Personal Insolvency in Australia is regulated by the Bankruptcy Act 1966 (Cth) (“the Act”). The different types of insolvency administrations available to personal debtors under the Act are:
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 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.
Part IX of the Bankruptcy Act 1966 (Cth) provides another alternative to bankruptcy by providing debtors with an inexpensive mechanism to reach a binding arrangement with their creditors to release the debtor from his or her debts. This part of the Act is only available to be utilised by those debtors who:
- have not, within the previous ten (10) years, been bankrupt, a party to a debt agreement or given an authority under Section 188 of the Act;
- have unsecured debts that are below the specified threshold amount;
- have property, which would be divisible among creditors in a bankruptcy, that is below the threshold amount;
- have after tax income that is below the adjusted threshold amount in the year beginning at the proposal time.
The effect of the foregoing is that Debt Agreements are only available to debtors who have a relatively low income, minimal assets and low debt levels.
To initiate a Debt Agreement, a debtor must give the Official Receiver a proposal for a binding agreement between the debtor and his or her creditors. Any Debt Agreement proposal must identify the property to be dealt with under the agreement, specify how it is to be dealt with and authorise the Official Receiver, a registered Trustee, or another person, to deal with the property as specified.
The proposal must be accompanied by a statement of the debtor’s affairs. If the proposal is accepted by the Official Receiver, the Official Receiver must write to creditors informing them of the proposal, provide creditors with a summary of the debtor’s statement of affairs and ask them whether it should be accepted or whether a meeting of creditors should be called. If the agreement does not specify how the property is to be distributed, it must be distributed in proportion to provable debts. This provision only applies if there are insufficient funds to pay creditors in full.
A Debt Agreement comes into force when the debtor’s proposal is accepted by the creditors. In the event that the proposal is processed by the holding of a creditors’ meeting, the proposal is accepted by creditors passing a special resolution (majority in number AND at least 75% in value of creditors present and voting). If the proposal is processed by the Official Receiver writing to creditors, then the proposal is accepted if creditors constituting a majority in number AND at least 75% in value of those creditors who reply before the deadline (25 working days after acceptance of the proposal) stating that the proposal should be accepted.
If creditors approve the Debt Agreement, then the debtor is released from all debts which would be provable in a bankruptcy. However, this release ceases to operate if the Debt Agreement is terminated by the debtor or creditors, or if the Debt Agreement is declared void by the Court. A Debt Agreement does not affect a secured creditor’s rights or release a guarantor from any guarantee given in respect to the debtor. A Debt Agreement may subsequently be varied by the consent of the parties and ends when all the obligations it created have been discharged.
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.
Part X of the Bankruptcy Act 1966 (Cth) (“the Act”) offers an alternative to bankruptcy by providing a debtor in financial difficulty with a formal but expensive mechanism to reach a binding arrangement with his or her creditors. The arrangements are individually tailored to suit the debtor’s unique financial circumstances. The debtor is able to negotiate a settlement with creditors that most likely involves the payment of less than 100 cents in the dollar. Payments can be by lump sum and/or by instalments over a certain period of time and may involve the sale of property together with the contribution of regular payments.
The provisions of Part X are invoked by the debtor signing what is called a Section 188 Authority, authorising either a Registered Trustee, a Solicitor or the Official Trustee (who is then referred to as the Controlling Trustee) to call a meeting of his or her creditors and to take control of his or her property. At the same time, the debtor must provide the Controlling Trustee with a proposal, including a draft PIA, and a Statement of Affairs outlining all known assets and liabilities of the debtor. A PIA takes the form of a Deed and must include specified terms, including but not limited to the following:
- identifying the debtor’s property that is to be available to pay creditors’ claims and how it is to be dealt with (whether or not already owned by the debtor when the agreement is executed);
- identifying the debtor’s income that is to be available to pay creditors’ claims and how it is to be dealt with (whether or not already derived by the debtor when the agreement is executed);
- specifying the extent (if any) to which the debtor is to be released from his or her provable debts;
- specifying the conditions (if any) for the agreement to come into operation and the circumstances in which, or the events on which, the agreement terminates;
- specifying the order in which proceeds of realising the property and/or income referred to in the agreement are to be distributed among creditors;
- specifying whether or not the antecedent transaction provisions of the Act apply to the debtor. That is, whether or not the Controlling Trustee can pursue for the benefit of creditors any transactions that have occurred prior to the day the agreement was executed;
- making the provision for a nominated person or persons to be trustee or trustees of the agreement; and
- providing that the debtor will execute such instruments and generally do all such acts and things in relation to his or her property and income as is required by the agreement.
The effect of appointing a Controlling Trustee is that creditors are unable to commence or continue any further action for the recovery of their debts from the debtor until the outcome of a subsequent meeting of creditors is known.
