Bankruptcy is legislated by the Bankruptcy Act 1966 (Cth) and applies to individuals.  In contrast, insolvency is legislated by the Corporations Act 2001 (Cth) and applies to companies and not individuals.  In the simplest terms, bankruptcy is a legal process where the debtor is declared unable to pay their debts.

The word bankruptcy derives from ‘bancus’ referring to the table of a tradesman and ‘rupture’ meaning broken, thus the term refers to one whose shop or place of trade is ‘broken’ or gone.

Process of Bankruptcy

1. Voluntarily, simply put is when bankruptcy is instigated by the person who becomes bankrupt, who is known as the debtor.  The legal process involves the debtor filing a bankruptcy petition, known as the debtor’s petition to the Official Receiver. The person must complete a debtors petition and a statement of affairs on forms provided by the Australian Financial Security Authority (AFSA). They must also complete a form acknowledging that they have read and understood the Prescribed Information Bankruptcy Regulations 2021 (Cth) reg 19. Once the petition is accepted the debtor becomes bankrupt from that day. If either the petition or statement does not appear to be in order, the Official Receiver (AFSA) may reject it or refer the petition to the court. There are legal reasons why an application may be denied, for example it appears that the debtor is able but unwilling to pay one or more debts.
2. Involuntarily, where bankruptcy is instigated by a creditor, who is owed money by the debtor.  The legal process involves the creditor filing a creditor’s petition with the Federal Court of Australia. The court then makes a sequestration order against the debtor’s estate and in favour of the creditor/s. The term sequestration derives from the the latin term ‘to take away’ and a sequestration order refers to the court’s order to take away the debtor’s property, for the benefit of the creditors. The court sequestration order entitles the judgement creditor/s to recover any available funds from the debtor’s estate.

In summary, a bankrupt person (as defined in the Bankruptcy Act 1966 s5(1) (Cth)) is someone who has become bankrupt either via the presentation and acceptance of a debtor’s petition or whose estate has been sequestered following a creditor’s petition.

The bankruptcy lawyers at Brander Smith McKnight have vast experience in bankruptcy law acting for both debtors and creditors. This may involve calling on recent and sometimes obscure developments in the law. For instance the High Court case of Ramsay v Compton [2017] HCA 28. This is discussed in our articles section.

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Trustees

Once a person is declared bankrupt, a trustee is appointed to take control of the bankrupt’s estate to secure and distribute the estate for the benefit of the creditor/s. The role of the trustee is to recover, realise and distribute divisible property among the creditors who are entitled to claim and who have lodged proofs of debts. The bankrupt’s estate is considered to vest in the trustee.

Trustees are formally registered with the court and can be private or government based. The government agency that can act as a trustee is the Australian Financial Security Authority (AFSA).

At the commencement of their appointment, the trustee will direct the bankrupt to provide a statement of their financial affairs.  On the basis of this statement, the trustee will make a preliminary determination as to what investigations should be undertaken and provide a preliminary creditor’s report. The trustee has extensive statutory powers of investigation and significant powers to assist in the recovery of property.

Trustees charge a fee which is paid to them from the bankrupt’s estate. Because private trustees have higher fees compared to government trustees, creditors often select a private trustee when it is likely that the bankrupt has assets to be discovered and distributed to creditors. In general, private trustees provide a faster service than the government trustee.

What to do if Served with a Bankruptcy Notice?

If you are served with a bankruptcy notice, you should obtain urgent legal advice. This is because you only have 21 days to either comply with the notice or make an application to court to have it set aside. Failure to do so will result in an act of bankruptcy entitling the creditor to file a creditor’s petition, seeking a sequestration order (as discussed above under involuntary bankruptcy).

What is Excluded from Creditors in a Bankrupt’s estate?

In general terms the trustee considers the estate of the bankrupt to be their income and assets and these vest in the trustee. However, there are important exemptions that don’t vest in the trustee.  These are:

1. Property held in trust for another person
2. Household property and requirements, which generally includes what is considered as necessary items such as clothes, furniture, white goods and TV but excludes works of art and antiques.
3. Personal property of sentimental value.
4. Property used to earn income, if not exceeding the prescribed amount as defined in the Bankruptcy Regulations
5. Means of transport, if not exceeding the prescribed amount as defined in the Bankruptcy Regulations
6. Some life insurance and superannuation, as described in the Act
7. Rights to certain damages or compensation, including property bought with or substantially with those funds.

It is important to note that there are specific provisions in the Bankruptcy Act 1966 (Cth)which allow a trustee flexibility such as the ability to recover superannuation contributions made by the bankrupt to defeat creditors.

