Bankruptcy

Author: Craddock Murray Neumann Lawyers

Publish Date: Jan 11, 2008

CURRENT BANKRUPTCY LAW (as at September 2004)

BANKRUPTCY ACT 1966

·  there is an Official Trustee for the Commonwealth.
· one Official Receiver for each bankruptcy district,  has the powers of the Official Trustee.

ACTS OF BANKRUPTCY

If debtor commits an "act of bankruptcy" the law presumes him/her to be insolvent BUT committing an act of bankruptcy does not of itself make a debtor bankrupt.  This only occurs after the hearing of a creditors petition or presentation of a debtor's petition (see below).  Acts of Bankruptcy include:
· a conveyance or assignment of property for the benefit of creditors generally;
· if with  intent to defeat creditors the debtor:
o departs or remains outside of Australia (e.g. Robert Trimboli);
o departs from his or her dwelling house or usual place of business;
o "otherwise absents himself or herself" or;
o begins to "keep house" (i.e. does not answer the door).
· a writ or garnishee issued to enforce a judgment fails to satisfy the judgment debt.
· a debtors petition is presented.
· at a meeting of creditors the debtor admits he/ she is insolvent.
· gives notice that payment of debts has been/ will be suspended.
· a debtor breaches a debt agreement (see below).
· debtor calls a meeting of creditors under Part X
· fails to comply with a Bankruptcy Notice.

BANKRUPTCY NOTICES

· Bankruptcy Notices must be based on judgment debt(s) exceeding $5,000 and give the debtor 21 days to pay the debt, do a deal with the creditor or apply to set it aside (s.41)
· the bankruptcy notice  must comply strictly with the prescribed form e.g.   
o Re Farrugia [2000] FCA 385.  Here Katz J. set aside a Bankruptcy Notice because page 1 of the prescribed form required the following statement :                        "This Bankruptcy Notice is an important document.  You should get legal advice if you are unsure of what to do after you have read it."                                              to be in bold type face.  The Bankruptcy Notice here used regular type face.  This defect could not be cured under Section 306 (the "near enough is good enough" section).  
o In Re Clubb (1993) ALR 123  Burchett J. set aside a Bankruptcy Notice claiming $738,977.68 because interest had been overstated In the  Notice by $213.73  - the Judgment Creditor had divided by 365 instead of 366 when calculating interest for a leap year.(see also Henry Saade Number B3019 of 1990 where a debt exceeding $100,000 was overstated by $33.19)
· If the judgment debtor does not comply with the Bankruptcy Notice he /she is deemed to be insolvent and this gives jurisdiction to the Federal Court to hear a Creditors Petition and make the debtor bankrupt (by making a Sequestration Order)
.
BECOMING A BANKRUPT - CREDITORS PETITIONS

· if a debtor owes the petitioning creditor more than $2,000 (s.44)
· AND has committed an act of bankruptcy within the last 6 months
·  a creditors petition can be filed starting  bankruptcy proceedings against the debtor.
· a secured creditor who abandons their security can present a petition.
· a secured creditor can petition based on the difference between the debt and the value of the security

HEARING OF THE CREDITORS PETITION

· a Creditors Petition is the document which commences bankruptcy proceedings in the Federal Court (or the Federal Magistrates Court).
· the Court gives the debtor the opportunity  to rebut the presumption of insolvency which arises because an act of bankruptcy has been committed (s52)
· the creditor must file affidavits containing evidence of :
o the act of bankruptcy/insolvency alleged
o the debt(s) relied on
· at the conclusion of the hearing the Court :
o if the Court is satisfied a debtor is insolvent (i.e. cannot pay their debts) it makes a sequestration order declaring the debtor bankrupt; or
o a petition will be dismissed if the debtor  proves that he/ she is able to pay his/her debts (whether willing to do so or not) e.g. Sarina v Wollondilly Shire Council [1980] 48 FLR372, or if the creditor has failed to prove their case (s.52(2))

BECOMING A BANKRUPT - DEBTOR'S PETITIONS

· debtor can go bankrupt by presenting a debtor's petition against him/ herself - (s55).
· the Official Receiver may reject a debtor's petition if the debtor would be likely to pay all debts within a reasonable time
· Court permission is needed if debtor is already bound by a Debt Agreement (Part IX) or is bound by a deal with their creditors under Part X of the Act.

