Bankruptcy Overview. Aims & Principles

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1 Introduction Insolvency law regulates consequences of financial failure. Not general regulation of supply, use, provision of credit. (Consumer Law) Existing because of credit; yet credit as essential to economy. Insolvency Not a procedure (is state or condition) State of insolvency can lead to insolvency procedure (eg bankruptcy) Via test & application of whether debtor is legally solvent Functions & Purpose of Bankruptcy Status Regulatory ensure repayment to creditors Deterrence of Bankrupt to avoid payment/promote solvency Protection of the community 'If all to be a bankrupt, community will not function. Drying of finances' Purpose: ' to devise a system of law to deal compassionately with the honest though unfortunate debtor who is often no more than a bewildered, ill-informed and overstretched consumer (Cork, 1982)' 'Guardian of values that seem appropriate in conduct of credit economy' (Harmer, 1988) Remedies for Creditors Self-help, judgement, or execution Not insolvency remedies (individual remedies) Are remedy of last resort As insolvency remedies are collective. Payment of all creditors. Creditors encouraged to pursue remedies, up to point of insolvency. Doctrine of relation back Voidable transactions If debtor becomes formally insolvent, have been paid but other creditors not. May have to 'put money back into pot'. Perspectives & Players on Insolvency Debtor 'their' insolvency. Traders & non-traders, Consumer debtors Creditor to receive 'their' payment. Dependent on type of debtor Government In PI, 80% of administered bankruptcies. Also, in execution for public interest. Regulators AFSA (Aust Fin Sec Auth), ATO. Inspector-General, Of ficial Receivers Insolvency practitioners Registered trustees 20% of 'high-stakes' bankruptcies. 'The Community' Impact of pokies etc. What the community wants, to react. Global Impact Assets offshore, creditors overseas, overseas holdings in order to flee jurisdiction. Insolvency Profession in Australia Performed by accountants, but do not have to be 'accountants'. Accounting degree, 'fit and proper', have studied company law. Registered Trustees (AFSA) are also likely Registered Liquidators (ASIC). Bankruptcy Overview Aims & Principles

2 Fair and orderly process; debtor and creditor participation; impartiality of trustee, efficiency and expedition; convenience in property recovery; equality of all creditors; release and discharge of debtor from debt; support commerce; harmonisation with other law; an international dimension; restriction f directors; and a body of honest practitioners Process Once a bankrupt, 'your' property is no longer 'yours' But, vested in the trustee. (with some exemptions) Forms 'estate' available for distribution to creditors with 'provable debts' Debtor Debtor becomes 'undischarged bankrupt' (restrictions, obligations & unde finably a stigma). 'Undischarged Bankruptcy' lasts 3 years, may extend to 5 or 8 years based on behaviour. Is somewhat taken from equation. Unable to move assets, rather action of the trustee. National Personal Insolvency Index records permanent bankruptcy, searchable by public. Bankrupt debtor obtains protection from proceedings by individual creditors (unless given leave by court). Debtor discharged 'given a fresh start' from debt obligations Trustee Trustee 'realises' (collects) assets & distributes to creditors as divident According to staturoty priorutues including expenses and amongst creditprs with pari passu principle (proportionate to amount owed/available). Trustee deals with creditor claims against estate has powers of calling for examinition with uncoorperative debotrs challenge ulent/voidable transactions by debtor recover assets for the estate Theories Creditor's Primacy 'Law exists for the creditors'. To be given the return for work done. Debtor agreed to terms of credit, that they were unable to perform/follow through with. Communitarian-ism 'Community matters'. Debt of the debtor and the community. Moreso looking at the social consequences. Ex; 'beds of a debtor's kids' A third party to be considered. De finition Bankruptcy the procedure The Bankrupt the declared debtor. Sequestration Order court makes to declare a person bankrupt. 'Sequest the property from the bankrupt'. National Personal Insolvency Index Trustee index recording register of bankrupts. Statutory De finition Section 5(2) BA A person is solvent if, and only if, the person is able to pay all the person s debts, as and when they become due and payable. (3) A person who is not solvent is insolvent ASIC v Plymin Confirmed a cash flow test. Debts as they become due and payable. Bank of Aust-Asia v Hall Able to pay with monies actually available Sandell v Porter Not confused with temporary lack of liquidity. Not insolvent.

