Bankruptcy is the process whereby the affairs of an insolvent person are administered under the Bankruptcy Act 1966 (Cth) (“the Act”). It applies to individuals, partnerships, joint debtors and deceased estates. There are two (2) ways a debtor can become bankrupt, namely:
- Debtor’s Petition – Where the debtor presents his or her own petition to the Official Receiver;
- Creditor’s Petition – When a creditor presents a petition to the Court, a Sequestration Order may be made against the estate of a debtor. For a petition to be presented, the debtor will need to have committed an act of bankruptcy, the most common being non-compliance with a Bankruptcy Notice, and be indebted to the creditor for an amount of at least $5,000.
The Official Receiver or a Registered Trustee, is appointed to administer the bankruptcy. The role of the Trustee is to investigate the financial affairs of the bankrupt, to realise all available assets including transactions that may be voidable, and to distribute realised funds to creditors without undue delay in accordance with the Act.
The usual period of bankruptcy is three (3) years. However, if the conduct of the bankrupt is unsatisfactory, then the period of bankruptcy can be extended by an Objection lodged by the Trustee.
One consequence of bankruptcy is that unsecured creditors are unable to commence or continue any further action for recovery of their debts against the bankrupt. Their rights are converted to a right of lodgement of a Proof of Debt in the bankruptcy and a right to receive distributions in the form of dividends declared by the Trustee. (NB: There are some exemptions to debts that are provable in bankruptcy: eg: fines and penalties; HECS debts and payments due under a Maintenance Order or Agreement. These exempt debts must still be paid by the debtor).
Further effects of bankruptcy include;
- in the event that the bankrupt holds a passport, or passports, no matter in what country it/they may have been issued, the bankrupt must deliver the passports to the Trustee. A bankrupt is not permitted to travel overseas without the Trustee’s written consent;
- a bankrupt shall not, without disclosing that he or she is an undischarged bankrupt, obtain credit (including the lease or hiring of goods) or draw a cheque for $3,000 or more (subject to CPI increase)
- a bankrupt shall not carry on business alone, or in partnership, under a name other than their own;
- a bankrupt is disqualified, without leave of Court, from managing a corporation.
Furthermore, Section 80 of the Act places an obligation on a bankrupt to notify the Trustee in writing of any change to his/her name or principal place of residence or telephone number during normal business hours.
Upon becoming a bankrupt, Sections 58 and 132 of the Act provide that the person’s property automatically vests in the Trustee. In addition, after-acquired property received by/devolved on the bankrupt during the bankruptcy period, may also vest in the Trustee. However, the bankrupt is able to retain certain property as set out in the Act, including amongst other things:
- property held in trust for another person;
- necessary clothes and household property, and such other household property that creditors may resolve;
- property that is used by the bankrupt in earning income by personal exertion whose aggregate value does not exceed a certain indexed value and such other equipment as the creditors may resolve or, upon application by the bankrupt, the Court orders;
- property used primarily as a method of transport up to a certain indexed value;
- subject to certain conditions, life assurance and endowment assurance policies and proceeds from the policies in respect of the bankrupt and the bankrupt’s spouse and the bankrupt’s interest in superannuation policies and proceeds thereof;
- any right of the bankrupt to recover compensation, damages and right of action for the death, personal injury or wrongs to oneself, their spouse or any family member;
- property purchased from the proceeds received from endowment and annuity policies, compensation/damages claims or Rural Adjustment Schemes;
- items of sentimental value, including awards of sporting, cultural, military or academic nature, as creditors may resolve.
In addition, whilst being a bankrupt, if the debtor receives or is deemed to have received income above the threshold amount, then the debtor is liable to make an income contribution to his bankrupt estate of 50c in every after tax dollar above the threshold amount.
If at any time all of the debts of the bankrupt are paid in full, then the bankruptcy can be annulled (terminated) pursuant to Section 153A of the Act. Alternatively, at any time during the bankruptcy, the bankrupt is able to make an offer to settle the claims of creditors in the form of a Section 73 Composition proposal. To succeed, the Composition proposal must be accepted by a majority in number AND 75% in value of creditors present and voting at the meeting of creditors convened for the purpose of considering the proposal. If the Composition proposal is accepted by creditors then the bankruptcy is annulled.
The above information is by necessity, general in nature and its brevity could lead to misunderstanding. For further information, you are invited to contact O’Brien Palmer.