1. 1 INSOLVENCY LECTURE 8 LAW EXTENSION COMMIT TEE

2. 2 THIS LECTURE Creditor’s petitions Debtor’s petitions Course of a hearing Vesting in the trustee Effects of bankruptcy

3. 3 TYPICAL SEQUENCE OF EVENTS Court judgment Issue and service of bankruptcy notice Failure to comply = act of bankruptcy Court makes sequestration order Presentation of creditor’s petition Court hearing

4. 4 CREDITOR’S PETITIONS INTRODUCTION If a debtor is unable to pay a creditor, or has refused to pay, the creditor may attempt to recover the debt by a variety of remedies - including initiating proceedings to bankrupt the debtor. Such proceedings are commenced by the creditor “presenting” (i.e. filing) an application to the court called a “creditor's petition” and that petition will seek the sequestration of the debtor's estate, which will cause bankruptcy. A creditor has six months from the date of the act of bankruptcy in which to present a petition (s.44(1)(c)); that time cannot be extended. The jurisdiction to make sequestration orders is set out in section 43 of the Bankruptcy Act.section 43 If the court makes a sequestration order, then the debtor becomes bankrupt and the trustee will take over the estate (I.e. the property) of the bankrupt and administer it for the benefit of unsecured creditors.

5. 5 CREDITOR’S PETITIONS – JURISDICTION BANKRUPTCY ACT SECTION 43 Jurisdiction to make sequestration orders (1) Subject to this Act, where: (a) a debtor has committed an act of bankruptcy; and (b) at the time when the act of bankruptcy was committed, the debtor: (i) was personally present or ordinarily resident in Australia; (ii) had a dwelling-house or place of business in Australia; (iii) was carrying on business in Australia, either personally or by means of an agent or manager; or (iv) was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager; the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.

6. 6 CONDITIONS ON WHICH CREDITOR MAY PETITION BANKRUPTCY ACT SECTION 44 Conditions on which creditor may petition (1) A creditor's petition shall not be presented against a debtor unless: (a) there is owing by the debtor to the petitioning creditor a debt that amounts to $5,000 or 2 or more debts that amount in the aggregate to $5,000, or, where 2 or more creditors join in the petition, there is owing by the debtor to the several petitioning creditors debts that amount in the aggregate to $5,000; (b) that debt, or each of those debts, as the case may be: (i) is a liquidated sum due at law or in equity or partly at law and partly in equity; and (ii) is payable either immediately or at a certain future time; and (c) the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition.

7. 7 SECURED CREDITORS WHO PETITION – S.44 (2) Subject to subsection (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security. (3) A secured creditor may present, or join in presenting, a creditor's petition as if he or she were an unsecured creditor if he or she includes in the petition a statement that he or she is willing to surrender his or her security for the benefit of creditors generally in the event of a sequestration order being made against the debtor. (4) Where a petitioning creditor is a secured creditor, he or she shall set out in the petition particulars of his or her security. (5) Where a secured creditor has presented, or joined in presenting, a creditor's petition as if he or she were an unsecured creditor, he or she shall, upon request in writing by the trustee within 3 months after the making of a sequestration order, surrender his or her security to the trustee for the benefit of the creditors generally. (6) A secured creditor to whom subsection (5) applies who fails to surrender his or her security when requested to do so by the trustee in accordance with that subsection is guilty of contempt of court.

8. 8 CREDITOR’S PETITIONS AGAINST MORE THAN ONE DEBTOR SECTION 45 Creditor's petition against partnership (1) A creditor of a partnership may present a petition against the partnership if he or she is entitled to present a petition against any one of the members of the partnership in respect of a partnership debt. (2) A creditor who is entitled to present a petition against a partnership may present a petition against any of the members of the partnership without including the others. SECTION 46 Petition against 2 or more joint debtors (1) A creditor's petition may be presented against 2 or more joint debtors, whether partners or not. (2) Where there are 2 or more respondents to a creditor's petition, the Court may make a sequestration order against one or more of them and dismiss the petition in so far as it relates to the other or others.

