DEBT RECOVERY AND BANKRUPTCY CHAPTER 17 DEBT RECOVERY AND BANKRUPTCY 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

What are “acts of bankruptcy”? There are 14 acts of bankruptcy in s 40 of the Bankruptcy Act and all of these suggest that the debtor is in financial trouble. Two of these acts are: failure to comply with a bankruptcy notice (the most common act of bankruptcy); and leaving/staying away/hiding with the intention to delay or defeat creditors: see Barton v DCT. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

PETITIONS IN BANKRUPTCY A person can become bankrupt in two ways: a creditor’s petition (involuntary) OR a debtor’s petition (voluntary): note proposed changes which will make voluntary bankruptcy more difficult. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

CREDITORS’ PETITIONS: CONDITIONS An act of bankruptcy must have been committed by the debtor in a six-month period before the petition The minimum prescribed amount (currently $5,000) must be owing to the petitioning creditor or creditors The debtor must be within the jurisdiction of the court (that is within the Australian jurisdiction) 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

SEQUESTRATION ORDERS A sequestration order is a declaration by a court that the debtor has become bankrupt Upon the making of a sequestration order, the debtor becomes bankrupt The order converts the debtor’s financial position (insolvent) to a legal position (bankrupt) All available property now vests in a trustee for sale and distribution amongst all valid creditors 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

PROPERTY AVAILABLE TO THE TRUSTEE property owned by the bankrupt at the date of bankruptcy (unless it is exempt) after-acquired property property owned at the date of “commencement of bankruptcy” (doctrine of relation back) certain property of a “controlled entity” 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

DATES IN BANKRUPTCY There are two important dates in the law of bankruptcy: the date of bankruptcy which relates to the length of time you are bankrupt; this commences on the day the court makes the sequestration order or the day the debtor’s petition is lodged the date of commencement of the bankruptcy, which is the date that the trustee uses to determine what property may belong to creditors 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

DATES IN BANKRUPTCY: EXAMPLE Relation back six month period. Any moneys paid are immediately “caught” 20/8/2009 19/11/2009 3/5/2010 1/7/2010 I---------------------------------------------------I---------------------------------------------I-----------------------------------------I Olivia pays $5,000 Olivia goes overseas Date creditor’s Court makes on her credit card with no return date. Petition lodged sequestration order This is when bankruptcy has commenced under relation back period for collection of assets Outside relation back period 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

WHAT IS EXEMPT PROPERTY? Property held in trust for other persons Necessary wearing apparel and household property Ordinary tools of trade, plant and equipment, professional instruments and reference books of the bankrupt of no greater value than $3,400 Property used by the bankrupt primarily for transport to a prescribed amount, currently $6,850 Life insurance or life insurance-endowment policies that have been in force at least two years before the bankruptcy 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

EXEMPT PROPERTY (CONT)…. Policies of pure endowment that have been in force at least five years before the bankruptcy Any right of the bankrupt to recover damages for personal injury or wrong done to the bankrupt, spouse or member of the family Income of the bankrupt, except by court order or where the bankrupt is subject to a contribution under the Act Property bought with exempt money is generally also exempt Note that a bankrupt person cannot enter contracts or obtain credit in excess of $4,835 without the approval of trustee/s. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

ORDER OF PAYMENT OF DEBTS Preferred debts (most common) Section 109 of the Act lists the order of payment: 1. child support deductions 2. remuneration and expenses of the trustee and the taxed costs of the petitioning creditor 3. funeral expenses of a deceased bankrupt 4. Wages and salaries to employees ($4,000 each employee) 5. Workers’ compensation payments, etc Preferred creditors receive payment in full before ordinary creditors receive anything. The previous category must be satisfied in full prior to creditors in the next category being paid. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

ORDER OF PAYMENT OF DEBTS CONT… Deferred debts If there are insufficient funds for full payment to ordinary creditors, they receive a proportionate amount. Deferred creditors get nothing until ordinary creditors are paid in full. Deferred debts include: claims for interest on interest-bearing debts for the period after the date of the bankruptcy claims by persons entitled under covenants, contracts and transfers that were void against the trustee loans from a related entity, such as a spouse. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

ALTERNATIVES TO BANKRUPTCY The Bankruptcy Act provides for two alternatives to the serious step of becoming bankrupt: Part IX – Debt Agreements: these apply to small insolvencies, currently under $88,379.20. The income of a person seeking a debt agreement should not exceed $66,284.40. Part X – Personal Insolvency Agreements: these could involve – lump sum payments to creditors c/- trustees; transfer of assets to trustee to be sold and divided amongst creditors; periodic payments to trustee to be distributed to creditors. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

DEBT RECOVERY METHODS Letter of Demand (not compulsory, but advisable) Issue of Statement of Claim or summons (note that the court jurisdictional amounts dictate which court will be used – for example, amounts under $60,000 will be recovered in the Local Court) Service of summons Judgment 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

Is income of a bankrupt exempt? The Bankruptcy Act requires debtors with an income over specified amounts to contribute to the estate debts: income of $44,189.60 (where there are no dependants); income of $60.097.86 (where there are more than 4 dependants); income above these amounts (depending on how many dependants they have) – in this case bankrupts are required to pay 50c for every $1 over the limit. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition

METHODS OF ENFORCING JUDGMENT Garnishment Orders – these can be continuing (4 weeks) OR once only. Garnishment orders, also called garnishees, can be enforced against a debtor’s bank account or wages. Writ of Execution – where the Sheriff “red tags” debtor’s goods after seizure, for sale by public auction. Instalment Orders – where the debtor applies to pay off the debt. Examination Summons – where the debtor is cross- examined in court and is required to advise the court of his assets and liabilities. Bankruptcy Notice – demand for payment under threat of bankruptcy. 2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition