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01 May 2007

Legislation Highlighted - Section 59 Subsequent Bankruptcies


4 min

What happens when an undischarged bankrupt incurs post-bankruptcy debts that he cannot meet?

The new creditors do not have the right to prove in the existing bankruptcy, nor do they have any rights to assets that existed at the time of the bankruptcy, or assets that came in existence after that date, as after-acquired property vests in the trustee of the bankrupt estate. The only enforcement action available to new creditors is to petition for a subsequent bankruptcy. The Bankruptcy Act provides for this process in section 59. To many the concept of a person being bankrupt twice at the same time will seem odd, but that is what does in fact occur.

But how do the mechanics for multiple bankruptcies work?

Both bankruptcies exist contemporaneously and two separate discharge dates will result, each under the normal provisions for that bankruptcy. The Act itself clarifies which property and debts should be in which estate. The theory is reasonably simple, albeit the relevant section is detailed. In relation to what property belongs where, the Act says:

Section 59 Second or subsequent bankruptcy

(1) Where a person who is a bankrupt again becomes a bankrupt:
(a) the property of the bankrupt:
(i) that was acquired by, or devolved on, the bankrupt on or after the date of the earlier bankruptcy; and
(ii) that had not been distributed amongst the creditors in the earlier bankruptcy before the date on which the person became a bankrupt on the later occasion
shall (subject to any disposition of that property made by the trustee in the earlier bankruptcy without knowledge of the presentation of the petition on, or by virtue of the presentation of which, the person became bankrupt on the later occasion and subject also to section 126) vest forthwith in the trustee in the later bankruptcy

Simply stated, property and recovery actions in existence before the date of the first bankruptcy remain with the first trustee. Any property that came into existence after the date of the first bankruptcy, including property that would have been after-acquired property, vests in the second trustee, unless it had already been realised by the first trustee. The first trustee must hand over any after-acquired assets that he still has at the time of the second bankruptcy.

Dealing with creditor's claims is also relatively simple. Debts incurred before the date of the first bankruptcy and that are provable in that bankruptcy, remain with that estate. Debts incurred after the date of the first bankruptcy are provable in the second estate.

There is one factor that is peculiar to multiple estates. The first trustee may lodge a proof of debt with the second trustee for any shortfall to his creditors, and any unpaid costs and remuneration. The Act reads:

(c) the trustee in the earlier bankruptcy:
(i) shall be deemed to be a creditor in the later bankruptcy in respect of any unsatisfied balance of his or her expenses or remuneration in the earlier bankruptcy, the liabilities incurred by him or her in administering the estate in the earlier bankruptcy and the debts proved in the earlier bankruptcy (whether or not those debts are entitled to priority, or are postponed, in the earlier bankruptcy);
(ii) shall rank equally with the ordinary unsecured creditors in the later bankruptcy; and

Is this fair? We believe so, as the assets in the second bankruptcy include assets that would otherwise have been after-acquired property in the first bankruptcy. The initial creditors and the first trustee should still be able to share in those assets. But the proof of debt lodged by the first trustee for the shortfall, the outstanding costs and remuneration ranks as an ordinary creditor, regardless of the priority any of the creditors of claims held in the first estate, giving the creditors in the second estate a share of those assets.

Creditors should not shy away from enforcing their rights against debtors, even when they are bankrupts. They do have a right against post-first bankruptcy assets.

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