9. 9 REQUIREMENTS AS TO CREDITOR’S PETITIONS BANKRUPTCY ACT SECTION 47 Requirements as to creditor's petition (1) A creditor's petition must be verified by an affidavit of a person who knows the relevant facts. (1A) If the rules of court prescribe a form for the purposes of this subsection, the petition must be in the form prescribed. (2) Except with the leave of the Court, a creditor's petition shall not be withdrawn after presentation.

10. 10 FORMALITIES FEDERAL COURT (BANKRUPTCY) RULES - RULE 4.02 Requirements for creditor's petition and supporting affidavit (Bankruptcy Act s 47) (1) A creditor's petition must be in accordance with Form 6. [see Course Notes] (2) The affidavit verifying the petition required by subsection 47(1) of the Bankruptcy Act may be in accordance with the affidavit set out in Part 2 of Form 6. (3) The petition must be accompanied by: (a) sufficient copies of the petition for service and proof of service; and (b) if the affidavit verifying the petition is not included in the petition in accordance with Part 2 of Form 6--an affidavit of a person who knows the relevant facts verifying the petition; and (c) if appropriate, the affidavits required by rule 4.04. (4) If the petition is accompanied by an affidavit of a person who knows the relevant facts verifying the petition in accordance with paragraph (3)(b), a copy of the petition must be attached to the affidavit.

11. 11 FORMALITIES – ADDITIONAL FEDERAL COURT (BANKRUPTCY) RULES 2005 - RULE 4.04 Creditor's petition founded on failure to comply with bankruptcy notice (1) If a creditor's petition is founded on an act of bankruptcy mentioned in paragraph 40(1)(g) of the Bankruptcy Act, the petition must be accompanied by: (a) an affidavit stating: (i) that the records of the Court and the records of the Federal Circuit Court have been searched and no application in relation to the bankruptcy notice has been made; or (ii) that an application was made in the Court or in the Federal Circuit Court, as applicable, for an order setting aside the relevant bankruptcy notice and the application has been finally decided; or (iii) that an application was made in the Court or in the Federal Circuit Court, as applicable, for an order extending the time for compliance with the bankruptcy notice and the application has been finally decided; and (b) an affidavit of service of the relevant bankruptcy notice. (2) If an application mentioned in subparagraph (1)(a)(ii) or (iii) was made, a copy of the order finally deciding the application must be attached to the affidavit required by paragraph (1)(a).

12. 12 FORMALITIES – DOCUMENTS TO BE SERVED FEDERAL COURT (BANKRUPTCY) RULES 2005 - RULE 4.05 Unless the Court otherwise orders, at least 5 days before the date fixed for the hearing of a creditor's petition, the applicant creditor must serve on the respondent debtor: (a) the creditor's petition; and (b) a copy of the affidavit, or affidavits, verifying the petition required by subsection 47(1) of the Bankruptcy Act; and (c) if applicable, a copy of the affidavit required by paragraph 4.04(1)(a); and (d) if applicable, a copy of the affidavit of service of the bankruptcy notice required by paragraph 4.04(1)(b); and (e) a copy of any consent to act as trustee filed under section 156A of the Bankruptcy Act.

13. 13 FORMALITIES – ADDITIONAL AFFIDAVITS TO BE FILED BEFORE HEARING FEDERAL COURT (BANKRUPTCY) RULES 2005 - RULE 4.06 Additional affidavits to be filed before hearing (1) Before the hearing of a creditor's petition, the applicant creditor must file the affidavits required by this rule. (2) The applicant creditor must file an affidavit that: (a) states that the documents required to be served under rule 4.05 have been served and when and how they were served; and (b) has attached to it a copy of the documents that were served and proof of service in relation to the documents. (3) The applicant creditor must file an affidavit of a person who has searched, or caused a search to be made, in the National Personal Insolvency Index no earlier than the day before the hearing date for the petition that: (a) sets out the details of any references in the Index to the debtor; and (b) states that there were no details of a debt agreement, about the debt on which the applicant creditor relies, in the Index: (i) on the day when the petition was presented; and (ii) on the day when the search was made; and (c) has attached to it a copy of the relevant extract of the Index.

