Annulment of Bankruptcy

13 July 2026 in Bankruptcy Lawyers | 5 min read | skip to FAQs

This article provides an overview of annulment in bankruptcy proceedings. If you are considering bankruptcy annulment, we recommend seeking legal advice from our bankruptcy team. We offer a free initial 20-minute consultation.

Overview

Bankruptcy often lasts for a prescribed period of three (3) years and 1 day before automatic discharge. However, the Bankruptcy Act 1966 (Cth) prescribes circumstances where an individual may bring the bankruptcy to an earlier conclusion through annulment.

What is Annulment?

Annulment refers to the effective nullification or cancellation of a bankruptcy. It is a distinct statutory remedy available for individuals that wish to void, for almost all intents and purposes in civil law, the declaration of their bankruptcy, as if it had never occurred. Once annulled, the former bankrupt is entitled to a reversion of all remaining assets/property that have not yet been validly transferred by the trustee, pursuant to section 154 of the Bankruptcy Act 1966 (Cth).

Like an ordinary discharge, restrictions that are associated with bankruptcy are also lifted, including obtaining credit, managing companies and overseas travel.

Annulment can be achieved by:

1. Paying debts and associated costs in full;
2. Acceptance of a composition or arrangement by creditors; or
3. Court order.

It is important to note that all property transferred prior to annulment, is validly done so by the trustee. Therefore, the former debtor is only entitled to what remains of the estate once annulment is effected.

Payment of debts in full

 The first way an annulment can be obtained, is if the bankrupt estate pays all debts in full pursuant to section 153A of the Bankruptcy Act 1966 (Cth) (“Act”). This includes interest where payable, realisations charge and the expenses of bankruptcy administration, including trustee fees and expenses.

As an example, a bankrupt inherits $100,000.00 from a family member while bankrupt. The bankrupt advises their trustee who organises for the sum to be transferred into the bankrupt estate. The trustee then settles all outstanding debts and expenses remaining, which cost a total of $40,000.00. The $60,000.00 remaining in the estate reverts to the formerly bankrupt individual upon annulment.

What is a composition or arrangement?

 Section 73 of the Act sets out that a bankrupt may make a proposal to creditors for:

1. A composition in satisfaction of his or her debts; or
2. A scheme of arrangement of his or her affairs.

This is in writing and signed by the bankrupt setting out the terms of the composition or scheme of arrangement and particulars of any sureties or securities forming part of the proposal.

This composition or arrangement is a financial proposal made by the bankrupt that is binding on acceptance. Composition/arrangement proposals may vary by:

1. Payment structure;
2. Property offered; or
3. Time of transaction.

Where commercially reasonable, creditors may accept offers for payment on a percentage of the original debt. This may be the case where the bankrupt estate has little to no prospects of paying the rest of the debt in a timely manner.

Creditors will generally compare the proposal with the likely return if the bankruptcy were to continue. Where a proposal offers creditors a greater likelihood of return or earlier return than continued administration of the estate, creditors may consider accepting less than the full amount owed.

Variations to the arrangement or composition can be made, providing that it follows the processes set out in the Act at section 74A.

Upon receiving the proposal under section 73, the trustee convenes a meeting of creditors and prepares a report outlining the estimated dividends that creditors could expect if the bankruptcy continued compared with the proposed composition or arrangement. This assists creditors in determining whether the proposal is commercially viable.

Section 74 of the Act provides that upon acceptance by a special resolution of creditors (75% by value), in a manner in accordance with the law, the bankruptcy is annulled.

Court order

Finally, the Court may order an annulment if it is satisfied that the original basis of the bankruptcy was erroneous. This is limited to circumstances where a sequestration order or debtors petition ought not to have been:

Although the wording in section 153B of the Bankruptcy Act 1966 lends itself to a single test, the court’s power to annul a bankruptcy is discretionary. The court generally exercises this discretion where the bankruptcy should never have occurred, rather than because the bankrupt’s financial circumstances have improved.

The bankrupt bears the onus of satisfying the Court that the sequestration (bankruptcy) order or debtors petition was improperly made, presented or accepted.

An example in Case Law: Ghosh v Newton [2024] FCA 898

The applicant argued that an annulment should be granted by court order on the basis that the sequestration order ought not to have been made, on account of her solvency.

The court relied on the legal reasoning in Rigg v Baker [2006] FCAFC 179; [2006] 155 FCR 531 at [61], that any facts which have come into existence since the making of the sequestration (bankruptcy) order are not relevant to the question of whether the sequestration (bankruptcy) order ought to have been made.

Applying that principle, the court did not consider the evidence on which the applicant sought to rely. At paragraph [12], Jackman J clarifies that even if the applicant had satisfied the threshold condition (that the sequestration order ought not to have been made), the respondent’s submissions were accepted that the following considerations weighed heavily against an exercise of the court’s discretion to annul:

1. An application has already been refused;
2. The court was not satisfied that the applicant made full disclosure of her financial affairs, or that she is currently solvent;
3. The applicant was subject to adverse cost orders;
4. The applicant has made no offer to pay her outstanding creditors, nor on the evidence of her financial position could any such offer be plausibly made and performed;
5. There was nothing identified in the public interest in favour of annulment; and
6. The applicant’s bankruptcy was imminently being discharged.

Key takeaways

1. Bankruptcy may be annulled before automatic discharge.
2. Annulment may occur through payment of debts in full, acceptance of a composition or arrangement, or by court order.
3. The trustee’s dealings with estate property before annulment remain valid.
4. Creditors may accept a compromise where it provides a better commercial outcome than continuing the bankruptcy.
5. Court-ordered annulments are generally limited to cases where the bankruptcy should not have occurred.

 

How BSM Sydney Lawyers can assist you

The bankruptcy lawyers at Brander Smith McKnight Lawyers Sydney have extensive experience in annulment of bankruptcies. Our lawyers understand how difficult and limiting bankruptcy can be and will provide legal assistance to annul your bankruptcy prior to the prescribed 3 years. BSM Sydney Lawyers are talented and persuasive negotiators and have decades of experience in settling financial disputes with creditors and drafting proposals for bankruptcy annulments. Our senior bankruptcy lawyers offer a free 20-minute consultation to discuss your individual matter.

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BSM Sydney Lawyers has offices conveniently located in Sydney CBD, Sutherland, Parramatta, Wollongong and Shellharbour.