Workers Compensation Reforms

Transcript Workers Compensation Reforms

Bankruptcy Update

NSW/ACT IPA Study Group 18 November 2010

Stephen Mullette

Director MatthewsFolbigg Lawyers

Bankruptcy

Bankruptcy is a sacred state, a condition beyond conditions, as theologians might say, and attempts to investigate it are necessarily obscene, like spiritualism. One knows only that he has passed into it and lives beyond us, in a condition not ours.

John Updike American writer, 1932-2009

Outline

           Legislation Update Family Law 139ZQ Notices Commencement / Appointment Annulment / Setting Aside Investigations / Recovery of Property Setting aside Personal Insolvency Agreements Income Reviews of Trustee Decisions Provable Debts Costs / Indemnity from estate

Legislation Update

Legislation Update BLAA 2010 (24 June 2010)

  

Bankruptcy Legislation Amendment Act 2010 (Cth)

– – – – Increase in threshold amounts for bankruptcy – $2,000 up to $5,000 (not $10,000) – Bankruptcy Notices – – Creditors Petitions 11 August 2010 commencement New Bankruptcy Notice – 1 August 2010 Shorter and easier to read Now need to file two complete copies An additional application form Filing fee $440 – ($150 extension of time)

Legislation Update BLAA 2010 (24 June 2010)

     New offences and penalties – 1 October 2010 (postponed – up to 14.1.2011) – Including failing to notify Official Receiver of adjournments etc – Infringement notices Abolition of Bankruptcy Districts – 15 July 2010 Declaration of Intention to present debtor’s petition – stay period increased from 7 days to 21 days – 1 October 2010 Remuneration of trustees – 1 October 2010 (postponed – up to 14.1.11) – draft regulations not yet finalised – review of trustees’ remuneration and expenses by Inspector-General No review of rates – was work necessary? Appropriate person? – $5,000 min remuneration – no right to sue bankrupt notice of third party payments within 7 days of receipt of invoice over $100 (suggested $3,000 per quarter..?)

Family Law

Family Law BAFLLAA 2005

 

Bankruptcy and Family Law Legislation Amendment Act 2005

Balancing the interests of creditors and the non bankruptcy spouse

BAFLLAA

 Bankruptcy and Family Law Legislation Amendment Act 2005 – Schedule 1 commenced 19 September 2005 – Family Court now has jurisdiction to deal with concurrent bankruptcy and Family Law proceedings

BAFLLAA

BEFORE ...

  A party could not commence Family Court proceedings for property or spouse maintenance if the other spouse is bankrupt Non bankrupt spouse claims were generally determined in another Court

BAFLLAA



BUT NOW ...

Since 19 September 2005, a party can commence Family Court proceedings for property settlement or spouse maintenance even if his or her spouse has become bankrupt

Property Settlement and BAFLLAA

 New s79(1): non bankrupt spouse can now file application for property settlement after the former spouse has become bankrupt

“s79(1) In property settlement proceedings, the court may make such order as it considers appropriate:

Property Settlement and BAFLAA (cont)

(a)

(b)

in the case of proceedings with respect to the property of the parties to the marriage or either of them – altering the interests of the parties to the marriage in the property; or

in the case of proceedings with respect to the vested bankruptcy property in relation to a bankrupt party to the marriage – altering the interests of the bankruptcy trustee in the vested bankruptcy property;

Property Settlement and BAFLLAA (cont)

including: (c) an order for a settlement of property in substitution for any interest in the property; and (d) (i) an order requiring: … (ii) the relevant bankruptcy trustee (if any);

Property Settlement and BAFLLAA (cont)

to make, for the benefit of either or both of the parties to the marriage or a child of the marriage, such settlement or transfer of property as the court determines.”

 How does the Court do this?

 How do the rights of Creditors of the bankrupt spouse get considered?

Section 75(2)(ha) Family Law Act

 New sub-section 75(2)(ha) has been inserted which provides for the Family Court, before making any orders in respect of vested property, to consider:

“(ha) the effect of any proposed order on the ability of a creditor of a party to recover the creditor’s debt, so far as that effect is relevant”

Section 114 Family Law Act

 Section 114(4) will allow the Family Court to make orders restraining the bankruptcy trustee from declaring and distributing dividends amongst the creditors

BAFLLAA IN ACTION

 How do the amendments work?

–

Kingsley & Kendle & Ors

– – – –

Visnic v. Visnic Lemnos & Lemnos Witt & Witt

[2007] FMCAfam 681

Lasic & Lasic

19      

Kingsley v. Kendle & Ors

[2010] FamCA 598

Application by wife to restrain Trustee’s solicitors from acting Were also acting for bankrupt husband On one view who else could be more appropriate?

