INSOLVENCY LECTURE1 WINTER 2010 LAW EXTENSION COMMITTEE
WELCOME TO THE COURSE • Lecturers: John Gooley, David Russell - our backgrounds • The Course Outline was completely revised for last semester, and expanded for this semester • Notes and slides from previous students will be of limited use to you • We now do 6 weeks of personal insolvency (bankruptcy) and 6 weeks of corporate insolvency • Prescribed texts (see p.7 of Course Outline): • Keay’s Insolvency 6th edition • Nichols - Annotated Bankruptcy Act • 2009 Corporations Legislation - Thomson Reuters • The Powerpoint slides, the use of journals and library reserve
THE ASSIGNMENT • Available on the website • Due on 13 July 2010 • Only one question with a word limit of 1500 • A pass mark is 50% • Lecture 5 covers topics relevant to the assignment • The assignment contains the question AND what is expected in your answer
THE ASSIGNMENT On 17 September 2005 Barry transferred to his wife Lynette his interest in a residential property at Cremorne which had previously been in his name only. At the time of the transfer Barry was a public servant who had no debts. At the time of the transfer the property was worth $2.7 million, however Barry transferred the property to Lynette for $1.1 million. On 1 January 2007, after leaving the public service, Barry acquired a coffee and muffin franchise at Ballina from Coffee Franchises Limited for $250,000. Barry financed this acquisition from a combination of savings and borrowings. Pursuant to the relevant franchise agreement with Coffee Franchises Limited, Barry was obligated to pay franchise royalties in the amount of $50,000 per month as well as to make advertising and marketing contributions in the amount of $1,000 per month. By June 2007 Barry owed Coffee Franchises Limited the amount of $167,000 for royalty and marketing fees. He did not have the funds to pay this amount. A court judgment was obtained against him. On 15 February 2010 the Federal Magistrates Court heard a Creditor’s Petition by Coffee Franchises Limited. On that date a sequestration order was made against the estate of Barry. The Official Trustee now seeks your advice as to whether the transaction between Barry and Lynette in relation to the Cremorne property is void.
THE ASSIGNMENT In your advice you are expected to: (a) identify all relevant provisions of the Bankruptcy Act, whether or not they produce an outcome in favour of the Official Trustee; (b) outline what needs to be established pursuant to each of those provisions; (c) explain who bears the onus of proof in relation to the relevant provisions; (d) refer to relevant case authorities dealing with those provisions; (e) identify any further evidence which needs to be obtained to assist the Official Trustee; (f) advise what methods are available to the Official Trustee to challenge the Cremorne property transaction. Note: There is insufficient material provided in the assignment question for students to come to a definitive view as to whether the Official Trustee will succeed. Students are not required to predict whether or not the Official Trustee will succeed. The purpose of the assignment is for students to demonstrate their knowledge and understanding of the relevant provisions.
THE EXAM • Detailed discussion of the exam will be in Lecture 10 and on the Sunday of Weekend School 2 • Exam is open book but not electronic • The LPAB website contains exam information and past exam papers QUESTIONS AND COMMENTS • You can ask questions before, during or after lectures • Feel free to email questions to the lecturers, to be dealt with at the next lecture • Do you already have insolvency experience which you can share?
