2013/14 GUIDE TO PERSONAL INSOLVENCY SP RIN

2013/14 GUIDE TO
PERSONAL INSOLVENCY
INDICATORS OF INSOLVENCY
PLAIN TALK.
STRAIGHT ANSWERS.
FAST RESULTS.
WORRELLS ARE A TEAM OF FULL TIME SPECIALISTS.
OLVENCY MANAGEMENT, RESTRUCTURE OR INSOLVENCY
S
ADMINISTRATION CAN BE A PERIOD OF GREAT STRESS.
N EXPERIENCED AND SPECIALIST TEAM CAN EASE THE PROCESS,
A
ENSURING A FAIR OUTCOME FOR ALL PARTIES CONCERNED.
EDITORS
Chris Cook, Partner Worrells Brisbane
Kate Lee, Marketing Coordinator
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
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INDICATORS OF INSOLVENCY
PERSONAL INSOLVENCY
1
BANKRUPTCY18
DIVISIBLE PROPERTY IN BANKRUPTCY
22
BANKRUPTCY AND THE FAMILY HOME
28
GETTING OUT OF BANKRUPTCY
32
INCOME CONTRIBUTIONS IN BANKRUPTCY
34
VOID TRANSACTIONS IN BANKRUPTCY
37
PREFERENCES IN BANKRUPTCY
41
PART X PERSONAL INSOLVENCY AGREEMENTS 44
SECTION 73 PROPOSALS 46
DISCHARGE & ANNULMENT
48
RELATED TOPICS
2
5 PHASES OF FAILURE
58
PROOFS OF DEBT AND SECURED CREDITORS 63
MEETINGS OF CREDITORS
65
DIVIDENDS68
CGT AND INSOLVENCY
73
GST AND INSOLVENCY
77
OBJECTIONS TO DISCHARGE
85
VOIDING SUPERANNUATION CONTRIBUTIONS
87
WORRELLS ARTICLES
WHAT’S IN A NAME?
IT’S MY MONEY, ISN’T IT?
ARE SUPERANNUATION MONIES
WITHIN THE TAXMAN’S REACH?
100
101
3
102
WORRELLS.NET.AU
2
WORRELLS PARTNERS
IT’S OUR PEOPLE THAT DELIVER
“‘PLAIN TALK, STRAIGHT ANSWERS
AND FAST RESULTS.”
At Worrells we’re specialists Solvency and Forensic Accounting
is all we do.
• 19 Partners,
• 18 Registered & Official Liquidators,
• 13 Registered Trustees,
• 3 Certified Fraud examiners,
• 5 east coast major metro locations,
Quick decisive action by a highly
skilled team acting in a caring,
respectful and fair manner does
make all the difference.
Established over 40 years ago,
Worrells draws upon over
200 years of partner experience.
…w
e can have experienced staff
at any location, quickly.
WORRELLS QLD
IVOR WORRELL
BRISBANE
CA (Fellow)
Liquidator
Registered Trustee
Justice of the Peace
07 3225 4310
[email protected]
RAJ KHATRI
BRISBANE
CA (Fellow)
Liquidator
Registered Trustee
Commissioner of Declarations
07 3225 4320
[email protected]
3
Ivor is a leading Queensland insolvency
practitioner. In a career spanning 40
years he has developed extensive
experience in corporate and personal
insolvency, receivership and litigation
support. Ivor is often called upon as an
expert witness and has experience as
receiver of property.
Raj’s area of expertise is corporate and
personal insolvency and has nearly
three decades of experience in the field.
He has extensive experience in viability
analysis and administration of corporate
continued trade, resulting in more going
concern sales.
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
Using proprietary technology, our
team have successfully completed
over 26,000 assignments.
Specialist accounting services,
delivered by dedicated full time
specialists, on time, on budget
every time.
MORGAN LANE
BRISBANE
CA
CPA (Fellow)
Liquidator
Registered Trustee
07 3225 4330
[email protected]
MICHAEL GRIFFIN
BRISBANE
CA
Liquidator
Registered Trustee
Commissioner of Declarations
07 3225 4360
[email protected]
MICHAEL PELDAN
BRISBANE
CA (Fellow)
Liquidator
Registered Trustee
Certified Fraud Examiner
Commissioner of Declarations
Justice of the Peace
07 3225 4370
[email protected]
CHRIS COOK
BRISBANE
CA
CPA
Liquidator
Commissioner of Declarations
07 3225 4386
[email protected]
Morgan Lane joined the firm in 1992
and became a full partner in 1996. He is
a member of the Institute of Chartered
Accountants in Australia, a member of
Insolvency Practitioners Association of
Australia and a fellow of CPA Australia
(specialist in insolvency
& reconstruction).
Michael is a member of the Institute
of Chartered Accountants in Australia,
an associate of the Insolvency
Practitioners Association of Australia,
and a member of the Association
of Certified Fraud Examiners.
He oversees a team in Brisbane and
works closely in consultation with the
Ipswich and Toowoomba offices.
Michael has been in public practice
since 1991. He is a fellow of Institute
of Chartered
Accountants in Australia and a member
of the Association of Certified Fraud
Examiners.
Michael oversees a personal and
corporate insolvency team in the
Brisbane office.
Chris has in excess of a decade of
experience in both the corporate and
personal insolvency fields. He has
significant involvement in numerous
personal insolvency appointments at
Worrells including bankruptcies and
personal insolvency arrangements. Chris
also has experience as a receiver of
partnership property by court order and
by private agreement.
WORRELLS.NET.AU
4
WORRELLS QLD
ADAM WARD
IPSWICH/TOOWOOMBA
CPA
Liquidator
Registered Trustee
Commissioner for Declarations
07 3280 6201 – Ipswich
07 4637 6501 – Toowoomba
[email protected]
JASON BETTLES
GOLD COAST
CA
Liquidator
Registered Trustee
Justice of the Peace
07 5553 3405
[email protected]
PAUL NOGUEIRA
SUNSHINE COAST
CA
CPA
Liquidator
Registered Trustee
Commissioner of Declarations
Adam spent 10 years in the Worrells
Brisbane office and subsequently
spearheaded the Ipswich and
Toowoomba offices. His experience is
in managing distressed businesses and
is adept in the manufacturing, building
and construction, mining, hospitality
and retail sectors. He specialises in
conducting independent financial
capacity assessments.
Jason is the managing partner
of Worrells Gold Coast and is a
Chartered Accountant and a member
of the Insolvency Practitioners
Association of Australia. With
extensive experience in investigating
and analysing corporate and personal
insolvency matters, he presents
appropriate informal and formal
solutions to clients.
Paul joined Worrells in 1999 and became
a partner in 2006. He is experienced
in all forms of corporate and personal
insolvency administrations across
numerous industry sectors.
He specialises in the SME sector in
business turnaround management and
insolvency solutions.
07 5459 1002
[email protected]
JOHN CUNNINGHAM
SUNSHINE COAST
CPA
Liquidator
Registered Trustee
07 5459 1001
[email protected]
5
John has over 23 years experience in
insolvency, starting out with the then
Official Receivers Office in Melbourne in
1989. John joined Worrells as part of the
Ramsay Clout merger in 2012. He has
developed a particular expertise in the
areas of building, retail and hospitality.
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
WORRELLS NSW/ACT
NICHOLAS MALANOS
SYDNEY
CPA
Liquidator
Registered Trustee
Certified Fraud Examiner
Member IPA
Graduate Diploma in Administration
Nick is a senior partner in Worrells
Sydney and has over 28 years experience
in all aspects of corporate and personal
insolvency. His vast knowledge in
the areas of voluntary administration
and deeds of company arrangement,
has allowed numerous companies to
successfully continue over the years.
02 9249 1200
[email protected]
CHRISTOPHER DARIN
SYDNEY
CA
Liquidator
Justice of the Peace
02 9249 1200
[email protected]
AARON LUCAN
SYDNEY
CA
02 9249 1200
[email protected]
STEPHEN HUNDY
CANBERRA
CA
Liquidator
Registered Trustee
Member of IPA
02 6287 6000
[email protected]
Chris became partner of Worrells
Sydney in 2008, after having
been in practice on his own since
1996. His solid understanding of
corporate insolvency and advocacy
appointments allows him to explore
all financial avenues available and to
assist companies to effectively deal
with all stakeholders.
Aaron joined Worrells Sydney in
January 2006 and became a partner
of the firm in July 2013. Aaron has
over 10 years experience in all forms
of corporate and personal insolvency
administrations. In addition to servicing
clients and referrers in Sydney and
surrounding areas, Aaron manages
Worrells’ Central West NSW practice.
Stephen joined Worrells in 2011 as a
partner of Worrells Canberra. He has
worked exclusively in the insolvency
industry since 1995 and provides
practical, commercial advice on
business issues. He also provides fraud
and financial investigation reports,
financial viability reviews and assists in
shareholder/partnership disputes.
WORRELLS.NET.AU
6
WORRELLS VIC
PAUL BURNESS
MELBOURNE
CPA
Liquidator
Registered Trustee
Certified Fraud Examiner
Member IPA
03 9613 5510
[email protected]
MATTHEW JESS
MELBOURNE
CPA
Liquidator
Registered Trustee
Member IPA
03 9613 5513
[email protected]
CON KOKKINOS
MELBOURNE
CPA
Liquidator
03 9613 5502
[email protected]
IVAN GLAVAS
MELBOURNE
CA
Liquidator
Member IPA
03 9613 5517
[email protected]
7
Paul is the managing partner of Worrells
Melbourne, having established the
practice in 2002. He has extensive
knowledge in all forms of corporate and
personal insolvency and reconstruction.
His experience extends to liquidations
of both large and small entities,
across many industries including,
manufacturing, construction, agricultural,
retail, and professional practices.
Matthew joined Worrells in 2004 and
became partner in 2006. He is an
official liquidator and certified practising
accountant, who has considerable
experience in the insolvency, commercial
accounting and corporate finance fields.
He also has experience includes due
diligence investigations, sale of business
transactions, corporate reconstructions
and financial turnarounds.
Con Kokkinos became a partner
in Worrells Melbourne in 2009.
With over 15 years in public practice,
Con is experienced in all forms of
corporate and personal insolvency
administrations and specialises in
small to medium business turnaround
management and solvency solutions.
Ivan Glavas became a partner of Worrells
Melbourne in January 2013. Ivan is a
Chartered Accountant with over 18 years
experience in dealing with corporate
and personal insolvency related matters
across numerous industries. Ivan’s
experience also includes litigation
support, fraud investigation and business
reconstruction advice.
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
NATHAN DEPPELER
BALLARAT/BENDIGO
CA
Liquidator
03 5338 4694
[email protected]
In July 2013, Nathan Deppeler was
appointed a Partner of Worrells Solvency
& Forensic Accountants and operates
from offices in Ballarat and Bendigo
servicing the Western and North/
Western Victoria region. Nathan has a
broad range of experience in all forms
of Corporate and Personal Insolvency
having specialised in insolvency since
graduating and became a registered
and official liquidator in May 2012.
FORENSIC PARTNERS
Our Worrells Forensic arm naturally
complements our core insolvency
capability.
A Forensic Accountant is often
retained to analyse, interpret,
ANITA OWENS
SUNSHINE COAST
CPA (Fellow)
Liquidator
Commissioner of Declarations
Forensic Accountant
07 5459 1003
[email protected]
SHARLENE ANDERSON
MELBOURNE
CPA
Chartered Accountant
Certified Fraud Examiner
Forensic Accountant
03 9613 5500
[email protected]
summarize and present complex
financial and business related
issues in a manner which is both
understandable and properly
supported.
