INSOLVENCY AND BANKRUPTCY LAW
Australia continues to experience the effects of the Global Financial Crisis. Whilst the insolvency numbers appear to be plateauing internationally, substantial fall out continues throughout industries in Australia.
As advisors to many industries, we have ascertained trends and can assist clients in managing troubling financial circumstances, including ageing debtor balances, debt negotiations and business restructure.
There are two broad categories commonly referred to under the label of Insolvency, these are: Bankruptcy (referring to the insolvency of an individual) and Liquidation (referring to the insolvency of a company).
An overview of Bankruptcy Law
Bankruptcy law in Australia is governed by the Bankruptcy Act 1966 (Cth) (“the Act”). Only an individual who is “insolvent” can be made bankrupt and a person is considered to be “insolvent” when they are unable to pay their debts “as and when they fall due.”
There two ways an individual can become bankrupt:
- By voluntarily choosing to become bankrupt; or
- When a creditor puts an individual into bankruptcy.
Besides individuals, bankruptcy can also be sought by a creditor against a deceased’s estate, a partnership (by naming one or more of the partners), joint Judgment Debtors, and against married couples.
How does a creditor make an individual bankrupt?
If a Creditor has obtained Judgment against a Defendant within the last 6 years for a debt amount that exceeds $5,000.00, the Judgment Creditor may seek to make the Judgment Debtor bankrupt.
The first step in the process is for the Judgment Creditor to file and serve a Bankruptcy Notice on the Judgment Debtor. A Bankruptcy Notice contains details of the amount of the debt due to the Judgment Creditor and attaches a copy of the Judgment. The Judgment Debtor has 21 days from the date of service to respond to the Bankruptcy Notice. If the Judgment Debtor does not respond to the Bankruptcy Notice the Judgment Debtor is deemed to have committed an “act of bankruptcy.”
Failure to pay out the amount due under the Bankruptcy Notice is an act of bankruptcy, which provides a basis for arguing the individual is insolvent. In effect, by failing to pay, the act of failing to pay demonstrates that the individual is unable to pay his/her/their debt. The act of bankruptcy allows for the Judgment Creditor to petition the Court to deem the Judgment Debtor a bankrupt.
The Judgment Creditor must file and serve a Creditor’s Petition on the Judgment Debtor within 6 months of the act of bankruptcy. The Creditor’s Petition provides the Judgment Debtor with a hearing date.
At the hearing, the Judgment Creditor must prove that:
- The Judgment Debtor is insolvent;
- That the debt continues to be owing; and
- That the Judgment Debtor does not already have a Sequestration Order (an Order that gives a Trustee control over the Judgment Debtors estate) against him or her.
Once the Court is satisfied that an act of bankruptcy occurred and the debt continues remains due and owing to the Judgment Creditor the Court will make a Sequestration Order and the Judgment Debtor is deemed bankrupt. A Trustee in bankruptcy is assigned to manage the Bankrupt’s estate.
Can a Judgment Debtor avoid bankruptcy?
Prior to the hearing date:
Under Part IX of the Act, a Judgment Debtor with minimal assets, a small debt amount and low income can submit a proposed debt agreement to the Official Receiver in an effort to avoid bankruptcy. If the Official Receiver and a majority of creditors approve the debt agreement the Judgment Debtor enters a binding agreement with the Judgment Creditor.
Part X of the Act provides for the Judgment Debtor to draft Personal Insolvency Agreements as a way for Judgment Debtors to make a payment proposal to all their creditors in attempt to settle their debts and avoid bankruptcy. Personal Insolvency Agreements must be accepted by at least 75% of the Judgment Debtor’s creditors attending at a creditor’s meeting before the Personal Insolvency Agreement is binding.
At the hearing:
The Judgment Debtor may contest the Creditor’s Petition. At least three days prior to the hearing date the Judgment Debtor must serve a Notice of Appearance. The Judgment Debtor must also provide a Notice which includes the grounds for opposition to the petition and an Affidavit supporting the reasons for the opposition of the Creditors Petition.
In addition, the Judgment Debtor may, on the steps of the Court house, make payment of the full debt amount. The Judgment Debtor must still prove to the Court that they are solvent before the Creditor’s Petition is withdrawn.
If successful, the Court will make a Sequestration Order.
What happens after a Sequestration Order is made by the Court?
Following the making of a Sequestration Order, the Judgment Debtor/Bankrupt must file a Statement of Affairs with the Official Receiver and provide a copy to their Trustee.
Under the Act the Trustee takes immediate control of the Bankrupt’s property. The trustee must deal with the Bankrupt’s property in the way most beneficial for the creditors. Once the assessment of the Bankrupt’s assets is complete the Trustee will call a meeting of the creditors and pay out any dividend of the estate. The Trustee’s fees are paid out of the Bankrupt’s estate prior to the creditors receiving a dividend (if any).
The end of bankruptcy
The Bankrupt is discharged from bankruptcy at the end of three years from the date the Statement of Affairs was filed. The bankruptcy is disclosed on the Bankrupt’s credit report for seven years.
The bankruptcy can be extended from three years to five or eight years upon the filing of an Objection to Discharge the Bankruptcy by the Official Receiver or the Trustee in Bankruptcy for the failure of the Bankrupt to meet their obligations.
The Bankrupt can file for an annulment of the Bankruptcy if they have paid all their debts in full or creditors accept an offer from the Bankrupt to pay all their debts and the offer is approved by the Court.
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