1. business and industrial
2. company
3. bankruptcy

w
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2012/13 GUIDE TO PERSONAL INSOLVENCY
PLAIN TALK.
STRAIGHT ANSWERS.
FAST RESULTS.
Editor
Chris Cook, Partner Worrells Brisbane
DISCLAIMER
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained
herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or
any member of the firm for any loss resulting from any error or omission within this brochure.
Liability limited by a scheme approved under Professional Standards Legislation.
1
2
3
PERSONAL INSOLVENCY13
5 PHASES OF FAILURE
14
BANKRUPTCY18
DIVISIBLE PROPERTY IN BANKRUPTCY 21
BANKRUPTCY AND THE FAMILY HOME
26
GETTING OUT OF BANKRUPTCY
29
INCOME CONTRIBUTIONS IN BANKRUPTCY
30
VOID TRANSACTIONS IN BANKRUPTCY
32
PREFERENCES IN BANKRUPTCY
36
VOIDING SUPERANNUATION CONTRIBUTIONS
38
PART X PERSONAL INSOLVENCY AGREEMENTS 45
SECTION 73 PROPOSALS 47
REVESTING OF PROPERTY
49
DISCHARGE & ANNULMENT
50
RELATED TOPICS55
PROOFS OF DEBT AND SECURED CREDITORS 56
PUBLIC EXAMINATIONS
57
Meetings of Creditors
59
Dividends62
CGT And Insolvency
69
GST AND INSOLVENCY
72
WORRELLS ARTICLES79
THE TAXMAN COMETH
80
ASSET PROTECTION STRUCTURES
EXPOSED UNDER PPS ACT
81
DEALING WITH REAL PROPERTY AFTER DISCHARGE
83
WHAT HAPPENS WHEN A MEMBER OF A
SELF MANAGED SUPER FUND BECOMES BANKRUPT?
84
A TALE OF THREE PROPERTIES
85
GLOSSARY87
A WORD FROM IVOR
Our Guide to Personal Insolvency inevitably focuses largely
on personal bankruptcies, so it’s worthwhile knowing that
the term “bankruptcy” derives from two Latin words, bancus
meaning table, and ruptus meaning broken.
Before the advent of shops, when merchants and traders
carried on business from markets, they set up their
businesses on tables or benches in the market place, to
display their wares. In those early days, if a merchant could
not pay his debts, the practice was for his table to be broken
so as to signify that he was out of business. Whether the
merchant broke his own table or whether his creditors took a
hand in the process is not clear; probably both happened. In
any event bancus ruptus or broken table has evolved into our
word bankruptcy.
Along with the evolution of the term bankruptcy, both the
law relating to personal insolvency and the community’s
perception of the bankruptcy process have evolved.
Today we have a very detailed and codified framework of
Bankruptcy law, drawn from both legislation and from Court
judgments. Bankruptcy law aims to combine equity for and
between creditors, with the need to provide a fresh financial
start for debtors who could not otherwise survive. To a very
large degree the law succeeds in its aims.
Another major evolution relates to the incredible amount of
information that the ordinary person can get from the web
on almost any subject, including bankruptcy. But not all of
the information focuses on what most people really want to
know, not all of it is expressed in everyday English, and not
all of it aims to correct the many misconceptions which still
abound about bankruptcy and its consequences for both
debtors and creditors.
Worrells 2012/13 Guide to Personal Insolvency is an up to
date, one volume, easy to understand explanation of the law
and practice of personal insolvency in Australia and it draws
together in a form convenient to all, the combined experience
of Worrells 16 partners.
For our professional colleagues the Guide will provide a
quick reference explanation of the relevant law which can be
used in their office, or passed onto clients. For those facing
the uncertainty of bankruptcy, or who are subject to one of
the other forms of personal insolvency, often one of the most
difficult issues is uncertainty about what will happen. Using
its simple English question and answer format the Guide
shines a light on and explains the uncertainties which most
affect debtors.
We have also included in our Guide a selection of interesting
and illuminating articles taken from our popular monthly
Plain Talk e-Update newsletter.
Bankruptcy is not about punishing business owners for
making mistakes. And it’s not about penalising people
for taken risks, because risk taking is the very essence
of our market economy. It’s about removing impossible
financial obligations in a way which is
transparent and fair to all.
Of course each insolvency is unique
on some way, and although our Guide
is accurate at the date of publication,
both the law and the practice of
insolvency continue to evolve. That is
why we encourage all readers to treat the
information in the Guide as a statement
of general principles and always to seek
qualified professional advice, or to contact
a Worrells partner, before committing to any
course of action.
Ivor Worrell
Coordinating Partner
“bankruptcy is not about punishing
business owners for making mistakes.”
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
The essence of Worrells and our contemporary culture is now illustrated through our brand.
We strived for an evolution toward a modern and fresh brand - one that reflects who we are.
We hope you like it as much as we do.
3
WORRELLS PARTNERS
It’s our people that deliver
“Plain talk,
straight answers
and fast results.”
WorRells are a team of full time specialists.
Solvency Management, Restructure or Insolvency
Administration can be a period of great stress. An
experienced and specialist team can ease the process,
ensuring a fair outcome for all parties concerned.
At Worrells we’re specialists Solvency Accounting is all we do.
•
16 Partners,
•
16 Registered & Official Liquidators,
•
13 Registered Trustees,
•
3 Certified Fraud examiners,
•
5 east coast major metro locations,
… we can have experienced staff at any
location, quickly.
4
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
Quick decisive action by a highly skilled team
acting in a caring, respectful and fair manner
does make all the difference.
Established over 38 years ago, Worrells
draws upon over 200 years of experience.
Using proprietary technology, our team
have successfully completed over 25,000
assignments.
Specialist accounting services, delivered
by dedicated fulltime specialists, on time,
on budget every time.
IVOR WORRELL brisbane
FCA
Official Liquidator
Registered Trustee
Member IPA
Forensic Accountant
Justice of the Peace
07 3225 4310
[email protected]
Ivor Worrell is a Registered Trustee in
Bankruptcy and Official Liquidator. Ivor is a
leading Queensland insolvency practitioner
and in a career spanning 38 years he has
developed experience in Corporate and
Personal Insolvency, Receivership and
Litigation Support.
Raj Khatri brisbane
Morgan Lane brisbane
MICHAEL GRIFFIN brisbane
FCA
Official Liquidator
Registered Trustee
Member IPA
Commissioner of Declarations
CA
CPA (Fellow)
Official Liquidator
Registered Trustee
Member IPA
Justice of the Peace
CA
Registered Liquidator
Official Liquidator
Registered Trustee
Certified Fraud Examiner
Member IPA
Commissioner of Declarations
07 3225 4320
[email protected]
Raj Khatri joined the firm in 1986 rising
to become a Partner in 1994. His area of
specialty is Corporate Insolvency and has
over 26 years experience in the field.
Raj is a fellow of the Australian Institute of
Chartered Accountants, an associate of
the New Zealand Society of Accountants
and the Institute of Corporate Managers,
Secretaries and Administrators.
07 3225 4330
[email protected]
Morgan Lane joined the firm in 1992 and
became a full partner in 1996. His wealth of
experience gained in both the private and
public sectors adds further depth to our
insolvency division. Morgan is a Fellow of
CPA Australia accredited as a Specialist in
Insolvency & Reconstruction, an Associate
of the Institute of Chartered Accountants
and The Institute of Corporate Manager,
Secretaries and Administrators.
07 3225 4360
[email protected]
Michael is a Registered Liquidator, Official
Liquidator and a Registered Trustee in
Bankruptcy. Michael is also a Member of
the Institute of Chartered Accountants and
the Insolvency Practitioners Association.
Michael’s experience includes all forms of
personal and corporate insolvency matters.
5
WORRELLS PARTNERS
MICHAEL PELDAN brisbane
CHRIS COOK brisbane
ADAM WARD IPSWICH
FCA
Registered Liquidator
Official Liquidator
Registered Trustee
Certified Fraud Examiner
Member IPA
Commissioner of Declarations
CPA
CA
Registered Liquidator
Official Liquidator
Member IPA
Commissioner of Declarations
CPA
Registered Liquidator
Official Liquidator
Registered Trustee
Member IPA
Commissioner of Declarations
07 3225 4386
[email protected]
07 3280 6201
[email protected]
Chris is an Official Liquidator, Chartered
Accountant, Certified Practising
Accountant and a member of the Insolvency
Practitioners Association of Australia.
Adam Ward joined the firm in 2001 and
became a partner in 2011. Adam is a
Registered Liquidator, Official Liquidator and
is a member of both CPA Australia and the
Insolvency Practitioners Association.
07 3225 4370
[email protected]
Michael joined the firm as a graduate
in 1991 after completing studies as
a mature-aged student, and became
a full partner in July 2000. Michael’s
experience includes all aspects of
Corporate and Personal Insolvency
and Financial Investigation. Michael
is also engaged in Fraud Awareness
Management and Education and is one
of the firm’s Certified Fraud Examiners.
6
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
Chris joined the firm in February 1999 and
has considerable experience in both the
Corporate and Personal Insolvency Fields.
Chris is the partner and heads a team that
specialises in Corporate and Personal
Insolvency.
His experience includes all forms of
Corporate and Personal insolvency matters.
Adam is the Partner that leads a team at our
Worrells Ipswich Office.
JASON BETTLES GOLD COAST
Paul Nogueira sunshine coast
JOHN CUNNINGHAM sunshine coast
CA
Official Liquidator
Registered Trustee
Member IPA
Commissioner of Declarations
CPA
CA
Registered Liquidator
Official Liquidator
Registered Trustee
Member IPA
Commissioner of Declarations
CPA
Liquidator
Registered Trustee
07 5553 3405
[email protected]
07 5459 1001
[email protected]
07 5459 1002
[email protected]
Jason is an Official Liquidator, Registered
Liquidator, Registered Bankruptcy Trustee,
Chartered Accountant and a member of
the Insolvency Practitioners Association
of Australia. He has worked exclusively in
the field of insolvency since 1995, managing
the Gold Coast Insolvency Division of a
second tier accounting firm for two years
before joining us in October 2001. Jason
has experience in all forms of corporate
and personal insolvency matters. He has
provided recommendations on the most
appropriate solutions to deal with insolvency
issues to all types of parties. Jason’s
knowledge and experience allows him to
consider informal arrangements to solve
insolvency problems, as well as the formal
insolvency administrations.
Paul joined Worrells in 1999 after completing
his degree with the Queensland University
of Technology. He was appointed a Partner
in 2006 and opened the Worrells Sunshine
Coast office in 2007. Paul is experienced
in all forms of Corporate and Personal
insolvency administrations over various
industries and specialises in small to
medium business turnaround management
and solvency solutions. Paul adheres to
the firm’s “Plain Talk, Straight Answers,
Fast Results” approach and is available
to provide no obligation advice to any
party that may find themselves faced with
solvency problems.
John joined Worrells as a partner in 2012.
He is one of ten partners in Queensland
and 16 nationally.
John has over 23 years experience in the
insolvency field having commenced with
the then Official Receivers Office in
Melbourne in 1989.
John joined forces with Paul Nogueira
as part of the Ramsay Clout merger with
Worrells in 2012.
Whilst John has taken appointments in a
wide variety of areas and industries he has
developed a particular expertise in the areas
of building, retail and hospitality.
7
WORRELLS PARTNERS
Nicholas Malanos sydney
Christopher Darin sydney
Stephen Hundy CANBERRA
CPA
Registered Liquidator
Official Liquidator
Registered Trustee
Certified Fraud Examiner
Member IPA
CA
Registered Liquidator
Official Liquidator
Justice of the Peace
CA
Registered Liquidator
Official Liquidator
Registered Trustee
Member IPA
02 9249 1214
[email protected]
02 9249 1209
[email protected]
Nick has in excess of 27 years experience in
all aspects of corporate insolvency. He has
particular expertise in the areas of Voluntary
Administration and Deeds of Company
Arrangement which has now enabled
numerous businesses to successfully
continue on over the years.
8
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
Chris is a Registered Liquidator, Official
Liquidator and associate member of the
Institute of Chartered Accountants in
Australia. Chris joined the firm as partner of
the Sydney firm in July 2008 having been in
practice on his own account since 1996.
Chris’ experience includes all aspects
of corporate insolvency and adopts a
consultative approach when exploring all
financial avenues available to a distressed
company. Chris also undertakes corporate
advocacy appointments, assisting directors
and companies in dealing with their debtors,
creditors and other insolvency practitioners.
02 6287 6000
[email protected]
Stephen Hundy joined Worrells Solvency &
Forensic Accountants in 2011 as a partner
and leads our Canberra office. Stephen
has worked exclusively in the insolvency
industry since 1995 and is able to provide
assistance in all areas of personal and
corporate insolvency. Stephen specialises in
the provision of clear practical commercial
advice on a wide range of business issues
for individuals and small to medium
enterprises.
He adopts a hands-on approach being
involved in all aspects of an appointment.
In addition, Stephen also has experience in
preparing fraud and financial investigation
reports, undertaking financial viability
reviews and has assisted with shareholder
and partnership disputes.
paul burness melbourne
matthew jess melbourne
Con Kokkinos melbourne
CPA
Official Liquidator
Registered Liquidator
Registered Trustee
Certified Fraud Examiner
Member IPA
CPA
Registered Liquidator
Official Liquidator
Registered Trustee
Member IPA
CPA
Registered Liquidator
Official Liquidator
03 9613 5510
[email protected]
Paul Burness is a Certified Practising
Accountant, an Official Liquidator and a
Registered Trustee in Bankruptcy. He is also
a member of the Insolvency Practitioners
Association of Australia.
Paul has considerable experience in all
forms of Corporate and Personal Insolvency
and Reconstruction, specialising in
insolvency since graduating. Paul is the
managing partner of the Melbourne firm.
03 9613 5502
[email protected]
03 9613 5513
[email protected]
Matthew is an Official Liquidator and
Certified Practising Accountant, who has
considerable experience in the Insolvency,
Commercial Accounting and Corporate
Finance fields. Matthew’s experience
includes due diligence investigations,
sale of business transactions, corporate
reconstructions and financial turnarounds.
Con Kokkinos joined the Melbourne office
on a full time basis in April 2008. Con has
been a Liquidator since November 2001 and
is a member of CPA Australia.
Con brings with him over 15 years of
insolvency experience with an emphasis
in all aspects of corporate insolvency.
Matthew has also completed the Advanced
Insolvency Course with the Insolvency
Practitioners Association of Australia.
9
LATEST PERSONAL
INSOLVENCY STATISTICS
Insolvency figures as released by THE Insolvency AND Trustee Service Australia (ITSA).
Release No: 127
Date issued: 10 July 2012
ADMINISTRATIONS UNDER THE BANKRUPTCY ACT 1966 STATISTICS (PROVISIONAL*) JULY 2011 - JUNE 2012
Bankruptcies
(Parts IV and XI)
NSW
Debt Agreements
(Part IX)
Personal Insolvency
Agreements (Part X)
Total insolvency
activity
10/11
11/12
%
Change
10/11
11/12
%
Change
10/11
11/12
%
Change
10/11
11/12
%
Change
8127
7623
-6.20%
2661
3093
16.23%
126
115
-8.73%
10914
10831
-0.76%
ACT
186
171
-8.06%
98
146
48.98%
1
4
300.00%
285
321
12.63%
VIC
4521
4253
-5.93%
1733
1757
1.38%
106
97
-8.49%
6360
6107
-3.98%
QLD
6145
6253
1.76%
2244
2476
10.34%
74
79
6.76%
8463
8808
4.08%
128.57%
1948
1891
-2.93%
160
138
-13.75%
SA
1603
1517
-5.36%
338
358
5.92%
7
16
NT
106
80
-24.53%
54
56
3.70%
0
2
WA
1701
1569
-7.76%
625
769
23.04%
55
60
9.09%
2381
2398
0.71%
TAS
713
697
-2.24%
301
292
-2.99%
6
5
-16.67%
1020
994
-2.55%
Total
23102
22163
-4.06%
8054
8947
11.09%
375
378
0.80%
31531
31488
-0.14%
Note 1:
All the above figures refer to personal administrators under the Bankruptcy Act only (and not corporate insolvency).
Note 2:All the above figures refer to personal administrations under the Bankruptcy Act only
(and not corporate insolvency).
Note 3:There were 5,058 (22.8%) business related bankruptcies and 17,105 (77.2%) non-business bankruptcies
during the financial year. A business related bankruptcy is defined as being one in which an individual’s bankruptcy is directly
related to his or her proprietary interest in a business. *Verified annual figures are published in the ANNUAL REPORT ON THE
OPERATION OF THE BANKRUPTCY ACT 1966 for each financial year, released by the office of the Inspector-General in Bankruptcy,
Insolvency and Trustee Service, Australia,
42 Macquarie St, BARTON ACT 2600.
Telephone (02) 6270 3400 Fax (02) 6270 3413
These figures, together with some historical data, may be found on ITSA’s homepage on the Internet at www.itsa.gov.au
10
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
Bankruptcy
2010/11
2011/12
NSW
8127
7623
ACT
186
171
VIC
4521
4253
QLD
6145
6253
SA
1603
1517
NT
106
80
WA
1701
1569
TAS
713
697
Personal Insolvency Agreements (Part X)
NSW
2010/11
2011/12
126
115
ACT
1
4
VIC
106
97
QLD
74
79
SA
7
16
NT
0
2
WA
55
60
TAS
6
5
Total Insolvency Activity
NSW
ACT
BANKruptcy 2010/11
10000
2010/11
2011/12
10914
10831
285
321
VIC
6360
6107
QLD
8463
8808
SA
1948
1891
NT
160
138
WA
2381
2398
TAS
1020
994
BANKruptcy 2011/12
8000
6000
4000
2000
0
NSW ACT
VIC
QLD
SA
NT
WA
TAS
150
ERSONAL INSOLVENCY
P
AGREEMENTS (PART X)
2010/11
120
ERSONAL INSOLVENCY
P
AGREEMENTS (PART X)
2011/12
90
60
30
0
NSW ACT
VIC
QLD
SA
NT
WA
TAS
12000
T OTAL INSOLVENCY
ACTIVITY 2010/11
10000
T OTAL INSOLVENCY
ACTIVITY 2011/12
8000
6000
4000
2000
0
NSW ACT
VIC
QLD
SA
NT
WA
TAS
11
PERSONAL INSOLVENCY NUMBERS
REMAIN CONSISTENT, THAT’S WHY AN
UNDERSTANDING IS THIS AREA IS VITAL.
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
1
PERSONAL INSOLVENCY
5 PHASES OF FAILURE
14
BANKRUPTCY18
DIVISIBLE PROPERTY IN BANKRUPTCY
21
BANKRUPTCY AND THE FAMILY HOME
26
GETTING OUT OF BANKRUPTCY
29
INCOME CONTRIBUTIONS IN BANKRUPTCY
30
VOID TRANSACTIONS IN BANKRUPTCY
32
PREFERENCES IN BANKRUPTCY
36
VOIDING SUPERANNUATION CONTRIBUTIONS
38
PART X PERSONAL INSOLVENCY AGREEMENTS 45
SECTION 73 PROPOSALS 47
REVESTING OF PROPERTY
49
DISCHARGE & ANNULMENT
50
13
1
5 PHASES OF FAILURE
5 PHASES OF FAILURE
Every year thousands of businesses open their doors and commence trading. Many of these businesses will fail in the
first few years, some will fail in the years after that, and only a few will prosper and survive in the long term. This is by no
means a new phenomenon and the statistics change very little from year to year.
Based on our past experience dealing
with business failures, we have prepared
the following information which
identifies what we call the ‘Five Phases
to Failure’ and the elements which
are likely to be found at each phase.
No two business failures are identical
so not all of the elements will be found
in every case. But when you see enough
failures patterns start to appear. We
believe that the ‘Five Phases to Failure’
can provide useful benchmarks for
struggling businesses. Used as an
early warning system, they may save
some businesses from insolvency
as business owners will identify the
deterioration of their financial position
early enough to take proactive action.
A failing business may display
characteristics from more than one
phase at one time and they may spend
a little or a lot of time in each phase.
These are not definite steps that can be
predicted with any certainty to appear
and last for definite periods. They are
more like road signs that indicate the
direction of a business failure journey.
1. CONFIDENT PHASE
(THE RISE)
The first phase occurs with the
opening of the business and during
the early periods of trading.
Business owners are full of confidence
when they start trading. They have
high expectations about how the
business will perform and exude
enthusiasm, and this will blind some
to seemingly obvious pitfalls. Many
people starting businesses will have
no business experience and little or no
knowledge of budgeting, accounting
or financial management. They may
not seek advice in the early stages.
Yet they are confident of success.
Turnover builds during these early
days as customers take advantage of
opening specials. New suppliers give
generous discounts and extended
terms to secure the new customer
and the owners will probably sign
credit applications and guarantees.
Financial information is prepared, if not
analysed in any detail, and expansion
plans are made to fulfil the expected
continued growth. This is the time when
new motor vehicles are leased, new
premises are considered and financial
budgeting does not seem important.
Owners believe that the business will
continue to grow. The commitments
entered into during this phase may
have an effect on the business and the
owner’s personal life, in the future.
(v)Directors willing to sign personal
obligations and guarantees.
But many businesses are seriously
under-capitalised when they start,
surviving on supplier credit and
overdrafts. When budgets are prepared
(usually for banks and investors) they
are not done in consultation with
accountants and are typically overly
optimistic and incomplete. There will
be no provision for slow payments by
debtors, cost overruns, bad debts or
losses in the first few months. Profit
is not of major concern as none was
expected in the first few periods, but the
losses are not covered by capital, they
are covered by debt. Growth of turnover
is considered all important but the cost
of making these sales, especially by
discounting, is not fully understood.
Some business owners realise that this
period will end and seek advice from
their accountants. Their accountants
help them prepare for the inevitable
start of phase two by keeping a realistic
view of the level of sales, ensuring
that overheads are kept under control
and that sufficient capital is available
when required. Phase two is where the
future of many businesses is decided.
During this phase we can expect to see:
(i)Good trading with a reasonable
demand for the product
or services offered.
(ii)Increasing turnover. New
business is won at the expense
of more established competitors,
mainly by discounting.
(iii)Suppliers offering discounts and
credit to win supply contracts.
(iv)The business products and
the staff are innovative and
ahead of competitors.
14
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
(vi)Financial statements and budgets
are prepared, although not
necessarily thoroughly analysed.
(vii)New premises and/or plant
are brought online.
(viii)E xpansion and trading are
often being funded on finance,
because of limited capital.
(ix)Growth of turnover is considered
all important but the cost of making
these sales is not fully understood.
(x)Regular drawings by owners.
(xi)Great plans for future expansion
being confidently discussed.
(xii)Staff bonuses and
incentives are offered.
2. CONSOLIDATION PHASE
(THE PLATEAU)
Eventually the honeymoon period
ends and things settle down.
Sales now have to be won from
established competitors that are
already adjusting to the new player
in the market and heavy discounting
is no longer an affordable option.
The effects of competition begin to
be felt, as existing players bring their
operations up to date and start actively
competing for business. The owners
recognise that to succeed it is not simply
good enough to be new and energetic,
it is also necessary to be disciplined,
knowledgeable and pragmatic.
Financiers, customers and suppliers
need to be constantly reassured
about the strengths of the business,
its products, service and finances.
PERSONAL INSOLVENCY
Suppliers will end their discounts
and extended terms and now require
payment. Some customers, having tried
the new business and taken advantage
of the discounts, will go back to their
regular suppliers so sales will start to
drop. The first question is, now that
sales have stabilized or have declined
from the initial period, is whether the
business is profitable on the bottom
line? Many businesses still have a gross
profit, but cannot meet overheads. This
affects under-capitalised business very
quickly. The second question is whether
profits are sufficient to repay any losses
incurred in the opening phase of the
business, as these losses are currently
supported by suppliers and the bank.
To counter this problem, some people
will make sales on extended terms or to
anyone that will place an order, resulting
in slow payments and bad debts. The
difference between sales, profits and
cash flow needs to be recognised.
At this point some businesses adapt to
the new conditions and remain profitable
and some do not. The ones that do not
will find new business harder to win.
Financiers and investors will pay closer
attention to the declining results and
banks will notice the ever increasing
overdraft balance. Financial information
may be produced, but the owners may
not have the skills or knowledge to
interpret and evolve a survival strategy.
Importantly many of them will still not get
advice, and when they do, some advisors
will not want to deliver bad news. Left
alone, profits will reduce or disappear
and cash flow will tighten. Confidence
and enthusiasm will start to decline.
Many businesses will stay in this phase
for long periods, struggling to survive.
Those that don’t adapt to the new
conditions can expect to see:
(i)Sales getting harder to win
and increased competition.
(ii)Turnover becoming stagnant
or reducing for two or more
consecutive periods.
(iii) Current asset ratio weakening.
(iv)Closer attention from the
bank and investors.
(v)Margins being squeezed
as suppliers end their early
discounts and prices have to
be dropped to get sales.
(vi)Credit being harder to obtain
from suppliers who require
guarantees from directors.
(vii)An intermittent inability to
meet all commitments - the
overdraft balance increases.
(viii)Grand plans quietly downgraded
to more realistic levels or
are dropped entirely.
(ix)Uncertainty about the
business’ ability to trade
profitably in the future.
(x)Preparation of financial
statements becoming less
regular and less rigorous.
(xi)Directors and owners
becoming less enthusiastic.
(xii)Long periods being spent on
managing cash flow rather
than managing profit.
Business owners who understand the
trading results or seek advice from
their accountants or trade groups will
build on their foundations of budgets
and capital and survive. But those
who cannot or will not rethink and
adapt their business model eventually
advance to the third phase.
5 PHASES OF FAILURE
1
3. DEBT PHASE (THE DECLINE)
Tough trading conditions have led to real
financial problems. A steady decline
will continue until the business closes
or sufficient bottom line profits are
earned to cover past losses. The limited
initial working capital would have been
used up and cash flow is now entirely
supplied by creditors, including the
Australian Taxation Office (ATO) and
banks. The injection of further capital
without making the business profitable
just delays the inevitable failure.
Cash flow problems cause a series of
other problems. The lack of working
capital and continued losses mean
that some debts are not being paid.
Some creditors will now not supply
further credit and only trade on a cash
on delivery (COD) basis, plus they
will require partial payments of old
debt with payments for new orders.
This makes cash flow even worse.
Getting sufficient stock becomes
a problem causing customers to
shop elsewhere - compounding
the problem with lower sales.
Business owners may use creative
accounting when dealing with financiers
and investors. Preparation of financial
statements becomes intermittent and
advice from accountants and bankers is
generally ignored. All planning is done on
a day to day survival basis. Some owners
are solely concerned with getting
enough money to pay the more urgent
debt, borrowing from anyone that will
lend or from family members, or selling
or mortgaging houses to obtain cash
injections. The business is technically
insolvent and insolvent trading is now
an issue for company directors.
15
1
5 PHASES OF FAILURE
The business must be made profitable
before the problem of past losses
can be solved. Profits may enable a
company to propose a deed of company
arrangement, and a sole practitioner
to propose a personal insolvency
agreement. These will provide some
time for past debts to be paid without
the threat of winding up or bankruptcy.
Importantly, people take the stress
home causing problems in their family
life, particularly when they have
borrowed money from family members.
Businesses owners are now risking
more than just money and assets.
A business in the debt phase is
usually characterised by:
(i)Creative accounting being used for
reporting to banks and investors.
(ii)Spending is reduced on noncore activities i.e. marketing.
(iii)Further and greater use of
ATO funds and failure to remit
superannuation monies.
(iv)Further slippage in turnover,
margins and profits.
(v)Quality customers are lost as
they find more stable suppliers.
(vi)A need for longer term
‘arrangements’ with some creditors.
(vii)Some suppliers only
supplying on COD basis.
(viii)Planning is done on a day
by day survival basis.
(ix)Accountants consulted but
advice generally ignored.
(x)Internal systems and controls
begin to break down.
(xi)Management’s main preoccupation
is demands from creditors.
(xii)Insolvent trading is now an
issue for company directors.
Some people will now admit that there
is a problem and will seek help. This
is a big step towards survival, but
no guarantee that the business will
survive. Sometimes advisors can only
control the crash as the business fails
and attempt to reduce the damage.
But some will not seek advice and
they will end up in the fourth phase.
16
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
4. DENIAL PHASE
Ultimately businesses are run by people
and now human nature plays a major role
in their future. Some people will reach
the denial phase. They will continue
to trade, justifying their actions in the
belief that a solution is just around the
corner, or that next month’s trading
will be better. No amount of financial
statements or cash flow projections
will make them change their minds.
Their accountants may convince
them to talk to advisors, but they
leave the meeting adamant that any
problems will work themselves out.
Other people see the situation
differently. Employees begin to look for
more secure employment. Financiers
and investors make demands to try
to reduce their exposure. Creditors
start issuing proceedings and the
remaining customers look for a more
reliable supplier. Almost no financial
statements are prepared and bad
results are not believed. Owners do
not know the extent of outstanding
debts, and tax and superannuation
has not been paid for some months.
Cash flow is entirely dependent upon
debtors making payments as all other
sources of money, both personal
and borrowed, are exhausted.
Blame is laid on everyone else
(accountants, bankers and solicitors
included). The only thing that advisors
can do is keep putting the facts and
figures to the business owners and
ensure that their own professional
obligations are fulfilled, and hope
that the business owner will start
to believe that there is a problem.
Some will come to that conclusion
and appoint the necessary people
to handle the business. Some will
not. For them, this phase generally
ends when director penalty notices
are received from the ATO or legal
proceedings are served by creditors.
This is reflected in:
(i)A belief that problems that exist
can be overcome relatively
simply. Wishful thinking is
the order of the day.
(ii)Greater losses are incurred
but the true extent is not
acknowledged or known.
(iii)Management’s time allocated
to non-core activities.
(iv)Bank and investor relations make
demands to reduce their exposure.
(v)Management shows signs of
complacency or arrogance.
(vi)Blame for the situation is
laid on everyone else.
(vii)Preparation of any financial
statements is all but abandoned.
(viii)Demands from creditors are ignored
and proceedings are issued.
(ix)A refusal to recognise the existence
of bad debts and redundant stock.
(x)It becomes difficult to get supply
on credit or at a reasonable cost.
(xi)Management becomes
unavailable to make decisions,
or if decisions are made, they
are regularly countermanded.
(xii)Current asset ratio likely
to be less than 0.5
This is where many business
owners first seek advice from their
accountants and solicitors, and
when the only realistic advice is to
see an insolvency practitioner.
5. THE COLLAPSE
Denial is superseded by reality. Reality
may come quickly with the appointment
of a liquidator or bankruptcy trustee, or
come slowly as all sources of money
are extinguished, remaining staff leave
and the doors eventually close.
All working capital is long gone and
owners start to look to protect their
personal positions through asset
protection strategies set up at the
commencement of trading. Goodwill is
non-existent, the landlord is changing
the locks and the banks have cut off
the overdraft. Creditor support has
ended and customers have no faith
in the business. Owners start to
discover the extent of the debts and
the number of personal guarantees
they signed during the early days.
Liquidation and bankruptcy are terms
now used in daily conversation.
PERSONAL INSOLVENCY
1
In this phase we expect to see:
(i)All working capital has
been exhausted.
(ii)Non-adherence to any payment
arrangements with the ATO.
(iii)Directors and proprietors look
to protecting themselves.
(iv)Goodwill is lost.
(v)Bank and investors are not
interested in further extensions.
(vi)Insufficient funds are available to
pay wages, rent, or chattel leases.
(x)Sole proprietors become bankrupt.
(xi)Directors are subject to demands
from guaranteed creditors and
insolvent trading claims from
liquidators, resulting in bankruptcy.
(xii)Family situations reach a
crisis stage, often leading to
separation and divorce.
CONCLUSION
How do business owners get a business
off this road to failure? Sometimes
there are no solutions. A business
that is not profitable may survive on
injections of funds alone, but eventually
those funds have to run out. Some
businesses simply do not have a
large enough profitable market or an
appropriately formed business model
to survive, regardless of any actions
taken or capital invested. Sometimes
the business just will not work despite
the effort and money invested into it.
(vii)The ATO issues directors
penalty notices.
(viii)Administrators appointed and
are expected to work miracles
with virtually no working capital
or reliable information.
Business decisions are made by people
and to start the recovery process these
people have to admit that there is a
problem, make some tough decisions
and be willing to take corrective
action. Some people just will not do it
in time to make a difference, and time
is usually critical. Those who do make
the tough decisions will generally
achieve a much better outcome for
themselves and their families.
5 PHASES OF FAILURE
This is where some people finally realise
that they need help, but often it is too late
to save the business. The best that
accountants or insolvency practitioners
may be able to do is control the financial
crash. By this time there is little
likelihood of saving the business, even
under a deed of company arrangement or
personal insolvency agreement. It may
be that this course of action will enable
the debtor to avoid bankruptcy.
The first step is to get an experienced
accountant to prepare accurate and
up to date financial statements. Using
these statements, management
should work with the accountant in the
preparation of a realistic business plan
and meaningful budgets. It is imperative
for management to be fully informed
and to look at the position objectively.
It may be necessary to involve an
insolvency practitioner, especially
if help is desirable with managing
creditors, or if it is clear that the
business’ difficulties are more than
a short term cash flow problem.
(ix)Creditors fail to accept the
director’s proposal or trading
on and the business is closed.
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17
1
BANKRUPTCY
BANKRUPTCY
WHAT IS BANKRUPTCY?
Bankruptcy is a legal process where a trustee is appointed to administer an insolvent person’s affairs in order to provide
a fair distribution of that person’s assets to their creditors. Bankruptcy is a legitimate and just way for a debtor to solve
their debt problems, and is one way for creditors to take action against someone for unpaid debts.
WHY CHOOSE BANKRUPTCY?
The Bankruptcy Act has been
developed for the protection of both
debtors (the bankrupt) and creditors.
The debtor is protected from being
pursued by his or her creditors and, with
limited exceptions, is released from his
or her debts at the end of the bankruptcy.
It provides a debtor with a fresh start.
Bankruptcy protects the interests of
creditors by having an independent,
qualified professional control and
investigate the affairs of the bankrupt
and oversee the collection and
distribution of the bankrupt’s assets.
HOW DOES A PERSON
BECOME BANKRUPT?
CAN A DEBTOR BE MADE
BANKRUPT IF THEIR ASSETS
EXCEED THEIR DEBTS?
Yes. A person is legally insolvent if
they are unable to pay their debts as
and when they fall due. If a debtor
owns sufficient assets to cover his
debts but is unable to liquidate them
(sell them or borrow against them) to
actually pay the debts, they may be
bankrupted. Technically a debtor is
legally insolvent if they do not satisfy
a bankruptcy notice, regardless of
whether they can pay the debt or not.
But, the Official Receiver has the
discretion not to accept a debtor’s
petition if they believe that the debtor is
solvent and could satisfy their debts.
A person may become bankrupt
in one of two ways.
WHAT IS A STATEMENT
OF AFFAIRS?
They may bankrupt themselves by filing
a debtor’s petition and a statement
of affairs with the Official Receiver.
This process is referred to as lodging
a ‘debtor’s petition’. A person is made
bankrupt when the Official Receiver
processes the debtor’s petition
and issues an estate number.
A statement of affairs is a document
that must be completed by all
bankrupts that sets out their personal
and financial information. This is an
important document for two reasons:
A person may also be made bankrupt
by the Federal Court on the application
of one of their creditors through a
‘creditor’s petition’. In most instances,
a creditor must have obtained a
judgment on their debt and have
served a ‘bankruptcy notice’ on the
debtor. If the debtor does not pay
the debt before the expiry of the
bankruptcy notice, the creditor may
file a creditor’s petition with the
Federal Court seeking a sequestration
order bankrupting the debtor.
18
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
1.It is the financial disclosure of a
bankrupt’s assets and debts and
this information is used by the
trustee in conducting the estate.
2.The date of lodgement of
the statement of affairs will
determine when the bankruptcy
ends (the date of discharge).
HOW DOES BANKRUPTCY
AFFECT SOMEONE?
A person is an ‘undischarged
bankrupt’ from the date of bankruptcy
until they are either discharged or
annulled. During this period they:
(i)Can’t act as a company officer;
(ii)Can’t trade under a registered
business name without advising
people that they are bankrupt (they
can trade under their own name);
(iii)Must make all of their divisible
assets available to the trustee;
(iv)Can’t incur credit over an indexed
amount without advising the
lender that they are bankrupt;
(v)Must surrender their passport(s)
and will have limitations on
overseas travel; and
(vi)Must make all books and records
and financial statements
available, including those of
associated entities such as
companies and trusts.