Each of our Forensic Partners brings
a wealth of practical experience and
knowledge to the application of a full
range of forensic services.
Anita joined Worrells in 2012 as part
of the Ramsay Clout merger. Anita
commenced her insolvency career
in Noosa in 1989. She completed a
Bachelor of Business at the University
of Southern Queensland in 1995 and a
Graduate Certificate of Forensic Studies
(Accounting) at Monash University in
2005. Anita has experience in forensic
accounting and all aspects of insolvency.
Sharlene is a forensic accountant and
registered company auditor. Sharlene
joined Worrells in 2013 as a Partner
specialising in Forensic Accounting.
Sharlene has considerable experience
across various areas of forensic
accounting including financial
statement fraud, embezzlement,
litigation support and valuations.
WORRELLS.NET.AU
8
WORRELLS IS HERE
TO ASSIST YOU
INSOLVENCY SETS UP LARGE PRACTICAL AND EMOTIONAL HURDLES TO THOSE FACING
THE CHALLENGE FOR THE FIRST TIME. THIS IS TRUE OF THE PROFESSIONAL ADVISOR
OFFERING GUIDANCE TO HIS OR HER CLIENT, IT’S TRUE FOR THE DIRECTOR FACING
THE LOSS OF A COMPANY AND IT’S TRUE FOR EACH INDIVIDUAL CONTEMPLATING THE
POSSIBLE LOSS OF MUCH THAT THEY HAVE WORKED LONG AND HARD FOR.
The insolvent client’s level of dependence on his or her
professional advisor is often both misunderstood and
understated. It is the client’s accountant or solicitor, or
perhaps both working together, who commonly has the
onerous task of discovering and demonstrating the true
financial position. Frequently they must persuade the
client that specialist insolvency help is necessary, and it
is they who must find and nominate a suitable insolvency
practitioner who they trust and can work with.
It is true that many insolvencies are invested with strong
emotions; creditors may be angry to learn of their
loss, employees may suffer the stress of being thrown
out of work without adequate notice, customers face
the frustration of lost deposits and incomplete jobs,
bankrupts and directors face crises of confidence in
themselves, and marriage breakdowns are sometimes
the bedfellows of financial difficulties.
The company director and the insolvent debtor, for
their part, are faced with both emotional and practical
problems. It is never easy to admit that a business
venture has been unsuccessful, and added to this the
need to understand new and confusing insolvency terms,
processes and options is no easy feat.
For our professional advisor colleagues, Worrells provides
an independent, objective and knowledgeable resource
that can be called upon to help the professional advisor
help their clients.
Fear that labels such as “bankruptcy”, “insolvency” and
“liquidation” will conjure up in the minds of the minority
suggestions of wrong doing, or financial profligacy, have
to be overcome. The partners of Worrells know from
regular contact with those facing impossible financial
difficulties that an exaggerated sense of the perceived
stigma can lead to delay in seeking the protection and
assistance of insolvency legislation, and can add greatly
and needlessly to the client’s distress.
Worrells have now been providing high quality insolvency
and related service for over 40 years. We pride ourselves
on offering reliable and practical solutions to those
burdened with debt. Our large investment in state of
the art proprietary software streamlines all functions
leading to savings which are passed on by way of
competitive pricing.
Personal bankruptcy and each of the forms of company
insolvency are not about punishing business owners
for making mistakes. And they are not about penalising
people for taking risks, because risk is at the very
essence of our market economy. They are about
removing impossible financial obligations in a way
which is transparent and fair to all. They are about
financial recovery and financial equity.
9
That is why we exist.
For those facing insolvency we provide a service which is
transparent, equitable and respectful.
Worrells 2013/14 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 19 partners.
We offer this Guide to help assist and inform in any role that
you may find yourself in, when contemplating insolvency
administration. Our advice is always made available on a
complimentary and confidential basis with respect and
openness as the cornerstone of all that we do.
WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
“‘FOCUSED LOCALLY,
RESOURCED NATIONALLY
– WORRELLS IS THE
FIRM OF CHOICE FOR
ALL INSOLVENCY
APPOINTMENTS.“‘
NOOSA
MAROOCHYDORE
BRISBANE
IPSWICH
TOOWOOMBA
GOLD COAST
BALLINA
CENTRAL COAST
SYDNEY
CANBERRA
BENDIGO
BALLARAT
MELBOURNE
WORRELLS.NET.AU 10
LATEST PERSONAL
INSOLVENCY STATISTICS
INSOLVENCY FIGURES AS RELEASED BY AUSTRALIAN FINANCIAL SECURITY AUTHORITY (AFSA).
NEW ADMINISTRATIONS UNDER THE BANKRUPTCY ACT 1966
STATISTICS (PROVISIONAL) JULY 2012 – JUNE 2013
RELEASE NO: 131
DATE ISSUED: 9 JULY 2013
BANKRUPTCIES
(PARTS IV AND XI)
DEBT AGREEMENTS
(PART IX)
TOTAL PERSONAL
INSOLVENCY
ACTIVITY
PERSONAL INSOLVENCY
AGREEMENTS (PART X)
11/12
12/13
%
CHANGE
11/12
12/13
%
CHANGE
11/12
12/13
%
CHANGE
11/12
12/13
%
CHANGE
NSW
7,627
6,799
-10.86%
3,089
3,235
4.73%
118
88
-25.42%
10,834
10,122
-6.57%
ACT
172
206
19.77%
146
173
18.49%
6
1
-83.33%
324
380
17.28%
VIC
4,249
4,180
-1.62%
1,755
1,846
5.19%
98
79
-19.39%
6,102
6,105
0.05%
QLD
6,251
6,052
-3.18%
2,485
2,706
8.89%
80
54
-32.50%
8,816
8,812
-0.05%
SA
1,523
1,493
-1.97%
360
484
34.44%
16
17
6.25%
1,899
1,994
5.00%
NT
80
102
27.50%
56
102
82.14%
2
3
50.00%
138
207
50.00%
WA
1,567
1,469
-6.25%
773
772
-0.13%
63
47
-25.40%
2,403
2,288
-4.79%
TAS
694
575
-17.15%
291
334
14.78%
5
5
0.00%
990
914
-7.68%
22,163
20,876
-5.81%
8,955
9,652
7.78%
388
294
-24.23%
31,506
30,822
-2.17%
TOTAL
Note 1:All the above figures refer to personal administrations under the Bankruptcy Act only
(and not corporate insolvency).
Note 2:Provisional statistics are correct at the date of compilation.
Verified annual figures for all types of personal insolvency administrations are available from
our Annual Report.
These figures, together with some historical data, may be found on the Australian Financial Security Authority
homepage at www.afsa.gov.au
For further information on these statistics, please read the Guide to provisional personal insolvency statistics.
11 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
BANKRUPTCY
2010/11
2011/12
2012/13
9000
NSW
8127
7,627
6799
8000
ACT
186
172
206
7000
VIC
4521
4,249
4180
QLD
6145
6,251
6052
SA
1603
1,523
1493
NT
106
80
102
WA
1701
1,567
1469
1000
TAS
713
694
575
0
BANKRUPTCY 2010/11
BANKRUPTCY 2011/12
BANKRUPTCY 2012/13
6000
5000
4000
3000
2000
NSW
ACT
VIC
QLD
SA
PERSONAL INSOLVENCY
AGREEMENTS (PART X)
2010/11
2011/12
2012/13
126
118
88
120
ACT
1
6
1
100
VIC
106
98
79
QLD
74
80
54
SA
7
16
17
NT
0
2
3
WA
55
63
47
20
TAS
6
5
5
0
WA
TAS
P ERSONAL INSOLVENCY
AGREEMENTS (PART X)
2010/11
140
NSW
NT
P ERSONAL INSOLVENCY
AGREEMENTS (PART X)
2011/12
P ERSONAL INSOLVENCY
AGREEMENTS (PART X)
2012/13
80
60
40
NSW
ACT
VIC
QLD
SA
NT
WA
TAS
TOTAL INSOLVENCY ACTIVITY
NSW
2010/11
2011/12
2012/13
12000
T OTAL INSOLVENCY
ACTIVITY 2010/11
10914
10,834
10122
10000
T OTAL INSOLVENCY
ACTIVITY 2011/12
8000
T OTAL INSOLVENCY
ACTIVITY 2012/13
ACT
285
324
380
VIC
6360
6,102
6105
QLD
8463
8,816
8812
6000
SA
1948
1,899
1994
4000
NT
160
138
207
WA
2381
2,403
2288
TAS
1020
990
914
2000
0
NSW
ACT
VIC
QLD
SA
NT
WA
TAS
WORRELLS.NET.AU 12
PERSONAL INSOLVENCY
THRESHOLDS
The following information outlines both the monetary
thresholds and time limits that apply in relevant
insolvency practices.
INCOME CONTRIBUTION THRESHOLD
Income Thresholds before Income Contributions
become Payable (after tax & s139N deductions):
PRIORITY EMPLOYEE ENTITLEMENT
THRESHOLD
Priority Claim for Employee:
A maximum priority dividend (including superannuation)
of $4,200.00 The balance paid as a non-priority debt.
BANKRUPTCY NOTICES
$50,332.10 - No Dependents
$59,391.88 - 1 Dependent
$63,921.77 - 2 Dependents
$66,438.37 - 3 Dependents
$67,445.01 - 4 Dependents
$68,451.66 - 5+ Dependents
Maximum Dependant Income - $3,277.00
Minimum amount for issuance of a Bankruptcy Notice:
$5,000.00
PART IX THRESHOLDS
For current figures please visit our website
via the QR code below.
To be eligible to proposal a Part IX Agreement:
Time period for compliance:
The debtor has 21 days to pay the debt or
be deemed insolvent.
These figures are correct as at 31 July 2013.
$75,498.15 - Income (after tax)
$100,664.20 - Available Assets (after secured debts)
$100,664.20 - Unsecured Creditors
ASSET ALLOWANCES
$3,600.00 - Tools of Trade allowance
$7,350.00 - Motor Vehicle Allowance
$5,176.00 - Obtaining Credit without Disclosure
GENERAL DIVIDENDS
Notice to be given to creditors to lodge Proofs of Debt:
at least 21 days before Declaration
Minimum time after Declaration before payment
of Dividend:
at least 21 days after the end of the lodgement period.
Minimum Dividend:
Liquidators are not required to pay a dividend under
$25.00 to any creditor.
13 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
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2013 GUIDE
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UIDE TO
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WORRELLS.NET.AU 14
INDICATORS OF INSOLVENCY
15 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INDICATORS OF INSOLVENCY
1
PERSONAL
INSOLVENCY
BANKRUPTCY
DIVISIBLE PROPERTY IN BANKRUPTCY
BANKRUPTCY AND THE FAMILY HOME
GETTING OUT OF BANKRUPTCY
INCOME CONTRIBUTIONS IN BANKRUPTCY
VOID TRANSACTIONS IN BANKRUPTCY
PREFERENCES IN BANKRUPTCY
PART X PERSONAL INSOLVENCY AGREEMENTS SECTION 73 PROPOSALS DISCHARGE & ANNULMENT
18
22
28
32
34
37
41
44
46
48
WORRELLS.NET.AU 16
PERSONAL INSOLVENCY
INDICATORS OF INSOLVENCY
PERSONAL INSOLVENCY NUMBERS
APPEAR TO BE ON THE DECLINE,
HOWEVER THE NEED FOR
AN UNDERSTANDING IN THIS AREA
HAS NOT LESSENED.
