Bankruptcy is a legal process where a bankruptcy trustee is appointed to administer an insolvent person’s affairs, in order to provide for a fair distribution of that person’s divisible assets to their creditors.
Why choose bankruptcy?
The Bankruptcy Act 1966 exists to protect debtors (i.e. the bankrupt) and creditors.
The debtor is protected from being pursued by creditors and, with limited exceptions, is released from their debts upon their discharge from bankruptcy. Bankruptcy aims to provides a debtor with a fresh start.
Bankruptcy protects creditors’ interests by having an independent, qualified professional control and investigate the bankrupt’s affairs and collect and distribute the bankrupt’s divisible assets.
There are limited grounds that a bankruptcy trustee can prevent overseas travel. The bankruptcy trustee may hold your passport.
Check out our blog article, "I am a bankrupt, can I have an overseas holiday?" to learn more.
By payment in full of all of the debts and costs of the bankrupt estate.
By entering a formal compromise agreement with creditors pursuant to section 73 of the Bankruptcy Act 1966.
Not sure if this applies to you?
Get in touch to find out.
The bankrupt estate may continue after discharge while the bankruptcy trustee finalises the estate, and the discharged bankrupt may have some ongoing obligations, but they will no longer be ‘bankrupt’.
A bankrupt is automatically discharged three years after their completed Statement of Affairs is filed with the Australian Financial Security Authority (AFSA)—unless a bankruptcy trustee files an ‘objection to the discharge’. (click here)
If the bankruptcy commenced via a debtor’s petition (i.e. a voluntary bankruptcy, where a person chooses to bankrupt themselves), the Statement of Affairs must have been filed at the same time, so therefore the bankruptcy ends three years after the debtor’s petition is accepted.
If the bankruptcy commenced via a sequestration order (a court order), the Statement of Affairs would not have been filed at that time. The bankrupt must complete and lodge a Statement of Affairs with AFSA. The longer the delay in filing the Statement of Affairs, the longer the three-year bankruptcy period is prolonged. If the Statement of Affairs is never filed, the bankruptcy will continue until the death of the bankrupt; however, the estate’s conduct will continue until completed.
However, other mechanisms can end a bankruptcy earlier, or annul the bankruptcy entirely. An annulment reverses the bankruptcy, as if it never happened. There are three ways of annulling a bankruptcy:
The bankruptcy trustee obtains sufficient monies to pay all of the bankrupt estate’s debts and costs.
A section 73 proposal is accepted by the bankrupt’s creditors.
The bankrupt convinces the court the bankruptcy should never commenced.
Further to point one above, the bankrupt estate’s costs and debts are:
all provable debts of the estate
the Asset Realisation Charge (ARC), which is currently 7 percent and is payable to AFSA
the bankruptcy trustee’s expenses and remuneration
any other charges or statutory costs of the estate.
For a bankruptcy to be annulled by all debts and costs being paid, the trustee must have sufficient money to satisfy all the pre-bankruptcy debts, the bankruptcy costs and the statutory charges. Generally, this type of annulment happens when the sale of an asset provides enough money to pay these costs, or when a friend or relative provides the funds.
A section 73 proposal is a formal proposal presented to creditors under section 73 of the Bankruptcy Act 1966. It provides a mechanism for bankrupts to put forward a proposal to their creditors as an alternative to the bankruptcy continuing. If creditors accept a section 73 proposal, the bankruptcy is exchanged for an obligation under the section 73 agreement.
Usually, the court will only annul a bankruptcy when it can be shown that the bankruptcy should never have been commenced. This happens:
where the proper legal process was not followed in initially bankrupting the person
if there was no debt outstanding to a petitioning creditor at the time
if the bankrupt is actually solvent.
A bankrupt who successfully obtains an annulment through the court should be aware that the ex-bankruptcy trustee has the right to use assets in their possession to pay outstanding remuneration and outlays, and if the net value is insufficient, they may seek payment from the ex-bankrupt.
Last updated: 3.11.2017
Need help navigating a bankruptcy?
It can be daunting but the sooner we chat the more we can help.
It's worth considering the credit rating status before a bankruptcy appointment, it may be currently in a less than optimal or poor state.
Bankruptcy is a legal process intended to help rehabilitate, rather than punish.
For business-related tax debt, the Australian Taxation Office (ATO) can choose to disclose your debt information to credit reporting bureaus/agencies. This subject to certain business and debt criteria, and whether if already engaged with the ATO to manage tax debts.
Bankruptcy is also recorded on a public register called the National Personal Insolvency Index (or NPII), which is never removed but the status will be updated with certain updates such as being discharged from bankruptcy.
In certain business or commercial circumstances, bankrupts are required to disclose their bankruptcy.
Those amounts are the amounts your receive after tax is paid/payable. And factors in any variations on income like income tax payments and child support payments (section 139N of the Bankruptcy Act 1966). During bankruptcy, your income is assessed annually based on the above factors, and you may have to pay a portion of your income into the bankruptcy estate (called an income contribution) for the benefit of your creditors.
Worrells work this all through from the outset with people considering or subject to bankruptcy to ensure they understand what could happen with any possible income contributions during the standard three-year bankruptcy period.
You can keep a motor vehicle that is your primary means of transportation if its value is less than the statutory threshold, currently $9,400. This amount is updated each financial year by AFSA, click here to check current amounts.
Where the value of the vehicle exceeds the statutory threshold, the bankruptcy trustee will be entitled to the value of the vehicle above that threshold. Sometimes, that will require sale of the vehicle.
If you rent, you will not lose your home. If you own your home, then your interest in the home is an asset of the bankrupt estate. Often the home is an asset jointly owned with a non-bankrupt spouse or partner. In such cases, the non-bankrupt joint owner will usually have the opportunity to acquire your interest in the home from the bankruptcy trustee. If that cannot be achieved, then it is likely that your home will be sold.
Currently the amount for tools of trade you can keep is $4,350. This amount is updated each financial year by AFSA - check the current amounts here.
A secured creditor holds a security interest, such as a mortgage, in some or all the company’s assets, to secure a debt they are owed by a company. For example, lenders might require a security interest in company assets when they provide a loan.
An unsecured creditor does not hold a security interest in relation to a debt they’re owed by a company.
Bankruptcy trustees of bankrupt estates investigate pre-bankruptcy transfers or transactions when they believe the transaction improperly dissipated or removed assets that would otherwise be available to creditors. The Bankruptcy Act 1966 will in some cases permit voiding these transactions and require the other party to return an asset, or make a payment, to the trustee. Sometimes contributions made by or on behalf of the bankrupt (pre-bankruptcy) to superannuation funds fall into this category.
To void this type of transaction, the trustee must show:
A transaction was entered into.
They can identify the other party to the transaction.
The transaction occurred within a specific period, or while the debtor was insolvent.
The transaction was either undervalue, or had the required purpose of improperly removing assets from a bankrupt estate.
It does not involve protected property.
This Guide deals with contributions that are made prior to bankruptcy that have all of these factors.
One of a trustee’s roles is to ensure that all of a bankrupt’s divisible assets are available to distribute to their creditors. Part of this role is to find whether a bankrupt entered into a transaction before they became bankrupt that reduced the assets available for distribution. For this reason, the trustee seeks to recover these assets. The Bankruptcy Act provisions give trustees the power to recover monies paid to eligible superannuation plans in the period before the bankruptcy.
Occasionally when debtors face bankruptcy, they try to protect some of their assets by hiding, moving or transferring assets to a third party to hold during the period of bankruptcy. Sometimes debtors make payments to their superannuation plan, as superannuation is generally an exempt asset.
The provisions attempt to deter debtors from moving assets into their superannuation plan at their creditors’ expense, and allow trustees to recover the money from the fund when payments fall under the relevant conditions.
Various sections of the Bankruptcy Act are designed to void transactions, or transfers, of property in order to provide a fair distribution of a bankrupt’s assets to their creditors. Section 121 ‘Transfers to defeat creditors’ is designed to void transfers where the intention of that transfer is to remove the property out of reach of the trustee or creditors.
Subdivision B of Division 3 of Part VI of the Bankruptcy Act is aimed at voiding transfers of property to eligible superannuation plans where the intention of the transfer was to defeat creditors. The main provisions are very similar to section 121, but target superannuation plans, as the Bankruptcy Act generally excludes monies in superannuation plans from being divisible property.
Under section 128B of the Bankruptcy Act, transfers made by a debtor are void if they occurred after 28 July 2006, and:
they are made to eligible superannuation plans of the bankrupt
the property would have formed part of the bankrupt estate if the transfer had not been made
the main purpose of the transaction was to keep an asset from falling into the trustee’s hands and being available to creditors.
Most people will initially consider payments as transfers, but any property transfers can be subject to these provisions. Section 128B goes one step further to include any transaction that creates new property. This is usually in the form of securities or equitable/legal interests over assets the bankrupt still owns i.e. creating a charge in favour of the superannuation plan may be deemed a transfer of property.
A trustee will examine payments to superannuation plans and any other assets created, and will assess whether the payment falls within the provisions. The inherently difficult part to determine is the debtor’s intention at the time of the transfer.
