Process of going bankrupt

 

The process of going bankrupt is formalised. An application known as a debtor’s petition is lodged. When the Official Receiver accepts the petition and allocates a bankruptcy number the debtor becomes bankrupt. The trustee then begins the process of asset distribution amongst the creditors.

Debtor’s petition

Documents to be completed

A debtor who wants to go bankrupt must complete:

a debtor’s petition for bankruptcy;

a statement of affairs; and

an acknowledgment that the debtor has read the “prescribed information”.

Debtors can obtain a Debtor’s Petition form containing these three documents from the AFSA office or website (at www.afsa.gov.au).

Filing or “presenting” the documents

After completing the documents, the debtor needs to either post, or email them to AFSA.

There is no minimum amount that has to be owed before a debtor files a petition for bankruptcy.

When does the debtor become bankrupt?

When the Official Receiver accepts the petition, and allocates a bankruptcy number, the debtor becomes bankrupt. The bankruptcy actually takes effect from midnight of the night before the petition is accepted. The Official Receiver generally accepts the petition on the day it is received or the day after. AFSA usually processes a debtor’s petition within 24–48 hours.

Assistance to complete documents

Low-income debtors can get free assistance from financial counselling services to complete a statement of affairs. Financial counsellors will also assess whether there are any options available for a debtor other than bankruptcy. For a list of services, see Financial counselling services.

What happens after the documents are sent to AFSA?

Once the debtor is bankrupt, the trustee might ask them to come in for an interview. However, consumer bankrupts with no assets are not usually required to attend a trustee’s office for an interview. The trustee might also sometimes ask for copies of contracts and documents relating to the debts, and might require the bankrupt to hand over their passport. Again this is unlikely to happen to a consumer bankrupt with no assets.

Declaration of intention to present a debtor’s petition

A debtor may present to the Official Receiver (AFSA) a declaration of an intention to present a debtor’s petition. This has the effect of stopping a creditor from taking enforcement action in relation to a debt, which would be provable in bankruptcy, for a period of (21 days). The idea is to allow a debtor and their creditors time to make an arrangement to pay the debts and to avoid the need for bankruptcy.

It is important to note that the presentation of such a declaration is an “act of bankruptcy” upon which a creditor can petition for bankruptcy if no agreement is reached (s 40(1)(da)). The 21-day stay will not stop:

a secured creditor repossessing secured property;

a creditor’s petition being filed; or

a sequestration order being made.

It is conceivable that in many cases the presentation of such a declaration may harm a debtor’s position. Therefore, it is recommended that advice be obtained before presenting such a declaration and careful thought be given to the debtor’s other options.

Creditor’s petition

If a debtor owes $5,000 or more to a creditor, the creditor can enforce the debt by taking bankruptcy proceedings against the debtor. To do this the creditor must file a creditor’s petition in either the Federal Court or the Federal Circuit Court.

Act of bankruptcy

At the hearing of the creditor’s petition, the creditor must establish that the debtor committed an act of bankruptcy within the six months before the petition was filed in court. An act of bankruptcy is an action of a debtor that shows an inability to pay their creditors. Section 40 of the Bankruptcy Act lists over 20 actions that are considered to be acts of bankruptcy. In almost all cases, the act of bankruptcy used by creditors is a failure to comply with a bankruptcy notice (s 40(1)(g)).

Bankruptcy notices

A creditor who has obtained a court order against a debtor can apply to the Official Receiver for a bankruptcy notice. The Regulations prescribe the form of the bankruptcy notice. Before a bankruptcy notice can be applied for, the final order or orders must be for at least $5,000 and be less than six years old. The bankruptcy notice is attached to a copy of the court order and demands payment of the debt within 21 days of service.

If the debtor does not pay within the time period, they will have committed an act of bankruptcy and the creditor will then be able to file a creditor’s petition.

Extending time for compliance

If a bankruptcy notice has been served on a debtor, the debtor can apply to the Federal Court or Federal Circuit Court to extend time for compliance with the notice, as long as:

the time for compliance has not expired; and either

proceedings to have the judgment or order set aside have been instituted; or

an application to set aside the bankruptcy notice has been filed with the Federal Court or Federal Circuit Court (s 41(6A)).

The court will not extend time if it is of the opinion that the proceedings to set aside the judgment or order either:

a have not been instituted bona fide (with an honest intention); or

b are not being prosecuted with due diligence.