CAN A BANKRUPT CONTINUE
TO EARN INCOME?
Yes, a bankrupt may continue to earn
income and is encouraged to do so.
If income earned during the bankruptcy
exceeds certain indexed threshold
limits, the bankrupt will have to pay a
contribution from that income to the
estate. Income under these provisions
includes personal income, certain
benefits provided by third parties and
income from superannuation or trusts.
Income is then reduced by the income
tax payable on the income, legitimate
business expenses (where appropriate)
and certain child support payments.
The liability to pay this contribution
to the estate survives beyond the
discharge of the bankruptcy and can
be enforced by the trustee. The trustee
may garnishee the bankrupt’s wages
or use the supervised account regime
to collect contributions. The bankrupt
may be re-bankrupted by the trustee
for non-payment of contributions.
PERSONAL INSOLVENCY
1
All of a bankrupt’s divisible property is
controlled by their trustee. This includes
all property the bankrupt owned when he
or she was bankrupted and all property
received after the date of bankruptcy but
before discharge. This latter property
is called after-acquired property.
Some property is not divisible.
Divisible property (i.e. property that
can be divided amongst creditors)
does not include the following:
(i)Necessary clothing and
household items;
(ii)Tools of trade to an indexed amount;
(iii)A motor vehicle to an
indexed amount;
(iv)Life assurance or endowment
policies (subject to some limitations);
(v)Certain damages and
compensation payments;
(vi)Sentimental property (as defined
in the Bankruptcy Act);
(vii)Superannuation payments
(subject to certain limitations).
CAN THE TRUSTEE RECOVER
PROPERTY THAT WAS SOLD
BEFORE BANKRUPTCY?
Maybe. The trustee will look at any
sales or transfers of property that
occurred within the five years before
the bankruptcy. If these transactions
appear improper, undervalued, or to have
had the purpose of attempting to defeat
creditors, that property or its value
may be recovered from the recipient.
The trustee may also recover monies
from creditors who may have received
payment of their debts in the six
months before the bankruptcy. Such
payments are commonly referred to as
preferential or preference payments.
HOW DOES BANKRUPTCY
AFFECT JOINTLY OWNED REAL
PROPERTY?
The trustee of a bankrupt estate may
have his or her name placed on the title
deed in place of the bankrupt. This is
called entering transmission. The trustee
will usually invite the co-owner of the
property to either buy the bankrupt’s
interest or join in selling the property. If
the co-owner will not cooperate with
the trustee or they cannot agree on a
satisfactory arrangement, the trustee
can force the sale of joint property.
CAN BANKRUPTCY AFFECT A
FAMILY TRUST?
A trustee may recover any property
that a bankrupt has given or sold to a
trust at less than its true value. The
trustee will also receive any monies
that may be owed to the bankrupt by a
trust in the form of a loan or outstanding
entitlements, and receive any
distribution due to the bankrupt. Usually
the trustee of a discretionary trust will
not make distributions to someone
while they are bankrupt. Trustees of
unit trusts will not have that discretion.
WHAT IS THE EFFECT
ON CREDITORS?
When a person is made bankrupt,
their creditors exchange the right
to enforce their claims for a right to
prove in the bankrupt estate for a
dividend. All creditors with claims at
the date of bankruptcy can prove for
a dividend. There are few exceptions
to this rule that are not covered here.
WHAT THE RIGHTS OF SECURED
CREDITORS AFFECTED?
The bankruptcy does not affect the
rights of secured creditors in relation
to their security. They can enforce
their charges or securities and prove
for any deficiency in the estate. There
are special provisions on how secured
creditors may prove for shortfalls before
the secured assets have been sold.
WHAT ARE
NON-PROVABLE DEBTS?
BANKRUPTCY
HOW DOES BANKRUPTCY
AFFECT PROPERTY?
Certain debts cannot be claimed
in the bankruptcy. Non-provable
debts cannot be proved and will
not be released at the end of the
bankruptcy. These debts include:
(a)Some portion of a HECS debt;
(b)Court imposed fines; and
(c)The remainder of maintenance
agreements under the
Family Law Act;
Full details of provable debts are set out
in section 82 of the Bankruptcy Act.
CAN THE TRUSTEE
PAY DIVIDENDS?
Yes. Ultimately the role of the trustee
is the distribution of the bankrupt’s
assets to the creditors. Obviously this
can only occur if the bankrupt has
assets. Section 109 of the Bankruptcy
Act sets out the order of priorities
under which dividends must be paid.
Some payments and certain debts
need to be paid before dividends
are paid to unsecured creditors.
WHEN DOES
BANKRUPTCY END?
The bankruptcy period automatically
ends (the bankrupt is discharged)
three years after the date on which the
bankrupt files his or her statement of
affairs. But the conduct of the estate
may continue for some time thereafter.
The period of bankruptcy may be
extended for up to five years. This
is done when the trustee lodges an
objection to discharge. This may happen
if the bankrupt fails to cooperate with
the trustee, leaves Australia without
permission, manages a company without
the leave of the court, or engages
in misleading conduct in relation to
an amount over an indexed sum.
19
BANKRUPTCY
1
WHAT IS AN ANNULMENT OF
THE BANKRUPTCY?
WHAT ARE THE
TRUSTEE’S POWERS?
An annulment is the cancellation of
the bankruptcy and reinstatement
of the affairs of the debtor as if
no bankruptcy had occurred. An
annulment can be obtained:
The trustee has the power to sell
any divisible asset of the bankrupt,
investigate the affairs of the bankrupt
and examine the bankrupt and others
under oath, conduct and sell any
business of the bankrupt, admit debts
and distribute dividends. The trustee
is empowered to exercise all of the
rights and powers that the bankrupt
would have had if they had not become
bankrupt, plus has recovery powers
that the bankrupt would not have.
(a)By an order of the court on
the basis that the bankruptcy
should not have occurred;
(b)By the bankrupt’s debts and
the costs of the administration
being paid in full; or
(c)By a proposal under section 73
being accepted by creditors.
WHO LOOKS AFTER A
BANKRUPT ESTATE?
When a person is made bankrupt, a
trustee in bankruptcy is appointed to
administer the bankrupt’s estate. The
trustee is an appropriately qualified
and registered specialist accountant
who is either an officer of the Federal
Court (a registered trustee) or a public
servant (the Official Receiver).
In summary, the trustee will:
(a)Find and protect the assets
of the bankrupt;
(b)Realise those assets;
(c)Conduct investigations into the
financial affairs of the bankrupt
and any suspicious transactions;
(d)Make appropriate recoveries;
(e)Report to creditors;
(f)Report offences to ITSA; and
(g)Distribute surplus funds to creditors.
A debtor presenting a debtor’s
petition or a creditor filing a creditor’s
petition can obtain a consent from a
trustee to become the trustee of the
estate. If no consent is obtained, the
Official Receiver will be the trustee.
ay...’
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20
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
CAN A TRUSTEE BE CHANGED?
Yes. The Bankruptcy Act allows
the trustee to be changed. There
are two ways of doing this.
1.The creditors may change
the trustee by voting for a
change. This may occur at any
time and for any reason.
2.The court may replace a trustee if
it is convinced that it is proper to
do so. This usually only happens
if the trustee has done something
wrong, and the court forms
the opinion that a new trustee
needs to take over the estate.
A replacement trustee is also appointed
if the current trustee dies or retires.
GOVERNMENT CHARGES
(ARC AND IRC)
Bankrupt estates attract a government
charge. This charge is payable at the
rate of 4.4% of gross monies received
into the estate, less payments to secured
creditors, trade on costs and other minor
amounts. Monies held by trustees for
an estate must also be held in interest
bearing accounts with any interest
earned being payable to the government.
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PERSONAL INSOLVENCY
1
DIVISIBLE PROPERTY IN BANKRUPTCY
DIVISIBLE PROPERTY IN BANKRUPTCY
INTRODUCTION
In simple terms, trustees of bankrupt estates sell the assets of the bankrupt and distribute the proceeds to the bankrupt’s
creditors. This guide looks at which of the bankrupt’s assets can be sold by the trustee. It does not look at assets that
may be recovered from other parties through other provisions related to void transactions under the Bankruptcy Act.
Not all of the bankrupt’s assets are
available to the trustee. The Bankruptcy
Act defines “divisible” assets (those
assets that are available to the
trustee) from “non-divisible” assets
(those assets that are not available
to the trustee). Understandably,
whether an asset is divisible or not
is sometimes a contested issue.
It is also important to determine what
is property of the bankrupt and what
is not. Items held on trust or loaned to
the bankrupt, or simply do not belong to
the bankrupt, do not vest in the trustee.
They are not the bankrupt’s assets
and therefore cannot be divisible.
VESTING OF THE “PROPERTY
OF THE BANKRUPT”
Vesting Property
Any property of the bankrupt
automatically vests in the trustee on
the commencement of the bankruptcy.
The trustee isn’t required to take any
action for this ‘vesting’ to occur. Where
applicable, legal title to some property
may have to be registered in the
trustee’s name, but equitable title will
automatically vest (e.g. real property).
Assets acquired by the bankrupt after
the bankruptcy commenced and before
discharge may also vest in the trustee
when they are acquired. These are
called ‘after-acquired property’.
BANKRUPTCY ACT 1966 - SECTION 58
Vesting of property upon
bankruptcy-general rule
(1)Subject to this Act, where a
debtor becomes a bankrupt:
(a)the property of the bankrupt, not
being after-acquired property,
vests forthwith in the Official
Trustee or, if, at the time when
the debtor becomes a bankrupt,
a registered trustee becomes
the trustee of the estate of the
bankrupt by virtue of section 156A,
in that registered trustee; and
(b)after-acquired property of the
bankrupt vests, as soon as it is
acquired by, or devolves on, the
bankrupt, in the Official Trustee
or, if a registered trustee is the
trustee of the estate of the bankrupt,
in that registered trustee.
After-acquired property includes any
property acquired by or devolved
on the bankrupt on or after the
date of the bankruptcy and before
discharge, being property that is also
divisible amongst their creditors.
Non-divisible after-acquired property
does not vest in the trustee.
One of the purposes of section 58 is
to provide immediate protection to
assets from individual creditors who
are attempting to recover their debts
by enforcements against assets. As
the bankrupt is no longer the legal
owner of the property, nothing can be
given away to creditors or taken from
the estate under enforcement actions.
Once the asset has vested in the
trustee, only the trustee may deal with
that asset. This allows for an orderly
and fair distribution of the bankrupt’s
assets between the proper creditors.
BANKRUPTCY ACT 1966 - SECTION 58
Vesting of property upon
bankruptcy-general rule
(3) Except as provided by this Act, after
a debtor has become a bankrupt,
it is not competent for a creditor:
(a) to enforce any remedy against
the person or the property
of the bankrupt in respect
of a provable debt; or
The two important factors are:
(b) except with the leave of the
Court and on such terms as the
Court thinks fit, to commence any
legal proceeding in respect of a
provable debt or take any fresh
step in such a proceeding.
1.The property must have been
acquired during the term
of the bankruptcy; and
There are two exceptions that
allow creditors to commence or
continue action against property:
2.It would otherwise be classified
as divisible property.
1.Secured creditors have a right to
exercise their security over any
asset covered by their security.
Section 58 only provides protection
to divisible assets that are not
covered by a valid security.
If existing owned property is not deemed
as ‘divisible’ at the commencement of
bankruptcy, it would not be divisible
if acquired during bankruptcy.
‘After-acquired property’, in relation
to a bankrupt, means property that is
acquired by, or devolves on, the bankrupt
on or after the date of the bankruptcy
and is property that is divisible amongst
the creditors of the bankrupt.
2.Creditors can exercise their rights
against non-divisible property for
debts under maintenance orders
or agreements. Non-divisible
property does not fall under the
control or protection of the trustee
as it does not vest in the trustee.
21
DIVISIBLE PROPERTY IN BANKRUPTCY
1
BANKRUPTCY ACT 1966 - SECTION 58
BANKRUPTCY ACT 1966 - SECTION 58
Vesting of property upon
bankruptcy-general rule
Vesting of property upon
bankruptcy-general rule
(5) Nothing in this section affects
the right of a secured creditor
to realise or otherwise deal
with his or her security.
(2) Where a law of the Commonwealth
or of a State or Territory of the
Commonwealth requires the
transmission of property to be
registered and enables the trustee
of the estate of a bankrupt to be
registered as the owner of any such
property that is part of the property
of the bankrupt, that property,
notwithstanding that it vests in
equity in the trustee by virtue of
this section, does not so vest at
law until the requirements of that
law have been complied with.
(5A) Nothing in this section shall be taken
to prevent a creditor from enforcing
any remedy against a bankrupt, or
against any property of a bankrupt
that is not vested in the trustee
of the bankrupt, in respect of any
liability of the bankrupt under:
(a) a maintenance agreement; or
(b) a maintenance order; whether
entered into or made, as the
case may be, before or after the
commencement of this subsection.
All divisible property that is not
secured to a particular creditor is solely
under the control of the trustee. But
what is and is not divisible property
is not always straight forward.
REGISTRATION OF INTERESTS
In some cases registration is necessary
to record the vesting of the property
in the trustee. This is usually the case
with real property where the title of the
property will have to be transferred to
the trustee in order for the trustee to be
able to legally deal with the property.
This process is known as ‘entering
transmission’ - transmitting legal
ownership. The equitable interest will
vest in the trustee, however the legal
interest will need to be transferred.
In the case of real property, usually
the trustee will initially protect the
estate’s interest by lodging a caveat
on the title - vesting of the property
provides a ‘caveatable’ interest. But the
trustee will not be able to sign transfer
documents until title to the property has
been transferred into his or her name.
NEW TRUSTEES
Occasionally the trustee of the estate
will change during the bankruptcy.
How and why is not discussed here
and is not important to the property.
The remaining property in the estate
automatically vests in the new or
replacement trustee as soon as the
change of trustee takes effect. The same
transmission rules apply so the new
trustee may have to enter transmission
of relevant property into their name.
BANKRUPTCY ACT 1966 - SECTION 132
Vesting and transfer of property
(1) Subject to this section, and to
section 158, where a trustee is
appointed by the creditors, the
property of the bankrupt passes
to and vests in the trustee so
appointed on the day on which
the appointment takes effect.
(2) Subject to this section, the
property of the bankrupt passes
from trustee to trustee and vests
in the trustee for the time being
during his or her continuance in
office or, if the Official Trustee
becomes the trustee, in the Official
Trustee, without any conveyance,
assignment or transfer.
(3) Where a law of the Commonwealth
or of a State or Territory of the
Commonwealth requires the
transmission of property to be
registered, and enables the trustee
to be registered as the owner of
any such property that is part of
the property of the bankrupt, that
property, notwithstanding that
it vests in equity in the trustee
by virtue of this section, does
not vest in the trustee at law
until the requirements of that
law have been complied with.
Changes in trustees are not common,
but the procedural mechanism is in
place to allow a smooth transfer of the
rights to property to any new trustee.
WHAT IS DIVISIBLE PROPERTY?
Section 58 does not define what is
or is not divisible property, only that
all divisible property vests in the
trustee. It is easiest to think of divisible
property as all of the property of the
bankrupt and work backwards from
there. The Bankruptcy Act has a
wide definition of divisible property
and broadly covers the following:
(i)All property owned at the time
of bankruptcy or acquired
during the bankruptcy;
(ii)Any rights or powers over
property that existed at
the date of bankruptcy or
during the bankruptcy;
(iii)Any rights to exercise
powers over property;
(iv)Any property that vests because
an associated entity received
the property as a result of
personal services supplied by
the bankrupt (section 139D);
(v)Monies recovered from an
associated entity due to an increase
in the net worth of the entity as a
result of personal services supplied
by the bankrupt (section 139E).
The relevant section lists what classes of
assets are divisible amongst creditors:
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
PERSONAL INSOLVENCY
1
Property divisible among creditors
(1) Subject to this Act:
(a) all property that belonged to, or
was vested in, a bankrupt at the
commencement of the bankruptcy,
or has been acquired or is acquired
by him or her, or has devolved or
devolves on him or her, after the
commencement of the bankruptcy
and before his or her discharge; and
(b) the capacity to exercise, and to
take proceedings for exercising
all such powers in, over or in
respect of property as might
have been exercised by the
bankrupt for his or her own benefit
at the commencement of the
bankruptcy or at any time after the
commencement of the bankruptcy
and before his or her discharge; and
(c) property that is vested in the
trustee of the bankrupt’s estate
by or under an order under
section 139D or 139DA; and
(d) money that is paid to the trustee of
the bankrupt’s estate under an order
under section 139E or 139EA; and
(e) money that is paid to the trustee of
the bankrupt’s estate under an order
under paragraph 128K(1)(b); and
(f) money that is paid to the trustee
of the bankrupt’s estate under a
section 139ZQ notice that relates
to a transaction that is void against
the trustee under section 128C; and
(g) money that is paid to the trustee
of the bankrupt’s estate under
an order under section 139ZU;
is property divisible amongst the
creditors of the bankrupt.
is property divisible amongst the
creditors of the bankrupt.
The trustee will start with all of the
property and will eliminate
non-divisible assets from this list.
NON-DIVISIBLE PROPERTY
What is not divisible property is a
more difficult area. The Bankruptcy
Act provides that a number of types
of property will not be divisible.
Section 1162. of the Bankruptcy Act
summarises what is not classified as
property divisible amongst creditors.
The list of what assets are non-divisible
is extensive, but in most cases these
assets will appear fairly rarely. A lot of
them are not that common. Some of them
on the other hand, are very common and
are non-divisible as they are necessary
for the bankrupt’s subsistence.
These can be grouped roughly into
the following 14 different areas:
1.Property held by the bankrupt
in trust for another person,
that is, property that is not
owned by the bankrupt.
2.The bankrupt’s household property
prescribed by regulation 6.03 or
identified by a resolution passed
by the creditors before the
trustee realises the property.
3.Personal property that has
sentimental value for the
bankrupt and is identified by
a special resolution passed
by the creditors before the
trustee realises the property.
4.The bankrupt’s property - tools
of trade - that are for use by
the bankrupt in earning income
by personal exertion (subject
to the value limit prescribed
by the regulations).
5.A vehicle used by the bankrupt
as a means of transport, (subject
to the value limit prescribed
by the regulations).
7.The interest of the bankrupt
in a regulated superannuation
fund or an approved deposit
fund or an exempt public sector
superannuation scheme or a
payment to the bankrupt from
such a fund received on or after
the date of the bankruptcy, if the
payment is not a pension within
the meaning of the Superannuation
Industry (Supervision) Act 1993
(certain conditions apply).
DIVISIBLE PROPERTY IN BANKRUPTCY
BANKRUPTCY ACT 1966 - SECTION 116
8.A payment to the bankrupt under
a payment split under Part VIIIB
of the Family Law Act 1975 where
the eligible superannuation plan
involved is a fund or scheme
covered by the Act and the payment
involved is not a pension within the
meaning of the Superannuation
Industry (Supervision) Act 1993.
9.The amount of money a bankrupt
holds in an RSA or a payment
to a bankrupt from an RSA
received on or after the date of
the bankruptcy, if the payment is
not a pension or annuity within
the meaning of the Retirement
Savings Accounts Act 1997.
10.A payment to the bankrupt under
a payment split under Part VIIIB
of the Family Law Act 1975 where
the eligible superannuation
plan involved is an RSA; and the
splittable payment involved is
not a pension or annuity within
the meaning of the Retirement
Savings Accounts Act 1997.
11.Any right to recover damages or
compensation for personal injury
or wrong doing or in respect of the
death of the spouse or member
of family of the bankrupt.
6.Policies of life assurance or
endowment assurance in respect
of the life of the bankrupt or the
spouse of the bankrupt whether
the proceeds are received on or
after the date of the bankruptcy.
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DIVISIBLE PROPERTY IN BANKRUPTCY
1
12.Amounts paid under a scheme
approved by the States Grants
(Rural Reconstruction) Act 1971; the
States Grants (Rural Adjustment)
Act 1976 or approved by the States
and Northern Territory Grants (Rural
Adjustment) Act 1979; the States
and Northern Territory Grants (Rural
Adjustment) Act 1985; the States
and Northern Territory Grants (Rural
Adjustment) Act 1988; amounts paid
to the bankrupt for re-establishment
support under the Rural Adjustment
Scheme within the meaning of
the Rural Adjustment Act 1992;
amounts paid to the bankrupt as
a re-establishment grant under
the farm help re-establishment
grant scheme within the meaning
of the Farm Household Support
Act 1992; amounts paid to the
bankrupt as a dairy exit payment
within the meaning of the Farm
Household Support Act 1992.
EXEMPT ASSETS
13.Property that was funded either
wholly or substantially, with
protected money (what is protected
money is limited as a number of nondivisible assets lose their protection
when converted into cash,
particularly before bankruptcy).
SENTIMENTAL PROPERTY
14.Where, as at the time when the
trustee realises particular property,
the outlay in relation to the property
is in part protected money, the
trustee shall pay to the bankrupt so
much of the proceeds of realising
the property as can fairly be
attributed to that protected money.
Some otherwise divisible property is
subject to statutory value limits and
property with values under those limits
is exempt or non-divisible to that extent.
These limits change from time to time
and current amounts are listed on our
website on the Thresholds page.
These limits are designed to allow the
bankrupt to maintain some standard of
living (the household property limitations),
and maintain some employment (the tools
of trade and motor vehicle limitations).
These limits and the legislation
dealing with exempt values are set
out in the following regulations:
BANKRUPTCY REGULATIONS 1996 6.03
Household property
BANKRUPTCY REGULATIONS
1996 - 6.04
Property divisible among
creditors - prescribed amounts
What is sentimental property and
whether it is exempt is regulated by
the Bankruptcy Act. Sentimental
property must be non-monetary, have
real sentimental value to the bankrupt,
and be an award for sporting, cultural,
military or academic achievement. If
it does not fall into these categories,
it cannot be classified as sentimental
and usually will be divisible.
Creditors must also resolve that this
property is sentimental property by
special resolution at a meeting of
creditors or a virtual meeting. If the
creditors do not approve it as sentimental
property, it is divisible to the estate.
BANKRUPTCY REGULATIONS
1996 - 6.03A
Personal property
(1) For subparagraph 116 (2) (ba) (ii) of
the Act, sporting, cultural, military
or academic awards made to the
bankrupt in recognition of his or
her performance are personal
property to which subsection 116
(1) of the Act does not extend.
(2) Subregulation (1) does not
apply to a monetary award.
TIME LIMITS FOR REALISATION
Two provisions limit the time available
to trustees to realise property.
REVESTING OF PROPERTY
The first is the revesting provision under
section 129AA of the Bankruptcy Act.
Assets will revest in the bankrupt where
trustees do not realise divisible property
within the statutory time period. All
types of divisible assets are able to be
revested, with the exception of cash.
BANKRUPTCY ACT 1966
- SECTION 129AA
Time limit for realizing property
(1) This section applies only to:
(a) property (other than cash) that
was disclosed in the bankrupt’s
statement of affairs; and
(b) after-acquired property (other than
cash) that the bankrupt discloses in
writing to the trustee within 14 days
after the bankrupt becomes aware
that the property devolved on, or
was acquired by, the bankrupt.
In this subsection, cash includes
amounts standing to the credit of a
bank account or similar account.
In this subsection, cash includes
amounts standing to the credit of a
bank account or similar account.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
PERSONAL INSOLVENCY
1
1.The asset was owned before
the bankruptcy but was not
disclosed in the bankrupt’s
statement of affairs; or
2.The acquisition of after-acquired
property is not notified to the trustee
within 14 days of the bankrupt’s
knowledge of its acquisition; or
3.It is cash.
Otherwise property will revest six years
after either the bankrupt is discharged
or when the asset is disclosed to
the trustee, whichever is later.
BANKRUPTCY ACT 1966
- SECTION 129AA
Time limit for realizing property
3) Initially, the revesting
time for property is:
(a) for property disclosed in
the statement of affairs -the
beginning of the day that is the
sixth anniversary of the day on
which the bankrupt is discharged
from the bankruptcy; and
(b) for after-acquired property
that is disclosed before the
bankrupt is discharged from
the bankruptcy - the beginning
of the day that is the sixth
anniversary of the day on which
the bankrupt is discharged; and
(c) for after-acquired property that
is disclosed after the bankrupt is
discharged from the bankruptcy
- the beginning of the day that is
the sixth anniversary of the day
on which the bankrupt disclosed
the property to the trustee.
When that six year time limit commences
previously depended on when the
estate commenced and in relation to
transitional clauses. There were three
possibilities for assets disclosed in the
statement of affairs. The provisions were
introduced in 2003 and the transitional
clauses expired in 2009 (being six years
after the introduction). That is, the
earliest date that any property could
have revested was 5 May 2009. This gave
trustees six years after the introduction
to the provision to sell any assets.
Currently for estates that commenced
after 5 May 2003 (which is the
greater majority of current estates),
the revesting date is six years
after the date of discharge.
Acquisition of after-acquired property
must be notified to the trustee within
14 days of the bankrupt’s knowledge
of the acquisition. If notification is not
given within that period, the property
will not be eligible to be revested. For
property where proper notification is
given, the revesting date will be six
years after the date of discharge or
date of notification, whichever is later.
EXTENSION OF TIME
The trustee is able to extend the
revesting period for a further three
years after the “current” revesting
period ends or three years after some
specified event. The Act does not
limit the number of extension that may
be made. Therefore, in theory, the
trustee can keep extending the period
three years at a time indefinitely.
BANKRUPTCY ACT 1966
- SECTION 129AA
DIVISIBLE PROPERTY IN BANKRUPTCY
An asset will never revest
to the bankrupt if:
Time limit for realizing property
(4) If the trustee, before the current
revesting time, gives the bankrupt
a written notice (an extension
notice) stating that a later revesting
time applies to particular property,
then that later time becomes the
revesting time for that property.
(5) There is no limit on the number of
extension notices that the trustee
may give (either generally or in
relation to particular property).
(6) The time specified in an extension
notice must be either:
(a) a specified time that is not
more than 3 years after the
current revesting time; or
(b) a time that is reckoned by reference
to a specified event (for example,
the death of a life tenant), but
is not more than 3 years after
the happening of that event.
20 YEAR LIMIT
The second time limit is imposed by
section 127 and relates to divisible
property not caught under the revesting
provisions - property that was not
properly disclosed to the trustee. This
provision gives the trustee 20 years
from the date of bankruptcy to make
a claim to and realise any property.
BANKRUPTCY ACT 1966 - SECTION 127
Limitation of time for making
claims by trustee etc.
(1) After the expiration of 20 years
from the date on which a person
became a bankrupt, a claim shall
not be made by the trustee in the
bankruptcy to any property of the
bankrupt, and that property shall,
subject to the rights, if any, of a
person other than the trustee in
respect of the property, be deemed
to be vested in the bankrupt, or a
person claiming through or under
him or her, as the case may be.
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1
BANKRUPTCY AND THE FAMILY HOME
BANKRUPTCY AND THE FAMILY HOME
How the Bankruptcy Act applies to a bankrupt’s family home is often misunderstood. The loss of the bankrupt’s family
home is usually felt more intensely than the loss of any other asset. Understandably, many bankrupts know that the loss
of the home will disrupt the family unit, not only affecting the bankrupt but also their children and partners/spouses who
may be solvent.
Because of these factors, trustees in bankruptcy must approach the realisation of a bankrupt’s interest in a family home
with some tact and understanding, while protecting the rights and interests of creditors.
IS THE FAMILY HOME
PROTECTED?
No. The family home is not a protected
asset under the Bankruptcy Act. If
there is equity in the property after
paying out any proper mortgage
and selling costs, the trustee is
obliged to realise the property.
WHAT ABOUT JOINT
OWNERSHIP?
The realisation process is relatively
straightforward when the bankrupt is
the only owner of the home, or all of the
owners are bankrupt. However, often
the bankrupt and his or her non-bankrupt
spouse will own the family home
together as ‘joint tenants’. But even if
the family home is jointly owned by the
bankrupt and a solvent (non bankrupt)
co-owner, the trustee can still insist
on the bankrupt’s share of the equity
being realised. The options available
to achieve this are discussed below.
WHAT HAPPENS TO
JOINT TENANCIES ON THE
BANKRUPTCY OF ONE OR
MORE OWNERS?
A joint tenancy is automatically severed
upon the bankruptcy of any one of the
joint tenants - at least as far as it relates
to the ownership interest of the bankrupt.
This occurs due to the ‘involuntary
alienation’ or severing of the
fundamental legal rights of the parties
necessary to create a joint tenancy. This
practice is long established having been
mentioned in the 1862 case of Paten v
Cribb. The trigger to this alienation of
legal rights is the vesting of the property
in the trustee and that occurs at the
commencement of the bankruptcy.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
After the severing of the joint tenancy,
those interests in the property are
held as a ‘tenants in common’. This
is important if a bankrupt dies after
their bankruptcy. If the joint tenancy
had not been severed, the bankrupt’s
share of the property (and the
equity attached to that share) would
automatically vest in the co-owner
upon the death of the bankrupt, and
the value would be lost to the estate.
HOW IS THE EQUITY IN A
PROPERTY DETERMINED?
The trustee will have the property
valued. Secured debts are deducted from
that value and the bankrupt’s share of the
equity is calculated by a simple equation.
WHAT IF THERE IS NO EQUITY
IN THE PROPERTY?
Sometimes there is no equity in a
property when it vests in the trustee,
meaning that the debts secured against
the property are greater than the
current value of the property. In some
cases the mortgagees will exercise
their rights and sell the property.
But sometimes the mortgages will take
no action and the bankrupt and possibly
other parties will continue to service
that loan. It is also a fair consideration
to predict that the value of the property
may increase. The property vests in the
trustee at the time of bankruptcy and
remains vested even where there is no
equity and even if the trustee takes no
immediate action to sell the property.
The property will remain vested in the
trustee even after the bankrupt has
been discharged from bankruptcy.
The trustee will generally review
the equity position of the property
periodically. They are able to realise
any equity generated after the date
of bankruptcy. This is the case even if
that equity has been generated by the
continued payment of the mortgage
by the bankrupt or the other owner.
Mortgage payments attributed to the
bankrupt’s share are deemed to be rental
payments for the use and occupation
of the property during that time.
HOW ARE PROPERTIES
REALISED?
Where the trustee is the only owner,
they can put the property for sale.
Where there is a co-owner, the trustee
will usually take the following steps:
1.Give the co-owner the
opportunity to buy the estate’s
interest in the property.
2.If that is not possible, see whether
the co-owner will join with the
trustee in cooperatively marketing
the property on agreed terms.
3.If an agreement on selling the
property cannot be reached,
the trustee can ask the court to
appoint a ‘statutory trustee for
sale’ over the co-owner’s interest
to force a sale of the property.
The appointment of a statutory
trustee compels the sale of the home,
notwithstanding that the co-owner is
solvent and has not contributed to the
bankruptcy in any way. Although the
court will often attempt to soften the
effect of such an order by allowing the
spouse time to relocate, but the ultimate
result is that the property will be sold.
PERSONAL INSOLVENCY
1
WHAT ABOUT GETTING
VACANT POSSESSION?
The sale process usually begins with
the trustee ‘entering transmission’.
This is the legal process to have the
trustee’s name placed on the certificate
of title in place of the bankrupt’s. This
is necessary so that the trustee can
execute a sale contract and transfer
forms when selling the property.
The trustee will normally be required to
provide vacant possession when selling
a property therefore it will be necessary
for the bankrupt to vacate the property
before settlement. The trustee usually
does not expect a bankrupt to vacate the
premises immediately upon bankruptcy
and will, in normal circumstances, allow
for a few weeks for the alternative
arrangements to be made.
Usually the trustee will only enter
transmission if satisfied that there is
equity in the property. If there is doubt
about the final outcome, the trustee may
initially lodge a caveat over the title to
protect the estate’s interests for the
short term, giving them some time to
determine what to do with the property.
WHAT ABOUT MORTGAGEES?
The vast majority of family homes
are subject to a mortgage. The
mortgage may be enforced during the
bankruptcy, possible even when the
mortgage payments are up to date as
the bankruptcy itself may constitute
a default in the terms the mortgage.
Although mortgagees have the power to
sell the bankrupt’s home, in most cases
they will leave the task to the trustee.
WHAT IF THE BANKRUPT CAN
CONTINUE WITH MORTGAGE
PAYMENTS?
If the bankrupt has the capacity to
continue making mortgage payments,
the mortgagee will usually not insist
upon possession of the property,
preferring to allow the loan repayments
to continue. The trustee will have no
objection to this, provided that the
bankrupt arranges for the equity in
the property to be paid to the estate.
This type of arrangement benefits
everyone. The bankrupt estate
obtains the equity in the property,
the mortgagee retains a performing
loan and the bankrupt’s family
avoids the sale of their home.
However, the property can still be sold
by the trustee even if the mortgage
payments are kept up to date, and
they will be able to benefit from the
extra equity generated in the property
because of these additional payments.
In some cases the trustee may allow
the bankrupt to stay in residence during
the selling period provided the bankrupt
assists that process, contributes a fair
rent and maintains the property, and
when the trustee is satisfied that the
bankrupt will continue to cooperate.
HOW ARE THE PROCEEDS OF
SALE DISTRIBUTED?
If the property is wholly owned by
the bankrupt, the estate will receive
the entire surplus of the sale after
any mortgagee and selling costs are
paid. If the property is co-owned, the
trustee will share the surplus with the
solvent owner on the basis of the legal
entitlement as shown on the title deed.
Although the title to a property may be
held equally, occasions will arise where
unequal contributions have been made
towards the acquisition or development
of the said property. This may lead to one
party holding the property for the other
party in a constructive or resultant trust
and will potentially alter the distribution.
The sharing of equity may also be altered
under the doctrine of exoneration if
loans secured on the property were
used by one party and not the other.
WHEN DOES THE DOCTRINE OF
EXONERATION APPLY?
The property may be encumbered
by a mortgage that secures a loan to
the sole benefit of one owner, even
though all owners have agreed to the
mortgage. The doctrine says that the
person who received the benefit of the
loan should have the first obligation
to repay the loan - and the co-owner
should only be considered a surety
(guarantor) and their share should
only be used to meet any shortfall.
A simple example of the doctrine would
be a family home worth $400,000 owned
by the bankrupt and a solvent spouse.
Prior to bankruptcy they agreed to
the bank taking a mortgage over their
property to support an advance of
$150,000 to the bankrupt’s business. On
a sale of the property $250,000 would be
available for distribution to the owners
($400,000 sale price less the mortgage
of $150,000). Because each owner
had an equal share in the legal title to
the property it might be thought that
they should each receive $125,000.
BANKRUPTCY AND THE FAMILY HOME
WHAT IS ENTERING
TRANSMISSION?
However the doctrine of exoneration may
require that the amount due under the
mortgage should be deducted from the
bankrupt’s equity so that the following
equitable distribution would apply:
Bankrupt’s share = $200,000
less $150,000 = $50,000
Spouse’s share = $200,000
The principle of the doctrine of
exoneration is not applied without a full
review by the trustee who must find
compelling evidence that it should apply.
IS THERE A TIMEFRAME FOR
THE SALE OF THE PROPERTY?
Trustees will generally sell property
in a timely fashion. Section 129AA of
the Bankruptcy Act requires trustees
to realise property within a period
ending six years after the discharge of
bankrupt. This generally allows 9 years
to arrange such sales. If the trustee does
not do so, the property could potentially
revest in the discharged bankrupt.
The six year rule only applies to
property disclosed to the trustee. If
the property is not disclosed in the
bankrupt’s statement of affairs or as
after-acquired property, the trustee will
have 20 years to deal with the property.
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1
BANKRUPTCY AND THE FAMILY HOME
WAR SERVICE HOMES
A bankrupt or a debtor under Part X of
the Bankruptcy Act cannot have a war
service home taken from them, except
in extraordinary circumstances. This
arises from the provisions of the Defence
Service Homes Act which state:
DEFENCE SERVICE HOMES ACT 1918
- SECTION 45A
Bankruptcy of purchaser or borrower
(1) Except with the approval of the
Secretary, the estate or interest of
a purchaser or borrower in any land,
land and dwelling-house or right
of residence in a retirement village
that is the subject of a contract
of sale, or of a mortgage or other
security securing a Corporation
advance or a subsidised advance:
(a) shall not be taken from the
purchaser or borrower under
the Bankruptcy Act 1966; and
(b) shall not be sold in satisfaction
of a judgment debt, otherwise
than by the Bank or another
mortgage in the exercise of
powers under a contract of sale,
or a mortgage or other security.