Transfers to superannuation plans made by third parties on the debtor’s behalf may also be caught under these provisions. Third parties may also hold assets that belong to the debtor, or owe money to the debtor. Paying that money into a superannuation plan on the debtor’s instruction will be a transaction that can be examined. Again, the intention of the transfer must be to defeat creditors.
Under section 128C, transfers made by third parties are void if:
They are made to eligible superannuation plans of the bankrupt.
The property would have formed part of the property available to creditors in a bankrupt estate (usually as a debt due) if the transfer had not been made.
The transfer occurred under a scheme that the debtor was a party to—effectively, it was done under the debtor’s direct or implied instructions.
The main purpose of the transaction was to keep that asset from falling into the trustee’s hands and becoming available to creditors.
One of the main purposes of the transaction must be to protect the asset from creditors—to defeat the creditors’ interest in the property. This intention only needs to be one main purpose of the transaction, not the only purpose. This is subjective, and is usually inferred from the transaction circumstances, the debtor’s financial position at that time, and the result of the transaction.
This intention can be deemed by the debtor’s (i.e. pre-bankrupt) actual or impending insolvency, but only if it can be shown that the debtor was—or was about to become—bankrupt at the time of the transaction. If the debtor was solvent at the time and remained solvent for some time after the transaction—with no indication of an impending bankruptcy—it would be difficult to connect the eventual insolvency to the transaction.
It is common for debtors to undertake transactions with this intention when legal action against them is pending and it appears likely or inevitable that judgment will be brought against them. Alternatively, a loan or other agreement that has been breached could lead to a demand that a debtor cannot meet. In these circumstances, showing or deeming that the intention existed may be quite easy. Most bankrupts who undertake transactions to protect assets, usually only do so close to the time of bankruptcy.
The trustee will also examine the debtor’s history of personal contributions to eligible superannuation funds. If the payment is one of a series of similar payments over a long period, there could be an argument that the required intention did not exist. If the payment is a once-off large payment—especially if significantly larger than any previous payments—it is likely that the intention existed.
The same deeming provisions apply to transfers by third parties. If it can be shown that the debtor was insolvent, or was about to become insolvent at the time, the intention can be deemed. The same indicators can determine the debtor’s intention. There is no requirement for the other party to know or suspect the insolvency, as there is no claim against that other party.
The debtor does not have to have been insolvent at the time of the transaction for it to be void. As detailed in Section 128B, it is the debtor’s intention that is important, and showing insolvency or pending insolvency is a key means of showing that intention. If the trustee relies on that deeming provision, the court will require evidence of insolvency.
The Bankruptcy Act provides for a presumption of insolvency if the debtor did not keep proper records of their financial affairs during that period. That presumption is rebuttable, i.e. it may be disproved by positive evidence of solvency. This may be quite difficult if there are truly no records on the debtor’s financial affairs. The same rebuttable presumption of insolvency applies to transfers made by third parties.
The rebuttable presumption is designed to stop bankrupts from avoiding their past transactions being overturned by simply destroying or hiding the records needed to examine the transaction. In essence, the presumption deems that the debtor is insolvent at a particular time, unless there are records that prove otherwise. As a consequence of that deemed insolvency, the transactions under examination can be said to have been done under the required intention.
The Bankruptcy Act goes to some lengths to ensure that innocent parties to void transactions are not prejudiced any more than necessary. The provisions that relate to the voiding of superannuation contributions are no different. The Bankruptcy Act provides protection for two parties: the bankruptcy trustee and the superannuation plan trustee.
The first party is the trustee of the eligible superannuation plan. When a contribution is received, certain taxes and other charges are deducted and paid to the government, fund managers, etc. The bankruptcy trustee will seek the voiding of the transfer (i.e. the entire amount of the contribution). Payment of the entire contribution would leave the superannuation trustee (the plan) out of pocket to the extent of the taxes and charges. Section 128B of the Bankruptcy Act provides that when an amount of the superannuation contribution is recovered, the amount of taxes and charges that applied to that contribution must be paid to the superannuation trustee, to ensure that they are not left with a shortfall.
Interestingly, this protection only applies to payments that are made to the bankruptcy trustee under a section 139ZQ notice. It is debatable whether this protection applies if the superannuation trustee voluntarily returns the contribution to the bankruptcy trustee, or even if the bankruptcy trustee obtains a court order for the contribution to be returned.
Innocent parties are protected when they receive title to any property in good faith (i.e. without any knowledge of the intention of the transfer).
This protection also applies to superannuation trustees when contributions are made by other parties, but are voided under the appropriate Bankruptcy Act provisions. The provisions in section 128B and 128C also apply to third party contributions, except they are referred to as ‘contributions’ by other parties. Section 128C(8) of the Bankruptcy Act provides protection to parties that obtain title to property without knowing the intention of the transfer when the contribution is made by another party.
Section 128L of the Bankruptcy Act protects superannuation trustees from criminal and civil prosecution for acts done in good faith. These acts include complying with a superannuation account-freezing notice (section 139ZQ notice under the Bankruptcy Act) or a court order.
Section 128E of the Bankruptcy Act gives bankruptcy trustees certain powers to help them make these claims. One is the power to issue a superannuation account-freezing notice. The Official Receiver issues the notices when the bankruptcy trustee has satisfied to the Official Receiver that there are “reasonable grounds” that a contribution to a superannuation plan is void under Sections 128B or 128C. The notice comes into force when it is given to the trustee of an eligible superannuation plan.
These notices affect the superannuation plan trustee’s rights to deal with the funds in the plan, except in limited circumstances. The notices are designed to ensure that money is not paid out, or otherwise disbursed, before potential void transactions are resolved.
One important point is that the notice is either directed at the money paid into the plan from the contribution under examination (the money must be traced and identified in the plan at the time of issuing the notice), or the bankruptcy trustee must apply for to the court for an order under section 139ZU in relation to rolled-over superannuation interests.
The trustee can also apply to the Official Receiver to issue a notice under section 139ZQ whereby the Official Receiver can seek repayment from the recipient of the funds. Because the notice is given by the Official Receiver and affects the rights of the bankrupt on what would be otherwise exempt (non-divisible) property, the notice must set out why the Official Receiver believes that the contributions to the superannuation plan are void.
A superannuation account-freezing notice is not an open-ended right for a bankruptcy trustee. Section 128F of the Bankruptcy Act states that the Official Receiver can revoke the notice at any time. The notice is automatically revoked if the money is claimed under a revoked 139ZQ notice, or if the court sets aside the 139ZQ notice.
For example, if the superannuation account-freezing notice was supporting a section 139ZQ notice and that notice is satisfied or revoked, the freezing notice is also automatically revoked.
The bankruptcy trustee has 180 days to take, or conclude, their action after the Official Receiver issues a freezing notice. If a bankruptcy trustee cannot provide sufficient evidence within 180 days to satisfy to the Official Receiver that a section 139ZQ notice should be issued, the freezing notice will be revoked.
Similarly, if a bankruptcy trustee seeks relief through a section 139ZU order, then the court may order:
compliance with that order
that the order be set aside or dismissed.
If the application for the order is withdrawn within the 180-day period, the freezing notice will be automatically revoked.
The notice is also revoked if no order under section 139ZU is made within the 180-day period. The trustee is bound by a 180-day period, but may be extended by applying to the court.
The provisions that allow bankruptcy trustees to recover money paid into eligible superannuation plans also contemplate the transfer of money (the rollover of superannuation interests) between more than one plan, or between one or more people. These provisions allow the tracing of the void money into a second plan. Section 139ZU of the Bankruptcy Act allows the court to order a payment from the second plan to the bankruptcy trustee, but there are limitations.
The first limitation is that the contribution to the first plan must be void under sections 128B or 128C. But if the money has been transferred (rolled-over) to another plan, there may be insufficient funds in the first plan to satisfy a claim.
If there is sufficient money in the first plan to pay the claim, this provision will not be necessary, but there may be a shortfall. The money, or part of it, would now be in a second plan.
The shortfall contemplated in section 139ZU is the shortfall between the money remaining in the first plan and the bankruptcy trustee’s claim amount. Only the shortfall amount may be claimed from the second plan. Essentially, the trustee can keep tracing the money into the new plan and recover the shortfall.
Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.
Last Updated: 3.11.2017
Usually, bankruptcy will not impact upon a person's right to practice in their profession or generate an income. Some professions impose restrictions on their members if they become bankrupt (including, but not limited to, real estate agents, solicitors and travel agents) and some licensing bodies may impose restrictions on bankrupts (including, but not limited to, building licenses).
An objection to discharge can be used as a penalty for a bankrupt’s actions before or during bankruptcy, or to encourage them to cooperate with their bankruptcy trustee. Often it is in creditors’ interests—or the public interest—that a bankrupt is not discharged at the three-year mark if they have committed an offence under the Bankruptcy Act 1966.
An objection can be lodged at any point during the bankruptcy, but before discharge, and must be within the Bankruptcy Act 1966's statutory grounds.
A bankruptcy trustee lodges the objection notice with the Australian Financial Security Authority (AFSA) and sends a copy to the bankrupt. Once AFSA records the notice on the National Personal Insolvency Index (NPII)—the statutory register—the objection becomes legal.
