Insolvency law LAWS 3014 Notes PDF

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Rough note for insolvency law 3014...

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Insolvency law LAWS 3014 – Week 1.2

Ex parte james 1874 – a trustee must be seen to act fairly at all times, can exclude strict legal application of certain laws – mistake of law saw payment made to trustee: creditor paid trustee money when he was not obligated to – trustee said no to repayment: Judge held that it was a mistake and trustee was an officer of court and court should set example to the world – to be as honest as other people the trustee should repay money. It has been held consistently to be of general principle towards the actions of the trustee – they must act properly and currently in fairness concerns. 1975 English In Re Clark Ex parte trustee v Texaco [1975] I AER 453 – the rule will apply when there are four circumstances: bankrupt estate enriched by transaction: claimant cannot submit ordinary proof of debt to reclaim money: an honest person would consider it unfair for the trustee to retain the money: the rule only operates to nullify a mistake (only amount that enrichment concerned is claimable) 90% + of bankruptcies are voluntary: compulsory bankruptcy where a creditor goes to court and requests sequestration of the debtor. Voluntary bankruptcy: Law recognises this as a serious matter. The law wants to be sure that persons declaring bankruptcy are in fact bankrupt. Therefore, there is a voluntary preliminary process to ensure someone is bankrupt: it proposes to give 21 days which provides for a moratorium (all court proceedings halt. All debt actions halt) against debts held against person. If it doesn’t work, then (Declaration of intention to present a debtor’s petition). This is an act of bankruptcy in and of itself. Gives opportunity to discuss with creditors a deal that might resolve the situation. Always the option of a contractual negotiation too: signed agreement for 75% for example. Requires agreement with all creditors. All or nothing agreement for all creditors. Private contractual arrangement. This requires entitlement to a debtor’s petition for ability to present a declaration of intention: If a creditors petition exists this denies this. If already in a bankruptcy process this is denied Part IX and X agreements preclude this too Cannot be used twice in a 12 month period. Process: signed declaration, statement of affairs and approach official receiver who checks it. Official Receiver gives simple English explanations of alternatives and results of bankruptcy, then endorsement occurs and 21 days commences: if getting nowhere can be halted otherwise at end 21 days debtors petition can be filed or if you don’t the moratorium constitutes an act of bankruptcy entitling another creditor to bring action of bankruptcy. To qualify to bring Intention to bring a debtors petition you have to be insolvent therefore proves bankruptcy: The Act tries to help someone avoid bankruptcy:

The form has asset declarations in a statement of debtor’s affairs: can advise of own trustee with their written consent. Official Receiver checks forms: A child can become bankrupt in Australia: You don’t have to be living in Australia but you must have a connection to Australia: s 55(2A) – connection with Australia provision – requires that the person is personally present, or ordinarily resident in Australia: or has a dwelling house or place of business in Australia: C was carrying on business in Australia personally or by means of an agent or manager, or was a member of a firm or partnership carrying on business in Australia by means of a partner, agent or manager. Firstly personally present or ordinarily in Australia: people may be resident in more than one place – where one ordinarily resides even if only for part of a year (have telephone, bank account): Had a dwelling place or place of business – prima facie house to live in: complicated by lease to tenants – answer to this is no – must be a place where you can yourself live whenever you like (can be a room): Fuller Jr in the Matter Alford v Alford [2017] FCA 782 – Singapore living arrangement for an Australian – with no intention to return: Court discussed whether or not he had a dwelling house: he had leased his house in Australia – a house to reside in if you so desire: authorities said house that is used or may be used at whim at any time: lease defeats this – Statement of Affairs s 55(3AA) Likely not to be bankrupt: 2A unwilling 2B three times or once in last 5 years previously presented petition Would likely be able to pay debts in a reasonable time: but is unwilling – or has previously presented a petition three times or at least once in the last 5 years Debtors can abuse the process: Clyne v The Deputy Federal Commissioner of Taxation (1984) 154 CLR 589: petition brought against debtor by a creditor. Debtor worked out that he would be better off if he could speed up bankruptcy: rushed in an had himself declared bankrupt: cut off date was shorter for self-declaration Voidable antecedent transactions: distinction must be drawn between proper and ulterior purpose: an abuse of process occurred in this case to shorten the relation back in time property that would go to the trustee BWK Elders v White [2004] FCA 1611: defendants being sued by Elders for 1.8m in damages: they were not wealthy defendants but had some assets – worked out that if they could pretend they had borrowed assets from wives and then went bankrupt wives could claim: Elders were restrained by requiring court order to get at assets: Defendants had rushed in to self-declare: Elders requested that bankruptcy be set aside and annulled on the grounds that those proceedings were an abuse of process and relied on Clyne: two bases for holding as abuse of process: 1. Must be insolvent to get bankruptcy which they weren’t – only after the judgment came down they would be: 2: trying to ensure assets going to wives was an abuse of process –

