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Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
Bankruptcy law
Chapter 20
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
by Barron & Fletcher. Slides prepared by Kay Fanning.
Bankruptcy
• Where legal possession is taken of a
debtor’s possessions, for the benefit
of that person’s creditors.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-2
Purpose of Bankruptcy Act
1966 (Cwlth)
• Provides for the investigation of the bankrupt to
determine if all assets have been disclosed or
other offences have been committed.
• Ensures an equitable distribution of the
bankrupt’s property among creditors.
• Enables a discharged bankrupt to start anew,
free from the demands of creditors and the
bankruptcy trustee.
• Benefits the community, by allowing the
bankrupt to make his/her own living.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-3
Advantages and disadvantages
for creditors
Advantages
• Equitable and proportionate distribution of the
debtor’s assets.
• Recovery of property that was distributed prior to
bankruptcy.
• Public examination may uncover property available
for distribution to creditors.
Disadvantages
• Significant fees for administering the estate, and
court costs associated with the recovery of costs
are paid before creditors.
• Delays and complications
• Bankrupt must stop trading.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-4
Advantages and disadvantages
for debtors
Advantages
• Enables bankrupt to avoid being sued by creditors for debts incurred
prior to the bankruptcy.
• New start in six months to three years, with cooperation.
• Bankrupt maintains ‘necessary property’.
Disadvantages
• Debtor’s property available for settlement of debts.
• Earnings may be used as contribution towards debts.
• Stigma attached to bankruptcy.
• Restrictions in obtaining credit without notifying credit provider of
bankruptcy.
• Bankrupt’s passport to be surrendered.
• Cannot be director of company without permission of Supreme Court.
• Cannot conduct a business without disclosure of bankruptcy.
• Details of bankruptcy published in National Personal Insolvency Index.
• Must comply with Bankruptcy Act.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-5
Definitions
• Insolvency: The person is unable to
pay all his/her debts as and when
they become due and payable.
• Bankruptcy: A person who is required
to provide a trustee with specified
property, to be distributed among
creditors.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-6
Administration of
Bankruptcy Act 1966
INSPECTOR-GENERAL IN BANKRUPTCY
(appointed by Attorney-General’s Department)
Overseas general administration of Bankruptcy Act
STATE OFFICIAL RECEIVER
(appointed by Governor-General)
OR
REGISTERED TRUSTEE
(appointed by Federal Court)
Administration and distribution of Bankrupt’s estate:
 Gathering Bankrupt’s estate
 Realising non-money assets
 Distributing dividend to creditors
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-7
Official trustee in bankruptcy
A body corporate which holds and
invests property on behalf of the
creditors, prior to sale and distribution.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-8
How a person can be made
bankrupt
By Creditor’s Petition
• Debtor is “forced” into bankruptcy
By Debtor’s Petition
• Debtor “volunteers” for bankruptcy
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-9
Bankruptcy by debtor’s petition
(voluntary bankruptcy)
Insolvent
Declaration of Intention S54A
(provides stay period)
Debtor's Petition S55
(Statement of Affairs)
Acceptance by Official Receiver
Sequestration Order
Property of Bankrupt vested
in Official Receiver
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-10
Acts of bankruptcy
• Acts of bankruptcy are listed in
Part IV, Division I, Section 40 of
Bankruptcy Act 1966 (Cwlth)
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-11
Failure to comply with a
bankruptcy notice
Final judgement made
(creditor has right against debtor decided)
Bankruptcy notice served
(based on final judgement order)
- sum due
- deadline to be paid
Debtor complies - doesn't
commit act of bankruptcy
Pay debt
Prove debt not owed
- counter-claim
- set-off
- cross demand
Debtor doesn't comply commits act of bankruptcy
Creditor presents petition for
bankruptcy (> $2000 owed):
Served on debtor
Court makes sequestration
order - debtor is automatically
bankrupt
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-12
Court proceedings for
Sequestration Order
BANKRUPTCY NOTICE
ACT OF BANKRUPTCY
(failure to comply with bankruptcy notice)
CREDITOR’S PETITION
(presented by creditors with >$2000 owed S44)
SERVED ON DEBTOR
DEBTOR ATTENDS BANKRUPTCY COURT
HEARING OF THE CREDITOR’S PETITION
Prove:
 debt exists
 debtor committed one or more Act of
Bankruptcy within six months before creditor’s
petition presented
 service of petition of debtor
COURT MAKES SEQUESTRATION ORDER
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-13
Sequestration Order (on
Creditor’s/Debtor’s Petition)
Administration of the Estate
 Debtor files statement of Affairs
(Assets/Liabilities) within 14 days.
 Trustee calls creditors to meeting within 28 days.
 Public examination of debtor.
 Creditors prove debt exists.
 Trustee realises assets.
 Trustee pays dividends to proven creditors.