14. 14 FORMALITIES – ADDITIONAL AFFIDAVITS TO BE FILED BEFORE HEARING (4) The applicant creditor must file an affidavit of a person who knows the relevant facts that: (a) was sworn as soon as practicable before the hearing date for the petition; and (b) states that each debt on which the applicant creditor relies is still owing. (5) The applicant creditor must file a search affidavit if the debt stated in the petition is an amount payable to the applicant creditor under a judgment of a court that ordered the amount to be paid into the court. (6) In subrule (5): "search affidavit ", in relation to a petition stating a debt ordered to be paid into a court, means an affidavit of a person who has searched in the proper office of the court, not earlier than the day before the hearing date for the petition, stating whether the amount of the debt, or part of that amount, has been paid as ordered.

15. 15 SERVICE OF A CREDITOR’S PETITION The petition, verifying affidavits and consent (if any) must be served on the debtor. Service must be proved as a fact Personal service proved by an affidavit of a process server is the best form of service Petitions can be served in accordance with Reg 16.01 An order for substituted service can be made under section 309(2). Service must be effected not less than 5 days before the hearing –FCBR 4.05. If there is a dispute as to whether there has been valid service, this is a factual issue upon which evidence will be heard.

16. 16 OPPOSITION TO A CREDITOR'S PETITION FEDERAL COURT (BANKRUPTCY) RULES 2005 - RULE 2.06 Opposition to application, interim application or petition (1) In this rule: "application " includes an interim application. (2) A person who intends to oppose an application or petition must, at least 3 days before the date fixed for the hearing of the application or petition or, with the leave of the Court, at the hearing: (a) file a notice of appearance in accordance with Form 4; and (b) file a notice in accordance with Form 5 stating the grounds of opposition; and (c) file an affidavit in support of the grounds of opposition; and (d) serve the notices and supporting affidavit on the applicant.

17. 17 CHANGE OF PETITIONERS BANKRUPTCY ACT 1966 - SECT 49 Change of petitioners Where a creditor's petition is not prosecuted with due diligence or where for any other reason the Court considers it proper to do so, the Court may permit to be substituted as petitioner or petitioners another creditor or other creditors to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor, and the petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditor. The substituting creditor must be a person whose debt was in existence at the time of the act of bankruptcy alleged in the petition – McNamara v Langford (1931) 45 CLR 267

18. 18 PROCEEDINGS ON A CREDITOR’S PETITION BANKRUPTCY ACT 1966 - SECT 52 Proceedings and order on creditor's petition (1) At the hearing of a creditor's petition, the Court shall require proof of: (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b) service of the petition; and (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. NOTE THE DISCRETION – “MAY”

19. 19 DISMISSAL OF A CREDITOR’S PETITION Apart from any issue of discretion, the court may dismiss the petition because it is technically deficient. The debtor has the onus of proving that there is sufficient cause for a sequestration order not being made. Usually the major defence is that there is some fatal flaw in the bankruptcy notice eg an omission or defect in the form, or defect in its execution or its service. A petition presented more than six months after the date of the act of bankruptcy is flawed and must be dismissed, as must a petition claiming a debt of less than $5,000. If the bankruptcy notice is defective, the petition must be dismissed as there is no act of bankruptcy on which to found it and the court has no jurisdiction to proceed.

20. 20 THE DEBT: GOING BEHIND THE JUDGMENT A court hearing a creditot’s petition can “go behind” the judgment on which the creditor relies in order to ascertain whether the judgment was founded on a real debt. Part of the rationale for this is that not only are the courts dealing with rights of the particular judgment creditor and debtor, but they are also dealing with the rights of the debtor's other creditors. The Court will not generally go behind such a judgment unless it can be shown that it was obtained by default, or compromise, or where fraud or collusion is alleged.

