Bankruptcy Act 1966 Essay: What Happens When You File For Bankruptcy?

What Really Happens When You File For Bankruptcy?

What Are The Consequences Of Bankruptcy?

Act of bankruptcy and its consequences

Dennis Sharp has received bankruptcy notice from the Australian Taxation Office (ATO) which claimed due taxes of $1,425,950.75. It became clear that Dennis has transferred business assets to Uruguay. In addition, Dennis and his wife were seen loading a van with furniture from their home in the night. 

According to Section 40 (1) of Bankruptcy Act, 1966, when a debtor commits an act of bankruptcy if in Australia or anywhere else, an individual makes transfer, settlement or disposition of the property for the benefit of creditors, and if they become bankrupt, are considered as void against the trustees (Commonwealth of Australia, 2016). In addition, subsection 1(c) of Section 40 of the same Act states that when such an act is done with an intention to defeat or delay their creditors, when they departs from Australia, which is their usual place of business.

As per Section 40 of the Act, it is evident that after receiving the bankruptcy notice from the ATO of dues of taxes, Dennis was still transferring his business property to Uruguay in South America. It means, he was shifting his business to South America without paying dues to ATO.

According to Section 43 which is about jurisdiction to make appropriation orders, its subsection 1 states that when a debtor commits an act of bankruptcy while residing in Australia and was carrying on business in Australia, the Court can make sequestration order against the property of the debtor on the petition of creditor (Australian Financial Security Authority, 2016). After making the sequestration order against the estate of the debtor, he or she can only be discharged under subsection 149(1) or bankruptcy could be annulled under subsection 74(1) or 153A(1) or 153B.

So, it is advised to the ATO to take the matter to the court for further assistance by the court as the debtor i.e. Dennis has left the country without clearing his debts and ATO has the right to take them to the court as they have absconded from the country and started residing at Monte Carlo in France.

Dennis has been arrested and imprisoned in Uruguay for fraud. Under Section 29 (2) of the Bankruptcy Act, 1966, all the courts having jurisdiction authority in matters of bankruptcy, can act as auxiliary to each other in case of courts in external territories as well.  In addition, subsection 2(b) of Section 29 states that in the matters of bankruptcy, the court can act as the auxiliary to the courts of other countries having jurisdiction regarding the matters of bankruptcy.

Sequestration order and its discharge or annulment

When Dennis has been arrested and imprisoned in Uruguay for fraud, the matter taken to the court of Australia can be extended to the relevant court in Uruguay (Waltzer Law Group, 2009). However, as per subsection 4 of Section 29 of the Act, the court of Australia will have to send a letter of request to the court of external territory i.e. to the relevant court of Uruguay to act as an auxiliary to it for the bankruptcy matter (ASFA, 2016). The court of Uruguay will deal with the matter on behalf of court of Australia and take the matter of bankruptcy into consideration.

Dennis has been declared bankrupt on the petition of ATO and his trustees want to examine Georgia but she does not want to return back to Australia from the Monte Carlo. The trustees of Dennis want to examine Georgia under Section 81 of the Act, which is about discovery of bankruptcy property. Subsection (1) of Section 81 states that when an individual becomes bankrupt, the court or registrar can summon the relevant person or examinable person related to the debtor for examination regarding the matter of bankruptcy (Office of Parliamentary Counsel, 2017). However, it requires the application on behalf of creditors, trustees or the Official Receiver (Money Help, 2018).

If trustees want to examine Georgia regarding the matter of bankruptcy, they need to apply to the court or the Registrar and then only, they can call Georgia for examination fro the matter of bankruptcy because she is examinable being related person to the debtor i.e. wife of Dennis (Rhode, 2016). In addition, subsection (1A) provides that when a summon is provided to the examinable person by the court or the registrar, it requires the examinable or summoned person to be there at a specified place, time and day that are reasonable in such circumstances and what is suitable to the court or the registrar (lawyers.com, 2018). So, in this case, the court or the registrar should decide the suitable place and if court or the registrar wants the debtor or the related person to come to the place they desire, the debtor or the examinable person will have to come there and present all the related documents as desired by the related authority.   

Thus, after declaration of bankruptcy by the ATO, Dennis has been held bankrupt and his wife can be examined by the trustees if they apply for the same to the court or registrar. If she does not want to return back to Australia from the Monte Carlo, she should discuss the matter with the Court or registrar and if they find it suitable to examine her while she remain in Monte Carlo, it will be their decision, but if they want her to come back to Australia for proper examination for the matter of bankruptcy, she will have to come back to be examined (Wong, 2016).  