17 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INDICATORS OFBANKRUPTCY
INSOLVENCY
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?
A person may become bankrupt in one of two ways.
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 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.
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 their 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.
PERSONAL INSOLVENCY
WHAT IS BANKRUPTCY?
1
WHAT IS A STATEMENT OF AFFAIRS?
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:
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:
>
Can’t act as a company officer;
>
Can’t trade under a registered business name
without advising people that they are bankrupt
(they can trade under their own name);
>
Must make all of their divisible assets available
to the trustee;
>
Can’t incur credit over an indexed amount without
advising the lender that they are bankrupt;
>
Must surrender their passport(s) and must seek
permission for overseas travel; and
>Must make all books and records and financial
statements available, including those of associated
entities such as companies and trusts.
WORRELLS.NET.AU 18
INDICATORS OF INSOLVENCY
BANKRUPTCY
CONTINUED
CAN A BANKRUPT CONTINUE TO
EARN INCOME?
CAN THE TRUSTEE RECOVER PROPERTY THAT
WAS SOLD BEFORE BANKRUPTCY?
Yes, a bankrupt may continue to earn income and is
encouraged to do so.
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.
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.
HOW DOES BANKRUPTCY AFFECT PROPERTY?
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:
>
Necessary clothing and household items;
>
Tools of trade to an indexed amount;
>
A motor vehicle to an indexed amount;
>Life assurance or endowment policies
(subject to some limitations);
>
Certain damages and compensation payments;
>
Sentimental property
(as defined in the Bankruptcy Act);
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 AFFECT 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.
>
Superannuation payments
(subject to certain limitations).
19 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INDICATORS OFBANKRUPTCY
INSOLVENCY
CONTINUED
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?
Certain debts cannot be claimed in the bankruptcy.
Non-provable debts cannot be proved for and will not
be released at the end of the bankruptcy. These debts
include:
>
Some portion of a HECS debt;
>
Court imposed fines; and
>
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.
A BANKRUPT IS NORMALLY
DISCHARGED THREE YEARS
AFTER A COMPLETED
STATEMENT OF AFFAIRS IS
LODGED WITH ITSA.
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.
WHAT IS AN ANNULMENT OF THE
BANKRUPTCY?
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:
PERSONAL INSOLVENCY
ARE THE RIGHTS OF SECURED
CREDITORS AFFECTED?
1
>
By an order of the court on the basis that the
bankruptcy should not have occurred;
>
By the bankrupt’s debts and the costs of the
administration being paid in full; or
>
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).
A debtor presenting a debtor’s petition or a creditor filing
a creditor’s petition can obtain consent from a registered
trustee. If no consent is obtained, the Official Receiver will
be the trustee.
WHAT ARE THE TRUSTEE’S POWERS?
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.
WORRELLS.NET.AU 20
BANKRUPTCY
CONTINUED
In summary, the trustee will:
>
Find and protect the assets of the bankrupt;
>
Realise those assets;
>
Conduct investigations into the financial affairs of the
bankrupt and any suspicious transactions;
>
Make appropriate recoveries;
>
Report to creditors;
>
Report offences to ITSA; and
>
Distribute surplus funds to creditors.
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 retires or dies.
GOVERNMENT CHARGES (ARC AND IRC)
Bankrupt estates attract a government charge. This
charge is payable at the rate of 4.7% 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.
21 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
DIVISIBLE PROPERTY
IN BANKRUPTCY
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.
(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 afteracquired property does not vest in the trustee.
The two important factors are:
PERSONAL INSOLVENCY
INTRODUCTION
1
1.The property must have been acquired during the
term of the bankruptcy; and
2.It would otherwise be classified as divisible property.
If existing owned property is not deemed as ‘divisible’
at the commencement of bankruptcy, it would not be
divisible if acquired during bankruptcy.
VESTING OF THE “PROPERTY OF
THE BANKRUPT”
‘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.
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’.
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
BANKRUPTCY ACT 1966 - SECTION 58
Vesting of property upon bankruptcy-general rule
Vesting of property upon bankruptcy-general rule
(1)Subject to this Act, where a debtor becomes
a bankrupt:
(3) Except as provided by this Act, after a debtor has
become a bankrupt, it is not competent for a creditor:
(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
(a) to enforce any remedy against the person or the
property of the bankrupt in respect of a provable
debt; or
(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.
WORRELLS.NET.AU 22
DIVISIBLE PROPERTY
IN BANKRUPTCY
CONTINUED
There are two exceptions that allow creditors to
commence or continue action against property:
documents until title to the property has been transferred
into his or her name.
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.
BANKRUPTCY ACT 1966 - SECTION 58
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.
BANKRUPTCY ACT 1966 - SECTION 58
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.
(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:
Vesting of property upon bankruptcy-general rule
(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.
NEW TRUSTEES
Occasionally the trustee of the estate will change during
the bankruptcy. 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
(a) a maintenance agreement; or
Vesting and transfer of property
(b) a maintenance order; whether entered into or
made, as the case may be, before or after the
commencement of this subsection.
(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.
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
(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.
23 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
DIVISIBLE PROPERTY
IN BANKRUPTCY
CONTINUED
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:
>
All property owned at the time of bankruptcy or
acquired during the bankruptcy;
>
A ny rights or powers over property that existed at the
date of bankruptcy or during the bankruptcy;
>
A ny rights to exercise powers over property;
>
A ny property that vests because an associated entity
received the property as a result of personal services
supplied by the bankrupt (section 139D);
>
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:
BANKRUPTCY ACT 1966 - SECTION 116
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
PERSONAL INSOLVENCY
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.
1
(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.
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 116(2) 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. Some
of them 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.
WORRELLS.NET.AU 24
DIVISIBLE PROPERTY
IN BANKRUPTCY
CONTINUED
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.
4.The 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).
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.
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 and if the
payment is not a pension within the meaning of the
Superannuation Industry (Supervision) Act 1993
(certain conditions apply).
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 a
retirement savings account (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.
12.Amounts paid under a scheme approved by the
States Grants (Rural Reconstruction) Act 1971;
the States Grants (Rural Adjustment) Act 1976
13.Property that was funded either wholly or
substantially, with protected money (what is
protected money is limited as a number of
non-divisible assets lose their protection when
converted into cash, particularly before bankruptcy).
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.
EXEMPT ASSETS
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 page 13 of this guide and 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 - 6.0
Property divisible among creditors - prescribed amounts
25 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
DIVISIBLE PROPERTY
IN BANKRUPTCY
CONTINUED
BANKRUPTCY ACT 1966 - SECTION 129AA
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.
Time limit for realizing property
SENTIMENTAL PROPERTY DOES
NOT INCLUDE ITEMS SUCH AS
ENGAGEMENT/WEDDING RINGS.
(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.
An asset will never revest to the bankrupt if:
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.
1.The asset was owned before the bankruptcy but was
not disclosed in the bankrupt’s Statement of Affairs; or
BANKRUPTCY REGULATIONS 1996 - 6.03A
3. It is cash.
Personal property
Otherwise property will revest six years after either the
bankrupt is discharged or when the asset is disclosed to
the trustee, whichever is later.
(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.
PERSONAL INSOLVENCY
SENTIMENTAL PROPERTY
1
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
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.
WORRELLS.NET.AU 26
DIVISIBLE PROPERTY
IN BANKRUPTCY
CONTINUED
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 extensions 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
(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.
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.
27 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
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 effecting 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.
THE PROSPECT OF LOSING THE
FAMILY HOME IN BANKRUPTCY
IS OFTEN THE MOST STRESSFUL
PART OF BANKRUPTCY.
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.
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.
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.
WHAT IF THERE IS NO EQUITY IN THE
PROPERTY?
WHAT ABOUT JOINT OWNERSHIP?
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.
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.
But sometimes the mortgagees 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.
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
PERSONAL INSOLVENCY
BANKRUPTCY AND THE FAMILY HOME
1
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.
WORRELLS.NET.AU 28
BANKRUPTCY AND
THE FAMILY HOME
CONTINUED
HOW ARE PROPERTIES REALISED?
Where the trustee is the only owner, they can put the
property up 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.
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 should have no
objection to this, provided that the bankrupt arranges for
the equity in the property to be paid to the trustee of the
bankrupt estate.
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.
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.
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 co-owner time to relocate, the
ultimate result is that the property will be sold.
However, the property can still be sold by the trustee at a
later point, even if the mortgage payments are kept up to
date. This means the estate will be able to benefit from
the extra equity generated in the property because of
these additional payments.
WHAT IS ENTERING TRANSMISSION?
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.
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.
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 ABOUT GETTING VACANT POSSESSION?
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
non-bankrupt co-owner on the basis of the legal
entitlement as shown on the title deed.
29 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
BANKRUPTCY AND
THE FAMILY HOME
CONTINUED
1
IS THERE A TIMEFRAME FOR THE SALE
OF THE PROPERTY?
WHEN DOES THE DOCTRINE OF
EXONERATION APPLY?
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.
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
non-bankrupt spouse. Prior to bankruptcy they agreed
with 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.
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 less $150,000 Spouse’s share =
=
=
$200,000
$50,000
$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.
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 a bankrupt. This generally allows
nine years to arrange such sales. If the trustee does
not do so, the property could potentially revest in the
discharged bankrupt.
PERSONAL INSOLVENCY
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
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.
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 dwellinghouse 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.
WORRELLS.NET.AU 30
BANKRUPTCY AND
THE FAMILY HOME
CONTINUED
Although the secretary of this 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 their discretion even
when the bankrupt has incurred very substantial
business debts.
There can be no doubt that some bankrupts have taken
business risks (which they would otherwise have avoided)
in the knowledge that they would not lose their home.
This is inequitable as far as creditors are concerned,
but this is currently the law.
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.
31 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
GETTING OUT
OF BANKRUPTCY
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 completed Statement of Affairs is filed with
Insolvency and Trustee Service Australia (ITSA) - unless an
‘objection to the discharge’ has been filed by the trustee.
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 obtains 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
PERSONAL INSOLVENCY
HOW DOES A BANKRUPTCY NORMALLY END?
1
3.The bankrupt convinces the court that the
bankruptcy should never have been commenced.
WHAT ARE THE DEBTS AND COSTS OF
THE ESTATE?
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.
The costs and debts are:
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.
>
The expenses and remuneration of the trustee; and
>
All provable debts of the estate;
>
The Asset Realisation Charge (ARC) payable to ITSA
under the Act;
>
A ny other charges or statutory costs of the estate.
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.
AS THE BANKRUPT’S DISCHARGE DATE IS BASED ON
THE FILING DATE OF THE STATEMENT OF AFFAIRS
– MEANS ANY DELAY WILL IMPACT ON THE END DATE.
WORRELLS.NET.AU 32
GETTING OUT
OF BANKRUPTCY
CONTINUED
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.
33 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INCOME CONTRIBUTIONS
IN 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 must also pay
contributions to their estate from that income if the
amount earned is over the relevant threshold.
THERE IS NO REASON WHY A
BANKRUPT CANNOT CONTINUE
TO EARN AN 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
PERSONAL INSOLVENCY
CAN A BANKRUPT WORK DURING
THEIR BANKRUPTCY?
1
(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) A ny 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.
WORRELLS.NET.AU 34
INCOME CONTRIBUTIONS
IN BANKRUPTCY
CONTINUED
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 trustee.
