Transcript Slide 1

Bankruptcy
Presentation to CLC Quarterlies
Alexandra Kelly, Senior Solicitor
Consumer Credit Legal Centre (NSW) Inc
21 February 2011
This presentation is for information only. You must seek legal
advice in relation to any particular circumstances.
Consumer Credit
Legal Centre (NSW)
Credit and Debt Hotline
1800 808 488/ 1800 007 007
Financial Counsellors line
1800 650 084
Insurance Law Service (National)
1300 663 464
Mortgage Hardship Service – casework, intake
via Credit and Debt Hotline
Over 17,000 calls last financial year
Over 500 cases last year
About 4900 referrals to financial counsellors in
the last financial year
Overview
• Bankruptcy Basics (as contained in hand out);
• Recent Amendments to the Bankruptcy Act;
• Recent CCLC Casework issues:
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The rise of Bankruptcy Notices and Creditor’s Petitions to
enforce personal debts – options for debtors;
Bankrupts with mortgages – risks of trying to retain the
house;
Traps for advisers – recent complaints and hindsight
Questions/discussion
Bankruptcy Act 1966 (Cth)
"bankrupt" means a person:
(a) against whose estate a sequestration order
has been made; or (Involuntary)
(b) who has become a bankrupt by virtue of the
presentation of a debtor's petition.
(Voluntary)
A person may be made bankrupt or declare
bankruptcy even where they are “solvent”.
Recent Amendments
• Bankruptcy Legislation Amendment Act 2010
(No.106)
• Schedule 4 Part 1
•
Increase minimum debt to support a Bankruptcy Notice and Creditor’s
Petition from $2,000 to $5,000
• Schedule 4 Part 2
•
Declaration of Intention Stay period change from 7 days to 21 days
Bankruptcy as a debt enforcement tool
• The courts say that the bankruptcy court is not
there to facilitate the collection of debts,
particularly from a debtor who is solvent but
simply refuses to pay: Re Stubberfield (1995)
134 ALR 169
• In 2009-2010 11,196 Bankruptcy Notices were
issued in Australia and the FMC made 2,318
sequestration orders
Bankruptcy as a debt enforcement
tool
Creditors use Bankruptcy as a debt enforcement tool:
a. debt write-off for tax purposes;
b. meet the requirements of a debt insurance policy;
c. cheap enforcement method, given a fee for a
Bankruptcy Notice is $440 it is a relatively economic way
of bring pressure upon a solvent but recalcitrant debtor;
d. hostility between debtor and creditor;
e. investigation into a debtor’s affairs; or
f. closing down an irresponsible debtor.
The A family –case study
The A family migrated to Australia in the early 80’s from Macedonia.
Mr and Mrs A Senior and their son and daughter-in-law (Mr and Mrs A
Junior) jointly owned two units in Sydney.
Mr and Mrs A Senior worked as cleaners and their English skills were poor.
Whilst they understood they own both properties with their son, they had
little understanding they had joint obligations under the mortgage and
property maintenance.
Mr A Junior was out of work due to a back injury and Mrs A Junior received
Centrelink benefits as she cared for their two young children.
Mr A, who had primary responsibility in paying the mortgage, fell behind
on the mortgage and the strata.
In August 2009 a statement of claim was issued and served for the
outstanding rates. After, 28 day judgement was entered against them for
$4,200
Bankruptcy Notice –what do you
do?
2 days after the judgment was entered, a “Bankruptcy Notice”
was issued and subsequently served on Mr and Mrs A Senior
and Junior.
The A’s had 21 days to:
a. Pay or Come to an arrangement.
a. Set aside the bankruptcy notice;
Service of BN
Regulation 16.01
(a) sent by post, or by a courier service, to the person at his or her last-known address; or
(b) left, in an envelope or similar packaging marked with the person’s name and any relevant
document exchange number, at a document exchange where the person maintains a
document exchange facility; or
(c) left, in an envelope or similar packaging marked with the person’s name, at the last-known
address of the person; or
(d) personally delivered to the person; or
(e) sent by facsimile transmission or another mode of electronic transmission:
(i) to a facility maintained by the person for receipt of electronically transmitted
documents; or
(ii) in such a manner (for example, by electronic mail) that the document should, in the
ordinary course of events, be received by the person.