Auxiliary jurisdiction and its necessary process

A person is said to be bankrupt if he or she has been declared bankrupt on the basis of the provisions of the Bankruptcy Act 2016 and has not yet been discharged from the charges or allegations of bankruptcy. Australian Financial Security Authority (AFSA) looks after the matter of registration of the bankruptcy (ASIC, 2013). According to the Section 125 of the Bankruptcy Act 1966 the estate of the bankrupt is administered by the official trustee and also obliges the bank or any co-operative society to notify the trustee about the bankruptcy. This is done in order to let the trustee know that any further payments form the bankrupt’s account cannot be processed without the prior permission of court. It has been seen that most of the bankrupt’s assets are administered by the official trustee (AFSA, 2009). Trustee is a person that holds legal rights to the property of another person. It requires a great deal of responsibilities to perform the task of a trustee. The roles and responsibilities of a trustee are clearly mentioned in the Insolvency Practice Rules (Bankruptcy) 2016 as well as the Bankruptcy Act 1966 (Elder Law Answers, 2014). The trustee undertakes the activity of investigating the estate of the bankrupt as well as the investigation of other financial affairs of the same. These investigations are reported to the Insolvency and Trustee Service Australia (ITSA). The trustee determines the property of the bankrupt so that it can be realized in order to pay the dividends to the creditors (Solvency Accountants, 2018).

Charles Dacot has left Australia and has started to live in Dusseldorf, Germany. The trustee has all the possible rights to forfeit his property and take necessary actions so that the creditors can be repaid from the amount realized from the property forfeited. According to the Australian Laws, if the bankrupt person is traveling overseas then he or she needs to take the permission of the trustee. In order to travel overseas it is important to get the consent of the trustee in writing. According to Section 272 of the Act this law is applicable to those bankrupts whose estates are administered by a trustee in bankruptcy. It is also important to mention a legitimate reason for overseas travel to the trustee. It is also important that while taking the permission from the trustee, the bankrupt needs to be present in Australia (AFSA, 2013). In this case as Charles has not taken any prior permission from his trustee Amanda Ganesh, he is clearly at fault and has committed an offense. The trustee has all the rights to sell off the assets of the bankrupt including their house and property. All the assets need to be declared in front of the trustee at the time of declaring bankruptcy (AFSA, 2018).

Examination of related persons under Section 81

On the basis of the Australian law the trustees have a discretion over the decision of the bankrupts that whether they can travel overseas or not. No legislative prohibition has been developed against the bankrupts that want to leave the country. So, Charles has all the rights to leave the country but, he needs to take the permission of his trustee that whether he can leave or not. According to the Section 77 of the Bankruptcy Act 1966, the bankrupt is liable to surrender his passport to his trustee (Worrells, 2012). After the application of the trustee the court comes into picture and takes the possession of the property of the bankrupt. This should be practiced by the trustee of Charles and Court should be applied for the possession of the property of Charles in Australia (Australian Government, 2017).

A bankrupt person needs to repay his debt either by selling off his assets or by earning income and then paying off his debts. Being bankrupt directly impact the income as well as the employment of the person. It is the duty of the bankrupt to keep the trustee updated about the changes in his income and any new employment (Australian Government, 2016). Any changes in the income level, unemployment or new job should be informed to the trustee. The main reason behind this is that if the trustee finds out about the income he will ask to contribute a certain amount for the repayment of debts. Contribution is the compulsory payments that needs to be deducted from the bankrupt’s income. The compulsory payments include 50 per cent of the amount that are earned by the bankrupt above the income threshold. This amount is calculated by the trustee (AFSA, 2016).

A bankrupt has no restriction on earning income by being employed according to the Bankruptcy Act 1966. According to the Bankruptcy Act 1966, the trustee on the basis of the formula mentioned in the Act decides over the contribution that needs to be paid by the bankrupt. The formula is:

Section 139L of the Bankruptcy Act 1966 and the 6.12C of the Banking Regulation has defined income in a detailed manner. According to this income includes termination payments, fringe benefits, loan repayments, non-cash benefits from person other than employer, money received by an entity or company for services delivered, tax refunds, allowances in the form of additional income, withdrawals from business, superannuation payments as well as other payments as determined by the trustee. Amount received for the support of child or as maintenance amount is not included in the assessable amount. Charles receives $15000 per month in Germany. Charles claims that this amount is being given by his ex-father-in-law for the support of his child’s education. Hence, it can be said that this is not an income to Charles and therefore this amount cannot be used for the purpose of repayment to the creditors. This is so because according to the Bankruptcy Act 1966, the assessable income of the bankrupt on which the formula is applied does not include the amount received for child support. Child Support (Registration and Collection) Act 1988 also supports this statement (AFSA, 2008).