PROTECTING THE ESTATE BEFORE SEQUESTRATION

· Court can appoint a trustee to take control of the debtor's property at any time after a Bankruptcy Notice is issued  (s.50)

COMMENCEMENT OF THE BANKRUPTCY

· the bankruptcy commences upon commission of the earliest act of bankruptcy within 6 months before the date upon which a Creditors Petition is presented (i.e. bankruptcy proceedings are commenced) or, in the case of a Debtor's Petition, generally when the Debtors Petition is accepted by the Official Receiver (exceptions apply - see s.115)

EFFECT OF BANKRUPTCY

· Section 58:  the "divisible property" of the bankrupt vests in the Official Trustee, a private (registered) trustee who has consented to act,
· "divisible property" includes all property owned by the bankrupt at the commencement of the bankruptcy (see below) not being property excluded under s.116.
· property aquired during the bankruptcy before discharge (e.g. inheritance under a will)  is "after -acquired property" which is also  "divisible property" .
· all proceedings commenced by the debtor are stayed but
· a bankrupt can continue actions for personal injury (s60) and the proceeds are not available to creditors (s116(2)(g)
·  creditors' rights to recover debts are converted into a right to "prove" for their debts in the estate (see "Provable Debts" below)
· liabilities of the bankrupt under  Maintenance Agreements (Family Law Act) remain enforceable.
· secured creditors (e.g. mortgagor) can still sell the security.

STATEMENT OF AFFAIRS

· a bankrupt must file a Statement of Affairs in the prescribed form (s.54)
· the Statement lists the debts, property, income and liabilities of the debtor
· creditors can inspect the Statement but some personal information is confidential.

PROVABLE DEBTS

"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 may become subject before he becomes discharged by reason of an obligation incurred before the date of bankruptcy, are provable in his bankruptcy"  s.82
· therefore if a debtor enters into a lease before bankruptcy, payments of rent  falling due after the bankruptcy are provable debts
·  therefore tax payable on income derived before bankruptcy is a provable debt even if a Notice of Assessment has not issued until after the bankruptcy (DCT v Jones [1999] FCA 308)
· bankruptcy only discharges a bankrupt's provable debts
· unpaid family law maintenance is a provable debt but the liability for maintenance is not discharged by the bankruptcy
· "contingent" debts such as liabilities under guarantees are provable (so long as the court can fairly estimate their value s.82(6)).
· breach of contract to marry does not give rise to a provable liability (Hardy v Fothergill [1888] 13 APP. CAS 351)
· claims for unliquidated damages arising other than under contract or breach of trust and criminal fines/penalties are not provable (s.82(2)) e.g. a negligence claim for which judgment had not been entered before bankruptcy is not provable
· a secured creditor has four options:
o can rely entirely on the security
o may realise the security independently of the bankruptcy and prove for any balance still owing
o may surrender the security to the trustee for the benefit of all creditors and prove for the whole of the debt as an unsecured creditor
o may estimate the value of the security (thereby giving the trustee power to redeem the security at that value) and prove for the difference between the total debt and the estimated value of  the security
· the proof of debt must be in the prescribed form, give particulars of the debt and state whether or not it is secured (s.84)
· the trustee can admit the proof in whole, in part, or wholly reject it, or require further evidence in support of it (s.102)

MEETINGS OF CREDITORS and COMMITTEE OF INSPECTION

· the trustee must hold a meeting of creditors if one quarter in value of the creditors require or if creditor lodges sufficient security with the trustee (s.64).
· only a creditor entitled to prove their debt may vote
· a simple majority (ordinary resolution) is one passed by a majority in value of the creditors
· a special resolution is one passed by the majority in number and at least 3/4 in value of the creditors
· the creditors may appoint a Committee of Inspection "for the purpose of supervising and superintending the trustee" (s. 70)

COMPOSITIONS AND SCHEMES BY BANKRUPT

· a bankrupt may do a "deal" with the creditors by entering into
· a composition or a scheme of arrangement of affairs (s.73) e.g. payment by a third party of the debts, in return for an annulment of the bankruptcy (s.74)
· the creditors may accept the proposal by a special resolution

PROPERTY AVAILABLE TO CREDITORS

· All property belonging to the bankrupt at the commencement of the bankruptcy or which the bankrupt receives  (before discharge) is divisible amongst creditors except:
o property held in trust for another person
o a bankrupt can retain household furniture, personal effects, tools of trade up to $3,000 and cars up to $5,000 (as at September 2004)
o damages/compensation for personal injury
o various other statutory entitlements (e.g. amounts paid under the Farm-Help Re-establishment Scheme)
o superannuation within the bankrupt's pension RBL
· amounts recovered by creditors under writs within 6 months before, or after, the presentation of a petition must be paid to the trustee (less the taxed costs of execution) (s.118)
· transfers of property within 5 years of the commencement of the bankruptcy for an undervalue are void against the trustee and may be "clawed back" (s. 120), but: 
o if the transfer took place more than 2 years before the commencement of the bankruptcy and the transferee proves the transferor was solvent when the  transfer took place, that transfer is not void
o the trustee must repay the value 8given for the transfer
o purchasers in good faith at market value are protected
· a transfer of property where the bankrupt's  main purpose was to defeat creditors is void (s.121) but:
o a purchaser for market value in good faith can keep the property transferred
o the trustee must repay the consideration for the void transfer
· generally, a transfer of property within 6 months before the presentation of a petition is void (s.122) if the debtor was insolvent and the creditor received a preference over other creditors by receiving more than he/she would have received as a dividend from the trustee but
o this does not apply to a creditor in the ordinary course of business who acted in good faith and gave market consideration
o where the creditor and the debtor/bankrupt had a running account only the net advantage received  by the creditor is recoverable (the trustee can choose the point of peak indebtedness)

ENTITIES CONTROLLED BY BANKRUPT

· the Court has certain powers to "claw back" from third parties property  to which the bankrupt has materially contributed - see Division 4A
· if a person has received property as a result of a  transaction which is void against the trustee, the trustee may, by written notice, require the person to repay it (s.139ZQ).

