1. INSOLVENCY LECTURE 4 WINTER 2010 LAW EXTENSION COMMITTEE

2. 2 INSOLVENCY WINTER 2010 Administration of the Estate See Keays Chapter 6 Initial actions by the Trustee: (a)Examining the books and records of the bankrupt – section 77(1)(a) requires the bankrupt to deliver up all of the books in the bankrupt’s possession and which relate the bankrupt’s “examinable affairs”: see Griffin v Pantzer [2004] FCAFC 113 at [175]. This overrides the bankrupt’s right to the privilege against self- incrimination. Note definition of “books” in section 5 and penalty for non-compliance in section 78(1);[2004] FCAFC 113

3. 3 (b)delivery up of books of an associated entity of the bankrupt: section 77(a)(i). Note the definition of “associated entity”; (c)A Statement of Affairs must be filed prior to the official receiver accepting a debtor’s petition where there is a voluntary bankruptcy: sections 55(2), 56B(3) and 57(2). Where a sequestration order has been made the bankrupt is required to file a statement of affairs with the official receiver within 14 days from the date on which they are notified of bankruptcy; (d)Interview of bankrupt: section 77(b); (e)Giving notice of the bankruptcy to banks and other financial institutions, the Australian Taxation Office and debtors of the bankrupt;

4. 4 Relations with Creditors (a)informing creditors: note section 19(1)(d); (b)rights of creditors:  give the trustee lawful directions (sec 177);  Appeal to the court in relation to any action of the trustee which affects a creditor;  fix trustees remuneration (sect 162);  Initiate and take part in public examination under section 81;  Inspect accounts and records kept by trustee (section 173);  Inspect the proofs of debt of other creditors (section 101)

5. 5  Apply to the court for review of any decision by the trustee in respect of a proof of debt (section 104(1);  certain creditors can be paid in priority (section 109);  Creditors who have lodged a proof of debt are entitled to be paid a dividend (section 140);  Creditors made by resolution move trustee (section 181);  Creditors may indemnify the trustee Meetings of Creditors – section 64 and 64A (notice), chairperson (section 64K and 64P), quorum (section 64N), Minutes (section 64L), adjournment (section 64Y), right to vote (section 64ZA), motions (section 64ZD, resolutions (section 5).

6. 6 Taking possession of property The trustee must take possession of all of the bankrupt’s property immediately, where it is physically possible to do so: section 129(1) – includes title deeds The trustee can apply to the court seeking an order for the enforcement of possession: section 129(2). Investigations Section 19AA empowers the trustee to carry out an investigation in relation to the bankrupt’s conduct and examinable affairs, and the books, records and accounts kept by the bankrupt as far as they relate to the bankruptcy  Search warrants: section 130(1), (2). Note sections 77 and 78  Access to premises: section 77AA;  Access to books of associated entities: section 77A;  Private examinations: section 77C notices – inquisitorial in nature.

7. 7 Note: notices of examination cannot be oppressive and the Court has power to review any challenge to a section 77C notice.  Offshore information notices: section 81A;  Public examinations: section 81. This is a broad administrative and inquisitorial power and can include a requirement that person produced will. Note such an examination often follows an interview at the Trustees office (section 77(b).  Who may be examined? See definitions of “examinable persons” and ”examinable affairs” in section 5;  Is the power to examine restricted? Yes, if it is an abuse of process (Keays page 146) or where it requires examinees to answer questions which may incriminate themselves (other than bankrupts)  The power can be used to assist in the conduct of contemplated or existing legal proceedings: see Crawford v Sellars (Trustee) in the matter of Hussen (Bankrupt) [2000] FCA 162[2000] FCA 162

8. 8  Disclaimer of Assets - this will occur where the retention of property is to onerous or where the property is worth little or is unsaleable: section 133.  Carrying on business – see section 134.  Assignment of rights of action – see section 134.  Can seek directions from the court - see section 134(4).  Consolidation of estates – see section 53.  Realising assets – note that the trustee has 20 years from the date of bankruptcy to claim property: section 127 (subject to section 129AA). Income of the bankrupt – Division 4B of the Act provides for the collection of monetary contributions by trustees dependent on the level of income of the bankrupt. Division 4B contains what is known as the “supervised account regime” (section 139ZIA) which comprises powers given to the official receiver to issue a notice to the bankrupt’s employer/or bank in effect garnisheeing the bankrupt’s wages so as to collect the amount assessed. For high income bankrupts a “supervised account “ regime has been introduced.