(2) Where a husband and wife are
joint purchasers or borrowers
in relation to land, land and a
dwelling-house or a right or
residence in a retirement village,
the Secretary may give an approval
under subsection (10) in relation
to the estate or interest of both
of them if either of them becomes
bankrupt or incurs a judgment debt.
Although the secretary of the
department has discretion to allow a
trustee to sell the bankrupt’s property,
in reality this discretion is very seldom
applied. In our experience the secretary
will not exercise his discretion even
when the bankrupt has incurred
very substantial business debts.
There can be no doubt that some
bankrupts have taken business risks
which would otherwise have been
avoided in the knowledge that they
would not lose their home. This is
inequitable as far as creditors are
concerned, but that currently is the law.
‘By T he Way...’
SUMMARY
1.A bankrupt’s home can be sold
even if the bankrupt only has a
part interest in the property.
2.The trustee will normally offer
the property for sale to any
co-owner prior to having the
property placed on the market.
3.The trustee will normally sell
the interest in the property
without undue delay.
4.The trustee must recover the value
for the property but has a wide
discretion regarding how to sell.
5.The trustee will normally allow the
bankrupt a few weeks to arrange
alternative accommodation.
6.The doctrine of exoneration
or a constructive or resultant
trust may adjust the distribution
of the sale proceeds.
7.War Service homes are
excluded from realisation.
on can be bankrupt
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Obviously special rules apply
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
PERSONAL INSOLVENCY
1
GETTING OUT OF BANKRUPTCY
GETTING OUT OF BANKRUPTCY
HOW DOES A BANKRUPTCY NORMALLY END?
A person’s bankruptcy usually ends with the bankrupt being discharged from bankruptcy. This signifies the end of
the legal process against the bankrupt. The bankrupt or trustee need do nothing to obtain a discharge, it is purely an
operation of the Bankruptcy Act three years after the statement of affairs is lodged.
The bankrupt estate may continue after
discharge while the trustee finalises
the estate, and the discharged bankrupt
may have some ongoing obligations,
but they will no longer be ‘bankrupt’.
WHEN IS A BANKRUPT
DISCHARGED?
A bankrupt is automatically discharged
three years after their statement of
affairs is filed with ITSA (Insolvency
and Trustee Service Australia) unless an ‘objection to the discharge’
has been filed by the trustee.
If the bankruptcy was commenced
via a debtor’s petition, the statement
of affairs must have been filed at
the same time and therefore the
bankruptcy will end three years after
acceptance of the debtor’s petition.
If the bankruptcy was initiated by a
sequestration order (an order of the
court), the statement of affairs would not
have been filed at that time. The bankrupt
will have to complete a statement of
affairs and lodge it with ITSA. As the
bankruptcy ends three years after the
filing of the statement, the longer the
bankrupt takes to file it, the longer the
bankruptcy will be protracted. If the
statement of affairs is never filed, the
bankruptcy will continue until the death
of the bankrupt, however the conduct of
the estate will continue until completed.
CAN A BANKRUPT GET
OUT OF BANKRUPTCY
BEFORE DISCHARGE?
Yes. The bankruptcy may be
annulled. An annulment is a complete
undoing of the bankruptcy, as if the
bankruptcy never had happened.
HOW IS A BANKRUPTCY
ANNULLED?
A bankruptcy will be annulled if:
1.The trustee has sufficient
monies to pay all of the debts
and costs of the estate;
2.A section 73 proposal is accepted
by the bankrupt’s creditors; or
3.The bankrupt convinces the
court that the bankruptcy should
never have been commenced.
WHAT ARE THE DEBTS AND
COSTS OF THE ESTATE?
The costs and debts are:
(a)All provable debts of the estate;
(b)The Asset Realisation Charge (ARC)
payable to ITSA under the Act;
(c)The expenses and remuneration
of the Trustee; and
(d)Any other charges or statutory
costs of the estate.
WHAT IS A SECTION
73 PROPOSAL?
This is a formal proposal put to creditors
under section 73 of the Bankruptcy Act.
It provides a mechanism for bankrupts to
put forward a proposal to their creditors
as an alternative to the continuation
of the bankruptcy. If the creditors
accept the proposal, the bankruptcy is
effectively exchanged for an obligation
under the section 73 agreement.
WHY WOULD THE COURT
ANNUL A BANKRUPTCY?
Usually the court will only annul a
bankruptcy when it can be shown that
the bankruptcy should never have
been commenced. This may happen
where the proper legal process was
not followed in initially bankrupting
the person, if there was no debt
outstanding to that creditor at that time,
or if the bankrupt is actually solvent.
Bankrupts who successfully obtain an
annulment through the court should be
aware that the ex-trustee has the right
to use the assets in their possession
to pay outstanding remuneration and
outlays, and if insufficient, may seek
payment from the ex-bankrupt.
For a bankruptcy to be annulled by all
debts and costs being paid, the trustee
must have sufficient money to satisfy
all the pre-bankruptcy debts, the costs
of the bankruptcy and the statutory
charges. This type of annulment
generally happens when the sale of
an asset provides enough money to
pay these costs, or when a friend
or relative provides these funds.
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1
INCOME CONTRIBUTIONS IN BANKRUPTCY
INCOME CONTRIBUTIONS IN BANKRUPTCY
CAN A BANKRUPT WORK DURING THEIR BANKRUPTCY?
Yes. In most cases, a bankrupt will be able to earn an income during their bankruptcy. Subject to some provisions
and exceptions, the bankrupt is encouraged to earn an income during this period as there is no logical reason why a
bankrupt should not be entitled to earn an income and benefit from those earnings. The Bankruptcy Act states that they
should also pay contributions to their estate from that income.
WHAT ARE INCOME
CONTRIBUTIONS?
A working bankrupt may be liable to
make a contribution to their bankrupt
estate from income earned during their
bankruptcy. It is equitable that some of
the rewards from the bankrupt’s efforts
during the bankruptcy period be used to
satisfy their past debts and this has been
put into statute in the Bankruptcy Act.
WHAT INCOME IS ASSESSED
FOR CONTRIBUTIONS?
The bankrupt’s income is assessed
to determine whether contributions
must be paid. The provisions of the
Bankruptcy Act set out the definition
of income to be assessed.
Income has the same meaning as
defined under the Taxation Acts, but
also includes other amounts that have
not been earned from physical exertion
or investments, and amounts that may
not even be taxable income. These
other incomes include loans made
to the bankrupt, items that fall under
the Fringe Benefit Tax provisions,
annuities, pensions and some social
security or insurance payments.
IS ALL MONEY
EARNED INCOME?
No. There are a number of amounts
that are not income for contribution
assessment purposes. These are set out
under paragraph (b) of section 139L.
(b) The following are not income in
relation to a bankrupt (even if
they come within the ordinary
meaning of “income”):
(i) An amount paid to the bankrupt:
(A) From the Child Support Reserve
established under the Child
Support (Registration and
Collection) Act 1988 ; or
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
(B) From another source for the
maintenance of children of whom
the bankrupt has custody; or
(iv) A payment to the bankrupt under:
(A) A legal aid scheme or service
established under a law of the
Commonwealth or of a State or
Territory of the Commonwealth; or
(B) A legal aid scheme or service
approved by the Attorney-General
for the purposes of paragraph
2(4)(a) of the Federal Court of
Australia Regulations; or
(C) Any other legal aid scheme
or service established
to provide assistance to
people on low incomes;
(v) A payment or amount that
the regulations provide is not
income of the bankrupt.
ARE ANY AMOUNTS
DEDUCTIBLE FROM
AFTER-TAX INCOME?
Yes. Deductions are available for
payments to support a child, if they
are paid pursuant to a maintenance
agreement under the Family Law
Act or under a maintenance order.
Deductions are also available for
certain business expenses. Section
139N of the Bankruptcy Act sets
out these deductions in detail.
HOW DOES THE TRUSTEE
OBTAIN INFORMATION ABOUT
A BANKRUPT’S INCOME?
It is a requirement under the Act that
the bankrupt provide details of their
income to their trustees. The trustee
will usually send a form to be completed
by the bankrupt on each anniversary
of the date of bankruptcy. These forms
need to be completed and returned
with any documentation supporting the
income earned and deductions claimed.
WHAT IF THE BANKRUPT DOES
NOT COMPLETE THE FORMS?
It is an offence for the bankrupt not
to cooperate with their trustee and
complete the income assessment forms.
If they do not do so, the trustee may
object to the bankrupt’s discharge from
bankruptcy (extending their bankruptcy
period) and estimate the bankrupt’s
income and assess them accordingly.
CAN THE TRUSTEE
INVESTIGATE THE BANKRUPT’S
INCOME INFORMATION?
Yes. Whilst the trustee has the power
to make an assessment on what they
reasonably believe to be the income
of the bankrupt, practically they will
investigate the matter as fully as
possible before making that assessment.
If the information received from the
bankrupt is inadequate or questionable,
the trustee will seek further information.
If appropriate, the trustee can conduct
their own examination and can request
further information to be provided
to clarify any matter. If the further
information is not forthcoming, the
trustee can make the assessment
on what they reasonably believe
the income is and it then up to the
bankrupt disprove the assessment.
PERSONAL INSOLVENCY
1
The calculation is made on assessed
income, which is the surplus of income
after tax, Medicare and proper
deductions. A contribution will be
payable if that assessed income is more
than the current statutory threshold.
The amount of that threshold is based
on the number of dependents that the
bankrupt had during that assessment
period - see the ‘Thresholds’ page on
our website for the current figures.
The trustee is entitled to receive one
half of the balance over the threshold.
That is, the ‘over threshold after tax
income’ is divided equally between the
bankrupt and trustee. The formula is:
(Assessed Income - Actual
Income Threshold Amount) / 2
HOW IS THE ASSESSMENT
MADE?
The trustee makes an assessment on
the estimated income based on the
information supplied by the bankrupt at
the beginning of the assessment year.
An assessment (called a determination)
is made on these estimates and the
bankrupt becomes liable to pay any
contributions to the trustee from
the date of the assessment.
At the end of the assessment period,
the bankrupt will supply the actual
amount of the past year’s income, along
with estimates for the next year. The
past year’s assessment is adjusted if
necessary, then a new assessment
is made for the next year’s estimated
income and the process starts again.
HOW OFTEN ARE THE
ASSESSMENTS MADE?
Each assessment period runs from the
date of the bankruptcy or its anniversary
and ends on the day before the next
anniversary. Assessment periods
continue until the bankrupt is discharged,
even if the bankruptcy is extended
through an objection to discharge.
WHAT HAPPENS TO THE
MONEY PAID UNDER AN
ASSESSMENT?
The money paid under these provisions
will be paid into the general pool of
funds that is available to creditors.
WHAT OBLIGATIONS DOES THE
BANKRUPT HAVE?
The bankrupt must provide information
about their income and deductions and
provide access to all books and records
required by the trustee. If the bankrupt
neglects or refuses to provide either,
the trustee can lodge an objection to the
discharge of the bankrupt and ITSA may
prosecute the bankrupt for an offence.
HOW DOES THE BANKRUPT GET
NOTICE OF THE ASSESSMENT?
Once a determination has been made,
the trustee sends a notice to the
bankrupt setting out the amount payable
and particulars on how the determination
was calculated. The trustee will usually
include a schedule for the payment of
the contributions over the remaining
months of the assessment period.
IS THIS A LEGAL OBLIGATION?
Yes. Issuing a notice of determination
creates a legal obligation to pay the
contribution. The trustee has the power
to nominate when the payments are to
be made and the debt can be collected
from the bankrupt as a debt due. These
rights remain after the bankrupt has
been discharged, meaning that the
bankrupt can be re-bankrupted for
non-payment of any contribution.
WHAT CAN THE TRUSTEE DO
TO ENFORCE COLLECTION?
INCOME CONTRIBUTIONS IN BANKRUPTCY
HOW IS THE INCOME
CONTRIBUTION CALCULATED?
If an assessment is made and
the bankrupt refuses or neglects
to pay, the trustee can:
(a)Issue notices to employers or
other people that owe the bankrupt
money to garnishee those monies.
(b)Issue an objection to the discharge
of the bankrupt, extending
the bankruptcy period;
(c)Prohibit the bankrupt from
travelling overseas;
(d)Re-bankrupt a discharged bankrupt,
if the refusal to pay occurs after the
bankrupt has been discharged; or
(e)Issue a notice under the
supervised account regime
provisions of the Act.
WHAT IS THE SUPERVISED
ACCOUNT REGIME?
Trustees may determine that the
supervised account regime be
activated. This requires the bankrupt
to open a supervised account into
which they must deposit all of their
income. The trustee then supervises
all withdrawals from that account to
ensure that income contributions are
made. The threat of these provisions
generally encourages a bankrupt to
make contributions as required.
CAN THE ASSESSMENT
BE REVIEWED?
Yes. The Act provides a mechanism
for any assessment to be reviewed
by the Inspector General, but the
request must be made within 60 days
of the assessment. Upon receipt the
Inspector General will then have 60
days to decide whether the assessment
should be reviewed and make a ruling.
These decisions handed down by the
Inspector General may be reviewed by
the Administrative Appeals Tribunal.
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1
VOID TRANSACTIONS IN BANKRUPTCY
VOID TRANSACTIONS IN BANKRUPTCY
WHAT ARE THE PROVISIONS DESIGNED TO DO?
Trustees of bankrupt estates investigate any pre-bankruptcy transactions when they suspect the transaction improperly
transferred assets away from the bankrupt that would have come under the trustee’s control and therefore benefitted
creditors. The Bankruptcy Act will sometimes allow these transactions to be voided and require the other party to return
an asset or make a payment to the trustee.
WHO MAY RECOVER MONEY
UNDER THESE PROVISIONS?
WHY DO TRUSTEES VOID
SOME TRANSACTIONS?
Trustees of bankrupt estates and
personal insolvency agreements
(PIA) may use these provisions to
void transactions, if the PIA gives the
trustee that right. However, this right
is not available to trustees of Part IX or
a PIA that where the agreement does
not provide this right to the trustee.
One of a trustee’s roles is to ensure
that all of the bankrupt’s assets are
available for distribution to creditors.
Part of this role is to discover whether
the bankrupt entered into a transaction
that reduced the amount of assets
that are available for distribution. The
trustee will want to recover these
assets and void any transaction that
has provided an advantage to any
creditor so that they can make a more
equitable distribution to all creditors.
WHAT MUST THE TRUSTEE
DO TO BE ABLE TO MAKE A
RECOVERY?
To void a transaction, the trustee must:
1.Identify the transaction.
2.Identify the other party
to the transaction.
3.Prove that the transaction occurred
within a specific time period, or
while the bankrupt was insolvent.
4.Prove that the transaction
was either undervalue or had
the required intention.
5.Show that the transaction did
not involve protected property.
Some debtors when realising that they
are about to be made bankrupt, may
want to protect some of their assets
from their creditors. Some debtors
hide, move or transfer these assets to a
third party to hold during the period of
bankruptcy. These provisions are meant
to deter debtors from moving assets out
of their own hands at the expense of their
creditors, and to permit rightful recovery.
WHAT TYPE OF TRANSACTIONS
MAY BE VOIDED?
These powers enable the trustee to void
the following types of transactions:
1.Undervalued transactions
(section 120).
2.Transfers done with the intention to
defeat creditors (section 121). and
3.Transfers where the
consideration was paid to a
third party (section 121A).
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
UNDERVALUED
TRANSACTIONS - SECTION 120
WHAT ARE UNDERVALUED
TRANSACTIONS?
Transfers of assets for less than
market value are deemed ‘undervalue’.
Sometimes a debtor will sell or
transfer assets to third parties
shortly before their bankruptcy and
attempt to make the transaction look
commercial. These transactions may
take the form of the following:
(i)A sale for less than the market
value of the asset - moving a
valuable asset to another party; or
(ii)A purchase of something
at a greater consideration
than it is worth thus moving
money to another party.
Examples of these transactions
include a debtor:
(a)Selling their share of the family
house to their spouse for $1.00
or ‘natural love and affection’;
(b)Granting a mortgage or security to
someone in exchange for monies
that were lent in the past;
(c)Purchasing an asset of limited
worth and paying a high price.
The trustee may void transfers of
property (including money) if they
were done within five years before the
commencement of the bankruptcy.
PERSONAL INSOLVENCY
1
Yes. The Act will protect transfers
from being voided if (all three
factors must be present):
(a)It occurred more than two years
before the commencement
of the bankruptcy; and
(b)It did not involve a party
related to the debtor; and
(c)The debtor was solvent at the
time of the transfer and remained
solvent after the transaction.
Transactions undertaken with nonrelated parties whilst the bankrupt
was solvent should be protected as a
solvent debtor will not be prejudicing
creditors by transferring assets. The
other party to the transaction has the
onus of proving that the bankrupt was
solvent at the time of the transaction and
remained solvent immediately thereafter.
IS THE TIMING DIFFERENT IF
THE OTHER PARTY IS RELATED
TO THE BANKRUPT?
Yes. The two year period extends to four
years if the other party to the transaction
is related to the bankrupt. This means
that any undervalue transactions
occurring in the period four years before
the commencement of the bankruptcy
are automatically void if they involve
related parties, as defined as ‘related
entities’ in the Bankruptcy Act.
IS INSOLVENCY IMPORTANT?
A person is solvent if they are able to
pay all of their debts as and when they
become due and payable. A person who
is not solvent is therefore insolvent.
The debtor must have been insolvent at
the time in order to void a transaction
if it occurred between the two or four
year period mentioned above and within
the five year time limit. The court will
usually look to the trustee to provide
some evidence to substantiate the
state of insolvency at the time of the
transfer. Consequently the onus of
defending these claims and therefore
declaring solvency, lies with the party
seeking to rely on the defence.
The Act provides for a presumption
of insolvency if the debtor did not
keep proper records of their financial
affairs during that period, but that
presumption is rebuttable (i.e. it may
be disproved by positive evidence of
solvency). This may be quite difficult
if there are truly no records on the
financial affairs of the bankrupt.
ARE SOME
TRANSFERS EXEMPT?
Yes. Some transfers of property will not
be void. The Act provides protection
to payments of tax, payments under
family law agreements and payments
under part IX debt agreements.
A transfer is exempt if it is:
(a)A payment of tax payable under
a law of the Commonwealth
or of a State or Territory; or
(b)A transfer to meet all or
part of a liability under a
maintenance agreement or
a maintenance order; or
(c)A transfer of property under
a debt agreement;
(d)A transfer of a kind described
in the regulations; or
(e)A transfers made under
maintenance agreements or
orders made in the Family Court.
The Family Court would have to overturn
the original maintenance order before
the trustee will be able to make any
recovery under this section. It would be
difficult for any trustee to convince the
Family Court that it should overturn its
own decision in order to allow the trustee
to recover assets from an ex-spouse.
THE TRUSTEE MUST REFUND
THE CONSIDERATION RECEIVED
Section 120 voids the whole transaction,
not just the recovery of an asset or
money. This means that to get the
transferred asset back, the trustee must
refund any consideration received by
the bankrupt as part of that transaction.
This consequently places each party
back to the position they held before the
transaction was undertaken. Otherwise
the estate would end up with both the
consideration provided by the other party
as well as the asset that was transferred.
WHAT IS NOT
CONSIDERATION?
VOID TRANSACTIONS IN BANKRUPTCY
ARE SOME TRANSFERS OF
ASSETS PROTECTED?
Some things are not deemed to be
consideration and cannot be refunded.
These include the transferee being
related to the transferor; the transferee
being a spouse or de facto spouse of the
transferor; the transferee’s promise to
marry or to become the de facto spouse
of the transferor; love or affection; and
the transferee granting a spouse a right
to live at the transferred property.
HOW LONG DOES THE TRUSTEE
HAVE TO TAKE THE ACTION?
Recovery actions must be commenced
by the trustee within six years of
the bankrupt becoming bankrupt.
TRANSFERS TO DEFEAT
CREDITORS - SECTION 121
WHAT ARE TRANSFERS TO
DEFEAT CREDITORS?
Sometimes debtors transfer property
primarily to protect the property from
their creditors. The Act allows such
transfers to be voided where the
intention of the bankrupt was to stop
divisible assets becoming available to
creditors, or where the intention of the
bankrupt was to defeat or delay the
proper distribution of assets to creditors.
WHAT MAKES A TRANSFER
FALL INTO THIS CATEGORY?
To be a transaction to defeat
creditors, it must involve:
1.Property that in all likelihood would
have become part of the estate or
been available to creditors and is
made unavailable to the trustee
because of the transfer; and
2.The intention of making that
property unavailable to creditors,
permanently or temporarily.
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VOID TRANSACTIONS IN BANKRUPTCY
1
WHAT TYPES OF
TRANSACTIONS ARE CAUGHT?
THE TRUSTEE MUST REFUND
THE CONSIDERATION RECEIVED
HOW LONG DOES THE TRUSTEE
HAVE TO TAKE THE ACTION?
There must be a transfer of property.
Something must pass from the bankrupt
that would have become a divisible
asset in the estate. However a transfer
can also be of property created by the
debtor that results in another person
becoming the owner of something
that did not previously exist. Prime
examples are the creation of a mortgage,
securities or other interests over
property owned by the bankrupt, where
the security would stop the property
becoming available to the trustee.
Section 121 voids the whole transaction,
not just the recovery of an asset or
money. This means that to get the
transferred asset back, the trustee must
refund any consideration received as
part of that transaction, thereby placing
each party back to the position they held
before the transaction was undertaken.
If this was not the case, the estate may
end up with both the consideration
provided by the other party, even if it
was less than the value of the asset
transferred, as well as the asset that
was transferred (that can be realised).
Actions under section 121 may be started
at any time after the trustee discovers
the transaction. The difference with
other recovery provisions under
the Bankruptcy Act is that the 121
transaction has a flavour of fraud and
may be pursued more vigorously.
HOW DO YOU DETERMINE THE
BANKRUPT’S INTENTION?
One of the main purposes of the
transaction must be to protect the
asset from creditors. This is subjective
and usually must be inferred from the
circumstances of the transaction, the
financial position of the bankrupt at that
time and the result of the transaction.
But intention can also be deemed by
the actual or impending insolvency of
the debtor (if it can be shown that the
bankrupt was or was about to become
bankrupt at the time of the transaction).
If the debtor was solvent at the time and
remained solvent for some time after
the transaction, it may be difficult to
connect the transaction to the existence
of the knowledge of insolvency.
WHAT IS INSOLVENCY?
A person is solvent if they are able to
pay all of their debts as and when they
become due and payable. A person
who is not solvent is insolvent.
IS INSOLVENCY IMPORTANT?
The court will usually look to the trustee
to provide some evidence on insolvency
at the time of the transfer if the trustee
is using the deeming provisions.
The Act provides for a presumption
of insolvency if the debtor did not
keep proper records of their financial
affairs during that period. That
presumption is rebuttable, i.e. it may
be disproved by positive evidence of
solvency. This may be quite difficult
if there are truly no records on the
financial affairs of the bankrupt.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
WHAT IS NOT CONSIDERATION?
Some things are not deemed to be
consideration and cannot be refunded.
Things that are not consideration
include the transferee being related
to the transferor; the transferee being
a spouse or de facto spouse of the
transferor; the transferee’s promise to
marry or to become the de facto spouse
of the transferor; love or affection; and
the transferee granting a spouse a right
to live at the transferred property.
TRANSFER NOT VOID IF
DONE IN GOOD FAITH
The Act will protect transfers where
the transferee acted in good faith. To
be able to rely on these provisions, the
other party to the transfer must have
(all three factors must be present):
(i)Provided consideration at least
to market value (calculated at
the time of the transfer); and
(ii)Have no knowledge of or could
not have reasonably inferred the
intention of the bankrupt; and
(iii)Could not have inferred at the time
that the transferor was insolvent
or about to become insolvent.
To be able to use this defence, the
other party must have been completely
oblivious of the debtor’s financial
position and intention. As many of
these transactions are done with
relatives or other related parties, this
lack of knowledge may be difficult to
prove. It is not often that transactions
examined under this section are
undertaken with complete strangers.
TRANSACTIONS WHERE
CONSIDERATION GIVEN TO A
THIRD PARTY - SECTION 121A
WHO ELSE MAY BE INVOLVED
IN THESE ACTIONS?
Third parties not actually directly
involved in a transaction between
the bankrupt and another party can
be the subject of recovery actions by
the trustee, originally under sections
120 and 121 if they have received the
consideration that should have been
paid to the bankrupt. Currently section
121A is designed to allow the trustee
to collect money from a third party
where they received money that should
have been paid to the bankrupt.
In these scenarios it is not essential that
the original transaction was undervalued
or had the intention to defeat or delay
creditors, as it is the payment of the
consideration to the third party that
will be examined. That is, did the third
party give valuable consideration to
the bankrupt for that money at that
time, or was the intention of directing
the payment to the third party done
with the prerequisite intention?
PERSONAL INSOLVENCY
1
The Act deems that the receiving of
the consideration should be viewed as
a transfer of property by the bankrupt
to that third party. That consideration
therefore constitutes that the property
transferred and the transfer may be
viewed under section 120 and 121.
If that payment of consideration
is considered void for reasons
as set out in these sections, the
consideration will be recoverable from
the third party under this section.
These provisions are relatively new
and not entirely tried and tested in
court. It is possible that the trustee
will be able to take an action against
the original party to the transaction
and separately against the third party
that received the consideration.
PROTECTION OF
CERTAIN TRANSFERS
WHAT PROTECTION
IS PROVIDED IN THE
BANKRUPTCY ACT?
The Act provides some protection to
people dealing with a debtor before
bankruptcy. A transaction is not
automatically void because the debtor
later becomes bankrupt. Essentially
protection may be provided to
people that had no knowledge of the
impending bankruptcy and who acted
in normal business circumstances.
WHO GETS THIS PROTECTION?
DIVISIBLE PROPERTY IN BANKRUPTCY
WHAT CAN BE DONE?
This provision protects an innocent,
unknowing party who entered in a
commercial transaction in ordinary
dealings with the bankrupt, as long
as the following factors are met:
(a)The transaction happened before
the bankruptcy (the bankrupt does
not have the right to deal with
their assets after bankruptcy);
(b)The other party was unaware of
the impending bankruptcy; and
(c)The transaction was in good
faith and in the ordinary
course of business.
‘Good faith’ and ‘ordinary course of
business’ elements may be difficult
to prove. The other party must not
have acted in any manner that would
give the impression that they were
not acting in good faith. Ordinary
course of business has been held
to be in the ordinary course of the
relevant industry, not the ordinary
course of that particular creditor.
The burden of proof rests with
the party attempting to gain the
protection of the section.
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35
1
PREFERENCES IN BANKRUPTCY
PREFERENCES IN BANKRUPTCY
WHAT ARE PREFERENTIAL PAYMENTS?
Preferential payments or ‘preferences’ are payments or transfers of assets to creditors that gives that creditor an
advantage over other creditors. These payments or transfers may be able to be recovered by trustees of bankruptcy
estates under the provisions of the Bankruptcy Act. Preferences are usually payments of money, though a variety of
transfers of assets could be preferential.
WHO MAY RECOVER
PREFERENTIAL PAYMENTS?
WHAT ARE THE ELEMENTS OF
A PREFERENTIAL PAYMENT?
MUST THERE BE A DEBTOR CREDITOR RELATIONSHIP?
In personal insolvency matters, only
trustees of bankrupt estates and
personal insolvency agreements (where
the agreement includes recovery
of these preferential transactions)
may claim the return of preferential
payments. Similar provisions also
exist in the Corporations Act for
payments made by companies.
Before the court will void a payment
or transfer, it must be satisfied that:
Yes. The transaction must have
involved or been done at the direction
of a creditor of the bankrupt and must
have satisfied a debt that would have
been provable in the estate if the
transaction had not been undertaken.
WHY DO TRUSTEES VOID
PREFERENTIAL PAYMENTS?
(d)It occurred within the relevant time
period before the bankruptcy;
The trustee’s main role is to distribute the
bankrupt’s assets fairly between their
creditors. To do so they must discover
whether any creditor has received
treatment that would have given them a
distribution - prior to bankruptcy - that
was not equitable when compared
to the distribution to other creditors
in the bankruptcy. Trustees are able
to void transactions that involve one
creditor so that they can make a more
equitable distribution to all creditors.
(e)The transaction gave the creditor
an advantage over other creditors
(usually determined as the creditor
receiving more than they would
have if they had proved for that
amount in the estate); and
(a)A transfer of property was made
(this is usually a payment of money);
(b)Something passed from the
bankrupt to a creditor or on
the creditor’s instructions;
(c)It occurred at a time when the
bankrupt was insolvent;
(f)The creditor suspected or should
have suspected that the bankrupt
was insolvent at the time.
WHEN IS SOMEONE
INSOLVENT?
The Bankruptcy Act defines insolvent
as not being able to pay all your debts
as and when they become due and
payable. The bankrupt must have been
insolvent at the time of the transfer or
payment. The reasoning is that a solvent
person has the capability of paying all
of their debts (whether they actually
did or not) and therefore no creditor
could have been advantaged over
the others by receiving a payment.
WHO HAS TO PROVE
INSOLVENCY?
The onus of proving insolvency
lies with the trustee.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
MUST THERE BE A TRANSFER
OF AN ASSET?
Yes. There must have been a transfer
of some property between the parties.
It is common for that transfer to be a
payment of money, but any asset passing
from the bankrupt to the creditor (even
an asset that has just been created by
the transaction, like a security) will be
sufficient to be a transfer of property.
The amount of the preference is the
value of the asset transferred.
WHAT IS THE RELEVANT
TIME PERIOD?
The transfer of the asset must
have happened during a specific
period before the bankruptcy. The
period differs depending on how
the bankruptcy was commenced:
1.Creditor’s petition - six
months before the filing of
the creditor’s petition.
2.Debtor’s petition (where a creditor’s
petition is pending) - the period
starts on the commencement of
the bankruptcy; defined as the time
of the earliest act of bankruptcy
within the six months before the
creditor’s petition was filed.
3.Debtor’s Petition - six months
before the presentation of
the debtor’s petition.
PERSONAL INSOLVENCY
MUST THE DEBT BE
UNSECURED?
Yes. A preference cannot be given
to a creditor holding a security over
assets. Secured creditors either give
up their security (if the creditor is paid
in full), or the bankrupt gains equity in
the secured asset (if the creditor is not
paid in full). However if the security
was not properly created or the value
of the security is less than the amount
of the payment, then the transfer or
the excess value over the security’s
worth may be deemed as preferential.
HAS IS PREFERENTIAL
TREATMENT DETERMINED?
The creditor must have received more
than they would have received if they
had refunded the monies and proved
for that amount in the bankruptcy. This
is purely a mathematical calculation.
If the creditor did not receive more by
way of the payment than they would
have received from a dividend in the
bankruptcy, there is no advantage
or preferential treatment.
WHAT DEFENCES ARE
AVAILABLE TO CREDITORS?
The three arms of the
statutory defence are:
1.The transfer was in the ordinary
course of business.
2.The recipient acted in good faith.
3.The recipient gave market
value consideration or at
least market value.
The creditor must be able to prove all
three arms of the defence otherwise
the entire defence fails. The transfer
is also not voidable if it was made
pursuant to a maintenance agreement
under the Family Law Act, or was made
under a part IX debt agreement.
WHAT IS GOOD FAITH
AND THE ORDINARY
COURSE OF BUSINESS?
WHAT SHOULD CREDITORS
DO IF A TRUSTEE CLAIMS A
PREFERENTIAL PAYMENT?
The creditor must not have acted in any
manner that would give the impression
that they were not acting in good faith
or under normal trading conditions.
Actions that may repute good faith are
the issuing of proceedings or statutory
notices to the debtor, ceasing supply etc.
They must not have forced the payment
to be made by way of threat or action.
On a simplistic basis they
should make sure that:
WHAT IS MARKET VALUE
CONSIDERATION?
(d)The trustee shows that
they received an advantage
over other creditors.
Usually the easiest component to prove
is that the creditor gave market value
consideration. If the creditor is a trade
creditor, the initial supply of goods or
services that created the debt would
provide the market value consideration.
A loan creditor can rely upon the initial
loan to the bankrupt. The creditor
will only have to show that they have
given something of similar value in
consideration for receiving the payment.
WHEN WILL THE DEFENCES
NOT BE AVAILABLE?
The creditor cannot rely on the defences
when they knew or had reason to
suspect that the bankrupt was insolvent
and that the transaction would give
them a preference over other creditors.
PREFERENCES IN BANKRUPTCY
1
(a)The transaction was done within
the relevant time period;
(b)They are not a secured creditor;
(c)They are (or were) a creditor when
the payment was made and that
the payment was not a cash on
delivery (COD) type transaction;
The following points are more
detailed and complex to determine:
(a)Whether the creditor gave extra
credit to the debtor after the
payment in question was received.
It is possible that the claim may
be reduced or eliminated by the
amount of extra credit granted.
This is commonly known as the
‘running account defence’;
(b)That the trustee can show
insolvency at the time of or before
the payment was received;
(c)Whether the creditor has a
realistic chance of convincing
a Judge that all three of the
statutory defences are available.
WHAT CAN CREDITORS DO IF
THEY HAVE TO REFUND MONEY
TO A TRUSTEE?
Creditors refunding preferences may
lodge a proof of debt for the amount
refunded. They may also have some
rights under any guarantees given by
other parties that support that debt.
HOW LONG DOES THE TRUSTEE
HAVE TO MAKE A CLAIM?
Claims have to be commenced within
six years after the commencement
of the bankruptcy. It is not sufficient
for the trustee to only have made a
formal demand within that period,
they must issue legal proceedings
within that time period as well.
37
1
VOIDING SUPERANNUATION CONTRIBUTIONS
VOIDING SUPERANNUATION CONTRIBUTIONS
INTRODUCTION
Trustees of bankrupt estates investigate pre-bankruptcy transfers or transactions when they believe the transaction
improperly dissipated or removed assets that would otherwise have come under the trustee’s control and therefore
are available to creditors. The Bankruptcy Act will sometimes permit these transactions to be voided and require the
other party to return an asset or make a payment to the trustee. Sometimes contributions made by or on behalf of the
bankrupt (pre-bankruptcy) to superannuation funds fall into this category.
To void such a transaction, the
trustee must show that:
REASONS FOR AVOIDING
THESE TRANSACTIONS
1.A transaction was entered into;
One of a trustee’s functions is to
ensure that all of the bankrupt’s
assets are available for distribution
to their creditors. Part of that role
is to discover whether the bankrupt
entered into a transaction before they
became bankrupt that reduced the
amount of assets that are available for
distribution. The trustee will want to
recover these assets. The provisions
set out in this guide give the trustee
the power to recover monies paid
to eligible superannuation plans in
the period before the bankruptcy.
2.They can identify the other
party to the transaction.
3.The transaction occurred within
a specific time period, or while
the debtor was insolvent.
4.The transaction was either
undervalue or had the
required purpose.
5.It does not involve
protected property.
This guide deals with contributions
made pre-bankruptcy that
have all of these factors.
Some debtors, realising that they
are about to be made bankrupt,
want to protect some of their assets
from their creditors. Some debtors
hide, move or transfer these assets
to a third party to hold during the
period of bankruptcy. Sometimes
debtors pay the money into their
superannuation plan as superannuation
is generally an exempt asset.
These provisions are meant to deter
debtors from moving assets out of their
own hands into their superannuation
plan at the expense of their creditors,
and allow a trustee to recover the money
from the fund when the payments
fall under the relevant conditions.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
VOIDING PAYMENTS
TO ELIGIBLE
SUPERANNUATION PLANS
CONTRIBUTIONS BY
THE BANKRUPT
Various sections of the Bankruptcy Act
are designed to void transactions or
transfers of property in order to provide
a fair distribution of a bankrupt’s assets
to their creditors. One well known
section is section 121 ‘transfers to defeat
creditors’ which is designed to void
transfers where the intention of that
transfer is to remove the property from
the grasp of the trustee or creditors.
Subdivision B of Division 3 of Part
VI of the Bankruptcy Act is aimed at
voiding transfers of property to eligible
superannuation plans where the
intention of the transfer was to defeat
creditors. The main provisions are
very similar to section 121, but these
provisions have been tailored specifically
with application to superannuation
plans. This was necessary as the
Bankruptcy Act generally excludes
monies in superannuation plans
from being divisible property.
Transfers made by a debtor are void if
they occurred after 28 July 2006 and:
• T hey are made to eligible
superannuation plans of the bankrupt;
• The property would have formed
part of the property available to
creditors in a bankrupt estate if
the transfer had not been made;
• The main purpose of the transaction
was to keep that asset from falling
into the trustee’s hands and
being available to creditors.
