Luật học - Chapter 20: Bankruptcy law

This is the prescribed textbook for your course.Available NOW at your campus bookstore!Bankruptcy lawChapter 20Learning objectivesAt the end of this chapter you should understand:the objectives of bankruptcy lawthe advantages and disadvantages of bankruptcy from the perspective of the creditor and the debtorhow the Bankruptcy Act 1966 (Cwlth) is administeredthe difference between a debtor’s petition and a creditor’s petitionthe term ‘acts of bankruptcy’ and give examplesthe steps involved in obtaining a sequestration orderthe property of a bankrupt that is available for distribution to creditorsLearning objectives (cont.)the order in which creditors’ debts are paidthe powers of the trustee, including the power to avoid antecedent transactionsthe procedure for discharge from bankruptcythe contrast between the bankruptcy of a debtor with alternative procedures under Parts IX and X of the Bankruptcy Act.IntroductionBankruptcyWhere legal possession of a debtor’s possessions is taken for the benefit of that person’s creditors.Debtor’s property is sold and distributed fairly amongst creditors, following which the bankrupt is given a discharge of their debts.May be sought by debtor or creditorRegulated by the Bankruptcy Act 1966 (Cwlth)Objectives of bankruptcy LawTo assist the debtorWill be entitled, once discharged, to make a fresh start free from the demands of creditorsTo protect creditors:by preventing debtors from disposing of property when bankruptcy is inevitableby distributing the debtor’s assets among creditors in the swiftest and most economical manner.Objectives of bankruptcy law (cont.)To benefit the community:by giving a debtor who is hopelessly in debt an opportunity to make a new start, rather than remain a burden on the community.by imposing limits on the capacity of a person who is an undischarged bankrupt to enter new contracts.Advantages for creditorsEquitable and proportionate distribution of debtor’s assetsRecovery of property that was distributed prior to bankruptcyPossibly uncover more property available for distribution to creditors by public examinationDisadvantages for creditorsSignificant fees for administering the estate, and court costs associated with the recovery of costs, are paid before creditors.Delays and complicationsBankrupt must stop tradingAdvantages for debtorsEnables bankrupt to avoid being sued by creditors for debts incurred prior to the bankruptcy.New start in three years, with cooperation.Bankrupt maintains ‘necessary property’.Disadvantages for debtorsDebtor’s property available for settlement of debtsEarnings may be used as contribution towards debtsStigma attached to bankruptcyRestrictions in obtaining credit without notifying credit provider of bankruptcyBankrupt’s passport to be surrenderedCannot be director of company without permission of Supreme CourtCannot conduct a business without disclosure of bankruptcyDetails of bankruptcy published in National Personal Insolvency IndexMust comply with Bankruptcy ActDistinction between bankruptcy and insolvencyInsolvencyThe person is unable to pay all of his or her debts as and when they become due and payable.BankruptcyThe person is required to provide a trustee with specified property, to be distributed among creditors.Insolvency and Trustee ServiceBankruptcy matters are administered under the umbrella of the Insolvency and Trustee Service Australia or ITSA.ITSA provides bankruptcy, trustee and related services including advice and regulation in one location.Important role in countering illegal activities and protecting Australian community from impact of financial failureBankruptcy Act 1966—administrationInspector-General in bankruptcy(appointed by Attorney-General’s Department)Overseas general administration of Bankruptcy Act State Official Receiver OR Registered trustee (appointed by Governor-General) (appointed by Federal Court)Administration and distribution of bankrupt’s estate:  Gathering bankrupt’s estate  Realising non-monetary assets  Distributing dividend to creditorsOfficial trustee in bankruptcyA body corporate that holds and invests property on behalf of the creditors prior to sale and distribution.How a person can be made bankruptDebtor ‘volunteers’ for bankruptcyby debtor’s petitionDebtor is ‘forced’ into bankruptcyby creditor’s petitionBankruptcy by debtor’s petition (voluntary bankruptcy)Insolvent Declaration of intention s. 54A(provides stay period) Debtor's petition s55 Statement of affairs Acceptance by official receiver Sequestration order Property of bankrupt vested in official receiverBankruptcy by creditor’s petitionInitiated by one or more creditors and presented to the Federal Court.If satisfied, court issues a sequestration order which results in the debtors estate being vested in the Official Trustee or a registered trustee for distribution to creditors.Process may be expensive and drawn out so it’s important to consider commercial realities.Usually used when there is a large sum of money or the debtor has acted fraudulently.Conditions before creditors’ petition will issueDebt owed to creditor/s must be at least $5000 and be capable of being quantified.Debtor must have committed an act of bankruptcy within a period of six months before the presentation of the petition.Generally the debtor