9. 9  Contribution assessment period – section 139K. A trustee may assess a bankrupt’s income in this period.  The “actual income threshold amount” is defined in section 139K. Note the method of calculation set out in section 139S. “Income” is defined in section 139L.  The process of assessment is set out in section 139W and the decision may be reviewed in accordance with section 139ZA. Note also the hardship provisions set out in section 139T(2)  It is possible for the Official Receiver to collect from persons other than the bankrupt: section 139ZK(2). Claims of creditors  Debts provable in bankruptcy: section 82(1)  Non-provable claims: section 82(2)  Secured creditors: section 5 and 58(5)  Proofs of debt: section 84(1)

10. 10 Distribution of the estate  Section 140(1) requires the trustee to declare and pay dividends ”with all convenient speed”. Before paying a dividend, the trustee has to ensure that the bankrupt has filed a statement of affairs. If not, will leave of the court must be obtained. Dividends can only be paid to creditors who have proved their debts: section 140(1) and a trustee not need not pay a dividend in amount less than $25.  Special priorities – see section 109

11. INSOLVENCY WINTER 2010 KEY DATES IN A BANKRUPTCY “the date of the bankruptcy” - s 5 [Nichols 64]s 5 “the commencement of the bankruptcy” - s 5 [Nichols 64]s 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 need to read these 4 provisions together 11

12. INSOLVENCY WINTER 2010 KEY DATES IN A BANKRUPTCY “the date of the bankruptcy” - s 5 [Nichols 64] – 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 [Nichols 64] – this is the time at which the bankruptcy is by virtue of section 115 deemed to have commenced.s 5 12

13. INSOLVENCY WINTER 2010 KEY DATES IN A BANKRUPTCY s 115 - commencement of a bankruptcy – Where a creditors 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 or 6 months immediately before the date on which the creditors petition. If the bankruptcy is as a result of the acceptance of a debtors 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): see Keays pg 29s 115 s 116 - property divisible amongst creditors - all property which belonged to the bankrupt at the commencement of the bankruptcys 116 13

14. INSOLVENCY WINTER 2010 RELATION BACK - sections 115 and 116 s 115 – If a person becomes a bankrupt on a creditors petition (and sub- section 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.s 115 See the following diagram from Keays at pg 29: Act of bankruptcy Act of bankruptcy Petition presented Sequestration order made 16/2/2006 23/3/200621/9/20065/11/2005 14

15. INSOLVENCY WINTER 2010 RELATION BACK - sections 115 and 116 With respect to debtor’s petitions, see section 115(2) What does “relation back” mean? According to Lord Esher MR in Re Pollit [Nichols 298] “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.” 15

16. INSOLVENCY WINTER 2010 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: see Keays pg 30. 16

17. INSOLVENCY WINTER 2010 In Anscor Pty Ltd v Clout [Keays at pg 30-31] 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: cf Carter at 780--781 per Lindley LJ. 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’ (Carter at 782 per AL Smith LJ – and see Fiorino at 18 and Alvaro at 426-427), 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.” 17

18. INSOLVENCY WINTER 2010 The result of the doctrine of relation back is that all subsequent dealings 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. If a creditor’s petition has an extended life (see section 52(5)) ie up to 24 months then it may be that the period is extended even further. Applying this to Keays’ diagram on pages 29-30, a sequestration order might not be made until September 2008 if it has been extended because the court has considered it just and equitable: see Nichols page 174. There will be no relation back period where a debtors petition has been presented and the debtor did not commit an act of bankruptcy in the 6 months preceding the presentation of the petition. 18

