Bankruptcy

A Bankruptcy Notice is a document issued by the Official Receiver (who sits in the Australian Financial Security Authority (AFSA)) at the request of a creditor who has obtained a final judgment or order from a court against a debtor for payment of money.  The Bankruptcy Notice requires the debtor to pay or secure the payment of the amount claimed in the notice within 21 days of the notice being served on the debtor.

If the debtor does not comply with the Bankruptcy Notice or apply to the court to set it aside within 21 days then the debtor will have committed an “act of bankruptcy”.  Once an “act of bankruptcy” has been committed, the creditor who served the Bankruptcy Notice can commence court proceedings against the debtor and ask the court to make an order bankrupting the debtor (called a Sequestration Order).

A trustee in bankruptcy is the person in charge of administering a bankrupt estate upon the making of a Sequestration Order.  The trustee can either be the Official Trustee in Bankruptcy or a trustee who is registered with AFSA on the National Personal Insolvency Index and permitted to have control of the administration of bankruptcies.

The trustee will undertake investigations into the bankrupt estate and the bankrupt’s financial affairs.  These investigations can date back a number of years in order to ascertain whether or not invalid transactions have taken place, such transfers that were done in order to defeat creditors or make preferential payments.

The trustee has a duty to recover property for the benefit of the bankrupt estate.  Once the trustee has recovered all of the divisible property, the trustee will then realise the property and make distributions to creditors in proportion to their proved debts.

A Proof of Debt is a document which allows an unsecured creditor to lodge a claim against the bankrupt estate for payment of the total debt amount owing to the creditor, potentially including legal costs and interest.  It is also the necessary first step for a creditor to participate and vote at a meeting of creditors or to receive a dividend.  Before a creditor is allowed to vote at a meeting of creditors or a dividend is paid, the trustee must adjudicate on the Proof of Debt and decide whether to admit or reject it.  To ensure the Proof of Debt is accepted it must be clearly drafted and it is best practice to substantiate the claim by annexing supporting documents.

The general rule under the bankruptcy regime in Australia is that all property of a bankrupt vests in her trustee as soon as she becomes bankrupt and all property acquired during her bankruptcy vests in her trustee as soon as she acquires it.  However, there are exceptions to the general rule.  For example, the bankrupt is allowed to keep personal property that has sentimental value and most household items of reasonable value.

Similarly, a bankrupt is allowed to keep money transferred into a regulated superannuation fund before bankruptcy.  However, the trustee may be able to access money held in such a fund where unusual lump sum payments were made into the fund before the bankruptcy in the hope of keeping that money away from the trustee or creditors, or where money is paid out of the superannuation fund after bankruptcy as a pension, in which case the money will be treated as income and the bankrupt may have to pay a contribution to the trustee.

If you are bankrupt and plan on accessing your superannuation fund, it is important to obtain expert advice to ensure the monies held in your regulated superannuation fund do not end up in the hands of your trustee.

If a debtor owns property with another person and then becomes bankrupt, the bankrupt’s interest in the property will vest in the trustee and from that point on the trustee will have a beneficial interest in the property.  For example, if A and B own a house together and they each have a 50% share in the house, then A’s 50% share will vest in his trustee as soon as he becomes bankrupt, so the trustee will have a 50% share and B will have a 50% share.  The trustee’s beneficial interest will become a legal interest upon registration of a transfer.  However, there may be circumstances where the legal title does not reflect the real interests of the registered proprietors and so, for example B is entitled to more than a 50% share.

If the trustee decides to recover the bankrupt’s interest in the property, the joint property owner can always negotiate with the trustee to buy the bankrupt’s former interest.  However, if that option is not affordable or the joint property owner and the trustee cannot agree on a price, the trustee can make an application to the court for the appointment of trustees for sale, who will sell the property and divide the proceeds after the trustee’s fees, mortgage, legal fees and agents fees have been paid.

If you own property jointly with a bankrupt it is important to seek expert advice about your legal interests and entitlements before you take part in negotiations with the trustee to ensure you put your best case forward, and you do not short change yourself.