21. 21 GOING BEHIND THE JUDGMENT In Udovenko v Mitchell (1997) 79 FCR 418, Davies J held at 421 that, “the circumstances in which a court will go behind a judgment cannot be stated in a definitive manner; however there are two guiding principles.Udovenko v Mitchell First as Fullagar J said in Corney v Brien; “if the judgment in question followed a full investigation and trial on which both parties appeared, the court will not reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out..” Secondly in the same case, Dixon, Williams Webb and Kitto JJ cited the remarks of Latham CJ in Petrie v Redmond that.. “The court looks with suspicion on consent judgments and default judgments”. Fullagar J put this point more forcefully when he said: “But, wherever the judgment in question is a judgment by default, it appears that the court will always “go behind” the judgment if there is what it regards as a bona fide allegation that no real debt “lay behind” the judgment.”

22. 22 GOING BEHIND THE JUDGMENT Courts may decide whether or not to accept the judgment as satisfactory proof of the debt claimed: Wren v Mahony (1971-72) 126 CLR 212.Wren v Mahony In Wren, the High Court held that the Bankruptcy Court not only may go behind a judgment, but must do so if there appear to be substantial reasons to doubt whether there really was a debt due to the petitioning creditor. Further it was held that a judgment after the trial of an action will not usually be re-opened unless a prima facie case of fraud or collusion or miscarriage of justice is made out.

23. 23 GOING BEHIND THE JUDGMENT In going behind the judgment a court may find that the part of the judgment is still payable notwithstanding the part that is impugned. However, the court will only reconsider the judgment in order to ascertain whether the petitioning creditor’s debt on which the bankruptcy proceedings have been founded should be struck out altogether. The court does not reconsider the judgment merely with a view to seeing whether the judgment debt should be reduced. Where a debtor appeals from the judgment upon which the bankruptcy notice and creditor's petition is based, they may be able to have the bankruptcy hearing adjourned until after the appeal is determined if it is bona fide and based upon genuine and substantial grounds.

24. 24 DISCRETION TO DISMISS BANKRUPTCY ACT - SECT 52 (2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition.

25. 25 SOLVENCY AS A DEFENCE SECTION 52(2)(a) “able to pay his or her debts” A sequestration order is not appropriate where a debtor who is able to pay his debts, refuses to do so. The words, “able to pay” do not mean “willing and able to pay”. In Re Sarina; Ex Parte Wollondilly Shire Council (1980) 32 ALR 596, Deane J held that there was no policy discernible in the legislation which allows a creditor to make bankrupt a recalcitrant but solvent debtor. However the test in re Sarina is not to be applied in a sterile way.Re Sarina; Ex Parte Wollondilly Shire Council

26. 26 SOLVENCY AS A DEFENCE The discretion under section 52(2)(a) should not be exercised unless the debtor demonstrates that the petitioning creditor will be satisfied from the ordinary remedies such as execution and garnishment; hence, proof of solvency may not be enough.section 52(2)(a) If the debtor’s solvency is based upon assets not available under execution or garnishment by creditors, that may not be proof of solvency. If the debtor has the capacity to borrow to pay the debt, but does not do so, the court may exercise a discretion against the debtor. It is not enough that the debtor simply establish that the value of their assets exceeds the value of their liabilities. The debtor is required to establish that the assets are available to be realised and capable of ready realisation likely to result in payment of the debtor's debt within a reasonable time.