must be resident or have a residential or business address in Australia at the time the act of bankruptcy was committed.Acts of bankruptcyListed in Part IV, Division I, s. 40 of the Bankruptcy Act 1966 (Cwlth)One of the most common acts of bankruptcy is a failure to comply with a bankruptcy notice.The Official Receiver may issue the notice on application of creditor/s who have obtained a final judgement or order for an amount of at least $5000.The notice requires the debtor to pay within a prescribed time.Failure to comply with bankruptcy noticeFinal judgment made(creditor has right against debtor decided)Bankruptcy notice served(based on final judgment order)– sum due– deadline to be paidDebtor compliesno act of bankruptcyDebtor doesn't complycommits act of bankruptcyPay debtProve debt not owed– counterclaim– set-off– cross demandCreditor presents petitionfor bankruptcy (> $5000 owed)Served on debtor Court makessequestration orderDebtor automatically bankruptCourt proceedings for sequestration orderBankruptcy noticeAct of bankruptcy(failure to comply with bankruptcy notice)Creditor’s petition(presented by creditors with >$5000 owed S44)Served on debtorDebtor attends bankruptcy courthearing of the creditor’s petition Prove:  debt exists  debtor committed one or more acts of bankruptcy within six months before creditor’s petition presented  service of petition of debtorCourt makes sequestration orderSequestration order (on creditor’s/debtor’s petition)Administration of the estate:Debtor files statement of affairs (assets/liabilities) within 14 daysTrustee calls creditors to meeting within 28 daysPublic examination of debtorCreditors prove debt existsTrustee realises assetsTrustee pays dividends to proven creditorsDebtor freed from all provable debtsProof of debt Secured Unsecured Rely on Estimate Realise/surrender security security security Shortfall Proof of debt  Amount  How incurred  SubstantiationAssets available to the trusteeAssets of bankrupt owned on day of bankruptcy, i.e. earliest act of bankruptcy that can be counted, within last six monthsAssets bankrupt acquires while bankruptIncome above threshold amount (includes the value of fringe benefits and money paid to associated entities)Certain property excluded from bankruptcySection 116(2) of the Bankruptcy Act 1966 lists some specific exclusions, e.g.clothes and necessary household furniturepersonal belongingsvehicle (worth up to $6850)property used to obtain income by personal exertion, not exceeding a prescribed value.Property available for payment of debtsDoctrine of relation back (s. 115):The bankruptcy will relate back to the earliest act of bankruptcy committed by the debtor within the six-month period preceding the date of the presentation of the creditor’s petition, or the application for the making of a sequestration order (debtor’s petition).Aimed at preventing persons aware of imminent bankruptcy from disposing of property that should be used to satisfy creditors’ debtsAntecedent transactions: s. 118Execution and attachments before bankruptcyMoney received via execution against property, six months before or after the presentation of the petition, must be paid to trustee (less costs).Antecedent transactions: s. 120Voluntary settlements (within five years):Consideration inadequateVoid against trusteeExceptions:To meet child supportTo pay taxesTo fulfil a debt agreement obligationAntecedent transactions: s. 121Fraudulent dispositions:Intention of defeating creditorsExceptions:Market value paidIn good faithPreferential payments: s. 122Transfer of property (within six months of presentation of petition)By insolvent personMade from person’s own moneyMade in favour of a creditor in preference to other creditorsExceptions:Received during normal course of businessReceived in good faithPurchased for at least market valueDischarge from bankruptcyAutomatic discharge—after three yearsDischarge—usually within three years from filing of statement of affairsMay be extended to five years.May be extended to eight years on return to AustraliaAnnulment—where all debts are paid, or bankruptcy was not deservedDebt agreements under Part IXProposal options:Payment of debt over period of timeCreditors accept less than full amountAvailable if debtor has:unsecured debts of less than $90 326.60property of less than $90 326.60After tax income of less than $67 744.95not been bankrupt or entered into a Part X arrangement in last ten years.Debt agreements under Part IX (cont.)ProposalOfficial Trustee75% of creditors approveDebt agreementRecorded on National Personal Insolvency Index (NPII)Part X schemes—personal insolvency agreementsAgreement with creditors outside of bankruptcy, avoiding consequences and stigma of bankruptcy.Debtor must authorise a registered trustee or solicitor to call a meeting of the debtor's creditors.Within 14 days of consenting to act and meeting with creditors, the trustee must prepare a report summarising the affairs of the debtor.Trustee must state whether a personal insolvency agreement is in the best interest of the creditors.Meeting of creditors seeks information from debtor who must present statement of affairs, assesses and votes on agreement. Reasons for bankruptcyConsumer debtLack of business and investment skillsChange in economic or political climateUnforeseen liabilities