The Bulletin August 2018

DEBT
Bankruptcy & winding up procedures
ALEX MARSHALL, MARSHALLS SOLICITORS
This article is not intended to provide
you with a detailed and step-by-step
outline of bankruptcy and winding up
procedures available to creditors.
It will give practitioners who do not
regularly practise in these areas (and
perhaps some that do) some insights into
various areas where problems arise and
ways to avoid them.
Both of these jurisdictions are highly
technical and require practitioners to
be prudent in their time-keeping and
document preparation. Getting things
wrong (even the smallest thing) is often
fatal, with obvious consequences.
BANKRUPTCY
Bankruptcy is the area of practice
whereby creditors with a debt in excess
of $5,000 apply to have natural persons
made bankrupt. In simple terms, making
someone bankrupt effectively transfers
control of their assets (subject to certain
statutory exceptions) and their affairs
to a trustee in bankruptcy. The trustee
can either be the Official Receiver or
one of the many private trustees who
are authorised to act as such under the
Bankruptcy Act. The trustee then gathers
in their estate and distributes the net
proceeds amongst the creditors. This is
distributed to the known/proven creditors
on a pro rata basis and in accordance with
a statutory formula.
HOW DO YOU BANKRUPT SOMEONE?
A creditor of a natural person can
bankrupt someone if it can show that the
person or persons have committed an act
of bankruptcy. There are various such acts
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THE BULLETIN August 2018
defined by the Bankruptcy Act 1966, but
the most common one used by creditors
is the non-compliance by a debtor with a
bankruptcy notice.
BANKRUPTCY NOTICE
Before a Bankruptcy Notice can be
issued, the creditor must first have
obtained a final judgment or order for
payment of a debt of at least $5,000.
Bankruptcy Notices are issued via the
Australian Financial Security Authority
(AFSA) website. Once issued the notice
needs to be served upon the debtor –
personal service is the usual method but
there are alternatives where personal
service cannot be effected.
CREDITOR’S PETITION
Once a Bankruptcy Notice is served
upon a judgment debtor, they have 21
days (not including the day of service) to
comply with the Bankruptcy Notice. If
they fail to do so they commit an act of
bankruptcy and the judgment creditor is
then able to issue a Creditors Petition. The
Petition must be issued within six months
of the date of commission of the act of
bankruptcy.
The Petition can be issued in either the
Federal Court or the Federal Circuit Court.
Most practitioners appear to choose the
Federal Circuit Court.
WHY SEEK TO BANKRUPT SOMEONE?
Although this is not strictly a “legal”
question, you will quite often be asked to
justify the issue of bankruptcy proceedings.
Bankruptcy of itself is not a debt
If there is any money left over after this process,
this is distributed to the known/proven creditors
on a pro rata basis and in accordance with a
statutory formula.
collection process. In my opinion, it
represents a test of solvency. Because
bankruptcy applications are generally
based on a Bankruptcy Notice, which of
itself is a test of solvency, the Creditor’s
Petition is in effect a second chance for
the debtor to show solvency, either by
formal objection to the Petition itself
or by arranging to pay out the Creditor’s
Petition and seeking dismissal of the same
(with the acquiescence of the creditor). A
necessary (and desired) side-effect of the
Petition is that the client may well get paid.
That should never be the primary reason
for its issue.
CORPORATIONS
A winding up application is an
application by a creditor who is owed
more than $2,000 to have a company
wound up and a liquidator appointed.
Winding up applications can also be made
by other people besides creditors, but I
am only concerning myself with creditor
issued applications.
If a company is wound up on the
application, an official liquidator is
appointed and he or she then takes control
of the company and liquidates it according
to a statutory formula. If there is any
money left over after this process, this is
distributed to the known/proven creditors
on a pro rata basis and in accordance with
a statutory formula.
SUPREME OR FEDERAL COURTS?
A winding up application can be issued
from either the Supreme Court or the
Federal Court. These days there is not a
great deal of difference between the cost
and approaches of either.
DO I NEED A JUDGMENT?
Although a statutory demand (Section
459E Notice) can be issued without a
judgment being obtained, I have always
believed that it is prudent for a creditor to