A bankruptcy can be extended for two or five years, making the total bankruptcy period five or eight years. The extension period depends on the type of statutory ground for objection. The usual discharge provisions then apply, with automatic discharge at the end of the extended period.
The extension period is determined by the statutory ground used for the objection. A ‘non-special ground’ will result in a two-year extension, and a ‘special ground’ will result in a five-year extension. The objection must address a specific statutory ground. More than one objection can be lodged in a bankruptcy. Under section 149D of the Bankruptcy Act 1966, the grounds for a bankruptcy trustee to object to a bankrupt’s discharge are outlined below.
If the bankrupt:
Fails to provide written information about their property or income.
Fails to disclose particulars of income or expected income.
Fails to pay a contribution amount to the trustee.
Fails to dispose of assets or spend monies within five years before bankruptcy without adequate explanation.
Fails to return to Australia when requested.
Fails to sign a document as required by a trustee under the Bankruptcy Act 1966 provisions.
Fails to make assets available to creditors (i.e. void transactions under sections 121, 128B or 128C of the Bankruptcy Act 1966).
Fails to provide true and full information to a trustee (i.e. intentionally providing false or misleading information to a trustee.
Fails to disclose a liability (intentionally) that existed at the time of bankruptcy.
Fails to disclose a beneficial interest in a property.
If the bankrupt:
Fails to cease managing a corporation in contravention of the Corporations Act 2001 and without leave being granted.
Fails to return to Australia.
Fails to make assets available to creditors (i.e. void transactions under section 120 or 122 of the Bankruptcy Act 1966).
Fails to act honestly in regarding amounts that exceed $3,000 (i.e. the bankrupt’s conduct is misleading involving transactions of $3,000 or more).
Fails to disclose a liability that existed at the time of bankruptcy.
Fails to comply with section 77(1) or section 80 of the Bankruptcy Act 1966.
Fails to attend a creditors’ meeting under certain circumstances, or an interview, or an examination, without reasonable excuse.
If more than one ground applies, the extension period is based on the ground with the longest period only, i.e. these periods are not cumulative. If this ground is later removed (i.e. the bankrupt complies with their obligations), the extension period applies to the next longest period attached to any remaining ground. The extension period may not change if two special, or two non-special grounds apply, and only one is lifted.
Special grounds do not require the reasons to be outlined on the notice to object, due to the nature of these grounds. Whereas, a non-special ground requires the reasons to be outlined on the notice to object.
A bankruptcy trustee can withdraw an objection at any time. Bankruptcy trustees normally withdraw the objection if the grounds are satisfied. But there is no requirement to withdraw it, especially concerning a special ground. If all grounds have been satisfied, the notice of objection can be completely withdrawn. The objection lodgement and the withdrawal are recorded on the NPII.
If the normal three-year bankruptcy passed while the objection was in force, withdrawing the objection will automatically discharge the bankrupt as at the objection withdrawal date—not the original bankruptcy discharge date. If the objection is withdrawn during the normal three-year bankruptcy period, the bankruptcy will end by automatic discharge at the end of that three-year period.
However, the objection can be removed by a higher authority. A bankrupt can apply to the Inspector-General in Bankruptcy to review the trustee’s decision to object to a bankrupt’s discharge. The application for review must be made within 60 days of the bankrupt receiving the notice of objection. If the Inspector-General agrees to review the objection, a decision must be made within 60 days of receiving the application.
The Inspector-General must review the objection on the following basis:
Whether the ground exists under the Bankruptcy Act 1966.
Whether sufficient evidence supports that ground.
The bankrupt’s conduct before the objection was lodged.
However, as special grounds do not require reasons to be outlined in a bankruptcy trustee’s notice to object, the Inspector-General cannot consider the evidence, or the bankrupt’s conduct, therefore obtaining a decision to cancel these objections is difficult. Even if the bankrupt subsequently complies with the bankruptcy trustee’s requests, the bankrupt’s conduct will not automatically mean an objection is removed or withdrawn. To get an objection based on a special ground removed, a bankrupt may have to show that the circumstances do not justify the objection in the first instance.
Last updated: 3.11.2017
Bankruptcy trustees of bankrupt estates investigate pre-bankruptcy transfers or transactions when they believe the transaction improperly dissipated or removed assets that would otherwise be available to creditors. The Bankruptcy Act 1966 will in some cases permit voiding these transactions and require the other party to return an asset, or make a payment, to the trustee. Sometimes contributions made by or on behalf of the bankrupt (pre-bankruptcy) to superannuation funds fall into this category.
To void this type of transaction, the trustee must show:
A transaction was entered into.
They can identify the other party to the transaction.
The transaction occurred within a specific period, or while the debtor was insolvent.
The transaction was either undervalue, or had the required purpose of improperly removing assets from a bankrupt estate.
It does not involve protected property.
This Guide deals with contributions that are made prior to bankruptcy that have all of these factors.
One of a trustee’s roles is to ensure that all of a bankrupt’s divisible assets are available to distribute to their creditors. Part of this role is to find whether a bankrupt entered into a transaction before they became bankrupt that reduced the assets available for distribution. For this reason, the trustee seeks to recover these assets. The Bankruptcy Act provisions give trustees the power to recover monies paid to eligible superannuation plans in the period before the bankruptcy.
Occasionally when debtors face bankruptcy, they try to protect some of their assets by hiding, moving or transferring assets to a third party to hold during the period of bankruptcy. Sometimes debtors make payments to their superannuation plan, as superannuation is generally an exempt asset.
The provisions attempt to deter debtors from moving assets into their superannuation plan at their creditors’ expense, and allow trustees to recover the money from the fund when payments fall under the relevant conditions.
Various sections of the Bankruptcy Act are designed to void transactions, or transfers, of property in order to provide a fair distribution of a bankrupt’s assets to their creditors. Section 121 ‘Transfers to defeat creditors’ is designed to void transfers where the intention of that transfer is to remove the property out of reach of the trustee or creditors.
Subdivision B of Division 3 of Part VI of the Bankruptcy Act is aimed at voiding transfers of property to eligible superannuation plans where the intention of the transfer was to defeat creditors. The main provisions are very similar to section 121, but target superannuation plans, as the Bankruptcy Act generally excludes monies in superannuation plans from being divisible property.
Under section 128B of the Bankruptcy Act, transfers made by a debtor are void if they occurred after 28 July 2006, and:
they are made to eligible superannuation plans of the bankrupt
the property would have formed part of the bankrupt estate if the transfer had not been made
the main purpose of the transaction was to keep an asset from falling into the trustee’s hands and being available to creditors.
Most people will initially consider payments as transfers, but any property transfers can be subject to these provisions. Section 128B goes one step further to include any transaction that creates new property. This is usually in the form of securities or equitable/legal interests over assets the bankrupt still owns i.e. creating a charge in favour of the superannuation plan may be deemed a transfer of property.
A trustee will examine payments to superannuation plans and any other assets created, and will assess whether the payment falls within the provisions. The inherently difficult part to determine is the debtor’s intention at the time of the transfer.
Transfers to superannuation plans made by third parties on the debtor’s behalf may also be caught under these provisions. Third parties may also hold assets that belong to the debtor, or owe money to the debtor. Paying that money into a superannuation plan on the debtor’s instruction will be a transaction that can be examined. Again, the intention of the transfer must be to defeat creditors.
Under section 128C, transfers made by third parties are void if:
They are made to eligible superannuation plans of the bankrupt.
The property would have formed part of the property available to creditors in a bankrupt estate (usually as a debt due) if the transfer had not been made.
The transfer occurred under a scheme that the debtor was a party to—effectively, it was done under the debtor’s direct or implied instructions.
The main purpose of the transaction was to keep that asset from falling into the trustee’s hands and becoming available to creditors.
One of the main purposes of the transaction must be to protect the asset from creditors—to defeat the creditors’ interest in the property. This intention only needs to be one main purpose of the transaction, not the only purpose. This is subjective, and is usually inferred from the transaction circumstances, the debtor’s financial position at that time, and the result of the transaction.
This intention can be deemed by the debtor’s (i.e. pre-bankrupt) actual or impending insolvency, but only if it can be shown that the debtor was—or was about to become—bankrupt at the time of the transaction. If the debtor was solvent at the time and remained solvent for some time after the transaction—with no indication of an impending bankruptcy—it would be difficult to connect the eventual insolvency to the transaction.
It is common for debtors to undertake transactions with this intention when legal action against them is pending and it appears likely or inevitable that judgment will be brought against them. Alternatively, a loan or other agreement that has been breached could lead to a demand that a debtor cannot meet. In these circumstances, showing or deeming that the intention existed may be quite easy. Most bankrupts who undertake transactions to protect assets, usually only do so close to the time of bankruptcy.
The trustee will also examine the debtor’s history of personal contributions to eligible superannuation funds. If the payment is one of a series of similar payments over a long period, there could be an argument that the required intention did not exist. If the payment is a once-off large payment—especially if significantly larger than any previous payments—it is likely that the intention existed.
