Bankruptcy · Web view(s 116(1)) Property acquired after sequestration order & before discharge from bankruptcy Is all paid to the trustee (within the 3 year period) Examples: Will

What is bankruptcy? Law which provides for the orderly division of assets amongst creditors The law of bankruptcy is wholly a creation of statue:

o The Bankruptcy Act 1966 o (amended Dec 1996) – known as the “Bond” amendments

Who can be bankrupt?o Debtors who are NOT companies o (Co’s liquidations are governed by the Corporations Law)o The corporate equivalent is “winding up”

What is the point of bankruptcy? (3 aims of bankruptcy)1. Desire to treat all UNSECURED creditors equally amongst themselves

o Each creditor has an fair and equal chance to get their $$$ back2. The public interest of relieving the debtor from a hopeless financial position and

retuning that person to a productive lifeo Give the debtor a 2nd chance or fresh start

3. The legislation retains the policy that fraudulent or dishonest debtors SHOULD be punished

o Any debtor who has tried to do the dodge and INTENTIONALLY hides money or assets away from creditors is penalised

Is bankruptcy the same as insolvency? NO The term “bankruptcy” is OFTEN MISUSED Should not claim a person is “bankrupt” and MUST MAKE SURE that the entire

process has been completed Insolvency merely describes a state of affairs in which the debtor is unable to pay

his/her debts as and when they fall due from his/her own money Not all insolvent people become bankrupt they can avoid it through Part IX & X

Unsecured vs secured creditors

Secured creditors will simply enforce their security against the bankrupt, and only prove their debt in the bankruptcy if there is still money owing

An unsecured creditor on the other hand has to wait until the trustee in bankruptcy gets in all the property of the bankrupt and then he shares a proportion in the distribution from the estate.

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BANKRUPTCY

Page 1: General Questions and background

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Road to Bankruptcy Summary

1. To start Commencement of Bankruptcy EITHER:a. Debtor commits an act i.e. Leaves country, etc –s40(1)(c)b. Creditor files a Notice of Bankruptcy under s41 giving debtor 21 days to

pay otherwise on 22 day BANKRUPT

2. If a) has occurred – This is the commencement date of bankruptcy

3. If b) has occurred – s41 - the creditor serves a notice and receives a Judgment Creditor notice which is gives to the Debtor and it puts the Debtor into bankruptcy



(6 months)

(3 Years)


Become insolvent / cannot pay creditors / accumulates lots of debts

Commit an Act of Bankruptcy – s40(1)(REFER NEXT PAGE)

Either Filing Notice (22 days) or an Committing Act (i.e. leaving country)

Creditor files a petition i.e. files a Notice s41

Where a Sequestration order is made

Date which you are formally “bankrupt”

Date which court makes an order is the “official”

date of bankruptcy.

Formal Hearing

This is the commencement of bankruptcy

Bankruptcy Timeline (Events)

End/Discharge of Bankruptcy

This is where you count back your 6 months rule.(relation back doctrine)

Isn’t the date of bankruptcy and commencement the same thing?

NO

The date is very important as prior to the date the ctt brings down the hammer, and you were probably bankrupt sometime before that period, the law says you a bankrupt from the commencement of your bankruptcy.

It goes backwards under the relation back doctrine, from the date before the formal hearing and it goes back to the first act of bankruptcy that you have committed (eg 6 months prior) VERY VERY IMPORTANT. That period means that your trustee can get back all the property that you owned NOT from the date of B, BUT FROM THE COMMENCEMENT of bankruptcy. (good for creditors)

Claw back, in some cases the truste can go back indefinitely if he finds out that you have been offloading your assets with the intention to defraud your creditors (these provisions are very complicated, different sections and dimensions)


FLM = Finance Law Materials


Bankruptcy Notice Example: This means that the creditor has obtained judgment against the debtor, & then

when the debt is not paid, he can issue a bankruptcy notice against the debtor. If the debt is not paid within the time specified, the debtor has committed an act

of bankruptcy. However note that the bankruptcy notice must be very carefully prepared, or the

Bankruptcy proceedings on which it is based can then fail.

Who initiates Bankruptcy?