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 don’t cooperate, 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 an 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 is then
up to the bankrupt to disprove the assessment.
HOW IS THE INCOME CONTRIBUTION
CALCULATED?
The calculation is made on assessed income, which is the
surplus of income after tax the Medicare Levy 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 - refer to page 13 of this guide and on our website
on the Thresholds page.
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, including when the
bankruptcy is extended through an objection to discharge.
35 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INCOME CONTRIBUTIONS
IN BANKRUPTCY
CONTINUED
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 A 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.
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. The decisions handed down by the
Inspector-General may be reviewed by the Administrative
Appeals Tribunal.
WHAT CAN THE TRUSTEE DO TO
ENFORCE COLLECTION?
PERSONAL INSOLVENCY
WHAT HAPPENS TO THE MONEY PAID UNDER
AN ASSESSMENT?
1
If an assessment is made and the bankrupt refuses or
neglects to pay, the trustee can:
>
Issue notices to employers or other people that owe
the bankrupt money to garnishee those monies.
>
Issue an objection to the discharge of the bankrupt,
extending the bankruptcy period;
>
Prohibit the bankrupt from travelling overseas;
>
Re-bankrupt a discharged bankrupt, if the refusal to
pay occurs after the bankrupt has been discharged;
or
>
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.
WORRELLS.NET.AU 36
VOID TRANSACTIONS
IN BANKRUPTCY
WHAT ARE THE PROVISIONS DESIGNED TO DO?
Trustees of bankrupt estates investigate any prebankruptcy transactions when they suspect the
transaction improperly transferred assets away
from the bankrupt that would have come under the
trustee’s control and therefore benefited 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.
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?
WHO MAY RECOVER MONEY UNDER THESE
PROVISIONS?
These powers enable the trustee to void the following
types of 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 a
PIA where the agreement does not provide this right
to the trustee.
1. Undervalued transactions (section 120);
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.
WHY DO TRUSTEES VOID SOME
TRANSACTIONS?
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 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.
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).
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:
>
A sale for less than the market value of the asset moving a valuable asset to another party; or
>
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:
>
Selling their share of the family house to their spouse
for $1.00 or ‘natural love and affection’;
>
Granting a mortgage or security to someone in
exchange for monies that were lent in the past;
>
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.
37 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
VOID TRANSACTIONS
IN BANKRUPTCY
CONTINUED
Yes. The Act will protect transfers from being voided if
(all three factors must be present):
1.It occurred more than two years before the
commencement of the bankruptcy; and
2.It did not involve a party related to the debtor; and
3.
The debtor was solvent at the time of the transfer
and remained solvent after the transaction.
Transactions undertaken with non-related 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 within 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 payment of tax payable under a law of the
Commonwealth or of a State or Territory; or
>
A transfer to meet all or part of a liability under a
maintenance agreement or a maintenance order; or
>
A transfer of property under a debt agreement;
>
A transfer of a kind described in the regulations; or
>
A transfer made under maintenance agreements or
orders made in the Family Court.
PERSONAL INSOLVENCY
ARE SOME TRANSFERS OF ASSETS
PROTECTED?
1
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?
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.
WORRELLS.NET.AU 38
VOID TRANSACTIONS
IN BANKRUPTCY
CONTINUED
HOW LONG DOES THE TRUSTEE HAVE TO
TAKE THE ACTION?
HOW DO YOU DETERMINE THE
BANKRUPT’S INTENTION?
Recovery actions must be commenced by the trustee
within six years of the bankrupt becoming bankrupt.
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.
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.
ANY ACTION TAKEN TO
MOVE, HIDE OR SELL ASSETS
PRIOR TO BANKRUPTCY
WILL BE INVESTIGATED AND
POTENTIALLY OVERTURNED.
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.
WHAT TYPES OF TRANSACTIONS
ARE CAUGHT?
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.
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 TRUSTEE MUST REFUND THE
CONSIDERATION RECEIVED
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).
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):
1.
Provided consideration at least to market value
(calculated at the time of the transfer); and
39 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
VOID TRANSACTIONS
IN BANKRUPTCY
CONTINUED
3.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.
HOW LONG DOES THE TRUSTEE HAVE TO TAKE
THE ACTION?
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 section 121 transaction has a flavour of fraud
and may be pursued more vigorously.
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?
WHAT CAN BE DONE?
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.
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.
PERSONAL INSOLVENCY
2.Have no knowledge of or could not have reasonably
inferred the intention of the bankrupt; and
1
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?
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:
>
The transaction happened before the bankruptcy
(the bankrupt does not have the right to deal with
their assets after bankruptcy);
>
The other party was unaware of the impending
bankruptcy; and
>
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.
WORRELLS.NET.AU 40
PREFERENCES
IN BANKRUPTCY
WHAT ARE PREFERENTIAL PAYMENTS?
Preferential payments or ‘preferences’ are payments or
transfers of assets to creditors that gives an advantage
over other creditors. These payments or transfers may
be able to be recovered by trustees of bankrupt estates
under the provisions of the Bankruptcy Act. Preferences
are usually payments of money, though a variety of
transfers of assets could be preferential.
>
It occurred at a time when the bankrupt was
insolvent;
>
It occurred within the relevant time period before
the bankruptcy;
>
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
WHO MAY RECOVER PREFERENTIAL
PAYMENTS?
>
The creditor suspected or should have suspected that
the bankrupt was insolvent at the time.
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.
WHEN IS SOMEONE INSOLVENT?
WHY DO TRUSTEES VOID PREFERENTIAL
PAYMENTS?
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.
WHAT ARE THE ELEMENTS OF A
PREFERENTIAL PAYMENT?
Before the court will void a payment or transfer, it must be
satisfied that:
>
A transfer of property was made (this is usually a
payment of money);
>
Something passed from the bankrupt to a creditor or
on the creditor’s instructions;
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.
MUST THERE BE A DEBTOR – CREDITOR
RELATIONSHIP?
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.
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.
41 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
PREFERENCES
IN BANKRUPTCY
CONTINUED
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 - six months before the presentation
of the debtor’s petition.
3.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.
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.
HOW 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.
PERSONAL INSOLVENCY
WHAT IS THE RELEVANT TIME PERIOD?
1
WHAT IS GOOD FAITH AND THE ORDINARY
COURSE OF BUSINESS?
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.
WHAT IS MARKET VALUE CONSIDERATION?
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.
IF A CREDITOR RECEIVED MORE THAN THEY WOULD
HAVE IN THE BANKRUPTCY – IT IS LIKELY THEY RECEIVED
A PREFERENCE.
WORRELLS.NET.AU 42
PREFERENCES
IN BANKRUPTCY
CONTINUED
WHEN WILL THE DEFENCES NOT BE
AVAILABLE?
WHAT CAN CREDITORS DO IF THEY HAVE TO
REFUND MONEY TO A TRUSTEE?
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.
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.
WHAT SHOULD CREDITORS DO IF A TRUSTEE
CLAIMS A PREFERENTIAL PAYMENT?
HOW LONG DOES THE TRUSTEE HAVE TO
MAKE A CLAIM?
On a simplistic basis they should make sure that:
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.
>
The transaction was done within the relevant
time period;
>
They are not a secured creditor;
>
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 trustee shows that they received an advantage
over other creditors.
The following points are more detailed and complex to
determine:
>
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’;
>
That the trustee can show insolvency at the time of
or before the payment was received;
>
Whether the creditor has a realistic chance of
convincing a Judge that all three of the statutory
defences are available.
43 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
PART X PERSONAL
INSOLVENCY AGREEMENTS
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).
WHAT IS A PERSONAL INSOLVENCY
AGREEMENT?
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 Insolvency and Trustee
Service Australia (ITSA) for registration on the official
record. ITSA will then allocate an ‘estate number’.
HOW IS THE PROPOSAL ACCEPTED?
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.
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.
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.
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.
WHY CHOOSE A PART X AGREEMENT?
IS SIGNING A SECTION 188 AUTHORITY AN ACT
OF BANKRUPTCY?
A debtor will usually use a personal insolvency
agreement to:
>
Get relief from their debts;
>
Ensure a fair distribution of their assets to creditors;
>
Provide a higher dividend than would be payable in
bankruptcy;
>
Maintain their source of income; and
>
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:
1.An 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.
PERSONAL INSOLVENCY
WHAT IS PART X OF THE BANKRUPTCY ACT?
1
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 actions 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.
WORRELLS.NET.AU 44
PART X PERSONAL
INSOLVENCY AGREEMENTS
CONTINUED
IF A RESOLUTION IS PASSED
ACCEPTING THE PIA – ALL
UNSECURED CREDITORS ARE
BOUND BY THE AGREEMENT.
>
The trustee terminating the agreement with the
consent of creditors;
>
The passing of a special resolution at a meeting of
creditors, or
>
A n application to the court to terminate the
agreement and possibly bankrupt the debtor.
HOW DOES THE AGREEMENT AFFECT THE
DEBTOR’S PROPERTY AND INCOME?
WHO ADMINISTERS A PERSONAL INSOLVENCY
AGREEMENT?
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.
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.
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?
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:
DOES SIGNING A SECTION 188 AUTHORITY
AFFECT A CREDIT RATING?
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.
CAN A DEBTOR CONTINUE TO ACT AS A
DIRECTOR OF A COMPANY?
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.
GOVERNMENT REALISATION CHARGE
The administration attracts a government charge known
as ‘Asset Realisation Charge’. This charge is payable at
the rate of 4.7% 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.
>
The provisions of the agreement, automatically
terminating the agreement;
45 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
SECTION 73
PROPOSALS
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.
CREDITORS ARE USUALLY ONLY
INTERESTED IN A SECTION 73
PROPOSAL IF IT MEANS MORE
DOLLARS IN THEIR POCKET.
HOW DO BANKRUPTS MAKE A PROPOSAL?
The bankrupt will be required to 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.
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.
COMPOSITION OR ARRANGEMENT?
A proposal under section 73 can be structured as either
a ‘composition’ or a ‘scheme of arrangement’.
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.
PERSONAL INSOLVENCY
WHAT IS A SECTION 73 PROPOSAL?
1
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 expenses or
costs. 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.
HOW IS THE PROPOSAL ACCEPTED?
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.
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.
WORRELLS.NET.AU 46
SECTION 73
PROPOSALS
CONTINUED
WHO ADMINISTERS A SECTION 73 PROPOSAL?
WHAT IF THE DEBTOR DEFAULTS?
The proposal must include a provision for a trustee to
administer the agreement. It is usual that the trustee of
the bankrupt estate will be the trustee 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.
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:
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.
>
Terminating the agreement automatically through
the terms of the agreement;
>
Terminating the agreement with the consent
of creditors;
>
Terminating the agreement by resolution of creditors;
or
>
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.
GOVERNMENT REALISATION CHARGE
The administration of section 73 proposals attracts a
government charge known as ‘Asset Realisation Charge’.
Currently this charge is payable at the rate of 4.7% 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.
47 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
DISCHARGE & ANNULMENT
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 Statement
of Affairs to ITSA. In this scenario the bankrupt will
be discharged three years after ITSA receives the
Statement of Affairs.
It is 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.
PERSONAL INSOLVENCY
INTRODUCTION
1
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.
WORRELLS.NET.AU 48
DISCHARGE & ANNULMENT
CONTINUED
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.
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
Penalty: Imprisonment for 6 months.
Debts provable in bankruptcy
In most cases the discharged bankrupt will be cooperative
with the trustee throughout the period of the bankruptcy.