The same deeming provisions apply to transfers by third parties. If it can be shown that the debtor was insolvent, or was about to become insolvent at the time, the intention can be deemed. The same indicators can determine the debtor’s intention. There is no requirement for the other party to know or suspect the insolvency, as there is no claim against that other party.
The debtor does not have to have been insolvent at the time of the transaction for it to be void. As detailed in Section 128B, it is the debtor’s intention that is important, and showing insolvency or pending insolvency is a key means of showing that intention. If the trustee relies on that deeming provision, the court will require evidence of insolvency.
The Bankruptcy Act provides for a presumption of insolvency if the debtor did not keep proper records of their financial affairs during that period. That presumption is rebuttable, i.e. it may be disproved by positive evidence of solvency. This may be quite difficult if there are truly no records on the debtor’s financial affairs. The same rebuttable presumption of insolvency applies to transfers made by third parties.
The rebuttable presumption is designed to stop bankrupts from avoiding their past transactions being overturned by simply destroying or hiding the records needed to examine the transaction. In essence, the presumption deems that the debtor is insolvent at a particular time, unless there are records that prove otherwise. As a consequence of that deemed insolvency, the transactions under examination can be said to have been done under the required intention.
The Bankruptcy Act goes to some lengths to ensure that innocent parties to void transactions are not prejudiced any more than necessary. The provisions that relate to the voiding of superannuation contributions are no different. The Bankruptcy Act provides protection for two parties: the bankruptcy trustee and the superannuation plan trustee.
The first party is the trustee of the eligible superannuation plan. When a contribution is received, certain taxes and other charges are deducted and paid to the government, fund managers, etc. The bankruptcy trustee will seek the voiding of the transfer (i.e. the entire amount of the contribution). Payment of the entire contribution would leave the superannuation trustee (the plan) out of pocket to the extent of the taxes and charges. Section 128B of the Bankruptcy Act provides that when an amount of the superannuation contribution is recovered, the amount of taxes and charges that applied to that contribution must be paid to the superannuation trustee, to ensure that they are not left with a shortfall.
Interestingly, this protection only applies to payments that are made to the bankruptcy trustee under a section 139ZQ notice. It is debatable whether this protection applies if the superannuation trustee voluntarily returns the contribution to the bankruptcy trustee, or even if the bankruptcy trustee obtains a court order for the contribution to be returned.
Innocent parties are protected when they receive title to any property in good faith (i.e. without any knowledge of the intention of the transfer).
This protection also applies to superannuation trustees when contributions are made by other parties, but are voided under the appropriate Bankruptcy Act provisions. The provisions in section 128B and 128C also apply to third party contributions, except they are referred to as ‘contributions’ by other parties. Section 128C(8) of the Bankruptcy Act provides protection to parties that obtain title to property without knowing the intention of the transfer when the contribution is made by another party.
Section 128L of the Bankruptcy Act protects superannuation trustees from criminal and civil prosecution for acts done in good faith. These acts include complying with a superannuation account-freezing notice (section 139ZQ notice under the Bankruptcy Act) or a court order.
Section 128E of the Bankruptcy Act gives bankruptcy trustees certain powers to help them make these claims. One is the power to issue a superannuation account-freezing notice. The Official Receiver issues the notices when the bankruptcy trustee has satisfied to the Official Receiver that there are “reasonable grounds” that a contribution to a superannuation plan is void under Sections 128B or 128C. The notice comes into force when it is given to the trustee of an eligible superannuation plan.
These notices affect the superannuation plan trustee’s rights to deal with the funds in the plan, except in limited circumstances. The notices are designed to ensure that money is not paid out, or otherwise disbursed, before potential void transactions are resolved.
One important point is that the notice is either directed at the money paid into the plan from the contribution under examination (the money must be traced and identified in the plan at the time of issuing the notice), or the bankruptcy trustee must apply for to the court for an order under section 139ZU in relation to rolled-over superannuation interests.
The trustee can also apply to the Official Receiver to issue a notice under section 139ZQ whereby the Official Receiver can seek repayment from the recipient of the funds. Because the notice is given by the Official Receiver and affects the rights of the bankrupt on what would be otherwise exempt (non-divisible) property, the notice must set out why the Official Receiver believes that the contributions to the superannuation plan are void.
A superannuation account-freezing notice is not an open-ended right for a bankruptcy trustee. Section 128F of the Bankruptcy Act states that the Official Receiver can revoke the notice at any time. The notice is automatically revoked if the money is claimed under a revoked 139ZQ notice, or if the court sets aside the 139ZQ notice.
For example, if the superannuation account-freezing notice was supporting a section 139ZQ notice and that notice is satisfied or revoked, the freezing notice is also automatically revoked.
The bankruptcy trustee has 180 days to take, or conclude, their action after the Official Receiver issues a freezing notice. If a bankruptcy trustee cannot provide sufficient evidence within 180 days to satisfy to the Official Receiver that a section 139ZQ notice should be issued, the freezing notice will be revoked.
Similarly, if a bankruptcy trustee seeks relief through a section 139ZU order, then the court may order:
compliance with that order
that the order be set aside or dismissed.
If the application for the order is withdrawn within the 180-day period, the freezing notice will be automatically revoked.
The notice is also revoked if no order under section 139ZU is made within the 180-day period. The trustee is bound by a 180-day period, but may be extended by applying to the court.
The provisions that allow bankruptcy trustees to recover money paid into eligible superannuation plans also contemplate the transfer of money (the rollover of superannuation interests) between more than one plan, or between one or more people. These provisions allow the tracing of the void money into a second plan. Section 139ZU of the Bankruptcy Act allows the court to order a payment from the second plan to the bankruptcy trustee, but there are limitations.
The first limitation is that the contribution to the first plan must be void under sections 128B or 128C. But if the money has been transferred (rolled-over) to another plan, there may be insufficient funds in the first plan to satisfy a claim.
If there is sufficient money in the first plan to pay the claim, this provision will not be necessary, but there may be a shortfall. The money, or part of it, would now be in a second plan.
The shortfall contemplated in section 139ZU is the shortfall between the money remaining in the first plan and the bankruptcy trustee’s claim amount. Only the shortfall amount may be claimed from the second plan. Essentially, the trustee can keep tracing the money into the new plan and recover the shortfall.
Last Updated: 3.11.2017
Normally, a person’s bankruptcy ends with the bankrupt being discharged—called a ‘discharge from bankruptcy’. Unless an ‘objection to discharge’ is lodged, discharge occurs automatically three years after the bankrupt’s Statement of Affairs is filed with the Australian Financial Security Authority (AFSA). Discharge releases the bankrupt from the bankruptcy; however, the bankrupt estate (property, assets etc.) continues until all matters are satisfactorily concluded. This means the discharged bankrupt is still obligated to cooperate with the trustee.
Alternatively, a bankruptcy can be annulled. Discharge and annulment do not have the same legal result.
A discharge concludes the legal status of a person being a ‘bankrupt’, while the trustee completes their duties to the bankrupt estate. Whereas an annulment reverses the bankruptcy entirely—as if it never happened, thereby removing the person from bankruptcy and ending the bankrupt estate completely.
The Bankruptcy Act 1966 allows a bankruptcy to be extended for a total of five or eight years when a bankrupt has not cooperated with their trustee, or when an offence has been committed. If an objection to discharge is lodged against a bankrupt, the discharge date occurs at the end of the granted extended period.
Commonly, a person’s bankruptcy automatically ends three years after their Statement of Affairs is filed with AFSA, under section 149 of the Bankruptcy Act. If the bankruptcy commenced via a debtor’s petition (i.e. a person voluntarily bankrupts themself), the Statement of Affairs must have been filed at the same time. Therefore, without an objection to discharge being lodged, the bankruptcy ends three years after the debtor’s petition was accepted.
If the bankruptcy commenced via a sequestration order (i.e. an order of the court), the Statement of Affairs would not have been filed at that time. The bankrupt must complete and lodge a Statement of Affairs with AFSA, and the bankrupt is discharged three years from this date.
The longer the delay in filing the Statement of Affairs, the longer the three-year bankruptcy period is prolonged. If the Statement of Affairs is never filed, the bankruptcy will continue until the death of the bankrupt; however, the estate’s conduct will continue until completed.
Discharge from bankruptcy is an automatic process of law, regardless of whether it ends at the standard three year mark, or at the end of the extended period. Usually a trustee will confirm in writing that the bankrupt has been discharged and ask for information to conduct a final income assessment.
Even though the bankruptcy ends, the discharged bankrupt is obligated to assist the trustee under section 152 of the Bankruptcy Act, as the conduct of the bankrupt estate may continue. While the estate is commonly completed within the three-year period, there are exceptions. The estate does not end until the trustee has completed all the necessary tasks. Penalties apply to discharged bankrupts that do not provide all reasonable assistance to the trustee.
Discharge releases a bankrupt from their provable debts. These are debts that were outstanding at the date of bankruptcy—not debts incurred after the bankruptcy commenced—and that can be proved for in the bankrupt estate for a dividend. Debts that are not provable in the estate are not released and some debts are only partially released.
Significantly, a person’s debts are only released up until the point when the bankrupt is discharged from bankruptcy, under section 153 of the Bankruptcy Act.
