INSOLVENCY LECTURE 5 QUESTIONS WINTER 2010 LAW EXTENSION COMMITTEE

QUESTION RE SECTION 40(1)(b) Section 40(1)(b) provides that a debtor commits an act of bankruptcy if in Australia or elsewhere: (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.

QUESTION RE SECTION 40(1)(b) The question: How is it ascertained which property would be void as against the trustee for this Section? Do we go to Sections 120, 121, 122 for this definition? This seems like a lot of work for the court at that point in time. The phrase “void against the trustee” does direct attention to Sections 120, 121 and 122. To establish a void transaction as an act of bankruptcy, it would be necessary for the petitioning creditor to prove all that the trustee would have to prove if a transaction was challenged under one of these Sections.

QUESTION RE SECTION 40(1)(b) It would be a lot of work for both the court and the petitioning creditor, but it has been done in relation to Section 122 (void preferences). While the argument was not always successful, the High Court has recognised in three cases that giving a void preference is capable of being an act of bankruptcy upon which a petition can be founded: –Burns v Stapleton (1959) 102 CLR 97 –Radio Corporation Pty Limited v Bear (1961) 108 CLR 414 –Robert Reid Pty Limited v Cassidy ( ) 114 CLR 558 The trustee was the person challenging the void preference, but in addition tried to show that the preference was itself an act of bankruptcy, so as to extend the relation-back period.

QUESTION RE BURDEN OF PROOF Question: In relation to Sections 120, 121 and 122 (transfers void against the trustee) does the burden shift to the trustee and then to the transferee to rebut the relevant presumption in the Sections? Section the trustee bears the onus of proving that the transaction is undervalued. Section 120(3) provides that a transfer is not void against the trustee if the relevant transferee proves that, at the time of the transfer, the transferor was solvent. The burden of proving the issue of solvency (which may provide a defence) rests on the transferee. Section 120(3A) provides for a rebuttable presumption of insolvency. The trustee has the benefit of this rebuttable presumption and the burden lies upon the transferee to rebut the presumption of insolvency.

QUESTION RE BURDEN OF PROOF In summary, the trustee bears the burden of proving an undervalued transaction under Section 120, but the burden shifts to the transferee to prove a defence relating to solvency.

QUESTION RE BURDEN OF PROOF Section the trustee bears the burden of proving that the transferor’s main purpose in making the transfer was to defeat creditors. The main purpose can be inferred from all the circumstances, including that the transferor was or was about to become insolvent - Section 121(2). Section 121(4) provides a “defence” if the transferee gave market value consideration, did not know the main purpose and did not know of the insolvency - in this regard there is an “evidentiary onus” upon the transferee. Who else is going to call this evidence? There is a rebuttable presumption of insolvency contained in Section 121(4A). The trustee has the benefit of this rebuttable presumption of insolvency and it is up to the transferee to call evidence to rebut it.

QUESTION RE BURDEN OF PROOF Section the trustee bears the onus of proving that the transfer had the effect of giving a creditor a preference. Section 122(2) provides for “defences” including purchaser in good faith for market value. The burden of proving this specifically lies upon the transferee - Section 122(3). Section 122(4)(c) contains a deeming provision. The trustee bears the onus of proving the matters which will lead to the deeming taking effect.

QUESTION RE PROTECTION OF SUCCESSORS IN TITLE - SECTION 120(6) Question: Does the trustee refund the price paid by an innocent third party, or if the property is passed to an innocent third party does that mean the trustee cannot obtain the property. The trustee attacks a transfer of property by a person who later becomes a bankrupt - Section 120(1). If the property has been transferred by the bankrupt and is still held by the original transferee, then if the trustee proves an undervalued transaction, the trustee obtains the property but is obliged to pay to the transferee the value of any consideration which the transferee gave for the transfer - Section 120(4). However, if the transferee has onsold to a third party, who has acquired in good faith and by paying market value, that transfer cannot be attacked and the title of the innocent third party is secure - Section 120(6).