PERSONAL INSOLVENCY
1
Most people will initially think of
payments of money as transfers, but
any property being transferred can
be subject to these provisions. The
section also goes one step further to
include any transaction that creates
new property. This is usually in the
form of securities or equitable/legal
interests over assets still owned by
the debtor. That is, creating a charge in
favour of the superannuation plan may
be deemed to be a transfer of property.
7.For the purposes of this section:
(a) transfer of property includes
a payment of money; and
(b) a person who does something
that results in another person
becoming the owner of property
that did not previously exist, is
taken to have transferred the
property to the other person; and
(c) the market value of property
transferred is at market value
at the time of the transfer.
The trustee of the estate will examine
payments to superannuation plans
and any other assets created and will
assess whether the payment falls
within the above criteria. Most of the
criteria are factual. The difficult part
of the examination is determining the
intention of the debtor at the time of
the transfer. How that intention may be
determined or deemed is set out below.
CONTRIBUTIONS BY A
THIRD PARTY
Transfers to superannuation plans
made by third parties on behalf of the
debtor may also be caught under these
provisions. Third parties may have
assets that belong to the debtor or
owe money to the debtor. Paying that
money into a superannuation plan on
the instruction of the debtor will be
a transaction that can be examined.
These are referred to as a ‘schemes’
in the Act. Again the intention of the
transfer must be to defeat creditors.
Transfers made by third
parties are void if:
•
•
•
•
T hey are made to eligible
superannuation plans
of the bankrupt;
The property would have formed
part of the property available to
creditors in a bankrupt estate
(usually as a debt due) if the
transfer had not been made;
The transfer occurred under
a scheme to which the debtor
was a party to - effectively if it
was done under the debtor’s
direct or implied instructions;
The main purpose of the transaction
was to keep that asset from
falling into the trustee’s hands
and being available to creditors
BANKRUPTCY ACT 1966
- SECTION 128C
Transfers that are void
(1) If:
(a) a person (the transferor)
transfers property to another
person, (the transferee); and
(b) the transfer is by way of a
contribution to an eligible
superannuation plan for the benefit
of a person who later becomes a
bankrupt (the beneficiary); and
(c) the transferor did so under
a scheme to which the
beneficiary was a party; and
(d) the property would probably have
become part of the beneficiary’s
estate or would probably have been
available to creditors if the property
had not been transferred; and
(e) the beneficiary’s main purpose in
entering into the scheme was:
(i) to prevent the transferred property
from becoming divisible among
the beneficiary’s creditors; or
(ii) to hinder or delay the process
of making property available
for division among the
beneficiary’s creditors; and
(f) the transfer occurred on
or after 28 July 2006;
the transfer is void against the trustee
in the beneficiary’s bankruptcy.
(2) For the purposes of paragraph (1)(b),
disregard a benefit that is payable in
the event of the death of a person.
VOIDING SUPERANNUATION CONTRIBUTIONS
BANKRUPTCY ACT 1966 - SECTION 128B
Superannuation contributions made
to defeat creditors--contributor is a
person who later becomes a bankrupt
Transfers that are void
(1) A transfer of property by a
person who later becomes a
bankrupt (the transferor) to
another person (the transferee)
is void against the trustee in the
transferor’s bankruptcy if:
(a) the transfer is made by way
of a contribution to an eligible
superannuation plan; and
(b) the property would probably have
become part of the transferor’s
estate or would probably have been
available to creditors if the property
had not been transferred; and
(c) the transferor’s main purpose
in making the transfer was:
(i) to prevent the transferred property
from becoming divisible among
the transferor’s creditors; or
(ii) to hinder or delay the process
of making property available
for division among the
transferor’s creditors; and
(d) the transfer occurs on or
after 28 July 2006.
As with transfers made by the debtor,
transfers of any property or newly
created property by the transaction
may be caught by these provisions. The
major difference is the exclusion under
subsection 2. of ‘benefits’ payable in
the event of the death of a person.
9.For the purposes of this section:
(a) transfer of property includes
a payment of money; and
(b) a person who does something
that results in another person
becoming the owner of property
that did not previously exist is
taken to have transferred the
property to the other person; and
(c) the market value of property
transferred is its market value
at the time of the transfer.
39
VOIDING SUPERANNUATION CONTRIBUTIONS
1
INTENTION
BANKRUPTCY ACT 1966 - SECTION 128B
One of the main purposes of the
transaction must be to protect the
asset from creditors - to defeat the
creditor’s interest in the property. This
intention only needs to be one of the
main purposes of the transaction, not
the only purpose. This is a subjective
aspect which is usually inferred from the
circumstances of the transaction, the
financial position of the debtor at that
time and the result of the transaction.
Showing the transferor’s main
purpose in making a transfer
This intention can be deemed by the
actual or impending insolvency of the
debtor - but only if it can be shown that
the debtor was or was about to become
bankrupt at the time of the transaction.
If the debtor was solvent at the time
and remained solvent for some time
after the transaction with no indication
of an impending bankruptcy, it will
be difficult to connect the eventual
insolvency to the transaction.
It is common that transactions with
this intention are undertaken when
a debtor has a pending legal action
against them and it appears likely or
inevitable that judgment will be brought
down against them Alternatively it
could be that a loan or other agreement
has been breached and will lead to
a demand that they will not be able
to meet. In these circumstances,
showing or deeming that the intention
existed may be quite easy. Most
bankrupts who undertake transactions
to protect assets usually only do so
close to the time of bankruptcy.
(2)The transferor’s main purpose
in making the transfer is taken
to be the purpose described
in paragraph (1)(c) if it can
reasonably be inferred from all the
circumstances that, at the time of
the transfer, the transferor was, or
was about to become, insolvent.
(3) In determining whether the
transferor’s main purpose in
making the transfer was the
purpose described in paragraph
(1)(c), regard must be had to:
(a) whether, during any period ending
before the transfer, the transferor
had established a pattern of making
contributions to one or more
eligible superannuation plans; and
(b) if so, whether the transfer, when
considered in the light of that
pattern, is out of character.
(4) Subsections (2) and (3) do not
limit the ways of establishing
the transferor’s main purpose
in making a transfer.
The trustee will also examine the
debtor’s historical pattern of making
contributions to eligible superannuation
funds. If the payment is one of a
series of very similar payments over
a long period, there could be an
argument that the required intention
did not exist. If the payment is a once
off large payment, especially if it is
significantly larger than any previous
payments, it can probably be safely
deemed that the intention existed.
THIRD PARTY CONTRIBUTIONS
The same deeming provisions apply to
transfers by third parties. If it can be
shown that the debtor was insolvent
or was about to become insolvent at
the time, the intention can be deemed.
The same indicators may also be
used to determine the intention of the
debtor. There is no requirement for
the other party to know or suspect
the insolvency, as there is no claim
being made against that other party.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
BANKRUPTCY ACT 1966
- SECTION 128C
Showing the beneficiary’s main
purpose in entering into the scheme
(3) The beneficiary’s main purpose
in entering into the scheme is
taken to be the purpose described
in paragraph (1)(e) if it can
reasonably be inferred from all the
circumstances that, at the time
when the beneficiary entered into
the scheme, the beneficiary was, or
was about to become, insolvent.
(4) In determining whether the
beneficiary’s main purpose in
entering into the scheme was the
purpose described in paragraph
(1)(e), regard must be had to:
(a) whether, during any period
ending before the scheme was
entered into, the transferor had
established a pattern of making
contributions to one or more
eligible superannuation plans for
the benefit of the beneficiary; and
(b) if so, whether the transfer, when
considered in the light of that
pattern, is out of character.
(5) For the purposes of paragraph (4)(a),
disregard a benefit that is payable in
the event of the death of a person.
(6) Subsections (3) and (4) do not
limit the ways of establishing
the beneficiary’s main purpose
in entering into a scheme.
INSOLVENCY
The debtor does not have to have been
insolvent at the time of the transaction
for it to be void. As detailed in the last
section, is it the intention of the debtor
that is important through showing
insolvency or pending insolvency is a
key means of showing that intention. If
the trustee is relying on that deeming
provision, the court will require
evidence on insolvency. Solvency and
insolvency is defined in the Act as:
PERSONAL INSOLVENCY
1
(2) A person is “solvent” if, and only
if, the person is able to pay all
the person’s debts, as and when
they become due and payable.
(3) A person who is not
solvent is “insolvent”.
The Act provides for a presumption
of insolvency if the debtor did not
keep proper records of their financial
affairs during that period. That
presumption is rebuttable, i.e. it may
be disproved by positive evidence of
solvency. This may be quite difficult
if there are truly no records on the
financial affairs of the debtor.
BANKRUPTCY ACT 1966 - SECTION 128B
Rebuttable presumption of insolvency
(5) For the purposes of this section,
a rebuttable presumption arises
that the transferor was, or was
about to become, insolvent at
the time of the transfer if it is
established that the transferor:
(a) had not, in respect of that time,
kept such books, accounts
and records as are usual and
proper in relation to the business
carried on by the transferor
and as sufficiently disclose the
transferor’s business transactions
and financial position; or
(b) having kept such books,
accounts and records, has
not preserved them.
The same rebuttable presumption
of insolvency applies to transfers
made by third parties.
BANKRUPTCY ACT 1966
- SECTION 128C
Rebuttable presumption of insolvency
(7) For the purposes of this section,
a rebuttable presumption arises
that the beneficiary was, or
was about to become, insolvent
at the time the beneficiary
entered into the scheme if it is
established that the beneficiary:
(a) had not, in respect of that time,
kept such books, accounts
and records as are usual and
proper in relation to the business
carried on by the beneficiary
and as sufficiently disclose the
beneficiary’s business transactions
and financial position; or
(b) having kept such books,
accounts and records, has
not preserved them.
The rebuttable presumption is
designed to stop bankrupts avoiding
having their past transactions being
overturned simply by destroying or
hiding the records needed to examine
the transaction. The presumption
essentially deems that the debtor is
insolvent at a particular time unless
there are records that prove otherwise.
As a consequence of that deemed
insolvency, the transactions under
examination can be said to have been
done under the required intention.
PROTECTION OF
OTHER PARTIES
The Bankruptcy Act goes to some
lengths to ensure that innocent parties to
void transactions are not prejudiced any
more than necessary. The provisions that
relate to the voiding of superannuation
contributions are no different. The Act
provides protection for two parties.
The first party is the trustee of the
eligible superannuation plan. When a
contribution is received, certain taxes
and other charges are deducted and paid
to the government, fund managers etc.
The trustee of the bankrupt estate will
seek the voiding of the transfer - meaning
the entire amount of the contribution.
Payment of the entire contribution
would leave the superannuation
trustee (the plan) out of pocket to the
extent of the taxes and charges.
The Act provides that when an amount
of the contribution is recovered, the
amount of taxes and charges that apply
to that contribution must be paid to
the superannuation trustee, to ensure
that they are not out of pocket.
BANKRUPTCY ACT 1966
- SECTION 128B
Refund of contributions tax etc.
(5A) If:
(a) as a result of subsection (1),
a transfer made by way of
a contribution to an eligible
superannuation plan is void
against the trustee in the
transferor’s bankruptcy; and
(b) any of the following amounts was
debited from the contribution:
(i) an amount in respect of tax in
respect of the contribution;
(ii) a fee, or a charge, in respect
of the contribution>; and
(c) in compliance with a section 139ZQ
notice that relates to the transfer, the
trustee of the eligible superannuation
plan pays an amount to the trustee
in the transferor’s bankruptcy; and
(d) the amount paid in compliance
with the section 139ZQ notice
exceeds the amount so debited;
the trustee in the transferor’s bankruptcy
must pay to the trustee of the eligible
superannuation plan an amount
equal to the amount so debited.
VOIDING SUPERANNUATION CONTRIBUTIONS
BANKRUPTCY ACT - SECTION 5
Interpretation
The interesting part is that this protection
only applies to payments that are
made to the bankruptcy trustee under
a section 139ZQ notice. It is debatable
whether this protection will apply if
the superannuation trustee voluntarily
returns the contribution to the bankruptcy
trustee, or even if the bankruptcy
trustee obtains an order of the court
for the contribution to be returned.
The other protection is given to innocent
parties that received title to any property
in good faith - meaning without any
knowledge of the intention of the transfer.
Protection of successors in title
6.This section does not affect the
rights of a person who acquired
property from the transferee in
good faith and for at least the
market value of the property.
THIRD PARTY CONTRIBUTIONS
This protection also applies to
superannuation trustees when the
contributions are made by other
parties, but are voided under the
appropriate provisions. The provisions
are the same, only worded as
contributions by other parties.
41
VOIDING SUPERANNUATION CONTRIBUTIONS
1
BANKRUPTCY ACT 1966 - SECTION 128C
Refund of contributions tax etc.
7A.If:
(a) as a result of subsection (1),
a transfer made by way of
a contribution to an eligible
superannuation plan is void
against the trustee in the
beneficiary’s bankruptcy; and
(b) any of the following amounts was
debited from the contribution:
(i) an amount in respect of tax in
respect of the contribution;
(ii) a fee, or a charge, in respect
of the contribution; and
(c) in compliance with a section 139ZQ
notice that relates to the transfer, the
trustee of the eligible superannuation
plan pays an amount to the trustee
in the beneficiary’s bankruptcy; and
(d) the amount paid in compliance
with the section 139ZQ notice
exceeds the amount so debited;
the trustee in the beneficiary’s
bankruptcy must pay to the trustee of
the eligible superannuation plan an
amount equal to the amount so debited.
SUPERANNUATION
ACCOUNT-FREEZING NOTICES
The same protection is also given to
parties that obtain title to property
without knowing the intention of
the transfer when the contribution
is made by another party.
(ii) the trustee of the bankrupt’s
estate has made an application
for a section 139ZU order that
relates to the transaction and the
member’s superannuation interest
Protection of successors in title
8.This section does not affect the
rights of a person who acquired
property from the transferee in
good faith and for at least the
market value of the property.
These notices affect the superannuation
plan trustee’s rights to deal with the
funds in the plan, expect in limited
circumstances. The notices are
designed to ensure that the money is
not paid out or otherwise disbursed
before the issue of the potentially void
transactions in question is resolved.
PROTECTION AGAINST
CRIMINAL AND CIVIL
PROSECUTION
The Bankruptcy Act also protects the
trustee of the eligible superannuation
plan from criminal and civil prosecution
for acts done in good faith. These
acts include complying with a section
139ZQ notice or an order of the court.
42
BANKRUPTCY ACT 1966 - SECTION 128L
Protection of trustee of eligible
superannuation plan
(1) No criminal or civil proceedings lie
against the trustee of an eligible
superannuation plan because
of anything done (or not done)
by the trustee in good faith:
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
The Bankruptcy Act gives bankruptcy
trustees certain powers to assist them in
making these claims. One is the power to
issue superannuation account-freezing
notices. The notices are issued by the
Official Receiver and are only done so
when the bankruptcy trustee has satisfied
the Official Receiver that there are
“reasonable grounds” that a contribution
to a plan is void. The notice comes into
force when it is given to the trustee
of the eligible superannuation plan.
BANKRUPTCY ACT 1966 - SECTION 128E
BANKRUPTCY ACT 1966 - SECTION 128L
Giving of freezing notice
(2) The Official Receiver may, by written
notice (a superannuation account freezing notice) given to the trustee
of the eligible superannuation plan,
direct the trustee of the plan not to:
(a) cash or debit; or
(b) permit the cashing, debiting,
roll-over, transfer or forfeiture of;
the whole or any part of the
superannuation interest except:
(c) for the purposes of complying with
a notice under section 139ZQ; or
(1) This section applies in relation
to a member of an eligible
superannuation plan if the
Official Receiver has reasonable
grounds to believe that:
(d) for the purposes of complying with
an order under section 139ZU; or
(a) a transaction is void against the
trustee of a bankrupt’s estate
under section 128B or 128C; and
(f) for the purposes of giving effect
to a family law payment split; or
(b) either:
(i) the whole or a part of the member’s
superannuation interest is
attributable to the transaction; or
One important point is that the notice is
either directed at the money paid into
the plan from the contribution under
examination (the money will have to be
traced and identified in the plan at the time
of issuing the notice) or the bankruptcy
trustee must make an application for an
order under section 139ZU in relation to
rolled-over superannuation interests.
The money must be identifiable.
These notices do not act in the same way
as a section 139ZQ notice (139ZQ notices
are a quasi-judicial demand). In fact, one
of the remedies that a bankruptcy trustee
has is the ability to apply to the Official
Receiver for notice under section 139ZQ.
(e) for the purposes of charging costs
against, or debiting costs from,
the superannuation interest; or
(g) in accordance with the written
consent of the Official Receiver
given under section 128H; or
(h) for the purposes of complying
with an order under
paragraph 128K(1)(b); or
(i) for the purposes of complying
with an order under
subsection 139ZT(2); or
(j) in such circumstances (if any) as
are specified in the regulations.
Because the notice is given by the Official
Receiver and affects the rights of the
bankrupt on what would be otherwise
exempt (non-divisible) property, the
reasons for issuing the notice and the
circumstances behind the decision to
issue must be set out in the notice. That
is, the notice must set out why the Official
Receiver believes that the contributions
to the superannuation plan are void.
PERSONAL INSOLVENCY
1
(3) The superannuation accountfreezing notice must set out
the facts and circumstances
because of which the Official
Receiver considers that the
Official Receiver has reasonable
grounds to believe that:
(a) the transaction is void against the
trustee of the bankrupt’s estate
under section 128B or 128C; and
(b) either:
(i) the whole or a part of the member’s
superannuation interest is
attributable to the transaction; or
(ii) the trustee of the bankrupt’s
estate has made an application
for a section 139ZU order that
relates to the transaction and the
member’s superannuation interest.
A superannuation account-freezing
notice is not an open ended right for
a bankruptcy trustee. The notice may
be revoked by the Official Receiver
at any time. The notice will be
automatically revoked if the money
is claimed under the section 139ZQ
notice and the notice is revoked or of
the court sets aside the 139ZQ notice.
That is, if the superannuation accountfreezing notice was supporting a
section 139ZQ notice and that notice
is satisfied or is revoked, the freezing
notice is automatically also revoked.
BANKRUPTCY ACT 1966 - SECTION 128F
(3) If:
(a) subparagraph 128E(1)(b)(i) applied
in relation to a superannuation
account-freezing notice given in
relation to a member of an eligible
superannuation plan; and
(b) during the 180-day period after
the superannuation accountfreezing notice comes into force,
a section 139ZQ notice is given in
relation to the transaction referred
to in paragraph 128E(1)(a);
the superannuation accountfreezing notice is revoked:
(c) when the trustee of the
plan complies with the
section 139ZQ notice; or
BANKRUPTCY ACT 1966 - SECTION 128F
Revocation of freezing notice when
section 139ZU order complied with etc.
(5) If:
(e) when the Court sets aside
the section 139ZQ notice.
(a) subparagraph 128E(1)(b)(ii) applied
in relation to a superannuation
account-freezing notice given in
relation to a member of an eligible
superannuation plan; and
The bankruptcy trustee effectively
has 180 days to take or conclude their
action after the freezing notice is
given. If they cannot provide sufficient
evidence within that time to satisfy
the Official Receiver that a section
139ZQ notice should be issued, the
freezing notice will be revoked.
(b) during the 180-day period after
the superannuation accountfreezing notice comes into force,
a section 139ZU order is made
in relation to the transaction
referred to in paragraph 128E(1)
(a) and in relation to the member’s
superannuation interest;
(d) when the section 139ZQ
notice is revoked; or
BANKRUPTCY ACT 1966 - SECTION 128F
Revocation of freezing notice
if no section 139ZQ notice
given after 180 days
(4) If subparagraph 128E(1)(b)(i) applied
in relation to a superannuation
account-freezing notice given
in relation to a member of an
eligible superannuation plan,
the superannuation accountfreezing notice is revoked if:
(a) 180 days pass after the notice
comes into force; and
(b) no section 139ZQ notice has been
given in relation to the transaction
referred to in paragraph 128E(1)(a).
Similarly if the bankruptcy trustee is
seeking relief through a section 139ZU
order, then the court may order;
(i)compliance with that order or
(ii)that order being set aside
or dismissed or
(iii)if the application for the order
is withdrawn within the 180 day
period, the freezing notice will
automatically be revoked.
VOIDING SUPERANNUATION CONTRIBUTIONS
BANKRUPTCY ACT 1966 - SECTION 128E
the superannuation accountfreezing notice is revoked:
(c) when the trustee of the
plan complies with the
section 139ZU order; or
(d) when the section 139ZU order
is set aside on appeal.
Revocation of freezing notice when
application for section 139ZU
order dismissed or withdrawn
(6) If:
(a) subparagraph 128E(1)(b)(ii) applied
in relation to a superannuation
account-freezing notice given in
relation to a member of an eligible
superannuation plan; and
(b) during the 180-day period after
the superannuation accountfreezing notice comes into force:
(i) the Court dismisses an application
for a section 139ZU order in
relation to the transaction
referred to in paragraph 128E(1)
(a) and in relation to the member’s
superannuation interest; or
(ii) an application for a section
139ZU order in relation to the
transaction referred to in paragraph
128E(1)(a) and in relation to
the member’s superannuation
interest is withdrawn;
the superannuation accountfreezing notice is revoked.
The notice is also revoked if no
order under section 139ZU is made
within the 180 day period.
43
VOIDING SUPERANNUATION CONTRIBUTIONS
1
BANKRUPTCY ACT 1966 - SECTION 128F
SECTION 139ZU ORDERS
Revocation of freezing notice if no
section 139ZU order made after 180 days
The provisions that allow bankruptcy
trustees to recover money paid into
eligible superannuation plans also
contemplates the transfer of money (the
roll-over of superannuation interests)
between more than one plan or between
one or more people. It allows the tracing
of the void money into a second plan.
Section 139ZU allows the court to make
an order directing a payment of money
from the second plan to the bankruptcy
trustee, but there are limitations.
(7) If subparagraph 128E(1)(b)(ii) applied
in relation to a superannuation
account-freezing notice given
in relation to a member of an
eligible superannuation plan,
the superannuation accountfreezing notice is revoked if:
(a) 180 days pass after the notice
comes into force; and
(b) no section 139ZU order has been
made in relation to the transaction
referred to in paragraph 128E(1)
(a) and in relation to the member’s
superannuation interest.
The trustee is bound by a 180 day
period, but that period may be
extended on application to the court.
BANKRUPTCY ACT 1966 - SECTION 128F
Extension of 180 day period
(8) The Court may, on application by the
Official Receiver, extend, or further
extend, the 180 day period referred
to in subsection (5), (6) or (7).
(9) The Official Receiver may make an
application under subsection (8):
(a) if the Official Trustee is the trustee
of the bankrupt’s estate--on the
initiative of the Official Receiver; or
(b) if a registered trustee is the
trustee of the bankrupt’s
estate--on application by
the registered trustee.
The first limitation is that the contribution
to the first plan must be void under the
provisions set out above. This is the
void transaction. But if the money has
been transferred (rolled over) to another
plan, there may not be sufficient funds
left in that first plan to satisfy a claim.
If there is sufficient money still in the
first plan to pay the claim, this provision
will not be necessary. But there may
be a shortfall. The money, or part of
it, would now be in a second plan.
The shortfall contemplated in the
section is the shortfall between the
money remaining in the first plan and
the amount of the bankruptcy trustee’s
claim. Only the amount of the shortfall
may be claimed from the second
plan. Essentially the trustee can keep
tracing the money into the new plan
and effect a recovery of the shortfall.
BANKRUPTCY ACT 1966
- SECTION 139ZU
Order relating to rolled-over
superannuation interests etc.
(1)If, on application by the trustee
of a bankrupt’s estate, the
Court is satisfied that:
(a) a transaction is void against the
trustee of the bankrupt’s estate
under section 128B or 128C; and
(b) the transaction was by way
of a contribution to an eligible
superannuation plan (the first
plan)for the benefit of a person
(the beneficiary) who may or
may not be the bankrupt; and
(c) the beneficiary’s withdrawal benefit
in relation to the first plan falls short
of the amount of the money, or the
value of the property, received as
a result of the transaction; and
(d) the beneficiary has a
superannuation interest in another
eligible superannuation plan; and
(e) the superannuation interest referred
to in paragraph (d) is attributable,
in whole or in part, to the roll over
or transfer, after the transaction
referred to in paragraph (a)
happened, of the whole or a part of
the beneficiary’s superannuation
interest in the first plan;
the Court may, by order, direct the trustee
of the other eligible superannuation plan
to pay to the trustee of the bankrupt’s
estate a specified amount not exceeding
whichever is the lesser of the following:
(f) the amount of the shortfall
referred to in paragraph (c);
(g) the beneficiary’s withdrawal
benefit in relation to the other
eligible superannuation plan.
44
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
PERSONAL INSOLVENCY
1
PART X PERSONAL INSOLVENCY AGREEMENTS
PART X PERSONAL INSOLVENCY AGREEMENTS
WHAT IS PART X OF THE BANKRUPTCY ACT?
Part X (part 10) is a part of the Bankruptcy Act that allows a debtor to enter into an arrangement with their creditors to
satisfy their debts without being made bankrupt. This type of proposed arrangement to creditors is called a personal
insolvency agreement (PIA).
WHY CHOOSE A PART X
AGREEMENT?
WHAT IS A PERSONAL
INSOLVENCY AGREEMENT?
A debtor will usually use a personal
insolvency agreement to:
It is the formal agreement between a
debtor and their creditors that sets out
how the debtor will satisfy their debts. It
is in the form of a deed and is executed
by the debtor and their trustee once
creditors have agreed to the proposal.
(i)Get relief from their debts;
(ii)Ensure a fair distribution of
their assets to creditors;
(iii)Provide a higher dividend than
would be payable in bankruptcy;
(iv)Maintain their source of income; and
(v)Avoid the restrictions of bankruptcy.
HOW IS THE PROCESS
STARTED?
A debtor must choose a controlling
trustee (a solicitor or a registered
trustee in bankruptcy) and provide
them with three documents:
1An authority under Section 188
giving the controlling trustee
control over their assets and
requiring them to call a meeting of
creditors to consider the proposal.
2.A statement of affairs detailing
all assets, liabilities and other
personal information.
3.A draft personal insolvency
agreement detailing the terms of the
proposal to be made to creditors.
The controlling trustee will sign a
consent to act and will forward the
documentation to ITSA (Insolvency
& Trustee Service Australia)
for registration on the official
record. ITSA will then allocate
the estate an ‘estate number’.
The proposal can contain almost any
lawful term and conditions. Usually it
will provide for the repayment of monies
over time and sometimes the sale of
some assets. It will also usually contain
a moratorium from creditor’s claims for
the term of the agreement, and payment
of a sum which is less than the full
amount in full satisfaction of claims.
HOW IS THE PROPOSAL
ACCEPTED?
The controlling trustee must hold a
meeting of creditors within 25 business
days after the appointment. The
creditors attending this meeting will
decide whether to accept the proposal
or not. There must be a majority in
both the number of the creditors and
more than 75% in value in favour of
the proposal for it to be accepted.
This is called a special resolution.
If the proposal is not accepted by
the required majority, the creditors
may resolve that the debtor become
bankrupt, but cannot actually bankrupt
the debtor at that meeting. Creditors
may also resolve that the debtor
be released from the control of the
controlling trustee, allowing creditors
to commence recovery action or
bankruptcy proceedings against them.
IS SIGNING A SECTION 188
AUTHORITY AN ACT OF
BANKRUPTCY?
Yes. In the course of the Part X process
a debtor will commit a number of acts
of bankruptcy, including signing the
section 188 authority, calling a meeting
of their creditors and obtaining a
special resolution by creditors. Any
creditor may use these acts to apply
to the court to have the debtor made
bankrupt if the proposal is not accepted.
HOW ARE CREDITORS
AFFECTED BY THE PERSONAL
INSOLVENCY AGREEMENT?
Secured creditors’ rights under
their securities remain intact. They
may exercise their rights regardless
of the outcome of the meeting and
acceptance of the proposal.
Unsecured creditors with debts that
would be provable in a bankruptcy
exchange their right to enforce their
claims for a right to share in the
proceeds of the personal insolvency
agreement. If accepted by the required
majority, all unsecured creditors will
be bound by the agreement whether
they attended the meeting or not, or
voted in favour of the proposal or not.
HOW DOES THE AGREEMENT
AFFECT THE DEBTOR’S
PROPERTY AND INCOME?
Only property that is included in the
personal insolvency agreement is
affected. Property that is not included
in the agreement is not available to
creditors. The debtor is only required
to contribute part of their income if the
agreement includes terms requiring
them to do so. When applicable, the
debtor will make the same type of
contribution out of their income as
they would if they were bankrupt.
45
1
PART X PERSONAL INSOLVENCY AGREEMENTS
CAN THE TRUSTEE
PAY DIVIDENDS?
Yes. The trustee will make distributions
in accordance with the terms of the
agreement. When dividends are paid will
depend on the duration of the agreement
and when funds become available. If
the duration is expected to be short, the
trustee will usually pay a dividend when
all of the assets have been realised and
all funds collected. If the agreement
extends over a long period, the trustee
may make interim distributions
as money becomes available.
WHEN DOES A
PERSONAL INSOLVENCY
AGREEMENT END?
The agreement ends when the
debtor satisfies the requirements
of the deed in full.
WHAT HAPPENS IF THE
DEBTOR DOES NOT COMPLY
WITH THE TERMS OF THE
AGREEMENT?
WHO ADMINISTERS A
PERSONAL INSOLVENCY
AGREEMENT?
CAN A DEBTOR CONTINUE
TO ACT AS A DIRECTOR OF
A COMPANY?
The proposal for an agreement must
include the appointment of a registered
trustee or the Official Receiver to
administer the agreement. If no one
is nominated, the Official Receiver
will be the trustee. Their powers
and obligations will be set out in the
agreement and in conjunction with the
Bankruptcy Act. Fundamentally they are;
to enforce the terms of the agreement,
sell any assets, collect any monies
and make a distribution to creditors.
No. A debtor cannot act as a director
whilst subject to the terms of a personal
insolvency agreement. This restriction
is lifted when the agreement has ended.
DOES SIGNING A
SECTION 188 AUTHORITY
AFFECT A CREDIT RATING?
GOVERNMENT
REALISATION CHARGE
The administration attracts a
government charge known as ‘Asset
Realisation Charge’. This charge is
payable at the rate of 4.4% of gross
monies received into the estate, less
payments to secured creditors and
trade on costs. It is a priority payment
to any dividend payable to creditors.
Yes, the fact that the debtor has
signed a section 188 Authority will
be recorded by credit agencies. But
this may be more favourable than
outstanding writs, defaults and a
bankruptcy on the debtor’s file.
If the terms of the agreement are not
satisfied, then the agreement will be
considered to be in default. Usually
a default notice will be issued to
the debtor within a few days and if
not rectified, the agreement will be
breached and may be terminated by:
(i)The provisions of the
agreement, automatically
terminating the agreement;
(ii)The trustee terminating
the agreement with the
consent of creditors;
(iii)The passing of a special resolution
at a meeting of creditors, or
(iv)An application to the court to
terminate the agreement and
possibly bankrupt the debtor.
‘By The Way...’
Many, if not most bankrupts wish they had
decided to move to bankruptcy earlier than they
did! Often the delay only puts off the inevitable
and adds to the stre ss of the financial burden.
Better to face up to the inevitable and get the
fresh start promoted by the Bankruptcy Act.
46
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
PERSONAL INSOLVENCY
1
SECTION 73 PROPOSALS
SECTION 73 PROPOSALS
WHAT IS A SECTION 73 PROPOSAL?
During the course of a bankruptcy, a bankrupt may be in a position to make a proposal to their creditors to satisfy their
debts and consequently end their bankruptcy. Section 73 of the Bankruptcy Act provides a bankrupt with the mechanism
to make that proposal.
If accepted, the creditors would expect to receive a larger distribution than they would receive under the continued
bankruptcy and the bankrupt would be released from the restrictions associated with bankruptcy.
HOW DO BANKRUPTS MAKE
A PROPOSAL?
COMPOSITION OR
ARRANGEMENT?
HOW IS THE
PROPOSAL ACCEPTED?
The bankrupt will be required send
a written proposal to their trustee
requesting that a meeting of creditors
be called to consider the proposal.
This written request will set out the
particulars of their proposal. The
trustee will conduct any necessary
investigations into the benefits of the
proposal, issue a report and call a
meeting for the creditors to vote on the
acceptance or rejection of the proposal.
A proposal under section 73 can be
structured as either as a ‘composition’
or a ‘scheme of arrangement’.
The proposal is put to creditors at
a meeting called under the same
provisions as bankruptcy meetings. The
creditors attending that meeting vote
on the proposal. The proposal must
be accepted by a special resolution,
which is both a majority in number of
the creditors present and voting, and
at least 75% of the dollar value of the
creditor’s debts present and voting.
The bankrupt will usually be required to
pay the trustee to undertake this process
as there is no requirement for the funds
in the estate to be used for this purpose.
If the proposal is accepted, the
bankruptcy will be annulled at the
time of the acceptance. If the proposal
is not accepted, the bankruptcy will
continue as if the proposal had never
been put forward to creditors.
A composition is an agreement to pay
money to the trustee. The composition
can be for any amount and can be
paid over any period of time.
A scheme of arrangement can contain
almost any lawful provision. It can
contain provisions for the payment
of monies, the sale of certain assets,
payments from third parties, or any
combination of these factors.
INVESTIGATING AND
REPORTING
Before holding the meeting of creditors
the trustee will conduct investigations
and issue a report to creditors detailing
the terms of the proposal. The report
will compare the likely returns from
the proposal to that of the continuation
of the bankruptcy. This report will not
be issued until the investigations are
complete and the trustee has properly
examined all relevant matters.
DELAYS IN CALLING A
MEETING OF CREDITORS
A trustee is entitled to decline to call
a meeting if the proposal does not
adequately provide for the payment
of the bankruptcy trustee’s approved
fees and outlays. The trustee also
may require that the bankrupt pay an
amount (a surety) to cover the costs
and fees of the trustee for investigating
the proposal, calling and holding the
meeting. This money will have to be
paid before the proposal is examined.
If the proposal is accepted, the
bankruptcy is consequently annulled.
The now ‘ex-bankrupt’ will be bound
by the terms of the agreement.
The agreement is binding on all
creditors, whether they attend
or vote at the meeting or not.
If the proposal is defeated, the
bankruptcy continues as normal.
WHO ADMINISTERS A
SECTION 73 PROPOSAL?
The proposal must include a provision for
a trustee to administer the agreement.
It is usual that the trustees of the
bankrupt estate will be the trustees of
the section 73 agreement, but a new
trustee may be appointed under the
agreement. The trustee’s role is to
ensure that the ex-bankrupt complies
with the terms of the agreement and
enforce the provisions as necessary.
They will also pay dividends to creditors.
47
1
SECTION 73 PROPOSALS
WHAT ABOUT THE ACTS OF
THE PREVIOUS BANKRUPTCY
TRUSTEE?
Section 74 of the Bankruptcy
Act provides that the acts of the
bankruptcy trustee during the period of
bankruptcy remain valid. Without this
provision, the bankrupt or any party
to a bankrupt’s transactions would
be able to challenge its validity.
CAN THE TRUSTEE PAY
DIVIDENDS?
Yes. The trustee of the agreement will
make distributions under the terms of
the agreement. If the agreement does
not stipulate these provisions, they
will make distributions when practical
given the amount of money on hand and
when the agreement is likely to end.
WHEN DOES A SECTION 73
AGREEMENT END?
The agreement ends when
the debtor fully satisfies the
requirements of the agreement.
WHAT IF THE
DEBTOR DEFAULTS?
GOVERNMENT REALISATION
CHARGE
Section 76B provides enforcement
provisions. These will be used if the
debtor does not fulfil the terms of the
agreement. All of the powers that are
available to a trustee under Part X of
the Act (in the enforcement of personal
insolvency agreements) are available
to a trustee of a composition or scheme
of arrangement. These include:
The administration of section 73
proposals attracts a government charge
known as ‘asset realisation charge’.
Currently this charge is payable at the
rate of 4.4% of gross monies received
into the estate, less payments to secured
creditors and trade on costs. It is payable
in priority to any dividend to creditors.
(i)Terminating the agreement
automatically through the
terms of the agreement;
(ii)Terminating the agreement with
the consent of creditors;
(iii)Terminating the agreement by
resolution of creditors; or
(iv) Terminating the agreement
by court order.
Any application to the court to terminate
the agreement can also include an
application to bankrupt the debtor
and initiate a new bankruptcy.
‘By The Way...’
Did you know that de ceased estates
can
become bankrupt? When the liabilities
of
de ceased estate are greater than
of the assets of the estate Part XI
the
the value
of the
Bankruptcy Act provides for the est
ate to be
made bankrupt by a creditor or the
exe
cutor.
