Tired of Chasing Unpaid Rates? Exploring the option of Bankruptcy

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1 Tired of Chasing Unpaid Rates? Exploring the option of Bankruptcy Presentation By: Marelda Hibberd Partner Restructuring & Insolvency 1 Jessica Allen Lawyer Restructuring & Insolvency 20 April 2018

2 Date 20 April 2018 Introduction Welcome Who are we? The Maddocks Team ML + C first point of contact for Local Councils. ML + C and the Insolvency team work together to assist in recovering the outstanding debt. 2

3 The Maddocks Team ML+ C Your first point of contact Penny Lyall, Head of Operations Julia Casey, Account Manager Insolvency & Restructuring Bankruptcy work start to end Marelda Hibberd, Partner Jessica Allen, Lawyer 3

4 Agenda 1. Bankruptcy: Process Overview 2. The Prospects of Recovery for Council in a Bankruptcy 3. Considering the extent of a Trustee s powers: case scenarios 4. Bankruptcy: Analysing the Advantages 5. Bankruptcy Process vs Section 181 Sale: case scenarios 4

5 Bankruptcy: Process Overview Overview, Process Timeline, Role of the Trustee & Consequences 5

6 What is Bankruptcy: Bankruptcy is a legal process where an individual is declared unable to pay their debts. Bankruptcy releases the individual from most of their debts. Once an individual is made bankrupt, a Trustee is appointed to control the individual s estate and can deal with all the assets of the individual and realise assets. The Trustee has very wide powers and responsibilities. The Trustee s role is to achieve a fair and reasonable outcome for all creditors. 6

7 Bankruptcy Timeline April 2018 Step 2: Obtain Bankruptcy Notice Following judgment. Official Receiver issues Bankruptcy Notice (2-4 days). Cost of Bankruptcy Notice: $470 Personal service of Bankruptcy Notice (1 week minimum). Once served, payment of debt must be made within 21 days. If debt still not paid, debtor commits act of Bankruptcy can then proceed to step 3. Step 4: Sequestration (Bankruptcy) Order Order made. Copies of the Order to be filed with the Australian Financial Security Authority (AFSA) (within 2 working days). Bankruptcy Trustee is appointed. Step 1: Decide if the matter is appropriate for Bankruptcy Judgment debt has been obtained? The debtor is an Australian resident. $5,000 minimum debt (taking into account judgment debt, interest and accrued interest) Step 3: Creditor s Petition File a Creditor s Petition with the Court (7 days) Service of Creditor s Petition to be served at least 5 days before the hearing of the Petition. Hearing of the Petition (3-6 weeks). Cost of Creditor s Petition: $3475. Trustee appointed and begins to realise assets for distribution

8 The Trustee Once appointed by the Court, the Trustee steps into the shoes of the Bankrupt. The Bankrupt s estate comes under the control of the Trustee and the Trustee has very wide powers in which to deal with the Bankrupt s property, realise other assets and investigate the financial position of the Bankrupt. 8

9 Timeline of events once Trustee is appointed Gather information Advise ATO within 14 days of bankruptcy Within 20 business days of receipt of SOA, trustee must prepare a Declaration of Independence, Relevant Relationships and Indemnities (DIRRI) and initial remuneration notice (s 19(1)(a), IPR ss 70-30, 70-35). Report to Creditors within 3 months of the date of Bankruptcy of the likelihood of a dividend (IPR s 19(1)(c)). Hold a meeting of creditors to approve remuneration (past and capped future) (IPS Div 60) Income Contribution Assessments Notify bankrupt of bankruptcy as soon as possible Take control of assets & insure risks (s 129 Bankruptcy Act 1966 (Cth)) Receive Statement of Affairs (SOA) within 14 days. Notify all creditors of the bankruptcy including initial information of creditor s rights. Call for Proofs of Debt and pay a dividend (if there are sufficient funds). Bankrupt automatically discharged 1 year after SOA lodged (unless objection lodged) Notify AFSA of finalisation of estate within 7 days of finalisation (Reg 8.55) 9

10 The rights and responsibilities of the Trustee Realise assets Investigate the Bankrupt s affairs Possible voidable transactions Report any offences to relevant law enforcement agency 10

11 Sale of Property? Not necessarily. Part of the Trustee s role is to investigate and take into control all assets of the Bankrupt s estate. 11

12 What are the consequences of bankruptcy for a ratepayer? Loss of control The Bankrupt can keep ordinary household goods, tools and vehicles up to a set amount but the Trustee can sell other assets including the Bankrupt s house and property. Travel Bankrupt must request permission in writing from their Trustee to travel overseas. NPII Public Register The Bankrupt s name will permanently be recorded on the National Personal Insolvency Index (NPII) and the Bankrupt s ability to obtain future credit can be affected. Employment The Bankrupt needs to make compulsory payments to their Trustee if they earn over a certain amount and there are restrictions on some professional employment. 12

13 Are Local Councils secured creditors? Yes. Local Councils are secured creditors Part 8 of the Local Government Act 1989 (Vic) provides local councils with a security over a property for the payment of rates. Surrendering their security Petitioning creditor Lodgement of proof of debt Practical Effects Adjustment at settlement of sale 13

14 Distribution of estate A Bankrupt s estate will be distributed in the following priority: 1. Petitioning creditor s costs 2. Trustee s costs and remuneration 3. Employees 4. Secured creditors 5. Unsecured creditors 14