3 Alternatives to Bankruptcy Part IX the Idea Low income debtors/creditors with informal/inexpensive alternative to bankruptcy. Thus a question od test; 'low-income debtor' able to invoke Part IX? Part IX Debt Agreements Bene fits to creditors Lower cost of proceedings Faster action in dealing with debts Having debtor trade on, enable crediot to continue supply goods/services to them Attract 'outside' money (eg, from family) for payment to creditors Better return for creditors rather than formal bankruptcy of debtor 'Act of bankruptcy', if failure, straight to bankruptcy. Process insolvent debtor draws up written proporsal seeks assement of Of ficial Receiver (BA s185c(2)) If accepted, OR makes contract in writing to creditors (BA s185ea(1)) OR asks creditor to reply with approval. Majority in value agree, formalises as debt agreement.(s185ec(1)) Deadline of 35 Days/42 in Dec (Bas185)) Debtor and creditors are parties to the agreement. BA s185i Debtor is released from debts (subject to performing the agreement). Criteria Unsecured debts do not exceed a threshold amount presently $106,561 (indexed 20 March and 20 September each year) This threshold amount is calculated as seven times the maximum basic rate of the partnered pension, so is a statutory formula based on the Social Security Act 1991 (Cth). BA s185c(5) not have an after taxable income for the year of more than $79,920.75(indexed) BA s185c(5) Note, this is 75% of the threshold amount assets (divisible property) of less than a threshold amount presently $106,561 (indexed) BA s185c(5) not if at any time in the 10 years immediately before the proposal he or she has been bankrupt, a party to a debt agreement or given an authority under Part X (s188). BA s185c(4) Process Steps of Agreement Proposal 1. Must be in approved form along with explanatory statement (s185c(2b) and signed by debtor Identify the debtor s property that is to be dealt with under the agreement. 2. Specify how the property is to be dealt with 3. Provide that all provable debts in relation to the agreement rank equally and if the total amount paid by the debtor...is insufficient to meet those debts in full...[then payment is] proportionately And remember a debt agreement may provide for any matter relating to the debtor s financial affairs BA s185c(3) Statement of Affairs, BA s185d Information given to OR of current 'affairs'. Given with proposal (s185d(1)) Creditors may inspect, without fee. (s185d(2)) Must be materially accurate, must not misinform. (s158ed) Effect of Part IX Debtor cannot present debtor's petition for bankruptcy. Vice versa for creditor to force bankruptcy. (s55(6) / s185k(1)) 'Act of Bankruptcy' Thus if proposal fails/not accepted. Debtor Bankrupt (s40

4 Debtor will have entry on the NPII (Index) s185c(2)() Specified person, OT or reg trustee, or another person registed as administor deals with indenti fied property (s185c(2)(c). Recorded on organisation records for 5 years. During voting period creditors cannot take action to recover debt or enforce a remedy against debtor or their property Secured creditors usually unaffected BA s185xa Must disclose if debtor is obtaining goods and services or incurring debt of more than $5,387 (updated quarterly). (Debtor 'poisonous' to deal with) If trading as a business must disclose to all dealing with the business End of Part IX if the debtor fulfills all of his or her obligations under the debt agreement BA s 185N(1) and then the debtor is released from provable debts. BA s185na(1) when a written proposal is made to terminate and this is accepted by majority in value of creditors after the OR has written to them. BA s 185P, s185pa and s185pc. Applicable deadline is 14 days [21 in December] if the court orders that the agreement is ended. BA s 185Q and there can then be a simultaneous hearing for a sequestration order. BA s185q(2),(5). Application to court from debtor, creditor or OR if OR declares in writing the agreement is terminated because there has been a designated 6 month arrears default. BA s185qa if the debtor becomes bankrupt by his own petition with court permission or as part of a joint petition BA s185r Case Law Regarding Termination Fifty-first RH Nominees v Rice [2003] FMCA 213 DCT v Criniti [2009] FMCA 417 BMW Australia Finance Ltd v Geraerts [2004] FMCA 1028 **Tolhurst Ltd v Thomas [2007] FMCA 1111 Kenny v Carkeek [2007] FMCA 510 DCT v Trigo-Contillo [2005] FMCA 1856 Allied Mills Pty Ltd v Kiriakidis [2006] FMCA 1164 Offences Party to Debt Agreement Shall not obtain credit >$3000 without informing of DA Bill of exchange/cheque >$3000 Hire purchase agreement Obtain G/S >$3000 Obtain amount >$3000 from supply of G/S Carry on business under assumed name, or name of other person without disclosure. Penalty under Section 269 is imprisonment for 3 years Note substitute $5,387 for $3,000 above (2014 amount)

5 Part x Personal Insolvency Arrangments Flexible arrangments outside bankruptcy. A 'practical and sensible arrangment' Occurs: For reasons, speci fic to individuals not fitting to low-income category. Bene fits to Debtor the selection of the controlling trustee who will usually become the trustee of the estate if the creditors accept the proposal avoiding the stigma of bankruptcy avoiding the cost of court proceedings avoiding untoward publicity avoiding the limitations placed on undischarged bankrupts minimised examinations into the affairs of the debtor less exposure to criminal prosecution avoids the other formal consequences of bankruptcy like ending a partnership due to bankruptcy and the limitations placed on undischarged bankrupts After acquired property may be kept. (Property acquired while bankrupt Eg; received from will while bankrupt). Bene fit to Creditor the debtor s assets are independently controlled which minimises the opportunity of the debtor disposing of them avoiding cost of court proceedings which would come out of the estate possibility of a greater distribution likelihood that debtor s friends and family will contribute funds to able the debtor to avoid bankruptcy thus allowing for a greater distribution the debtor s business can be carried on and so the creditor continues to have a customer the debtor may be more cooperative because he or she is involved in the process and again this may mean a greater distribution the process allows greater flexibility debtors may be more willing to assign non-divisible property to creditors Process of a Part X Statement of Affairs/Proposal to Trustee PIA accepted by majority of creditors (at least 75% in value) Trustee administers PIA. Pays dividend. PIA terminates. Commencement Resident of Aust/Carrying business authorises reg trust. Or OT. OT calls meeting of creditors and signs authority of approved form (s188(1)) Authority has no effect Effect Signing of s188 authority is irrevocable. Once meeting called, committing act of Bankrupcty (s40(1)(i)-(m) Section 188A(2) A personal insolvency agreement (PIA) must: (a) identify the debtor s property (whether or not already owned by the debtor when he or she executes the agreement) that is to be available to pay creditors claims; and (b) specify how the property is to be dealt with; and (c) identify the debtor s income (whether or not already derived by the debtor when he or she