An objection to discharge is generally lodged if they have
not been cooperative. Few bankruptcies continue longer
than the statutory three years.
(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.
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
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 the bankruptcy
commenced are not released by discharge.
49 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
DISCHARGE & ANNULMENT
CONTINUED
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
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.
PERSONAL INSOLVENCY
BANKRUPTCY ACT 1966 - SECTION 82
1
SECURITIES OVER
ASSETS AT THE TIME OF
BANKRUPTCY CAN BE
ENFORCED AT ANY TIME.
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.
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CONTINUED
BANKRUPTCY ACT 1966 - SECTION 153
BANKRUPTCY ACT 1966 - SECTION 153
Effect of discharge
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:
(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) 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;
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 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.
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.
OBLIGATIONS OF BUSINESS PARTNERS,
GUARANTORS & JOINT DEBT HOLDERS
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.
(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.
51 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
DISCHARGE & ANNULMENT
CONTINUED
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.
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
this guide on page 46.
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.
PERSONAL INSOLVENCY
The debts include all those that have been proved in
the bankruptcy, but also the 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.
1
3. Annulment by the court
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.
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.
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
dealt within section 75.
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DISCHARGE & ANNULMENT
CONTINUED
PROTECTION OF THE TRUSTEE
Once the proved debts and costs have been paid under
option one; or a formal section 73 proposal is accepted
by creditors under option two; or the court orders an
annulment under option three; the bankrupt is annulled
and the trustee will forward the appropriate notices to
ITSA for updating on the National Personal Insolvency
Index (NPII).
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.
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.
BANKRUPTCY ACT 1966 - SECTION 154
Effect of annulment
(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.
BANKRUPTCY ACT 1966 - SECTION 154
Effect of annulment
(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.
53 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
1
PERSONAL INSOLVENCY
WORRELLS.NET.AU 54
INDICATORS OF INSOLVENCY
55 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INDICATORS OF INSOLVENCY
2
IS INSOLVENT TRADING AN OFFENCE?
Yes. Insolvent trading may be an offence and may be
referred to ASIC for further investigation and potential
criminal prosecution. It is recommended that directors
seek their own legal advice, in relation to such offences.
Section 588G - Director’s duty to prevent insolvent
trading by company goes on to stipulate:
(3) A person commits an offence if;
(a) the person is a director of the company when it
incurs a debt; and
1
Creditors can only take actions against directors for their
individual debts. Unlike liquidators, they cannot group
all creditors’ debts into their claim. The Corporations Act
will stop the creditor from commencing action when the
liquidator has begun proceedings or has intervened in an
application for a civil penalty order. That is, claims will be
restricted when the liquidator has already started their
own action.
RELATED
TOPICS
(b) the company is insolvent at that time, or becomes
insolvent
by incurring
debt, or by incurring at
5 PHASES
OF that
FAILURE
that time debts including that debt; and
HOW LONG DO LIQUIDATORS HAVE TO TAKE AN
INSOLVENT TRADING ACTION?
The Corporations Act allows liquidators six years from
58commence an action
the beginning of the liquidation to
for insolvent
PROOFS OF DEBT AND SECURED CREDITORS
trading. Proceedings63must have been
(c) the person suspected at the time when the company
commenced within that six year 65
period. It is not sufficient
MEETINGS OF CREDITORS
incurred the debt that the company was insolvent or
just to issue a demand.
DIVIDENDS
68
would
become insolvent as a result of incurring that
debtCGT
or other
debts
(as in paragraph (1)(b); and
WHAT SHOULD DIRECTORS73
DO IF A
AND
INSOLVENCY
(d) the GST
person’s
failure
to prevent the company incurring
AND
INSOLVENCY
the debt was dishonest.
LIQUIDATOR MAKES A CLAIM?
77
Yes. If a liquidator does not make a claim, the creditors
of the company (individually or in a group) may make a
claim themselves. The creditors may commence an action
at any time with the written consent from the liquidator.
Creditors may ask the liquidator to give them consent up
to six months after the liquidation commences.
2.
That the debts were incurred after that time
3.
Proof of directorship at that time (whether formally
appointed as such or not).
A Liquidator should be asked to demonstrate:
OBJECTIONS TO DISCHARGE
85
1. That the company was insolvent during the
CAN CREDITORS
TAKE INSOLVENT
VOIDING SUPERANNUATION
CONTRIBUTIONS
87
appropriate period
TRADING ACTIONS?
In settling claims with the liquidator it must be ensured
that the settlement is sanctioned by the court (usually by
way of a consent order). This will provide protection from
any future potential claims made by creditors of
the company.
THE COURTS HAVE MADE IT CLEAR THAT THE POSITION
OF DIRECTOR CARRIES CERTAIN RESPONSIBILITIES, WHICH
CANNOT BE AVOIDED, INCLUDING THE DUTY TO KEEP
INFORMED ABOUT THE COMPANY’S SOLVENCY.
WORRELLS.NET.AU 56
INDICATORS OF INSOLVENCY
RELATED TOPICS
INSOLVENCY IMPACTS MANY
STAKEHOLDERS DIFFERENTLY,
ACROSS VARIOUS INDUSTRIES
AND SECTORS, SOME OF WHICH
ARE EXPLORED IN THIS SECTION.
57 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INDICATORS
5 PHASES
OF INSOLVENCY
OF FAILURE
2
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 affect on the business and the
owner’s personal life in the future.
Based on our past experience dealing with business
failures, we have prepared what we call the ‘Five Phases
to Failure’ and the elements which are likely to be found
at each phase.
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.
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.
During this phase we can expect to see:
1. CONFIDENT PHASE (THE RISE)
3.Suppliers offering discounts and credit to win
supply contracts.
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 fulfill the expected continued growth.
RELATED TOPICS
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.
1.Good trading with a reasonable demand for the
product or services offered.
2.Increasing turnover. New business is won at the
expense of more established competitors, mainly
by discounting.
4.The business products and the staff are innovative
and ahead of competitors.
5.Directors willing to sign personal obligations
and guarantees.
6.Financial statements and budgets are prepared,
although not necessarily thoroughly analysed.
7. New premises and/or plant are brought online.
8.Expansion and trading are often being funded on
finance, because of limited capital.
9.Growth of turnover is considered all important but the
cost of making these sales is not fully understood.
10. Regular drawings by owners.
11.Great plans for future expansion being
confidently discussed.
12. Staff bonuses and incentives are offered.
WORRELLS.NET.AU 58
INDICATORS
5 PHASES OFOF
FAILURE
INSOLVENCY
CONTINUED
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.
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.
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:
>
Sales getting harder to win and increased
competition.
>
Turnover becoming stagnant or reducing for two or
more consecutive periods.
>
Current asset ratio weakening.
>
Closer attention from the bank and investors.
>
Margins being squeezed as suppliers end their early
discounts and prices have to be dropped to get sales.
>
Credit being harder to obtain from suppliers who
require guarantees from directors.
>
A n intermittent inability to meet all commitments the overdraft balance increases.
>
Grand plans quietly downgraded to more realistic
levels or are dropped entirely.
>
Uncertainty about the business’ ability to trade
profitably in the future.
>
Preparation of financial statements becoming less
regular and less rigorous.
>
Directors and owners becoming less enthusiastic.
>
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.
59 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INDICATORS
5 PHASES
OF INSOLVENCY
OF FAILURE
CONTINUED
2
A business in the debt phase is usually characterised by:
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.
>
Creative accounting being used for reporting to
banks and investors.
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.
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.
>
Spending is reduced on non-core activities i.e.
marketing.
>
Further and greater use of ATO funds and failure to
remit superannuation monies.
>
Further slippage in turnover, margins and profits.
RELATED TOPICS
3. DEBT PHASE (THE DECLINE)
>
Quality customers are lost as they find more stable
suppliers.
>
A need for longer term ‘arrangements’ with
some creditors.
>
Some suppliers only supplying on COD basis.
>
Planning is done on a day by day survival basis.
>
Accountants consulted but advice generally ignored.
>
Internal systems and controls begin to break down.
>
Management’s main preoccupation is demands
from creditors.
>
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.
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
WORRELLS.NET.AU 60
5 PHASES OF FAILURE
CONTINUED
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:
>
A belief that problems that exist can be overcome
relatively simply. Wishful thinking is the order of
the day.
>
Greater losses are incurred but the true extent is not
acknowledged or known.
>
Management’s time allocated to non-core activities.
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.
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.
>
Bank and investor relations make demands to reduce
their exposure.
In this phase we expect to see:
>
Management shows signs of complacency or
arrogance.
>
Non-adherence to any payment arrangements with
the ATO.
>
Blame for the situation is laid on everyone else.
>
Directors and proprietors look to protecting
themselves.
>
Preparation of any financial statements is all
but abandoned.
>
All working capital has been exhausted.
>
Goodwill is lost.
>
Demands from creditors are ignored and proceedings
are issued.
>
Bank and investors are not interested in further
extensions.
>
A refusal to recognise the existence of bad debts and
redundant stock.
>
Insufficient funds are available to pay wages, rent, or
chattel leases.
>
It becomes difficult to get supply on credit or at a
reasonable cost.
>
The ATO issues director penalty notices.
>
Management becomes unavailable to make
decisions, or if decisions are made, they are regularly
countermanded.
>
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.
>
Administrators appointed and are expected to work
miracles with virtually no working capital or reliable
information.
>
Creditors fail to accept the director’s proposal or
trading on and the business is closed.
>
Sole proprietors become bankrupt.
61 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
5 PHASES OF FAILURE
CONTINUED
>
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.
RELATED TOPICS
>
Directors are subject to demands from guaranteed
creditors and insolvent trading claims from
liquidators, resulting in bankruptcy.
2
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.
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.
WORRELLS.NET.AU 62
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.
WHICH 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?
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 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.
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.
63 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
PROOFS OF DEBT AND
SECURED CREDITORS
CONTINUED
2
DEEMED SURRENDERING OF SECURITY
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.
A secured creditor may choose to intentionally surrender
their security and prove for the whole amount of their debt
in the estate.
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.
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
ENFORCED SALE OF ASSET(S)
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.
WORRELLS.NET.AU 64
MEETINGS OF CREDITORS
WHY ARE MEETINGS OF CREDITORS CALLED?
WHO MAY CALL A MEETING OF CREDITORS?
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. The Bankruptcy Act outlines
the rules about how and when meetings are to be called
and run, as well as how issues are to be decided at
the meeting.
Only the trustee in bankruptcy can call meetings of
creditors. A trustee in bankruptcy may call meetings at
any time, but must call meetings when:
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.
>
Whenever the creditors so direct by resolution; and
>
Whenever so requested in writing by at least 25% of
the value of creditors;
>
Whenever so requested in writing by less than 25%
of the value of creditors, where 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:
2. The meeting should be run according to a formal
agenda set out in the notice of meeting.
>
A notice calling the meeting and setting out the
agenda for the meeting;
3. The president (chairperson) of the meeting will be
elected by those attending.
>
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;
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.
>
A proof of debt form; and
>
A proxy form and if applicable a voting slip.
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.
65 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
MEETINGS OF CREDITORS
CONTINUED
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.
WHO RUNS THE MEETING?
A chairperson or a president runs the meeting.
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?
>
Submit a claim before or at the commencement
of a meeting and have it noted on the register of
attendance; and
>
If the claim is not admitted for any reason, make sure
an objection is noted in the minutes.
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.
RELATED TOPICS
DO CREDITORS NEED TO ATTEND MEETINGS?
