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Chapter 20 - Bankruptcy law. 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,...
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Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 2-1 Bankruptcy law Chapter 20 Copyright â 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-2 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-3 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-4 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) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-5 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-6 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-7 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-8 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-9 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’ Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-10 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: creditor’s debt exists debtor committed one or more acts of bankruptcy within six months before petition presented service of petition of debtor Court makes sequestration order Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-22 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-23 Proof of debt Secured Rely on security Estimate security Unsecured Realise/surrender security Shortfall Proof of debt Amount How incurred Substantiation Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-24 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) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-25 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-26 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-27 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) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-28 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-29 Antecedent transactions: s 121 • Fraudulent dispositions: – Intention of defeating creditors • Exceptions: – Market value paid – In good faith Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-30 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-31 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-32 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 $90 326.60 – property of less than $90 326.60 – After tax income of less than $67 744.95 – not been bankrupt or entered into a Part X arrangement in last ten years Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-33 Debt agreements under Part IX (cont.) Proposal Official Trustee 75% of creditors approve Debt agreement Recorded on National Personal Insolvency Index (NPII) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-34 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-35 Reasons for bankruptcy • Consumer debt • Lack of business and investment skills • Change in economic or political climate • Unforeseen liabilities Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-36 ...Bankruptcy law Chapter 20 Copyright © 201 4 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev • 2-2 Learning objectives At the end of this chapter. .. from all provable debts Copyright © 201 4 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev • 2-2 3 Proof of debt Secured Rely on security Estimate... Shortfall Proof of debt Amount How incurred Substantiation Copyright © 201 4 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev • 2-2 4 Assets available