Debtors Petition (Not common)(presented by the debtor personally)

Creditors Petition (Most common) (presented by a creditor or several creditors acting jointly)

For a creditor to file a petition, a certain number of conditions must be fulfilled PRIOR to the presentation.

These conditions are outlined in s 44(1)

Debt owing must be > $2,000 (single or aggregated if > 1 creditor) Amount must be owing BOTH at the time when the petition is filed

AND at the time of the act of bankruptcy on which the petition relies The debtor MUST have committed an act of bankruptcy within a period

of 6 months immediately before the petition is filed

The common acts of bankruptcy include:

PAGE 273 FLM

All of the Acts are VERY hard to prove except for (g).As there are a lot of procedural things to do and creditors do not have the access to the debtors private financial and personal records

What is an act of Bankruptcy? (s 40) (p 273 FLM)

Check FLM for full list Such acts DO NOT have

to be against the actual creditor filling the petition (can be against any creditor/person)

(s 40(1)(d)) Unsatisfied Execution (against a debtor’s assets)

o Creditor has obtained judgment in ctt against the debtor

o And the debtor hasn’t paid the judgment debt.

Then the sheriff’s office seizes the debtor’s assets to satisfy the debt etc.

(s 40(1)(c)) Debtor with intent to defeat or delay creditors does the

following:o Leaves the country (s 40(1)(c)(i))o Leaves house or place of business (s 40(1)(c)(ii))o Absents himself (s 40(1)(c)(iii))o Beings to keep house (s 40(1)(c)(iv))

(s 40(1)(b)) A conveyance/assignment

that would be void as against the trustee in bankruptcy

(eg: where the bankrupt gives away his property that would otherwise be available for the payment of creditors after he becomes a bankrupt)

(s 40(1)(g)) - *****VERY IMPORTANT FAILURE to comply with a Bankruptcy

Notice – 21 days from date to pay up. If not pay, this is ‘commencement date’

(MOST COMMON) 99% of creditors Bankrupt their debtors

with 1 of these It is the personal equivalent to a statutory

demand in co law


THEN


Bankruptcy Notices:

What is a Bankruptcy notice? (s 41) It is a formal document which DEMANDS

that the debtor pay a judgment debt or as much of it that remains unpaid.

The notice must be in the prescribed form and must state the consequences of non-compliance

The debtor has 21 days to pay up. If on day 22, still no payment or has not reached an agreement to the satisfaction of the creditor, then on THIS day you HAVE committed an act of Bankruptcy.

Who can serve (issue) a Bankruptcy notice? Must be a JUDGMENT CREDITOR

o (creditor who has gone to ctt and got a judgment debt issued)

Creditor must be owed > $2,000 Debtor must NOT have any of the following:

o Any defences (to clear debt)o No counter claim (eg defective goods)

If so it would be a commercial dispute & not a Bankruptcy dispute

o Has not had a stay (ie any protests)

Presentation / Requirements of a creditors petition (s 47)

The petition must then be verified by an affidavit Sworn statement sworn by 1 of the class of people that can give stat decs

Formal Hearing Then there will be a FORMAL hearing to get a formal date The date you go to ctt & the date the court gives its order is a technical date It is the date that you are FORMALLY B It is the date that you begin (count the 3 yr period)

You must reveal that you are an undischarged bankrupt if you don’t you suffer sever penalties

Ctt can require/mandate that the B brings before the ctt all their financial details Typically will need to bring a statement of assets and liabilities And any attempt to fake this is purgery as they are swore statements before the court

Sequestration order (s 52(1))Seizing property that belongs to someone else and holding it until profits pay the demand for which it was seized



Now that Bankruptcy has been establishedWhat happens next?

Effect of bankruptcy on debtor (s 58) Subject to a few minor exceptions, all of

the debtor’s property will be vested immediately to the registered trustee, or an official trustee.