This allows creditors such as the Australian Taxation Office to offset monies payable to the bankrupt (after bankruptcy) against debts payable by a person before their bankruptcy.
If a bankruptcy is annulled, a person’s debts will still exist and must be satisfied in some other manner. These debts are usually satisfied in the process of getting the annulment, i.e. payment in full, or through a section 73 agreement.
Section 82 of the Bankruptcy Act sets out what debts are provable in the estate and will be released upon discharge. Frequently, all of a bankrupt’s debts fall into this category and are discharged, but there are some significant exceptions including penalties or fines and HECS debts.
Only provable debts are released. Furthermore, some debts are provable in the estate for the amount owing, but by statute are not released in full at discharge (e.g. amounts under a maintenance agreement or order given before the bankruptcy date). An outstanding maintenance agreement amount at the time of the bankruptcy is released, but amounts payable after the bankruptcy commenced are not released at discharge.
Section 82 of the Bankruptcy Act also outlines debts that are not provable and will not be released on discharge. These are confirmed by section 153 of the Bankruptcy Act that provides that non-provable debts are not released upon discharge. These sections include a liability to pay an income contribution to the trustee, debts incurred by way of fraud, and liabilities under maintenance agreements or orders.
A bankrupt should be aware that non-provable debts will survive the bankruptcy process and will need to be paid by other means.
A debt owed to a secured creditor is not released against the asset secured—only against the bankrupt. Valid securities in place at start of bankruptcy can be enforced against the secured asset at any time, even after the bankrupt is discharged. However, secured assets are generally sold in the three years prior to bankruptcy discharge (although there are some exceptions).
Any shortfall after the secured asset’s sale is released from the bankrupt at discharge. A secured creditor cannot recover any shortfall suffered after selling the asset secured from the discharged bankrupt. Most securities are exercised with the asset sold before the bankrupt’s discharge and any shortfall is proved for in the estate, but not always. Sometimes these assets take longer than three years to realise. In this case, the secured creditor will not recover any shortfall.
If the secured asset has not been sold before discharge, any amount proved for (an estimated shortfall) in the estate is released at discharge. That debt therefore no longer exists and cannot be claimed against the secured asset. This affects creditors that make large shortfall estimates by underestimating the value of the secured asset.
The key point, under section 153(3) of the Bankruptcy Act, is that the secured part of a secured creditor’s debt survives a discharge from bankruptcy and the deficiency is released.
A business partner of a bankrupt is protected, as under section 153(4) of the Bankruptcy Act, a discharged bankrupt is not released from a partnership debt. These debts normally hold a joint liability under the Partnership Act 1892. These provisions also apply to people that entered into contracts or arrangements with the bankrupt, guaranteed a debt of the bankrupt, or simply have joint debts with the bankrupt. These people are liable for such debts, or their part of the debts they are liable for if the bankrupt had not become a bankrupt.
These joint debts are only released against the discharged bankrupt, not the other parties to the debt. Creditors can pursue the other parties to a debt, even after the discharge of the bankrupt, and their subsequent release from the debt from the bankrupt.
An annulment is a reversal of a bankruptcy. However, the bankruptcy will appear indefinitely on the public record (the National Personal Insolvency Index or NPII) and credit reference databases for two years from the annulment date, or five years from the date of bankruptcy, whichever is later. For an annulment to occur, a bankrupt needs to take one of the following three actions:
Annulment on payment of debts in full.
Section 73 proposal.
Annulment by court order.
The first two actions require satisfaction of the bankrupt’s debts, at least in part, and the last one requires an order of the court.
Under section 153A of the Bankruptcy Act, a bankruptcy is annulled if the estate has sufficient monies to pay all of the debts and the costs of the estate in full. This means that the bankrupt is now solvent and there is no need for the bankrupt estate, or a release from debts. Commonly, a bankruptcy is annulled when a bankrupt receives monies from a third party (usually a relative) or when a bankrupt’s assets are sold or refinanced.
The debts include all those that have been proved for in the bankruptcy, but also any applicable interest accrued after the bankruptcy’s commencement. The administration costs, charges and expenses of the bankrupt estate—including the trustee’s remuneration and expenses and AFSA’s Asset Realisation Charge (ARC, currently 7 percent)—are payable on the amount required to meet all of the debts and costs. If the bankruptcy was commenced by a creditor’s application, the petitioning creditor’s costs also need to be paid.
Bankrupts must understand that the extra estate costs incurred may be significant and must be paid in full to obtain this type of annulment.
A section 73 proposal is made under section 73 of the Bankruptcy Act. Section 73 gives bankrupts an alternative to their continued bankruptcy by allowing them to propose a formal arrangement to their creditors. This process is similar to proposing a Part X agreement to creditors (i.e. instead of bankruptcy); however, a section 73 proposal is initiated during a bankruptcy.
The process requires the creditors to accept the proposal and receive a benefit that was unavailable to them in the bankruptcy, in exchange for agreeing to annul the bankruptcy. Upon acceptance, an annulment occurs and the new agreement takes effect. The debts of the now ex-bankrupt are not released by discharge, but through the agreement terms being satisfied. Non-provable debts are covered in section 75 of the Bankruptcy Act.
Under section 153B of the Bankruptcy Act, a bankrupt can apply to the court for an order annulling (i.e. effectively overturning) the bankruptcy. The court will only consider an application if it believes that the bankruptcy should never have commenced in the first place. An application can be made against a sequestration order (i.e. a creditor’s petition) or the acceptance of a debtor’s petition by AFSA.
A bankrupt may apply for an annulment for numerous reasons not detailed here; the emphasis is on the bankrupt’s rights.
Once a bankruptcy is annulled, a trustee gives the appropriate notices to AFSA to update the NPII.
Section 154 of the Bankruptcy Act protects a trustee’s actions while they are trustee of a bankrupt estate. Any transactions or sales entered into during this period are not reversed, or reviewed. The trustee can use assets in the annulled estate to pay any costs and remuneration that remain unpaid at the time of the annulment.
If the assets in the estate are insufficient to meet the trustee’s costs and expenses, a trustee can collect the balance from the annulled bankrupt. This means that it is possible for a trustee to bankrupt the ex-bankrupt for costs incurred before the bankruptcy was annulled. However, this is a rare scenario.
Last Updated: 3.11.2017
In simple terms, bankruptcy trustees sell the assets of a bankrupt and distribute the proceeds to the bankrupt’s creditors. This factsheet looks at which assets can be sold by the bankruptcy trustee. It does not look at assets that may be recovered from other parties through other provisions relating to void transactions under the Bankruptcy Act 1966.
Not all of the bankrupt’s assets are available to a bankruptcy trustee. The Act defines ‘divisible’ assets (assets available to a bankruptcy trustee) from ‘non-divisible’ assets (assets that are not available to a bankruptcy trustee). Understandably, whether or not an asset is divisible is often a contested issue.
Items that are held on trust or loaned to a bankrupt—or that do not belong to a bankrupt —do not vest in a bankruptcy trustee. They are not the bankrupt’s assets and cannot be divisible.
Upon bankruptcy, any property of the bankrupt automatically vests in the bankruptcy trustee. Under section 58 of the Bankruptcy Act, a bankruptcy trustee is not required to take any action for this ‘vesting’ to occur. Where applicable, legal title to some property may have to be registered in the bankruptcy trustee’s name, but equitable title will vest automatically, e.g. real property.
Assets acquired by a bankrupt after the bankruptcy commenced but before discharge may also vest in the bankruptcy trustee when they are acquired. These are called ‘after-acquired property’.
After-acquired property includes any property acquired by or inherited by the bankrupt on or after the date of the bankruptcy, and before discharge, being property that is also divisible among their creditors. Non-divisible, after acquired property does not vest in the bankruptcy trustee.
There are two important factors in defining after-acquired property:
The property must have been acquired during the bankruptcy’s term.
The property would otherwise be classified as divisible property.
If existing owned property is not deemed as ‘divisible’ at the commencement of bankruptcy, it is not divisible if acquired during bankruptcy.
One purpose of section 58 of the Bankruptcy Act is to immediately protect assets from individual creditors who attempt recovery of their debts by exercising securities against assets. Creditors cannot take these assets from a bankrupt, or from the estate, under enforcement actions.
Once an asset has vested in a bankruptcy trustee, only the bankruptcy trustee may deal with that asset, as a bankrupt is no longer the legal owner. This allows for an orderly and fair distribution of the bankrupt’s assets between the proper creditors.
Vesting of property upon bankruptcy — general rule:
(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
There are two exceptions that allow creditors to commence or continue action against property:
Secured creditors have a right to exercise their security over any asset covered by their security. Section 58 of the Bankruptcy Act only provides protection to divisible assets that are not covered by a valid security.
Creditors can exercise their rights against non-divisible property for debts under maintenance orders or agreements. Non-divisible property does not fall under the control or protection of the bankruptcy trustee, as it does not vest in the bankruptcy trustee.
Vesting of property upon bankruptcy —general rule:
(5) Nothing in this section affects the right of a secured creditor to realise or otherwise deal with his or her security.