Executors of insolvent de ceased est
ates
48
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
should probably make more use of Part
XI.
PERSONAL INSOLVENCY
1
REVESTING OF PROPERTY
REVESTING OF PROPERTY
WHAT IS REVESTING OF PROPERTY?
Vesting of property to a bankruptcy trustee occurs at the commencement of a bankruptcy. Revesting is the transfer of
any property that had previously vested in a bankruptcy trustee back to the bankrupt after they have been discharged
from bankruptcy. These provisions (under section 129AA of the Bankruptcy Act) are meant to encourage trustees to
realise assets as expediently as possible.
Provisions dealing with the revesting of
property were added to the Bankruptcy
Act in 2003. Prior to then all property
of a bankrupt vested in the trustee
and there was no mechanism for that
property to revest. Trustees could hold
property for 20 years and no one else
could deal with that property unless the
trustee disclaimed their interest in it. The
revesting provisions changed this position.
WHICH ESTATES DO THE
PROVISIONS AFFECT?
All bankruptcy estates are subject to
the revesting provisions, regardless if
the bankrupt was discharged before the
implementation of the provisions in 2003.
WHAT TYPE OF PROPERTY
IS AFFECTED?
Subject to the exemptions below, all
non-cash property is able to be revested.
Cash held at the time of bankruptcy or
cash acquired during the bankruptcy is
excluded from the revesting provisions
as it does not need to be realised.
WHAT ARE THE
OTHER EXEMPTIONS?
Two major classes of property will never
revest back in the bankrupt. They are:
1.Property that was not disclosed in the
bankrupt’s statement of affairs, and
2.Property acquired after bankruptcy
(after-acquired property) which
was not notified to the trustee
within 14 days of the bankrupt’s
knowledge of its acquisition.
These exemptions are designed to stop
bankrupts from not disclosing property
to their trustees and having that property
revest to them. The bankrupt must
ensure that the trustee is aware of the
property for it to be eligible for revesting.
Section 127 gives the trustee 20 years to
realise property both non-disclosed and
excluded from the revesting provisions.
WHEN DOES AN
ASSET REVEST?
Property will revest to the bankrupt six
years after discharge. When that six year
period commences will depend upon
when the bankrupt estate commences.
There are two possibilities for property
disclosed in the statement of affairs:
1.For bankrupts who are discharged
after 5 May 2003, the revesting
date is six years after the date of
discharge regardless of whether
the bankruptcy commenced
before or after 5 May 2003.
2.For bankrupts who were discharged
before 5 May 2003, the revesting
date was six years after 5 May
2003. That is, the revesting date
was 5 May 2009 unless the
revesting date was extended.
The earliest date that any property
in any estate could have revested
to any bankrupt was 5 May 2009,
but generally it will be six years
after the date of discharge.
WHEN DOES “AFTER-ACQUIRED
PROPERTY” REVEST?
The acquisition of after-acquired property
must be notified to the trustee within
14 days of the bankrupt’s knowledge
of the acquisition. The revesting date
for this property is six years after
either the date of discharge or the date
of notification, whichever is later.
For example:
1.Where the acquisition and
notification occurs before the
discharge of the bankrupt, the
revesting date is six years after the
date of discharge, or if discharge
occurred before 5 May 2003, the
revesting date of 5 May 2009 applies;
2.Where the acquisition occurs before
the discharge of the bankrupt but
notification is given after discharge,
the revesting date is six years
after the date of the notification,
or if notification occurred before
5 May 2003, the revesting date
of 5 May 2009 applies. These
cases will be fairly limited as the
discharge date must fall within
14 day after the acquisition of the
property and before notification.
Again, the earliest date that afteracquired property revested to any
bankrupt was 5 May 2009.
WHAT HAPPENS WHEN AN
OBJECTION TO DISCHARGE
IS LODGED?
The six year period before revesting
starts with the discharge of the bankrupt,
which may be up to five years after
the normal date for discharge. That
is, revesting may not occur until 14
years after the start of a bankruptcy
where an objection has extended the
bankruptcy period for five years.
If the objection is removed and the
bankrupt is immediately discharged
under statutory discharge provisions,
the six year period commences on
the date that the objection is removed
(the actual date of discharge), not the
date that would have been the date of
discharge if there had been no objection.
CAN THE TRUSTEE DELAY THE
REVESTING OF PROPERTY?
Yes. The trustee may issue an extension
notice to the bankrupt during the
unexpired six year period and extend the
revesting period for a further three years
after the ‘current’ revesting period or
three years after a specified event. The
Bankruptcy Act does not have any limit to
the number of extension that the trustee
can make. Therefore in theory, the trustee
can keep extending the period indefinitely.
BANKRUPTCY ACT 1966
- SECTION 129AA
(4) If the trustee, before the current
revesting time, gives the bankrupt
a written notice (an extension
notice) stating that a later revesting
time applies to particular property,
then that later time becomes the
revesting time for that property.
(5) There is no limit on the number of
extension notices that the trustee
may give (either generally or in
relation to particular property.
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1
DISCHARGE & ANNULMENT
DISCHARGE & ANNULMENT
INTRODUCTION
A bankruptcy usually ends with the bankrupt being discharged. Without an objection to discharge being lodged, this
will occur three years after the filing of the bankrupt’s statement of affairs with ITSA (Insolvency and Trustee Service
Australia). Discharge releases the bankrupt from the bankruptcy, however the bankrupt estate (property, assets etc) will
continue as long as required for all matters to be satisfactorily concluded. This means the discharged bankrupt still has
an obligation to cooperate with the trustee.
The alternative to a discharge from
bankruptcy is to have the bankruptcy
annulled. Discharge and annulment
do not have the same legal result.
A discharge is the conclusion to the
legal status of bankruptcy against the
person, while the bankrupt estate will
continue until the trustee has completed
their duties. An annulment cancels
the bankruptcy entirely – as if it never
happened, therefore removing the
bankrupt from bankruptcy and ending
the bankrupt estate completely.
The Bankruptcy Act provides for an
extension to a bankruptcy to a total of
five or eight years in circumstances
where the bankrupt has not cooperated
with the trustee or when an offence
has been committed. If an objection
is lodged against the discharge of a
bankrupt, the automatic discharge
date will not occur until the end of
the granted extended period.
DISCHARGE FROM
BANKRUPTCY
TIMING OF DISCHARGE
The bankruptcy of a person will
normally end three years after the
statement of affairs is filed with
ITSA. This occurs pursuant to
section 149 of the Bankruptcy Act.
This is the most common way that a
person ceases to be a bankrupt.
If the bankruptcy is started by way
of a debtor’s petition, the statement
of affairs would have been filed with
the debtor’s petition at the time of
bankruptcy. Without an objection to
discharge being lodged, the bankruptcy
will end three years after the date of
the filing of both of these documents.
If the bankruptcy is started by way of
an order of the court (a sequestration
order), the statement of affairs
would not have been filed at the time
of the bankruptcy. The bankrupt
will have to submit a completed
a statement of affairs to ITSA. In
this scenario the bankrupt will be
discharged three years after ITSA
receives the statement of affairs.
It usual for someone who has been made
bankrupt by the court to be bankrupt for
longer than a three year period, if only
by a few weeks or so, due to the need
for the bankrupt to complete and submit
the statement to ITSA. Consequently
the longer the bankrupt takes to send
their statement of affairs to ITSA, the
longer that the period of bankruptcy
will continue. If the statement of
affairs is never filed, the bankruptcy
will continue until the bankrupt dies.
It is important to note that the
bankruptcy does not start with the
filing of the statement of affairs, it
commences when the order of the court
is made or at the time that the debtor’s
petition is accepted. It is only the end
date that is dependent upon the date
of the filing of the statement of affairs.
Some people believe that they do not
become bankrupt until their statement
of affairs is filed. This is not correct.
The discharge is purely an automatic
process of law. The trustee and/or
ITSA need not do anything to grant the
bankrupt a discharge, whether at the
end of the standard three year period
or at the end of a period extended
due to an objection to discharge.
Usually the trustee will write to the
bankrupt and confirm they have been
discharged and ask for information to
conduct a final income assessment.
BANKRUPTCY ACT 1966 - SECTION 149
Automatic discharge
(1) Subject to section 149A, a bankrupt
is, by force of this subsection,
discharged from bankruptcy in
accordance with this section.
(4) If the bankrupt becomes a bankrupt
after the commencement of section
27 of the Bankruptcy Amendment
Act 1991 , the bankrupt is discharged
at the end of the period of 3 years
from the date on which the bankrupt
filed his or her statement of affairs.
This section also allows for the discharge
of bankrupts who were bankrupted
before this section was amended in
1991 but had not lodged statements of
affairs before the amendment. Discharge
without the lodgement of a statement
of affairs is no longer possible.
BANKRUPT TO CONTINUE
TO ASSIST TRUSTEE
AFTER DISCHARGE
Even though the bankruptcy ends, there
is still an obligation on the discharged
bankrupt to assist the trustee as the
conduct of the bankrupt estate may still
be continuing. Though it is common for
the estate to be completed within the
three year period, sometimes it is not
completed in that period. The estate will
not end until the trustee has completed
all of the necessary tasks. The
discharged bankrupt must provide all
reasonable assistance to the trustee, and
there are penalties if they do not do so.
BANKRUPTCY ACT 1966 - SECTION 152
Discharged bankrupt to give assistance.
A discharged bankrupt must, even
though discharged, give such
assistance as the trustee reasonably
requires in the realisation and
distribution of such of his or her
property as is vested in the trustee.
Penalty: Imprisonment for 6 months.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
PERSONAL INSOLVENCY
1
RELEASE FROM DEBTS
One of the effects of discharge is
to release the bankrupt from their
provable debts. These are debts
that were outstanding at the date of
bankruptcy (not ones incurred after
the bankruptcy commenced) and that
can be proved in the bankrupt estate
for dividends. But there are some
debts that are not provable in the
estate and will not be released and
some that are only partially released.
It is important to note that the debts
are only released at the point when the
bankrupt is discharged from bankruptcy.
This allows some creditors - like the
Australian Taxation Office to offset
monies payable to the bankrupt after
bankruptcy against debts payable by
the bankrupt before bankruptcy.
As the debts are released upon the
discharge of the bankruptcy, if the
bankruptcy ends before discharge via
annulment the debts will therefore
still exist and will have to be satisfied
in some other manner. These debts
are usually satisfied in the process of
getting the annulment e.g. payment in
full or through a section 73 agreement.
BANKRUPTCY ACT 1966 - SECTION 153
Effect of discharge
(1)Subject to this section, where a
bankrupt is discharged from a
bankruptcy, the discharge operates
to release him or her from all
debts (including secured debts)
provable in the bankruptcy, whether
or not, in the case of a secured
debt, the secured creditor has
surrendered his or her security for
the benefit of creditors generally.
Section 82 sets out what debts are
provable in the estate and will be
released upon discharge. Most of the
time all of a bankrupt’s debts will fall into
this category and be discharged, but
there are some significant exceptions.
BANKRUPTCY ACT 1966 - SECTION 82
Debts provable in bankruptcy
(1)Subject to this Division, all debts
and liabilities, present or future,
certain or contingent, to which a
bankrupt was subject at the date
of the bankruptcy, or to which he
or she may become subject before
his or her discharge by reason
of an obligation incurred before
the date of the bankruptcy, are
provable in his or her bankruptcy.
Debts that are provable are released
and debts that are not provable are
not. Furthermore there are some debts
that are provable in the estate for
the amount owing, but by statute are
still not released in full at discharge.
These generally relate to amounts
under a maintenance agreement or
maintenance order given before the
date of the bankruptcy. The amount
that was outstanding under the
agreement at the time of the bankruptcy
is released, but amounts that become
payable after bankruptcy commenced
are not released by discharge.
BANKRUPTCY ACT 1966 - SECTION 82
Debts provable in bankruptcy
(1A)Without limiting subsection (1),
debts referred to in that subsection
include a debt consisting of all
or part of a sum that became
payable by the bankrupt under
a maintenance agreement or
maintenance order before the
date of the bankruptcy.
Section 82 also lists debts that are not
provable and will not be released on
discharge. This is confirmed by section
153 which provides that non-provable
debts are not released upon discharge.
These sections include a liability to
pay an income contribution to the
trustee, debts incurred by way of a
fraud and liabilities under maintenance
agreements or orders. Section 82
sets out these debts in detail.
BANKRUPTCY ACT 1966 - SECTION 153
DISCHARGE & ANNULMENT
In most cases the discharged bankrupt
will be cooperative with the trustee
throughout the period of the bankruptcy
and continues to be cooperative. An
objection to discharge is generally
lodged if they have not been cooperative.
Few bankruptcies continue longer
than statutory three years.
Effect of discharge
(2) The discharge of a bankrupt
from a bankruptcy does not:
(a) release the bankrupt from:
(i) a debt on a recognizance; or
(ii) a debt with which the bankrupt
is chargeable at the suit of the
sheriff or other public officer on
a bail bond entered into for the
appearance of a person prosecuted
for an offense against a law of the
Commonwealth or of a State or
Territory of the Commonwealth;
(aa) release the bankrupt from liability
to pay an amount to the trustee
under subsection 139ZG(1);
(b) release the bankrupt from a debt
incurred by means of fraud or
a fraudulent breach of trust to
which he or she was a party or
a debt of which he or she has
obtained forbearance by fraud; or
(c) subject to any order of the Court
made under subsection (2A),
release the bankrupt from any
liability under a maintenance
agreement or maintenance order;
Note: A discharged bankrupt remains
liable under any pecuniary penalty order
because such liabilities are not provable
in bankruptcy, see subsection 82(3A).
A bankrupt should be aware
that these types of debts will
survive the bankruptcy process
and will need to be paid.
RIGHTS OF SECURED
CREDITORS
The debt owed to a secured creditor is
not released against the asset secured
- only against the bankrupt. Securities
in place at the time the bankruptcy
commences can be enforced against
the secured asset at any time, even
after the discharge of the bankrupt.
Generally secured assets would have
been sold in the three years prior to
the date of discharge, but in some
cases they may not have been.
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1
DISCHARGE & ANNULMENT
These debts (effectively the shortfalls
after the sale of the asset secured) are
released from the bankrupt personally
at discharge. The secured creditor
cannot recover any shortfall suffered
after selling the asset secured from the
discharged bankrupt. Most securities
are exercised and the asset sold before
the discharge of the bankrupt and any
shortfall would have been proved in
the estate, but this is not always the
case. Sometimes these assets take
longer than three years to realise. If
that is the case, the secured creditor
will not recover any shortfall.
If the secured asset has not been sold
before discharge, one important factor
is that any amount proved (an estimated
shortfall) in the estate is released at
discharge. That debt therefore no longer
exists and cannot be claimed against
the secured asset. This will affect
creditors who make large estimates
of shortfalls by underestimating
the value of the secured asset.
The key point to note is that the secured
part of their debt will survive a discharge
from bankruptcy and the deficiency will
be released. Secured creditors should
read the other material available on our
website and throughout this guide on
proving for shortfalls and seek specialist
advice before making estimates.
OBLIGATIONS OF BUSINESS
PARTNERS, GUARANTORS &
JOINT DEBT HOLDERS
A number of provisions deal with
secured debts and proving for shortfalls
in the estate. These provisions should be
examined before relying on them and are
detailed in another guide topic. They are
only covered in summary in this section.
The discharge of a bankrupt does
not release a business partner of the
bankrupt from a partnership debt.
These debts would normally hold a
joint liability under the Partnership Act.
These provisions also applies to people
that have entered into contracts or
arrangements with the bankrupt, have
guaranteed a debt of the bankrupt or
simply have joint debts with the bankrupt.
These people will still be liable for such
debts, or the part of the debts that
they would have been liable for if the
bankrupt had not become a bankrupt.
BANKRUPTCY ACT 1966 - SECTION 153
BANKRUPTCY ACT 1966 - SECTION 153
Effect of discharge
(3) The discharge of a bankrupt from
a bankruptcy does not affect the
right of a secured creditor, or any
person claiming through or under
him or her, to realise or otherwise
deal with his or her security:
(a) if the secured creditor has not
proved in the bankruptcy for any
part of the secured debt - for the
purpose of obtaining payment
of the secured debt; or
(b) if the secured creditor has proved
in the bankruptcy for part of the
secured debt - for the purpose of
obtaining payment of the part of the
secured debt for which he or she
has not proved in the bankruptcy;
52
her security, but not otherwise, the
secured debt, or the part of the secured
debt, as the case may be, shall be
deemed not to have been released
by the discharge of the bankrupt.
and, for the purposes of enabling
the secured creditor or a person
claiming through or under him or
her so to realise or deal with his or
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
Effect of discharge
(4) The discharge of a bankrupt
from a bankruptcy does not
release from any liability a person
who, at the date on which the
bankrupt became a bankrupt:
(a) was a partner or a co-trustee
with the bankrupt or was jointly
bound or had made a joint
contract with the bankrupt; or
(b) was surety or in the nature of
a surety for the bankrupt.
These joint debts are only released
against the discharged bankrupt. They are
not released against the other parties to
the debt. Creditors can pursue the other
parties to a debt, even after the discharge
of the bankrupt, and their subsequent
release from the debt from the bankrupt.
ANNULMENT OF BANKRUPTCY
An annulment is a complete undoing
of the bankruptcy. It is as if the
bankruptcy never happened, apart
from the fact that it will still appear on
the public record (the NPII) and credit
reference databases for some time.
For an annulment to occur the bankrupt
needs to take one of three actions. Two
of these actions require satisfaction of
the bankrupt’s debts, at least in part; the
third requires an order of the court.
1.ANNULMENT ON PAYMENT
OF DEBTS IN FULL
A bankruptcy will be annulled if the
estate has sufficient monies to pay all
of the debts and the costs of the estate
in full. If that occurs, the bankrupt is no
longer insolvent and there is no need for
the bankrupt estate or a release from
debts. This usually happens when the
bankrupt receives monies from a third
party (usually a relative) or when the
bankrupt’s assets are sold or refinanced.
BANKRUPTCY ACT 1966 - SECTION 153A
Annulment on payment of debts
(1) If the trustee is satisfied that all
the bankrupt’s debts have been
paid in full, the bankruptcy is
annulled, by force of this subsection,
on the date on which the last
such payment was made.
The debts include all those that have been
proved in the bankruptcy, but also interest
accrued after the commencement
of the bankruptcy on those debts
that have interest components. The
costs, charges and expenses of the
administration of the bankrupt estate
includes the remuneration and expenses
of the trustee, the asset realisation
charge (ARC) payable on the amount
necessary to meet all of the debts
and costs and if the bankruptcy was
commenced by a creditor’s application
- the costs of the petitioning creditor.
BANKRUPTCY ACT 1966 - SECTION 153A
Annulment on payment of debts
(1A) In determining whether there
has been full payment of a debt
that bears interest, the interest
must be reckoned up to and
including the date on which the
debt (including interest) is paid.
PERSONAL INSOLVENCY
Bankrupts must understand that the
extra costs incurred in the estate
may be significant and that these
debts must also be paid in full in order
to obtain this type of annulment.
2. SECTION 73 PROPOSAL
A section 73 proposal is made under
section 73 of the Bankruptcy Act,
hence the name. That section provides
a mechanism for bankrupts to propose
an alternative to their creditors - a
formal arrangement - to the continued
bankruptcy. The process is similar
to proposing a part X agreement to
creditors, but the difference being is
that it is initiated during the bankruptcy.
The process involves the creditors
accepting and receiving a benefit
which would not have been available
to them in the bankruptcy, in exchange
for agreeing to annul the bankruptcy.
The annulment occurs on the
acceptance of the proposal and the
new agreement takes effect. Section
73 proposals are discussed in detail in
a separate topic in this publication.
Debts of the now ex-bankrupt are not
released by operation of the law as there
is no discharge. The debts are released
only by agreement with the creditors and
this usually occurs through a term of the
agreement. Therefore the agreement
must be completed before any unpaid
debts are released. Non-provable
debts are also deal with in section 75.
BANKRUPTCY ACT 1966 - SECTION 75
Effect of composition or
scheme of arrangement
(2) The acceptance of a composition or
scheme of arrangement does not:
(a) except with the consent of the
creditor to whom the debt is
due, release the bankrupt from
a provable debt that would
not be released by his or her
discharge from bankruptcy; or
(b) release any other person from
any liability from which he or
she would not be released by
the discharge of the bankrupt.
3. ANNULMENT BY THE COURT
BANKRUPTCY ACT 1966 - SECTION 154
The bankrupt can apply to the court
for an order annulling (effectively
overturning) the bankruptcy. The
court will only entertain an application
if they believe that the bankruptcy
should never have commenced in the
first place. The application may be
brought against a sequestration order
(a creditor’s petition) or the acceptance
of a debtors petition by ITSA.
Effect of annulment
There can be numerous reasons
under which a bankrupt may apply
for an annulment and is not detailed
here; rather the rights of bankrupts
to be able to do so are outlined.
BANKRUPTCY ACT 1966 - SECTION 153B
Annulment by Court
(1) If the Court is satisfied that a
sequestration order ought not to
have been made or, in the case
of a debtor’s petition, that the
petition ought not to have been
presented or ought not to have
been accepted by the Official
Receiver, the Court may make an
order annulling the bankruptcy.
(2) In the case of a debtor’s petition,
the order may be made whether
or not the bankrupt was insolvent
when the petition was presented.
(1) If the bankruptcy of a person (in this
section called the former bankrupt)
is annulled under this Division:
(a)all sales and dispositions of property
and payments duly made, and all
acts done, by the trustee or any
person acting under the authority
of the trustee or the Court before
the annulment are taken to have
been validly made or done; and
(b) the trustee may apply the property
of the former bankrupt still vested
in the trustee in payment of the
costs, charges and expenses of the
administration of the bankruptcy,
including the remuneration and
expenses of the trustee; and
(c) subject to subsections (3), (6)
and (7), the remainder (if any)
of the property of the former
bankrupt still vested in the
trustee reverts to the bankrupt.
If the assets in the estate are not
sufficient to meet the costs and
expenses of the trustee, they can collect
the balance from the annulled bankrupt.
That is in extreme circumstances,
the trustee may be able to bankrupt
the ex-bankrupt for costs incurred
before the bankruptcy was annulled.
PROTECTION OF THE TRUSTEE
BANKRUPTCY ACT 1966 - SECTION 154
Once the proved debts and costs have
been paid under option 1; or a formal
section 73 proposal is accepted by
creditors under option 2; or the court
orders an annulment under option 3;
the bankrupt is annulled and the trustee
will forward the appropriate notices
to ITSA for updating on the NPII.
Effect of annulment
But what about any actions taken by
the trustee before the annulment?
The Bankruptcy Act protects the acts
performed by the trustee while they
are trustee of the bankrupt estate. It
does not undo transactions or sales
entered into during this period. It
also allows the trustee to use assets
in the annulled estate to pay any
costs and remuneration that remain
unpaid at the time of the annulment.
DISCHARGE & ANNULMENT
1
(2) If the property of the former
bankrupt referred to in paragraph (1)
(b) is insufficient to meet the costs,
charges and expenses referred to
in that paragraph, the amount of
the deficiency is a debt due by the
former bankrupt to the trustee and
is recoverable by the trustee by
action against the former bankrupt
in a court of competent jurisdiction.
53
Insolvency impacts many
stakeholders differently,
some of which are explored
in this section.
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
2
RELATED TOPICS
PROOFS OF DEBT AND SECURED CREDITORS 56
PUBLIC EXAMINATIONS
57
Meetings of Creditors
59
Dividends62
CGT And Insolvency
69
GST AND INSOLVENCY
72
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2
PROOFS OF DEBT AND SECURED CREDITORS
PROOFS OF DEBT AND SECURED CREDITORS
WHAT IS A SECURED CREDITOR?
A secured creditor is one that has been granted a security or charge over assets to protect their outstanding debt. This
guide deals with how and when a secured creditor may lodge a proof of debt in relation to their debt, or the unsecured
part of their debt.
WHAT ASSETS FALL
UNDER THE SECURITY?
Almost any asset may be secured under
an appropriate charge, but only assets
that are actually secured under a charge
will be available to the secured creditor.
The security will identify the assets
that it covers or will detail the classes of
assets that are subject to the security.
WHAT CAN THE SECURED
CREDITOR DO WITH THE
ASSETS SECURED?
If the credit agreement with the secured
creditor has been breached, they may
take control of the assets covered by
their charge. They are not entitled to
take control over assets not covered
by their charge. In the majority of
cases, the secured creditor will sell the
assets and keep sufficient monies to
satisfy their secured debts and costs
of enforcing their charge. They will
refund the balance to the debtor.
HOW IS THE SECURED CREDITOR
AFFECTED IF THE DEBTOR IS IN
LIQUIDATION OR BANKRUPTCY?
The rights of a secured creditor are
usually not affected by the appointment
of a liquidator or bankruptcy trustee.
But there are certain times when a
security will be unenforceable.
WHAT IF THERE IS A SHORTFALL
AFTER THE SALE OF THE
ASSETS?
Any shortfall after the sale of secured
assets under the charge can be quantified
and proved in the estate. The secured
creditor may simply lodge a proof of
debt for the shortfall in the appropriate
insolvent estate and participate in
any dividend with other creditors.
DO THE ASSETS HAVE TO BE
SOLD BEFORE THEY CAN LODGE
A PROOF OF DEBT?
No. The secured creditor may lodge a
proof of debt for the estimated shortfall by
estimating the value of the unsold secured
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
assets and deducting that amount from
the amount owed. A secured creditor will
then be entitled to vote on and receive
dividends for that estimated shortfall,
but in exercising their rights without
due consideration of the consequences
it may backfire unfavourably.
ESTIMATING A SHORTFALL
To be able to lodge a proof of debt for an
estimated shortfall, the secured creditor
will have to estimate the value of the
assets held under the security. The
estimated value is declared on the proof
of debt form along with the full amount of
the debt and the calculated shortfall. The
secured creditor may consider creating a
safety net to ensure maximum return by
using a low estimate of the value of the
remaining assets - making the shortfall
as large as possible, so the shortfall and
any dividend paid on that shortfall is high.
But there are consequences for placing
a deliberately low estimate on secured
assets and these are outlined below.
REDEMPTION OF SECURITY
Both liquidators and bankruptcy trustees
have a right to redeem securities by
paying out the estimated value as
stated on the secured creditor’s proof
of debt. So when a secured creditor
undervalues the secured assets to make
their shortfall large, the liquidator or
trustee may pay them that low amount
and release the asset from the charge.
Secured creditors will lose their right
to the true value of the asset and will
only be able to prove for the shortfall.
ENFORCED SALE OF ASSET
If the liquidator or trustee does not or
cannot redeem the security by paying out
the amount estimated, they may require
that the asset be placed for sale. The sale
will realise the asset and quantify any
shortfall owing to the secured creditor.
AMENDING THE ESTIMATE
BY REQUEST
The value of the asset secured may
alter over time for many reasons. If this
occurs, the secured creditor may apply
to the liquidator, trustee or the court to
amend the estimated value of the asset
on their proof of debt. If the liquidator,
trustee or court is satisfied that the
original value was made under a genuine
error or the value has changed since
the estimate was made, they may allow
the creditor to amend the estimate.
AMENDING THE
ESTIMATE BY SALE
If the asset is sold after the estimate is
made, the amount realised in the sale
is automatically exchanged for the
estimate made by the secured creditor.
HOW DOES AN
AMENDMENT OF THE VALUE
AFFECT DIVIDENDS PAID
BEFORE THE AMENDMENT?
A change in the estimated value may
happen after a dividend has been paid to
the secured creditor. Increasing the value
of an estimate (lowering the shortfall
and therefore reducing the amount of the
proof of debt) will mean that the secured
creditor would have received too much
in their dividend and they will have to pay
back the excess amount. Lowering the
value of an estimate (raising the shortfall
and the amount of the proof of debt) will
entitle the creditor to a further (catch up)
dividend - if further dividends are paid.
DEEMED SURRENDERING
OF SECURITY
A secured creditor may choose
to intentionally surrender their
security and prove for the whole
amount of their debt in the estate.
Secured creditors may also be deemed
to have surrendered their security if
they vote for the whole of their debt at
a meeting of creditors (the exception
being voluntary administration meetings).
If the security is deemed surrendered,
they lose all rights to the assets
secured under the charge. Secured
creditors should exercise care when
voting at meetings they only vote for
their shortfall (estimated or actual).
RELATED TOPICS
2
PUBLIC EXAMINATIONS
PUBLIC EXAMINATIONS
WHAT IS A PUBLIC EXAMINATION?
A public examination is the common name given to the process of an external administrator formally examining various
parties in an insolvent estate. Both the Corporations Act and the Bankruptcy Act have provisions to conduct such
examinations. Though the name is not technically correct in all circumstances, we shall use that description for all types
of examinations in under both Acts.
WHY HOLD A PUBLIC
EXAMINATION?
There are a number of reasons, including:
(i)Getting information from
uncooperative persons;
(ii)Obtaining documentation that
would otherwise be unavailable;
(iii)Obtaining detailed explanations
on difficult matters in the estate;
(iv)Uncovering offences;
(v)Determining whether there is
a claim that may be made;
(vi)Obtaining details of defences
to claims without having to
commence proceedings; and
(vii)Generally gathering information.
WHO MAY APPLY FOR
AN EXAMINATION?
An ‘eligible applicant’ may apply for an
examination under the Corporations Act.
An eligible applicant is the liquidator or
provisional liquidator; an administrator
or administrator of a deed of company
arrangement; the Australian Securities
and Investment Commission (ASIC)
or someone authorised by ASIC. ASIC
will authorise people to make the
application in limited circumstances.
Under the Bankruptcy Act, the Official
Receiver may commence the public
examination of parties under section
77C of the Act. This is usually done at
the request of the trustee controlling the
estate. The trustee, the Official Receiver
or any creditor of the bankrupt may apply
to the Federal Court for an examination
under section 81 of the Bankruptcy Act.
WHERE ARE
EXAMINATIONS HELD?
Under the Bankruptcy Act:
(a)Section 81 examination are held
in the Federal Court or Federal
magistrates Court; and
(b)Section 77C examinations are held
without all of the formality but still
under oath at the offices of the
Official Receiver or any other place
designated by the Official Receiver.
These two sections give some diversity
under the Bankruptcy Act that is not
available under the Corporations Act.
WHO MAY BE EXAMINED?
Orders for the examination of directors
and officers of the company in theory
must be given by the court. Section
596B gives the court discretion to
order the examination of other people.
Anyone can be summoned to appear
to answer questions and to produce
records to the court in an examination
under the Corporations Act. To make the
order the court will have to be shown
that the person has information on the
‘examinable affairs’ of the company.
The Bankruptcy Act provides for an
examination of the bankrupt and other
‘examinable persons’. Examinable
persons include directors of associated
entities, spouses of the bankrupt, people
in possession of records, creditors
of the bankrupt and debtors of the
bankrupt, accountants and solicitors.
Essentially, anyone who has advised
or dealt with the bankrupt, or may
have information on dealings with
the bankrupt, may be examined.
WHAT ARE
“EXAMINABLE AFFAIRS”?
Section 9 of the Corporations Act
defines examinable affairs as follows;
in relation to a company means:
(a) the promotion, formation,
management, administration or
winding up of the corporation; or
(b) any other affairs of the corporation
(including anything that is included
in the corporation’s affairs
because of section 53); or
(c) t he business affairs of a connected
entity of the corporation, in so
far as they are, or appear to be,
relevant to the corporation or to
anything that is included in the
corporation’s examinable affairs
because of paragraph (a) or (b).
The same requirement exists in the
Bankruptcy Act - only people that
have information on the examinable
affairs may be examined.
Examinable affairs in relation
to a bankrupt means:
(a)The person’s dealings, transactions,
property and affairs; and
(b)The financial affairs of an
associated entity of the person,
in so far as they are, or appear to
be, relevant to the person or to any
of his or her conduct, dealings,
transactions, property and affairs.
Orders for examinations under the
Corporations Act are generally given in
the Supreme or Federal Courts, but the
conduct of the examinations is usually
passed to the local magistrates or similar
courts. Even though they are usually held
in the lower court, the same rules and
enforcement powers apply as they would
for a Supreme or Federal Court matter.
57
PUBLIC EXAMINATIONS
2
WHO ASKS THE QUESTIONS
AT THE EXAMINATION?
CAN A WITNESS
BE REPRESENTED?
It is common for a solicitor or barrister
to be engaged to ask the questions,
though a liquidator or trustee may
do so. Barristers are often used
due to their knowledge of the court
process and their skill in examining
and cross examining witnesses.
Witnesses have the right to be
represented by counsel or a solicitor,
but their role is very limited compared
to their role in a trial, as there is no case
to prove or defend. The Bankruptcy Act
allows for counsel or a solicitor to reexamine the witness. They will generally
only ask questions to clarify a point, and
they cannot call witnesses themselves.
Interestingly under the Bankruptcy
Act any creditor may attend the
examination and put questions to
any witness regardless of whether
they applied for the examination or
not. They simply need to attend and
request the right to ask questions.
WHAT TYPE OF QUESTIONS
MAY BE ASKED?
Appropriate questions are limited to
the examinable affairs of the insolvent
company or bankrupt. This definition
has been stretched over the years to
include the witness’s ability to meet
the claims that may be made against
them and issues like the professional
indemnity insurance cover that may
cover those claims. At times, the
person asking the questions may
have to convince the court that the
question should be allowed.
WHAT IF THE WITNESS LIES?
All public examinations are conducted
under oath or affirmation. That is, if
the witness does not tell the truth,
they may be charged with perjury.
CAN THE WITNESS REFUSE
TO ANSWER QUESTIONS?
No. There is no right to refuse to answer
questions. However, if the witness
formally objects to any question as it may
be incriminating to them, the answer
may not be used against them in a later
offence prosecution. But, they still must
answer the question fully and truthfully.
In reality, this policy of objections does
not usually concern the liquidator or
trustee, as they do not initiate offence
prosecutions and therefore will not be
using the information for that purpose.
The information obtained is generally
used by the liquidator or trustee for
commercial recovery actions.
WHAT IF SOMEONE DOES NOT
ATTEND THE EXAMINATION
WHEN ORDERED TO DO SO?
Examinations under the Corporations
Act and section 81 of the Bankruptcy
Act are held in court and the witnesses
are formally summonsed to the court.
Non-appearance under a summons from
the court may, and often does, lead to a
warrant for the arrest of the witness.
The courts will generally give the
witness the opportunity to comply
with the summons before issuing
that warrant. Usually the registrar of
the court will attempt to locate the
witness and instruct them to attend
before the court within a short time
thereafter. It is not unusual for an
arrest warrant to be then issued if
they do not attend at this stage.
CAN ANYONE WATCH
THE EXAMINATION?
Anyone can attend and watch
public examinations that are held
in open court. Rarely the court will
order a closed session. The general
public cannot however take part
in the examination process.
‘By T he Way...’
r the Bankruptcy
There is no obligation unde
ll his or he r employe r
Act for a bankrupt to te
nkrupt.
that they have be come ba
58
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
RELATED TOPICS
2
Meetings of Creditors
Meetings of Creditors
WHY ARE MEETINGS OF CREDITORS CALLED?
Meetings are held so that creditors can find out the status of an estate, ask questions, give suggestions about how the
file is handled and approve the appointee’s remuneration. Both the Corporations Act and the Bankruptcy Act have rules
about how and when meetings are to be called and run, as well as how issues are to be decided at the meeting.
WHAT ARE THE BASIC STEPS?
The meeting process is similar to
most other organised meetings of
clubs, associations or corporations.
There is a logical order to the
events surrounding the meeting and
certain things must be done before,
during and after the meeting.
1.Creditors should receive adequate
notice of the time and place of the
meeting. They should be given
a report that contains all of the
information needed for them to make
informed decisions on the matters
to be discussed and resolutions
being put to that meeting.
2. The meeting should be run
according to a formal agenda set
out in the notice of meeting.
3. The meeting will be chaired either
by a person nominated by those
attending (in the case of meetings
under the Bankruptcy Act), or
subject to limited exceptions the
person required by the provisions
of the Corporations Act.
4. Resolutions will be decided
by a vote of those creditors
attending the meeting and who
are entitled to vote. Resolutions
are determined in favour of
the prescribed majority. What
constitutes a majority may differ
according to the type of meeting
or the type of resolution sought.
5. The participants may adjourn
the meeting by putting forward a
motion to that effect and having the
resolution ‘passed’ by the creditors.
6. All matters during a meeting
will be recorded as minutes of
the meeting and distributed
within the prescribed time.