27. 27 OTHER SUFFICIENT CAUSE SECTION 52(2)(b) “other sufficient cause” In section 52(2)(b), reference is made to “other sufficient cause”: see Clyne v Deputy Commissioner of Taxation (1985) 5 FCR 1 which held that the circumstances constituting such are extremely varied and include public interest considerations. They will be decided on a case by case basis.section 52(2)(b), The circumstances have been held to include: no service of the originating process which led to the entry of judgment on which the petition is based; the existence of a claim by the debtor amounting to a set off or cross-claim or cross-demand against the petitioner. The debtor must establish the existence of the “sufficient cause” and some evidence must be provided to enable the court to evaluate the claim and be satisfied that it will be prosecuted;

28. 28 SOLVENCY AS A DEFENCE “other sufficient cause” (cont.) where the debtor offers payment but this is declined by the creditor; where there is a pending appeal against the judgment relied on as the foundation of the bankruptcy proceedings and the appeal is based on genuine and arguable grounds; bias; futility of bankruptcy; Re Capel [1998] FCA 372; improper purpose ie the bankruptcy proceedings are used as a means of extortion: Rozenbes v Kronhill (1956) 95 CLR 407;Rozenbes v Kronhill

29. 29 STAY OF THE SEQUESTRATION ORDER The court does not have power to suspend the operation of a sequestration order other than for a period not exceeding 21 days - section 52(3).section 52(3 Stays are granted reluctantly, and only if the bankrupt wants to appeal against the making of the sequestration order. The appeal court has power to further extend the stay.

30. 30 LAPSE AND EXTENSION OF THE LIFE OF THE PETITION LAPSE OF PETITION – SECTION 52(4) (4) A creditor's petition lapses at the expiration of: (a) subject to paragraph (b), the period of 12 months commencing on the date of presentation of the petition; or (b) if the Court makes an order under subsection (5) in relation to the petition--the period fixed by the order; unless, before the expiration of whichever of those periods is applicable, a sequestration ord er is made on the petition or the petition is dismissed or withdrawn. EXTENSION OF LIFE OF PETITION – SECTION 52(5) (5) The Court may, at any time before the expiration of the period of 12 months commencing on the date of presentation of a creditor's petition, if it considers it just and equitable to do so, upon such terms and conditions as it thinks fit, order that the period at the expiration of which the petition will lapse be such period, being a period exceeding 12 months and not exceeding 24 months, commencing on the date of presentation of the petition as is specified in the order.

31. 31 STATEMENT OF AFFAIRS BY BANKRUPT Where a sequestration order is made, the person against whose estate it is made shall, within 14 days from the date on which he or she is notified of the bankruptcy: make out and file with the Official Receiver for the District in which the sequestration order was made a statement of his or her affairs; and furnish a copy of the statement to the trustee: s 54.s 54 Failure to file a statement of affairs means that time will not begin to run for the purpose of automatic discharge from bankruptcy (i.e. after 3 years).

32. 32 DEBTOR’S PETITIONS A debtor may choose to go voluntarily bankrupt. This is done by presenting a “debtors’ petition” to the Official Receiver. Up to 90% of bankruptcies are voluntary. There are three types of debtor’s petitions that may be presented: - by an individual debtor; - by joint debtors; - by partnership debtors.

33. 33 WHO MAY PRESENT A DEBTOR’S PETITION ? Any debtor except for a corporation, partnership, or association is able to present a debtor's petition. A debtor who presents a debtor's petition needs to show a connection with Australia: see section 55(2A).section 55(2A). DEBTOR’S PETITIONS OF INDIVIDUAL DEBTORS Debtors need to file a statement of affairs in the statutory form: section 55(2) and Form 3. In that statement a list of all assets and liabilities and other prescribed information is given.section 55(2) The petition is presented to the Official Receiver in bankruptcy who must accept it unless a decision is made to reject it under section 55(3). Some petitions must be rejected - see section 55(2A). There are discretions to reject insection 55(3) and (3AA).section 55(3)section 55(2A).section 55(3)

34. 34 DEBTOR’S PETITION AS AN ABUSE OF PROCESS The right to present a debtor's petition has the potential to be an abuse of process. A debtor who was not insolvent or who does not believe himself or herself to be insolvent and who presents a petition may be regarded as presenting for an improper purpose and, in and such cases, the creditor can apply for an annulment of the bankruptcy on the basis that it should not have been accepted: BWK Elders (Australia) Pty Ltd v White [2004] FCA 1611. BWK Elders (Australia) Pty Ltd v White If the purpose of the debtor's petition was to avoid liability of a kind that results from the operation of the bankruptcy laws themselves, making it, for example, impossible for a creditor to obtain a sequestration order, it can be annulled. The onus is on the creditor to establish that the debtor has a improper purpose.

