Role of a Bankruptcy Trustee in Australia

Bankruptcy Services

Bankruptcy Advice and Services in Melbourne, Sydney, Brisbane, Gold Coast, and Perth.

HM Advisory offer a full suite of bankruptcy advice services, each optimised to the circumstances of the individual and carried out with compassion and respect. Our bankruptcy experts and registered Trustee’s operate in Melbourne and across Australia to help you understand and navigate the process of bankruptcy.

Trustee in Bankruptcy

Once a person is made bankrupt, a Bankruptcy Trustee is appointed. The Trustee manages the bankrupt estate of the individual.

As a personal insolvency expert, the bankruptcy trustee is a registered and qualified specialist who is either a public servant (the Official Receiver) or an officer of the court (a registered bankruptcy trustee). Prior to presenting a creditor’s or debtor’s petition for bankruptcy, the individual can gain consent from the registered bankruptcy trustee of their choice. If no registered bankruptcy trustee is engaged, the Official Receiver becomes the bankrupt individual’s trustee.

A bankruptcy trustee has authority over the bankrupt individual to:

sell any of their divisible property
conduct investigations into their affairs
examine the individual and their associates under oath
sell and/or conduct any of their business.

Fundamentally, the bankruptcy trustee is empowered to exercise all the bankrupt individual’s rights prior to their bankruptcy for them. Furthermore, there are additional recovery powers that can be exercised by the trustee that the individual does not have.

During the bankruptcy process, the trustee will:

identify and safeguard, then realise any of the bankrupt individual’s divisible assets
undertake investigations into the bankrupt individual’s financial activities and any suspicious transactions
take any necessary recovery actions
report to the bankrupt individual’s creditors and distribute any surplus funds to them
notify the Australian Financial Security Authority (AFSA) of any offences.

Debtor’s petition and Creditor’s Petition

Bankruptcy can come in two forms – voluntary and involuntary. Under a voluntary bankruptcy, you file for bankruptcy on your own behalf. Inversely, involuntary bankruptcy is as its name suggests; others are filing for you to be determined as bankrupt.

The legal definition of bankruptcy is covered in section 5 of the Bankruptcy Act 1966 (Cth), and bankrupt individuals are defined as being in one of the two categories: the debtor’s petition (voluntary) and the creditor’s petition (involuntary).

Under a Debtor’s Petition, a person files the bankruptcy application for themselves at their own discretion and there is no minimum debt requirement to do so, as the application is completely voluntary. The steps under this process are:

The individual lodges a Declaration of Intention to Present a Debtor’s Petition with AFSA.
A 21-day stay period commences, which allows the individual time to consider their financial options and any alternative arrangements to settle debts. During this time, the individual can also apply to be made bankrupt prior to the end of the stay period. Similarly, creditors may also apply for the individual to be made bankrupt prior to the end of the stay period.
The individual’s creditors are informed that they are unable to take any enforcement actions to recover debts, and they are provided with a copy of the individual’s financial statements.
At the end of the stay period, the individual or their creditors can apply for bankruptcy.

An Official Receiver may reject a debtor’s petition in certain circumstances. These instances are more likely to occur when there is likelihood that the individual can pay off their debts within a reasonable amount of time, or if there is any evidence or indication that the individual simply doesn’t want to pay their creditors.

Unlike the voluntary process, a creditor’s petition allows for a determination of a bankruptcy via court proceedings, otherwise known as a ‘sequestration order’. For a creditor’s petition to be successful, a number of requirements must be met:

more than $5,000 is owned by the individual;
within 6 months of the application, an ‘act of bankruptcy’ occurred; and
there was residential or business connection by the debtor with Australia.

Under the Bankruptcy Act 1966 (Cth), an ‘act of bankruptcy’ refers to actions by an individual look that make them appear like they will soon be bankrupt. The most common of these is the individual not complying with a bankruptcy notice, but others may include the going overseas with the intent of holding off creditors, or giving notice to any creditor that they have or will halt payment of any debts owed. In addition, the lodgement of a Declaration of Intention to Present a Debtor’s Petition under the voluntary process is also considered an act of bankruptcy.

A creditor’s petition may also be rejected for similar reasons as is possible with the debtor’s petition, such as evidence that an individual is likely to be able to repay their debts to the creditor.

Insolvent Deceased Estates

A late individual’s assets, debts and liabilities are collectively referred to as their ‘deceased estate’. In most scenarios, the Will left by the deceased person is used to guide the administration of their estate. Assets are normally distributed among the late individual’s beneficiaries (family and friends), in accordance with the terms of the Will.

All assets, debts and liabilities are included in a deceased estate, often comprising some or all of the following:

Bank accounts and superannuation
Property
Life insurance policies
Personal belongings
Debts, including secured (e.g. mortgages) and unsecured (e.g. credit cards).

Most debt types will remain after an individual’s passing. Before the state’s assets can be distributed to beneficiaries, creditors have the primary right to recoup any money owed to them. This process is normally handled by the executor of the deceased individual’s Will, assuming the deceased estate is financially sound. The executor’s responsibilities include notifying creditors of the late individual, processing their claims and making the necessary payments. To be deemed insolvent, a deceased estate lacks the resources needed to pay off its outstanding debts.

Creditors are only able to make claim on funds they are owed from the deceased estate – the beneficiaries are not normally responsible for paying back any debts if the estate lacks the funds or assets to cover them. For shared debts, such as in the case of spouses or couples, the remaining living individual(s) are still responsible for their portion of debts shared with the deceased individual.

Creditors can, in some instances, apply to have an insolvent deceased estate administered in accordance with Part XI of the Bankruptcy Act 1996. To do so, an estate must be insolvent with debts of $10,000 or more, and occurs when:

the deceased individual passes away with unresolved debts totalling over $10,000; or
the deceased estate becomes insolvent following debts incurred by its legal personal representative.

