INSOLVENCY LECTURE 9
LAW EXTENSION COMMITTEE
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THIS LECTURE
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The doctrine of “relation-back”
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Property available to the trustee
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Exempt property
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Administration of the estate by the trustee
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THE DOCTRINE OF RELATION-BACK
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This doctrine is concerned with maximising the assets available to the Trustee in
Bankruptcy
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Normally court orders take effect from the date they are made by a judge
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However, the doctrine of relation-back operates to bring into the bankrupt estate,
property owned by the bankrupt in a period several months before the
sequestration order is made by a court ie. the bankruptcy commences earlier
than the date the court order is made
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There is a “formula” for calculating the relation-back period
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There are several categories of property not caught by the doctrine of relationback
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KEY DATES IN A BANKRUPTCY
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To understand the doctrine, and to work out when the bankruptcy commences,
you need to have regard to:
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“the date of the bankruptcy” - s 5
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“the commencement of the bankruptcy” - s 5
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s 115 - commencement of a bankruptcy
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s 116 - property divisible amongst creditors - all property which belonged to
the bankrupt at the commencement of the bankruptcy
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You need to read these 4 provisions together
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KEY DATES IN A BANKRUPTCY
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“the date of the bankruptcy” - s 5 – this is date on which a sequestration order
was made against the estate or where, in a case where the bankrupt presented
a debtor’s petition, the date which they became bankrupt by reason of section
55, 56E or 57.
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“the commencement of the bankruptcy” - s 5 – this is the time at which the
bankruptcy is by virtue of section 115 deemed to have commenced.
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KEY DATES IN A BANKRUPTCY
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s 115 - commencement of a bankruptcy – Where a creditor’s petition is
used, then generally the bankruptcy is taken to have relation back to, and to
have commenced at, the time of the commission of the earliest act of
bankruptcy committed by the person within the period of 6 months immediately
before the date on which the creditors petition was presented (i.e. filed)
•
If the bankruptcy is as a result of the acceptance of a debtor’s petition, the
bankruptcy is taken to have relation back to and commenced at the time
indicated in the table set out in s 115(2)
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The following graphic shows how to calculate the relation-back period for a
bankruptcy based upon a Creditor’s Petition
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KEY DATES IN A BANKRUPTCY
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RELATION BACK - sections 115 and 116
What does “relation back” mean? According to Lord Esher MR in Re Pollit
“The title of the trustee in the subsequent bankruptcy related back to that act of
bankruptcy. What does that mean? The result of the relation back is, that all
subsequent dealings with the debtor's property must be treated as if the
bankruptcy has taken place at the moment when the act of bankruptcy was
committed. The debtor must be considered as having become a bankrupt the
moment the deed was executed. Then, he being a bankrupt, all the money which
he then had, and all the money which was owing to him, passed to the trustee in
the bankruptcy for the purpose of being distributed by him amongst the bankrupt's
creditors.”
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RELATION BACK - sections 115 and 116
Where a person commits an act of bankruptcy, that person is not entitled to deal
with his or her estate. He or she has no right to gather it in if not already in his or
her hands or to make payment to his or her creditors out of that which he or she
has actually at his or her command. He or she can have no good discharge to a
debtor who pays him or her with notice of the act of bankruptcy, because the
debt made by subsequent bankruptcy proceedings will be turned into a debt due
to his or her trustee, and not to himself or herself
- Ponsford, Baker & Co v Union of London and Smith's Bank Ltd
[1906] 2 Ch 444.
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RELATION BACK - sections 115 and 116
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In Anscor Pty Ltd v Clout [2004] FCAFC 71 at [43](g) Lindgren J stated:
“The vesting in the trustee in bankruptcy does not take place upon the
commencement of the bankruptcy; it takes place forthwith upon the debtor’s
becoming a bankrupt. A debtor becomes a bankrupt on the making of a sequestration
order upon a creditor’s petition (s 43(2) of the Act) or upon the endorsement by the
Official Trustee of a debtor’s petition as ‘accepted’ (s 55(4A) of the Act). Until then,
there is no trustee in bankruptcy in whom property can vest ... The ‘commencement of
the bankruptcy’, however, marks the time as at which the items of property
constituting the ‘property of the bankrupt’ are to be identified. Those items of property
constitute the property which vests in the trustee in bankruptcy forthwith upon the
debtor’s becoming a bankrupt. Such an item of property will not vest in the trustee in
bankruptcy if it no longer exists when the debtor becomes a bankrupt, or if it still
exists then but has been transferred in the meanwhile for full value under a
transaction protected by s 123 as mentioned in the preceding paragraph. Statements
to the effect that avoidance by the trustee is effective as from ‘the date of the accruer
of [the trustee’s] title, or, in other words ... from the date of the act of bankruptcy to
which the title of trustee relates back’ …... do not signify that there is an actual vesting
in the trustee at the commencement of the bankruptcy. They signify that, the transfer
by the debtor/bankrupt being disregarded, if the property still exists at the
commencement of the bankruptcy, it will form part of the property of the bankrupt
which will vest in the trustee forthwith upon the debtor’s becoming a bankrupt, if the
property also still exists then.”