Property of bankrupt and its administration by trustees

On the basis of the above discussed facts it is clear that the trustee has no role to play over the amount received by Charles on a monthly basis.

Conclusion

It can be concluded that the trustee Amanda Ganesh can sell off the property of Charles Dacot in Australia as she has the right upon the assets of the bankrupt and can use this amount to help the bankrupt to repay his debt. The amount being received by Charles cannot be taken over by the trustee as this amount comes for Charles child’s education purpose and hence, the amount cannot be considered as an income to Mr. Charles.

References

AFSA, 2008. Official Trustee Practice Statements 1 Income Contributions. [Online] Available at: https://www.afsa.gov.au/sites/g/files/net1601/f/otps1.pdf [Accessed 03 September 2018].

AFSA, 2009. Application of section 125 of the Bankruptcy Act where an estate is administered by the Official Trustee. [Online] Available at: https://www.afsa.gov.au/sites/g/files/net1601/f/otps2.pdf [Accessed 03 September 2018].

AFSA, 2013. OTPS3 – Overseas travel in bankrupt estates administered by the Official Trustee. [Online] Available at: https://www.afsa.gov.au/sites/g/files/net1601/f/otps3-0715.pdf [Accessed 2018].

AFSA, 2016. How does bankruptcy affect my income and employment? [Online] Available at: https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts/how-does-bankruptcy-affect-my-income-and-employment [Accessed 03 September 2018].

AFSA, 2018. What are the consequences of bankruptcy? [Online] Available at: https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts/what-are-consequences-bankruptcy [Accessed 2018].

ASFA, 2016. What is bankruptcy? [Online] Available at: https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts/what-bankruptcy [Accessed 3 Sepetember 2018].

ASIC, 2013. Bankruptcy and personal insolvency agreements. [Online] Available at: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/bankruptcy-and-personal-insolvency-agreements/ [Accessed 03 September 2018].

Australian Financial Security Authority, 2016. Financial assistance and bankruptcy. [Online] Available at: https://www.afsa.gov.au/insolvency [Accessed 3 Sepetember 2018].

Australian Government, 2016. Bankruptcy and employment. [Online] Available at: https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts/how-does-bankruptcy-affect-my-income-and-employment/bankruptcy-and-employment [Accessed 03 September 2018].

Australian Government, 2017. Bankruptcy Act 1966. [Online] Available at: https://www.legislation.gov.au/Details/C2017C00197 [Accessed 03 September 2018].

Commonwealth of Australia, 2016. What are the consequences of bankruptcy? [Online] Available at: https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts/what-are-consequences-bankruptcy [Accessed 3 September 2018].

Elder Law Answers, 2014. A Brief Overview of a Trustee's Duties. [Online] Available at: https://www.elderlawanswers.com/a-brief-overview-of-a-trustee39s-duties-3600 [Accessed 03 September 2018].

lawyers.com, 2018. Who Pays for a Bankruptcy? [Online] Available at: https://www.lawyers.com/legal-info/bankruptcy/consumer-bankruptcy/who-pays-for-a-bankruptcy.html [Accessed 3 September 2018].

Money Help, 2018. Going Bankruot. [Online] Available at: https://www.moneyhelp.org.au/your-debt-options/going-bankrupt/ [Accessed 3 Sepetember 2018].

Office of Parliamentary Counsel, 2017. Insolvency Practice Rules (Bankruptcy) 2016. Canberra.

Rhode, S., 2016. Here Is Exactly Why People Who File Bankruptcy Are Smart. [Online] Available at: https://www.huffingtonpost.com/steve-rhode/here-is-exactly-why-peopl_b_7695826.html [Accessed 3 September 2018].

Solvency Accountants, 2018. What is the Function of a Trustee in Bankruptcy? [Online] Available at: https://smsolvency.com.au/personal-insolvency/what-is-the-function-of-a-trustee/ [Accessed 03 September 2018].

Waltzer Law Group, 2009. How does bankruptcy work? [Online] Available at: https://waltzerlawgroup.com/how-does-bankruptcy-work/ [Accessed 3 September 2018].

Wong, K., 2016. What Really Happens When You File for Bankruptcy. [Online] Available at: https://twocents.lifehacker.com/what-really-happens-when-you-file-for-bankruptcy-1781919974 [Accessed 3 Septembeer 2018].

Worrells, 2012. A Bankrupt is not locked into living in Australia. [Online] Available at: https://worrells.net.au/newsletter-articles/a-bankrupt-is-not-locked-into-living-in-australia/ [Accessed 03 September 2018].