(5A) Nothing in this section shall be taken to prevent a creditor from enforcing any remedy against a bankrupt, or against any property of a bankrupt that is not vested in the trustee of the bankrupt, in respect of any liability of the bankrupt under:
(a) a maintenance agreement; or
(b) a maintenance order; whether entered into or made, as the case may be, before or after the commencement of this subsection.
All divisible property that is not secured to a particular creditor is solely under the control of the bankruptcy trustee. But deciding what is divisible property is not always straightforward.
In some cases, registration is necessary to record vesting of property in the bankruptcy trustee. This is usually the case with real property, where the title of the property needs to be transferred to the bankruptcy trustee in order for the bankruptcy trustee to be able to legally deal with the property.
This process is known as ‘entering transmission’ (i.e. transmitting legal ownership). The equitable interest will vest in the bankruptcy trustee; however, the legal interest will also need to be transferred.
Usually, in the case of real property, a bankruptcy trustee will initially protect the estate’s interest by lodging a caveat on title—vesting of the property provides a ‘caveatable’ interest. However, a bankruptcy trustee will only be able to sign transfer documents when the property title is transferred into their name.
Occasionally, a bankruptcy trustee will change during a bankruptcy. Any remaining property in an estate automatically vests in the new bankruptcy trustee when the change of bankruptcy trustee takes effect. The same transmission rules apply, so the new bankruptcy trustee may have to enter into ‘transmission’ of the relevant property into their name.
Changes in bankruptcy trustees are uncommon, but the procedural mechanism is in place to allow a smooth transfer of the rights to property to any new bankruptcy trustee.
Section 58 does not define what is or is not divisible property, only that all divisible property vests in the bankruptcy trustee. A bankruptcy trustee considers divisible property as all of the property of the bankrupt, then, eliminates non-divisible assets from the list.
The Bankruptcy Act broadly defines divisible property as covering the following:
All property owned at the time of bankruptcy, or acquired during the bankruptcy.
Any rights or powers over property that existed at the date of bankruptcy, or during the bankruptcy.
Any rights to exercise powers over property.
Any property that vests because an associated entity received the property as a result of personal services supplied by the bankrupt (section 139D of the Bankruptcy Act).
Monies recovered from an associated entity due to an increase in the net worth of the entity as a result of personal services supplied by the bankrupt (section 139E of the Bankruptcy Act).
Monies recovered from a regulated superannuation fund further to a 139ZQ notice being sent to the superannuation fund's trustee (section 128C of the Bankruptcy Act) or via a court order (under 128K of the Bankruptcy Act).
Monies paid to the bankruptcy trustee under an order related to rolled-over superannuation interests etc. (under section 139ZU of the Bankruptcy Act).
Section 116 of the Act lists what classes of assets are divisible among creditors.
Property divisible among creditors
(1) Subject to this Act:
(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and
(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her Discharge; and
(c) property that is vested in the trustee of the bankrupt’s estate by or under an order under section 139D or 139DA; and
(d) money that is paid to the trustee of the bankrupt’s estate under an order under section 139E or 139EA; and
(e) money that is paid to the trustee of the bankrupt’s estate under an order under paragraph 128K(1) (b); and
(f) money that is paid to the trustee of the bankrupt’s estate under a section 139ZQ notice that relates to a transaction that is void against the trustee under section 128C; and
(g) money that is paid to the trustee of the bankrupt’s estate under an order under section 139ZU; is property divisible amongst the creditors of the bankrupt.
Determining what is not divisible property is a difficult area. The Bankruptcy Act provides that some property types will not be divisible. Section 116(2) of the Act summarises what is not classified as property divisible among creditors.
In some instances, assets that would be nondivisible in bankruptcy that are converted to cash or asset before bankruptcy— can become divisible property.
The list of non-divisible assets is extensive but, in most cases, these assets rarely appear. Some of them are very common and are non-divisible because they are necessary for the bankrupt’s ability to live.
These can be grouped into the following areas:
Property held by the bankrupt in trust for another person (i.e. not owned by the bankrupt).
The bankrupt’s household property prescribed by Regulation 6.03 or identified by a resolution passed by the creditors before the bankruptcy trustee realises the property.
Personal property that has sentimental value for the bankrupt and is identified by a special resolution passed by the creditors before the bankruptcy trustee realises the property.
The tools of trade that the bankrupt uses in earning income by personal exertion—subject to the value limit prescribed by the regulations.
A vehicle used by the bankrupt as a means of transport—subject to the value limit prescribed by the regulations.
Policies of life assurance or endowment assurance covering the life of the bankrupt or their spouse, whether the proceeds are received on or after the date of the bankruptcy.
The bankrupt’s interest in a regulated superannuation fund (or approved deposit fund or an exempt public sector superannuation scheme). And any payment to the bankrupt from such a fund (received on or after the date of the bankruptcy) if the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993.
A payment to the bankrupt under a payment split under Part VIIIB of the Family Law Act 1975, where the eligible superannuation plan is a fund or scheme covered by the Act and the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993.
Money held in the bankrupt’s retirement savings account (RSA)—or a payment to a bankrupt from an RSA received on or after the date of the bankruptcy—if the payment is not a pension or annuity within the meaning of the Retirement Savings Accounts Act 1997.
A payment to the bankrupt under a payment split under Part VIIIB of the
Family Law Act where the eligible superannuation plan involved is an RSA, and the payment involved is not a pension or annuity within the meaning of the Retirement Savings Accounts Act.
Any right to recover damages or compensation (or amounts received before or after bankruptcy) for personal injury or wrongdoing or regarding the death of the bankrupt’s spouse, de factor partner, or family member.
Amounts paid to the bankrupt under a rural support scheme as prescribed by the Act.
Amounts paid to the bankrupt by the Commonwealth as compensation in relation to loss as prescribed by the Act relating to the rural support scheme.
Property that was purchased or acquired with protected money.
Any property that, under an order—under either Part VIII, or Part VIIIAB of the Family Law Act 1975—the bankruptcy trustee is required to transfer to the bankrupt’s spouse or a former spouse, or former de facto partner.
The bankrupt’s property that is a support for the bankrupt that was funded under the National Disability Insurance Scheme (NDIS), or NDIS amount as defined in that Act.
Some divisible property is subject to statutory value limits. Property valued under these limits is exempt or non-divisible to the extent of the limit. These limits change periodically, as prescribed by the Australian Financial Security Authority (AFSA).
The limits are designed to allow the bankrupt to maintain a standard of living (the household property limitations), and maintain some employment (the tools of trade and motor vehicle limitations).
The Bankruptcy Act defines what is sentimental property, and whether it is exempt. Sentimental property must be non-monetary, have real sentimental value to the bankrupt, or be an award for sporting, cultural, military or academic achievement. If it does not fall into these categories, it cannot be classified as sentimental and usually becomes divisible.
Creditors must also resolve by special resolution at a meeting of creditors (or a virtual meeting) that this property is sentimental. If the creditors do not approve it as sentimental property, it becomes divisible property to the estate.
Section 129AA sets out the periods that divisible assets must be dealt with. A bankruptcy trustee must realise any divisible assets disclosed by a bankrupt within six years after the bankrupt is discharged. This period can be extended up to three years at a time by giving written notice to the bankrupt prior to the six-year expiry. There is no limit on how many extensions a bankruptcy trustee can seek.
For after-acquired property disclosed to the bankruptcy trustee during bankruptcy, the bankruptcy trustee has six years after the bankrupt’s discharge date to deal with the property. For any after-acquired property disclosed by the bankrupt after discharge, the bankruptcy trustee has six years commencing on the date of disclosure to realise the property. Again, a bankruptcy trustee can extend these periods.
If the assets are not dealt within the required period, they can revest to the bankrupt.
Section 127 of the Bankruptcy Act outlines that a bankruptcy trustee has 20 years from the date of bankruptcy to deal with the property of the bankrupt. After the 20 years’ expiry, the property revests to the bankrupt.
Last Updated: 13.04.2021
However, a bankruptcy can be extended in certain circumstances.
This applies to both people who are bankrupt and people who are subject to a personal insolvency agreement (Part X) or a debt agreement (Part IX).
The Australian Financial Security Authority (AFSA) has on its website an overview of employment restrictions to alert people to the potential trades and professional memberships that are affected in these circumstances.
On a general basis, state governments administer legislation that governs eligibility rules for trades such as plumbers, builders, secondhand dealers, etc. While national or state-based professional associations / statutory boards govern such professions as accountants, lawyers, barristers etc.
The schedule is to assist and alert people to which statutory bodies may have such restrictions. It does not mean that employment or operation in those field is voided on the event of bankruptcy, it simply assists in pointing users in the right direction and is not an exhaustive list.
Impact on membership | considered an exclusion by the relevant Act or Rules, however applications for consideration can be made to the governing body to retain membership/licence. |
Potential impact | must be disclosed to the governing body but is not specifically considered an exclusion |
No impact | not specifically listed as an exclusion by the relevant Act or Rules |
Exclusion | current legislation/regulations advise that bankruptcy/personal insolvency is an automatic exclusion |
Note: Legislation and membership rules are subject to change. This table should be used as a guide only. You should contact the relevant source of information directly to confirm any impact prior to lodging the relevant personal insolvency applications.
