Occasionally we handle a personal insolvency file that leads to a bankruptcy being annulled through section 153A of the Bankruptcy Act. This annulment is obtained by the payment of his or her debts in full.
Occasionally we handle files that have a joint estate component, where two people are bankrupted and have joint assets and debts. This can happen when bankrupts were partners in a business, but more commonly occurs where husbands and wives are bankrupted on joint debts.
Less occasionally we handle a file that contains both elements, joint bankrupts where one or both, or more of the bankrupts if there are more, are annulled by the payments of their debts in full. We are currently handling one such file.
Our bankrupts, the W’s, are husband and wife. They were not in partnership in any business. They jointly took out a car loan and, having then lost their jobs, could not meet the repayments. The car was repossessed and sold and they were bankrupted on the shortfall.
Joint estates can occur when bankrupts are bankrupted together, or very closely together. It does not need to be a joint application (an application to bankrupt both parties at the same time, but that does occur and we have one of them too.)
To have a joint estate you need joint assets and joint debts. There technically may be a ‘joint estate’ without both of these, but practically there is no joint estate to administer. In our case there was a joint debt and a joint asset, the family home.
The equity in the family home was going to be enough to satisfy all of the debts (joint and individual) of both bankrupts. After the bankrupts confirmed that they could not refinance the property (they could not meet the current payments) and no family member or friend could advance money to buy the estate’s interest, the property was sold.
Interest on Debts
One factor that needs to be considered when annulling a bankruptcy under section 153A is the potential that the debts will have interest accrued after the date of bankruptcy. Interest before the date of bankruptcy on interest bearing debts will form a part of their proof of debt.
Interest accrued after the date of bankruptcy is only paid once all of the debts and costs have been paid, but needs to be paid before an annulment can be received. Though this did not happen in this case, it is possible for a bankrupt to have sufficient assets in their estate to satisfy their debts and interest to the date of bankruptcy, but not the interest accrued after that date and until the payment of a dividend.
Interest is claimable in these circumstances under section 153(1A).
Annulment on payment of debts
153A(1A) In determining whether there has been a full payment of a debt that bears interest, the interest must be reckoned up to and including the date on which the debt (including interest) is paid.
The handling of joint estates is rather simply in theory. As we set up a separate file code for joint estates in our system (we have one for each individual estate and one for the joint) we can allocate the costs of each estate properly. The assets in each estate are realised and are used to pay the costs of and dividend in that estate.
The surpluses (if any) then need to be considered. If each estate has a surplus (I am yet to see one of these) they are returned to the appropriate parties. If the joint estate has a surplus, but the individual estates do not, the money is divided amongst the individual estates in proportion to the interest in the joint estate.
In our case, after meeting all of the joint creditors, half of the surplus was paid to each individual estate, as that was each bankrupt’s proportion of the original property.
110(1) In the case of joint debtors, whether partners or not, the joint estate shall be applied in the first instance in payment of their joint debts, and the separate estate of each joint debtor shall be applied in the first instance in payment of his or her separate debts.
If there had been a surplus in any of the individual estates, those monies would have been paid to the joint estate, regardless of whether other individual estates had surpluses or not. However the joint estate only will receive sufficient money to meet its claims. Individual estates do not need to provide a surplus to the joint estate.
110(2) If there is a surplus in the case of any of the separate estates, it shall be dealt with as part of the joint estate and if there is a surplus in the case of the joint estate, it shall be dealt with as part of the respective separate estates in proportion to the right and interest of each joint debtor in the joint estate.
There are times when the joint estate has a surplus and, after that has been distributed to the individual estates, some of the bankrupts are annulled and receive their surpluses (those with few individual debts) and some remain bankrupt (where the money from the joint estate is not sufficient to pay their individual debts). Surpluses from one individual estate are not automatically passed to another individual estate. They belong to that particular – now annulled – person.
There are times where one bankrupt has a surplus in his or her individual estate, but that surplus is transferred to the joint estate and is insufficient to meet the joint debts in full. They will remain bankrupt as they still have debts, they just happen to be jointly owed with someone else.
In our case, the money transferred into the individual estates was sufficient to pay both bankrupt’s individual debts and other costs and they are being annulled.
The position with Asset Realisation Charge (ARC) is interesting. ARC is payable on all receipts in a personal insolvency estate (with a few exceptions). The current rate is 4% of receipts.
If that rule was strictly enforced, then an estate that realised a $1 million property would have to pay $40,000 in ARC. But what if the bankrupt’s debts were only $50,000 (assume the property had to be sold)? That hardly seems fair or equitable.
Section 6A of the Bankruptcy (Estate Charges) Act 1997 is one of these exceptions. It effectively says that ARC will only be payable on the amount required to annul the bankrupt, not any surplus from the estate that is returned to the annulled bankrupt.
Charge not payable on estate surplus
(a) the person receives an amount in respect of a bankrupt’s estate; and
(b) as a result of receiving the amount, the person becomes able to pay off all the bankrupt’s debts;
then the following amounts are not taken into account in determining the amount on which charge is payable:
(c) any excess of the received amount over the amount needed to pay off all the bankrupt’s debts;
(d) any amount later received by the person in respect of the estate.
This also means that trustees have to conduct a different calculation on what ARC is payable in these situations.
The Act gets more specific when dealing with partnership debts. Partnership debts are different from simple joint debts, like a home mortgage in a husband and wife’s names, as they are ‘joint’ debts under the Partnership Act, not joint and several.
The Bankruptcy Act says that partnership creditors (after receiving a dividend, if any, from the joint estate which is likely to be the partnership estate if all partners are bankrupt) must wait until all individual creditors of the bankrupt have been satisfied before they can be paid a dividend from the individual estate.
141 Where one partner of a firm becomes bankrupt, a creditor to whom the bankrupt is indebted jointly with the other partners of the firm or any of them shall not receive a dividend out of the separate property of the bankrupt until all the separate creditors have received the full amount of their respective debts.
To add one more factor to the discussion, the case of Re Budgett; Cooper v Adams (decided in 1894) allows partnership creditors to have the same rank as creditors in the individual estates when there is no joint estate at all. Otherwise they would not have any rights to any property.