Any property owned at the date of the B vests to trustee (s 58(1)(a))

Any “after-acquired” property (property acquired by the debtor on or after the date of the bankruptcy and before discharge) also vests to trustee (s 58(1)(b))

This means that you DO NOT want to win powerball

No debt enforcement proceedings (s 58 (3))o There is a stay of existing proceedingso If you as a creditor have already started to

sue the bankrupt, THEN there is a stay or monitorance over existing proceedings you can’t go ahead with them

Effect of bankruptcy on creditors***REMEMBER secured creditors stand OUTSIDE bankruptcy

The trade creditors are the all heavily hit on this 1Eg, plumbers, electricians, credit cards debts, utilities etc

Position of creditors (s 58(5))o If the security does not realise the full

amount of their debt, they can prove in their bankruptcy, the unsecured creditors are prohibited from bringing in any debt enforcement proceedings you cannot sue any longer.

o Creditors have converted their right to sue in contract law for the debt to a mere right to prove in bankruptcy.

Division of property

Proof of debtsAll unsecured creditors must prove that the debtor actually owes them moneyMust prove this to the trustee (s 82 – s 102)

o Proof of debts is an important procedural matter, the unsecured creditors bring up all of their invoices, documentation & evidence of the debt & they present it to the trustee (who accepts or rejects their debts).

o However some debts are not provable in bankruptcy (unliquidated debts, eg if someone has sued the debtor in a personal injuries matter & their debt is unliquidated (ie haven’t specified an exact amount), it is NOT a provable debt.

Pari passu rule (s 108)There is an equal treatment of all creditors And each will be paid proportionately

Priority payments to creditors (s 109)Big list on pg 283-284 of FLMBut main 1 is the 2nd 1, the trustee is has priority over any costs charges and expenses incurred by the controlling trustee

If there is nothing then it goes to a government receiver who gets appointed and gets a salary. Private trustees are more efficient in getting in the assets

Exempt property (s 116(2))o Family house (& household items) – pg245o Income (to threshold)o Superfund & life insurance policieso Personal injury claimso Tools of the bankrupt’s trade

(s 116(2)(c)(1)) - $3150)o Cars ($6150 = current amount (indexed from

$5k) (s 116(2)(ca)) This is the amount of equity in the car (ie value less sum owing under finance)


Exceptions (property which trustee CANNOT take)Defence in s 123 – it forgives transactions between the relation back day (ie commencement of the bankruptcy – ie 1st act of bankruptcy) and the sequestration order, which are:

- in good faith- in the ordinary course of business- made without notice of the presentation of the petition against the debtor.- HOWEVER it is subject to the rules about preferences set out below.- An example is the sale of property at market value- Or transactions which have occurred “at arms length”


Doctrine of relation back (s 115 & s 116)

This is used by the trustee to go back to get more stuff from the debtor, goes back to time of the commencement of bankruptcy

How is the commencement of bankruptcy calculated?

1 offence of BankruptcyOnly 1 offence? Then this MUST be the act which formed the basis for the creditors petition. Therefore bankruptcy commences at the of THAT act

>1 OffenceIf >1 offence, then Bankruptcy commences at the time of the 1st act which occurred within a period of 6 months prior to the filing of the creditors petition

***NOTE As a creditor YOU WANT the commencement to be as FAR BACK as possible THIS ALLOWS the trustee to INCREASE the amount available for distribution The transactions the trustee will be looking at are 1s with related parties, eg

family members, or dealings, colleges business associates. Onus is on the transferee that you must make this defence Payment in must be good faith and without notice of B to be “OK”


BANKS and bankruptcy

Bank transactions (s 123)o Case: Re Keever; Ex parte Midland Bank o K had an a/c with defendant bank which was overdrawno Committed an act of Bankruptcyo Bu received a cheque of an amount which was in excess of the overdrafto Paid cheque into a/c for collectiono Cheque cleared on the day K was adjudicated a bankrupto Bank was held entitled to succeed by arguing it had a lien on the cheque on the

day it was paid in and they had NO notice of the act of bankruptcy)

Bank pays a cheque of a person who became bankrupt (s 124)Case: Re Hasler

o After date of Bankruptcy the debtor wrote 2 cheque which were paid upon presentation by the bank

o The trustee applied for an order that the bank pay the sum to himo Main issue:o Had the bank paid without negligence?o Held NO, Branch managers were instructed to read bankruptcy info in a # of

publications and, in particular the bank supplied branch mangers with a particular publication which had info that H had a creditors petition presented and was later adjudicated a bankrupt

o Ctt held bank as liable for the amount

Other duties on Banks (s 125)o If a bank finds out that a customer is an undischarged bankrupt it MUST inform

the trustee in writingo There must be no further payments out of the a/co EXCEPT under the written instructions of the trustee or a ctt order (s 125(1))