Midnight at beginning of the day you are accepted bankrupted is the starting point of Bankruptcy s 57A: s 115(2) Compulsory bankruptcy divided in different headings: 5 of them Standing Debtor – against whom can you bring a petition Grounds: Petition – what are the requirements Hearing – what happens at the court hearing: Standing: in order to have debtor declared bankrupt the petitioning creditor(s) must be owed at least 5k, payable for a future date: s 44. Joint petitioners: can be adjoined – Debts must be owing at the time of the act of bankruptcy and when the petition is presented (to court) and at the time of the hearing The debt must be liquidated: fixed – two ways: by agreement or by court. Damages must be fixed by the court to become liquidated: Due or payable either already or at a fixed date in the future: Debtor: Connection s 43(1) to Australia: same as earlier – ordinary resident, dwelling house etc apply from Alfords case Grounds: One ground for a creditors bankruptcy petition: debtor has committed an act of bankruptcy: the law recognises that it is almost impossible for a creditor to know whether a debtor is insolvent or not – acts of bankruptcy are actions by the debtor that allows the court to presume bankruptcy: always rebuttable – inference may be incorrect – Acts of bankruptcy create a presumption that the debtor is bankrupt therefore permitting the creditors’ petition to be based on this act – ones then flips to debtor: s 40 sets out the acts of bankruptcy: 40(1)(g) – most favoured and popular – used most commonly: the failure to comply to comply with a bankruptcy notice: S 40 – a debtor commits an act of bankruptcy in each of the following cases: A – if in Australia or elsewhere makes a conveyance of property for the benefit of creditors (handing over property to usually third party to benefit creditors) B – if in Australia or elsewhere he or she makes a transfer (i) he or she makes a conveyance, transfer, settlement or other disposition of his or her property or of any part of his or her property; (ii) he or she creates a charge on his or her property or on any part of his or her property; (iii) he or she makes a payment; or

(iv) he or she incurs an obligation; that would, if he or she became a bankrupt, be void as against the trustee; s 40(1)(c) if, with intent to defeat or delay his or her creditors: (i) he or she departs or remains out of Australia; (ii) he or she departs from his or her dwelling-house or usual place of business; (iii) he or she otherwise absents himself or herself; or (iv) he or she begins to keep house; Intention proved by way of facts: reason or intention of the party who is hiding was in fact because they wanted to avoid the payment of their debts. DCT v Robert Nitijudo Wachjo [2005] FCA 561 Intent to defeat or delay is a question of fact and must be alleged by a petitioning creditor and proved. It is seldom that the intent of a debtor can be proved by a debtor’s own statements, and it is usually shown by inference from the circumstances in which the debtor departed from his dwelling house or place of business. The evidence necessary to prove intent must differ according to the circumstances of each particular case: Edge Technology [2005] FCA 561 at [5]: In considering the conduct of the debtor against a background of all the facts and circumstances, it is clear that the Court must infer that a person intends the necessary consequences of his or her acts: i.e. if you head overseas which has the impact to deny creditors money this is likely taken as an intent: S 40 (1)(d) if: (i) execution has been issued against him or her under process of a court and any of his or her property has, in consequence, either been sold by the sheriff or held by the sheriff for 21 days; or (ii) execution has been issued against him or her under process of a court and has been returned unsatisfied; 21 day hold: improves the timing of act of bankruptcy especially for other parties relying on it Any Act of bankruptcy is generally available to any party: Act that proves the debtor is bankrupt you do not need a connection the act of bankruptcy – prevents other creditors being held up by negotiations between one party and the debtor The act of bankruptcy must be within the past 6 months with the exception of certain acts of bankruptcy which are continuing: i.e. the ones in C and D holding of goods for 21 days: going O/S means everyday you stay away is an act of bankruptcy: Debtor presents a debtor’s petition or intends to present: under s 54A Most commonly used act of bankruptcy:

