WATER, WATER EVERYWHERE AND NOT A DROP TO DRINK!
The recent case of Hoppe1 dealt with the issue of where a bankrupt had not filed a statement of affairs (SOA) but funds were available to be distributed to creditors as a dividend under a directions order. Section 146 of the Bankruptcy Act 1966 enables dividends to be distributed to creditors whose debts are proved (admitted into the bankrupt estate by the bankruptcy trustee) as if a SOA had actually been filed.
The Judge identified four threshold conditions that must be met:
- no statement of affairs is held
- the bankruptcy trustee took all reasonable steps to contact the bankrupt
- the bankruptcy trustee took all reasonable steps to identify the bankrupt's creditors
- the bankruptcy trustee gave identified creditors reasonable notice of the intent to make a section 146 application.
The Hoppe case is similar to a file our Melbourne office is currently handling where, if the bankrupt cooperated with the process, it would mean far less costs being incurred and a better outcome for creditors and potentially the bankrupt alike.
As with the Hoppe case, our team is unable to make contact with the bankrupt or obtain a SOA. And yet our investigations identified a real property interest that appears to hold sufficient equity to extinguish all known debts and thereby annul the bankruptcy! These type of circumstances really saddens us, as those struggling financially can get proper and complimentary advice from a range of sources—including the teams at Worrells of course—rather than deny or ignore the problem.
Despite our best efforts to engage with this bankrupt, we now face a host of tasks to deal with the real property. The practical steps needed to distribute the real property proceeds to creditors include:
- Attempt to contact the bankrupt by post, phone, personal service, social media, employers, and any other means. If unsuccessful, as the bankruptcy trustee, we'll seek assistance from the Australian Financial Security Authority (AFSA) via a 77CA notice. It also means drawing the regulator's attention to the bankruptcy, which may involve negative consequences for the bankrupt if other non-compliance/offence matters are identified.
- Transfer the real property to the bankruptcy trustee.
- Apply to court to have the property vacated for sale. This may result in the bankrupt having to move out—a distressing proposition and predicament—and is enforceable by the Bailiff Sheriff, which also incurs further costs.
- Sell the property and receive settlement proceeds into the estate.
- Take steps to identify creditors and advise them of the section 146 application. This may include advertising in national newspapers calling for creditors to submit their claims. Seeking who is in the creditor pool involves enormous costs, making it very difficult for a bankrupt to get their bankruptcy annulled due to the significant time and resources incurred.
- Apply for a court order allowing the distribution of funds as no SOA is held.
Depending on how the bankruptcy administration progresses, multiple applications may be required for multiple recoveries to be made over time. Similar case law to Hoppe have included a standard form of order regarding the requirement of the bankruptcy trustee to advertise the distribution. This is an additional public notice of the bankruptcy that will be available to parties and may be reported in searches in years to come.
From a practical effect, the bankrupt is not required to participate in the court hearing, so they may miss out on participating in the adjudication process of creditor debts. So, any disputed creditor claims may be approved as the bankrupt's side of the story is unknown and supporting evidence undiscoverable.
If an SOA remains unforthcoming and all matters are complete in the bankrupt estate, a further and final court application is required to finalise the estate and discharge the bankrupt from the bankruptcy. Again, meaning further costs are incurred. Finally, and critically, the bankrupt may miss their opportunity to find alternate funding or a more commercial outcome for themselves and their creditors—particularly in an annulment scenario.
The teams at Worrells are available to assist debtors, business owners, and their advisors to help assess financial challenges and the solutions available. We walk all parties through all the conceivable impacts and aim to empower people with proper advice. Please contact your local office to get a complimentary, confidential, and obligation-free consultation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.