In addition, although there are guidelines in the Bankruptcy Regulations 2021 (Cth) regarding what is considered necessary household and personal property, there may be the need for discussion with the trustee and general agreement with creditors.

The experienced bankruptcy lawyers at BSM are able to navigate the legal intricacies of bankruptcy and advise on exclusions to the bankrupt’s estate.

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Call us to arrange a free 20 minute no obligation consultation that includes case evaluation and cost estimate.

Investigation of Conduct Prior to Being made Bankrupt

The trustee has the power to investigate and make void various transactions that the bankrupt may have made during or prior to the bankruptcy.

Section 120 of the Bankruptcy Act 1966 (Cth) provides that where the bankrupt transfers property to any person for less than the market value of that property in the period beginning 5 years before the commencement of that bankruptcy to the end of the bankruptcy will be void against the trustee. In simple terms, the property transferred under this transaction can be recovered by the trustee to be included in the bankrupt’s estate and distributed to creditors. This section of the Act occasionally arises after a family law property settlement. Where property, including the family home has been transferred to one party for less than market value and the transferor subsequently becomes bankrupt within 5 years the transfer of that property may be void against the trustee. It is important that parties to a family property settlement or families facing bankruptcy obtain expert legal advice from the bankruptcy lawyers at Brander Smith McKnight.

Section 121 of the Bankruptcy Act 1966 (Cth) provides that where a person who later becomes a bankrupt transfers property to another person, where the transferor’s main purpose in making the transfer was to prevent, hinder or delay making that property available to creditors will be void against the trustee.

There is no time limit on transfers within section 121 of the Act. Moreover, there is no statutory time limit to this legal action by the trustee. In simple terms, any transaction made prior to or during a bankruptcy with the intention of defeating creditors may be reversed by the trustee at any time. In relation to section 120 the statutory time limit for the trustee to commence legal proceedings is 6 years from the date of the bankruptcy.

Public Examination

A public examination is a court ordered investigation into a bankrupt’s conduct and affairs which investigates all financial transactions and property dealings associated with the bankrupt. This can be instigated on the application of a creditor, the Official Receiver or the bankrupt’s trustee. It occurs where there has been or there is suspected to have been some conduct by the bankrupt with the aim of defeating the creditors such as giving away assets.  The bankrupt and anyone associated with them or who has knowledge of their financial affairs can be called to participate in a public examination.

What Happens if there are Insufficient Funds to pay the Creditors?

The general principle that guides the distribution of the bankrupt estate is that all provable debts rank equally and if there are insufficient funds to meet all claims in full, the claims are met proportionately, pursuant to section 108 of the Bankruptcy Act. However, this is subject to important exceptions outlined in the Bankruptcy Act 1966 (Cth).  For instance, the first priority of fund allocation goes to the costs of the petitioning creditor and administration costs such as trustee expenses and fees. In addition income for the purposes of child support is not available to the creditors and must be passed on to the relevant Child Support Agency.

Debts covered by Bankruptcy

All unsecured creditors subject to providing a proof of their debt are entitled to have all or a portion of their debt paid from the bankrupt estate. Unsecured creditors are people who are owed money by the bankrupt but don’t have any security over the bankrupt’s property, such as a mortgage over real property or a security registered on the Personal Property Security Register (PPSR).  Conversely, secured creditors are people owed money by the bankrupt who do have security over the bankrupt’s property, such a bank with a mortgage over the bankrupt’s real property.

Secured creditors are not subject to the bankruptcy but are entitled to recover their debt from the secured property. Once the debt has been paid to the secured creditor, that amount will not be available to unsecured creditors. As an example, where a bankrupt owns a house with a mortgage, the mortgagee bank is entitled to the repayment of the entire amount of the loan. The remaining funds will then be available for distribution among the unsecured creditors.

Those debts included in the bankruptcy are often referred to as provable debts. For a creditor to be entitled to receive a distribution from the bankrupt estate, the creditor must have a provable debt. S82 of the Bankruptcy Act 1966 (Cth) sets out the definition of a provable debt and includes, for example, money payable pursuant to a contract, judgement debts, tax debts and payment for work done.