After the bankruptcy notice has expired

If the debtor fails to comply with the requirements of the bankruptcy notice, an act of bankruptcy has been committed and the creditor can then use this as grounds for petitioning the court for the bankruptcy of the debtor. The creditor can then file a creditor’s petition and serve it on the debtor. The petition will contain the date of the bankruptcy hearing.

At the hearing of the petition, the Federal Court or Federal Circuit Court may make a “sequestration order” (an order giving the trustee control of the debtor’s property) and make the debtor bankrupt (s 43).

Contesting the creditor’s petition at the hearing

Under the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth), a person who intends to oppose a creditor’s petition must file and serve a notice of appearance, a notice stating the grounds of opposition, and an affidavit in support of the grounds of opposition at least three days before the hearing date, or at the hearing with leave of the court (r 2.06). Therefore, it is important to get advice quickly if you have been served with a creditor’s petition.

A debtor can sometimes avoid becoming bankrupt by turning up in court on the morning of the hearing for the sequestration order with the money in hand. In such circumstances, the debtor is usually required to prove to the court that they are solvent, for the petition to be withdrawn. The debtor might be required to give evidence to the court or produce an affidavit.

Filing a statement of affairs

Once the court has made the sequestration order, the debtor must file a statement of affairs with the Official Receiver. This must be done in the prescribed form within 14 days of being notified of the bankruptcy and verified by affidavit. A copy must be given to the trustee (s 54).

Examinations of the bankrupt and others

There are three main ways in which a bankrupt can be examined under the Bankruptcy Act. Under two of these procedures, “other persons” can also be examined.

1 Under section 81, the court or a Registrar can at any time, whether before or after the end of the bankruptcy, summons the bankrupt, or an “examinable person” to be examined in public in relation to the bankruptcy. “Examinable person” has a very wide definition in section 5 of the Act, including a person who might be able to give information in relation to the bankruptcy.

2 Under section 77C, a bankrupt or any other person can be required by written notice to “give evidence” to the Official Receiver.

3 Under section 77(1)(c), the trustee can require a bankrupt to attend a meeting of creditors. (These meetings are not common). The meetings can be held at the request of the creditors or the discretion of the trustee.

Examination under section 77

Section 77 concerns “duties of the bankrupt as to discovery of property”. Questions should not be put merely for the purpose of showing that the person being examined has committed some offence against the Bankruptcy Act.

It is unlikely that a consumer debtor who has not transferred property within the five years before the commencement of the bankruptcy would be examined.

If the trustee detects evidence indicating that the bankrupt might have committed an offence under the Bankruptcy Act, the trustee might refer the matter to the Bankruptcy Fraud Investigation section within AFSA. If the Fraud Investigation section believes that the offence can be substantiated, the matter will be referred to the Director of Public Prosecutions. The public prosecutor will then decide whether to proceed with the prosecution.

Under section 77C, any person can be required to attend before the Official Receiver and give evidence and produce documents relating to any matters connected with the performance of the functions of the Official Receiver or a trustee under the Bankruptcy Act.

Section 77C does not specifically allow a person who is examined to be represented by counsel or by a solicitor. However, section 77C is based on section 264 of the ITAA 1936, and the case law on section 264 seems to assume that the person who is examined is entitled to have representation. Therefore, it is arguable that a court would hold that a person would also be entitled to representation under section 77C. AFSA generally allows a person who is examined to be represented by counsel, and again it is recommended that anyone who is summonsed should obtain representation.

Examination under section 81

Under section 81 of the Bankruptcy Act, the Registrar or the court might summons the bankrupt or a person associated with the bankrupt for a public examination of the bankrupt for a number of reasons. There might, for example, be a suspicion that assets have been hidden or that an offence has been committed. Either a creditor, the trustee or the Official Receiver might apply to the court to summons the bankrupt for an examination.

At the public examination the trustee or a representative, such as a barrister, questions the bankrupt. A creditor is allowed to ask questions of the bankrupt, provided that the Registrar is satisfied that the questions are relevant. The court or the Registrar of the Federal Court hears the examination. If the Registrar or the Court thinks fit, a magistrate might hear the examination.

The examination might be held for the purpose of obtaining further details of the bankrupt’s assets, or of the bankrupt’s past and present affairs, or to ascertain whether the bankrupt has committed an offence.

A person who is summonsed for an examination is entitled to be represented by counsel or by a solicitor. As the transcript of the public examination might be admissible in evidence in other proceedings, it is recommended that anyone who is summonsed obtain representation.