2
HOW IS A PROOF OF DEBT ADMITTED?
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.
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.
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:
>
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;
WORRELLS.NET.AU 66
MEETINGS OF CREDITORS
CONTINUED
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.
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 them. An attorney can decide how to vote, and can
respond to changing circumstances during a meeting.
WHO CAN BE A PROXY?
Almost anyone over the age of 18 can act as a proxy.
HOW ARE RESOLUTIONS DECIDED?
A vote of creditors is called a resolution - the creditors
resolving a proposal or motion. Most resolutions are
ordinary resolutions, which under the Bankruptcy Act
requires a simple majority in value only.
There are provisions for some proposals at meetings to
require a ‘special resolution’, being more than 50% in
number and 75% in value.
CAN RESOLUTIONS BE PASSED WITHOUT A
PHYSICAL MEETING?
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.
CAN MEETINGS BE ADJOURNED?
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.
WHO WILL KEEP THE MINUTES?
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.
Minutes of the meeting called under the Corporations
Act will be lodged with the Australian Securities &
Investments Commission (ASIC) within the appropriate
time period. Worrells also lodge the minutes on the
estate’s file information page on our website, which is
not a requirement under legislation. Meetings under the
Bankruptcy Act are not formally lodged with Insolvency
and Trustee Service Australia (ITSA), but are lodged on
the estate’s file information page.
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 currently no corresponding provision in
the Corporations Act.
67 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
DIVIDENDS
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.
The minimum time periods to pay dividends are defined
in the Bankruptcy Act. If there are no complications,
a dividend will take about two months to distribute.
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.
The Bankruptcy Act sets out the obligation to pay
dividends as quickly as practical.
In practice the trustee 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 realisations - if
any - and the costs of paying multiple smaller dividends.
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. CALLING 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.
The proof of debt form is specific to the Bankruptcy
Act requirements. The correct form needs to be used in
order to participate in a dividend. The trustee 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.
The trustee cannot just pay out money to anyone in any
manner. Dividends must be declared in accordance with
the steps set out in the Bankruptcy Act and dividends
must be paid to creditors in a certain order under
various priorities.
TIME PERIODS FOR CALLING FOR PROOFS
OF DEBT
STEPS IN PAYING DIVIDENDS
The period that must be given to lodge proofs of debt
under the Bankruptcy Act it is defined as a ‘reasonable
period’. Usually a 21 day period is used under the
Bankruptcy Act on the basis that, if it is deemed
reasonable under the Corporations Act it should
therefore be reasonable under the Bankruptcy Act.
There are four basic steps that must be followed to pay a
dividend. 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.
RELATED TOPICS
INTRODUCTION
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.
2.Admitting proofs of debt - verifying that the debt is
proper to the satisfaction of the trustee.
WORRELLS.NET.AU 68
DIVIDENDS
CONTINUED
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 creditors and trustees rights if a
proof of debt is not lodged within the time period.
NOTICES TO BE ISSUED
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.
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.
DATES FOR PAYMENT
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. The Bankruptcy Act says 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 Bankruptcy Act sets these provisions out in
section 144.
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.
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 trustee
to disprove a claim. Section 83 sets out the requirement.
BANKRUPTCY ACT 1966 - SECTION 83
Debt not to be considered proved until admitted
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.
The trustee 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.
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The trustee 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.
Section 140 of 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.
The Bankruptcy Act also sets a 14 day time period for the
trustee to admit, reject or otherwise deal with the claim.
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 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;
In that time period, the trustee will have three options:
(c) reject it in whole; or
1.To admit the proof of debt, which can be done if
sufficient information is attached to the proof;
(d) require further evidence in support of it.
3. To request further information.
(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.
3. REJECTING PROOFS OF DEBT
APPEALS AGAINST TRUSTEE’S DECISION
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:
Creditors have the right to have the decision to reject
their proof of debt reviewed by the court. Creditors’ rights
are set out 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.
2.To reject the proof of debt, if there is no doubt that
the debt is either fully or partially not provable; or
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.
RELATED TOPICS
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.
2
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.
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
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DIVIDENDS
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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.
REVOKING A DECISION TO OBJECT
There are times when the trustee will decide that their
rejection or admittance of a proof of debt should be
reversed. In some cases the reversal may only be partial,
with a part of the debt being rejected or admitted after the
initial assessment.
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.
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 have been heard.
The appointee will forward a cheque to the creditor along
with 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 section.
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.
But from a practical point this is not always the case.
The Bankruptcy Act sets out an order for the priorities of
payment of dividends under section 109, but only gives
a limited priority to outstanding employee wages and no
priority to retrenchments payments.
(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.
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2
BANKRUPTCY ACT 1966 - SECTION 110
Priority payments
Application of estates of joint debtors
(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;
(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.
(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 trustee, the employee creditor should clearly
indicate whether they are claiming as an employee and
use the required proof of debt forms for that purpose.
JOINT BANKRUPTCY ESTATES
The Bankruptcy Act has a 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. 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
the matter can end there.
(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.
RELATED TOPICS
BANKRUPTCY ACT 1966 - SECTION 109
The result generally is:
>
A ny 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.
>
A ny 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.
>
There is no right to use surplus assets from one
individual estate to pay creditors in the other
individual estate.
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.
WORRELLS.NET.AU 72
CGT AND INSOLVENCY
OVERVIEW
INCOME TAX ASSESSMENT ACT 1997 - SECTION 104.10
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.
Disposal of a CGT asset: CGT event A1
(7) CGT event A1 does not happen if the disposal of the
asset was done:
(a) to provide or redeem a security; or
There are three main issues with capital gains tax and
insolvent estates:
(b) because of the vesting of the asset in a trustee under
the Bankruptcy Act 1966 or under a similar foreign
law; or
1.Who is responsible for the payment of capital
gains realised after the appointment of an external
administrator?
(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.
2.What happens to capital losses available at the date
of the appointment?
BANKRUPTCY
3.Holding companies when a solvent wholly-owned
subsidiary is wound up.
1.WHO 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:
> Bankruptcy trustees and part X trustees;
> Liquidators; and
> 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 owned the asset.
The ITAA confirms that “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 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 of the ITAA.
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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.
LIQUIDATION
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.
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
T he 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.
Where a capital gain arises that would lead to a tax
liability, the insolvency practitioner will advise the
Australian Taxation Office (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 their 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.
CORPORATIONS ACT 2001 - SECTION 437B
INCOME TAX ASSESSMENT ACT 1997 - SECTION 106.60
Administrator acts as company’s agent
Acts by security holders
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.
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.
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
RELATED TOPICS
This section has two effects on CGT and bankruptcy.
2
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.
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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.WHAT 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
still provide a release from debts and therefore any 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.
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 rollover of an asset) from the liquidator of a subsidiary under
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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
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).
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.
These conditions are:
>
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;
>
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);
>
The liquidated company must be a 100% owned
subsidiary from the time of the disposal until the
cancellation of the shares;
>
The market value of the asset(s) must comprise at
least part of the capital proceeds for the cancellation
of the shares;
>
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.
INCOME TAX ASSESSMENT ACT 1997 - SECTION 126.85
RELATED TOPICS
a members’ voluntary winding up. This relief may only be
a reduction of the CGT, not an entire exemption.
2
Effect of roll-over on certain liquidations
(3) The reduction of the capital gain is worked out
in this way.
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):
(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
(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.
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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
>
Receivership (even if only appointed over
some of the assets)
>
Voluntary administration
>
E xecuting a deed of company arrangement
An incapacitated entity is defined
(section 195-1of 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.
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
(d) an administrator appointed to an entity under Division
2 of Part 5.3A of the Corporations Act 2001 ; or
(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
(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.
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.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX)
ACT 1999 - SECTION 58.20
Representatives are required to be registered
(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).
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In fact, the ATO must cancel the representative’s
GST registration if they believe that they do not need
to be 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”.
In summary, if the entity becomes incapacitated:
1.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;
2.If the incapacitated entity was or should have been
registered for GST, the representative must register
for GST.
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
Tax periods of incapacitated entities
(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.
(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 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.
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 58.30
A NEW TAX SYSTEM (GOODS AND SERVICES TAX)
ACT 1999 - SECTION 58.35
Notice of cessation of representation
Tax periods of representatives
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.
(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.
TAX PERIODS AND LODGEMENTS
How does the appointment of a representative affect
tax periods?
RELATED TOPICS
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.
2
(2) This section has effect despite Division 27 (which is
about how to work out the tax periods that apply).
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.
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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).
A NEW TAX SYSTEM (GOODS AND SERVICES TAX)
ACT 1999 - SECTION 27.40
An entity’s concluding tax period
(1) If:
(a) an individual dies; or
(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.
(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.
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 postappointment 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 their
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?
It is unlikely that this provision will have much affect
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.
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.
WHO MUST LODGE THE BAS?
A NEW TAX SYSTEM (GOODS AND SERVICES TAX)
ACT 1999 - SECTION 58.5
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
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.
(1) If you are registered or required to be registered, you
must give to the Commissioner a GST return for each
tax period.
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(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.
The representative is not liable when the supply or
acquisition occurred before becoming the representative
of the incapacitated entity.
RELATED TOPICS
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.
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.
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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
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.
(3) An adjustment event:
(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).
(a) can arise in relation to a supply even if it is not a
taxable supply; and
WRITING OFF BAD DEBTS
Adjustment Events
(b) can arise in relation to an acquisition even if it is not
a creditable acquisition.
ACCRUAL BASED ACCOUNTING
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
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.
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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
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
creditors’ 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.
(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.
A NEW TAX SYSTEM (GOODS AND SERVICES TAX)
ACT 1999 - SECTION 21.15
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.
(1) You have an increasing adjustment if:
(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).
RELATED TOPICS
A NEW TAX SYSTEM (GOODS AND SERVICES TAX)
ACT 1999 - SECTION 21.5
2
Bad debts written off (creditable acquisitions)
(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
(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 preappointment (decreasing adjustment).
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A NEW TAX SYSTEM (GOODS AND SERVICES TAX)
ACT 1999 - SECTION 19.40
A NEW TAX SYSTEM (GOODS AND SERVICES TAX)
ACT 1999 - SECTION 19.50
Where adjustments for supplies arise
Increasing adjustments for supplies
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:
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.
(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.
COLLECTION OF DEBTORS
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.
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
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.
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2
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
uncollectable (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.
RELATED TOPICS
SUMMARY OF ADJUSTMENTS
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:
>
The appointment of an external administrator
requires that administrator to register as a
representative of an incapacitated entity;
>
If the incapacitated entity is required to be registered
for GST, the representative will be required to
register for GST;
>
The incapacitated entity’s tax year will end on the
date of the appointment and a final BAS will have to
be filed;
>
The representative registered for GST purposes
has a responsibility to file BAS’s during their
administration;
>
The representative will have to notify the ATO of any
increasing adjustments due to collection of debtors
and payment of partial dividends.
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OBJECTIONS TO DISCHARGE
WHAT IS AN OBJECTION TO DISCHARGE?
Under normal circumstances a person’s bankruptcy
will automatically end three years after the bankrupt’s
Statement of Affairs is filed with the Insolvency and
Trustee Service Australia (ITSA). This is called a
discharge from bankruptcy. However the trustee of a
bankrupt estate may extend the period of a person’s
bankruptcy by lodging an objection to discharge.
WHY OBJECT TO A BANKRUPT’S DISCHARGE?