Debts not Covered by Bankruptcy

Debts that are not covered by bankruptcy are debts that are not provable debts, pursuant to s82 of the Act, for example:

1. Debts incurred by the bankrupt since the bankruptcy
2. Court and traffic fines
3. Debts incurred by fraudulent activity
4. Child support and child maintenance
5. HECS and HELP debts (Higher Education Contribution Scheme and Higher Education Loan Program) or student loans
6. Amount payable under proceeds of crime law
7. Unliquidated claims against the bankrupt occurring prior to bankruptcy and not arising from breach of contract, for instance claims arising from a MVA where the bankrupt was at least partly at fault)
8. Centrelink overpayment from fraudulent activity but not due to an administrative error.

A debt owed to the Australian Taxation Office is released on bankruptcy. Although the Tax Commissioner has the power to issue a statutory garnishee over wages, this only applies when the order was issued prior to bankruptcy. Pursuant to section 108 of the Act, the ATO ranks the same as any other unsecured creditor.

If you are unsure about your debt and whether a creditor can continue to demand payment for it, following bankruptcy, contact the experienced bankruptcy lawyers at Brander Smith McKnight.

02 8539 7475

Call us to arrange a free 20 minute no obligation consultation that includes case evaluation and cost estimate.

How long does Bankruptcy last?

Bankrupts are automatically discharged after 3 years and 1 day provided no objection has been lodged, (s149 of the Act).  In certain circumstances there can be extensions of the bankruptcy, pursuant to s149A. Objections may be lodged by the trustee on a number of grounds which will extend the period of bankruptcy to a total of 5 or 8 years. A bankruptcy will be extended to 5 years if the bankrupt failed to:

1. Disclose a debt existing at the date of bankruptcy
2. Advise the trustee of any change of name, address or phone number
3. Sign a document at the trustee’s request
4. Attend a meeting of creditors or an interview or examination without a reasonable excuse or approval of the trustee
5. Disclose an interest in property

A bankruptcy will be extended to 8 years if the bankrupt:

1. Left Australia and didn’t return
2. Failed to return to Australia despite being asked by the trustee
3. Unlawfully continued to manage a corporation
4. Obtained goods, services or money to a value of over $6,200 without disclosing the bankruptcy
5. Disobeyed a request from the trustee for information about property or income
6. Didn’t disclose a source of income in their statement of affairs or during the bankruptcy
7. Failed to pay contributions to the trustee or explain how money was spent
8. Failed to explain adequately the disposal of property
9. Failed to explain the purpose for which money was spent

Annulment of a Bankruptcy

Annulment ends the bankruptcy prior to the standard period of 3 yrs. There are 3 ways for a bankruptcy to be annulled.

1. A bankrupt may propose a composition or arrangement to creditors to pay a portion of their debts (s73 of the Act). This is voted on by creditors and if accepted by creditors holding at least 75% of the debt the annulment will be granted.
2. Upon payment of all of the debts (s153A of the Act)
3. By the court if the court is satisfied that the sequestration order ought not to have been made (s153B of the Act)

Rights of a Bankrupt

The bankrupt person has rights including operating a savings bank account, traveling freely throughout Australia and acting as the executor of a deceased estate. They must, however, notify the trustee of any change of name, address or employment.

Implications and Impact of Bankruptcy

It is essential to consider the pros and cons of voluntarily applying for bankruptcy. In addition to being bankrupt for 3 to 8 years a bankrupt person has the following restrictions:

1. Must surrender their passport for the duration of the bankruptcy
2. Unable to manage a company, including being director for the duration of the bankruptcy, (s206B Corporations Act 2001 (Cth))
3. Experiences an adverse credit rating. A bankruptcy will remain on a credit report.
4. Must not either alone or jointly with another person, obtain credit of $3,000 or more without informing the lender that they are an undischarged bankruptcy
5. Any legal action commenced by a person who subsequently becomes a bankrupt, is stayed until the trustee gives written notice to continue the proceedings, (s60 (2) Bankruptcy Act 1966 (Cth)). There are some exceptions, for example personal injury claims.
6. Various obligations to assist the trustee. For example, s152 of the Act states that even after discharge, a bankrupt must assist the trustee with the realisation and distribution of the bankrupt’s property and that the maximum penalty for failure to do so is 6 months in gaol.

What Happens at the end of Bankruptcy?

As set out above the process of bankruptcy is onerous and burdensome for the bankrupt. However, the benefit is that upon discharge from bankruptcy, the bankrupt is released from liability for all provable debts (s153).

Why Choose BSM Lawyers?

We have extensive experience in bankruptcy law and have advised and advocated for both debtors and creditors. We remain up to date with all recent changes in bankruptcy law and can help you navigate the legal system. Our lawyers can help develop a strategy to deal with your bankruptcy issues in what can be a stressful time.

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