WHO MAY CALL A MEETING
OF CREDITORS?
External administrators must call
meetings of creditors. Creditors
cannot organise meetings that have
legal effect in the estate, but there is
nothing prohibiting creditors and other
interested parties having informal
meetings themselves. External
administrators may call meetings at any
time, but must call meetings when either:
(a)the Act dictates they do so; or
(b) when the prescribed number of
creditors request that they do so.
For example section 64 of the
Bankruptcy Act provides that a meeting
must be called when requested by at
least 25% of the value of creditors, or
when creditors have lodged sufficient
security for the costs of the meeting.
WHAT PERIOD OF NOTICE
MUST BE GIVEN?
The period of notice is prescribed by
the Acts and varies dependent upon
the type of meeting being called. It is
usually about 14 days but some meetings,
particularly voluntary administration
meetings, have shorter notice periods.
WHAT SHOULD BE SENT TO
CREDITORS WHEN A MEETING
IS CALLED?
The following should be sent to creditors:
(i)A notice calling the meeting
and setting out the agenda
for the meeting;
(ii)Particulars of any resolutions
that are to be dealt with at that
meeting and sufficient information
in order to make an informed
decision on the resolution;
Creditors should obtain any missing
documents from the external
administrator who is calling the meeting.
WILL A REPORT TO CREDITORS
BE ISSUED?
A report from the external administrator
will generally accompany the notice of
meeting and the other documents. The
report should outline the current position
of the estate and the investigations
undertaken contain details about
further examinations and the potential
actions to be taken by the external
administrator, all relevant information
and recommendations on any decisions
that are to be made at the meeting.
DO CREDITORS NEED TO
ATTEND MEETINGS?
No. Creditors do not lose any rights
to prove for dividends if they do not
attend meetings. However they will
not have a say in the conduct of the
estate nor on any resolution. It is
prudent to encourage creditors to at
least attend by proxy to ensure that
a quorum is formed and the meeting
can proceed without adjournment.
WHERE AND WHEN ARE
MEETINGS HELD?
Meetings should be held at a time
and place convenient to the majority
of the creditors. A convenient time is
generally during business hours on
a normal business day. A convenient
place is generally in the town or city
centre where a majority in number of
the creditors conduct their business.
(iii)A proof of debt form; and
(iv)A proxy form and possibly
a voting slip.
59
2
Meetings of Creditors
WHO RUNS THE MEETING?
A chairperson or a president runs the
meeting. The chairperson for most
meetings under the Corporations
Act is the convener of the meeting
(the insolvency practitioner) or
someone delegated to that role.
A president must be chosen to control
meetings called under the Bankruptcy
Act. The president can be anyone at
that meeting, but is usually the trustee
or some person associated with the
trustee as they have experience in
conducting meetings. Some of the
actions taken and decisions made
may not be enforceable if they are
not handled in the technically correct
manner, so it is beneficial to have an
experienced person control the meeting.
IS THERE AN AGENDA?
Yes. Only the matters on the agenda
can be decided upon at the meeting.
The agenda is generally set by the
relevant Act but may be amended.
The agenda should be set out in the
notice of meeting issued to creditors.
WHEN SHOULD CREDITORS
LODGE THEIR CLAIMS?
Creditors should lodge a claim prior to or
at the meeting otherwise creditors will
not be able to vote at the meeting, as only
creditors who have proved that they are
owed creditors in the estate may vote.
Creditors should follow these rules:
(i)Attach copies of invoices or other
documentation detailing the amount
owed and how it arose, or indicate
that these records are available
if required to prove the debt;
(ii)Submit a claim before or at the
commencement of a meeting
and have it noted on the
register of attendance; and
(iii)If the claim is not admitted for any
reason, make sure an objection
is noted in the minutes.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
DO CREDITORS HAVE TO LODGE
A PROOF OF DEBT TO BE ABLE
TO VOTE?
For meetings under the Bankruptcy
Act: No - section 64D provides that
a written statement setting out
the claim is advisable, but it is not
necessary for a proof of debt to
be lodged. For meetings under the
Corporations Act, not necessarily.
Unless required, a statement of
claim appears to be sufficient.
To eliminate all doubt, it is recommended
that creditors lodge proofs of debt.
HOW CAN CREDITORS
ATTEND THE MEETING?
Creditors will have to decide how to
attend a meeting. They may attend
in person, by proxy or attorney, or
by participating over the phone.
The distinction between a proxy
and an attorney is that a proxy will
usually only vote in accordance with
instructions and directions given to
him. An attorney can decide how to
vote, and can respond to changing
circumstances during a meeting.
WHO CAN BE A PROXY?
HOW IS A PROOF OF
DEBT ADMITTED?
Almost anyone over the age
of 18 can act as a proxy.
The external administrator will decide
whether or not to admit the proofs of
debt or claim for voting by examining
the material attached to the proof of
debt and comparing it to the information
contained in the company records.
The decision is final at the meeting
but can be challenged in the court
after the meeting has been held. If
such a challenge is successful, the
outcome of the meeting itself may be
challenged if the use or otherwise
of that claim would have definitely
changed the outcome of the meeting.
HOW ARE RESOLUTIONS
DECIDED?
If a claim is rejected, the creditor
should have a statement read into the
minutes disagreeing with the decision
and reserving the right to challenge the
decision in an appropriate forum. At this
point however, there is nothing more
that the creditor can do to influence
the meeting, but they may remain in
attendance until the meeting is closed.
CAN CREDITORS
ASK QUESTIONS?
Yes. A meeting of creditors is a
forum for creditors to ask questions.
Questions should always be addressed
to the chairperson or president,
who in turn will put the question
directly to the relevant person if
required. Alternatively, creditors may
ask questions of the chairperson,
trustee or liquidator directly.
A vote of creditors is called a resolution
- the creditors resolving a proposal
or motion. Most resolutions are
ordinary resolutions, and are resolved
or defeated by a simple majority.
The Corporations Act provides for a
resolution to be firstly taken ‘on the
voices’, which is a simple majority in
number. If the resolution cannot be
decided on the voices or a creditor
requests one, the resolution will be
taken by a poll. Similar voting provisions
occur in the Bankruptcy Act, but the
Bankruptcy Act requires a simple
majority in value - not number.
The required majority for an ordinary
resolution by a poll is more than 50%
in number and 50% in value both
voting for the resolution. There are
also provisions for some proposals at
meetings to require a ‘special resolution’,
being more than 50% in number and
75% in value. These resolutions are
usually done in writing on voting slips.
RELATED TOPICS
CAN RESOLUTIONS BE
PASSED WITHOUT A
PHYSICAL MEETING?
The Bankruptcy Act allows single
resolutions to be passed by creditors
without a meeting being called.
This is known as a virtual meeting.
Voting is done through the mail with
creditors indicating their acceptance
or rejection of the motion, or they
can object to the vote being taken in
that format and request a meeting
to be called to decide the matter.
There is no corresponding provision
in the Corporations Act currently.
Though there are no corresponding
virtual meeting provisions in the
Corporations Act, effectively meetings
can be held with only proxies and
special proxies being held in the name
of the chairman, and with no creditor
physically attending the meeting. The
result is one or more resolutions passed
without a ‘physical’ meeting of people.
WHO WILL KEEP THE MINUTES?
CAN MEETINGS
BE ADJOURNED?
Minutes of the meeting called under
the Corporations Act will be lodged
with the Australian Securities &
Investment Commission (ASIC)
within the appropriate time period.
Worrells will also lodge the minutes
on the estate’s file information page
on our website. Meetings under the
Bankruptcy Act are not formally lodged
with Insolvency and Trustee Service
Australia (ITSA), but will also be lodged
on the estate’s file information page.
Yes. Anyone may propose a resolution
for an adjournment of the meeting. At
times the chairperson or president may
adjourn the meeting to better consider
proofs of debt and voting rights. The type
of meeting will determine the maximum
time period allowed for any adjournment.
Meetings of Creditors
2
Minutes are kept by a minutes secretary.
The Corporations Regulations provide
that the chairperson must cause minutes
to be filed and they will determine who
will be the minutes secretary. The
Bankruptcy Act requires creditors to
appoint the minutes secretary. It will
usually be a staff member of the trustee.
‘ By T he W
ay...’
De bts tha
t
are p‘ rovable
’ in
a bankrupt
cy and
d on discha
rge include
taxation
de bts, prov
ided that t
he outstand
ing re turns
are lodged
and asse ss
ed be fore d
ischarge.
Asse ssmen
ts issued a
fte r bankr
uptcy for
pre -bankru
ptcy income
tax de bts
can still
be colle cte
d from a dis
charged ba
nkrupt.
ge t re lease
61
2
Dividends
Dividends
INTRODUCTION
Dividends are the logical end to most insolvency appointments. But they can cause a delay in finalising the estate due to
the need to follow the legal process, adhere to statutory time limits and conduct the examinations necessary to admit or
reject proofs of debt as appropriate. This guide covers those parts of the Corporations Act and the Bankruptcy Act that
relate to the payment of dividends from insolvent estates.
The minimum time periods to pay
dividends are set out in the Acts. If
there are no complications, a corporate
insolvency dividend will take about
one month to distribute and a personal
insolvency dividend will take about two
months to distribute. The difference
is due to a statutory time period
stipulated under the Bankruptcy Act.
The tasks that commonly give rise to
complications and time delays are the
admittance of proofs of debt. These
may defer the dividend for some time,
especially if the rejection of a proof
of debt is appealed in the courts.
Dividends in Detail
The payment of dividends is often
the only real tangible output from
insolvent estates, though often even
this result is not possible. Sometimes
there are simply no assets to realise
and no funds to distribute.
Both the Corporations Act and the
Bankruptcy Act set out the obligation
to pay dividends as quickly as practical.
The Corporations Regulations say:
REGULATION 5.6.67
Declaration and distribution of dividend
(1) The liquidator must, as soon as
practicable, declare and distribute a
dividend among the creditors whose
debts or claims have been admitted.
(2) The liquidator must distribute
as dividend all money in
hand except enough:
(a) to meet the costs of
administration; or
(b) to give effect to the
provisions of the Act.
The Bankruptcy Act obligations
are at section 140.
62
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
BANKRUPTCY ACT 1966 - SECTION 140
Declaration and distribution of dividends
(1) The trustee of the estate of a
bankrupt shall, subject to this
section, with all convenient
speed, declare and distribute
dividends amongst the creditors
who have proved their debts.
(2) Subject to the retention of such sums
as are necessary to meet the costs of
administration or to give effect to the
provisions of this Act, the trustee shall
distribute as dividend all moneys in hand.
In practice the external administrator
will have to withhold sufficient monies
to complete the remaining work
required in the estate. They will also
determine the most appropriate time to
pay dividends given further anticipated
realizations - if any - and the costs of
paying multiple smaller dividends.
The external administrator cannot
just pay out money to anyone in any
manner. Dividends must be declared
in accordance with the steps set out in
the relevant Act and dividends must be
paid to creditors in a certain order under
various priorities as set out in those Acts.
STEPS IN PAYING DIVIDENDS
The process of declaring and paying
dividends under both Acts is very similar.
There are four basic steps that must be
followed to pay a dividend regardless
of which Act applies. These steps are:
1.Calling for proofs of debt - giving
every known creditor the
opportunity to lodge a claim (proof
of debt) in the estate and participate
in the dividend distribution.
2.Admitting proofs of debt
- verifying that the debt is
proper to the satisfaction of
the external administrator.
3.Rejecting proofs of debt where
appropriate - to ensure that
only legitimate creditors of
the estate participate in the
dividend distribution.
4.Paying the dividend distributing the funds.
1. C
ALLING FOR PROOFS
OF DEBT
All creditors must be given the
opportunity to lodge their claim in the
form of a proof of debt. So the first step is
calling for proofs of debt from all known
creditors. A proof of debt is a formal
document used to make a claim in the
estate, which demonstrates that a debt
exists and sets out the particulars of the
debt. Without sufficient proof that the
debt exists, it will not be admitted for the
amount stated, or potentially not at all.
Proofs of debt forms are specific to the
Corporations Act and the Bankruptcy
Act requirements. The correct form
needs to be used in order to participate
in a dividend. The appointee may not
be able to admit claims that are not
sufficiently detailed on the correct
form, which may result in the creditor
being excluded from the dividend.
Creditors can lodge proofs of debt at any
stage in the administration; they do not
need to wait until a dividend is called. In
theory once a creditor has lodged a proof
of debt, they need not lodge another. But
creditors should ensure that their claim
has been lodged and appears in any list
of proof of debts received. If they are
in doubt, they should lodge another.
RELATED TOPICS
2
The appointee must formally notify
all known or potential creditors of
the intended dividend distribution
and request that proofs of debt
be lodged by a certain date.
The approach under the Acts is similar,
but the process is slightly different. The
period that must be given to lodge proofs
of debt under the Corporations Act is “not
less than 21 days”. Under the Bankruptcy
Act it is defined as a ‘reasonable period’.
Usually the 21 day period is used under
the Bankruptcy Act on the basis that,
if it is deemed reasonable under the
Corporations Acts it should therefore be
reasonable under the Bankruptcy Act.
The Corporations Act regulation states:
REGULATION 5.6.65
Liquidator to give notice of
intention to declare a dividend
(2) A notice in accordance with sub
regulation (1) must specify a date,
not less than 21 days after the
date of the notice, on or before
which formal proof, in accordance
with Form 535 or 536, of a debt
or claim must be submitted to
participate in the distribution.
A relevant provision in the
Bankruptcy Act is:
BANKRUPTCY ACT 1966 - SECTION 140
Declaration and distribution of dividends
(3) Before declaring the first dividend,
the trustee must give written
notice of the trustee’s intention
to declare the dividend to anyone
the trustee knows of who claims,
or might claim, to be a creditor but
has not lodged a proof of debt.
(4) The trustee shall, in a notice
published or sent in pursuance of
subsection (3), specify a reasonable
period within which creditors
may lodge their proofs of debts.
It is important to have definite time
periods in which to lodge claims so
that the payment of the dividend is
not delayed or challenged due to the
lodgement of claims as cheques are
being drawn. The cut-off date is final and
the provisions stipulate both creditor’s
and appointee’s rights if a proof of debt
is not lodged within the time period.
Notices to be Issued
The Corporations Act requires
two notices to be issued to notify
creditors of a dividend. These are:
1. An advertisement on ASIC’s
notification page; and
2. A Corporations Form 547 or 548
posted to the creditors that have
not already lodged proofs of debt.
These notices are usually posted to all
creditors regardless of whether they
have lodged a proof of debt or not. This
provides an opportunity to bring all
creditors up to date with the conduct of
the file and allows creditors to amend
their proofs of debt if necessary. These
notices will usually contain a list of
proofs of debt received to date so that
creditors can check whether their proof
of debt has been received. Regulation
5.6.65 of the Corporations Act states:
REGULATION 5.6.65
Liquidator to give notice of
intention to declare a dividend
(1) The liquidator must give notice of
his or her intention to declare a
dividend not more than 2 months
before the intended date:
(a) by publishing a notice in the Gazette
in accordance with Form 546; and
(b) in writing, in accordance with
Form 547 or, for a final dividend,
in accordance with Form 548, to
any person whose debt or claim
has not been admitted and who:
(i) for a winding up by the Court - is
shown as a creditor in the report
on the affairs of the company
under subsection 475 (1) of
the Corporations Act; or
(ii) for a members’ voluntary winding
up - appears in the company’s
records to be a creditor; or
(iii) for a creditors’ voluntary winding
up - is shown as a creditor in the list
of creditors prepared in accordance
with subparagraph 497 (2) (b)
(ii) of the Corporations Act; or
(iv) to the knowledge of the liquidator
claims to be, or might claim to
be, a creditor of the company.
The Bankruptcy Act does not require
any advertising of the dividend, though
it is sometimes done. It only requires
that a notice is sent to all known
creditors who have not lodged proofs
of debt. Again common practice is
to send a notice to all creditors and
provide an update on the estate.
Dividends
Time periods for calling
for proofs of debt
Occasionally a trustee will advertise a
personal insolvency dividend when they
suspect that there may be creditors that
have not been disclosed; particularly
when a statement of affairs has not been
lodged and an application will have to be
made to the court to pay the dividend.
BANKRUPTCY ACT 1966 - SECTION 140
Declaration and distribution of dividends
(3) Before declaring the first dividend,
the trustee must give written
notice of the trustee’s intention
to declare the dividend to anyone
the trustee knows of who claims,
or might claim, to be a creditor but
has not lodged a proof of debt.
Dates for Payment
No dividend may be paid until the
lodgement period for proofs of debt
has expired and all proofs of debt have
been admitted or rejected. That is,
the cheques will not be drawn within
that 21 day or ‘reasonable’ period.
Under the Corporations Act, the time
period for issuing the initial notice
calling for proofs of debt to the intended
date of payment can be no more than
two months. It is the intended date of
payment - the date that the dividend may
be paid without any complications or
delays - that is relevant to this section,
not the actual date of payment. Payment
may actually be made after that date due
to the admittance and rejection process.
REGULATION 5.6.65
Liquidator to give notice of
intention to declare a dividend
(1) The liquidator must give notice of
his or her intention to declare a
dividend not more than 2 months
before the intended date:
63
2
Dividends
If the dividend is postponed past
the intended date, the liquidator
may have to re-advertise the notice
declaring the new intended date.
No time limit has been put into the
Act, so a delay of a few days to admit
proofs of debt would not necessarily
be considered a postponement. If it
was decided that this dividend would
be postponed for a few months, then
advertising would be required.
REGULATION 5.6.69
Postponement of declaration
If the liquidator postpones the
declaration of a dividend past the
date shown for that purpose in the
notice published in the Gazette, the
liquidator must publish a further
notice in the Gazette, in accordance
with Form 546, of the liquidator’s
intention to declare a dividend.
The Bankruptcy Act does not set a
maximum time period after the intended
date of declaring a dividend, but says
that dividends must not be paid before 21
days after the lodgement date for proofs
of debt. Therefore the trustee will have
to wait about 21 days to receive proofs of
debt, and without further complication,
wait another 21 days after that before
they can issue dividend cheques.
NON-LODGEMENT OF
PROOF OF DEBT
There has to be a mechanism to close
the proof of debt register at a certain
time so that the dividend can be paid
without being challenged. Both Acts say
that if creditors do not lodge their proofs
of debt within the specific period, they
will be excluded from that dividend.
If there are sufficient funds to pay a
further dividend at a later date, these
creditors may lodge their proofs of debt
and be paid the original dividend they
missed out on (a catch-up dividend), and
then participate in the next dividend. If
there are not sufficient funds available
to pay a second dividend (a second
dividend is never declared), they will
not receive a dividend at all. Hence
it is imperative for creditors to lodge
their proofs of debt before the expiry
of the initial lodgement period.
The Corporations Act specifically
states that creditors who do not
lodge their proofs of debt in time are
excluded from the current dividend.
REGULATION 5.6.65
Liquidator to give notice of
intention to declare a dividend
BANKRUPTCY ACT 1966 - SECTION 140
(3) Subject to regulation
5.6.68, a person:
Declaration and distribution of dividends
(a) who claims to be a creditor; and
(7) Where the trustee has sent a
notice in pursuance of subsection
(3) or (5) of this section in relation
to the declaration of a dividend,
the trustee shall not declare the
dividend until after the expiration
of 21 days after the expiration of
the period specified in the notice.
(b) who does not submit a formal proof
of a debt or claim on or before the
date specified in the notice given
under subregulation (1); is excluded
from participating in the distribution
to which that notice relates.
64
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
The rights of the creditors to receive
a dividend on any proof of debt lodged
too late to participate in the original
dividend are set out in regulation 5.6.68.
They essentially allow a creditor to
receive a ‘catch up’ dividend before
the next dividend is paid. Of course
if there are insufficient monies and
therefore no more dividends, the
creditor will receive nothing.
REGULATION 5.6.68
Rights of creditor who has not proved
debt before declaration of dividend
(1) If:
(a) a creditor’s debt or claim has
not been admitted before the
declaration of a dividend; and
(b) the debt or claim is admitted;
the creditor is entitled to be
paid dividends that the creditor
has failed to receive, out of any
available money for the time being
in the hands of the liquidator,
before that money is applied to the
payment of a further dividend.
(2) A creditor is not entitled to disturb
the distribution of a dividend
declared before the creditor’s
debt or claim was admitted.
The Bankruptcy Act sets these
provisions out in section 144 and
they are essentially the same as the
provisions in the Corporations Act.
BANKRUPTCY ACT 1966 - SECTION 144
Right of creditor who has not proved debt
before declaration of dividend
A creditor who has not proved his or
her debt before the declaration of a
dividend is entitled to be paid, out of
any available money for the time being
in the hands of the trustee, dividends
that he or she has failed to receive
before that money is applied to the
payment of a future dividend, but he
or she is not entitled to disturb the
distribution of a dividend declared
before he or she proved his or her debt.
2. ADMITTING PROOFS OF DEBT
Before a dividend can be paid on any
proof of debt, it must be admitted. This
is a different process to having a proof
of debt admitted for voting purposes at
a meeting of creditors. It is not always
the case that proofs of debt admitted at
meetings will be admitted for dividends
as the burden of proof is different.
The time available to consider a proof
of debt is also different in both cases,
as some proofs of debt are lodged at
the start of the meeting when there
is no time for appointees to properly
consider the claim. Such reviews may be
necessary for admittance for dividends.
RELATED TOPICS
2
Regulation 5.6.63 of the Corporations
Act deals with the admittance of proofs
of debt for corporate dividends.
REGULATION 5.6.63
Dividend payable only on
admission of a debt or claim
A dividend in the winding up of the
affairs of a company may be paid only
to a creditor whose debt or claim has
been admitted by the liquidator at the
date of the distribution of dividends.
Section 83 is the corresponding
provision in the Bankruptcy Act.
Liquidators have to review proofs of
debt within 14 days after the lodgement
date and make a decision on whether
to admit or reject the claim, or seek
further information. ASIC may grant
an extension to that time period if
required. In cases when hundreds of
proofs of debt are received at one time,
that extension is likely to be needed.
REGULATION 5.6.66
Time allowed for dealing with
formal proof of debt or claim
(1) If the liquidator has given notice
in accordance with subregulation
5.6.65 (1), the liquidator must:
(1) The trustee shall examine each
proof of debt and the grounds of
the debt sought to be proved and,
subject to the power of the Court
to extend the time, shall, not later
than 14 days after the expiration of
the period specified in the notice of
intention to declare a dividend as the
period within which creditors may
lodge their proofs of debt, either:
(b) within such further period
as ASIC allows;
(c) reject it in whole; or
Debt not to be considered
proved until admitted
(c) before the end of that period:
For the purposes of this Act, a creditor
shall be taken not to have proved a debt
until a proof of debt lodged by him or her
in respect of that debt has been admitted.
(ii) reject it; or
The trustee or liquidator will only have
to assess the material attached to the
proof of debt and information in the
available records. Creditors should
ensure that they attach copies of all
appropriate documentation (invoices and
statements) to their proof of debt when
it is initially lodged. They should keep
the originals themselves, in case they
are needed later or the copies are lost.
Admission or rejection of proofs
(a) admit the proof of debt in whole;
in writing:
The bottom line is that creditors must
provide sufficient proof to show that the
claim should be admitted for dividends.
It is not up to the liquidator or trustee
to try to locate sufficient information.
BANKRUPTCY ACT 1966 - SECTION 102
(a) within 14 days after the date
shown in the notice; or
BANKRUPTCY ACT 1966 SECTION 83
The trustee or liquidator will make an
assessment of the material provided
by the creditor and decide on the
correctness or validity and the amount
of the debt. If they believe that all or part
of the debt is not fully proved, they will
seek further clarification and material
from the creditor. If they cannot obtain
that clarification, they may reject
the proof of debt in full or in part.
The Bankruptcy Act also sets a 14 day
time period for the trustee to admit,
reject or otherwise deal with the claim.
(i) admit a formal proof of debt or
claim received by the liquidator; or
(iii) admit part of it and reject part of it; or
(iv) require further evidence
in support of it; and
(d) give notice of the liquidator’s
decision to the creditor who
submitted the proof.
Dividends
The important point to make here is that
the burden of proving the existence and
amount of a claim lies on the creditor
making the claim. The onus is not on
the appointee to disprove a claim.
(b) admit it in part and reject it in part;
(d) require further evidence
in support of it.
In that time period, the trustee
will have three options:
1.To admit the proof of debt, which
can be done if sufficient information
is attached to the proof;
2.To reject the proof of debt, if there
is no doubt that the debt is either
fully or partially not provable; or
3.To request further information.
(4) If the liquidator has admitted a
formal proof of debt or claim, the
notice of dividend is sufficient
notice of the admission.
The Bankruptcy Act provides that
a dividend cannot be paid before 21
days after the lodgement date. This
time is used to examine the proofs
of debt that have been lodged.
BANKRUPTCY ACT 1966 - SECTION 140
Declaration and distribution of dividends
(7)
Where the trustee has sent a
notice in pursuance of subsection
(3) or (5) of this section in relation
to the declaration of a dividend,
the trustee shall not declare the
dividend until after the expiration
of 21 days after the expiration of
the period specified in the notice.
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Dividends
3. REJECTING PROOFS OF DEBT
The onus of proving that they have a valid
claim lies with the creditor. If the material
attached to the proof of debt does not
sufficiently prove that a debt exists in the
stated amount, the practitioner will not
be able to admit the claim or some part of
the claim. Two options are then available:
1.Ask the creditor for further
information to make a better
determination (which is
the usual case); or
2.Reject the proof of debt in full
or in part (usually done if better
information is not forthcoming).
Rejecting a proof of debt is done when
the creditor either will not or cannot
provide sufficient information to prove
that they have a valid claim in the
stated amount. The notice of rejection
will set out the particulars of the claim
that are rejected and the reasons for
rejection. The creditor has a right to
appeal the rejection of their proof of
debt and have the court decide whether
the proof should be admitted or not.
Having the appeal heard by the
court may delay the payment of a
dividend. Unfortunately, the time
period for this process is governed
by the availability of the courts.
The Corporations Act contains these
provisions in regulation 5.6.54.
CORPORATIONS REGULATIONS
- REGULATION 5.6.54
Grounds of rejection and
notice to creditor
(1) Within 7 days after the liquidator has
rejected all or part of a formal proof
of debt or claim, the liquidator must:
(a) notify the creditor of the
grounds for that rejection in
accordance with Form 537; and
(b) give notice to the creditor
at the same time:
(i) that the creditor may appeal to the
Court against the rejection within
the time specified in the notice,
being not less than 14 days after
service of the notice, or such further
period as the Court allows; and
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(ii) that unless the creditor appeals
in accordance with subparagraph
(i), the amount of his or her debt
or claim will be assessed in
accordance with the liquidator’s
endorsement on the creditor’s proof.
The Bankruptcy Act contains
these provisions in section 102.
BANKRUPTCY ACT 1966 - SECTION 102
Admission or rejection of proofs
(1) The trustee shall examine each
proof of debt and the grounds of
the debt sought to be proved and,
subject to the power of the Court
to extend the time, shall, not later
than 14 days after the expiration of
the period specified in the notice of
intention to declare a dividend as the
period within which creditors may
lodge their proofs of debt, either:
(a) admit the proof of debt in whole;
(b) admit it in part and reject it in part;
(c) reject it in whole; or
(d) require further evidence
in support of it.
(2) Where the trustee rejects a proof
of debt in whole or in part, he or
she shall inform the creditor by
whom it was lodged, in writing,
of the grounds of the rejection.
APPEALS AGAINST
TRUSTEE’S DECISION
Creditors have the right to have the
decision to reject their proof of debt
reviewed by the court. Creditors’ rights
are set out in Regulation 5.6.54 of the
Corporations Act and Section 104 of the
Bankruptcy Act. Even if a proof of debt
is rejected, the liquidator or trustee may
amend that decision upon the provision
of better information, if the information is
provided within the required time period.
However, if a proof of debt is formally
rejected, creditors must be aware
that they have a limited time period
to apply to the court for adjudication.
Even if they are furnishing better
information to the liquidator or trustee,
they must be mindful that this time
period is expiring. The court may
allow an application after the time
period expires, but creditors should
not assume that the court will do so.
CORPORATIONS REGULATIONS
- REGULATION 5.6.54
Grounds of rejection and
notice to creditor
(2) A person may appeal against
the rejection of a formal proof
of debt or claim within:
(a) the time specified in the notice
of the grounds of rejection; or
(b) if the Court allows — any
further period.
(3) The Court may extend the time for
filing an appeal under subregulation
(2), even if the period specified
in the notice has expired.
There are strict time limits for seeking
such relief and these will be set out in the
notice of rejection. If the application for
the review of the decision is not made
within that time period, the Court will
generally not hear the appeal. We would
always suggest that creditors seek legal
advice as soon as a rejection is received.
BANKRUPTCY ACT 1966 - SECTION 104
Appeal against decision of
trustee in respect of proof
(1) A creditor, or the bankrupt, may
apply to the Court for review of
a decision of the trustee under
subsection 102(1), (3) or (4) in
respect of a proof of debt.
(2) The Court may, upon the
application, confirm, reverse or
vary the decision of the trustee.
(3) Subject to the power of the Court
to extend the time, an application
under this section to review a
decision shall not be heard by
the Court unless it was made
within 21 days from the date on
which the decision was made.
The onus of proving to the court that
the claim should be admitted lies with
the creditor. They have to show that
the decision to reject the claim was
incorrect based on the information
that was provided to the practitioner.
RELATED TOPICS
2
There are times when the appointee will
decide that their rejection or admittance
of a proof of debt should be reversed.
Both Acts allow that reversal. In some
cases the reversal may only be partial,
with a part of the debt being rejected or
admitted after the initial assessment.
The Corporations Act set out
this right in regulation 5.6.55
CORPORATIONS REGULATIONS
- REGULATION 5.6.55
Revocation or amendment
of decision of liquidator
(1) If the liquidator considers
that a proof of debt or claim
has been wrongly admitted,
the liquidator may:
(a) revoke the decision to admit the
proof and reject all of it; or
(b) amend the decision to admit
the proof by increasing or
reducing the amount of the
admitted debt or claim.
(2) If the liquidator considers that all
of a proof of debt or claim has been
wrongly rejected, the liquidator may:
(a) revoke the decision to reject the
proof of debt or claim; and
(b) admit all of the proof or admit
part of it and reject part of it.
The Bankruptcy Act sets out
this right in section 102.
BANKRUPTCY ACT 1966 - SECTION 102
Admission or rejection of proofs
(3) Where the trustee considers that
a proof of debt has been wrongly
admitted, he or she may:
(a) revoke the decision to
admit the proof of debt and
reject it in whole; or
(b) amend the decision to admit
the proof of debt by increasing
or reducing the amount
of the admitted debt.
(4) Where the trustee considers that
a proof of debt has been wrongly
rejected in whole, he or she may:
(a) revoke the decision to reject
the proof of debt; and
(b) admit the proof of debt in whole
or admit the proof of debt in
part and reject it in part.
Once the appointee has made that
decision and amended their initial
decision, they will have to give notice
to that creditor of their new decision
and if appropriate, make adjustments
to the dividend to be paid or in some
cases pay a catch up dividend.
4. PAYMENT OF DIVIDENDS
The last step in the process is the
physical payment of the dividend.
This happens after the proof of debt
lodgement date has expired, all of
the proofs of debt have all been
admitted or rejected and any appeals
on rejections have been heard. The
appointee will forward a cheque to the
creditor along with a statutory Form
549 for corporate insolvencies and a
Form 2 for personal insolvencies.
If dividend cheques are not banked
within a reasonable time period or if
creditors cannot be located, the monies
will be held by the external administrator
for a period of six months after the date
of payment, and then forwarded to the
appropriate government authority. After
this time the creditor will then have to
seek the money from that authority.
PRIORITIES IN THE PAYMENT
OF DIVIDENDS
It is a standard concept that all
creditors will rank equally in insolvent
estates and will be paid ‘pro-rata’
dividends. This concept is set in
statute in the following sections.
BANKRUPTCY ACT 1966 - SECTION 108
Debts proved to rank equally except as
otherwise provided
Except as otherwise provided by this
Act, all debts proved in a bankruptcy
rank equally and, if the proceeds
of the property of the bankrupt are
insufficient to meet them in full, they
shall be paid proportionately.
CORPORATIONS ACT 2001
- SECTION 555
Debts and claims proved to rank equally
except as otherwise provided
Except as otherwise provided by
this Act, all debts and claims proved
in a winding up rank equally and,
if the property of the company is
insufficient to meet them in full, they
must be paid proportionately.
But from a practical point this is
not always the case. Each Act also
sets out an order for the priorities
of payment of dividends.
Dividends
REVOKING A DECISION
TO OBJECT
The Corporations Act gives the greatest
priority to employees. It provides that
entitlements due to employees are to
be fully paid before payments to nonpriority creditors. The general priority
for dividends is set out in section 556.
CORPORATIONS ACT
2001- SECTION 556
Priority payments
(1) Subject to this Division, in the
winding up of a company the
following debts and claims must
be paid in priority to all other
unsecured debts and claims:
(e) subject to subsection (1A)-next,
wages and superannuation
contributions and superannuation
guarantee charge payable by the
company in respect of services
rendered to the company by
employees before the relevant date;
(f) next, amounts due in respect
of injury compensation, being
compensation the liability for which
arose before the relevant date;
(g) subject to subsection (1B)next, all amounts due:
(i) on or before the relevant date; and
(ii) because of an industrial
instrument; and
(iii) to, or in respect of, employees
of the company; and
(iv) in respect of leave of absence;
(h) subject to subsection (1C)-next,
retrenchment payments payable
to employees of the company.
The Bankruptcy Act has a similar general
provision under section 109, but only
gives a limited priority to outstanding
employee wages and no priority to
retrenchments payments. In these areas,
the Acts differ quite substantially.
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BANKRUPTCY ACT 1966 - SECTION 109
Joint Bankruptcy Estates
The result generally is:
Priority payments
The Bankruptcy Act has provision for
joint and separate estates. This occurs
when two or more bankrupts have joint
and several assets and liabilities. For
example, bankrupt business partners will
have partnership assets (joint) that are
held together and individual assets held
separately. They may also have individual
and joint creditors. This is generally
not an issue in a corporate estate and
the Corporations Act has no special
provisions dealing with joint estates.
(a)Any surplus assets in an individual
estate of one bankrupt can be used
to pay joint creditors in the joint
estate to the limit necessary to
satisfy those joint claims. If there
is still a surplus of assets after
paying both individual and joint
creditors, the bankrupt whose
estate had the surplus is annulled
from bankruptcy and the surplus
money will be returned to them.
(e) fifth, in payment of amounts
(including amounts payable by way
of allowance or reimbursement
under a contract of employment
or under an award or agreement
regulating conditions of
employment, but not including
amounts in respect of long service
leave, extended leave, annual
leave, recreation leave or sick
leave), not exceeding in the case of
any one employee $1,500 or such
greater amount as is prescribed by
the regulations for the purposes
of this paragraph, due to or in
respect of any employee of the
bankrupt, whether remunerated
by salary, wages, commission or
otherwise, in respect of services
rendered to or for the bankrupt
before the date of the bankruptcy;
(g) seventh, in payment of all amounts
due to or in respect of any
employee of the bankrupt, whether
remunerated by salary, wages,
commission or otherwise, in respect
of long service leave, extended
leave, annual leave, recreation leave
or sick leave in respect of a period
before the date of the bankruptcy;
To assist the appointee, the employee
creditor should clearly indicate
whether they are claiming as an
employee and use the required proof
of debt forms for that purpose.
The question is how are joint and
individual assets to be divided amongst
the joint and individual creditors
in bankrupt estates? In the first
instance, joint assets are used to pay
joint creditors, and each bankrupt’s
individual assets are used to pay
each bankrupt’s individual creditors.
In some cases there are no surplus
assets in either of these different
estates and matter can end there.
But in some cases, one estate (the joint
or either or both of the individual estates)
will have a surplus. How any surplus
is used is answered in section 110.
BANKRUPTCY ACT 1966 - SECTION 110
Application of estates of joint debtors
(1) In the case of joint debtors,
whether partners or not, the joint
estate shall be applied in the first
instance in payment of their joint
debts, and the separate estate of
each joint debtor shall be applied
in the first instance in payment
of his or her separate debts.
(2) If there is a surplus in the case of
any of the separate estates, it shall
be dealt with as part of the joint
estate and if there is a surplus in the
case of the joint estate, it shall be
dealt with as part of the respective
separate estates in proportion
to the right and interest of each
joint debtor in the joint estate.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
(b)Any surplus in the joint estate
will be divided proportionately to
the individual estates and their
portion of that money can be used
to pay their individual creditors.