Only the Federal Court or Federal Circuit Court has the authority to issue an order for the Administration of a Deceased Estate. An Independent Trustee will then be chosen and appointed to manage the deceased estate.

A regular bankruptcy process and the management of an insolvent deceased estate are quite similar. The financial affairs, assets, debts, and obligations of the estate will be assessed by the appointed Trustee. Following investigation, the Trustee will evaluate creditor claims and allocate any funds and assets. The Trustee may sell assets and distribute the proceeds to creditors fairly as part of this process. Depending on the nature of debt, distributions are made to creditors in specific order:

Creditors with secured debts are given preference (e.g. property mortgages or a vehicle under finance). A secured creditor has the right to sell the secured asset to recover debt owed to them. In some cases, a beneficiary may wish to avoid selling the item and will pay off the debt to the creditor or work out a refinancing option with them.
Creditors with unsecured debts (e.g. credit card balances or personal loans) are only entitled to repayment following the settlement of secured debts. If available, the Trustee may sell further assets to repay unsecured creditors.

Appointing a Trustee to administer a deceased estate has a major benefit in that the Trustee may set aside any voidable transactions. This can potentially raise the deceased estate’s value, placing it in a better position to pay its creditors and beneficiaries.

Section 73 Composition

A bankrupt individual may put forward a proposal to their creditors to resolve their debt owed, and ultimately have the bankruptcy annulled. The proposal is referred to as a ‘Section 73 Composition’ or ‘Section 73 Proposal’ as it exercises the use of Section 73 of the Bankruptcy Act 1966 (Cth).

In most instances, creditors will be compensated more for their debts under a Section 73 Composition than they would be under a continuing bankruptcy. The proposal can take many forms, but would most likely involve one or more of the following:

A lump sum payment made by a family member or friend of a bankrupt individual.
The bankrupt individual making payment instalments over time.
A limited number of the bankrupt individual’s creditors agreeing to not claim any dividend if the proposal is accepted.

In addition to the above arrangements, a bankrupt individual will also have to pay their trustee’s fees and expenses, which relate to reporting, proposal composition and holding a meeting of creditors for their consideration of the proposal.

Once the composition is put forward, a meeting of Creditors is called by the Trustee. The Trustee is required to recommend whether they believe the proposal should be accepted, but the Creditors have no obligation to follow the Trustee’s recommendation. For the composition to approved in what’s considered a ‘special resolution of creditors’, it must be agreed to in both majority number and over 75% of the value of the creditors’ owed debts. If rejected, the bankruptcy continues.

If accepted, the bankruptcy is immediately annulled. The Trustee then proceeds to manage the composition’s arrangements, collect all funds, and distributes them to the individual’s creditors in accordance with the Bankruptcy Act 1966 (Cth). Following completion of the arrangements as detailed in the composition and all its conditions are met, the Trustee will notify AFSA that the matter has been resolved.

Annulment

An annulment is the cancellation of a bankruptcy. Unlike the discharge of a bankruptcy, that happens automatically after the bankruptcy period has elapsed (generally 3 years and 1 day after the individual’s statement of affairs was accepted), an annulment results from one of three specific events:

a Section 73 composition is accepted by the bankrupt individual’s creditors; or
debts are settled in full, including all interested and fees charged by the individual’s bankruptcy Trustee; or
through formal court proceedings, it is determined that the bankruptcy should be set aside (i.e. it is proven that the individual shouldn’t have been made bankrupt to begin with).

Although an annulment means a bankruptcy is cancelled, the bankrupt individual’s name will remain on the National Personal Insolvency Index forever, with a markup that the bankruptcy was annulled. Credit reporting agencies may keep this record for 7 years. However, upon annulment, after the Trustee’s fees and expenses are settled, any surplus assets or funds will be returned to the bankrupt individual.

It’s also important to note that an annulment does not wipe the debts of a bankrupt individual that would also not have been released upon discharge of their bankruptcy, such as court-imposed penalties or fines relating to an offence against the law or child support debts.

Specialist assistance and guidance are required to successfully obtain bankruptcy annulment. There are various nuances affecting the process that are dependant on the circumstances of each individual. How well the process is managed will also have an impact on the results.

Specialist Bankruptcy Advice in Brisbane, Gold Coast, Perth, Sydney, and Melbourne

At HM Advisory, we provide bankruptcy advice for people who are in financial distress. Our team offers options, information, and advice that is based on respect and a strong understanding of your situation. With offices in Victoria, Western Australia, Queensland, and New South Wales, we proudly assist individuals from across the country, no matter your circumstances.

Whether you need bankruptcy advice in Brisbane, on the Gold Coast, or in the heart of Perth, we are here for you. HM Advisory have registered Trustee’s and Liquidators working in Melbourne and across Australia and can assist you with corporate insolvency matters.

Victoria

Level 21, 114 William Street
Melbourne VIC 3000

PO Box 117
Collins Street West VIC 8007

T (03) 8866 7600
F (03) 9428 4152

Western Australia

Suite 4, Level 3

16 Victoria Avenue Perth WA 6000

PO Box 6243
East Perth WA 6892

T (08) 9334 7400
F (03) 9428 4152

Queensland

Level 14, 15 Adelaide Street
Brisbane QLD 4000

PO Box 13127
George Street Brisbane QLD 4000

T (07) 3129 0438
F (03) 9428 4152

New South Wales

Level 12, 503 Kent Street
Sydney NSW 2000

PO Box Q904

Queen Victoria Building NSW 1230

T (02) 8270 6900
F (03) 9428 4152