After acquired property (s 116(1))Property acquired after sequestration order & before discharge from bankruptcy Is all paid to the trustee (within the 3 year period)

Examples:o Willo Powerballo Windfall gains






Division 4B

The aim of the divisions is to require a bankrupt who derives income during the bankruptcy to pay contributions towards the bankrupt's estate and to enable the recovery of certain money and property for the benefit of the bankrupt’s estate

What is included income? (definition – s 139L)o Ordinary incomeo Fringe benefitso Gifts & loans provided to Bo Trust incomeo Any benefit from any: accommodation, entertainment of FBT

Trustee can recoup them as if they were income

Contribution payable by bankrupt (s 139S)

= Actual income – Actual income threshold amount2

Where the threshold is:

Dependants Amount0 $37,537.501 $44,294.252 $47,627.633 $49,549.504 $50,300.25

> 4 $51,051.00***Note: Amounts are gross (ie be4 tax)

Property of controlling entities s 139A – H (not in FLM) Essentially PSI and anti-avoidance Aim B’s income disguised as income of entity controlled by

B (contractor) If B provides services to controlled entity for inadequate

remuneration trustee may recover

o property acquired by controlled entity s 139Do increase in entity’s net worth


Any transactions or transfers which have been undervalued, or have the aim or purpose to defeat creditors will be held void (3 types)


Property Recovered from Bankrupts Creditors & other parties

Undervalued transactions (s 120) Which took place within 5 years BEFORE the commencement of the bankruptcy

- where < market value is given- OR where NO consideration is given (ie gifts)

NOTE:- Love and affection is NOT consideration.o Apply Objective test: o Is it reasonably a genuine gift? Or is it an

undervalued transactiono Look at usual way that gifts given, gifts are meant

to be bona fide

Exceptions:If the transfer was >2 years before bankruptcy AND the transferor was SOLVENT at the time, the transfer isn’t void (ie yrs 3-5 prior).Any maintenance agreement or order

If the trustee does reverse the transaction (s 120(4))He/she must PAY the transferee an amount = to the value of any consideration that the transferee gave

Exclusions: (s 121(4)) Transfers which was given in

full market value consideration of property

Or the transferee could NOT reasonable have inferred that at the time of the transfer, the transferor was, or about to be insolvent

Transfers of property made to defeat creditors (Fraudulent dispositions) (s 121)

The main purpose was to:o Prevent property being available to creditorso Hinder or delay creditorso Or it is deemed to be the main purposeo AND at the time of the transfer, the transferor

WAS, or WAS ABOUT to be, insolvent.

Avoidance of preferences (s 122)Did the insolvent debtor make a transfer in favour of a creditor (for a certain creditor to gain an advantage or preference?)

ANSWER: Yes, then transfer is VOID. NO, transfer is ok

These provisions can only come into affect if there is more than 1 creditor (need >1 to be preferred amongst the others) Do NOT look at the intent of B or the recipient

The general situation is where a particular creditor who may personally know the debtor and may knew a problem, presses the B to pay them 1st.

However, the mere fact that they put pressure on, means that they are unlike to ever going to be able to make out a defence, BECAUSE it means that it is going to be evidence that you have request knowledge or suspicion of bankruptcy


Case: Re Stevens Transaction only needs to have the effect of giving a preference IT IS IMMATERIAL what was in the mind of the debtor or creditor

Case: Re Weiss; Ex parte White v John Vicars Creditors NET position must have improved Otherwise no effect of giving preference Case already had an equitable mortage, gained legal mortage NO EFFECT, therefore NO PREFERENCE

Case: Re Simpson If Creditors gets greater rights, then there is preference New bill of sale placed 1 which was needed for registration


Property Recovered from Bankrupts Creditors & other parties (cont)

Common Example:NOTE normal creditors who put pressure on, will NOT come under s 122

Eg. Telstra, electricity is overdue etcUnlikely that those utility providers will be caughtThey do this as a matter of course, common buss practice, doesn’t mean that they know or suspect, they are at arms length, it is what they do for all customers