 Debtor freed from all provable debts.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-14
Proof of debt
SECURED
RELY ON
SECURITY
ESTIMATE
SECURITY
UNSECURED
REALISE/SURRENDER
SECURITY
SHORTFALL
PROOF OF DEBT
 Amount
 How incurred
 Substantiation
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-15
Assets available to the
trustee
• Assets of bankrupt owned on day of
bankruptcy i.e. earliest Act of Bankruptcy
that can be counted, within last six months.
• Assets bankrupt acquires while bankrupt.
• Income above threshold amount (this
includes the value of fringe benefits and
money paid to associated entities).
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-16
Property excluded from
bankruptcy
Section 116 (2) Bankruptcy Act 1966
e.g.  necessary household furniture
 personal belongings
 vehicle (worth up to $5500)
 property used to obtain income
by
personal exertion
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-17
Property available for
payment of debts
Doctrine of Relation Back S115
• The bankruptcy will relate back to the
earliest act of bankruptcy committed by the
debtor within the six month period
preceding the date of the presentation of
the Creditor’s Petition, or the application for
the making of a Sequestration Order
(Debtor’s Petition).
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-18
Doctrine of Relation Back
• Aimed at preventing persons aware of
imminent bankruptcy from disposing
of property that should be used to
satisfy creditors’ debts.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-19
Property not available to
trustee
Property which has passed from bankrupt and is
protected from trustee
S123: Payments made:
 before day debtor became bankrupt
`
 without notice of petition by other party
 in good faith, during ordinary course of business.
S124: Payments or deliveries from someone who becomes
bankrupt:
 made in good faith
 during ordinary course of business
 without negligence.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-20
Property not available to
trustee (continued)
After acquired property
 income
S126: Protected transactions
- good faith on part of
acquirer
- valuable consideration
- completed before
intervention of trustee
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-21
Antecedent transactions
S118: Execution and attachments
before bankruptcy
• Money received via execution against
property, six months before or after
the presentation of the petition, must
be paid to trustee (less costs).
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-22
Antecedent transactions
S120: Voluntary settlements (within five
years)
• Consideration inadequate
• Void against trustee
Exceptions:
- to meet child support
- to pay taxes
- to fulfil a debt agreement obligation
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-23
Antecedent transactions
S121: Fraudulent dispositions
• Intention of defeating creditors
Exceptions:
- market value paid
- in good faith
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-24
Preferential payments
S122: Transfer of property (within six
months of presentation of petition)
• By insolvent person
• Made from person’s own money
• Made in favour of a creditor in preference to other
creditors
Exceptions:
- received during normal course of business
- received in good faith
- purchased for at least market value
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-25
Discharge and annulment of
bankruptcy
• Early Discharge - After minimum six
months from filing of statement of affairs.
• Discharge - Usually within three years from
filing of statement of affairs.
- May be extended to five years.
- May be extended to eight years
on return to Australia.
• Annulment - Where all debts are paid, or
bankruptcy was not deserved.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-26
Debt agreements under
Part IX
Proposal options:
• Payment of debt over period of time
• Creditors accept less than full amount
Available if debtor has:
• unsecured debts of less than $62 353
• property of less than $62 353
• taxable income of no more than $26 400
• not been bankrupt or entered into Part X
arrangement in last 10 years.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-27
Debt agreements under
Part IX (continued)
PROPOSAL
OFFICIAL TRUSTEE
75% CREDITORS APPROVE
DEBT AGREEMENT
RECORDED ON NATIONAL PERSONAL
INSOLVENCY INDEX (NPII)
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-28
Part X schemes
Composition
• Payment of debts by instalments, or
• Accept less than full satisfaction of debts.
• Debtor can continue in business.
Deed of Assignment
• Assignment of all divisible property for the benefit of
creditors generally (excludes property acquired after
execution of deed).
Deed of Arrangement
• Allows trading out of financial difficulties.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-29
Bankruptcy Legislation Amendment Bill 2001 (Cwlth)
Bankruptcy (Estate Charges) Amendment Bill 2001
(Cwlth)
• Debtor’s Petition may be rejected where
undertaken to avoid other legal obligations, e.g.
complying with a Family Court settlement.
• Debtor will have a thirty-day cooling-off period after
lodging petition.
• Discharge from bankruptcy after six months
removed.
• Alterations in lodging objections to discharge from
bankruptcy.
• Automatic duration of bankruptcy to be two years.
• Administrative procedures to be streamlined.
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-30
Reasons for bankruptcy
• Consumer debt
• Lack of business and investment skills
• Change in economic and/or political
climate
• Unforeseen liabilities
Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Fundamentals of Business Law 4e
Copyright © 2000 McGraw-Hill
by Barron & Fletcher. Slides prepared by Kay Fanning.
Australia
20-31