Conflict of interest: – solicitors listed as secured creditor; – continue to act for husband in relation to non-vesting items – eg Super – debt alleged to H’s parents; H has interest in proving Held conflict re parents debt & whether sols debt secured Restrained from acting

20     

Kingsley v. Kendle & Ors

[2010] FamCA 598

Application by H parents for leave to intervene: 79(10) F

amily Law Act (

creditor, debt may not be paid if order made) Section 90AE

Family Law Act

power to make orders under s79 which binds third parties

Puddy v. Grossyard

[2010] FamCAFC 54 (liquidator claiming debt by husband) – s.90AE, s.79(10) and s75(2)(ha) (power of court to consider interests of creditors) refers to a debt “which is not controversial” – where disputed, some other jurisdictional basis is required

Lasic

– no power to order payment direct to creditor in bankruptcy Here – H power to be heard limited, if parents not allowed to intervene, may be no proper contradictor re the debt.

Visnic v. Visnic

(12 Nov 2010)

      Property settlement proceedings commenced in 2002; H bankrupted on 3 May 2010 Transitional operation of BAFLLAA – 18.9.05

Trustee asked to be heard (but not joined) on argument that no jurisdiction to make orders against vested property Wife applied to join trustee – Cohen J agreed Trustee’s duties in family law cases

   1976 1981 1989    1991 1993-1994 1991-2002

BAFLLAA IN ACTION

Lemnos & Lemnos

(30 August 2007) [2007] FamCA 1058 Married Purchase Beatty Street Purchase West Street in H’s name: 1. Investment?

2. Matrimonial Home?

Move into West Street Beatty Street rented then sold Tax deductions claimed in respect of ownership of West Street, including in respect of interest on the mortgage. Total claimed $3.4m.

BAFLLAA IN ACTION

  2002 2006

Lemnos & Lemnos

ATO investigation after tax return lodged showing West Street address as place of residence H challenges to assessment fail Total debt $5.7m.

 12.11.06

 3.7.07

Sequestration Order against H. Separation.

Assets: West Street $4.5-$5M. Mortgage $2.4M

BAFLLAA IN ACTION

 

Lemnos & Lemnos

The husband elected not to participate in the hearing other than as a witness called on behalf of the trustee, and was found to be “a reluctant participant when he attended at Court”.

Trustee in Bankruptcy: the proper course was to make a finding as to a money amount which represented the wife’s claim which would then rank equally with other creditors for distribution of the bankrupt’s available assets.

BAFLLAA IN ACTION

 

Lemnos & Lemnos

Le Poer Trench:

“that may be a possible result in a particular case, although I would think that in most cases which are likely to be considered by the Court involving a similar situation (ie all of the parties’ matrimonial assets vesting in a Trustee of one of the parties’ bankrupt estate), the applicant will be seeking a transfer of property or the declaration of an interest of the non-bankrupt party in the property vested in the Trustee”.

BAFLLAA IN ACTION

Lemnos & Lemnos

 In addition, the Trustee in bankruptcy may hold the matrimonial property on trust for the wife because of the:

“special nature of beneficial ownership of property as between spouses, irrespective of the fact that the legal title to the property may stand in one party’s sole name”

(at [66]). 26

27  

BAFLLAA IN ACTION

Lemnos & Lemnos

Contributions of the parties equal; Factors under s75(2) FLA: – wasting of the matrimonial assets under s75(2)(o); – Interests of creditors under s75(2)(ha).



BAFLLAA IN ACTION

Lemnos & Lemnos

Waste: – H’s conduct in completing his tax returns between 1991 and 2002 and claiming deductions for expenses (including mortgage interest) on West Street, whilst living there, was

“reckless and negligent at the least in filling in his tax returns for the relevant years”;

BAFLLAA IN ACTION

Lemnos & Lemnos

– included using old address (Beatty Street) as H’s residential address on tax returns throughout this period (and for 7 years after it had been sold!); – appropriate to require H to satisfy the ATO debt from his own resources (ie his share of the equity!)



BAFLLAA IN ACTION

Lemnos & Lemnos

The wife therefore received the benefit of: – – distributions from the family trust (the only source of income for which appears to be H’s income); W & H’s trust distributions applied to reduce the mortgage; – – Shifting to H the liability for the tax wrongfully retained; Thereby forcing H’s other creditors to accept a significantly smaller dividend 30

BAFLLAA IN ACTION

 

Lemnos & Lemnos

The Court was not persuaded by the Trustee’s argument that the wife had received a windfall from the non-payment of tax by the husband. In any event, the Court was not satisfied that the wife did or ought to have had knowledge of the non-payment of proper tax liabilities of the husband.