(2) A document given or sent to, or served on, a person in accordance with subregulation (1) is
taken, in the absence of proof to the contrary, to have been received by, or served on, the
person...
Personal service not required, but prudent.
Setting aside a bankruptcy notice
• Technical flaw in the BN (no explicit power in
Act or Rules –general power in s30(1) Act)
– Defect needs to be capable of causing substantial
injustice
– Does not meet an “essential” requirement of the
Act or is one which could “reasonable mislead a
debtor as to what us necessary to comply with the
notice”
– S41(2) BN must be in the form prescribed by the
regs.
Cont.
• S41(5) a notice is not necessarily invalidated if
the amount claimed exceeds the correct
amount due
– E.g. Held to be invalid where notice does not
record the amounts paid by the debtor (St George
Wholesale Finance Pty ltd v Spalla (2001) 181 ALR
682)
– Overstatement generally does not
• Debtor’s solvency is not a factor to resist a BN
Extend time for compliance
• S41(7) establishing Counter-claim, set-off or
cross demand is not technically setting aside
the BN but is an automatic extension of time
• Setting aside the default judgment founding
the BN, and extending time until that
application is heard
• Extending time for compliance with a BN, i.e.
a time to pay application
How?----Form 2
• Must be filed before the 21 days expires;
• Must be accompanied by an affidavit
detailing:
– The date the BN was served; and
– The defect; or
– The Notice of Motion setting aside judgment or steps taken to set
aside the original decision; or
– The reasons needed for further time, such as steps taken to satisfy the
debt; or
– Details of the details of the counter claim, set off or cross demand, the
amount (exceeding the BN amount) and the reason why not previously
raised.
See FMC website for template
Creditor’s Petition
But the A’s did not respond to the BN, so they committed “An
Act of Bankruptcy” .
Between December and January Creditor’s Petitions were
served on all the A’s, a date was set at the FMC.
• Creditor’s petitions need to be “personally served”
• A creditor has 6 months from the date of the act of
bankruptcy to present a petition (serve the petition, apply to
the FC or FMC)
Creditor’s Petition
• A debtor may oppose the petition and file a
notice at least 3 days before the hearing (O77
r11(2))
• At the hearing the Registrar can:
– Adjournment;
– Dismissal;
– Withdrawal;
– Sequestration order.
Resisting a petition
• S52 a petitioning creditor must at the hearing
of a sequestration order prove:
– Matters stated in the petition;
– Service of the petition; and
– That the debt relied on is still owing.
Court has complete discretion as to whether to
make an order.
- Solvency of debtor
- “other sufficient cause” (v. broad i.e. Can argue
anything)
“other sufficient cause”
• Judgment founding the petition entered by
default: re marsh (1991) 32;
• Cross demand or set off;
• Debtors lack of assets mean it is futile;
• Technical flaws of BN;
• A notice of motion to pay by instalments was
obtained before the act of bankruptcy;
• Solvent, but unwilling to pay (more then
assets)
Sufficient cause cont
• Going behind the judgment
– Substantial reasons;
– Default judgment;
– Fraud;
– Grounds for appeal or setting aside the judgment
The A’s continued
But, the A’s did not show up to the Petition Hearing.
In February 2010, the A’s were made bankrupt by sequestration by the
Registrar of Federal Magistrates Court in their absence. At this stage the
debt was $5,000
They received the statements of affair in the post and were contacted by
the trustee
16 days after the orders, they knocked on CCLC’s door
After the Sequestration Order
• Once bankrupt, a debtor’s bankruptcy will be ended by either discharge or
an annulment. Annulments may be obtained in several ways:
• • Section 74 – When a bankrupt proposes a composition or scheme of
arrangement for settlement of all of their debts with their creditors, and it
is accepted by creditors (a majority in number and at least 75% in value of
the creditors voting), the bankruptcy is immediately annulled.