HISTORY OF BANKRUPTCY LAW • The Roman Law of the Twelve Tables (450 BC) • Gave the debtor 30 days to pay or find someone else to pay • If payment not made, fastened in stocks for 3 market days • If still unpaid, debtors were entitled to physically divide the debtor’s body amonst themselves • Division was in proportion to the creditor’s share of the debt • The first English bankruptcy statute (1542) • Creditors could complain to the Lord Chancellor and obtain seizure of the debtor’s property • The remedy was initially only available to traders • The debtors’ prison • Until 1869 in England • Until January 2009 in Greece • Still exists in Dubai
COMMONWEALTH LAW • The Commonwealth Of Australia Constitution Act in s 51(xvii) gives the federal parliament power to legislate in relation to bankruptcy and insolvency • The current legislation is the Bankruptcy Act 1966 • Federal courts deal with bankruptcy matters - s 27 • Inspector-General in Bankruptcy - ss 11,12 • Insolvency and Trustee Service Australia (ITSA) • Official Receiver - s 15 • Official Trustee - ss 18,19 • Registered trustees - s 154A ff
PURPOSES OF BANKRUPTCY LAW • Pari passu distribution • proportional sharing • only deals with unsecured creditors • often little left after payment of secured creditors and costs • Protection • bankrupt is protected against further claims by creditors • protection for creditors • assets collected and divided amongst creditors • bankrupt has the slate wiped clean and can start again • Investigation • why the insolvency occurred • whether other assets are available for creditors • Restrictions on dealings • financial conduct of bankrupt is restricted and supervised
INTERACTION WITH OTHER AREAS OF LAW • Property law - what if your vendor goes bankrupt? • Commercial law - can you obtain title from a bankrupt seller? • Litigation - can you sue or be sued by a bankrupt? • Family law - can maintenance owed by a bankrupt parent be recovered? • Superannuation - can creditors get at a beneficiary’s entitlement? • Even if you never appear directly in a bankruptcy case, you will certainly need to know the effect which bankruptcy has on titles and rights. • Bankruptcy affects your future right to practise law: • the “bankrupt barristers” scandal • Legal Profession Act 2004 s 498(1)(d)
“SOLVENT” AND “INSOLVENT” • S 5(2) provides: “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.” • s 5(3) provides: “A person who is not solvent is insolvent.” • But how do you prove insolvency? • You know nothing about the debts, liabilities, income and expenses of the debtor • The debtor may not even keep financial records • The Bankruptcy Act provides a simple means of establishing insolvency by prescribing that certain events constitute an “act of bankruptcy”
ABILITY TO PAY DEBTS AS THEY FALL DUE • Sandell v Porter (1966) 115 CLR 666 • High Court considered a previous version of the definition - “unable to pay his debts as they become due from his own money” • This does not mean just cash on hand • Regard should be had to monies which a debtor could borrow on mortgage, or which could be obtained by selling assets • Whether a person is insolvent will be a question of fact in each case
COURSE OF A BANKRUPTCY • What follows is a broad summary of the topics to be covered in detail in Lectures 2-6 • Debtor fails to pay a debt, causing creditor to take action under Bankruptcy Act • Debtor commits one of the acts of bankruptcy listed in s 40, usually failure to comply with a bankruptcy notice - s 40(1)(g) • Voluntary and compulsory bankruptcy: • debtor presents a debtor’s petition - s 55; OR • creditor presents a creditor’s petition - s 47 • Court hearing a creditor’s petition may make a sequestration order against the estate of the debtor - s 43 • “Sequestration” is not a defined term but an ordinary English word meaning to set aside or separate
VESTING OF PROPERTY • The property of the bankrupt vests forthwith in the Official Trustee • S 58(1) provides: (1) Subject to this Act, where a debtor becomes a bankrupt: (a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and (b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.
DEALING WITH ASSETS • Trustee takes possession of property of the bankrupt - s 129 • Bankrupt must file a Statement of Affairs - s 54 • Trustee may convene a meeting of the creditors - s 64 • Creditors must lodge a Proof Of Debt - s 82 • Official Receiver may launch investigation - s 77C • Trustee pays costs of administration of the estate, then pays dividends to creditors wo have proved their debts - s 140
TERMINATION OF BANKRUPTCY • General rule - discharge from bankruptcy after 3 years - s 149 • Trustee may object to the discharge - s 149D • Annulment by Trustee certifying that all debts have been paid in full - s 153A • Annulment by court order - the sequestration order ought not to have been made - s 153B
DATE OF COMMENCEMENT OF BANKRUPTCY • Court orders usually take effect when made - but not in the case of a sequestration order • The bankruptcy will commence at the time of commission of the earliest act of bankruptcy in the 6 months immediately prior to presentation of the petition - s 115 • This date of commencement is important in relation to the doctine of “relation back”
RELATION BACK • Section 115(1) provides: If a person becomes a bankrupt on a creditor's petition and subsection (1A) does not apply, then the bankruptcy is taken to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period of 6 months immediately before the date on which the creditor's petition was presented. • Section 116(1) provides: Subject to this Act: (a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; …………………………………... is property divisible amongst the creditors of the bankrupt.