An objection to discharge may be use as a punishment
for some action taken by the bankrupt before or after
bankruptcy, or a method of encouraging them to
cooperate with the trustee. There are also times when
it would be in the interest of the creditors or the general
public that the bankrupt not be discharged at the usual
time because the bankrupt has committed some offence
under the Bankruptcy Act.
WHEN CAN A TRUSTEE OBJECT TO A
BANKRUPT’S DISCHARGE?
An objection may be lodged at any time during the
bankruptcy, but there needs to be statutory grounds to
do so. An objection must be lodged before the discharge
to be effective, as you cannot extend the time of a
bankruptcy that has ended. The opportunity to object is
gone once a bankrupt has been discharged.
HOW DOES A TRUSTEE OBJECT TO A
BANKRUPT’S DISCHARGE?
The trustee lodges the required notice of objection with
ITSA and forwards a copy to the bankrupt. Once that
notice is recorded by ITSA on the NPII (the National
Personal Insolvency Index is the statutory register) the
objection will have legal effect.
FOR HOW LONG WILL THE BANKRUPTCY
BE EXTENDED?
Objections do not last forever. A bankruptcy may be
extended for either two or five years, making the period
of the bankruptcy either five or eight years. The period of
extension will depend on the particular statutory ground
for the objection. The usual discharge provisions will
then apply at the new extended periods, with automatic
discharge occurring at the end of the extended period.
In effect the objection only takes effect once the original
discharge date is reached, as the objection only extends
the date of discharge. The bankrupt would have remained
bankrupt during the first three years anyway.
HOW IS THE EXTENSION LENGTH
DETERMINED?
The extension period is determined by the statutory
ground under which the objection was lodged. A ‘special
ground’ will result in a five year extension, and a ‘nonspecial ground’ will result in a two year extension.
WHAT ARE THE GROUNDS FOR OBJECTING?
The objection must be based on a very specific statutory
ground. These grounds are:
Special Grounds (five year extension):
1. Failure to provide written information about their
property or income;
2. Failure to disclose particulars of income or expected
income;
3. Failure to pay a contribution amount to the trustee;
4. Spent money or disposing of assets or spending
monies within five years before bankruptcy without
adequate explanation;
5. Leaving and not returning to Australia when
requested;
6. Failure to sign a document as required by the trustee
under the provisions of the Bankruptcy Act;
7. Making a transfer that is void under section 121 of
the Bankruptcy Act;
8. Intentionally providing false or misleading information
to the trustee;
9. Intentionally failing to disclose a liability that existed
at the time of bankruptcy; or
10. Failing to disclose a beneficial interest in any
property.
Other Grounds (two year extension):
1. Continuing to manage a corporation in contravention
of the Corporations Act and without leave being
granted;
2. Leaving Australia and not returning;
3. Making a void transfer under section 120 or 122 of
the Bankruptcy Act;
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5. Failure to disclose a liability that existed at the time
of bankruptcy;
6. Failure to comply with section 77(1) or section 80;
7. Failure to attend a creditors meeting under certain
circumstances or an interview or examination
without reasonable excuse; or
8. Failure to disclose a beneficial interest in property.
WHAT IF THERE IS MORE THAN ONE GROUND?
If there is more than one ground, the period of extension
will be based on the ground with the longest period.
The time periods are not cumulative. If the ground with
the longest period is subsequently lifted, the period of
extension will then be based on the next longest period
attached to a remaining ground. The period of extension
may still be the original extension period if two special or
two non-special grounds apply and only one is lifted.
IS THERE A DIFFERENCE BETWEEN OBJECTION
NOTICES FOR SPECIAL AND NON-SPECIAL
GROUNDS?
The main difference in the objection process is
the amount of information required on the notice.
The trustee used to have to state a reason when lodging
any objection. Reasons are no longer required for
objections based on special grounds due to the nature
of those grounds. The notice only requires information
on the ground on which the objection is based and the
evidence that the ground exists. Objections based on
non-special grounds still require reasons to be given in
the notice.
CAN AN OBJECTION BE WITHDRAWN?
The trustee may withdraw an objection at any time.
The trustee will normally withdraw the objection if the
grounds have been satisfied. But the trustee does not
have to withdraw it, especially if the objection is based on
a special ground. If all grounds have been satisfied, the
notice of objection may be completely withdrawn.
DOES WITHDRAWING AN OBJECTION
END THE BANKRUPTCY?
Maybe. If the bankrupt would have normally been
discharged during the period that the objection was in
force (if the three years expired during the objection
period), withdrawing the objection will automatically
discharge the bankrupt as at the date of the withdrawal
of the objection, not the original discharge date. If the
objection is withdrawn during the normal three year
bankruptcy period, the bankruptcy will end by automatic
discharge at the end of that three year period.
RELATED TOPICS
4. Misleading conduct by the bankrupt involving an
amount in excess of an indexed amount, currently
$5,176;
2
CAN THE OBJECTION BE REMOVED BY
A HIGHER AUTHORITY?
Yes. The Bankruptcy Act provides a review process.
The bankrupt may apply to the Inspector-General to
review the decision to lodge an objection. The request
for a review must be made within 60 days of the
notification of the objection being received by the
bankrupt. The Inspector General must first decide
whether or not to review the objection, and if they decide
to do so, review the objection and make the decision
within 60 days after the receipt of the request.
The Inspector-General must decide the review on the
following basis:
1. Whether the ground is a ground set out under the Act;
2.Whether there is sufficient evidence to support that
ground; and
3.The conduct of the bankrupt before the objection
was lodged.
It is more difficult to have an objection based on a
special ground removed as there are no reasons for the
Inspector-General to review, and no consideration is taken
of the conduct of the bankrupt after the lodgement of the
objection. That is, even if the bankrupt finally complies
with the trustee’s requests, the bankrupt’s conduct will
not automatically give rise to a removal or withdrawal of
the objection.
To have an objection based on a special ground
removed, the bankrupt may have to show that
circumstances existed that do not justify the objection
in the first instance.
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INTRODUCTION
Trustees of bankrupt estates investigate prebankruptcy 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:
1. A transaction was entered into.
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.
REASONS FOR VOIDING THESE TRANSACTIONS
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.
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.
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:
>They 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.
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
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(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.
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. 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 on page 89.
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.
RELATED TOPICS
(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
2
Transfers made by third parties are void if:
>
They 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
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(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.
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.
INTENTION
One of the main purposes of the transaction must be to
protect the asset from creditors - to defeat creditors’
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.
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.
BANKRUPTCY ACT 1966 - SECTION 128B
Showing the transferor’s main purpose in making a
transfer
(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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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.
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
(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:
(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) 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
(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) if so, whether the transfer, when considered in the
light of that pattern, is out of character.
(b) having kept such books, accounts and records, has
not preserved them.
(5) For the purposes of paragraph (4)(a), disregard a
benefit that is payable in the event of the death of a
person.
The same rebuttable presumption of insolvency applies to
transfers made by third parties.
(6) Subsections (3) and (4) do not limit the ways of
establishing the beneficiary’s main purpose in
entering into a scheme.
Rebuttable presumption of insolvency
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:
BANKRUPTCY ACT - SECTION 5
Interpretation
(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”.
RELATED TOPICS
BANKRUPTCY ACT 1966 - SECTION 128C
2
BANKRUPTCY ACT 1966 - SECTION 128C
(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
from avoiding 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.
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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.
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.
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
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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.
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.
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.
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.
SUPERANNUATION ACCOUNT-FREEZING
NOTICES
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
Superannuation account freezing notice
(1) This section applies in relation to a member of an
eligible superannuation plan if the Official Receiver
has reasonable grounds to believe that:
(a) a transaction is void against the trustee of a
bankrupt’s estate under section 128B or 128C; and
RELATED TOPICS
(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.
2
(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.
These notices affect the superannuation plan trustee’s
rights to deal with the funds in the plan, except 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.
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
to issue a notice under section 139ZQ.
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BANKRUPTCY ACT 1966 - SECTION 128E
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
(d) for the purposes of complying with an order under
section 139ZU; or
(e) for the purposes of charging costs against, or
debiting costs from, the superannuation interest; or
(f) for the purposes of giving effect to a family law
payment split; 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.
BANKRUPTCY ACT 1966 - SECTION 128E
(3) The superannuation account-freezing 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 account-freezing 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
account-freezing notice comes into force, a section
139ZQ notice is given in relation to the transaction
referred to in paragraph 128E(1)(a);
the superannuation account-freezing notice is
revoked:
(c) when the trustee of the plan complies with the
section 139ZQ notice; or
(d) when the section 139ZQ notice is revoked; or
(e) when the Court sets aside the section 139ZQ notice.
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.
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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 account-freezing 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;
> compliance with that order; or
> that order being set aside or dismissed; or
>
if the application for the order is withdrawn within the
180 day period, the freezing notice will automatically
be revoked.
BANKRUPTCY ACT 1966 - SECTION 128F
Revocation of freezing notice when section 139ZU order
complied with etc.
(5) 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
account-freezing 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;
the superannuation account-freezing 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
account-freezing notice comes into force:
RELATED TOPICS
BANKRUPTCY ACT 1966 - SECTION 128F
2
(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 account-freezing notice is
revoked.
The notice is also revoked if no order under section 139ZU
is made within the 180 day period.
BANKRUPTCY ACT 1966 - SECTION 128F
Revocation of freezing notice if no section 139ZU order
made after 180 days
(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 account-freezing 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.
WORRELLS.NET.AU 94
VOIDING SUPERANNUATION
CONTRIBUTIONS
CONTINUED
BANKRUPTCY ACT 1966 - SECTION 128F
BANKRUPTCY ACT 1966 - SECTION 139ZU
Extension of 180 day period
Order relating to rolled-over superannuation interests etc.
(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).
(1)If, on application by the trustee of a bankrupt’s
estate, the Court is satisfied that:
(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.
SECTION 139ZU ORDERS
The provisions that allow bankruptcy trustees to recover
money paid into eligible superannuation plans also
contemplate 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.
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.
(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.
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.
95 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
2
RELATED TOPICS
WORRELLS.NET.AU 96
INDICATORS OF INSOLVENCY
WHAT ABOUT ACCRUED DEBTS?
The debt must be incurred, not just accrued, when the
company is insolvent. There is a distinction between the
two. Incurring a debt is the legal creation of a debt that
did not previously exist. Accrued debts usually relate to
ongoing contractual agreements.
These types of contractual agreements are incurred at
the time of entering into the original agreement and only
become payable (or accrue) at a later date. As long as the
original agreement was entered into while the company
was solvent, and the later amounts only accrue because
of that original contract, they will not form part of an
insolvent trading claim. For example, lease payments that
become due on a regular basis are under a contract that
was entered into prior to the insolvency of the company.
HOW DO DIRECTORS BECOME LIABLE FOR
THESE CLAIMS?
Section 588G sets out the director’s duty to prevent
insolvent trading and sets the parameters by which the
liquidator can initiate the process for making a claim
against the director. Directors contravene this section by
allowing the company to incur the debt when they are
aware that there were grounds for suspecting that the
company was insolvent.
Once a director has breached the duty set out in section
588G, the provisions of section 588M will allow a
recovery of compensation from that director. A claim
is possible where the director is in contravention,
the creditors suffered loss or damage because of the
company’s insolvency and the debt was wholly or
partly unsecured.
Breaching this provision gives grounds for the liquidator
to make a claim against the director. Once this breach of
588G occurs, the provisions of section 588M will allow a
recovery action to be taken against that director by
the liquidator.
