INSOLVENCY SUMMER 2009/10LECTURE 4A

LAW EXTENSION COMMITTEE UNIVERSITY OF SYDNEY

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INSOLVENCY SUMMER 2009/2010

KEY DATES IN A BANKRUPTCY

• “the date of the bankruptcy” - s 5 [Nichols 64]

• “the commencement of the bankruptcy” - s 5 [Nichols 64]

• s 115 - commencement of a bankruptcy

• s 116 - property divisible amongst creditors - all property which belonged to the bankrupt at the commencement of the bankruptcy

• need to read these 4 provisions together

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INSOLVENCY SUMMER 2009/2010

KEY DATES IN A BANKRUPTCY

• “the date of the bankruptcy” - s 5 [Nichols 64] – this is date on which a sequestration order was made against the estate or where, in a case where the bankrupt presented a debtor’s petition, the date which they became bankrupt by reason of section 55, 56E or 57.

• “the commencement of the bankruptcy” - s 5 [Nichols 64] – this is the time at which the bankruptcy is by virtue of section 115 deemed to have commenced.

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INSOLVENCY SUMMER 2009/2010

KEY DATES IN A BANKRUPTCY

• s 115 - commencement of a bankruptcy – Where a creditors petition is used, then generally the bankruptcy is taken to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period or 6 months immediately before the date on which the creditors petition. If the bankruptcy is as a result of the acceptance of a debtors petition, the bankruptcy is taken to have relation back to and commenced at the time indicated in the table set out in s 115(2): see Keays pg 29

• s 116 - property divisible amongst creditors - all property which belonged to the bankrupt at the commencement of the bankruptcy

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INSOLVENCY SUMMER 2009/2010

RELATION BACK - sections 115 and 116

• s 115 – If a person becomes a bankrupt on a creditors petition (and sub-section 1A does not apply), then the bankruptcy is taken to have “relation back to”, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period of 6 months immediately before the date on which the creditor’s petition was presented.

• See the following diagram from Keays at pg 29:

Act of bankruptcy Act of bankruptcy Petition presented Sequestration order made

16/2/2006 23/3/2006 21/9/20065/11/2005

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INSOLVENCY SUMMER 2009/2010

RELATION BACK - sections 115 and 116

• With respect to debtor’s petitions, see section 115(2)

• What does “relation back” mean? According to Lord Esher MR in Re Pollit [Nichols 298]

“The title of the trustee in the subsequent bankruptcy related back to that act of bankruptcy. What does that mean? The result of the relation

back is, that all subsequent dealings with the debtor's property must be treated as if the bankruptcy has taken place at the moment when the act of bankruptcy was committed. The debtor must be considered as having become a bankrupt the moment the deed was executed. Then, he being a bankrupt, all the money which he then had, and all the money which was owing to him, passed to the trustee in the bankruptcy for the purpose of being distributed by him amongst the bankrupt's creditors.”

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INSOLVENCY SUMMER 2009/2010

RELATION BACK - sections 115 and 116

• Where a person commits an act of bankruptcy, that person is not entitled to deal with his or her estate. He or she has no right to gather it in if not already in his or her hands or to make payment to his or her creditors out of that which he or she has actually at his or her command. He or she can have no good discharge to a debtor who pays him or her with notice of the act of bankruptcy, because the debt made by subsequent bankruptcy proceedings will be turned into a debt due to his or her trustee, and not to himself or herself: Ponsford, Baker & Co v Union of London and Smith's Bank Ltd [1906] 2 Ch 444: see Keays pg 30.

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INSOLVENCY SUMMER 2009/2010

• In Anscor Pty Ltd v Clout [Keays at pg 30-31] Lindgren J stated:

“The vesting in the trustee in bankruptcy does not take place upon the commencement of the bankruptcy; it takes place forthwith upon the debtor’s becoming a bankrupt. A debtor becomes a bankrupt on the making of a sequestration order upon a creditor’s petition (s 43(2) of the Act) or upon the endorsement by the Official Trustee of a debtor’s petition as ‘accepted’ (s 55(4A) of the Act). Until then, there is no trustee in bankruptcy in whom property can vest: cf Carter at 780--781 per Lindley LJ. The ‘commencement of the bankruptcy’, however, marks the time as at which the items of property constituting the ‘property of the bankrupt’ are to be identified. Those items of property constitute the property which vests in the trustee in bankruptcy forthwith upon the debtor’s becoming a bankrupt. Such an item of property will not vest in the trustee in bankruptcy if it no longer exists when the debtor becomes a bankrupt, or if it still exists then but has been transferred in the meanwhile for full value under a transaction protected by s 123 as mentioned in the preceding paragraph. Statements to the effect that avoidance by the trustee is effective as from ‘the date of the accruer of [the trustee’s] title, or, in other words ... from the date of the act of bankruptcy to which the title of trustee relates back’ (Carter at 782 per AL Smith LJ – and see Fiorino at 18 and Alvaro at 426-427), do not signify that there is an actual vesting in the trustee at the commencement of the bankruptcy. They signify that, the transfer by the debtor/bankrupt being disregarded, if the property still exists at the commencement of the bankruptcy, it will form part of the property of the bankrupt which will vest in the trustee forthwith upon the debtor’s becoming a bankrupt, if the property also still exists then.”