National Authorities
Profession / Trade | Impact | Authority |
Accountants – CA | Impact on Membership/Licence | Chartered Accountants Australia and New Zealand |
Accountants – CPA | Impact on Membership/Licence | CPA Australia |
Accountants – IPA | Impact on Membership | Institute of Public Accountants |
Bookkeepers | Impact on Membership | Institute of Certified Bookkeepers |
Company director | An undischarged bankrupt or a person subject to a Personal Insolvency Agreement cannot be involved in the management of a company unless authorised by a Court. | Australian Securities & Investments Commission (ASIC) |
Councillors | Impact on Membership | Contact local government office |
Defence Force | Navy and/or RAAF personnel should contact their respective HR departments for information on potential consequences. | Department of Defence |
Finance Brokers & Securities | Impact on Membership/Licence. Note that finance broking in certain States/Territories may also be regulated under respective state legislation. | Australian Securities & Investments Commission (ASIC) |
Members of Parliament | Exclusion from Membership | Parliament of Australia |
Operating a Business (as a sole trader or partnership) | Potential Impact: Debt Agreement and Part X Agreements may not necessarily impact your ability to operate a business. Under Bankruptcy, you may be prevented from running a business because your trustee may sell the assets of your business. Any existing partnership you are part of will dissolve. If you are able to continue running the business by your trustee, you must disclose your bankruptcy to all those who your business deals with and you must include your full name in your business name. | Australian Financial Security Authority (AFSA) |
Police – Federal | Impact on Membership | Australian Federal Police |
Registered Nurse of Midwife | Potential Impact (but must be declared on application) | Nursing and Midwifery Board |
SMSF Trustee or Beneficiary | Exclusion from Membership | Australian Prudential & Regulatory Authority (APRA) |
Tax Agents | Impact on Membership | Tax Agent’s Board |
State/Territory Based Authorities
Profession/ trade | WA | Tas | NT | ACT |
Builders Licence | Potential Impact | Potential Impact | Exclusion | Exclusion |
Department of Commerce | Department of Justice | Northern Territory Building Practitioners Board | ACT Environment & Planning Directorate | |
Debt Collector/ Process Server/ Repossession Agent | Potential Impact | Potential Impact | Exclusion | Potential Impact |
Department of Commerce | Consumer Affairs & Trading | Northern Territory Licensing | Refer NSW | |
Electrician | Potential Impact | Potential Impact | Potential Impact | Potential Impact |
Energy Safety – Dept of Commerce | Department of Justice | NT Electrical Workers and Contractors Licensing Board | ACT Environment & Planning Directorate | |
Escort Agencies and/or Brothel Managers | N/A | N/A | Potential Impact | Potential Impact |
No Authority | No Authority | Northern Territory Licensing | Office of Regulatory Services | |
Gaming Room/ Casino Employees | Potential Impact | Potential Impact | Potential Impact | Potential Impact |
Department of Racing, Gaming and Liquor | Department of Treasury and Finance | Northern Territory Licensing | ACT Gambling & Racing Commission | |
Gas Fitter Licence | No Impact | No Impact | No Impact | Potential Impact |
Energy Safety – Dept of Commerce | Department of Justice | NT Worksafe | Environment & Planning Directorate | |
Justice of the Peace/ Comm. Dec | Exclusion | Exclusion | Exclusion | Impact |
Department of the Attorney General | Department of Justice | Department of Justice | Department of Justice and Community Safety | |
Liquor Licence (Publican) | Impact | Potential Impact | Impact | Potential Impact |
Department of Racing, Gaming and Liquor | Department of Treasury and Finance | Director General of Licensing | Office of Regulatory Services | |
Police – State | Impact | Impact | Impact | Impact |
WA Police | TAS Police | NT Police | Australia Federal Police | |
Plumber Licence | Potential Impact | No Impact | Potential Impact | Potential Impact |
Plumbers Licensing Board | Department of Justice | Northern Territory Plumbers & Drainers Licensing Board | Environment & Planning Directorate | |
Private Investigator Licence | Potential Impact | Potential Impact | Exclusion | N/A |
WA Police | Consumer Affairs and Fair Trading | Northern Territory Licensing | N/A – currently no licensing body | |
Real Estate Licence | Impact | Exclusion | Impact | Impact |
Department of Commerce | Property Agents Board | Northern Territory Licensing | Office of Regulatory Services | |
Second Hand Dealers & Pawnbrokers Liences | Potential Impact | Potential Impact | Impact | Potential Impact |
WA Police | TAS Police | Northern Territory Licensing | Office of Regulatory Services | |
Security Licence | No Impact | Potential Impact | No Impact | Potential Impact |
WA Police | Consumer Affairs and Fair Trading | Director General of Licensing | Office of Regulatory Services | |
Solicitors/ Lawyers (Practicing) | Impact | Impact | Impact | Impact |
Legal Practice Board | TAS Supreme Court | NT Supreme Court | ACT Supreme Court | |
Travel Agents Licence | All state licencing is being wound down | All state licencing is being wound down | All state licencing is being wound down | All state licencing is being wound down |
Department of Commerce | Consumer Affairs and Fair Trading | Northern Territory Licensing | Office of Regulatory Services | |
Vehicle Dealer Licence | Potential Impact | Exclusion | Exclusion | Potential Impact |
Department of Commerce | Consumer Affairs and Fair Trading | Northern Territory Licensing | Office of Regulatory Services |
Profession/ trade | NSW | VIC | QLD | SA |
Builders Licence | Exclusion | Potential Impact | Exclusion | Exclusion |
Department of Fair Trading | Victorian Building Authority | Queensland Building & Construction Commission | Consumer & Business Services – Licensing | |
Debt Collector/ Process Server/ Repossession Agent | Potential Impact | Exclusion | Exclusion | Potential Impact |
NSW Police | Consumer Affairs Victoria | Office of Fair Trading | Consumer & Business Services – Licensing | |
Electrician | Potential Impact | Potential Impact | Potential Impact | Potential Impact |
Department of Fair Trading | Energy Safe Victoria | Electrical Safety Office | Consumer & Business Services – Licensing | |
Escort Agencies and/or Brothel Managers | N/A | N/A | Potential Impact | Potential Impact |
N/A | Potential Impact | Exclusion | N/A | |
Gaming Room/ Casino Employees | Potential Impact | Potential Impact | Potential Impact | Potential Impact |
NSW Office of Liquor, Gaming & Racing | Commission for Gambling & Liquor Regulation | The Office of Liquor, Gaming and Racing (OLGR) | Consumer & Business Services – Licensing | |
Gas Fitter Licence | Potential Impact | Potential Impact | No Impact | No Impact |
Department of Fair Trading | Victorian Building Authority | Dept of Natural Resources and Mines | Consumer & Business Services – Licensing | |
Justice of the Peace/ Comm. Dec | Exclusion | Exclusion | Exclusion | Exclusion |
Department of Justice | Honorary Justice Office | Department of Justice & Attorney General | Attorney General’s Department | |
Liquor Licence (Publican) | Potential Impact | Impact | Impact | Potential Impact |
Office of Liquor Gaming & Racing | Commission for Gambling & Liquor Regulation | The Office of Liquor, Gaming and Racing | Consumer & Business Services | |
Police – State | Impact | Impact | Exclusion | Impact |
NSW Police | VIC Police | QLD Police | SA Police | |
Plumber Licence | Potential Impact | Potential Impact | Potential Impact | No Impact |
Office of Fair Trading | Victoria Building Authority | Queensland Building & Construction Commission | Consumer & Business Services | |
Private Investigator Licence | Potential Impact | Exclusion | Exclusion | Potential Impact |
NSW Police | Victoria Police | Office of Fair Trading Qld | Consumer & Business Services | |
Real Estate Licence | Impact | Impact | Exclusion | Exclusion |
Office of Fair Trading | Consumer Affairs Victoria | Office of Fair Trading | Consumer and Business Services | |
Second Hand Dealers & Pawnbrokers Liences | Impact | Impact | Impact | Impact |
Office of Finance and Services | Consumer Affairs Victoria | Office of Fair Trading | SA Police | |
Security Licence | No Impact | Potential Impact | No Impact | Potential Impact |
NSW Police | VIC Police | Office of Fair Trading | Consumer & Business Services | |
Solicitors/ Lawyers (Practicing) | Impact | Impact | Impact | Impact |
Legal Profession Admission Board | Board of Examiners | Legal Practitioners Admissions Board | Board of Examiners | |
Travel Agents Licence | All state licencing is being wound down | All state licencing is being wound down | All state licencing is being wound down | All state licencing is being wound down |
Office of Fair Trading | Consumer Affairs Victoria | Office of Fair Trading | Consumer & Business Services | |
Vehicle Dealer Licence | Exclusion | Exclusion | Exclusion | Exclusion |
Office of Fair Trading | Consumer Affairs Victoria | Office of Fair Trading | Consumer & Business Services |
Yes. In most cases, a bankrupt is able to earn an income during their bankruptcy. Subject to some provisions and exceptions, a bankrupt is encouraged to earn an income, as there is no logical reason why they should not be entitled to earn an income and benefit from it. The Bankruptcy Act 1966 states a bankrupt must pay contributions from their income to their estate if the amount earned is over the relevant threshold prescribed by the Australian Financial Security Authority (AFSA).
