What is bankruptcy?

  • Law which provides for the orderly division of assets amongst creditors
  • The law of bankruptcy is wholly a creation of statue:
  • The Bankruptcy Act 1966
  • (amended Dec 1996) – known as the “Bond” amendments

Who can be bankrupt?

  • Debtors who are NOT companies
  • (Co’s liquidations are governed by the Corporations Law)
  • 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
  • Each creditor has an fair and equal chance to get their $$$ back
  1. The public interest of relieving the debtor from a hopeless financial position and retuning that person to a productive life
  • Give the debtor a 2nd chance or fresh start
  1. The legislation retains the policy that fraudulent or dishonest debtors SHOULD be punished
  • 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.

Road to Bankruptcy Summary

  1. To start Commencement of Bankruptcy EITHER:
  2. Debtor commits an act i.e. Leaves country, etc –s40(1)(c)
  3. Creditor files a Notice of Bankruptcy under s41 giving debtor 21 days to pay otherwise on 22 day BANKRUPT
  1. If a) has occurred – This is the commencement date of bankruptcy
  1. 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)


FLM = Finance Law Materials


THEN

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”

BANKS and bankruptcy

Bank transactions (s 123)

  • Case: Re Keever; Ex parte Midland Bank
  • K had an a/c with defendant bank which was overdrawn
  • Committed an act of Bankruptcy
  • Bu received a cheque of an amount which was in excess of the overdraft
  • Paid cheque into a/c for collection
  • Cheque cleared on the day K was adjudicated a bankrupt
  • 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

  • After date of Bankruptcy the debtor wrote 2 cheque which were paid upon presentation by the bank
  • The trustee applied for an order that the bank pay the sum to him
  • Main issue:
  • Had the bank paid without negligence?
  • 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
  • Ctt held bank as liable for the amount

Other duties on Banks (s 125)

  • If a bank finds out that a customer is an undischarged bankrupt it MUST inform the trustee in writing
  • There must be no further payments out of the a/c
  • 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:

  • Will
  • Powerball
  • Windfall gains


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


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

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 arrangements

Part IX is used for low income earners, people with low net worth

Basically a simplified version of Part X

Much more informal and simplified, and more flexible.

May require, some income or financial counseling, monitoring

And 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 creditors

They organise meeting but doesn’t have to be an actual meeting

Can be org by electronic voting procedure or paper voting

However, creditors must still have a 75% (special resolution)

Who can enter into a Part IX Debt Agreement? (s185C(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 EARNER

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

Best entered into by high net worth individuals

On high income

With 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 trustee

Set up a meeting of your creditors

You propose an agreement to them to allow you to escape formal consequnes of B

Many cases it continued to let you manage a corporation and you can stay in your buss if you wanted too

Whether 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 shit

And 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)
  • 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 X

You have some control over the deal you put to your creditors

You can rehabilitate yourself, don’t have to tell everyone you are bankrupt

More freedom

Disadvantages of Part X

However it will still go on the NPII (national personal insolvency index)

It is expensive due to supervision

Must put all this in under s 188 of the Bankrupt act, must provide statement

A meeting of creditors under Part A is an act of B

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