How do People become Bankrupt?

◷ 4 minute read

There are generally two ways in which a person can become bankrupt in Australia.

Firstly, the person seeking to become bankrupt (the Debtor) can present a Debtor’s petition to the Official Receiver pursuant to section 55 of the Bankruptcy Act 1966 (Cth) (the Act).

Secondly, a creditor of the Debtor can present a creditor’s petition to the Court in accordance with section 43 of the Act.

Debtor’s Petition

Under section 55(2), a Debtor’s petition must be in the approved form and accompanied by a statement of affairs of the Debtor and a copy of that statement.

Furthermore, in accordance with section 55(2A) of the Act, at the time that the Debtor’s petition is presented, the Debtor must either:

• Be personally present or ordinarily resident in Australia;
• Have a dwelling-house or place of business in Australia;
• Carry on business in Australia, either personally or by the means of an agent or manager; or
• Be a member of a firm or partnership carrying on business in Australia by the means of a partner or partners or of an agent or manager.

Pursuant to section 55(3A) of the Act, the Official Receiver may reject a Debtor’s petition if:

• It appears from the information in the Debtor’s statement of affairs that, if the Debtor did not become bankrupt, they would be likely to be able to pay all the debts specified in the statement of affairs within a reasonable time; and
• The Debtor is unwilling to pay one or more debts to a particular creditor or creditors or is unwilling to pay their creditors in general; or
• Before the current petition was presented, the Debtor previously became bankrupt on a Debtor’s petition at least 3 times or at least one in the 5 years preceding the presentation of the current petition.

Under section 55(4) of the Act, the Official Receiver must accept a Debtor’s petition, unless they reject the petition under section 55 or are directed by the Court to reject it.

Where the Official Receiver accepts a petition presented under section 55, they must endorse the petition accordingly, upon which the debtor becomes bankrupt.

In accordance with section 55(8) of the Act, a Debtor who becomes bankrupt under section 55 of the Act continues to be bankrupt until:

• Their bankruptcy is discharged pursuant to section 149(1) of the Act; or
• Their bankruptcy is annulled under section 74(1) or 153A(1) of the Act.

Creditor’s Petition

Under section 43(1) of the Act, the Court may make a sequestration order against a Debtor on a petition presented by a creditor where:

• The Debtor committed an act of bankruptcy; and
• When the act of bankruptcy was committed, the Debtor:
  
  – Was personally present or ordinarily resident in Australia;
  
  – Had a dwelling-house or place of business in Australia;

• Was carrying on business in Australia; either personally or by means of an agent or manager; or
  
  – Was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager.

A Debtor will commit an act of bankruptcy, if they do any of the acts listed under section 40 of the Act. For example, a Debtor will commit an act of bankruptcy if they:

• Make a conveyance or assignment of their property for the benefit of their creditors generally;
• If they make a conveyance, transfer, settlement or other disposition of their property or part of their property;
• Create a charge on their property or part of it;
• Make a payment; or
• Incur an obligation;

That would be void against the trustee (the person responsible for administering the Debtor’s estate on bankruptcy) if the Debtor became bankrupt.

Under section 47(1) and (1A) of the Act, a creditor’s petition must be verified by the affidavit of a person who knows the relevant facts and in the prescribed form. This will usually be the creditor.

Moreover, once a creditor’s petition is presented, it cannot be withdrawn except with the leave of the Court.

Pursuant section 43(2) of the Act, once a sequestration order is made against the Debtor, the Debtor becomes bankrupt. The Debtor will continue to become bankrupt until:

• Their bankruptcy is discharged pursuant to section 149(1) of the Act; or
• Their bankruptcy is annulled under section 74(1) or 153A(1) of the Act.

Key Takeaway

You can become bankrupt voluntarily by presenting a debtor’s petition. On the other hand, you can be made bankrupt involuntarily if one of your creditors petitions the Court for a sequestration order to be made against you.

It is extremely important that both Debtors and creditors comply with the requirements under the Act, as a failure to do so may result in a petition being denied or dismissed by the Court.

Bankruptcy has serious implications for all aspects of a debtor’s life, as such, a person should become, nor be made, bankrupt lightly.