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, the difference between a debtor’s petition and a creditor’s petition,…
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Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill Australia Bankruptcy law Chapter 20 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Bankruptcy • Where legal possession is taken of a debtor’s possessions, for the benefit of that person’s creditors Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-3 Australia Purpose of Bankruptcy Act 1966 (Cwlth) • Provides for the investigation of the bankrupt to determine if all assets have been disclosed or other offences have been committed • Ensures an equitable distribution of the bankrupt’s property among creditors • Enables a discharged bankrupt to start anew, free from the demands of creditors and the bankruptcy trustee • Benefits the community, by allowing the bankrupt to make his/her own living Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-4 Australia Advantages and disadvantages for creditors Advantages • Equitable and proportionate distribution of the debtor’s assets • Recovery of property that was distributed prior to bankruptcy • Public examination may uncover property available for distribution to creditors Disadvantages • 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 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-5 Australia Advantages and disadvantages for debtors Advantages • Enables bankrupt to avoid being sued by creditors for debts incurred prior to the bankruptcy • New start in six months to three years, with cooperation • Bankrupt maintains ‘necessary property’ Disadvantages • 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 Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright â 2000 McGraw-Hill 20-6 Australia Definitions ã Insolvency: The person is unable to pay all his/her debts as and when they become due and payable • Bankruptcy: A person who is required to provide a trustee with specified property, to be distributed among creditors Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-7 Australia Administration of Bankruptcy Act 1966 INSPECTOR-GENERAL IN BANKRUPTCY (appointed by Attorney-General’s Department) Overseas general administration of Bankruptcy Act STATE OFFICIAL RECEIVER (appointed by Governor-General) OR REGISTERED TRUSTEE (appointed by Federal Court) Administration and distribution of Bankrupt’s estate: Gathering Bankrupt’s estate Realising non-money assets Distributing dividend to creditors Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-8 Australia Official trustee in bankruptcy A body corporate which holds and invests property on behalf of the creditors, prior to sale and distribution Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-9 Australia How a person can be made bankrupt By Creditor’s Petition • Debtor is “forced” into bankruptcy By Debtor’s Petition • Debtor “volunteers” for bankruptcy Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-10Australia Property excluded from bankruptcy Section 116 (2) Bankruptcy Act 1966 e.g necessary household furniture personal belongings vehicle (worth up to $5500) property used to obtain income by personal exertion Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-18Australia Property available for payment of debts Doctrine of Relation Back S115 • 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) Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-19Australia Doctrine of Relation Back • Aimed at preventing persons aware of imminent bankruptcy from disposing of property that should be used to satisfy creditors’ debts Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-20Australia Property not available to trustee Property which has passed from bankrupt and is protected from trustee S123: Payments made: before day debtor became bankrupt ` without notice of petition by other party in good faith, during ordinary course of business S124: Payments or deliveries from someone who becomes bankrupt: made in good faith during ordinary course of business without negligence Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-21Australia Property not available to trustee (continued) After acquired property income S126: Protected transactions - good faith on part of acquirer - valuable consideration - completed before intervention of trustee Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-22Australia Antecedent transactions S118: 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 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-23Australia Antecedent transactions S120: 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 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-24Australia Antecedent transactions S121: Fraudulent dispositions • Intention of defeating creditors Exceptions: - market value paid - in good faith Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-25Australia Preferential payments S122: 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 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-26Australia Discharge and annulment of bankruptcy • Early Discharge - After minimum six months from filing of statement of affairs • 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 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-27Australia 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 $62 353 • property of less than $62 353 • taxable income of no more than $26 400 • not been bankrupt or entered into Part X arrangement in last 10 years Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-28Australia Debt agreements under Part IX (continued) PROPOSAL OFFICIAL TRUSTEE 75% CREDITORS APPROVE DEBT AGREEMENT RECORDED ON NATIONAL PERSONAL INSOLVENCY INDEX (NPII) Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-29Australia Part X schemes Composition • Payment of debts by instalments, or • Accept less than full satisfaction of debts • Debtor can continue in business Deed of Assignment • Assignment of all divisible property for the benefit of creditors generally (excludes property acquired after execution of deed) Deed of Arrangement • Allows trading out of financial difficulties Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-30Australia Bankruptcy Legislation Amendment Bill 2001 (Cwlth) Bankruptcy (Estate Charges) Amendment Bill 2001 (Cwlth) • Debtor’s Petition may be rejected where undertaken to avoid other legal obligations, e.g complying with a Family Court settlement • Debtor will have a thirty-day cooling-off period after lodging petition • Discharge from bankruptcy after six months removed • Alterations in lodging objections to discharge from bankruptcy • Automatic duration of bankruptcy to be two years • Administrative procedures to be streamlined Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright â 2000 McGraw-Hill 20-31Australia Reasons for bankruptcy ã Consumer debt • Lack of business and investment skills • Change in economic and/or political climate • Unforeseen liabilities Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 2000 McGraw-Hill 20-32Australia ... Copyright 200 3 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 200 0 McGraw-Hill 2 0- 15Australia Proof of debt... Copyright 200 3 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 200 0 McGraw-Hill 2 0- 11Australia Acts of bankruptcy... Copyright 200 3 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Business Law 4e by Barron & Fletcher Slides prepared by Kay Fanning Copyright © 200 0 McGraw-Hill 2 0- 7 Australia Administration of