If either of the individual estates
has sufficient monies to pay the
individual creditors and still has a
surplus, that particular bankrupt will
be annulled from bankruptcy and
the surplus is paid to them. Unless
the other individual bankruptcy
estate also has sufficient monies
to pay their individual creditors,
they will not be annulled.
(c)There is no right to use surplus
assets from one individual
estate to pay creditors in the
other individual estate.
SUMMARY
For complete understanding of the
topic, the relevant sections of the each
of the Acts will have to be read in full.
In particular, the regulations of the
Corporations Act set out the complete
procedure for calling for proofs of
debt, their admission and rejection and
the appeal process to decisions. The
priority provisions in this guide have
only been mentioned in summary.
RELATED TOPICS
2
CGT AND INSOLVENCY
CGT And Insolvency
OVERVIEW
One of the roles of an external administrator is the realisation of assets owned by the insolvent person. The sale of some
of these assets could create a liability under the capital gains tax (CGT) legislation when they are sold. This is a factor
that the external administrator will be concerned about, at least to a limited extent.
There are three main issues with capital
gains tax and insolvent estates:
INCOME TAX ASSESSMENT
ACT 1997 - SECTION 104.10
1.Who is responsible for the
payment of capital gains realised
after the appointment of an
external administrator?
Disposal of a CGT asset: CGT event A1
2.What happens to capital
losses available at the date
of the appointment?
(b) because of the vesting of the
asset in a trustee under the
Bankruptcy Act 1966 or under
a similar foreign law; or
3.Holding companies when
a solvent wholly-owned
subsidiary is wound up.
1. W
HO IS RESPONSIBLE FOR
CAPITAL GAINS REALISED
AFTER THE APPOINTMENT
OF AN EXTERNAL
ADMINISTRATOR?
The Income Tax Assessment Act 1997
(ITAA) includes provisions that deal
with insolvent estates and capital
gains, at least where the estate is a
bankruptcy, a liquidation or a secured
creditor taking action under a security.
These provisions state that any
actions or realisations taken by:
(a)Bankruptcy trustees and
part X trustees;
(b)Liquidators; and
(c)Other people formally
acting under a security;
that lead to a capital gain tax liability,
are deemed to have been done by the
company, bankrupt or debtor; and not
by the external administrator. This
means that the external administrator
is not made personally liable for any
CGT liability. It places the liability on the
entity that originally owed the asset.
This process starts by looking at the
‘vesting’ or otherwise of the asset. The
legislation states that the vesting of
assets in a bankruptcy or liquidation, or
the providing or redeeming of a security
is not a disposal of a CGT asset and the
beneficial owner (the estate) does not
change. This is set out in section 104.10.
(7) CGT event A1 does not happen if
the disposal of the asset was done:
(a) to provide or redeem a security; or
(c) because of the vesting of
the asset in a liquidator of a
company, or the holder of a similar
office under a foreign law.
BANKRUPTCY
The ITAA (1997) confirms that the “the
vesting of the individual’s CGT assets
in the trustee under the Bankruptcy
Act 1966 or under a similar foreign
law is ignored” in relation to CGT. The
provisions related to bankruptcy are:
INCOME TAX ASSESSMENT
ACT 1997 - SECTION 106.30
EFFECT OF BANKRUPTCY
(1) For the purposes of this Part
and Part 3-3, the vesting of the
individual’s * CGT assets in the
trustee under the Bankruptcy
Act 1966 or under a similar
foreign law is ignored.
(2) This Part and Part 3-3 apply to an act
done in relation to a CGT asset of an
individual in these circumstances as
if it had been done by the individual:
(a) as a result of the bankruptcy of the
individual by the Official Trustee
in Bankruptcy or a registered
trustee, or the holder of a similar
office under a foreign law;
(b) by a trustee under a personal
insolvency agreement made
under Part X of the Bankruptcy
Act 1966, or under a similar
instrument under a foreign law;
(c) by a trustee as a result of an
arrangement with creditors
under that Act or a foreign law.
This section has two effects
on CGT and bankruptcy.
Firstly the vesting of property in the
trustee is not deemed to be a disposal of
the asset, so there is no capital gain tax
liability automatically created from the
vesting of assets. Secondly, any acts of
the trustee under a part IV bankruptcy,
section 73 arrangement or part X
personal insolvency agreement that
give rise to a CGT liability are deemed
to have been done by the individual (the
bankrupt or debtor) and not the trustee.
LIQUIDATIONS
This section provides that any act by a
liquidator that accrues a capital gain is
deemed to be an act of the company and
not the liquidator; therefore no personal
liability will pass onto the liquidator.
INCOME TAX ASSESSMENT
ACT 1997 - SECTION 106.35
EFFECT OF LIQUIDATION
This Part and Part 3-3 apply to an act
done by a liquidator of a company, or
the holder of a similar office under
a foreign law, as if the act had been
done instead by the company.
SECURED CREDITORS
This section deems that acts done by
people holding or appointed under
security documents that accrue a
capital gain are done by the entity that
gave the security, not the entity that
exercises the security. This also extends
to a controller appointed to assist the
mortgagee in exercising the security.
INCOME TAX ASSESSMENT
ACT 1997 - SECTION 106.60
ACTS BY SECURITY HOLDERS
This Part and Part 3-3 apply to an act
done by an entity (or an agent of the
entity) in relation to a CGT asset for the
purpose of enforcing or giving effect
to a security, charge or encumbrance
the entity holds over the asset as if
the act had been done instead by the
person who provided the security.
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CGT AND INSOLVENCY
One further point is that exercising a
security or the appointment of a receiver
or agent does not change the ownership
of the asset and does not accrue a CGT
liability as ownership of the asset does
not change. Controllers of property
usually only act as agents (for the owner
of the assets) with powers to sell under
the security. The only thing that does
change is the right of the security holder
to actually sell the asset on behalf of the
debtor. It is only the disposal (sale) of that
asset that may create a CGT liability.
EXTERNAL ADMINISTRATION
SUMMARY
Two points are relevant to
external administrators:
1. The appointment of a liquidator,
trustee, controller; or the vesting
of property and the exercising
of a security does not create a
deemed acquisition or disposal
of a CGT asset. Without another
disposal of the asset, no CGT
liability will accrue to any party.
2.The eventual disposal of the
CGT asset does not create a
personal liability for the external
administrator. The liability will
accrue to the individual or company.
Where a capital gain arises that would
lead to a tax liability, the insolvency
practitioner will advise the ATO.
The ATO will then lodge a proof of
debt in the estate for that liability.
WHAT ABOUT VOLUNTARY
ADMINISTRATORS?
The position is slightly different legally,
but ends with the same result. The
Corporations Act provides that a
voluntary administrator acts as the agent
of the company and not, effectively,
in his own right. Any CGT debt arising
during that period will be a company
debt, not a debt of the administrator.
Any CGT liability is not a debt incurred
by the voluntary administrator, so
they are not personally liable for it.
This position is very similar to that of
entities holding security over assets.
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CORPORATIONS ACT
2001 - SECTION 437B
Administrator acts as company’s agent
When performing a function, or
exercising a power, as administrator
of a company under administration,
the administrator is taken to be
acting as the company’s agent.
Administrators of deed of company
arrangements are also usually protected.
Most deed administrators simply act as a
manager of a bank account and enforcer
of the provisions of the deed. Rarely will
a deed administrator control the trading
and other actions of a company under
a deed that lead to asset realisations.
Trading is generally done directly by the
company, or with the deed administrator
acting as agent of the company
under the provisions of the deed.
2. W
HAT HAPPENS TO CAPITAL
LOSSES AVAILABLE AT THE
DATE OF THE APPOINTMENT?
The procedure for calculating
capital gains for tax purposes for
individuals is set out in section
102-5 of the ITAA. Two events occur
that eliminate past CGT losses:
1.A person is not entitled to bring
forward any capital losses from
prior years into a year in which he
or she became a bankrupt or was
released from their debts. This
only pertains to people becoming
bankrupt, not to companies.
But the provision works twice,
once when the person is made a
bankrupt, and then again usually three
years later when they are released
from their debts at discharge.
2. A person is not entitled to bring
forward any capital losses into a
year in which they are released from
their debts under a law relating to
bankruptcy. Discharge from such
debts occurs at the end of the
bankruptcy or the end of a part IX,
part X or a section 73 arrangement.
Any capital losses accrued before
the bankruptcy or other related
appointment will be lost at the
end of that administration.
The factor of timing in either becoming
a bankrupt (the commencement
of the bankruptcy) and the release
of debts (usually at the end of a
bankruptcy or the agreement) may
have to be taken into consideration.
INCOME TAX ASSESSMENT
ACT 1997 - SECTION 102.5
Assessable income includes
net capital gain
(2) However, if during the income year:
(a) you became bankrupt; or
(b) you were released from debts under
a law relating to bankruptcy;
any net capital loss you made for
an earlier income year must be
disregarded in working out whether
you made a net capital gain for
the income year or a later one.
Annulments of bankruptcies eliminate
the bankruptcy. Annulments obtained
by payment of debts (section 153) or
through the court will reinstate these
losses as there is no bankruptcy and
no release of debts - as they are paid.
Annulments obtained through section
73 proposals and the release of debts
attached to the through section 74 are
excluded as there still is a release of
debts, and the CGT losses will be lost.
INCOME TAX ASSESSMENT
ACT 1997 - SECTION 102.5
Assessable income includes
net capital gain
(3) Subsection (2) applies even though
your bankruptcy is annulled if:
(a) the annulment happens
under section 74 of the
Bankruptcy Act 1966 ; and
(b) under the composition or scheme
of arrangement concerned, you
were, will be or may be released
from debts from which you
would have been released if
instead you had been discharged
from the bankruptcy.
RELATED TOPICS
There appears to be no such provision
for a company entering into liquidation.
There is generally no real need for these
provisions as the life of the company
will come to an end at the conclusion
of the liquidation and there will be
no opportunity to use any accrued
CGT losses ‘after a liquidation’.
There is no statutory provision dealing
with the availability of losses to a
company that is subject to a deed
of company arrangement, so it is
expected that any losses would be
available to offset against any capital
gains made by the company realising
assets (or by the deed administrator
acting as agent of the company).
It is possible that the ATO will argue
that the same policy as the bankruptcy
provisions set out above should
apply, if the company will continue
in existence after the conclusion of
the deed of company arrangement,
or will only allow losses in the same
percentage as dividends paid to the
ATO and a release of part of such debt.
3. HOLDING COMPANIES WHEN
A SOLVENT WHOLLY-OWNED
SUBSIDIARY IS WOUND UP
The first thing to note is that the
subsidiary being would up must be
solvent. The ITAA gives specific tax
relief in the case of a holding company
receiving an asset (a roll-over of an
asset) from the liquidator of a subsidiary
under a members’ voluntary winding
up. This relief may only be a reduction
of the CGT, not an entire exemption.
This is partially due to the fact that, as the
liquidated company is solvent, the ATO
will be paid all outstanding tax liabilities
by that company and therefore will be
no release of debts. This CGT relief only
applies if the roll-over of the asset was
transferred in relation to the cancellation
of the shareholding in the 100% owned
subsidiary that is being wound up.
The holding company effectively
receives the asset in consideration
for the cancellation of the shares.
INCOME TAX ASSESSMENT
ACT 1997 - SECTION 126.85
INCOME TAX ASSESSMENT
ACT 1997 - SECTION 126.85
Effect of roll-over on certain liquidations
Effect of roll-over on certain liquidations
(1) A capital gain a company (the
holding company) makes because
shares in its 100% subsidiary
are cancelled (an example
of CGT event C2: see section
104- 25) on the liquidation of
the subsidiary is reduced if the
conditions in subsection (2) are
satisfied. The reduction is worked
out under subsection (3).
(3) The reduction of the capital gain
is worked out in this way.
The capital gain that a holding company
makes from the roll-over of the asset
because post-CGT shares in its 100%
owned subsidiary are cancelled on the
liquidation of the subsidiary is reduced
only if certain conditions are satisfied.
(a)The sum of the capital gains the
subsidiary would make on the
disposal of its CGT roll-over assets
to the holding company; and
These conditions are:
(a)There must be a roll-over of at
least one ‘CGT asset’ (i.e. acquired
on or after 20 September 1985)
and the asset must be disposed
of (transferred) by the subsidiary
to the holding company in the
course of its liquidation;
(b) The disposal must either be part of
the liquidator’s distribution in the
course of the liquidation; or have
occurred within 18 months of the
dissolution of the subsidiary (if they
are part of an interim distribution);
(c)The liquidated company must be
a 100% owned subsidiary from
the time of the disposal until the
cancellation of the shares;
(d)The market value of the asset(s)
must comprise at least part of
the capital proceeds for the
cancellation of the shares;
CGT AND INSOLVENCY
2
METHOD STATEMENT
Step 1. Work out (disregarding this
section) the sum of the capital gains and
the sum of the capital losses the holding
company would make on the cancellation
of its shares in the subsidiary.
Step 2. Work out (disregarding
this Subdivision):
(b) The sum of the capital losses it
would make except for Subdivision
170-D on the disposal of its CGT
assets to the holding company;
in the course of the liquidation assuming
the capital proceeds were the assets’
market values at the time of the disposal.
Step 3. If, after subtracting the sum
of the capital losses from the sum of
the capital gains, there is an overall
capital gain from step 1 and an overall
capital gain from step 2, then continue.
Otherwise there is no adjustment.
Step 4. Express the number of
post-CGT shares as a fraction of the
total number of shares the holding
company owned in the subsidiary.
Step 5. Multiply the overall capital gain
from Step 2 by the fraction from Step 4.
Step 6. Reduce the overall capital gain
from Step 1 by the amount from Step 5.
The result is the capital gain the holding
company makes from the cancellation
of its shares in the subsidiary.
(e)One or more of the shares that
were cancelled must have been
acquired by the holding company
on or after 20 September 1985, that
is, they must be post-CGT shares.
The mechanics to calculate this relief is
summarised below. Section 126-85 of
the ITAA contains the full explanation,
a snapshot is referenced below.
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2
GST AND INSOLVENCY
GST AND INSOLVENCY
INTRODUCTION
The introduction of goods and services tax (GST) added extra tax obligations to both taxpayers and insolvency
practitioners appointed to those taxpayers. This guide explains the more common issues arising from the appointment
of external administrators and GST. It deals with who is responsible for any GST liability and when that liability will arise.
However, the technicalities of GST are best left to tax accountants.
The insolvency of an entity, particularly
the vesting of assets in a bankruptcy
trustee, does not automatically give rise
to any GST consequences or liabilities
as there has been no ‘taxable supply’
by any party. However, the appointment
of an external administrator does
change the status of the entity for
GST purposes, and the practitioner
will assume some of the taxpayer’s
responsibilities. They also must start
reporting for GST in their own right.
These rules are governed by
the a New Tax System (Goods
and Services Tax) Act 1999.
THE INCAPACITATED ENTITY
What is an incapacitated entity?
An entity (the taxpayer) becomes
an incapacitated entity and an
external administrator becomes a
“representative of the incapacitated
entity” upon any of the following types
of appointments to the taxpayer:
•
Bankruptcy
•
Controlling trusteeship
•
Liquidation
•
eceivership (even if only appointed
R
over some of the assets)
•
Voluntary administration
•
E xecuting a deed of
company arrangement
An incapacitated entity is defined
(section 195-1 of the Act) as:
incapacitated entity means:
(a)An individual who is a bankrupt; or
(b)An entity that is in liquidation
or receivership; or
(c)an entity that has a representative.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
The ‘catch all’ part of that definition is
“an entity that has a representative”.
This effectively includes all other
insolvency type appointments that
are not bankruptcies, liquidations
or receiverships. A ‘representative’
of the incapacitated entity is also
defined in section 195-1 as:
(a) a trustee in bankruptcy; or
(b) a liquidator; or
(c) a receiver; or
(ca) a controller (within the
meaning of section 9 of the
Corporations Act 2001 ); or
TWO REGISTRATIONS
There are two parts to the registration
process. The first is the registration
of the representative of the
incapacitated entity to advise the
ATO that a representative has been
appointed. The second is registration
of the representative for GST if that
is required. Registration for GST is
necessary regardless of whether
the entity is expected to exceed the
turnover limits after the appointment,
if the entity was or should have been
registered before the appointment.
(d) an administrator appointed to an
entity under Division 2 of Part 5.3A
of the Corporations Act 2001 ; or
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 58.20
(e) a person appointed, or authorised,
under an Australian law to
manage the affairs of an entity
because it is unable to pay all
its debts as and when they
become due and payable; or
Representatives are required
to be registered
(f) an administrator of a deed
of company arrangement
executed by the entity.
Nearly all formal appointments over the
financial affairs of a person or company
are likely to convert that entity into
an incapacitated entity and require
the registration of the representative
with the Australian Taxation Office
(ATO). The appointment makes the
representative (the practitioner)
a new entity for GST purposes.
Registration of the representative for
GST purposes will be required if the
incapacitated entity is, or was required
to be, registered for GST purposes.
(1) A representative of an
incapacitated entity is required to
be registered in that capacity if the
incapacitated entity is registered
or required to be registered.
(2) This section has effect despite
section 23-5 (which is about who
is required to be registered).
The representative may not have any
GST responsibilities if the incapacitated
entity did not have any - for example:
a consumer bankruptcy. If there is a
requirement for the representative to
register for GST, the representative
must lodge returns in their own right
and report various matters to the ATO.
In fact, if the ATO must cancel the
representative’s GST registration if
they believe that they do not need
to be so registered: section 58.25
“The Commissioner must cancel
the registration of a representative
of an incapacitated entity if the
Commissioner is satisfied that the
representative is not required to
be registered in that capacity”.
RELATED TOPICS
In summary, if the entity
becomes incapacitated
(a)The practitioner becomes the
representative of the incapacitated
entity and becomes a new tax
entity in his or her own right.
They must register with the
ATO as the representative of
the incapacitated entity;
(b)If the incapacitated entity was
or should have been registered
for GST, the representative
must register for GST.
The registration as a representative of
the incapacitated entity ends when the
appointment ends. The practitioner (the
liquidator or trustee etc.) simply has
to notify the Commissioner to cancel
the registration. The practitioner must
notify the commissioner within 21 days
after ceasing to be a representative.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 58.30
Notice of cessation of representation
A representative who ceases to be
a representative of an incapacitated
entity must notify the Commissioner of
that cessation, in the approved form,
within 21 days after so ceasing.
TAX PERIODS AND
LODGEMENTS
How does the appointment of a
representative affect tax periods?
Most insolvency appointments happen
during a financial year, not June 30. The
current tax period for the incapacitated
entity is deemed to have ended on
the day before the appointment.
A new tax period commences on
the day of the appointment.
Final returns should be lodged for
GST purposes as at the date of the
appointment and the ATO will calculate
the outstanding debt, if any. The new
tax period (deemed to have started at
the date of the appointment) will end
on the date that the normal tax period
would have ended and returns will have
to be lodged separately for that period.
That is, the tax period is divided into two
periods at the date of appointment.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 27.39
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 27.40
TAX PERIODS OF
INCAPACITATED ENTITIES
An entity’s concluding tax period
(1) If an entity becomes an
incapacitated entity, the entity’s tax
period at the time is taken to have
ended at the end of the day before
the entity became incapacitated.
(a) an individual dies; or
(2) If a tax period (the first tax period)
ends on a particular day because of
subsection (1), the next tax period
starts on the day after that day and
ends when the first tax period would
have ended but for that subsection.
The representative also has a tax
period. It begins on the date of
appointment (the date of the new
divided tax period described above)
and each period has the same start
and end dates as the incapacitated
entity - so the initial tax period is likely
to be shorter than a normal tax period
unless the appointment happened to
occur on the first date of a tax period.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 58.35
Tax periods of representatives
(1) If a representative of an
incapacitated entity is required
to be registered in that capacity,
the tax periods applying to the
representative in that capacity
are the same tax periods that
apply to the incapacitated entity.
(2) This section has effect despite
Division 27 (which is about how to
work out the tax periods that apply).
The obligations of the representative
end when the appointment ends, but
the entity may or may not continue
in existence after that date. The Act
provides that the entity will have a
concluding tax period (its tax obligations
will end) when it dies (in the case of
a person) or ceases to exist (in the
case of other business entities).
GST AND INSOLVENCY
2
(1) If:
(b) another entity for any
reason ceases to exist;
the individual’s or entity’s tax
period at the time is taken to
have ceased at the end of the day
before the death or cessation.
(1A) If an entity ceases to carry on
any enterprise, the entity’s tax
period at the time is taken to have
ceased at the end of the day on
which the cessation occurred.
(2) If an entity’s registration is
cancelled, the entity’s tax period at
the date of effect of the cancellation
(the cancellation day) ceases at
the end of the cancellation day.
It is unlikely that this provision will have
much effect on a bankruptcy trustee
(even if they are required to be registered
for GST purposes) as the bankrupt is
likely to survive the bankruptcy process.
Companies in liquidation on the other
hand, usually are deregistered upon
the cessation of the liquidation.
WHO MUST LODGE THE BAS?
The Act provides that the representative
(who is registered for GST) must
lodge returns in each tax period
regardless of whether there has been
any activity or any amount of GST
to pay or refund to be received.
A NEW TAX SYSTEM (GOODS AND
SERVICES TAX) ACT 1999 - SECTION 31.5
Who must give GST returns
(1) If you are registered or required
to be registered, you must give
to the Commissioner a GST
return for each tax period.
(2) You must give the return
whether or not:
(a) your net amount for the
tax period is zero; or
(b) you are liable for the GST on
any taxable supplies that are
attributable to the tax period.
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2
GST AND INSOLVENCY
The practical effect is that the
representative will usually control the
financial affairs of the incapacitated
entity after the appointment and
will report the GST consequences
on transactions done after that
appointment. The intention is to pass
any post-appointment GST responsibility
to the representative while they are
in control. Some appointments (for
example: administrator of a deed of
company arrangement) do not leave
the representative in control of the
entity and it may have a requirement
to do its own reporting. In these
cases, the entity will have to lodge
a BAS itself and the representative
will lodge one for his transactions.
If the entity or representative is
required to be registered for GST
purposes, an obligation to commence
lodging returns commences on the
appointment, regardless of how the
representative has been appointed.
WHO IS LIABLE FOR THE GST?
The Act was altered to clarify who
was responsible for GST debits and
credits and whether the entity or the
representative would be liable for
the GST payable. The short answer
is that the representative is liable for
the tax consequences of transactions
that were entered into during their
appointment, regardless of the
capacity of their appointment.
Unfortunately and adding some
confusion, in describing the position,
the Act refers to the representative
(the insolvency practitioner) as
‘the entity’ and the incapacitated
entity as ‘the other entity’.
This is achieved in a two step process.
The first step is making the entity
responsible (deem the transactions
were done by the entity) for all supplies
and acquisitions etc. The intention is
to ensure that the GST consequences
that arise while the representative is
acting are the same as consequences
as if they were done by the entity.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
A NEW TAX SYSTEM (GOODS AND
SERVICES TAX) ACT 1999 - SECTION 58.5
General principle for the relationship
between incapacitated entities
and their representatives
(1) Subject to this Division, any
supply, acquisition or importation
by an entity in the capacity of a
representative of another entity
that is an incapacitated entity is
taken to be a supply, acquisition or
importation by the other entity.
The section will continue to apply if the
entity ceases to be an incapacitated
entity and the representative resigns,
meaning that the incapacitated
entity will be liable for further GST
liabilities based on transactions that
occurred while it was incapacitated.
(3) To avoid doubt, if the other entity
ceases to be an incapacitated entity,
this section continues to apply in
relation to the supply, acquisition
or importation, or to the act or
omission, after the other entity
ceases to be an incapacitated entity.
A further effect of the section is
to ensure that the entity will be
liable for, or entitled to, any GST
consequences of transactions
entered into during the period of the
representative’s appointment.
The second step is to make the
representative liable to pay the GST
that the entity would be liable to
pay - as far as that liability “is within
the scope of the representative’s
responsibility or authority for managing
the incapacitated entity’s affairs”.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 58.10
Circumstances in which
representatives have GST-related
liabilities and entitlements
General rule
(1) A representative of an
incapacitated entity:
(a) is liable to pay any GST that the
incapacitated entity would, but for
this section or section 48-40, be
liable to pay on a taxable supply
or a taxable importation; and
(b) is entitled to any input tax credit
that the incapacitated entity
would, but for this section or
section 48-45, be entitled to
for a creditable acquisition or a
creditable importation; and
(c) has any adjustment that the
incapacitated entity would, but for
this section or section 48-50, have;
to the extent that the making of the
supply, importation or acquisition
to which the GST, input tax credit
or adjustment relates is within
the scope of the representative’s
responsibility or authority for managing
the incapacitated entity’s affairs.
Appointments that do not give the
representative the “responsibility
or authority” to make transactions,
like a deed of company arrangement
appointment that does include such
powers, will not give rise to personal
liability for GST transactions. But
if the representative enters into
the transaction, they will be liable
for the GST consequences.
RELATED TOPICS
2
(2) This section does not apply to
the GST payable on a taxable
supply to the extent that one or
more of the following apply:
(a) the incapacitated entity received
the consideration for the supply
before the representative
became a representative of
the incapacitated entity;
(b) if, under Division 83 or 84, the GST
is payable by the recipient of the
supply--the incapacitated entity
provided the consideration for the
supply before the representative
became a representative of
the incapacitated entity;
(c) if:
(i) the supply is a supply for which
a voucher to which Division 100
applies is redeemed; and
(ii) the incapacitated entity supplied the
voucher before the representative
became a representative of
the incapacitated entity;
the consideration for the supply
referred to in subparagraph (i)
does not exceed the consideration
provided for the incapacitated
entity’s supply of the voucher.
(3) This section does not apply to an
input tax credit for a creditable
acquisition to the extent that the
incapacitated entity provided the
consideration for the acquisition
before the representative
became a representative of
the incapacitated entity.
These provisions end the argument
of who is responsible for GST
transactions. The entity is responsible,
but the representative is liable if they
entered into the transaction. The
representative has to lodge returns
at the same time as the entity, but the
commencement date of the first period
will depend on the appointment date.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 58.35
Tax periods of representatives
(1)If a representative of an
incapacitated entity is required
to be registered in that capacity,
the tax periods applying to the
representative in that capacity
are the same tax periods that
apply to the incapacitated entity.
(2) This section has effect despite
Division 27 (which is about how to
work out the tax periods that apply).
It is possible that two BAS’s should be
lodged for an entity. Take, for example,
a deed of company arrangement
where the deed administrator files a
BAS for tax consequences under the
administration of the deed, and the
company trades under its own right
and lodges its own BAS each period.
Each entity will only report its own
transactions on their own BAS.
ADJUSTMENTS TO
PRE-APPOINTMENT GST
LIABILITIES
In many insolvent estates, the ATO has
an outstanding debt for GST. Some
adjustments may be required to the
GST consequences of pre-appointment
transactions that may cause the ATO to
increase or decrease their outstanding
debt. These are called ‘increasing’
or ‘decreasing’ adjustments.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 19.10
Adjustment Events
(3) An adjustment event:
(a) can arise in relation to a supply even
if it is not a taxable supply; and
(b) can arise in relation to an
acquisition even if it is not a
creditable acquisition.
Accrual Based Accounting
GST AND INSOLVENCY
The representative is not liable
when the supply or acquisition
occurred before the representative
became the representative of
the incapacitated entity.
The two most common adjustments
under accrual accounting relate to
the GST consequences from;
1.
The non-collection of debtors
where GST has been paid
before the appointment
(decreasing adjustment); and
2.Adjustments to taxable credits due
to the non-payment of creditors
through a dividend where GST has
been claimed pre-appointment
(increasing adjustment).
Further, if a representative accounts
on an accrual basis, the GST effects
of transactions by the entity that
occurred before the appointment of the
representative may be attributed to the
first tax period of the representative.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 58.40
Effect on attribution rules of not
accounting on a cash basis
(1) If:
(a) a representative of an
incapacitated entity does not
account on a cash basis; and
(b) because of section 58-10, all
or part of the amount of GST
payable on a taxable supply is
payable by the representative, or
the representative is entitled to
all or part of the input tax credit
for a creditable acquisition
then, to the extent that, but for this
section, the GST or input tax credit
would be attributable to a tax period
that ended before the representative
became a representative of the
incapacitated entity, the GST or input
tax credit is instead attributable to
the first tax period applying to the
representative in that capacity.
(2) This section has effect despite
sections 29-5 and 29-10 (which
are about attribution of GST on
taxable supplies and of input tax
credits for creditable acquisitions).
75
2
GST AND INSOLVENCY
WRITING OFF BAD DEBTS
It is not uncommon for practitioners
to write off pre-appointment debtors
as uncollectable. There can be
numerous reasons for this to occur.
It is also possible that the insolvent
entity has accrued these debts before
the appointment and may have paid
or accrued GST on them. If these
debtors are written off, the GST
on those debts should in theory be
refunded. In practice they are deducted
off the GST debt outstanding.
A NEW TAX SYSTEM (GOODS AND
SERVICES TAX) ACT 1999 - SECTION 21.5
Writing off bad debts (taxable supplies)
(1) You have a decreasing adjustment if:
(a) you made a taxable supply; and
(b) the whole or part of the
consideration for the supply
has not been received; and
(c) you write off as bad the whole or
a part of the debt, or the whole
or a part of the debt has been
overdue for 12 months or more.
The amount of the decreasing
adjustment is 1/11th of the amount
written off, or 1/11th of the amount
that has been overdue for 12 months
or more, as the case requires.
(2) However, you cannot have an
adjustment under this section if
you account on a cash basis.
The Act clarifies that the adjustment
cannot be made if the representative
accounts on a cash basis.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 58.15
Adjustments for bad debts
(1) For the purposes of determining
whether an adjustment arises under
section 21-5 or 21-15 for the whole or
a part of a debt relating to a taxable
supply or creditable acquisition
for which a representative of an
incapacitated entity is liable to
pay GST, or is entitled to an input
tax credit, under section 58-10:
(a) the adjustment cannot arise if,
when the whole or part of the debt
is written off, or has been overdue
for 12 months, the representative
accounts on a cash basis; but
(b) it does not matter whether the
incapacitated entity accounts on a
cash basis at that or any other time.
(2) This section has effect
despite subsections 21-5(2)
and 21-15(2) (which preclude
adjustments for bad debts when
accounting on a cash basis).
NON-PAYMENT OF CREDITORS
Unless there are sufficient assets
to pay all creditors in full - which is
a rarity - there will be some part of
creditor’s debts that will go unpaid. If
the insolvent entity has claimed the GST
on these creditor amounts before the
appointment, they will in theory have to
be refunded to the ATO to the extent that
the creditors were unpaid. In practice
the GST liability to the ATO increases.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 21.15
Bad debts written off
(creditable acquisitions)
(1) You have an increasing
adjustment if:
(a) you made a creditable acquisition
for consideration; and
(b) the whole or part of the
consideration is overdue, but
you have not provided the
consideration overdue; and
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
(c) the supplier of the thing you
acquired writes off as bad the
whole or a part of the debt, or the
whole or a part of the debt has been
overdue for 12 months or more.
The amount of the increasing
adjustment is 1/11th of the amount
written off, or 1/11th of the amount
that has been overdue for 12 months
or more, as the case requires.
(2) However, you cannot have an
adjustment under this section if
you account on a cash basis.
CASH ACCOUNTING
The two most common adjustments
under cash reporting system relate
to the GST consequences from;
1.
The collection of debtors
where GST has not been
paid before the appointment
(increasing adjustment); and
2.
Adjustments due to the
payment of creditors through
a dividend where GST has not
been claimed pre-appointment
(decreasing adjustment).
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 19.40
Where adjustments for supplies arise
You have an adjustment for a supply
for which you are liable to pay GST
(or would be liable to pay GST if
it were a taxable supply) if:
(a) in relation to the supply, one or
more adjustment events occur
during a tax period; and
(b) GST on the supply was attributable
to an earlier tax period (or if the
supply was not a taxable supply,
would have been attributable to an
earlier tax period had the supply
been a taxable supply); and
(c) as a result of those adjustment
events, the previously attributed
GST amount for the supply (if
any) no longer correctly reflects
the amount of GST (if any) on the
supply (the corrected GST amount
), taking into account any change of
circumstances that has given rise to
an adjustment for the supply under
this Subdivision or Division 21 or 134.
RELATED TOPICS
2
Sometimes practitioners will collect
amounts from debtors that were billed
before the appointment. Under a cash
accounting system, no GST would have
been paid on these amounts. In practice,
this payment of the GST is an increasing
adjustment to the liability to the ATO.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 19.50
Increasing adjustments for supplies
If the corrected GST amount is greater
than the previously attributed GST
amount, you have an increasing
adjustment equal to the difference
between the corrected GST amount and
the previously attributed GST amount.
PAYMENT OF DIVIDENDS
TO CREDITORS
Under the cash accounting system,
GST is not claimed on supplies from
creditors until the payment is made to
the creditor. No GST credit will have
been allowed for outstanding creditors
at the time of the appointment, but will
be allowed when a dividend is paid to
those creditors. The practitioner will be
able to claim the GST on dividends paid
by way of a decreasing adjustment to
the ATO liability for the amount of the
dividend paid to relevant creditors.
A NEW TAX SYSTEM (GOODS
AND SERVICES TAX) ACT
1999 - SECTION 19.55
GST AND INSOLVENCY
COLLECTION OF DEBTORS
Decreasing adjustments for supplies
If the corrected GST amount is less than
the previously attributed GST amount,
you have a decreasing adjustment
equal to the difference between the
previously attributed GST amount
and the corrected GST amount.
SUMMARY OF ADJUSTMENTS
The following table sets out the general adjustments required for adjusting events occurring after the appointment for
pre-appointment transactions.
CASH REPORTING
ACCRUALS REPORTING
Debtors
Where debtors are collected by the
representative under a cash reporting system,
GST is attributable to the amount collected.
An increasing adjustment should be made to
the ATO’s proof of debt.
Where debtors are written off as uncollectible
(and GST has been accrued on these debtors),
the amount of GST attributable to the
written off debtors becomes a decreasing
adjustment to the ATO’s proof of debt.
Dividend to Creditors
Where dividends are paid to creditors
under a cash system, GST credits
arise for the amount of the payments.
These will give rise to a decreasing
adjustment to the ATO’s proof of debt.
Where GST credits have been claimed and
those creditors are now not going to be paid,
an increasing adjustment is made to the ATO’s
proof of debt to add back the unpaid credits.
Representatives must notify the ATO
of increasing adjustments or the
representative may become liable for
the lost dividends that should have
been collected by the ATO. The ATO will
then adjust their proof of debt to better
reflect their debt on pre-appointment
transactions once they know the
final result of those transactions.
SUMMARY
The following points provide a
summary of these provisions:
(i)
The appointment of an external
administrator requires that
administrator to register
as a representative of an
incapacitated entity;
(ii)
If the incapacitated entity is
required to be registered for
GST, the representative will be
required to register for GST;
(iii)
The incapacitated entity’s tax
year will end on the date of
the appointment and a final
BAS will have to be filed;
(iv)
The representative registered
for GST purposes has a
responsibility to file BAS’s
during their administration;
(v)
The representative will have
to notify the ATO of any
increasing adjustments due
to collection of debtors and
payment of partial dividends.
77
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3
worrells articles
THE TAXMAN COMETH
80
ASSET PROTECTION STRUCTURES
EXPOSED UNDER PPS ACT
81
DEALING WITH REAL PROPERTY AFTER DISCHARGE
83
WHAT HAPPENS WHEN A MEMBER OF A
SELF MANAGED SUPER FUND BECOMES BANKRUPT?
84
A TALE OF THREE PROPERTIES
85
79
3
THE TAXMAN COMETH
THE TAXMAN COMETH
The shock of the 2011 natural disasters hit many Australian’s hard, both as a community and commercially. After what
now seems to be a short reprieve in the scheme of things, we are again facing hard times of a different nature.
We were fortunate in the months of
recuperation to have our government’s
support and all manner of financial
relief and incentives. The Australian
Taxation Office (ATO) declared;
“As I have said in the past, during these
difficult times our message is clear to the
public, look after yourself, your family,
community and property first and don’t
worry about tax – we can sort things
out later.” Commissioner of Taxation.
Michael D’Ascenzo February 2011.
During this period of ‘let’s sort things
out later’ many businesses still
were accruing tax and literally were
putting off payment to be dealt with
later. It appears that later is now.
