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Unit 8 Debt recovery & bankruptcy: Topic 7 Statutory order of payment

Reading

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Contents

Preferred creditors
Ordinary creditors
Postponed claims
What about secured creditors?
What property is available to creditors?
Discharge from bankruptcy

 

Preferred creditors

Preferred debts are to be paid in full in the order which they appear in section 109 of the Bankruptcy Act 1966 (Cth).

Preferred creditors include:

  1. Child support.
  2. Administration costs of the bankruptcy (includes the costs of the trustee and petitioning creditor).
  3. Trustee and legal costs relating to any earlier part X agreement.
  4. Funeral expenses of a deceased bankrupt.
  5. Wages and salaries (up to a prescribed amount) due to employees of the bankrupt.
  6. Workers compensation payments.
  7. Payments due to employees for long service leave, holiday pay, sick leave and other entitlements.
  8. Fees paid by discharged apprentices or articled clerks.
  9. Payments to creditors who have been deemed to be preferred creditors by a majority vote at a creditor’s meeting.

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Ordinary creditors

If any funds remain after payment of Preferred creditors it will then be the turn of the ordinary creditors. If there are insufficient funds for them to be paid in full (this is often the case) then they will be paid proportionally (eg. 15 cents in every dollar).

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Postponed claims

As a result of amendments to the legislation in 1996 deferred creditors are no longer recognised. Previously, creditors who were not paid a dividend until all other creditors were paid were known as ‘deferred creditors’. However, claims by third parties who have surrendered assets to the trustee because of undervalued transactions (section 120) or the ‘controlled entities’ provisions (section 139) are postponed until all other creditors have been paid.

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What about secured creditors?

Secured creditors may include parties like a bank who has lent money to the bankrupt (prior to the bankruptcy) secured by a mortgage over the debtor’s house.

Provided there is sufficient security, the secured creditor will be paid in full when it sells the security.

Any excess funds relating to such sale by a secured creditor will go to the trustee.

The only time a secured creditor will become involved in a bankruptcy, is where the realised security was not sufficient to discharge the secured debt.

In such a situation, a secured creditor will usually become an unsecured creditor, to the extent of any shortfall.

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What property is available to creditors?

The main property available for distribution to the creditors includes:

Existing property – all property that belonged to the bankrupt at the commencement of the bankruptcy. Remember that by virtue of the doctrine of relation back in section 115 of the Act, the commencement date may be up to six months earlier than the date of the bankruptcy (which is the date the person actually becomes a bankrupt).

After acquired property –property acquired by the bankrupt after the commencement of the bankruptcy and before discharge. For example, if a person is left a gift in someone’s will after he or she becomes a bankrupt, that gift must be made available to the trustee. Income received during the bankruptcy must be paid over to the trustee only if it exceeds a prescribed amount.

Property controlled by associated entities – the trustee can investigate associated entities, such as companies or trusts, that the bankrupt person controls, and the court can order that such entities transfer property to the trustee for the benefit of creditors.

Antecedent transactions – the trustee may be able to increase the amount of available property by avoiding certain transactions that took place before the bankruptcy –fraudulent dispositions of property, undervalued transactions, preferential payments. You looked at these in an earlier topic.

Certain property is exempt – that is, it is not available to the trustee. This includes necessary clothing and household goods, tools of trade and motor vehicles up to a prescribed amount, certain life policies and the right of the bankrupt to recover damages for personal injury.

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Discharge from bankruptcy

Under section 149 of the Act a bankrupt can be automatically discharged from bankruptcy after three years. However, in certain circumstances, a bankruptcy may be extended up to eight years.

Amendments to the Act in 2003 removed the right of the bankrupt to apply for an early discharge. Early discharge is only available to bankruptcies in existence as at 4 May 2003.

A discharge operates as a release from all debts provable in the bankruptcy with the exception of such debts as a debt incurred by fraud, a pecuniary penalty order, a debt on a recognizance, a liability under a maintenance agreement and certain debts due to the Government.

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