The recent Federal Court decision of Quinn as trustee of the Bankrupt Estate of Philip Chill [2020] FCCA 2652 has reaffirmed the circumstances where the Court will make an order pursuant to s146 of the Bankruptcy Act 1966 (Act), permitting a trustee to distribute dividends to creditors who have proven their debts in the bankrupt estate, effectively dispensing with the requirement to obtain a statement of affairs from a bankrupt.

The facts

On 23 January 2020 a sequestration order was made in relation to the bankrupt's estate. The trustee had written to the bankrupt requesting that he complete and file a statement of affairs, as required by s54(1) of the Act. The bankrupt refused to do this, arguing that the sequestration order had been made in circumstances involving fraud and collusion.

The trustee made a successful application to the Official Receiver requesting the issue of a s77CA notice on the bankrupt, compelling the bankrupt to file and serve a statement of affairs within 14 days of the notice being issued. The notice was served on the bankrupt on 26 February 2020. Failure to comply with a s77CA notice is an offence that is punishable by imprisonment for up to 12 months.

Having still not complied with the s77CA notice, and after the trustee had recovered $143,200 from the bankrupt's bank account, the trustee was forced to file a Court application seeking an order that the administration of the bankrupt estate could proceed without a statement of affairs, and that payment could be made to the creditors identified at that point in time.

The amount recovered from the bankrupt's bank account was such that all known creditor claims, and the trustee's fees, could be paid in full.

Relevant principles

In reaching its decision to allow the distribution to proceed without a statement of affairs, the Court referred to the following as important principles which underscore the importance of proper disclosure by a bankrupt to the administration of an estate:

• Where a sequestration order is made against a person in bankruptcy proceedings, the bankrupt has a legal obligation to complete a statement of affairs within 14 days.
• A failure to do so results in a delay to the administration of the estate and additional unnecessary costs will be incurred by the trustee, which reduces the amount available to creditors. As such, the delay operates to the prejudice of known creditors.
• An order made under s146 of the Act enables the distribution of dividends amongst the creditors of a bankrupt estate as if the bankrupt had filed a statement of affairs and named those creditors.
• Adequate notice had been provided to the bankrupt of his obligation to provide a statement of affairs and of the trustee's intention to file a Court application in the event that the bankrupt did not comply.

In this instance, and having considered the above principles, the Court was satisfied that an order pursuant to s146 of the Act should be made. The trustee's costs in bringing the application were ordered to be paid from the bankrupt's estate.

Takeaways

A trustee is obliged to take appropriate steps to recover property for the benefit of creditors and to administer the estate as efficiently as possible, including by avoiding unnecessary expense. However, in the case of non-compliant bankrupts, Court intervention may be unavoidable.

It should be noted that, ordinarily, if a bankrupt refuses to complete a statement of affairs, the three (3) year bankruptcy period does not start to run. This means that it is possible for a bankrupt to remain in bankruptcy for an indefinite period of time. In this particular case, an amount sufficient to pay all creditors and the trustees fees was recovered, which meant that there was no justification for the bankruptcy to remain on foot and it could be annulled.

This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.