Under section 139P of the Bankruptcy Act, a bankrupt may be liable to make a contribution—subject to thresholds and number of dependents—to their bankrupt estate from income earned during their bankruptcy. It is fitting that some of the income from the bankrupt’s efforts during the bankruptcy are used to satisfy their past debts.
A bankrupt’s income is assessed to determine whether contributions must be paid. Section 139L of the Bankruptcy Act sets out the definition of income to be assessed.
The definition of ‘income’ is the same as under the Taxation Acts, but it also includes amounts that have not been earned from physical exertion or investments, and amounts that may not even be taxable income. These ‘other incomes’ include loans made to the bankrupt, items that fall under the Fringe Benefit Tax provisions, annuities and pensions, as well as some insurance payments.
No. Many amounts are not income for contribution assessment purposes. These are set out under paragraph (b) of section 139L of the Bankruptcy Act.
Yes. Deductions are available for payments made to support a child, if paid under a Family Law Act 1975 maintenance agreement or order. Deductions are also available for certain business expenses under section 139N of the Bankruptcy Act.
A bankrupt is required under the Bankruptcy Act to provide their income details to their trustee. Usually, a trustee will send a form to the bankrupt on each bankruptcy date anniversary. This form must be completed and returned with any documentation supporting the income earned and deductions claimed.
Under the Bankruptcy Act, it is an offence if a bankrupt does not cooperate with their trustee and complete their income assessment form. If a bankrupt does not cooperate, the trustee can object to the bankrupt’s discharge from bankruptcy (i.e. extend their bankruptcy period) and estimate the bankrupt’s income and assess it accordingly.
Yes. While a trustee can make an assessment on what they reasonably believe is a bankrupt’s income, in practise they investigate thoroughly before making an assessment. If the bankrupt supplies inadequate or questionable information, a trustee will seek further information.
If appropriate, a trustee can conduct an examination and request that the bankrupt provide further information to clarify any matter. If further information is not forthcoming, the trustee can make the assessment on what they reasonably believe the income is, putting the onus on the bankrupt to disprove the assessment.
The contribution calculation is made on assessed income, which is the amount of income left after tax, the Medicare levy and proper deductions. A contribution is payable if the assessed income is more than AFSA’s current statutory threshold. The threshold amounts are based on the number of dependents that the bankrupt had during that assessment period.
A trustee is entitled to receive one-half of the balance over the threshold amount (i.e. the ‘over threshold after tax income’ is divided equally between the bankrupt and trustee). The formula is:
(Assessed Income – Actual Income Threshold Amount) ÷ 2
The trustee makes an assessment of the estimated income based on information the bankrupt supplies at the beginning of the assessment period. An assessment (called a ‘determination’) is made on these estimates and the bankrupt becomes liable to pay any contributions to the trustee from the assessment date.
At the end of the assessment period, the bankrupt must supply the past year’s actual income amount, along with their estimates for the next year. The past year’s assessment is adjusted if necessary, then a new assessment is made for the next year’s estimated income and the process starts again.
Each assessment period runs from the date of the bankruptcy or its anniversary, and ends on the day before the next anniversary. Assessment periods continue until the bankrupt is discharged, including when a bankruptcy is extended through an objection to discharge.
Money paid under these provisions is paid into the estate funds for the benefit of the bankrupt’s creditors.
A bankrupt must provide information about their income and deductions, and give the trustee access to all required books and records. If the bankrupt refuses or fails to supply requested books or records, the trustee can lodge an objection to the bankrupt’s discharge and AFSA may prosecute the bankrupt for an offence.
Once a determination is made, the trustee gives a notice to the bankrupt setting out the amount payable and particulars on how the determination was calculated. Usually, a trustee will include a schedule of contribution payments over the remaining months of the assessment period.
Yes. Issuing an assessment notice creates a legal obligation to pay the contribution. A trustee can nominate when the payments are due and can be collected from the bankrupt as a debt due. These rights remain after the bankrupt has been discharged, which means that the bankrupt can be re-bankrupted for non-payment of any contribution.
Yes. The Act provides a mechanism for any assessment to be reviewed by the Inspector-General, but the request must be made within 60 days of the assessment. Upon receipt the Inspector-General has 60 days to decide whether the assessment should be reviewed and make a ruling. The decisions handed down by the Inspector-General can be reviewed by the Administrative Appeals Tribunal.
If an assessment is made and the bankrupt refuses or fails to pay, the trustee can:
issue notices to employers or other people that owe the bankrupt money to garnishee those monies (i.e. order third parties to withhold monies owing to the bankrupt)
issue an objection to the discharge of the bankrupt, extending the bankruptcy period
prohibit the bankrupt from travelling overseas
re-bankrupt a discharged bankrupt, if the refusal to pay occurs after the bankrupt has been discharged
issue a notice under the Bankruptcy Act’s supervised account regime provisions.
Trustees may determine that the supervised account regime is needed. This requires a bankrupt to open a supervised account where they must deposit all of their income. The trustee then supervises all withdrawals from that account to ensure that income contributions are made.
Last Updated: 3.11.2017
During a bankruptcy, a bankrupt may be in a position to make a proposal to their creditors to satisfy their debts and consequently end their bankruptcy early. Section 73 of the Bankruptcy Act 1966 provides a bankrupt with a mechanism to make that proposal.
If a section 73 proposal is accepted, the creditors would expect to receive a larger distribution than they would receive under the continued bankruptcy.
The bankrupt is required to send a written proposal to their trustee and request that a meeting of creditors be called to consider the proposal. The proposal’s particulars are set out in the written request. The trustee will investigate the benefits of the proposal as necessary, issue a report and call a meeting for the creditors to vote to accept or reject the proposal.
The bankrupt will usually be required to pay the trustee to undertake this process, as there is no requirement for estate funds to be used for this purpose.
If the proposal is accepted, the bankruptcy will be annulled from the acceptance date. If the proposal is not accepted, the bankruptcy will continue as if the proposal had never been put to creditors.
A section 73 proposal can be structured as either:
a composition
a scheme of arrangement.
A composition is an agreement to pay money to the trustee. The composition can be for any amount and can be paid over any period.
A scheme of arrangement can contain almost any lawful provision. It can contain provisions for the payment of monies, the sale of certain assets, and payments from third parties.
Before the meeting of creditors, the trustee will conduct investigations. Once satisfied, the trustee will issue a report to creditors detailing the proposal’s terms. The report will compare the likely returns from the proposal to the bankruptcy’s continuation.
A trustee can decline to call a meeting of creditors if the proposal does not provide for the trustee’s approved fees and expenses or costs to be paid. Prior to the proposal being examined, the trustee may also require the bankrupt to pay an amount (called a surety) to cover the trustee’s costs, and to cover the trustee’s fees to investigate the proposal, and to call and hold the meeting.
The proposal is put to a meeting of creditors under the same provisions as bankruptcy meetings. Only the creditors at that meeting vote on the proposal. It must be accepted by a special resolution, which is both a majority in number of the creditors (present and voting), and at least 75 per cent of the dollar value of the creditor’s debts (present and voting). So it is in every creditor’s best interests to attend and vote on a section 73 proposal.
If the proposal is accepted, the bankruptcy is consequently annulled. The now ‘ex-bankrupt’ will be bound by the agreement terms. The agreement binds all creditors, whether or not they attend or vote at the meeting.
The proposal must include a provision for a trustee to administer the agreement. Usually, the bankruptcy trustee will administer the agreement; however, a different trustee can be appointed under the agreement. The trustee’s role is to:
ensure that the ex-bankrupt complies with the agreement’s terms
enforce the provisions as necessary
pay dividends.
Section 74 of the Bankruptcy Act provides that the actions of the bankruptcy trustee during the bankruptcy period remain valid. Without this provision, the bankrupt or any party to a bankrupt’s transactions would be able to challenge its validity.
Yes. The trustee of the agreement will make distributions under the agreement terms. If the agreement does not stipulate these provisions, the trustee will make distributions when practical and when the agreement is likely to end.
The agreement ends when the debtor (the ex-bankrupt) satisfies the agreement terms in full.
If the debtor does not satisfy the agreement terms, section 76B of the Bankruptcy Act provides enforcement provisions. All of the powers that are available to a trustee under Part X of the Bankruptcy Act (in the enforcement of personal insolvency agreements) are available to a trustee of a composition or scheme of arrangement. These include terminating the agreement either:
automatically through the agreement terms
with creditors’ consent
by creditor resolution
by court order.
Any application to the court to terminate the agreement can also include an application to bankrupt the debtor to initiate a new bankruptcy.
The administration of section 73 proposals attracts a government charge known as a ‘realisation charge’. The current rate is 7 percent of gross monies received into the estate, less payments to secured creditors and trade-on costs. The realisation charge is payable in priority to any dividend to creditors.
Last Updated: 3.11.2017
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