15 Considering the extent of a Trustee s Powers Case Scenarios common facts of situations experienced by Local Councils 15

16 Case Scenario 1: Sunny Bay Local Council Mary and John are husband and wife. They own a property as tenants in common in equal shares in Wombat Creek, a suburb in Sunny Bay Local Council. No rates paid for a period of 5 years. Debt owing to Sunny Bay Local Council totalling $12,

17 Case Scenario 1: Sunny Bay Local Council Sunny Bay Local Council has made numerous attempts to contact Mary and John including the following: Sending her updated rates notices. Writing five letters of demand requesting payment and threatening further action if no payment is received. In February, the Council obtained a judgment debt from the Court for repayment of the debt. In July, the Council made an application to the Court for a summons for oral examination. 17

18 Case Scenario 1: Sunny Bay Local Council Service of the Court application was protracted as the property has a locked gate. Subsequent applications to the court were made for substituted service. Once the application was finally served, there continued to be no response or communications from Mary or John. 18

19 Case Scenario 1: Sunny Bay Local Council Sunny Bay Local Council believes the prospects of recovering their debt are dismal. Title search reveals that the property is encumbered by a mortgage in favour of the Commonwealth Bank. 19

20 The difficulties that arise in this scenario are: Refusal to communicate by the ratepayer. All avenues available to Sunny Bay Local Council have been exhausted. The ratepayers seem to be still living at the property (so a section 181 sale could be difficult). 20

21 How can the bankruptcy process assist in this scenario? Council no longer has the burden and expense in dealing directly with the ratepayer. All the assets of the bankrupt come into the possession of the Trustee and the Trustee is responsibility for fairly distributing the funds in the Bankrupt s estate. Encumbered property consider (?) 21

22 Case Scenario 2: Saltriver Local Council Sally owns a property in Saltriver Local Council and since Sally is the listed ratepayer of the property. A title search of the property reveals that the property is unencumbered. Sally is no longer living at the property but her estranged daughter Chloe resides at the property with her three children and de facto partner Alex. 22

23 Case Scenario 2: Saltriver Local Council There are unpaid rates of $23,987 owing to Saltriver Council. Police are investigating Alex for illegally growing Marijuana at the property. Sally wants the property sold and would not object to being made a bankrupt so that can happen. Saltriver is thinking about a section 181 sale but can t get access or vacant possession. 23

24 The difficulties arising in this scenario are: There is no mortgage on the property policy considerations of bankrupting a potentially solvent estate Family issues the ratepayer is not residing at the property - occupied by estranged daughter. Saltriver Local Council is entitled to seek Chloe, as the occupier of the property, to pay the rates and sell the property via a section 181 process. Local Council will need to consider the reputational concerns around this course of action. Criminal conduct being carried out on the property and the potential difficulties in Saltriver Local Council trying to sell the property via section

25 Bankruptcy: analysing the advantages When is Bankruptcy appropriate? 25

26 When is Bankruptcy appropriate? + Reputation (Owner- occupied property) Bankruptcy can be more appropriate when the property is owner-occupied and there are other complexities to suggest that it is beneficial that the sale not be carried out by the local council. + Options exhausted Bankruptcy is a viable option when the chance of local councils recovering the unpaid debt through their own mechanisms and processes has proved ineffective. + Recovery Local councils should compare the amount of debt with the costs of commencing bankruptcy proceedings (debt > $10,000 recommended). + Encumbered property When there is a ratepayer who has an encumbered property then, arguably, local councils cannot be certain that the ratepayer is able to pay their debts when they fall due. Often, the ratepayer may be asset rich but income poor. 26

27 Comparing Bankruptcy with the Section 181 Sale Process Comparison of the advantages and disadvantages and the appropriateness of each process depending on the circumstances 27

28 Section 181 Sale of Land Section 181 of the Local Government Act 1989 (Vic) (the Act) provides an avenue for councils to sell land to recover unpaid rates or charges. Under this process, the Local Council is responsible for selling the land. Sale is subject to existing encumbrances on title. No power to access property. 28

29 Section 181 Sale of Land There are three requirements before a Local Council can rely on section 181 to recover rates: 1. There must be more than 3 years of rates outstanding. 2. There must be no current payment arrangement. 3. The Council must have obtained a judgment debt for the amount owing. 29

30 Situations where the Section 181 Sale process is limited: 1. Occupied Property Complexities arise when the property is occupied including difficulty of local councils accessing the property and the public perception and reputational concerns around selling properties that are occupied. 2. Deceased Estates Complexities arise with how to distribute the proceeds of a sale. While the Act provides for the priority in which these payments are to be made, no provision is made for how deceased estates are to be dealt with. 3. Responsibility rests with Council Whether a section 181 or bankruptcy is most appropriate depends on the concerns of a particular local council and weighing the facts, advantages and disadvantages of a situation. 30

31 Deciding whether Bankruptcy or a Section 181 Sale is most appropriate Section 181 Sale More appropriate where there is vacant land or a vacant dwelling. Land unencumbered. Bankruptcy More appropriate for owneroccupied property and deceased estates. No requirement for there to be 3 years of outstanding rates the monetary threshold is $5,000 debt before commencing bankruptcy proceedings (this includes costs and interest). 31

32 32 Questions?

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