Are you feeling overwhelmed with the whole process of bankruptcy or insolvency? Have you declared bankruptcy or insolvency and are wondering how your property is going to be divided amongst your creditors? If you have answered ‘Yes’ to any of the above, maybe LegalVision can be of assistance.

Treating all creditors in the same way

At this stage, you have declared bankruptcy and the trustee has recovered as much as he or she can by way of assets belonging to you, which is ultimately going to be used to pay the creditors. When dividing up the spoils amongst all the creditors who have made a claim, bankruptcy law operates to treat every creditor the same way. This is also the reason why the trustee can cancel earlier transactions where other creditors have benefitted unfairly, been preferred or where assets have been given away at under value. In this way, creditors receive a fair and equitable distribution of assets. For instance, after all the valuations, the creditors may receive 75 cents to the dollar.

Exceptions

Now that you understand that the trustee will act in the creditors’ best interests to distribute your assets equitably and fairly, there are exceptions to this principle. They are as follows:

Set-Off

Under s86 of the Bankruptcy Act, set off occurs when people both owe each other money. This is where you and the creditor in one transaction have another transaction where you are also the debtor with the creditor. There must be a mutual identity in the debtor and creditor in both transactions. In other words, you and the creditor have to be in the exact same position in both transactions.

All of this may sound a bit complicated but let’s look at a scenario. Imagine an Electrician goes to his Doctor for a routine check-up. Then the next day, the Doctor calls the Electrician to fix the electrical circuiting in his office. This means that the Electrician owes the Doctor money and the Doctor owes the Electrician money. If the Doctor’s fee is $1000 and the Electrician’s fee is $700, the law permits the Electrician to ‘set off’ the $300 against the $1000 and pay the Doctor $300.

But what if the Electrician goes bankrupt? With set off, it means the Doctor who owes $700 will set off the $700 against the $1000 and get 100 cents to the dollar value for $700 and make a separate claim for the remaining $300. At the end of the day, the Doctor will get everything back that was owed from the Electrician.

Priority Creditors

There is another exemption known as priority creditors. This means the law gives certain types of creditors priority. Creditors given priority are paid first and in full before other creditors. Firstly, you have to pay the trustee and the legal costs of sequestration because they have been acts done on behalf and for the benefit of all the creditors. Secondly, employees of the business get certain priorities in respect of their direct salary. Other priorities that you should keep in mind are worker compensation claims, leave claims and apprenticeship/article clerk claims. Also, priorities may be validated through the approval from the creditors. The creditors can authorise the priority through a special resolution that a particular creditor be given preference: s109(9). They are all listed in s109 of the Bankruptcy Act but this is merely a guideline and it is strongly advised that you consult a professional Insolvency/Bankruptcy lawyer about your situation and options.

Interim Payments

Procedurally, an account is drawn up by the trustee which is advertised for inspection (usually through a letter or newspaper) and eventually when confirmed and settled, they proceed to pay out the creditors. Along the way, the trustee is allowed to make increment payments. For example, the trustee is allowed to make some estimation in terms of expenses and distribute some of the money if he is satisfied that he does not need them. This means that people do not have to wait until the end of the bankruptcy if there are sufficient funds to make interim payments.

Conclusion

The idea of seemingly never-ending financial debts and your business falling apart is definitely a testing and worrisome time for anyone. Why create extra stress for yourself? If you believe you need to know more about where your property goes when distributed in bankruptcy or insolvency, LegalVision will gladly assist. Give us a call on 1300 544 755.

Lachlan McKnight

Next Steps

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.