As well as selling assets, the Trustee has the ability to investigate the conduct of the bankrupt prior to being made bankrupt. Any transaction that has the effect of putting assets out of the reach of creditors can be set aside, depending on the circumstances at the time of the transaction.
This can involve transferring assets for nil or low value to a spouse or relative, at a time when the bankrupt suspects he or she is insolvent. It can also involve the money paid for the asset being given to a third party. In each case, the Trustee has the right to set the transaction aside and may recover money from third parties that can go towards the estate for distribution to creditors.
A Trustee will be much more inclined to go to the cost of investigation a transaction and recovery of monies paid when the transaction is large (often occurring when there are business debts involved). Creditors may be asked to contribute to the cost, if it is likely that it will yeild a return.
Smaller bankruptcies (usually as a result of consumer debt) are less likely to involve complex investigations or extensive cost, but all bankrupts need to be aware of the Trustee's right to investigate.
It is very important not to attempt to favour one creditor over another when debts get out of control. Creditors are entitled to be treated equally when a person is insolvent, and paying one creditor in full while ignoring another means that creditor receives an unfair advantage. Such payments can be recovered from the creditor by the Trustee, where the transaction is found to be a preferential payment.
What is a public examination?
A public examination is a court ordered investigation into a bankrupt’s conduct and affairs which investigates all financial transactions and property dealings associated with the bankrupt. The relevant court is either the Federal Court or the Federal Circuit Court. At an examination a bankrupt is required to answer all (even self-incriminating) questions. Notes and transcripts of the examination may be used as evidence in any subsequent civil or criminal proceedings [Bankruptcy Act 1966 (Cth) s 81].
Who can be called to participate in a public examination?
The bankrupt themselves and anyone associated with them who has, or could be presumed to have, a knowledge of their financial affairs. This includes:
Who can apply for a public examination to occur?
A public examination may be instigated on the application of a creditor, the Official Receiver or the bankrupt’s trustee [s 81].
Under what circumstances is a public examination likely to be ordered?
In circumstances where there has been, or there is suspected to have been, some conduct on the part of the bankrupt designed to defeat the bankrupt’s creditors. For example, where a bankrupt, just prior to entering bankruptcy, lost a large sum of money, gave away assets to friends or lost money at the casino.
What happens as a consequence of a public examination?
The Registrar of the court may order the payment of any debts owing to the bankrupt or the handing over of property belonging to the bankrupt. Any person who has possession or control of books or records relating to the bankrupt’s financial situation can be ordered to produce these.
How common are public examinations?
Public examinations are more common for bankrupts with complex business and financial dealings. It is unusual for a ‘consumer’ debtor to have a public examination.
What alternatives are there to a public examination?
The Official Receiver also has the option to examine (under oath) a bankrupt or person who has knowledge of the bankrupt’s affairs. These examinations are not conducted in public and are an alternative way of obtaining information for a trustee to administer a bankruptcy [s 77C].