The circumstances where recovery action is possible
pursuant to section 588M are as follows:
(b) t he person (in this section called the creditor) to
whom the debt is owed has suffered loss or damage
in relation to the debt because of the company’s
insolvency; and
(c) t he debt was wholly or partly unsecured when the
loss or damage was suffered; and
(d) the company is being wound up; whether or not
(e) the director has been convicted of an offence in
relation to the contravention; or
(f) a civil penalty Order has been made against the
director in relation to the contravention.
(2) The company’s liquidator may recover from the
director, as a debt due to the company, an amount
equal to the amount of loss or damage.
WHAT DEFENCES ARE AVAILABLE
TO DIRECTORS?
The Corporations Act provides statutory defences
that may be available to directors. They can be
summarised as:
1.The director had reasonable grounds to expect (not
just suspect) that the company was solvent.
2.A reasonable, competent person was producing
information that would reasonably lead to a belief
that the company was solvent.
3.The director had a good reason for not taking part in
the management of the company at the relevant time
(only relevant to having a good reason not to).
4.The director took all reasonable steps to stop
the company from incurring the debt, including
attempting to appoint a voluntary administrator
to the company.
1.The burden of proving the defences is placed upon
directors.
The courts have made it clear that the position of director
carries certain responsibilities, which cannot be avoided,
including the duty to keep informed about the company’s
solvency.
(1) This section applies where:
(a) a person (in this section called the director) has
contravened subsection 588G(2) or (3) in relation to
the incurring of a debt by a company; and
97 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INDICATORS OF INSOLVENCY
3
IS INSOLVENT TRADING AN OFFENCE?
Yes. Insolvent trading may be an offence and may be
referred to ASIC for further investigation and potential
criminal prosecution. It is recommended that directors
seek their own legal advice, in relation to such offences.
Section 588G - Director’s duty to prevent insolvent
trading by company goes on to stipulate:
(3) A person commits an offence if;
Creditors can only take actions against directors for their
individual debts. Unlike liquidators, they cannot group
all creditors’ debts into their claim. The Corporations Act
will stop the creditor from commencing action when the
liquidator has begun proceedings or has intervened in an
application for a civil penalty order. That is, claims will be
restricted when the liquidator has already started their
own action.
WORRELLS
ARTICLES
(a) the person is a director of the company when it
incurs a debt; and
(b) the company is insolvent at that time, or becomes
insolvent
by incurring
that debt, or by incurring at
WHAT’S
IN A NAME?
that time debts including that debt; and
IT’S MY MONEY, ISN’T IT?
(c) the person suspected at the time when the company
ARE SUPERANNUATION MONIES
incurred the debt that the company was insolvent or
WITHIN THE TAXMAN’S REACH?
would become insolvent as a result of incurring that
debt or other debts (as in paragraph (1)(b); and
CAN CREDITORS TAKE INSOLVENT
TRADING ACTIONS?
Yes. If a liquidator does not make a claim, the creditors
of the company (individually or in a group) may make a
claim themselves. The creditors may commence an action
at any time with the written consent from the liquidator.
Creditors may ask the liquidator to give them consent up
to six months after the liquidation commences.
The Corporations Act allows liquidators six years from
the beginning of the liquidation100
to commence an action
for insolvent trading. Proceedings
101must have been
commenced within that six year period. It is not sufficient
just to issue a demand.
102
WHAT SHOULD DIRECTORS DO IF A
LIQUIDATOR MAKES A CLAIM?
A Liquidator should be asked to demonstrate:
1.
That the company was insolvent during the
appropriate period
2.
That the debts were incurred after that time
3.
Proof of directorship at that time (whether formally
appointed as such or not).
In settling claims with the liquidator it must be ensured
that the settlement is sanctioned by the court (usually by
way of a consent order). This will provide protection from
any future potential claims made by creditors of
the company.
THE COURTS HAVE MADE IT CLEAR THAT THE POSITION
OF DIRECTOR CARRIES CERTAIN RESPONSIBILITIES, WHICH
CANNOT BE AVOIDED, INCLUDING THE DUTY TO KEEP
INFORMED ABOUT THE COMPANY’S SOLVENCY.
CORPORATE INSOLVENCY
(d) the person’s failure to prevent the company incurring
the debt was dishonest.
HOW LONG DO LIQUIDATORS HAVE TO TAKE AN
INSOLVENT TRADING ACTION?
INDICATORS OF INSOLVENCY
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99 WORRELLS SOLVENCY & FORENSIC ACCOUNTANTS
INDICATORS
WHAT’S
OF INSOLVENCY
IN A NAME?
We also used the forum provided by our e-Update’s to
state our view that S110 of the Bankruptcy Act, a section
that appears to have its genesis in a 1728 court decision,
has not only outlived its usefulness, but is quite capable
of providing what are clearly inequitable outcomes.
We also pointed out that the law contained in S110 was
wide open to manipulation. Lastly we observed that
bankruptcy trustees could be required to spend much
time (and therefore creditor’s funds) on complying with
this antiquated section.
If you missed these articles they are available
on our website.
How Long is the Bankruptcy Shadow?
How Relevant is a Rule Created in 1728
to a 21st Century Bankruptcy?
It would be nice to report that our views have prevailed
and that changes are expected… but that has not
happened. However, despite this, we believe that
publishing our views is a healthy exercise and will in due
course at least add to the debate, and may lead to reform.
“Bankruptcy” is, we believe, a highly pejorative term.
It conjures up, at least in some people’s minds,
suggestions of wrong doing and of financial profligacy.
There is no doubt that the perceived and the actual stigma
of bankruptcy has greatly receded over the last twenty
years or so, but the Worrells partners know from their
regular contact with those facing impossible financial
difficulties that they often delay seeking the protection
of the legislation simply because they do not want to
be thought of as a “bankrupt”. That delay adds to their
misery and is not something which the legislation, or
society, should want to see happen.
WORRELLS ARTICLES
In June last year we published an article
critical of the fact that the public record
of a person’s bankruptcy is kept forever
open. We pointed out that this approach is
antipathetic to the notion that bankruptcy
is intended to provide a fresh start, at
least after the three year discharge period.
Our position remains that the bankruptcy
record should be expunged after, say, five
to seven years in the same way that other
credit history is wiped from the record.
3
Certainly there are a small percentage of bankrupts
who are simply rogues, who appear to have no social
conscience, who are indeed profligate. For such people
being described as bankrupt is entirely appropriate.
But to lump the unemployed worker who has impossible
credit card debts under the same heading appears wrong.
We acknowledge that finding an alternative term for
small debtors and consumers is difficult, as is finding
an appropriate cut off level. But we would like to see the
problem tackled.
IVOR WORRELL,
Partner Worrells Brisbane
February 2013 Plain Talk e-Update
That being the case we have another issue to air.
It seems to us that the label “Bankrupt” may have outlived
its usefulness, at least as far as small debtors including
consumer debtors are concerned.
WORRELLS.NET.AU
WORRELLS.NET.AU100
IT’S
INDICATORS
MY MONEY,
OF INSOLVENCY
ISN’T IT?
Over the years, we have seen many, many companies, where the director has been very
surprised to learn that they owe the company money. In years gone by, it was common
strategy for the director to take money out of a company by way of a loan, which often
had no immediate terms of payment, so as to avoid paying any taxes. The landscape
changed somewhat, when the Tax Office become concerned about Division 7A Loan
Accounts, and as a result, often there is a loan agreement between the director and
the company, when a director takes funds from a company.
It never ceases to amaze us how often the directors are
surprised by amounts that they have drawn from the
company and which has shown in the books as money
owed by them back to the company. Most directors
consider that as it is their company, they are solely
entitled to the funds, and as a result it is not a loan at all.
A number of lessons come out of such matters for us,
they include:
In a recent matter that we have been involved in, it
became apparent that the director had been drawing
an amount $200,000 to $300,000 per annum from the
company over a period of time. I should say, that this was
in addition to a substantial salary that was paid to him.
As a result, by the time the director came to see me,
the loan due back to the company, was in excess of
$2,000,000. The director had no real ability to repay
those funds given that a substantial amount of funds
appear to have been used as lifestyle expenses. This
factor alone, potentially made the company insolvent,
given the company had what could otherwise be
described as a healthy business.
2.Closely monitoring loan accounts of the company is
imperative, as ultimately, if the company becomes
insolvent, a liquidator may be looking to recover from
the director which may ultimately affect the solvency
of the director.
1.
Paying tax by way of PAYG withholding, and therefore
a salary, drawn from the company, is not such a bad
thing. It allows the director to know exactly where the
company is at.
PAUL BURNESS,
Partner Worrells Melbourne
April 2013 Plain Talk e-Update
101WORRELLS
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FORENSICACCOUNTANTS
ACCOUNTANTS
ARE SUPERANNUATION
MONIES WITHIN THE
TAXMAN’S
REACH?
INDICATORS
OF INSOLVENCY
The Australian Taxation Office (ATO) holds many powers
to recoup what’s owed to them. One of which is the power
to ‘garnishee’ the tax debtor’s bank accounts, some trust
funds, property sale proceeds, company shares and trade
debtors. The question has long lingered about whether
superannuation funds were, practically speaking, also
part of the list.
The mechanism behind a garnishee notice is a simple
process of an entity receiving a notice demanding monies
held on behalf of a tax debtor, which is expressly to be
taken as being authorised by the debtor and/or any other
persons also entitled to all or part of the funds. This third
party is compelled to make the payment directly to the
ATO and is indemnified in doing so.
Superannuation funds by nature are supposed to be a
protected source of money and so it has been said that
a garnishee order would not be effective until the tax
debtor’s (member’s) benefits are payable under the rules
of the fund – which is usually when the member retires or
dies! In the event of bankruptcy superannuation monies
are excluded from the definition of divisible property and
therefore cannot be realised by a bankruptcy trustee for
the benefit of creditors.
Early this year the Denlays filed an application in
the Federal Court seeking a judicial review of the
Commissioner’s decision to issue the garnishee notice,
particularly given the stay on the enforcement of the
judgment. The court accepted the Denlay’s argument
and quashed the garnishee notice ordering that the
monies be refunded to the superannuation fund, and
interestingly awarded costs in favour of the Denlays on
an indemnity basis.
What is important to note is that the garnishee was
quashed essentially because it was inappropriate to
issue such a notice at the time of a court ordered stay on
enforcement proceedings, not because superannuation
monies are generally believed to have some sort of
protection.
WORRELLS ARTICLES
Denlay v Commissioner of Taxation (2013) FCA
307 saw a long speculated question put to a
test, which is conceivably one of many to come.
3
If you wish further information on the new provisions,
please contact us.
JASON BETTLES,
Partner Worrells Gold Coast
May 2013 Plain Talk e-Update
In the case of Denlay v Commissioner of Taxation a
garnishee was issued over the taxpayers’ superannuation
fund. Interestingly, at the time of the issuing of the
garnishee the parties were part way through the hearing
of appeals filed by the Denlays to amended income tax
assessments made by the ATO, and at a time when
the ATO had consented to an order for a stay of the
enforcement of a judgment in relation to the tax debt.
Mr & Mrs Denlay was declared bankrupt in 2012 upon
lodging debtor’s petitions, Jason Bettles, Partner Worrells
Gold Coast is the bankruptcy trustee of both estates.
Mr Denlay was not in a position to pay the tax debt or
further fund the appeal of the assessment.
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GLOSSARY
INDICATORS OF INSOLVENCY
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