The law as it relates to insolvency is fundamental in balancing the interests of an individual with those of the general community. It does this by ensuring that creditors are paid from the limited resources owned by a debtor.
Under the Bankruptcy Act 1966 (Cth) (‘Act’) a person that is unable to pay all their debts when they become due and payable is considered insolvent. Accordingly, an insolvent person may become bankrupt in one of two ways:
1. debtor’s petition (voluntarily)
2. sequestration order (involuntary)
In order to voluntarily enter bankruptcy, a debtor’s petition must be made to the Official Receiver. A statement of affairs must also accompany the petition which details the assets owned by an individual and the liabilities that are payable.
Once a debtor’s petition has been made, the application may be either accepted or rejected. Common reasons for rejecting the application can include:
• insufficient proof of identity; or
• capacity to pay debts within a reasonable time.
Should the Official Receiver accept the debtor’s petition, that person will become bankrupt.
Alternatively an individual may also become bankrupt in circumstances where a creditor makes an application to the court for a sequestration order. Provided the total debt owed is $5,000 or more, a creditor will only be successful in obtaining a sequestration order if the creditor files a creditor’s petition within six months of the commission of an act of bankruptcy. In accordance with the Act an act of bankruptcy can include:
• assigning property for the benefit of creditors generally;
• departing Australia, dwelling or place of business with the intention of defeating creditors; or
• failing to comply with a bankruptcy notice.
If a creditor is successful in obtaining a sequestration order, the affected individual must lodge a statement of affairs with the Official Receiver within 14 days.
Consequences of bankruptcy
Should an individual become bankrupt, ownership of that person’s assets will vest in a person known as the trustee in bankruptcy. Once property has vested, the trustee will then sell the property in order to distribute the proceeds of sale among the creditors. The amount each creditor will receive is determined in accordance with the relevant bankruptcy laws. By contrast, property that does not vest in the trustee on bankruptcy will include:
• property held by the bankrupt in trust for another;
• personal and household property;
• superannuation funds; and
• a vehicle under a prescribed value.
Other consequences of bankruptcy may include:
• compulsory contributions from the bankrupt’s income;
• inability to be a director;
• restrictions on leaving Australia; and
• some professional bodies restricting or preventing the bankrupt from continuing in that occupation.
Ordinarily a bankrupt will be discharged automatically after a period of three years. This period of time can be extended up to eight years if the trustee objects to the discharge. Alternatively, the bankruptcy may also be discharged through an annulment in circumstances where the bankrupt’s debt has been repaid, or by order of the court. As such, when a bankrupt is discharged it will release that person from all unsecured debts. Therefore any creditor that has not been paid in respect of an unsecured debt after discharge will not have any further claim.
To ensure accurate advice and facilitate a preferable legal outcome, it is important that professional advice is sought when a person may be considered insolvent, or a creditor is seeking a sequestration order against a debtor.