CONTROL OVER PERSON AND PROPERTY OF BANKRUPT

· a bankrupt must give all books and the bankrupt's passport to the trustee and provide the trustee with information about the bankrupt's examinable affairs (s.77)
· a bankrupt or a person who may be able to give information about the bankrupt can be examined before the Court (s.81)

INCOME OF THE BANKRUPT DURING BANKRUKPTCY

· if a bankrupt receives income above certain thresholds he/she must contribute the excess to the trustee for the benefit of creditors; as at September 2004:
o no dependants, threshold is $35,271.60 net (after tax)
o one dependant, $41,620.49 (net)
o two dependants, $44,794.93 (net)
o three dependants, $46,558.51 (net)
o four dependants, $47,263.94 (net)
o more than four dependants, $47,969.38
· the threshold can be raised in cases of hardship

DIVIDENDS

· trustees must tell known creditors and advertise before declaring a dividend (s.140)
· after payment of certain priority creditors (e.g. the petitioning creditor's taxed costs, certain employee entitlements etc) unsecured creditors are paid in proportion to their claims (s.s. 108,109)

DISCHARGE FROM BANKRUPTCY

· there is an automatic discharge three years after the Statement of Affairs is lodged with the Official Receiver unless an objection to discharge has been filed by the Trustee
· an objection can push bankruptcy out to five or eight years after the Statement of Affairs is lodged.  Grounds of objection include failure to co-operate and concealing assets from the Trustee
· for bankruptcies which commenced before 5 May 2003 early discharge is available (conditions apply)
· a discharge releases a bankrupt from all debts (including secured debts) provable in the bankruptcy (s. 153)
· if all the bankrupt's debts have been paid in full the bankruptcy is annulled (s. 153A)
· the Court can annul a bankruptcy if satisfied that the debtor should not have been made bankrupt (s.153)
· except as provided in the Bankruptcy Act (e.g. in relation to the validation of dispositions of property by the Trustee) upon annulment a bankruptcy is treated as if it had never happened

ALTERNATIVES TO BANKRUPTCY - DEBT AGREEMENTS - PART IX

· instead of going bankrupt a debtor can enter into an agreement with his/her creditors under Part IX if:
o they have not been bankrupt or utilised a Debt Agreement or Part X in the last ten years
o after tax income is less than about $52,000
o unsecured debts are less than about $70,000
o the debtor owns property divisible amongst the creditors worth less than about $70,000 (all these figures are as at September 2004)
· a debtor enters into a Part IX Debt Agreement by completing a Statement of Affairs and Debt Agreement Proposal
· ITSA or a registered trustee processes the Proposal
· Creditors receive a summary of the Proposal and accept or reject it by letter or at a meeting
· rejected Proposals lapse
· a Debt Agreement Administrator distributes the agreed amount amongst creditors - may be a friend or associate of the debtor or a professional debt administrator

ALTERNATIVES TO BANKRUPTCY - PART X ARRANGEMENTS

· if Part IX does not apply it is possible to enter into a Part X Arrangement as an alternative to bankruptcy
· there are three types of proposals:
o a Deed of Assignment under which the debtor assigns all of their divisible property to the trustee for the benefit of creditors; the debtor is immediately  released from all provable debts; the trustee can conduct examinations/investigations and recover assets and claw back "preferences"  (ss120-122); a Deed of Assignment is preferable where the debtor has significant assets but needs to keep future income or to continue to act as a director of a company; the Deed is in the proscribed form (Form 14)
o many options are open under a Deed of Arrangement e.g. some property can be transferred to a trustee and a lump sum paid then or in the future; examinations of the debtor's affairs proceed but undue preferences and undervalued transactions cannot be clawed back; the debtor is only released from the debts specified in the Deed; a business could continue to be carried on under the supervision of the trustee; the debtor may no longer act as a company director
o a composition is used where the debts (or less than the full amount of the debts) is to be paid by instalments; the debtor is released from all provable debts upon acceptance of the composition; a deed is not required and the terms are recorded in a resolution made at the creditors meeting; examinations can take place but there is no "claw back" of pre-composition transactions; the debtor can no longer act as a director of a company.


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