INSOLVENCY LECTURE 1A

WELCOME TO THE COURSE Lecturers: John Gooley, Michael Zammit, David Russell The Course Outline has been completely revised for this semester Notes from previous students wil be of limited use to you We now do 6 weeks of personal insolvency (bankruptcy) and 6 weeks of corporate insolvency Prescribed texts: –Keay’s Insolvency 6th edition –Nichols - Annotated Bankruptcy Act –2009 Corporations Legislation - Thomson Reuters

THE ASSIGNMENT Available on the website Due on 15 December 2009 Only one question with a word limit of 1500 A pass mark is 50% Lectures 4 and 5 cover topics relevant to the assignment - you will have to read ahead

THE EXAM Detailed discussion of the exam will be in Lecture 10 Exam is open book but not electronic The LPAB website contains exam information and past exam papersexam information QUESTIONS You can ask questions before, during or after lectures Feel free to questions to the lecturer, to be dealt with at the next lecture

HISTORY OF BANKRUPTCY LAW The Roman Law of the Twelve Tables (450 BC) –Gave the debtor 30 days to pay or find someone else to pay –If payment not made, fastened in stocks for 3 market days –If still unpaid, debtors were entitled to physically divide the debtor’s body amonst themselves –Division was in proportion to the creditor’s share of the debt The first English bankruptcy statute (1542) –Creditors could complain to the Lord Chancellor and obtain seizure of the debtor’s property –The remedy was initially only available to traders The debtors’ prison –Until 1869 in England –Until January 2009 in Greece –Still exists in Dubai

COMMONWEALTH LAW The Commonwealth Of Australia Constitution Act in s 51(xvii) gives the federal parliament power to legislate in relation to bankruptcy and insolvencys 51(xvii) The current legislation is the Bankruptcy Act 1966Bankruptcy Act 1966 Federal courts deal with bankruptcy matters - s 2727 Inspector-General in Bankruptcy - ss 11, Insolvency and Trustee Service Australia (ITSA)ITSA Official Receiver - s 1515 Official Trustee - ss 18, Registered trustees - s 154A ff154A

PURPOSES OF BANKRUPTCY LAW Pari passu distribution –proportional sharing –only deals with unsecured creditors –often little left after payment of secured creditors and costs Protection –bankrupt is protected against further claims by creditors –protection for creditors –assets collected and divided amongst creditors –bankrupt has the slate wiped clean and can start again Investigation –why the insolvency occurred –whether other assets are available for creditors Restrictions on dealings –financial conduct of bankrupt is restricted and supervised

INTERACTION WITH OTHER AREAS OF LAW Property law - what if your vendor goes bankrupt? Commercial law - can you obtain title from a bankrupt seller? Litigation - can you sue or be sued by a bankrupt? Family law - can maintenance owed by a bankrupt parent be recovered? Superannuation - can creditors get at a beneficiary’s entitlement? Even if you never appear directly in a bankruptcy case, you will certainly need to know the effect which bankruptcy has on titles and rights. Bankruptcy affects your future right to practise law: –the “bankrupt barristers” scandal –Legal Profession Act 2004 s 498(1)(d)498(1)(d)

“SOLVENT” AND “INSOLVENT” S 5(2) provides: “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.”5(2) s 5(3) provides: “A person who is not solvent is insolvent.”5(3) But how do you prove insolvency? –You know nothing about the debts, liabilities, income and expenses of the debtor –The debtor may not even keep financial records The Bankruptcy Act provides a simple means of establishing insolvency by prescribing that certain events constitute an “act of bankruptcy”

ABILITY TO PAY DEBTS AS THEY FALL DUE Sandell v Porter (1966) 115 CLR 666Sandell v Porter High Court considered a previous version of the definition - “unable to pay his debts as they become due from his own money” This does not mean just cash on hand Regard should be had to monies which a debtor could borrow on mortgage, or which could be obtained by selling assets Whether a person is insolvent will be a question of fact in each case

COURSE OF A BANKRUPTCY What follows is a broad summary of the topics to be covered in detail in Lectures 2-6 Debtor fails to pay a debt, causing creditor to take action under Bankruptcy Act Debtor commits one of the acts of bankruptcy listed in s 40, usually failure to comply with a bankruptcy notice - s 40(1)(g)s 40 Voluntary and compulsory bankruptcy: –debtor presents a debtor’s petition - s 55; OR55 –creditor presents a creditor’s petition - s 4747 Court hearing a creditor’s petition may make a sequestration order against the estate of the debtor - s 4343 “Sequestration” is not a defined term but an ordinary English word meaning to set aside or separate

VESTING OF PROPERTY The property of the bankrupt vests forthwith in the Official Trustee S 58(1) provides:58 (1) Subject to this Act, where a debtor becomes a bankrupt: (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 (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.

DEALING WITH ASSETS Trustee takes possession of property of the bankrupt - s 129s 129 Bankrupt must file a Statement of Affairs - s 54s 54 Trustee may convene a meeting of the creditors - s 64s 64 Creditors must lodge a Proof Of Debt - s 82s 82 Official Receiver may launch investigation - s 77Cs 77C Trustee pays costs of administration of the estate, then pays dividends to creditors wo have proved their debts - s 140s 140

TERMINATION OF BANKRUPTCY General rule - discharge from bankruptcy after 3 years - s Trustee may object to the discharge - s 149D149D Annulment by Trustee certifying that all debts have been paid in full - s 153A153A Annulment by court order - the sequestration order ought not to have been made - s 153B153B

DATE OF COMMENCEMENT OF BANKRUPTCY Court orders usually take effect when made - but not in the case of a sequestration order The bankruptcy will commence at the time of commission of the earliest act of bankruptcy in the 6 months immediately prior to presentation of the petition - s This date of commencement is important in relation to the doctine of “relation back”

RELATION BACK Section 115(1) provides:115 If a person becomes a bankrupt on a creditor's petition and subsection (1A) does not apply, then 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 creditor's petition was presented. Section 116(1) provides:116 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; …………………………………... is property divisible amongst the creditors of the bankrupt.

VOID TRANSACTIONS The trustee can challenge and seek to set aside certain transactions: Transactions which are undervalued - s Transactions to defeat creditors - s Transactions which give a preference to a creditor and which thus disadvantage the general body of creditors - s Certain superannuation contributions - s 128A128A

NEXT WEEK : LECTURE 2 Acts of bankruptcy Bankruptcy notices Reading: –Keays –Bankruptcy Act ss 40,41 –Nichols