If this is the case, (not relation back time) different date, VP can be set aside within 6 months of the ctt

Avoidance of preferences (s 122) (cont)

Exceptions:Creditor must have acted in: good faith ordinary course of business and provided valuable consideration deemed lack of good faith -s 122(4)(c)


Alternatives to Bankruptcy – Low Income Earners

If debtor doesn’t fulfill this arrangement – considered act of bankruptcy

These are arrangements between debtors and creditors which avoid bankruptcy. During time of part 9 and 10 no proceedings can be taken, relieved from being sued

Debt Agreements Part IX of the Act (s 185 – 185R)

What is it?An alternative to Part X arrangementsPart IX is used for low income earners, people with low net worthBasically a simplified version of Part XMuch more informal and simplified, and more flexible.May require, some income or financial counseling, monitoringAnd may ask for some assets to be given

Process is controlled by ITSA,They will help you draft up the agreement not as technical as Part X

What happens?Trustee works on behalf of ITSA, they put it to creditorsThey organise meeting but doesn’t have to be an actual meetingCan be org by electronic voting procedure or paper votingHowever, creditors must still have a 75% (special resolution)

Who can enter into a Part IX Debt Agreement? (s 185C(1))A debt agreement can be proposed by a debtor who has -

Not been bankrupt, utilised a debt agreement or given an authority under Part X of the Bankruptcy Act in the last 10 years

After tax income < $54,927.60 Unsecured debts < $73,236.80 Property not exempt under bankruptcy valued < $73,236.80

Other notes: A debt agreement proposal goes to the Official Trustee under s 185C(1). The effect of a debt agreement is that there is a distribution of property to

creditors under s.185L, either proportionately or by other agreement to the contrary.

The debtor is released from his debts – s 185J There is no further enforcement of these claims by the debtor – s 185K



Part X Arrangements - HIGH INCOME EARNERIf debtor doesn’t fulfill this arrangement – considered act of bankruptcy

Best entered into by high net worth individualsOn high incomeWith a substantial amount of assets

If low income and low net worth – this will be too complicated and will cost too much

To be successful, a SPECIAL RESOLUTION must be passed (>75% debts holding)Creditors who hold 75% of the debt will decide your future

Appoint trusteeSet up a meeting of your creditorsYou propose an agreement to them to allow you to escape formal consequnes of BMany cases it continued to let you manage a corporation and you can stay in your buss if you wanted tooWhether or not the deal was accepted depended on the meeting of your creditors and the report that your controlling trustee provided

Basically 2 meetings 1 to tell them u are in the shitAnd then to put prosal and then vote on it

1. Composition ( s 238-40) Creditors agree to accept payment of their debts by installment OR agree to accept a LESSER amount in full satisfaction of their debt (s 238)

o Note that all creditors must be treated equally in a composition.

2. Deed of Assignment (s 228-30) Debtor transfers all divisible property to a trustee for the benefit of creditors in

exchange for immediate release – s.213 and s.228 The deed binds all creditors, so that no creditor is able to present a creditor’s

petition or sue the debtor on the existing debt. Pretty much you just give everything you own to the creditors and call it even

3. Deed Of Arrangement ( s 233 & 234) A deed between debtor & the trustee which provides for some arrangement of the

affairs of the debtor with a view to the payment of the debtor’s debts either in whole or in part – s 213 and s 233

This is designed to allow the debtor to trade out (work out) of his difficulties.



Note that many of the steps in Part X are acts of bankruptcy under s.40(1)(I) to (n) on which a bankruptcy petition can be founded (ie if you fail to fulfill a Part X arrangement you have COMMITED an act of bankruptcy)Advantages of Part XYou have some control over the deal you put to your creditorsYou can rehabilitate yourself, don’t have to tell everyone you are bankruptMore freedom

Disadvantages of Part XHowever it will still go on the NPII (national personal insolvency index)It is expensive due to supervisionMust put all this in under s 188 of the Bankrupt act, must provide statementA meeting of creditors under Part A is an act of B



Documents

Bankruptcy · Web view(s 116(1)) Property acquired after sequestration order & before discharge from bankruptcy Is all paid to the trustee (within the 3 year period) Examples: Will