In this regard, the meeting must be held within 25 working days of appointment or within 30 days if the appointment is made in December.
The Controlling Trustee immediately takes control of the debtor’s property and undertakes certain investigations into the affairs of the debtor. In addition, the Controlling Trustee is required to issue a report to creditors regarding the findings of his investigations. This report is also required to contain a statement as to whether or not the PIA proposal is in the best interests of creditors. At the meeting convened to consider the proposal, creditors may resolve that the debtor be required to execute a PIA. The resolution will be carried if the majority in number AND 75% in value of creditors present at the meeting vote in favour of the PIA. In the event that the proposal for the PIA is not accepted by creditors then the most common outcome is for creditors to resolve that the debtor files for bankruptcy.
Creditors, whether they voted in favour of the PIA or not, are bound by the terms of the PIA and cannot take any action to recover their debts outside the PIA. Once all the terms of the PIA are fulfilled, the PIA is terminated. If the debtor defaults on the terms of the PIA, the Trustee may terminate the PIA or creditors may at a meeting of creditors resolve to terminate the PIA. In addition and in specific circumstances, a Court, may on the application of the Trustee, a creditor or the debtor, terminate the PIA. If a PIA is terminated by way of debtor default, then it is most likely that the debtor will become bankrupt.
A PIA may subsequently be varied, after receiving the consent of the debtor, by a special resolution of creditors at a meeting called for this purpose or by the Controlling Trustee writing to creditors. A PIA does not normally affect a secured creditor’s rights or releases a partner or joint debtor or a guarantor from any surety given in respect to the debtor.
The advantages of entering into a PIA can be summarised as follows:
- the appointment of a Controlling Trustee provides immediate independent control of the debtor’s property and affairs;
- the Controlling Trustee provides independent advice on the affairs of the debtor and the merits of the debtor’s proposal;
- the debtor avoids the stigma of bankruptcy;
- a PIA provides for the flexible administration of the debtor’s affairs including the opportunity to carry on business, which is difficult for an undischarged bankrupt;
- the opportunity exists to obtain assets which are not available under bankruptcy;
- the execution of a PIA avoids Court process;
- subject to the terms of the PIA, there is no requirement to contribute after acquired property.
As indicated above, the costs of a PIA can be prohibitive and accordingly, it will not be an appropriate alternative for debtors with no resources or access to limited resources.
Part XI of the Bankruptcy Act 1966 (“the Act”) provides for the appointment of a trustee to a deceased estate, where the estate is or may be insolvent. It is important to note that the estate of a deceased insolvent debtor may be administered under appropriate state based probate legislation. The alternative of seeking the appointment of a trustee under Part XI is preferred where there are or may be voidable transactions, where the affairs of the estate are complex, and/or where the appointment of such a trustee may be necessary to protect creditors’ interests.
In order for an appointment of a trustee pursuant to Part XI, the debtor must have satisfied one of the residency requirements at their date of death:
- the debtor was personally present or ordinarily resident in Australia
- the debtor had a dwelling-house or place of business in Australia
- the debtor was carrying on business in Australia, either personally or by means of an agent or manager, or
- the debtor was a member of a firm or partnership carrying on business in Australia by means of a partner or partners, or of an agent or manager.
Process of Appointment
The administrator of a deceased person’s estate, or a creditor that is owed at least $5,000 (after deducting the value of any security), may present a petition to the Court under Part XI of the Act in order that a trustee be appointed to manage the estate’s affairs. An order for the administration of a deceased insolvent estate can only be made by the Federal Circuit Court or the Federal Court of Australia. The application to the Court must include:
- Form 4 – Statement of Affairs under Part XI ; and
- Form 12 – Trustee Consent to Act Declaration); and either
- Form 14 – Creditor’s petition under s 244 of the Act; or
- Form 15 – Petition under s 247 of the Act by persons administering the estate of a deceased person; or
Copies of these forms are available from the Federal Court of Australia website, or can be obtained by request from O’Brien Palmer.
Role of the Trustee
On appointment of a trustee, all former administrators are divested of their powers and responsibilities to the estate. All divisible property and any after acquired property of the estate will thereafter vest in the trustee. The trustee will administer the estate subject to the provisions of the Act. The process of such an administration closely resembles the bankruptcy process. The trustee may be required to realise certain assets of the estate, to recover any of voidable dispositions identified, pay dividends if sufficient funds are realised, report to creditors and draw/pay fees associated with the administration.
In addition, O’Brien Palmer can act as a Court Appointed Receiver or a Trustee of jointly owned property pursuant to Section 66G of the Conveyancing Act 1919 (NSW).
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