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RELATION BACK - sections 115 and 116
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The result of the doctrine of relation back is that all dealings (after an act of
bankruptcy has occurred) with the debtor’s property must be treated as if the
bankruptcy had taken place at the moment when the act of bankruptcy was
committed. This means that the trustee is entitled to property of the bankrupt
which would not otherwise be available to the estate at the date of bankruptcy
(i.e. the date the court makes the sequestration order).
•
If a creditor’s petition has an extended life - see section 52(5) i.e. up to 24
months - then it may be that the relation-back period is extended even further.
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There will be no relation back period where a debtor’s petition has been
presented and the debtor did not commit an act of bankruptcy in the 6 months
preceding the presentation of the petition.
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PROPERTY DIVISIBLE AMONG CREDITORS - s 116
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PROPERTY DIVISIBLE AMONG CREDITORS - s 116
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S 58 vests the property of the bankrupt in the trustee [Lecture 7]
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All property owned at date of commencement of bankruptcy or acquired after
that date - s 116(1) – is property divisible amongst the creditors of the bankrupt.
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Trustee takes subject to the equities
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There are categories of exempted property
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EXEMPT PROPERTY
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EXEMPT PROPERTY - s 116(2)
Section 116(2) lists a large number of exceptions i.e. property NOT available to
the Trustee. Exempted property is not “divisible” property. The most common
categories are:
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property held in trust by the bankrupt - s 116(2)(a);
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life insurance and superannuation - s 116(2)(d);
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damages for personal injury or wrong - s 116(2)(g)
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EXEMPT PROPERTY - s 116(2)
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certain household property - s 116(2)(b) and Reg.6.03;
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certain personal property – s 116(2)(ba) and Reg.6.03A;
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certain property used for producing income - s 116(2)(c) and Reg.6.03B(1);
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certain means of transport - s 116(2)(ca) and Reg.6.03B(3);
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he indexed amounts are on the AFSA website and are updated quarterly;
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Current indexed amounts are tools etc $3,650, and vehicles $7,500.
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EXEMPT INSURANCE POLICIES - s 117
“117(1) Where:
(a) a bankrupt is or was insured under a contract of insurance against
liabilities to third parties; and
(b) a liability against which he or she is or was so insured has been
incurred (whether before or after he or she became a bankrupt);
the right of the bankrupt to indemnity under the policy vests in the trustee and any
amount received by the trustee from the insurer under the policy in respect of the
liability shall, if the liability has not already been satisfied, be paid in full forthwith to
the third party to whom it has been incurred”.
•The right to indemnity under a third party liability insurance policy vests in the
trustee
•Any amount received by the trustee must be paid to the claimant
•In practice, the trustee has no interest in dealing with the insurer, purely for the
benefit of a third party “victim”. What often happens is that the person wishing to
claim against the insurer seeks an assignment of the benefit of the policy by the
trustee.
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EXEMPT TRANSACTIONS: PAYMENTS MADE BY THE BANKRUPT - s 123
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Section 123 protects certain transfers by the bankrupt against relation back.
•
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It does not protect void dispositions [see Lecture 10].
Four kinds of transactions are exempt :
(a) a payment by the debtor to any of his or her creditors;
(b) a conveyance, transfer or assignment by the debtor for market value;
(c) a contract, dealing or other transaction by or with the debtor for market value;
or
(d) any transaction to the extent of a present advance made by an existing
creditor;
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“Payment” includes the drawing, making or indorsing of a bill of exchange,
cheque or promissory note - s 123 (7)
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“Transaction” includes payment, delivery, conveyance, transfer, assignment,
contract or dealing - s 123 (7)
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For a transaction to be exempt, three criteria must be satisfied (see over)
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EXEMPT TRANSACTIONS: PAYMENTS MADE BY THE BANKRUPT - s 123
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Such transactions are exempt if three criteria are satisfied :
(a) the transaction took place before the day on which the debtor became a
bankrupt (ie. the date the sequestration order was made by a court) ;
(b) the person, other than the debtor, with whom it took place, did not, at the
time of the transaction, have notice of the presentation of a petition against the
debtor; and
(c) the transaction was in good faith and in the ordinary course of business.
