstance, the bankrupt must answer any questions, and provide the necessary documents – even if such information may be incriminating.

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