Understanding bankruptcy

The Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’) is a Commonwealth Act that applies in all states and territories.

Courts that hear Bankruptcy Act matters are:

• the Federal Court;
• the Federal Circuit and Family Court of Australia;
• the Family Court (this court has jurisdiction under the Bankruptcy Act where the trustee is a party to family law property or spousal maintenance proceedings).

Both the Federal Court and the Federal Circuit Court can transfer proceedings to the Family Court and the Family Court of Western Australia (ss 35, 35A, 35B Bankruptcy Act).

The Bankruptcy Act creates the roles of:

• Inspector-General in Bankruptcy;
• Official Receiver;
• Official Trustee in Bankruptcy.

The Australian Financial Security Authority (AFSA) undertakes each of these roles. AFSA is an executive agency in the Attorney-General’s portfolio that manages the application of bankruptcy laws through the delivery of personal insolvency and trustee regulation and enforcement.

When a person becomes bankrupt, all their divisible property (see ‘Divisible property’ in ‘What happens to a bankrupt’s property?‘) vests in (i.e. ownership rights are moved to) the Official Trustee in Bankruptcy (AFSA), which is the trustee for the majority of bankruptcies. Debtors who enter voluntary bankruptcy can nominate a private registered trustee to manage their bankruptcy. Current policy is to give preference to registered trustees over the official trustee.

The trustee can require a bankrupt to provide all financial documents and any other information relevant to the bankruptcy. The trustee can ask the bankrupt to hand over their passport.

A trustee in bankruptcy also has the power to:

• investigate the conduct and dealings of the bankrupt and the reason for bankruptcy; and
• seize and sell certain assets and distribute the proceeds.

AFSA’s website is very useful; it includes legislation, statutory forms, indexable amounts, statistics and comment on recent events.

A non-business bankrupt with no assets who has bank­rupted via a debtor’s petition usually has AFSA as their trustee rather than a private trustee.

A private registered trustee usually becomes trustee at the request of a petitioning creditor or debtor before the debtor becomes bankrupt.

In some cases the creditor can ask for a private registered trustee to replace AFSA as the trustee after the debtor becomes bankrupt (ss 156A, 157 Bankruptcy Act).

It can be an advantage for a debtor to not have a private trustee, as the trustee’s fees can be significant.

Anybody who is concerned about a trustee or any other aspect of their bankruptcy administration can complain to AFSA, which reports directly to the Inspector-General. AFSA will investigate complaints against private trustees and against AFSA itself.