35. 35 COURSE OF A HEARING In the Course Notes: Creditor’s Petition Checklist Guide to Filing a Creditor’s Petition – Federal Circuit Court of Australia

36. 36 VESTING OF PROPERTY The property of the bankrupt vests forthwith in the Official Trustee S 58(1) provides:58 (1) Subject to this Act, where a debtor becomes a bankrupt: (a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and (b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.

37. 37 DEALING WITH ASSETS Trustee takes possession of property of the bankrupt - s 129s 129 Bankrupt must file a Statement of Affairs - s 54s 54 Trustee may convene a meeting of the creditors - s 64s 64 Creditors must lodge a Proof Of Debt - s 82s 82 Official Receiver may launch investigation (to ascertain other available assets) - s 77C s 77C Trustee pays costs of administration of the estate, then pays dividends to creditors who have proved their debts - s 140s 140

38. 38 EFFECTS OF BANKRUPTCY – ON THE BANKRUPT All “divisible” property vests in the Trustee - s 5858 Conduct can be investigated by the Trustee - s 77C77C Must notify Trustee of change of name or address - s 80(1)80 Must make contributions from income, over a threshold level Must surrender passport - s 7777 Must disclose to anyone to whom they apply for credit of >$3,000 that they are bankrupt - s 269269 Prohibited from managing or being a director of a corporation - Corporations Act s 206A206A Restrictions on practising as a barrister, solicitor or real estate agent Subject to any agreement between the partners, bankruptcy dissolves any partnership - s 33(1) Partnership Act 189233(1)

39. 39 EFFECTS OF BANKRUPTCY – ON LEGAL PROCEEDINGS Legal proceedings are a form of property which vests in the Trustee Legal actions brought by the bankrupt before the bankruptcy are stayed, until the Trustee elects to prosecute the claim or discontinue - s 60(2)60 Exception: a bankrupt retains the right to pursue actions for personal injuries and wrongs - s 60(4) A party cannot commence or continue with legal proceedings against a bankrupt, without the leave of the court - s 58(3)(b)58

40. 40 EFFECTS OF BANKRUPTCY – ON PROPERTY AND DEBTS EFFECT ON THE BANKRUPT’S PROPERTY On the date of the bankruptcy all divisible property vests in the Trustee - s 5858 Certain property is exempted or protected – see Lecture 8 Vesting has effect subject to orders of the Family Court - s 59A59A EFFECT ON CREDITORS Creditor cannot enforce remedies in respect of a provable debt - s 58(3)(a) Creditor has a right to share in distribution of the estate Secured creditors not affected - s 58(5)

41. 41 PAST EXAM QUESTION ON CREDITOR’S PETITIONS Question 3 from September 2015 exam Tai is a model who chartered a private jet to attend Fashion Week in Milan. When Tai did not pay, the aircraft owner sued in the District Court for $50,000. Tai did not defend the proceedings and a default judgment was entered. A Bankruptcy Notice was served but Tai ignored that as well. Tai was then served with a Creditor’s Petition which is brought to you a week before the date for hearing. You see that the Bankruptcy Notice claims interest at a rate different to that prescribed by the court rules. Tai tells you that there is a long-awaited payment for a modelling assignment in New York. After receipt Tai will be able to pay all debts. It is plain to you that Tai is clueless. Advise Tai about the legal risks of the forthcoming hearing, and what should be done to avoid bankruptcy. Your advice should be in plain English but should give references to the relevant statutory provisions and cases.