The interaction of joint and separate bankrupt estates can sometimes raise a question that is seldom considered. One such question recently arose in a file handled by our Sunshine Coast office.
A husband and wife were in business together as a partnership and were both made bankrupt by filing their own debtor’s petitions. The partnership had no assets to distribute but had significant debts. They also each had significant individual debts. The only asset of the bankrupts was a house that they owned as joint tenants.
Although filed with ITSA at the same time and indicating that they were partners seeking bankruptcy, the husband’s petition was accepted and his bankruptcy started on the Friday. The wife’s petition was accepted and she was made bankrupt on the next Monday. Effectively ITSA rejected the petition of the partnership.
One consequence was that the joint tenancy on the property was severed on the Friday and over the weekend the trustee and the wife were the tenants in common owners of the property. With the bankruptcy of the wife, the husband’s trustee and the wife’s trustee (the same person) became the tenants in common owners. The major point being that the property was no longer joint property as at Friday afternoon – half of the house became separate property in each individual estate.
The Bankruptcy Act sets out how joint and separate property is to be divided amongst joint and separate creditors.
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.
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.
The Act gets more specific when dealing with partnership debts. It says that partnership creditors (after receiving a dividend, if any, from the joint estate) must wait until all separate creditors in that estate have been satisfied before they can be paid a dividend.
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 joint creditors (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.
The question that needed to be answered in our case was whether there was a joint estate or not.
The Bankruptcy Act deals with how ‘partnerships’ can present a debtor’s petitions and how they may be accepted (section 56B). One of the exclusions – requiring ITSA to make an application to the Federal Court before it can accept such a petition – is where a creditor’s petition has been filed against one or more of the partners, but not all of them (section 56C). A creditor’s petition had been filed against the husband. ITSA did not make any application to form a joint estate and, also due to the processing of the petitions on separate days, the law created two individual estates, and no joint estate.
This is important to the different groups of creditors. The equity in the house is $50,000. But there are more than $50,000 of each joint and separate creditors.
If there had been a joint estate it would have consisted of the joint house (it would have remained joint property) and all of the proceeds would have gone to the joint creditors, and the separate creditors would receive nothing. As there is no joint estate, the joint creditors are able to claim in the separate estates [Re Budgett; Cooper v Adams] and everyone can share in the money.