19. INSOLVENCY WINTER 2010 PROPERTY DIVISIBLE AMONGST CREDITORS - S 116 S 58 vests the property of the bankrupt in the trustee [Lecture 1]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. 19

20. INSOLVENCY WINTER 2010 PROPERTY DIVISIBLE AMONGST CREDITORS - S 116 (Keays page 99 – 101) There are exceptions to section 116(1) and they are to be found in s 116(2). Note section 116(2)(a), (b), (ba), (c), (ca), (d), (g) and (q) in particular.s 116(2) In relation to section 116(2)(a) see Clout (Trustee) v Anscor Pty Ltd [2003] FCA 326 at [44] and Jones v Southall & Bourke Pty Ltd [2004] FCA 539 at [56] and [62].Clout (Trustee) v Anscor Pty LtdJones v Southall & Bourke Pty Ltd In relation to section 116(2)(b) see Rogers v Asset Loan Co. Pty Ltd [2006] FCA 434 at [37] - [38]. In Re Vaughan (1996) 71 FCR 34 a bankrupt was allowed to keep his box trailer as he used it to collect wood for heating his home in Tasmania.Rogers v Asset Loan Co. Pty Ltd In relation to section 116(2)(g) see Re Iskenderian; ex parte Iskenderian Bros Pty Ltd (1989) 21 FCR 363.Re Iskenderian; ex parte Iskenderian Bros Pty Ltd 20

21. INSOLVENCY WINTER 2010 EXEMPT TRANSACTIONS - ss 123 & 124 Protection of certain transfers of property against relation back - s 123s 123 In order to secure the protection against the principle of relation back a person must fulfill the requirements of section 123 or 124. In relation to section 123, four kinds of transactions are exempt – see section 123(1)(a), (b), (c) and (d) but only if the three criteria set out in s 123(1)(e), (f) and (g) are satisfied. The burden of proof is on the person who has dealt with the bankrupt - s 123(2) Effect of knowing that an act of bankruptcy has been committed - s 123(3) Maintenance agreements and orders protected - s 123(6) What is a “payment” or a “transaction” - s 123(7) “In the ordinary course of business” not restricted to trade - an act which is usual or common in the business of the debtor - a fair transaction - Robertson v Grigg (1932) 47 CLR 257 at 267Robertson v Grigg 21

22. INSOLVENCY WINTER 2010 EXEMPT TRANSACTIONS - ss 123 & 124 Protection of certain transfers of property against relation back - s 123s 123 Note that s 123 is subject to ss 118-122, 128B, 128C [Lecture 5 - transactions void against the trustee] Section 118 deals with execution by creditors against the property of a debtor who becomes a bankrupt. Sections 119 and 119A deal with sheriffs duties. Section 120 deals with undervalued transactions. Section 121 deals with certain transfers made to defeat creditors. Section 122 deals with preferences. Sections 128B and 128C deal with superannuation contributions made to defeat creditors. 22

23. INSOLVENCY WINTER 2010 Protection of certain payments to the bankrupt - s 124s 124 payment of money or delivery of property to a bankrupt is valid if: –before bankruptcy - made in good faith and ordinary course of business - s 124(1)(a) –after bankruptcy - made in good faith and ordinary course of business and without negligence - s 124(1)(b) burden of proof upon person asserting validity of transaction - s 124(2) knowledge or reason to suspect insolvency or bankruptcy - s 124 (3) “without negligence” - Re Hasler (1974) 23 FLR 139 [Keays 98-99 and Nichols page 363] where a bank was held not to have acted without negligence. Several days after the making of a sequestration order against a debtor’s estate, the bank paid two cheques paid drawn on one of the debtor’s accounts, which was in credit. The bank did not know of the sequestration order 23

24. INSOLVENCY WINTER 2010 Next week: Lecture 5 Transactions void against the trustee Reading: Keays, 104-129 Bankruptcy Act, ss 120-122, 128B-128C Nichols 323-122, 366-369 24