2-1 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev This is the prescribed textbook for your course. Available NOW at your campus bookstore!

2-2 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Bankruptcy law Chapter 20

2-3 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Learning objectives At the end of this chapter you should understand: the objectives of bankruptcy law the advantages and disadvantages of bankruptcy from the perspective of the creditor and the debtor how the Bankruptcy Act 1966 (Cwlth) is administered the difference between a debtor’s petition and a creditor’s petition the term ‘acts of bankruptcy’ and give examples the steps involved in obtaining a sequestration order the property of a bankrupt that is available for distribution to creditors

2-4 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Learning objectives (cont.) the order in which creditors’ debts are paid the powers of the trustee, including the power to avoid antecedent transactions the procedure for discharge from bankruptcy the contrast between the bankruptcy of a debtor with alternative procedures under Parts IX and X of the Bankruptcy Act.

2-5 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Introduction Bankruptcy Where legal possession of a debtor’s possessions is taken for the benefit of that person’s creditors. Debtor’s property is sold and distributed fairly amongst creditors, following which the bankrupt is given a discharge of their debts. May be sought by debtor or creditor Regulated by the Bankruptcy Act 1966 (Cwlth)

2-6 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Objectives of bankruptcy Law To assist the debtor –Will be entitled, once discharged, to make a fresh start free from the demands of creditors To protect creditors: –by preventing debtors from disposing of property when bankruptcy is inevitable –by distributing the debtor’s assets among creditors in the swiftest and most economical manner.

2-7 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Objectives of bankruptcy law (cont.) To benefit the community: –by giving a debtor who is hopelessly in debt an opportunity to make a new start, rather than remain a burden on the community. –by imposing limits on the capacity of a person who is an undischarged bankrupt to enter new contracts.

2-8 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Advantages for creditors Equitable and proportionate distribution of debtor’s assets Recovery of property that was distributed prior to bankruptcy Possibly uncover more property available for distribution to creditors by public examination

2-9 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Disadvantages for creditors 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

2-10 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Advantages for debtors Enables bankrupt to avoid being sued by creditors for debts incurred prior to the bankruptcy. New start in three years, with cooperation. Bankrupt maintains ‘necessary property’.

2-11 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Disadvantages for debtors 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

2-12 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Distinction between bankruptcy and insolvency Insolvency –The person is unable to pay all of his or her debts as and when they become due and payable. Bankruptcy –The person is required to provide a trustee with specified property, to be distributed among creditors.

2-13 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Insolvency and Trustee Service Bankruptcy matters are administered under the umbrella of the Insolvency and Trustee Service Australia or ITSA. ITSA provides bankruptcy, trustee and related services including advice and regulation in one location. Important role in countering illegal activities and protecting Australian community from impact of financial failure

2-14 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Bankruptcy Act 1966— administration Inspector-General in bankruptcy (appointed by Attorney-General’s Department) Overseas general administration of Bankruptcy Act State Official Receiver OR Registered trustee (appointed by Governor-General) (appointed by Federal Court) Administration and distribution of bankrupt’s estate:  Gathering bankrupt’s estate  Realising non-monetary assets  Distributing dividend to creditors

2-15 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Official trustee in bankruptcy A body corporate that holds and invests property on behalf of the creditors prior to sale and distribution.

2-16 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev How a person can be made bankrupt Debtor ‘volunteers’ for bankruptcy –by debtor’s petition Debtor is ‘forced’ into bankruptcy –by creditor’s petition

2-17 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Bankruptcy by debtor’s petition (voluntary bankruptcy) Insolvent Declaration of intention s. 54A (provides stay period) Debtor's petition s55 Statement of affairs Acceptance by official receiver Sequestration order Property of bankrupt vested in official receiver

2-18 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Bankruptcy by creditor’s petition Initiated by one or more creditors and presented to the Federal Court. If satisfied, court issues a sequestration order which results in the debtors estate being vested in the Official Trustee or a registered trustee for distribution to creditors. Process may be expensive and drawn out so it’s important to consider commercial realities. Usually used when there is a large sum of money or the debtor has acted fraudulently.