VOID TRANSACTIONS The trustee can challenge and seek to set aside certain transactions: • Transactions which are undervalued - s 120 • Transactions to defeat creditors - s 121 • Transactions which give a preference to a creditor and which thus disadvantage the general body of creditors - s 122 • Certain superannuation contributions - s 128A
EFFECTS OF BANKRUPTCY EFFECT ON THE BANKRUPT • All “divisible” property vests in the Trustee - s 58 • Conduct can be investigated by the Trustee - s 77C • Must notify Trustee of change of name or address - s 80(1) • Must make contributions from income, over a threshold level • Must surrender passport - s 77 • Must disclose to anyone to whom they apply for credit of >$3,000 that they are bankrupt - s 269 • Prohibited from managing or being a director of a corporation - Corporations Act s 206A • Restrictions on practising as a barrister, solicitor or real estate agent • Bankruptcy dissolves any partnership
EFFECTS OF BANKRUPTCY EFFECT ON LEGAL PROCEEDINGS • Legal proceedings are a form of property which vests in the Trustee • Legal actions brought by the bankrupt before the bankruptcy are stayed, until the Trustee elects to prosecute the claim or discontinue - s 60(2) • Exception: a bankrupt retains the right to pursue actions for personal injuries and wrongs - s 60(4) • A party cannot commence or continue with legal proceedings against a bankrupt, without the leave of the court - s 58(3)(b)
EFFECTS OF BANKRUPTCY EFFECT ON THE BANKRUPT’S PROPERTY • On the date of the bankruptcy all divisible property vests in the Trustee - s 58 • Certain property is exempted or protected - see later • Vesting has effect subject to orders of the Family Court - s 59A EFFECT ON CREDITORS • Creditor cannot enforce remedies in respect of a provable debt - s 58(3)(a) • Creditor has a right to share in distribution of the estate • Secured creditors not affected - s 58(5)
PROPERTY AVAILABLE TO THE TRUSTEE • Section 116(1): • property belonging to bankrupt at date of bankruptcy; • property acquired by bankrupt after commencement of bankruptcy and before discharge; • the right to exercise power over property. • Recoveries received by creditors - s 118 • Recoveries from sherrifs and courts - ss 119, 119A
PROTECTED DEALINGS • “Relation Back” can catch transactions carried out in the months before the making of a sequestration order. • However, certain transactions are protected. • Section 123 protects persons who have acquired property from the debtor and did not know at the time that a petition had been presented: • transaction must be before the date of the bankruptcy • in good faith • in the ordinary course of business • Section 124 protects persons who pay money or deliver property to the bankrupt in good faith and in the ordinary course of business, and • if transaction is after date of bankruptcy, also have to show that person acted without negligence • Maintenance payments made before the bankruptcy are protected - s 123(6)
EXEMPT PROPERTY - s 116 • Property held in trust - s 116(2)(a) • Certain prescribed household property - s 116(2)(b) and Reg. 6.03 • Property used for earning income - s 116(2)(c) and Reg. 6.04 • Means of transport - s 116(2)(ca) (value < $6,000) • Insurance policies and superannuation funds - s 116(2)(d) • except for void super contributions under ss 128B and 128C - see lecture 5 • Damages received for personal injuries or personal wrongs • Property transferred under Family Law Act orders - s 116(2)(q)
NEXT WEEK : LECTURE 2 • Acts of bankruptcy • Bankruptcy notices • Reading: • Powerpoint slides lecture 2 • Keays 53-68 • Bankruptcy Act ss 40,41 • Nichols 113-147