1. INSOLVENCY LECTURE 9 LAW EXTENSION COMMITTEE 1

2. THIS LECTURE The doctrine of “relation-back” Property available to the trustee Exempt property Administration of the estate by the trustee 2

3. THE DOCTRINE OF RELATION-BACK This doctrine is concerned with maximising the assets available to the Trustee in Bankruptcy Normally court orders take effect from the date they are made by a judge 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 There is a “formula” for calculating the relation-back period There are several categories of property not caught by the doctrine of relation- back 3

4. KEY DATES IN A BANKRUPTCY To understand the doctrine, and to work out when the bankruptcy commences, you need to have regard to: “the date of the bankruptcy” - s 5s 5 “the commencement of the bankruptcy” - s 5s 5 s 115 - commencement of a bankruptcys 115 s 116 - property divisible amongst creditors - all property which belonged to the bankrupt at the commencement of the bankruptcys 116 You need to read these 4 provisions together 4

5. KEY DATES IN A BANKRUPTCY “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.s 5 “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.s 5 5

6. KEY DATES IN A BANKRUPTCY 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)s 115 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) The following graphic shows how to calculate the relation-back period for a bankruptcy based upon a Creditor’s Petition 6

7. KEY DATES IN A BANKRUPTCY 7

8. 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.” 8

9. 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. 9

10. RELATION BACK - sections 115 and 116 In Anscor Pty Ltd v Clout [2004] FCAFC 71 at [43](g) Lindgren J stated:Anscor Pty Ltd v Clout “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.” 10

11. RELATION BACK - sections 115 and 116 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. 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. 11

12. PROPERTY DIVISIBLE AMONG CREDITORS - s 116116 12

13. PROPERTY DIVISIBLE AMONG CREDITORS - s 116116 S 58 vests the property of the bankrupt in the trustee [Lecture 7]S 58 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.s 116(1) Trustee takes subject to the equities There are categories of exempted property 13

14. EXEMPT PROPERTY 14

15. EXEMPT PROPERTY - s 116(2)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: property held in trust by the bankrupt - s 116(2)(a); life insurance and superannuation - s 116(2)(d); damages for personal injury or wrong - s 116(2)(g) 15

16. EXEMPT PROPERTY - s 116(2)116(2) certain household property - s 116(2)(b) and Reg.6.03; certain personal property – s 116(2)(ba) and Reg.6.03A; certain property used for producing income - s 116(2)(c) and Reg.6.03B(1); certain means of transport - s 116(2)(ca) and Reg.6.03B(3); he indexed amounts are on the AFSA website and are updated quarterly; Current indexed amounts are tools etc $3,650, and vehicles $7,500. 16

17. EXEMPT INSURANCE POLICIES - s 117117 “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. 17

18. EXEMPT TRANSACTIONS: PAYMENTS MADE BY THE BANKRUPT - s 123123 Section 123 protects certain transfers by the bankrupt against relation back. 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; “Payment” includes the drawing, making or indorsing of a bill of exchange, cheque or promissory note - s 123 (7) “Transaction” includes payment, delivery, conveyance, transfer, assignment, contract or dealing - s 123 (7) For a transaction to be exempt, three criteria must be satisfied (see over) 18

19. EXEMPT TRANSACTIONS: PAYMENTS MADE BY THE BANKRUPT - s 123123 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. 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] 19

20. EXEMPT TRANSACTIONS: PAYMENTS MADE TO THE BANKRUPT - s 124124 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. 20

21. EXEMPT BANK ACCOUNTS - s 125125 s 125(1) obliges a financial institution which has ascertained that it holds an account for a bankrupt, to inform the trustee in writing125 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) 21