2-19 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Conditions before creditors’ petition will issue Debt owed to creditor/s must be at least $5000 and be capable of being quantified. Debtor must have committed an act of bankruptcy within a period of six months before the presentation of the petition. Generally the debtor must be resident or have a residential or business address in Australia at the time the act of bankruptcy was committed.

2-20 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Acts of bankruptcy Listed in Part IV, Division I, s. 40 of the Bankruptcy Act 1966 (Cwlth) One of the most common acts of bankruptcy is a failure to comply with a bankruptcy notice. The Official Receiver may issue the notice on application of creditor/s who have obtained a final judgement or order for an amount of at least $5000. The notice requires the debtor to pay within a prescribed time.

2-21 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Failure to comply with bankruptcy notice Final judgment made (creditor has right against debtor decided) Bankruptcy notice served (based on final judgment order) – sum due – deadline to be paid Debtor complies no act of bankruptcy Debtor doesn't comply commits act of bankruptcy Pay debt Prove debt not owed – counterclaim – set-off – cross demand Creditor presents petition for bankruptcy (> $5000 owed) Served on debtor Court makes sequestration order Debtor automatically bankrupt

2-22 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Court proceedings for sequestration order Bankruptcy notice Act of bankruptcy (failure to comply with bankruptcy notice) Creditor’s petition (presented by creditors with >$5000 owed S44) Served on debtor Debtor attends bankruptcy court hearing of the creditor’s petition Prove:  debt exists  debtor committed one or more acts of bankruptcy within six months before creditor’s petition presented  service of petition of debtor Court makes sequestration order

2-23 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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

2-24 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Proof of debt Secured Unsecured Rely on Estimate Realise/surrender security security security Shortfall Proof of debt  Amount  How incurred  Substantiation

2-25 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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 (includes the value of fringe benefits and money paid to associated entities)

2-26 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Certain property excluded from bankruptcy Section 116(2) of the Bankruptcy Act 1966 lists some specific exclusions, e.g. –clothes and necessary household furniture –personal belongings –vehicle (worth up to $6850) –property used to obtain income by personal exertion, not exceeding a prescribed value.

2-27 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Property available for payment of debts Doctrine of relation back (s. 115): –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). –Aimed at preventing persons aware of imminent bankruptcy from disposing of property that should be used to satisfy creditors’ debts

2-28 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Antecedent transactions: s. 118 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).

2-29 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Antecedent transactions: s. 120 Voluntary settlements (within five years): –Consideration inadequate –Void against trustee Exceptions: –To meet child support –To pay taxes –To fulfil a debt agreement obligation

2-30 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Antecedent transactions: s. 121 Fraudulent dispositions: –Intention of defeating creditors Exceptions: –Market value paid –In good faith

2-31 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Preferential payments: s. 122 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

2-32 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Discharge from bankruptcy Automatic discharge—after three years 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

2-33 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 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 $ –property of less than $ –After tax income of less than $ –not been bankrupt or entered into a Part X arrangement in last ten years.

2-34 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Debt agreements under Part IX (cont.) Proposal Official Trustee 75% of creditors approve Debt agreement Recorded on National Personal Insolvency Index (NPII)

2-35 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Part X schemes—personal insolvency agreements Agreement with creditors outside of bankruptcy, avoiding consequences and stigma of bankruptcy. Debtor must authorise a registered trustee or solicitor to call a meeting of the debtor's creditors. Within 14 days of consenting to act and meeting with creditors, the trustee must prepare a report summarising the affairs of the debtor. Trustee must state whether a personal insolvency agreement is in the best interest of the creditors. Meeting of creditors seeks information from debtor who must present statement of affairs, assesses and votes on agreement.

2-36 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev Reasons for bankruptcy Consumer debt Lack of business and investment skills Change in economic or political climate Unforeseen liabilities