The ATO’s annual report for the 2010-11
year illustrates that while collectable
debt was down by 0.6 billion dollars,
insolvency debt has increased by 1.4
billion dollars. The correlation between
these types of debt appears indicative
of action taken in recent months and is
now forming the landscape of 2012.
Under the ATO’s “Firmer Action Policy”,
which was released in December 2010
as a fact sheet for ‘taxpayers with a
debt’, the ATO has advised there will
be a strong focus on taxpayer viability.
This is assessed under six key elements
in deciding if it will in essence allow a
business to continue, these being:
December 2011 saw two new ATO
initiatives being rolled out, the legal
profession data matching project
and boat owner data matching.
1. Gross margin.
The Queensland Law Society was
served by the ATO with a notice to
provide information on its members
in accordance with the Income
Tax Assessment Act and the Tax
Administration Act. In addition to
this scheme the ATO is undertaking
data analysis from more than 110,000
people who own boats worth more
than $25K and comparing this
information with declared income.
The courts were also flooded (pardon
the pun) in December 2011, with the
majority of all hearings being initiated
by way of ATO applications.
2. Cash flow.
3.Net assets and working
capital position.
4. Liquidity ratios.
5. Debtors and creditors.
6. Availability of debt funding.
As part of the ‘firmer action’ process
we have seen a marked increase in the
number of garnishee orders being issued
by the ATO. These orders can be issued
to a range of 3rd parties. In delivering our
February seminar series on ‘The Taxman
Cometh’ it was of great surprise to many
professionals that garnishee orders can
also be issued to superannuation funds.
Our message is that the ATO is
coming down on outstanding debt. Its
leniency to taxpayers in the past now
seems to be a thing of the past. It is
wanting resolution to files even if that
means bankruptcy or liquidation.
By Morgan Lane
Partner, Worrells Brisbane
Worrells Plain Talk e-Update March 2012
80
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
worrells articles
ASSET PROTECTION STRUCTURES
EXPOSED UNDER PPS ACT
3
This structure typically involves a
corporate group structure, where
assets used in conducting the business
are held in one or more “Asset Holding
Entity/ies”, separate to the “Trading
Entity” which is carrying the risks
associated with trading a business. The
Asset Holding Entity will lease/hire/
rent the assets to the Trading Entity,
to enable it to carry on its business.
This structure protects those assets in
the event the Trading Entity becomes
insolvent as ownership vests with the
Asset Holding Entity, as set out below.
Under the PPS Act, such arrangements
will be deemed security interests
(defined as a PPS lease) and
require perfection under the PPS
Act, usually by registration on the
PPS Register. Failure to perfect
will negate these asset protection
strategies due to the following:
•
•
n unperfected security interest
A
vests in the grantor on the
grantors insolvency (section
267 of the PPS Act); and
perfected security interest
A
has priority over an unperfected
security interest, where there
are competing security interests
(section 553. of the PPS Act).
There are a number of pre-conditions
to be able to perfect a security interest,
including that there is a written
security agreement signed or adopted
by the grantor (Section 20). From our
experience many asset protection
structures as set out above are loose
arrangements which are generally not
formally documented. This is perhaps
understandable given many of the
examples we see are small to medium
family companies, and the law as it
currently stands dictates that ownership
of those assets is paramount (as opposed
to possession under the PPS Act). Under
the current legislation the assets are
therefore generally not at risk on an
insolvency event of the Trading Entity,
assuming ownership can be proven.
This position will change when the PPS
Act commences, due to the effect of
the vesting provisions on insolvency
(Section 267) and the priority rules for
competing security interests (Section
553.. Based on the foregoing, asset
protection structures as set out above
must be documented in writing and
perfected by registration on the PPS
register. The PPS Act contains strict
timelines for registration on the PPS
Register which must be complied with.
The practical effect of not doing so is
that, upon insolvency of the Trading
Entity, ownership of the assets will
be transferred automatically to the
company in administration/liquidation
or the bankrupt estate and the asset
protection structure will provide no
protection to such assets. The assets
would also be lost to a secured creditor
who has a competing security interest
(such as a bank), provided that creditor
perfected their security interest in
compliance with the PPS Act.
ASSET PROTECTION STRUCTURES EXPOSED UNDER PPS ACT
The Attorney-General has recently determined the registration commencement time for the Personal Property
Securities Act (“PPS Act”) to be 30 January 2012. Consequently there is limited time to prepare for the new legislation,
including addressing the potential impact the PPS Act will have on asset protection structures commonly employed by
professional advisors in their own businesses and by their clients.
Specific Concepts and
Transitional Provisions
The discussion above is a brief summary
of how traditional asset protection
measures may be exposed under the
PPS Act. A number of concepts have
been addressed in this article which
warrants further explanation, including:
• What is a PPS Lease; and
• P
re-conditions to perfecting
a security interest (including
the requirement that there
be a written agreement).
There are also transitional provisions
contained in the PPS Act which appear
to provide some relief for existing
arrangements that are in place prior
to registration commencement time,
due to the concept of “temporary
perfection”. These issues are
discussed in further detail below:
What is a PPS Lease
PPS Lease is defined in Section 13 of the
PPS Act. In simple terms, a PPS Lease
means a lease or bailment of goods:
•
F or a term generally greater
than 12 months; or
•
F or goods that may or must be
described by serial number
(in accordance with the
regulations) generally for a
term of 90 or more days.
There is little doubt that the asset
protection structure as set out in this
article will meet the definition of a
PPS Lease in most circumstances.
81
3
ASSET PROTECTION STRUCTURES EXPOSED UNDER PPS ACT
Perfecting a
Security Interest
There are a number of pre-conditions
to be able to perfect a security
interest. These pre-conditions include
enforceability of security interests
against third parties, as set out in
Section 20 of the PPS Act. Enforceability
against third parties is satisfied where
the security interest is attached to
the collateral (Section 19) and:
•
T he Secured Party possesses
the collateral (Section 24), but not
by repossession. This is likely to
apply in limited circumstances;
•
T he Secured Party has perfected
the security interest by control
(Sections 25 to 29). This is limited
to certain financial collateral; or
•
T here is a written security
agreement signed or adopted
by the grantor (Section 20).
Given the nature of asset protection
structures set out in this article, a written
security agreement will be the best, and
potentially only, means of meeting the
criteria for perfecting a security interest.
Effect of the
Transitional Provisions
It would appear that the transitional
provisions in the PPS Act will apply
some relief for existing arrangements
that are in place prior to registration
commencement time. The transitional
provisions provide “temporary
perfection” for 24 months from
registration commencement time. The
security interest must be perfected
(usually by registration) within 24 months
to maintain continuous perfection.
The concept of temporary perfection
is a mechanism employed by the PPS
Act to provide temporary protection for
a security interest in existence prior to
registration commencement time, where
it was considered as a policy matter
that it would be appropriate to do so.
82
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
Section 307 of the PPS Act defines
a transitional security agreement as
“a security agreement that is in force
immediately before the registration
commencement time, and that continues
in force at and after that time.”
Summary
Security agreement is defined in
Section 10 of the PPS Act as:
1.Arrangements in place prior to
registration commencement time
may enjoy temporary perfection,
even if not documented in
writing, and may be capable of
maintaining continuous perfection
if perfected within 24 months of
registration commencement time.
However it is strongly advisable
that legal advice is sought on
any arrangements which are in
existence prior to registration
commencement time; and
“(a) an agreement or act by which
a security interest is created,
arises or is provided for; or
(b)writing evidencing such
an agreement or act.”
The words “or act” would appear
to extend the definition of security
agreement beyond mere written
documents. This is different to the
requirement for a “written security
agreement” in s 202., being one of
the criteria for a security interest to
be enforceable against third parties
(for agreements entered into after
commencement of the PPS Act).
Accordingly it would seem that a
secured party may be able to argue that
an unwritten arrangement constitutes a
“security agreement” for the purposes
of the transitional provisions.
Therefore, it appears that it may not be
necessary for temporary perfection
that the security interest satisfies the
requirement to make it enforceable
against third parties, and accordingly:
•
T he absence of a written agreement
may not preclude a secured party
taking advantage of the transitional
provisions providing temporary
perfection, if the secured party
can establish that there was “an
agreement or act by which a
security interest is created, arises
or is provided for” in force; and
•
T he secured party may also be
able to register a transitionally
perfected security interest
within the 24 months to maintain
continuous perfection from the
time immediately before the
registration commencement time.
In summary, asset protection structures
as set out in this article will fall under
the ambit of the PPS Act and require
perfection on the PPS register
(usually by registration). In addition:
2. arrangements entered into post
registration commencement time must
be documented in writing and perfected
by registration on the PPS register. As
noted above, the PPS Act contains strict
timelines for registration on the PPS
Register which must be complied with.
It is evident the provisions are quite
complex, and it is therefore advisable
that all businesses review their asset
protection structures and strategies
to ensure they can withstand the
commencement of the PPS Act.
This will include ensuring all existing
arrangements qualify for temporary
perfection under the transitional
provisions (and are subsequently
perfected within 24 months to
maintain continuous perfection).
It is also critical that any ongoing
asset protection advice properly
considers the impact of the PPS Act.
By Matthew Jess
Partner, Worrells Melbourne
Worrells Plain Talk e-Update
December 2011
worrells articles
DEALING WITH REAL
PROPERTY AFTER DISCHARGE
3
Dealing with real property is really
no different from dealing with any
other divisible asset. The trustee will
want to find the value of the property
and what amounts are secured
against it. These securities may
range from your simple housing loan
supported by a registered mortgage
to other creditors holding equitable
mortgages supported by caveats.
Once the trustee has gathered all of
these figures, he or she will be able
to do a calculation of the equity in the
property. They do this primarily to
determine whether any equity exists
and how that equity is divided between
the bankrupt estate and any co-owner.
No. The trustee still retains the legal
interest. In some cases the mortgagee
will move to sell the property and the
matter will come to an end with that
sale. In some cases secured creditors
do not move to sell the property (usually
because the loan is being kept up to
date) and the trustee will stay vested
with that (zero-value) legal interest.
In many cases the trustee will attempt to
‘sell’ the legal interest to any co-owner
for some amount once the equity
has been calculated, or for a nominal
amount if the equity has no value. At
times this will not be possible because
either the co-owner either does not
want to buy or is unable to buy.
It is necessary to differentiate between
the concepts of the legal interest that the
trustee has in the property and the equity
or the value of that interest. Even though
there may be no equity (the secured
creditors are owed as much or more than
the value of the property) the trustee still
has a legal interest in the property. It is
just currently not worth anything. We
use the word “currently” for a reason.
What happens then?
If there is equity in a property at the
time of the bankruptcy, the trustee will
move to sell the property to realise
that valuable interest. That sale may
be to a co-owner or on the market.
The guiding principle behind this is
that the asset (the equity) should be
realised as soon as practical for the
benefit of the estate’s creditors.
But what if there is no equity at that
time? Does the trustee just walk away?
•
T he trustee will not move to sell the
property because there is no equity.
•
T he bankrupt and the co-owner will
generally keep living in the property
and maintain the mortgage.
•
T he trustee will notionally attribute
the mortgage payments from the
bankrupt and the co-owner as rent
for his or her share of the property.
•
T he interest stays vested
in the trustee.
From time to time the trustee will
recalculate the equity position. Given
that the mortgage is being paid down
and the value of the property may be
rising, it is not uncommon for significant
equity to be generated over time. At
some point the trustee will be able to
realise it commercially. Remember
that the trustee still has a legal (now
valuable) interest in the property.
We have a number of recent
cases where this has occurred.
Two are worth mentioning.
DEALING WITH REAL PROPERTY AFTER DISCHARGE
It is commonly known that a bankrupt’s real property is a divisible asset in their bankrupt estate. It vests in the same
way as all other divisible property, but has the quirk of legal title registration not found in most other assets. Trustees in
bankruptcy will generally have to ‘enter transmission’, which is transferring the legal title to their name to enable them to
sell the property under their own signature.
In one case the husband and bankrupt
wife owned a property. At the time
of the bankruptcy there was minimal
equity and we offered to sell the
estate’s legal interest in the property
to the husband for that amount. He
declined to buy it at that time. Three
years later the value of the equity in the
property had increased significantly.
The husband recently paid the estate
$25,000 to buy the estate’s interest.
This was ten times the amount he would
have had to pay three years ago.
Similarly in another estate, two
years after discharge there was
finally sufficient equity to be realised
commercially. The co-owner was
surprised that our interest was not
extinguished at discharge, even though
we had written to him at the time
clearly stating that it would not. It cost
him about $40,000 to buy the estate’s
interest to save the house being sold.
Like every other asset, the discharge of
the bankrupt will not affect the trustee’s
interest and their ability to realise the
property. The revesting provisions are
quite clear that the trustee has at least
six years after discharge (that is nine
years from the start of the bankruptcy)
to deal with property without having
to seek extensions to do so.
In these and several other cases, the coowners could have quite rightly bought
our interest in the property at a greatly
lower price years before they eventually
did, but believed that we would never
be in a commercial or legal position to
enforce our interest in the property.
By Michael Peldan
Partner, Worrells Brisbane
Worrells Plain Talk e-Update
October 2011
83
WHAT HAPPENS WHEN A MEMBER OF A SELF
MANAGED SUPER FUND BECOMES BANKRUPT?
3
WHAT HAPPENS WHEN A MEMBER OF A SELF MANAGED SUPER FUND BECOMES BANKRUPT?
For the first time since the inception of the superannuation guarantee legislation twenty years ago there are now more
funds tied up in SMSF’s than are tied up in the larger industry funds. At the same time bankruptcy numbers remain high,
so it is timely to look at the interaction of these two elements.
Most SMSF are managed by corporate
trustee, and the relevant legislation
requires all members of the SMSF
to be a director of that corporate
trustee. But a difficulty arises when
a member becomes bankrupt as the
Corporations Act prohibits a bankrupt
from acting as a director of any company.
Further, under the superannuation
legislation a bankrupt is a “disqualified
person” and cannot take part in the
management of a superfund.
Clearly if a bankrupt cannot be a
director of the trustee of a SMSF
he also cannot be a member of that
fund, and his entitlements will need
to be otherwise dealt with. But
the good news is that there is a six
month period of grace during which
this issue can be addressed.
The period of grace applies only to
dealing with the bankrupt’s entitlement.
That is there is no period of grace in
relation to acting as a director. This
means that if the bankrupt is the
sole member of the SMSF and the
sole director of the trustee company
he will need to arrange for a new
director to be appointed quickly.
84
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
The most obvious way to deal with a
bankrupt’s interest in a SMSF is simply
to have that interest transferred to a
larger fund, within the six month period
of grace. This is not a transaction
which the trustee in bankruptcy can
frustrate, unless he or she believes that
that interest includes contributions
which should not have been made
and which are recoverable under
section 128B of the Bankruptcy Act
(see our November 2008 e Update
for a discussion on section 128B).
Another option is for the members
entitlements to be paid out, assuming
that this is permissible under the relevant
deed and legislation. A superannuation
payout made after bankruptcy is exempt
from realisation in the bankruptcy. If the
entitlement is taken as a pension, it will
be included as income of the bankrupt
when the trustee assesses whether or
not income contributions are payable.
Again the provisions of section 128B
may apply in some circumstances.
Usually the shares in the trustee
company will be held by the bankrupt
and will therefore vest in the trustee of
the bankrupt estate. But those shares
will have no commercial value and the
bankruptcy trustee will cooperate in a
transfer to any nominated third party.
In summary those involved with SMSFs
have three factors to consider:
a.A bankrupt’s entitlement in a SMSF
cannot remain as part of that fund
when he can no longer be a director.
b.In some circumstances all or part
of the bankrupt’s interest in his
super may be recoverable by the
trustee if contributions have been
made in voidable circumstances.
c.Lump sum payments made to a
bankrupt after the start of the
bankruptcy are exempt but pensions
will be treated as income for
income contribution purposes.
By Chris Cook
Partner, Worrells Brisbane
Worrells Plain Talk e-Update
February 2012
worrells articles
3
A TALE OF THREE PROPERTIES
Many times, however, we find that
properties that were owned by the
soon-to-be-bankrupt in the period
leading up to commencement of the
bankruptcy are no longer in their names
when we are appointed. It is these
transfers of property, particularly the
property transfers in three separate
estates we are handling and which
led to three different outcomes,
which are examined in this article.
There is usually nothing wrong with
a bankrupt selling a property in the
months before bankruptcy, as long as it
is for true value and the consideration
is accounted for properly. The acid test
of whether this happens is whether the
creditors are disadvantaged because
of the sale and the ultimate use of the
funds. For example, a trustee could not
complain about the sale of a property
before bankruptcy for true value where
all of the money went to the mortgagee
holding security over that property. The
creditors have not been disadvantaged.
However sometimes properties are
sold undervalue; sometimes for “love
and affection” (yes, people still try this
one); and sometimes the consideration,
although properly calculated, is not paid.
The three cases mentioned in this article
highlight the extremes of these positions.
In the first case, a quarter share in a
property was transferred a few weeks
before the bankruptcy commenced. In
obtaining a copy of the transfer form
, it indicated that the quarter share
was transferred for $130,000 – and
stamp duty was duly paid on that
amount. We obtained a valuation
of the property which showed that
$130,000 was more than a fair value
for that share. So far so good, but was
the consideration actually paid? There
was no indication of this happening.
We then obtained details of the
mortgaged debt. The debt secured
against the property was for more
than the value of the property. The
consideration ‘paid’ was the assumption
of the mortgage. When we considered
the acid test, that the share had no equity
(the value being less than the secured
debt), we could not show that anything of
value left the grasp of the creditors when
title was transferred. We could not see
any commercial recovery for the estate
as the secured creditor was always
going to get the proceeds of any sale.
The second case was only slightly
different. The half share in the property
had been transferred under the same
circumstances and the assumption of
debt was used as the consideration. The
transfer form had both a valuation and
the formal agreement to assume the
secured debt attached. The valuation
obtained by the parties checked out,
but the level of the debt secured on the
property was $80,000 less than the
valuation. That is, $40,000 of equity
(the equity in the half-share) was
transferred but no consideration was
paid for that equity. Remarkably the
documents attached to the transfer
clearly showed this discrepancy. We
issued a demand for the $40,000 that
should have been an asset in the estate.
A tale of three properties
In last month’s e-Update we detailed some of our dealings with real properties in bankruptcy estates. The central
message was that trustees retained a vested interest in real property and can deal with that interest late in the
bankruptcy period and up to six years after the bankrupt has been discharged.
The third case is a combination of the
last two with a twist. The share in the
property was transferred for a sum
based on a valuation. That valuation
checked out. The assumption of the
mortgaged debt was again the major
consideration paid, and the secured
debt was again less than the value of the
property. Equity had been transferred
but not obviously paid for at the time
the bankruptcy commenced. The
twist was that the new owner of that
share (a relative of the bankrupt) had
a bank cheque in the name of the old
owner for the amount of the equity
transferred and was ready to hand that
across to us when we were appointed.
They had agreed that he would hold
it until the trustee was appointed.
We quickly determined that the amount
of the cheque would have been the
amount that the estate would have
received if the property had remained
in the estate (probably more if selling
costs were taken into account). The
new owner owed the old owner the
money – really he was a debtor in
the estate – and he happily paid it to
us. This is a very rare occurrence.
If the message in our previous article
was that a trustee’s rights survive
the duration of the bankruptcy
and discharge, the message of
this article is that trustee’s still
have some rights of recovery if the
property is transferred away before
the bankruptcy commences.
By Michael Peldan
Partner, Worrells Brisbane
Worrells Plain Talk e-Update
November 2011
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
GLOSSARY
87
GLOSSARY
GLOSSARY
A
C
Annual Meeting & Annual Report
Caveat
Liquidators of Voluntary Windings
Up (whether Members or
Creditors Voluntary Wings Up)
are required under section 508 of
the Corporations Act to either
[latin: Let him beware]
(i)hold an annual meeting of members
and creditors of the company; or
(ii)lodge an annual report with
ASIC detailing the position
of the winding up.
ASIC
The Australian Securities and
Investments Commission
A notice, usually on a register, to place
the public on notice that no action of a
certain kind may be taken without first
informing the person who gave notice.
The most common use is placing a
notice on the title of Real Property to
protect an interest in that property.
Close Associate
(Corporations Act) of a director means:
(a)a relative or de facto spouse
of the director; or
Associated Entity
(b)a relative of a spouse, or of a de
facto spouse of the director.
In relation to a person, means:
Committee of Creditors or Inspection
(a)an entity (other than a company)
that is, or has been, associated
with the person; or
A smaller body of creditors or its
representatives (usually 3 to 7) that
have been elected by the main body of
creditors to represent them at meetings
with the appointee to the insolvency
estate. The committee has the same
powers as the general body of creditors
in making resolutions at meetings.
(b)a company that is, or has been,
associated with the person at a time
when the company is, or was, as the
case may be, a private company.
B
Bankrupt
Composition
A person:
One of the two types of agreements
that can be made between a bankrupt
and their creditors (under section 73 of
the Bankruptcy Act) during bankruptcy.
Acceptance of a proposal for a
Composition will annul the bankruptcy.
(a)against whose estate
a sequestration order
has been made; or
(b)who has become bankrupt by
virtue of the presentation of a
debtor’s petition and remains
undischarged (an undischarged
bankrupt). A discharged bankrupt
is a bankrupt who has been
discharged from bankruptcy under
Section 149 of the Bankruptcy Act.
Bankruptcy Notice
A notice issued by the Official
Receiver to a debtor under section
41 of the Bankruptcy Act requiring
the debtor to satisfy a Judgment
debt with a specific time period.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
Creditor
An entity that is owed money by another.
Creditor’s Petition
An application (a petition) to the Courts
to place a debtor into an insolvent estate
(bankruptcy for a person or liquidation for
a company) under an Order of the Court.
The application is usually made by a
creditor, or more than one creditor jointly,
that has an unsatisfied Bankruptcy
Notice or Statutory Demand. The
application must be heard by the Courts.
Creditors’ Voluntary Winding Up
Is the winding up of an insolvent
company under Part 5.5 of the
Corporations Act. This type of
winding up may be commenced
through the Voluntary Administration
provisions of the Corporations
Act, or through a meeting of the
company’s members through the
voluntary winding up provisions.
D
Debt Agreement
Means an agreement under
section 185H of the Bankruptcy Act
resulting from the acceptance of
a debt agreement proposal under
Part IX of the Bankruptcy Act.
Debtor
An entity that owes money
to another (a creditor).
Debtor’s Petition
Means a petition presented by a
debtor against himself or herself
and includes a petition presented
against a partnership in pursuance of
section 56 of the Bankruptcy Act and
a petition presented by joint debtors
against themselves in pursuance of
section 57 of the Bankruptcy Act.
Deed of Company Arrangement
Means a deed of company arrangement
executed under Part 5.3A of the
Corporations Act or such a deed as
varied and in force from time to time. It
is a formal arrangement entered into
between an insolvent company and
its creditors to resolve it outstanding
debt without going into liquidation.
Dependant
In relation to a bankrupt
means a person who:
(1)resides with the bankrupt; and
(2)does not receive any income
from a person other than the
bankrupt or a spouse or former
spouse of the bankrupt and:
(3)is wholly dependant on the
bankrupt for economic support
or partially dependant on the
bankrupt and partially on the
spouse or former spouse.
PERSONAL INSOLVENCY
A person who:
(a)is appointed to the position
of director; or
(b)is appointed to the position of an
alternate director and is acting
in that capacity regardless of the
name that is given to their position.
Unless the contrary intention appears,
it also includes a person who is not
validly appointed as a director, if:
(a)they act in the position
of a director; or
(b)the director of the company or
body are accustomed to act in
accordance with the person’s
instructions or wishes.
Director Penalty Notice
A notice served by the Commissioner
of Taxation on a director regarding
a remittable amount, under the
Prompt Recovery Regime.
Disclaiming a Lease
The process where a liquidator
of bankruptcy trustee formally
terminates an ongoing lease (or
other financial obligation), thereby
activating the right of the financier
to deal with the financed asset.
Doctrine of Exoneration
A principle in equity law that deals with
the rights of co owners of property
where one co owner has used that
property as security for a loan that
solely benefited that person. The
Doctrine makes assumptions about
the roles of principle and surety
over the loan and the security.
Dividend
A payment from an insolvent estate
on a proved claim in that estate.
Dividends are paid under the provisions
of the Corporations Act or Bankruptcy
Act in the set priorities for different
classes of creditors and “pro rata”
to the creditors within the class.
E
Eligible Applicant
(in relation to Public Examinations)
In relation to a corporation, means:
(a)ASIC; or
(b)a liquidator or provisional
liquidator of the corporation; or
(c)an administrator of the
corporation; or
(d)an administrator of a deed of
company arrangement executed
by the corporation; or
(e)a person authorised in
writing by ASIC to make:
(i)applications under the
Division of Part 5.9 in which
the expression occurs; or
(ii)such an application in relation
to the corporation.
Employee Entitlements
Amounts owing the employees of the
insolvent, usually made up of outstanding
wages, commissions etc; outstanding
leave entitlements and redundancy
payments. These entitlements are
generally priority claims in insolvent
estates, but the level of that priority
and the amount of the etitlement that is
priority varies in certain circumstances.
Entity
Means a natural person, company,
partnership or trust.
Examinable Affairs
In relation to a bankrupt means,
(a)the persons dealings, transactions
property and affairs; and
(b)the financial affairs of an
associated entity of the person,
in so far as they are, or appear to
be, relevant to the person or to any
of his or her conduct, dealings,
transactions, property and affairs.
In relation to a company means:
(a) the promotion, formation,
management, administration or
winding up of the corporation; or
(b)any other affairs of the corporation
(including anything that is included
in the corporation’s affairs
because of section 53); or
(c)the business affairs of a connected
entity of the corporation, in so
far as they are, or appear to be,
relevant to the corporation or to
anything that is included in the
corporation’s examinable affairs
because of paragraph (a) or (b).
GLOSSARY
Director
F
Floating Charge
Includes a charge that conferred
a floating security at the time of
its creation but has since become
a fixed or specific charge.
G
GEERS
The General Employee Entitlements
& Redundancy Scheme that
provides fuding for the payment of
employee entitlements. It is part
of the Australian Government’s
Department of Employment and
Workplace Relations. This scheme
provides funding for the payment of
certain entitlements left outstanding
in liquidations and bankruptcies.
I
Incapacitated Entity
An entity that is in liquidation
or receivership, or which has a
representative appointed; and a
person that in bankrupt or who has
entered into some arrangement
under the Bankruptcy Act.
Income Contribution Assessment
The assessment of a bankrupt’s
income by their Trustee to determine
whether the bankrupt is liable
under the Bankruptcy Act to pay
a contribution to their estate.
Indemnity
An enforceable agreement by
one person to pay another person
sums of money that are owed, or
may become owed, due to a costs,
loss or damage, especially in the
form of financial compensation.
89
GLOSSARY
GLOSSARY
Insolvent
A state of not being able to satisfy ones
debts as and when they become due and
payable. Insolvency can also be deemed
for non-satisfaction of a Bankruptcy
Notice or a Statutory Demand.
Insolvent under Administration
Means a person who:
(a)under the Bankruptcy Act 1966 or
the law of an external Territory,
is a bankrupt in respect of a
bankruptcy from which the person
has not been discharged; or
(b)under the law of an external
Territory or the law of a foreign
country, has the status of an
undischarged bankrupt;
and includes:
(c)a person any of whose property
is subject to control under:
(i)section 50 or Division 2 of Part X
of the Bankruptcy Act 1966 ; or
(ii)a corresponding provision of the
law of an external Territory or
the law of a foreign country; or
(d)a person who has executed
a personal insolvency
agreement under:
(i)Part X of the Bankruptcy
Act 1966 ; or
(ii)the corresponding provisions of
the law of an external Territory
or the law of a foreign country;
where the terms of the agreement
have not been fully complied with.
ITSA
Insolvency and Trustee Service Australia
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
J
M
Joint Tenancy
Maintenance Agreement
Ownership of land by two or
more persons who have identical
interests in the whole of the land.
Joint Tenancy can arise only when
4 conditions are satisfied:
Under the Bankruptcy Act means a
maintenance agreement, within the
meaning of the Family Law Act 1975,
that has been registered in or approved
by a Court in Australia or an external
territory or any other agreement with
respect to the maintenance of a person
that has been so registered or approved.
1.Each joint tenant is entitled to
possession at the same time;
2.The interests must be identical
3.Each must have the same title
4.The interests must exist
at the same time.
Judgment
Means a judgment, decree or order,
whether final or interlocutory, obtained
by way of a decision of a Court,
made pursuant to an application to
the Court to make that decision.
L
Lease
A contract under which the lessor grants
the lessee exclusive possession of the
property for an agreed period, usually
in return for rental and, sometimes, a
capital sum called the premium. These
are to be distinguished from Chattel
Mortgages that are a security over
assets owned by the entity or person.
Liquidation
The process of winding up a company’s
affairs, having a liquidator appointed
to the company, whether it is solvent
(members voluntary winding up) or
insolvent (creditors voluntary winding
up or Official Liquidation by the Courts).
Liquidator
A personal able to be appointed
to oversee the winding up of a
company. See “Registered Liquidator”
and “Official Liquidator”.
Members Voluntary Winding Up
This is the process of winding up a
solvent company, done when the
members no longer wish to retain the
company structure. There can be a
number of reasons for the members
wanting to do this, but usually it is
because the company has reached the
end of its useful life. This is the only
process for fully winding up the affairs
a solvent company. It ensures that
outstanding creditors are paid in full and
protects the members’ interests while
the company structure is dismantled.
N
National Personal Insolvency Index
(NPII)
In Bankruptcy, means the Index
of that name established under
the Bankruptcy regulations
Net Value
In relation to property, means:
(a)if the property is unencumbered:
the value of the property;
(b)if the property is encumbered
and the unencumbered value of
the property exceeds the amount
or value of the encumbrances:
the amount of the excess; or
(c)in any other case: a nil amount.
PERSONAL INSOLVENCY
Personal Insolvency Agreement
(in Bankruptcy)
The name of the agreement that can
be made between a debtor (being
a real person) and their creditors
under Part X of the Bankruptcy Act.
In relation to an entity, in
relation to a time, means:
(a)if the entity is a trust and the total
value of the trust property as at
that time exceeds the total of the
amounts of the trustee’s liabilities
as at that time (other than liabilities
constituted by the rights of persons
as beneficiaries under the trust):
the amount of the excess;
(b)if the entity is not a trust and
the total value of the entity’s
assets as at that time exceeds
the total of the amounts of the
entity’s liabilities as at that time:
the amount of the excess; or
(c)in any other case: a nil amount.
O
Objections to Discharge
A process where a Trustee in
Bankruptcy may apply for the extension
of the term of a bankruptcy (effectively
keeping someone bankrupt for an
extended period). Objections to
Discharge must be based on some
‘Ground’ and - depending on that Ground
- the extension may be for 2 or 5 years.
This process is possible under Division
2 of Part VII of the Bankruptcy Act.
Official Liquidator
Means a person registered as an official
liquidator under section 1283 of the
Corporations Act. (Also see “Liquidator”
and “Registered Liquidator”)
P
Part IX
Part IX (Nine) of the Bankruptcy Act,
dealing with the administration of smaller
insolvent estates outside bankruptcy.
Part X
Part X (Ten) of the Bankruptcy
Act, dealing with administration
of insolvent estates outside of
bankruptcy leading to a proposal by a
debtor to their creditors to enter into
a Personal Insolvency Agreement.
Preferential Payment
A payment(s) to a creditor made
under certain circumstances whilst
the payer is insolvent, where that
payment is recoverable from the
recipient by a Liquidator of a company
or a Trustee of a Bankrupt Estate.
Proof of Debt
Specific forms under the Corporations
Act and Bankruptcy Act for a creditor to
prove the existence and quantum of their
claim against the insolvent estate in the
estate for voting and dividend purposes.
The forms have to be in accordance
with form 535 (or form 536 for employee
claims) under the Corporations Act and
Form 8 under the Bankruptcy Act.
Proxy
The agency, function, or office of a
deputy who acts as a substitute for
another. Authority or power to act for
another by a document giving such
authority. In Insolvent estates, the
appointment of a proxy is performed by
the creditor for attendance at meetings
of creditors under the appropriate forms.
Public Examination
In relation to a company: a common
name given to the process of
examining parties that are connected
to the company about the affairs of
the company. These examinations
are conducted by the Courts
under section 596A and section
596B of the Corporations Act.
In relation to a bankrupt: a common
name given to the process of
examining parties that are connected
to the bankrupt about the affairs of
the bankrupt. These examinations
are conducted by the Courts under
section 81 of the Bankruptcy Act.
Q
GLOSSARY
Net Worth
Quorum Bankruptcy Act
In relation to the Bankruptcy Act,
a quorum is constituted by:
(a)The presence in person of
the trustee (or the trustee’s
representative); and
(b)A creditor, or a proxy or attorney
of a creditor, participating in
person or by telephone.
Note: A meeting requires at least
2 persons. Therefore the person
covered by paragraph (2)(a) cannot
also be the proxy or attorney of the
creditor covered by paragraph (2)(b).
R
Receivers and Managers
A receiver of property of a body
corporate is also a manager if the
receiver manages, or has under the
terms of the receiver’s appointment
power to manage, affairs of the body.
Registered Liquidator
Means a person registered as
a liquidator under subsection
1282(2) of the Corporations Act.
Registered Trustee
Means a person that has been
registered to act as a Trustee under
Division 1 of Part VIII in appointments
under the Bankruptcy Act.
Resolution
A motion moved at a meeting of creditors
(or a committee)that is approved by the
required majority of creditors (more
than 50% in number and 50% in value)
voting for the motion. For a Special
Resolution under the Bankruptcy Act
a majority of 50% in number and 75%
in value is required. The Corporations
Act has no special resolutions.
91
GLOSSARY
GLOSSARY
S
Scheme of Arrangement
One of the two types of agreements
that can be made between a
bankrupt and their creditors (under
section 73 of the Bankruptcy Act)
during bankruptcy. Acceptance of a
proposal for a scheme of arrangement
will annul the bankruptcy.
Section 73 Arrangements
Arrangements that are made by
bankrupts with their creditors to provide
for the annulment of the bankruptcy
and the creation of a formal obligation
for the ex-bankrupt to satisfy their
creditors (wholly or in part) over time.
Sequestration Order
An Order made by the Federal Court
at the hearing of a creditor’s petition
against a personal debtor (a real person
as opposed to a company) that makes
that person an undischarged bankrupt.
Solvent
Means being able to pay all ones
debts as and when they fall due.
Special Resolution
Subrogation
The substitution of one person for
another so that the person substituted
succeeds to the rights of the other.
T
Tenants in Common
Equitable ownership of land by
two or more persons in equal or
unequal undivided shares. The
share does not automatically pass
to the other owners under a right of
survivorship (as with joint tenancy).
Trustee (in Bankruptcy)
Means:
(a)in relation to a bankruptcy: the
trustee of the estate of the bankrupt;
(b)in relation to a Personal Insolvency
Agreement under Division 6
of Part IV: the trustee of the
Personal Insolvency Agreement;
(c)in relation to the estate of a
deceased person in respect of which
an order has been made under Part
XI: the trustee of the estate; or
(e)in relation to a trust:
(i)if only one person is a trustee
of the trust: that person; or
Under the Bankruptcy Act, means
a resolution passed by a majority
in number and at least threefourths in value of the creditors
present at a meeting of creditors
and voting on the resolution.
(ii)if 2 or more persons are
trustees of the trust: any one
or more of those persons;
Statutory Trustee
U
An appointment under a state’s property
law legislation (for example: section 38 of
the Qld Property Law Act) of Trustees to
be held by them on the statutory trust for
sale or on the statutory trust for partition.
Undervalued Transaction
Subordinate
To treat as less important. In relation to
a claim in a insolvent estate: to place
it behind other claims in priority.
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WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS WORRELLS.NET.AU
in his, her or its capacity as a trustee,
or in their respective capacities as
trustees, as the case may be, of the trust.
A transfer of property from a person
who later becomes bankrupt
where the transferee gave no
consideration for the transfer or
gave consideration of less value than
the market value of the property.
Undervalued transaction may be voided
under section 120 and associated
sections of the Bankruptcy Act.
V
Virtual Meetings
The common name given to the process
of trustees passing a single Creditors’
Resolution without calling a physical
meeting of creditors - done under
section 64ZBA of the Bankruptcy Act.
X
X (Part X)
Part X (Ten) of the Bankruptcy
Act, dealing with administration
of insolvent estates outside of
bankruptcy leading to a proposal by a
debtor to their creditors to enter into
a Personal Insolvency Agreement.
PLAIN TALK.
STRAIGHT ANSWERS.
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