• • Section 153A – Where the bankrupt pays all of their debts in full,
including the costs of the administration and the remuneration of the
trustee, the bankruptcy is annulled on the date that the final payment is
made.
• • Section 153B – If the court is satisfied that a sequestration order should
not have been made or a debtor’s petition should not have been
presented or accepted by the Official Receiver, then the court may make
an order annulling the bankruptcy.
Sequestration Order’s set aside
• Application for Review of Registrar’s decision
• Must be filed within 21 days of the decision or
seek an order extending time
• 7 days before the hearing the debtor must:
– notify all creditor’s by Form 12 (the petitioning
creditor, the ATO, credit cards, mortgage
providers)
Setting aside sequestration orders
• Before the hearing the debtor should:
– Pay the debt
– Initiate proceedings setting aside default
judgment
– Complete their statement of affairs
– Request/warn the Trustee not to incur further
costs
The A’s—an expensive lesson
• The A’s paid the original judgment
• The costs as agreed of the Trustee $3,000
• The costs of the petitioning creditor for the
Creditor’s Petition and the costs of the
application as agreed or taxed
• In total, the A’s paid $11,000. The original
strata levy debt, was $2,000.
Saving the Family Home
• Debt Agreements: Pros and cons
– Debt Agreement administrators are motivated for the fee
remuneration and may not make a workable solution for
the debtor
– Administrators mislead debtors – “government interest
free loan”
– Still has some of the cons of b/r – NPII listing , cra for 7
years
– If a debt agreement fails, need an order of the court or
wait 6 months to apply for b/r prolongs inevitable
Pros
• If Debt Agreement suitable, i.e. Significant
equity in property, repayments that are
affordable and will pay of the debts in a short
period of time then may work for some
people
Saving the family home:
Bankruptcy
• “deal with the trustee” either before, during
or after discharge from bankruptcy
– A secured creditor is able to realize an asset, but
prohibited unless other default
• A trustee has a wide discretion to accept a
sum of money in consideration for the sale of
property (s134(aa))
When will a trustee exercise the
discretion
• where there is little or no equity -- a cost
benefit analysis is undertaken, generally
speaking it costs $10,000 to realize a secured
asset therefore unless an amount above that
can be realised a trustee may offer the debtor
or a non-bankrupt co-owner to “purchase the
equity”;
Cont.
• A debtor may:
– Borrow from a family member;
– Save an amount from income to offer a lump sum;
– Make an agreement to pay it over time.
Risks for the debtor
• Must be able to maintain the payments to the
mortgage
• Must be able to comply with the terms of the
agreement, i.e. Pay the lump sum
• Risk if deal not done early, that property value will
increase and the deal will be off
• If the money is borrowed from a third party, they
may have an equitable interest in the property or
tranferred the title of the property
Caseworker pitfalls
• Advising bankruptcy where:
– Main debt is not-provable
– False belief the property is protected – proceeds
of personal injury
– Asset, such as home or interest in property
– Debtor likely to receive inheritance
– Family law
Family law and bankruptcy
• Cummins principle
Irrespective of whose name or names is
registered in, unequal contributions to it’s
acquisition, only one spouse received the
benefit from borrowing against it is owned
50:50 by the spouses
Family law
• Where there were family law proceedings and
bankruptcy proceedings whichever court
made the first order was binding;
• If bankruptcy occurs first, assets vests to the
trustee
• Amendments to the b/r act in 2005 mean that
the non-bankrupt spouse can apply to the
Family Court for orders that will bind the
trustee
Questions
• Resources:
• www.itsa.gov.au
• www.fmc.gov.au