S 40 (1)(g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not: (i) where the notice was served in Australia--within the time fixed for compliance with the notice; orf (ii) where the notice was served elsewhere--within the time specified by the order giving leave to effect the service; comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counterclaim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained; Starts with a judgment, which must exceed $5k, you can also have a joint bankruptcy notice where two or more creditors join together to exceed $5k, final judgment required (cannot be interim), must not have been a stayed judgment: an appeal automatically stays a judgment: undermines whole right of appeal otherwise. Fill in necessary form, attached judgment, and present to office of Official Receiver, who issues bankruptcy notice after checking judgment: also checks that the judgment is valid, this must be served within 6 months on the debtor: regulation 16.01 provides for serving documents in bankruptcy generally: service may be effected as follows: post or courier to person at last known address: left in an envelope at a document exchange where the person maintains a document exchange facility or left at last known address, or delivered to person in person, or emailed or faxed: or you might need to make an application for substituted service: often when person is overseas, or person is missing: Courts can decide substituted service protocols – newspaper ads, foreign attorney etc: Bankruptcy notice can be wiped by 21 days option to file application to set aside: counter claim, interrupts the running of 21 days, extension possible s 41 – set off or cross demand that reduces to below $5k Setting aside cannot be done on the grounds that you are solvent: Defect that is a major defect can permit the setting aside of a bankruptcy notice: must constitute a major serious prejudice against: Creditors address must be accurate, overstating the amount then the court will treat the matter as serious: understatement of amount is fine, formal defects or irregularities: substantial injustice results? Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71: substantial injustice caused if causes debtor was mislead or there was a tendency to mislead:

Bankruptcy Notice set aside: dispute judgment debt: if served summons and given opportunity to contest claim: therefore not additional opportunity to claim against action. Resistance of notice: set off; counterclaim and cross demand – Application to have judgment set aside: going behind the judgment (reluctant to do so) – the modern trend is to say no to technicality declarations of someone bankrupt

Principles to go behind the judgment: to get to the truth: must have a good case about why the judgment was granted and not opposed and secondly that you have a good defence against the claim – a bona fide reason for new opposition with reasonable defence: leading authority Ramsay Healthcare v Compton [2015] FCA 1207 where the court said there are no inflexible rules but there are guiding principles: consent judgments looked upon with suspicion: default judgments where no opposition raised are also suspicious: the court will not go behind the judgment unless there is evidence to show reason too: fraud – for e.g. Counterclaim or set off or cross demand: a set off is a contractual idea that relates to the fact that you have a claim against the other side: i.e. 700 owed and 1000 also owed can result in 300 owing. Counterclaim a legal claim against the other person: painter ruins a 25,000 persian rug while completing a 20,000 job – damages claim against painter therefore is counterclaim Crossdemand: unique to bankruptcy: unjust enrichment – non contractual claims These are raised against bankruptcy notice – court doesn’t then decide, but wants to hear that it is arguable – a genuine claim with enough evidence to prove so – court will hold on bankruptcy declaration while this gets sorted: Section 40: says you can only use a set off, counterclaim or cross demand that you could not raise before – i.e. could have raised it against summons you needed to have done it then. S 41 G – failure to comply with a bankruptcy act: Defects and errors in bankruptcy notice s 306 – defect results in irreparable prejudice that cannot be fixed by court order (i.e. wrong address for delivery of payment as opposed to minor spelling error) Adams v Lambert (2006) 228 CLR 409 – defect needed to be confusing, misleading or otherwise unfairly prejudicial or leaves out an element required by the act (i.e. pay within 21 days declaration) Defects not regarded as misleading: misstating the section of the Act – You must commence your action to set aside the bankruptcy notice within 21 days. You can’t get an extension unless you apply to set it aside – that process automatically suspends the 21 days and until the court hears the matter s 47 – If you use a tactic to delay i.e. not bona fide – the bankruptcy can be backdated to adjust s 41 (6) a b and c If you have committed an act of bankruptcy because the court will not set it aside: ground of bankruptcy: creditors petition s 44 s 47 form that it is signed and then – affidavit verified confirming the truth and sworn – it has a life of 12 months – once you start the case by filing a petition – you cannot walk away even if paid – you represent all creditors – you cannot withdraw without the court’s consent – can permit a substitution instead – court would usually adjourn and require all creditors to be contacted for a substitute to be found –