22. EXEMPT PURCHASES FROM THE BANKRUPT - s 126126 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 126126 22

23. 23 ADMINISTRATION OF THE ESTATE – INITIAL ACTIONS 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) Statement of affairs – assets, liabilities, income, expenditure, dispositions – s.54 Interviewing the bankrupt - the bankrupt must attend – s.77(1)(b) Giving notice of the bankruptcy – prudent for trustee to notify banks, ATO, debtors of the bankrupt, creditors not disclosed by Statement of Affairs

24. 24 ADMINISTRATION OF THE ESTATE – RELATIONS WITH CREDITORS Informing creditors – trustee keeps good relations – creditors are useful source of information. Must respond to reasonable enquiries from creditors – s.19(1)(d) 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). Meetings of creditors – May convene a meeting – s.64(2). Must convene a meeting (usually 25%) – s.64(1)

25. 25 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.

26. 26 ADMINISTRATION OF THE ESTATE - INVESTIGATIONS Search warrants – apply for a warrant to search premises and seize property – s.130 Other administrative processes: Notices issued by trustee – s.77A – requiring production of records Notices issued by Official Receiver – ss.77AA (access to premises) Private examinations - s.77C notice to attend before Official Receiver to give evidence and produce books 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

27. 27 ADMINISTRATION OF THE ESTATE – DISCLAIMER OF ASSETS Land burdened with onerous covenants or which is unsaleable – s.133(1AA) & (1) Leasehold – must obtain consent of court to disclaim – s.133(4). Landlord can prove as a creditor Contract – s.301 renders void an “ipso facto” clause

28. 28 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

29. 29 ADMINISTRATION OF THE ESTATE – DEALING WITH ASSETS Assignment of rights in action – trustee can sell a right – s.134 Directions from the court – s.134(4) Consolidation of estates – for two or more partners or joint debtors – s.53 Realising the assets: private contract, public auction, tender, online sale must pay out security holder first 20 years from the date of bankruptcy to claim property – s.127(1)

30. 30 ADMINISTRATION OF THE ESTATE – THE BANKRUPT’S INCOME Contribution assessment period – 12 month periods after date of bankruptcy Actual income threshold – s.139K – formula depends on number of dependants – present indexed base amount is $54,081.30 Income – broadly defined - s.139L Process of assessment – trustee makes an assessment – s.139W Review – by Inspector-General – s.139ZA Hardship – may apply for variation – s.139T Payment – trustee may allow instalments – s.139ZG Collection from others - Official Receiver may collect – s.139ZK, 139ZL Supervised account regime – bankrupt initially given opportunity to voluntarily comply – s.139ZIC - before regime invoked by trustee

31. 31 ADMINISTRATION OF THE ESTATE – FUNDING LITIGATION Section 305 funding – trustee may apply for government funding – trustee must reimburse if proceedings successful Creditors’ indemnity – court may provide a priority to a creditor who funds the trustee – s.109(10) Litigation funding – see notes re this topic in corporate insolvency slides

32. 32 ADMINISTRATION OF THE ESTATE – CLAIMS OF CREDITORS 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.” Non-provable claims –s.82(2) – unliquidated damages arising otherwise than by reason of contract, promise or breach of trust Provable claims – must be legally enforceable and in monetary terms Rule against double proof – joint creditors have to lodge a joint proof Set-off – creditor is entitled to set off against the debt which is owed, any sum which creditor owes to bankrupt – s.86(1) Secured creditors – bankruptcy does not interfere with rights of secured creditor – s.58(5) Proofs of debt – creditor must lodge under s.84(1). – approved AFSA Form 8. Creditor may appeal to court against rejection – s.104.

33. 33 ADMINISTRATION OF THE ESTATE – DISTRIBUTION AND PRIORITIES Payment of dividends: only to creditors who have proved their debts – s.140 creditors can seek court order for payment – s.147 Section 109 priority payments: costs and expenses of administration – s.109(1)(a) remuneration of trustee – s.109(1)(b) wages of employees – s.109(1)(e) priorities in favour of certain creditors – s.109(1)(j) court ordered priority – s.109(10)

34. 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. 34