BAFLLAA IN ACTION

Lemnos & Lemnos

Interest of Creditors: – s75(2)(ha), the Court found that the interest of creditors meant that there should be no further adjustment in favour of the wife; – not prepared to increase the amount to be retained by the Trustee as

“to do so would work an injustice and hardship upon the wife in the circumstances of this particular case”

(at [93]).



BAFLLAA IN ACTION

Lemnos & Lemnos

Just and Equitable: the court did have

“concern with the outcome of this case in so far as the creditor principally to lose out in the case is the Australian Taxation Office and therefore the taxpayers of this land. The question should realistically be asked why the wife should ultimately prosper at the expense of the public purse. The answer so far as I am concerned is that the Family Law Act as it now stands provides for that to be the outcome in appropriate cases. The legislation does not elevate the status of creditors to a ranking above the other considerations which the Court is required to consider under section 75(2)”.

BAFLLAA IN ACTION

Lemnos & Lemnos

 In the end, the wife’s receipt of half of the $2.4m equity was found to be just and equitable.

 Trustee appealed… 34

    

BAFLLAA IN ACTION

Lemnos & Lemnos

[2009] FamCAFC 20 (12 February 2009) On appeal (Coleman, Thackray & Ryan JJ) Basic interpretation of legal principles correct – unsecured creditors do not prevail over non-bankrupt spouse; Discretion miscarried –Coleman – pre-determined the 75(2)(ha) issue, including how the house was acquired; –Thackray, Ryan – undue weight given to wife’s innocence: perhaps relevant to penalties, not primary tax Matter remitted – still yet to be re-heard (H now discharged, and able to make contributions).

BAFLLAA IN ACTION

Lasic & Lasic

[2007] FamCA 837 Background: – 1977: H & W purchase property for $36,000 – 1998: Consent orders for transfer of H’s assets to W – conceded intention to defeat M – 2000: judgment for M against H – bankrupt – 2002: property worth $2,331,934.47

– 2005: proceedings by trustee under s.79A

– W assets of $3.5m at hearing – H owed M $470,000 for debt, interest, costs – Trustee owed $500,000 for fees, costs

BAFLLAA IN ACTION

      

Lasic & Lasic

[2007] FamCA 837 Coleman J critical of absence of evidence from H Wife’s evidence should be viewed with suspicion But no basis for rejecting much of it – no other explanation $250,000 underpaid as at 1998 Indexed by inflation? Total award $319k Payment to Trustee would mean nothing for M “Offensive to notions of justice and equity”

BAFLLAA IN ACTION

    

Lasic & Lasic

[2007] FamCA 837 M not in a position to intervene – 79(10A) 75(2)(ha) considered – the trustee not a “creditor” Trustee may be a person affected under 79(10) Ordered that W pay M direct No recovery for Trustee’s $500,000 fees & costs

BAFLLAA IN ACTION

    

Lasic & Lasic

[2009] FamCAFC 64 On appeal (Boland, Thackray & Ryan JJ) Held no basis for order for payment to creditor direct, once bankruptcy intervened (and since M had not applied under s.79A either) Held TJ had done best he could on the evidence (in the absence of any co-operation from the bankrupt) Held inflation basis of adjusting for the increase in value failed to have regard for the significant increase in value without contribution from either party Matter remitted –

Trustee for the Bankrupt Estate of N Lasic & Lasic

[2010] FamCA 682 (1 July 2010)

BAFLLAA IN ACTION

      

Trustee for the Bankrupt Estate of N Lasic & Lasic

[2010] FamCA 682 (1 July 2010) On rehearing (Stevenson J) W unimpressive, but difficult to identify H contributions in the absence of any evidence from him or any witness on his behalf; also no evidence of his needs Consent orders a ‘dishonest enterprise’ between H & W Orders made in place of consent orders 72.5/27.5 W/T Intervener – F, former solicitor for M; fruits of the action lien – judgment against H. However, orders made that W pay F – property of H transferred to W as part of dishonest purpose W to pay T $1.1 million; W to pay F $170K

41 

BAFLLAA IN ACTION

Conclusion on BAFLLAA

The trustee’s dilemma: – Double costs; – Priority for remuneration and expenses; – – The harder you fight the lower the return; –   Therefore the less weight for the interest of creditors?

Proving the bankrupt’s contributions / needs without co-operation from the bankrupt where any adjustment is to go to creditors?

BAFLLAA IN ACTION

  

Conclusion on BAFLLAA

No dividend estates: – The effect of an order on the ability of a creditor to recover a debt; – What if there is no prospect of creditors being paid a dividend; – What if the effect depends upon the court orders?

Early days – Not looking good for trustees Further case law necessary

BAFLLAA IN ACTION

Conclusion on BAFLLAA:

    Trustees need early advice / early view on merits Trustees in vulnerable position The Superannuation Issue(s)  Give the non-bankrupt spouse the super and the trustee the cash  Trustee access to the non The Separation Issue → bankrupt spouse’s super 43

Forced to the Family Court: The Separation Issue

    BAFLLAA – but what about the happily married bankrupt?