PREFERENCES AND PRE-PAYMENT Section 122(1) provides: (1) A transfer of property by a person who is insolvent (the debtor) in favour of a creditor is void against the trustee in the debtor’s bankruptcy if the transfer: (a) had the effect of giving the creditor a preference, priority or advantage over other creditors; and (b) was made in the period that relates to the debtor, as indicated in the following table …….. The question was: If the client of an accountant pre-pays for accountancy services, and shortly afterwards becomes bankrupt, would the pre-paymant be void as a preference?

PREFERENCES AND PRE-PAYMENT In the case of an up front payment the unfair preference section does not apply because there is a prepayment, not a payment to an existing creditor for past services advantaging that person. In the High Court case of Burns v Stapleton (1959) 102 CLR 97 a debtor agreed to provide security over his property to a creditor in return for an advance.Burns v Stapleton Security was provided for $5, 465, being an existing debt of $465 and a new advance of $5,000. The High Court held that there was a preference of only $465. The $5,000 transaction affected the future, the $465 transaction preferred the repayment of an existing debt. See also the article at

HOW DOES TRUSTEE REGAIN POSSESSION OF PROPERTY? The question was:If the bankrupt has disposed of property between the commencment of the relation back period and the making of the sequestration order, how does the trustee get it back? The trustee can bring procedings against the transferee seeking a declaration that the property has vested in the trustee and also seeking an order that it be re-conveyed or re-delivered to the trustee. The power of the court to make such orders is found in s 129 [next slide]s 129 Note that many such transfers would be exempt anyway under s 123.s 123

129 TRUSTEE TOTAKE POSSESSION OF PROPERTY OF BANKRUPT (1)The trustee shall forthwith take possession of all the property of the bankrupt capable of manual delivery, including all deeds, books and documents of the bankrupt. (2)The Court may, on the application of the trustee, enforce possession accordingly. (3)A person is not entitled, as against the trustee, to withhold possession of the books of account or any papers or documents of the bankrupt relating to the accounts or to any of the examinable affairs of the bankrupt or to claim any lien on any such papers or documents. (4)If a person has in his or her possession or power any moneys or security that he or she is not by law entitled to retain as against the bankrupt or the trustee, he or she shall pay or deliver the moneys or security to the trustee.

IS THERE AN ERROR AT KEAYS 29? The question: At Keays 29, the timeline posits an act of bankruptcy on 23 March However the previous sentence says: “in the following example the commencement of the bankruptcy is 24 March 2006”. Why would it start the day after? In s 5 “the commencement of the bankruptcy”, in relation to a bankrupt, means the time at which his or her bankruptcy is, by virtue of section 115, to be deemed to have commenced. S 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. Thus the bankruptcy is deemed to have commenced at the time of commission of the act of bankruptcy.

IS THERE AN ERROR AT KEAYS 29? The Acts Interpretation Act 1901 applies to all Commonwealth Acts - s 2.s 2 S 36(1) of the Acts Interpretation Act 1901 provides:S 36(1) (1) Where in an Act any period of time, dating from a given day, act, or event, is prescribed or allowed for any purpose, the time shall, unless the contrary intention appears, be reckoned exclusive of such day or of the day of such act or event. The bankruptcy is a “period of time” which is reckoned to have commenced by reference to “a given day, act, or event” being the commission of the act of bankruptcy. In the case of a bankruptcy notice, payment is required by a certain day. The debtor has all of that day (right up until midnight) to pay. Thus the act of bankruptcy which occurs on 23 March 2006 occurs at the last instant of 23 March S 36(1) means that “the commencement of the bankruptcy”, which is a period of time “dating from a given day, act, or event” (i.e. the commission of the act of bankruptcy) starts from the next day (in the Keays example - 24 March 2006), since no “contrary intention” appears in the Bankruptcy Act.

IS THERE AN ERROR AT KEAYS 29? So there is no error in Keays - the author is speaking of two different concepts with two different dates: 23 March 2006 is the date of the commission of the act of bankruptcy (albeit at the last instant of 23 March 2006); and 24 March 2006 (at the first instant of the new day) is the commencement of the bankruptcy - a defined phrase under s 5.