Back in 2006 we wrote an article about section 50 of the Bankruptcy Act. This was done because Michael Griffin of our Brisbane office had been appointed by the Federal Court to take control of a debtor’s property before the making of a sequestration order.
We revisit this section this month, because Michael Griffin and I have been appointed to another debtor’s property before sequestration. Given that this is only our second such appointment in four years, we can safely say that the section is not often used – actually very rarely used. But given the amount of transactions that occur within the months before sequestration and that we (as bankruptcy trustees) end up challenging, that section probably could get greater use.
The current Order was made shortly after the Bankruptcy Notice was served upon the debtor for a judgment debt and it appeared that he would try to divest himself of his only major asset. Without such an Order, any debtor can deal with his or her assets as they see fit – albeit with the knowledge that any transaction may be challenged after a Sequestration Order is granted. But by then it may be too late to recover the asset.
The most difficult part of the application would be satisfying the Court that the assets are in such danger of being lost that a proactive and interim step must be taken. This alone is a hurdle, but it is compounded by the fact that the creditor will have to have knowledge of the debtor’s assets and his or her intentions. This lack of knowledge is probably why the section is not used more often. Creditors rarely know what the debtor has and whether there is some transaction afoot to divest an asset.
The Court will contemplate such an Order for this interim receiver over the property of the debtor when it appears likely that property will be at risk of being lost to the estate (should the Sequestration Order be made). There is no need for the appointment once the Sequestration Order is made, as all of the property automatically vests in the trustee and the debtor cannot deal with it.
In fact the Order must specify when the interim appointment is to end. Usually this is when the application for the Sequestration Order has been heard and either a trustee in bankruptcy has been appointed or the application has been dismissed, but other circumstances may arise in particular cases that the court will use to end the appointment.
The Act states:
50 Taking control of debtor’s property before sequestration
(1) At any time after a bankruptcy notice is issued, or a creditor’s petition is presented, in relation to a debtor, but before the debtor becomes a bankrupt, the Court may:
(a) direct the Official Trustee or a specified registered trustee to take control of the debtor’s property; and
(b) make any other orders in relation to the property.
(1A) The Court may give a direction or make an order only if:
(a) a creditor has applied for the Court to make a direction; and
(b) the Court is satisfied that it is in the interests of the creditors to do so; and
(c) the debtor has not complied with the bankruptcy notice.
(1B) If the Court directs a trustee to take control of the debtor’s property, the Court must specify when the control is to end.
The debtor is not left completely unprotected. If the debtor does not become a bankrupt and his assets have been subject to the control of a section 50 receiver, they may have some recourse under Regulation 4.08 of the Bankruptcy Act for any damage that they suffered because of the appointment. The Court may make an assessment of damages suffered resulting from the appointment and an Order for payment of those damages by the creditor that requested the appointment, not against the section 50 receiver.
Creditors will have to keep this potential liability in mind when deciding whether to apply for such an appointment.