Separation is not a pre-requisite to property settlement proceedings.

But may be an abuse of process.

Private investigators filming marital fidelity?

139ZQ Notices

 139ZQ    139ZR 139ZS 139ZT

139ZQ Notices Part VI, Div 4B, Subdivision J Bankruptcy Act

Official Receiver may demand payment in respect of a void transaction Charge over property Court may set aside a notice Failure to comply – offence (6 months’ gaol) 46

Vale v. Sutherland [2009] HCA 26 Facts

      14 November 1992 Mrs Vale injured in motor vehicle accident 29 September 1994 Mrs Vale sues Mr Vale (and subsequently his insurer) 11 October 1996 statutory declaration that Mrs Vale able to pay her debts 28 September 1998 Mrs Vale instructs solicitor to transfer her interest in 3 properties to Mr Vale. Market appraisal (whole) $540,000 31 March 1999 valuation by valuer (whole) $416,700 23 April 1999 Mrs Vale transfers her interest to Mr Vale for $1

Sutherland v Vale Facts

      15 July 1999 personal injury proceedings dismissed. Mrs Vale ordered to pay insurer’s costs ($152,664.58) 24 April 2001 sequestration order 28 May 2002 s139ZQ notice served on Mr Vale claiming $270,000 (i.e. half of $540,000 not $416,700) 22 June 2002 solicitor wrote to trustee on behalf of Mrs Vale, alleging defects in the notice 19 April 2006 trustee commences proceedings to enforce the charge, and obtain possession 29 May 2006, in addition to filing a defence, cross-claim seeks order that the 139ZQ notice be set aside. No grounds specified.

Sutherland v Vale Federal Magistrates Court

  Lloyd-Jones FM  Heard 16 November 2006 Judgment 2 October 2007 s139ZQ notice set aside  No time limit to bring an application under s139ZS. No prejudice to any party Held the notice: “must not only carefully set out the value of the property but also state the basis for the valuation”

Sutherland v Vale Federal Magistrates Court

   Given valuation challenged, onus on trustee to establish amount of demand equal to the value of the property Only evidence of value was the 2 valuations. Better evidence was the formal valuation – i.e. $208,350 Notice defective because:  referred to ‘registered valuation’ when was really a market appraisal   overinflated value of the property transfer not invalid under s. 120 anyway because had not taken place (23 April 1999) within 2 years of bankruptcy (24 April 2001)

Sutherland v Vale Federal Magistrates Court

   s120: s120(3): 5 years before commencement of bankruptcy defence if solvent and transfer more than 2 years (now, if more than 4 years to a related party) Strict interpretation of s139ZQ notices: cf s260-5 ITAA notices

Sutherland v Vale Full Federal Court

Majority (Gray & Tracey JJ)  Strict interpretation – purpose of s139ZQ is to assist creditors; but has “serious impact” on third parties  Cross-claim seeking to set aside the notice did not plead any basis. None of the errors noted by FM referred to in the defence  Defence acknowledged that the sum of $270,000 was properly payable

Sutherland v Vale Full Federal Court

Majority (cont.)  Errors:  ‘registered valuation’ a nonsense, but not a significant error – “the term is devoid of meaning” and misdescription “of no consequence”  Overstatement of value not put in issue in pleadings or otherwise. Not sufficient evidence to say $270,000 was “a significant error”. Query whether a specific figure required at all, though normally s. 120 allegations will require a valuation

Sutherland v Vale Full Federal Court

Majority (cont.)  Errors:  Insufficient evidence to establish transfer took place more than 2 years prior to bankruptcy  s115 commencement on earliest act of bankruptcy in the 6 months before sequestration order – here probably 26 February 2001 (when bankruptcy notice expired  Transfer not effected until registered (probably 10 June 1999)

Sutherland v Vale Full Federal Court

Majority (cont.)  Errors:   FM wrong to set aside notice But need to determine date of transfer; date of commencement of bankruptcy in order to determine if there was a s120(3) defence  Therefore remit to Federal Magistrate

Sutherland v Vale Full Federal Court

Lindgren J (dissenting)  s306 could excuse the first error – ‘registered valuation’   No error in describing the transfer as occurring “within two years of the bankruptcy” as transfer occurred 10 June 1999 and bankruptcy deemed to commence on 26 February 2001 Contra majority – valuation was in issue before FM. Trustee had failed to establish value of $270,000 market appraisal was “reasonable asking price” not an opinion of value. Therefore only evidence of value was Woods valuation ($208,350)  Therefore notice should be set aside