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INSOLVENCY SUMMER 2009/2010

• The result of the doctrine of relation back is that all subsequent dealings with the debtor’s property must be treated as if the bankruptcy had taken place at the moment when the act of bankruptcy was committed. This means that the trustee is entitled to property of the bankrupt which would not otherwise be available to the estate at the date of bankruptcy.

• If a creditor’s petition has an extended life (see section 52(5)) ie up to 24 months then it may be that the period is extended even further. Applying this to Keays’ diagram on pages 29-30, a sequestration order might not be made until September 2008 if it has been extended because the court has considered it just and equitable: see Nichols page 174.

• There will be no relation back period where a debtors petition has been presented and the debtor did not commit an act of bankruptcy in the 6 months preceding the presentation of the petition.

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INSOLVENCY SUMMER 2009/2010

PROPERTY DIVISIBLE AMONGST CREDITORS - S 116

• S 58 vests the property of the bankrupt in the trustee [Lecture 1]

• All property owned at date of commencement of bankruptcy or acquired after that date - s 116(1) – is property divisible amongst the creditors of the bankrupt.

• Trustee takes subject to the equities.

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INSOLVENCY SUMMER 2009/2010

PROPERTY DIVISIBLE AMONGST CREDITORS - S 116 (Keays page 99 – 101)

• There are exceptions to section 116(1) and they are to be found in s 116(2). Note section 116(2)(a), (b), (ba), (c), (ca), (d), (g) and (q) in particular.

• In relation to section 116(2)(a) see Clout (Trustee) v Anscor Pty Ltd [2003] FCA 326 at [44] and Jones v Southall & Bourke Pty Ltd [2004] FCA 539 at [56] and [62].

• In relation to section 116(2)(b) see Rogers v Asset Loan Co. Pty Ltd [2006] FCA 434 at [37] - [38]. In Re Vaughan (1996) 71 FCR 34 a bankrupt was allowed to keep his box trailer as he used it to collect wood for heating his home in Tasmania.

• In relation to section 116(2)(g) see Re Iskenderian; ex parte Iskenderian Bros Pty Ltd (1989) 21 FCR 363.

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INSOLVENCY SUMMER 2009/2010

EXEMPT TRANSACTIONS - ss 123 & 124

Protection of certain transfers of property against relation back - s 123

• In order to secure the protection against the principle of relation back a person must fulfill the requirements of section 123 or 124.

• In relation to section 123, four kinds of transactions are exempt – see section 123(1)(a), (b), (c) and (d) but only if the three criteria set out in s 123(1)(e), (f) and (g) are satisfied.

• The burden of proof is on the person who has dealt with the bankrupt - s 123(2)• Effect of knowing that an act of bankruptcy has been committed - s 123(3)• Maintenance agreements and orders protected - s 123(6)• What is a “payment” or a “transaction” - s 123(7)• “In the ordinary course of business” not restricted to trade - an act which is usual

or common in the business of the debtor - a fair transaction - Robertson v Grigg (1932) 47 CLR 257 at 267

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INSOLVENCY SUMMER 2009/2010

EXEMPT TRANSACTIONS - ss 123 & 124

Protection of certain transfers of property against relation back - s 123

• Note that s 123 is subject to ss 118-122, 128B, 128C [Lecture 5 - transactions void against the trustee]

• Section 118 deals with execution by creditors against the property of a debtor who becomes a bankrupt.

• Sections 119 and 119A deal with sheriffs duties.• Section 120 deals with undervalued transactions.• Section 121 deals with certain transfers made to defeat creditors.• Section 122 deals with preferences.• Sections 128B and 128C deal with superannuation contributions made to defeat

creditors.

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INSOLVENCY SUMMER 2009/2010

Protection of certain payments to the bankrupt - s 124

• payment of money or delivery of property to a bankrupt is valid if:– before bankruptcy - made in good faith and ordinary course of business - s

124(1)(a)– after bankruptcy - made in good faith and ordinary course of business and

without negligence - s 124(1)(b)• burden of proof upon person asserting validity of transaction - s 124(2)• knowledge or reason to suspect insolvency or bankruptcy - s 124 (3)• “without negligence” - Re Hasler (1974) 23 FLR 139 [Keays 98-99 and Nichols

page 363] where a bank was held not to have acted without negligence. Several days after the making of a sequestration order against a debtor’s estate, the bank paid two cheques paid drawn on one of the debtor’s accounts, which was in credit. The bank did not know of the sequestration order

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INSOLVENCY SUMMER 2009/2010Next week: Lecture 5

Transactions void against the trustee

Reading:

Keays, 104-129

Bankruptcy Act, ss 120-122, 128B-128C

Nichols 323-122, 366-369

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