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The burden of proving these three criteria lies on the person who asserts the
validity of the transaction - s 123 (2)
As to the meaning of “good faith” and “in the ordinary course of business”, see
Lecture 10 slides
The fact that the transferee had notice that the debtor had committed an act of
bankruptcy does not mean that a transaction is deemed not to have been in
good faith and in the ordinary course of business - s 123 (3)
Maintenance agreements and orders are protected - s 123 (6) [subject to ss
121, 128B, 128C - see lecture 10]
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•
•
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EXEMPT TRANSACTIONS: PAYMENTS MADE TO THE BANKRUPT - s 124
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•
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Payment of money or delivery of property to a bankrupt is valid if:
– before bankruptcy - made in good faith and in the ordinary course of
business - s 124(1)(a)
– after bankruptcy - made in good faith and in the ordinary course of business
and without negligence - s 124(1)(b)
burden of proof is upon person asserting validity of transaction - s 124(2)
knowledge or reason to suspect insolvency, or knowledge of an act of
bankruptcy or the presentation of a creditor’s petition, does not deem the
transaction not to have been made in good faith and in the ordinary course of
business - s 124 (3)
“without negligence” - Re Hasler (1974) 23 FLR 139. Several days after the
making of a sequestration order against a debtor’s estate, the bank paid two
cheques drawn on one of the debtor’s accounts, which was in credit. The bank
manager himself did not know of the sequestration order, but the bank had not
followed its own procedures which required bank staff to become aware of
customer bankruptcies - the bank could not show that it acted without
negligence.
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EXEMPT BANK ACCOUNTS - s 125
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s 125(1) obliges a financial institution which has ascertained that it holds an
account for a bankrupt, to inform the trustee in writing
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if the trustee fails within one month to give written instructions to the institution, it
may deal with the account as it sees fit - s 125 (2)
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EXEMPT PURCHASES FROM THE BANKRUPT - s 126
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If the bankrupt acquires property after bankruptcy occurs, and another person
then acquires that property in good faith and for valuable consideration, such
acquisition shall be valid against the trustee - s 126
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ADMINISTRATION OF THE ESTATE – INITIAL ACTIONS
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Examining the books and records of the bankrupt – s.77(1)(a) requires bankrupt
to deliver all books in possession – otherwise can be obtained by warrant (s.78) or
search (s.130)
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Statement of affairs – assets, liabilities, income, expenditure, dispositions – s.54
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Interviewing the bankrupt - the bankrupt must attend – s.77(1)(b)
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Giving notice of the bankruptcy – prudent for trustee to notify banks, ATO, debtors
of the bankrupt, creditors not disclosed by Statement of Affairs
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ADMINISTRATION OF THE ESTATE – RELATIONS WITH CREDITORS
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Informing creditors – trustee keeps good relations – creditors are useful source of
information. Must respond to reasonable enquiries from creditors – s.19(1)(d)
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Rights of creditors:
• Resolve to give trustee directions – s.177;
• Appeal against any action of trustee – s.178;
• Fix trustee’s remuneration – s.162;
• Initiate and take part in public examinations – s.81;
• Inspect accounts and records – s.173;
• Inspect proofs of debt of other creditors – s.101;
• Apply to court to review decision re proof of debt – s.104;
• May be entitled to be paid in priority –s.109;
• Be paid a dividend – s.140;
• Resolve to remove a trustee – s.181;
• Indemnify the trustee for litigation and receive a priority dividend –
s.109(10).
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Meetings of creditors – May convene a meeting – s.64(2). Must convene a
meeting (usually 25%) – s.64(1)
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ADMINISTRATION OF THE ESTATE – TAKING POSSESSION OF PROPERTY
Section 129:
(1) The trustee shall forthwith take possession of all the property of the bankrupt
capable of manual delivery, including all deeds, books and documents of the
bankrupt.
(2) The Court may, on the application of the trustee, enforce possession accordingly.
(3) A person is not entitled, as against the trustee, to withhold possession of the
books of account or any papers or documents of the bankrupt relating to the
accounts or to any of the examinable affairs of the bankrupt or to claim any lien on
any such papers or documents.
(4) If a person has in his or her possession or power any moneys or security that he
or she is not by law entitled to retain as against the bankrupt or the trustee, he or she
shall pay or deliver the moneys or security to the trustee.