Proceeding to file a creditor’s petition: short document accompanied by verifying affidavit – made by a person who knows the facts – once present requires courts’ permission to be withdrawn – creditors can be substituted under s 49 – Hearing: the bankruptcy acts provides at the hearing of the creditors petition: the matters stated in the petition, and the affidavit supports this: properly served required unless you can show substituted service as set out under Pearlburst Pty Ltd v Summers Resort Group Pty Ltd [2007] NSWSC 1126 case to prove they got it: two creditors can join to make up the 5K – when the court is satisfied it may make a sequestration order under s 52 – it has a discretion: 24 months max it can be extended for: At the hearing there is an opportunity to go behind the judgment – establishing bona fide claim required – also if claiming to be solvent the court will not make persons bankrupt – if you Re Serena ex parte Wollondilly Shire Council (1980) 32 ALR 596 Judge Dean said there is no policy to be found in the act to make a bankrupt of an incalcitrant debtor who can afford to pay: Paying all your debts as they fall due Sandell v Porter (1966) 115 CLR 666 – court considered an issue of an inability to pay debts when they fell due: insolvency definition at this time also said debts to be paid out of debtors’ own money required for payment – doesn’t change this case – in assessing whether you can pay at your debts you don’t just look at cash resources but also at assets that could be used to raise money towards paying debts – i.e. sell assets or borrow against assets – debtors money not limited to cash resources – also includes assets derived cash realised within a relatively short time: ought to consider financial position as a whole not the temporary lack of liquidity – Bank of Australasia v Hall (1907) 4 CLR 1514 – Court said it was argued that only debts then actually payable and the amounts ascertained should be taken into consideration – the ability of the debtor – to cover future – as they become due requires some consideration of the immediate future – not only the debts payable today but also those coming up in the immediate future are to be considered – ANZ Banking Group v Foyster [2000] FCA 400 puts the onus to declare oneself solvent on the debtor Other sufficient cause: includes public interest Klein v DCT 1985 – no service of original summons that judgment based on the court cannot rely on it: Debtor’s offer to pay declined by creditor – or pending appeal against judgment being relied upon – provided debtor can show genuine and arguable basis: futility of the bankruptcy – Re Capel [1998] FCA 372 – where the debtors has so little that it doesn’t make sense to sequestrate them: if he has nothing or virtually nothing – or cases where bankruptcy proceedings used to force someone to pay can be set aside – Rozenbes v Cronhill (1956) 95 CLR 407 Court can extend the life of the petition beyond 12 months but maxes out at 24 months Covid 19 – Government passed law to suspend bankruptcy during this period from 25 March 2020 and are in force for 6 months: creditors threshold is $20,000 from 5k – in addition, the recipient of a bankruptcy notice who had 21 days now has 6 months to pay or oppose: bankruptcy notices before 25 March 2020 proceed as normal. Court can’t postpone bankruptcy – it takes effect immediately: property vests in the bankruptcy trustee: bankruptcy loses capacity to take legal proceedings, restrictions on travel

apply – written consent to travel required – National Personal Insolvency Index updated with new information, bankrupt becomes subject to the act – examination, meetings, assisting the trustee generally, cannot sit in parliament, creditors lose capacity to sue etc: they become party to the consensus credit...