22 Jun Getting out of Bankruptcy: Annulments
As daunting as it may be, if you have been declared bankrupt, there are options available to you to seek to end your bankruptcy earlier than would otherwise occur (ordinarily, bankruptcy lasts 3 years from the date of lodgment of a Bankruptcy Form). For instance, you may seek to obtain an annulment of your bankruptcy.
The term “annulment” is commonly used to describe the end brought to a marriage between a couple. By definition, if something is annulled, it is void and legally considered never to have existed or occurred.
In relation to a bankruptcy, annulment has a similar meaning. If a bankruptcy is annulled, the bankrupt estate is brought to an end and legally taken not to have occurred. There are however different types of annulments in bankruptcy and each type of annulment has a different process.
Annulment by payment of costs and debts in full
Pursuant to section 153A of the Bankruptcy Act 1966 (Cth) (the Act), where sufficient funds are realised from divisible property, or funds are made available by a third party to a bankrupt estate (usually a family member or friend), a bankruptcy may be annulled by paying all of the bankrupt’s debts in full.
Under section 153A(6) of the Act, “bankrupt’s debts” means:
“all debts that have been proved in the bankruptcy and includes interest payable on such of those debts as bear interest, and the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee.”
If a bankruptcy trustee is satisfied all the bankrupt’s debts are paid in full, the bankruptcy is annulled at the time of the last payment being made.
Annulment by Order of the Court
An Order can be made by the Court to annul the bankruptcy pursuant to section 153B of the Act where the Court is satisfied the bankruptcy ought not have occurred. This Court application is usually filed by an aggrieved bankrupt.
Successful applications pursuant to section 153B of the Act are rare and usually happen when there has been a procedural error leading up to the bankruptcy (such as in the case when a bankrupt did not receive correct notice of a petition for their bankruptcy filed with the Court) or may occur where a bankrupt is solvent and able to pay their debts (and therefore should not have been declared bankrupt).
Similar to the above, the Court can also set-aside a bankruptcy in circumstances where a bankruptcy ought not have occurred.
Annulment by way of creditors’ acceptance of a proposal by a bankrupt
A bankrupt may seek to reach a financial arrangement with creditors to compromise their debts (Section 73 Proposal) and achieve an annulment of their bankruptcy pursuant to section 74 of the Act.
A Section 73 Proposal typically involves the payment of money to a fund by the bankrupt or a third party (in a lump sum or by way of payments over time) which is distributed to pay the costs of the bankruptcy and a portion of creditors’ provable debts. The Composition Proposal may include assets or funds that would ordinarily be recoverable by a bankruptcy trustee, such as the proceeds from the sale of a motor vehicle or real property.
A bankrupt would usually liaise with their bankruptcy trustee to formulate and execute a Section 73 Proposal to their creditors.
The bankruptcy trustee will then prepare a report to creditors to provide a recommendation to creditors on whether or not they should accept the Section 73 Proposal and call a meeting of creditors at which creditors will vote on the Section 73 Proposal.
To accept a Section 73 Proposal, creditors must pass a Special Resolution. A Special Resolution is passed if, based on creditors in attendance at the meeting (in person, by proxy or by returning an assent/dissent form):
- A majority of creditors in number vote in favour of the resolution; and
- Creditors holding at least 75% of the value of creditors in attendance at the meeting vote in favour of the resolution.
If creditors resolve to accept the Section 73 Proposal, the bankruptcy is annulled at that time.
Main differences between different types of Bankruptcy annulments
One of the main differences between the above annulments is that annulments pursuant to section 153A and 153B of the Act do not result in the release of provable debts of a bankrupt; that is, after an annulment has occurred, a creditor that remains unpaid can pursue the bankrupt for payment of a debt owed in the normal manner (see this article for more information).
In contrast, after an annulment pursuant to section 74 of the Act, a bankrupt is released from their provable debts (just as they would be if they had been discharged from bankruptcy).
If a bankrupt has been discharged from bankruptcy, an annulment pursuant to section 74 of the Act is no longer available to them; however, an annulment pursuant to section 153A of the Act can still be achieved.
Annulments are different to proposals to settle debts prior to a bankruptcy. Proposals prior to bankruptcy will be discussed in a later newsletter article.
Obtaining the annulment of a bankruptcy requires specialist advice and guidance. There are many nuances involved in obtaining an annulment which vary depending on an individual’s circumstances. The outcome achieved can also be impacted on how successfully the process is managed.
SV Partners is experienced in dealing with and obtaining annulments of bankruptcies in a practical and commercial manner. If your client is considering obtaining an annulment, contact your local SV Partners’ office today to get further advice.