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ADMINISTRATION OF THE ESTATE - INVESTIGATIONS
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Search warrants – apply for a warrant to search premises and seize property –
s.130
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Other administrative processes:
• Notices issued by trustee – s.77A – requiring production of records
• Notices issued by Official Receiver – ss.77AA (access to premises)
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Private examinations - s.77C notice to attend before Official Receiver to give
evidence and produce books
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Public examinations under s.81:
• summons to attend court to be examined on oath
• “examinable person”
• inquisitorial
• no rules of evidence
• cannot abuse the process
• privilege against self incrimination (except for bankrupts)
• legal professional privilege not abrogated
• Off shore information notices – s.81A
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ADMINISTRATION OF THE ESTATE – DISCLAIMER OF ASSETS
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Land burdened with onerous covenants or which is unsaleable – s.133(1AA) & (1)
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Leasehold – must obtain consent of court to disclaim – s.133(4). Landlord can
prove as a creditor
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Contract – s.301 renders void an “ipso facto” clause
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ADMINISTRATION OF THE ESTATE – CARRYING ON BUSINESS
Trustee entitled to carry on business “so far as may be necessary to dispose of it or
wind it up for the benefit of creditors” – s.134(1)(b)
Examples:
•to enable trustee to assess whether business is profitable;
•to complete a project which will benefit the estate;
•while a buyer is located;
•if the business is profitable
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ADMINISTRATION OF THE ESTATE – DEALING WITH ASSETS
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Assignment of rights in action – trustee can sell a right – s.134
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Directions from the court – s.134(4)
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Consolidation of estates – for two or more partners or joint debtors – s.53
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Realising the assets:
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private contract, public auction, tender, online sale
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must pay out security holder first
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20 years from the date of bankruptcy to claim property – s.127(1)
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ADMINISTRATION OF THE ESTATE – THE BANKRUPT’S INCOME
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Contribution assessment period – 12 month periods after date of bankruptcy
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Actual income threshold – s.139K – formula depends on number of dependants –
present indexed base amount is $54,081.30
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Income – broadly defined - s.139L
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Process of assessment – trustee makes an assessment – s.139W
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Review – by Inspector-General – s.139ZA
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Hardship – may apply for variation – s.139T
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Payment – trustee may allow instalments – s.139ZG
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Collection from others - Official Receiver may collect – s.139ZK, 139ZL
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Supervised account regime – bankrupt initially given opportunity to voluntarily
comply – s.139ZIC - before regime invoked by trustee
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ADMINISTRATION OF THE ESTATE – FUNDING LITIGATION
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Section 305 funding – trustee may apply for government funding – trustee must
reimburse if proceedings successful
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Creditors’ indemnity – court may provide a priority to a creditor who funds the
trustee – s.109(10)
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Litigation funding – see notes re this topic in corporate insolvency slides
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ADMINISTRATION OF THE ESTATE – CLAIMS OF CREDITORS
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Debts provable in bankruptcy – s.82 – “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.”
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Non-provable claims –s.82(2) – unliquidated damages arising otherwise than by
reason of contract, promise or breach of trust
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Provable claims – must be legally enforceable and in monetary terms
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Rule against double proof – joint creditors have to lodge a joint proof
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Set-off – creditor is entitled to set off against the debt which is owed, any sum
which creditor owes to bankrupt – s.86(1)
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Secured creditors – bankruptcy does not interfere with rights of secured creditor –
s.58(5)
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Proofs of debt – creditor must lodge under s.84(1). – approved AFSA Form 8.
Creditor may appeal to court against rejection – s.104.
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ADMINISTRATION OF THE ESTATE – DISTRIBUTION AND PRIORITIES
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Payment of dividends:
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only to creditors who have proved their debts – s.140
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creditors can seek court order for payment – s.147
Section 109 priority payments:
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costs and expenses of administration – s.109(1)(a)
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remuneration of trustee – s.109(1)(b)
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wages of employees – s.109(1)(e)
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priorities in favour of certain creditors – s.109(1)(j)
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court ordered priority – s.109(10)
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QUESTION 4 FROM MARCH 2014 EXAM
Andrei Smyslov (“Andrei”) failed to satisfy a judgment of the District Court,
given on 2 July 2012, for $675,000. The judgment creditor applied on 1
August 2012 to the Official Receiver for the issue of a Bankruptcy Notice.
It was issued on 2 August 2012. It was served on 6 August 2012. A
Creditor’s Petition was presented on 1 October 2012. Andrei was made
bankrupt by order of the Federal Court, on 2 December 2012.
The Official Trustee seeks your legal advice. He wants to claim the following
property and sell it to pay the creditors:
a. A painting which Andrei gave to his wife on 12 August 2012;
b. A racehorse which Andrei sold at public auction on 6 September 2012;
c. A Lamborghini motor vehicle still in Andrei’s possession;
d. Andrei’s interest in a self-managed superannuation fund still under Andrei’s
control as trustee;
e. The repayment by Andrei of a loan to Westpac on 1 November 2012.
The Official Trustee says to you that he does not have the funds to pursue any
claims for void dispositions.
Advise the Trustee about the relation-back period for Andrei and identify the
issues which may arise if the Trustee seeks to recover the above property.
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