Did you know that a bankruptcy can be annulled?


Did you know that a bankruptcy can be annulled?

There are unfortunate instances in life when an individual may become bankrupt.  In fact, in Australia, there were 6,792 bankruptcies in 2020-21*.  But it’s not all gloom and doom.  Often after careful consideration of the situation, bankruptcy may be considered not only the right solution, but the best solution.

However, personal bankruptcy does not need to be the end of the road.  There are different options available, particularly on how a bankruptcy can be ended.

Did you know that a bankrupt can have their bankruptcy annulled by their trustee?

Annulling a bankruptcy is an ideal remedy to reverse a bankruptcy. It effectively nulls and voids the bankruptcy back to their former non-bankruptcy status, as though it never happened. This can be a very important safeguard to protect an individual from a trustee claiming current or future assets and to restore their creditworthiness.

How bankruptcy works

On the date a bankruptcy ends, generally after 3 years and 1 day, the bankrupt becomes a ‘discharged’ bankrupt. This means that although the bankruptcy may have ended, the discharged bankrupt will be faced with difficulties obtaining finance because of their history of bankruptcy.

An individual’s bankruptcy will be listed for a period of 5 years after the date of bankruptcy on most credit agency reports. Lenders will rely on credit reports from ratings agencies to derive information on the borrower’s history and inform their decisions on the risk of lending to them.

Ending bankruptcy before the full term

However, an individuals can bring their bankruptcy to an end before the expiration of the usual 3-year period, if one of the following two events occur:

  1. Full payment: when all their creditors, trustees’ fees and costs and government charges are paid in full;   or
  2. Acceptance by their creditors: the creditors accept an offer pursuant to Section 73 of the Bankruptcy Act (“Section 73 proposal”) whereby their creditors accept a dividend of less than 100 cents in the dollar in full and final satisfaction of their respective debts (commonly known as a “Section 73 annulment”).

A Section 73 annulment is an ideal option for those bankrupts who would benefit from an annulment but are unable to obtain enough funds to pay their creditors and all trustees’ fees and costs in full.

As most bankrupts would not be able to finance a full annulment, a Section 73 annulment is an attractive option that can benefit both the bankrupt and creditors who would otherwise receive no dividend in the bankruptcy.

Benefits of having the bankruptcy annulled  

The benefits of having the bankruptcy annulled by Section 73 include the following:

  • The bankruptcy will be annulled immediately at the meeting if approved.
  • The bankrupt’s obligations under the Bankruptcy Act will cease.
  • No further actions can be taken by the trustee to recover the property.
  • The trustee cannot make a claim for any windfalls such as an inheritance or a lottery win.
  • No further income contributions will be payable if a high income is earned.
  • Permission to travel will no longer be required.
  • Can become a director of a company.
  • Credit score may be improved.
  • The National Personal Insolvency Index will show the bankruptcy was annulled.
  • Ability to obtain an industry licence will improve.

Steps involved for an annulment

The process for a Section 73 annulment involves the following steps:

  1. The submission of a Section 73 proposal, whereby a third person such as a relative, friend, employer etc, provides a lump sum of money to be offered to the creditors.
  1. The trustee prepares a report to the creditors.
  1. A meeting of creditors is held, and creditors vote on the proposal by special resolution.
  1. If creditors accept the offer, the bankruptcy will be automatically annulled at that date. 
  1. A dividend will be paid to the creditors.

The likelihood of a special resolution being passed will depend on several factors including:

  • The amount and timing of funds which is being offered and the consequential size of the dividend it will generate to creditors.
  • The profile and attitude of creditors.
  • The length of the remaining period of the bankruptcy.

Importance of timing

Whilst a bankrupt can obtain an annulment of their bankruptcy by payment in full of their creditors either before or after they are discharged from bankruptcy, they can only have their bankruptcy annulled by way of a Section 73 proposal before they are discharged from bankruptcy.

Therefore, if a bankrupt wishes to have their bankruptcy annulled by a Section 73 proposal, they should commence the process at least 2 to 3 months prior to the discharge date.

Case example

Billy incorporated a company and went into a café business. Billy had a unique skill to make the best coffees in town and for a long time the business was profitable. However, when COVID spread, customer numbers shrunk and revenue slowed down. Billy was unable to pay his suppliers who were owed $50,000. One of Billy’s suppliers obtained an order of the court to bankrupt Billy. Consequently, Billy faced a 3-year bankruptcy period and was unable to continue as a director of his company.

During his bankruptcy, Peter, a friend of Billy’s, had a great business idea to start a food and coffee delivery business and he wanted Billy to join him in the business venture by making him a director and shareholder. Because Billy was bankrupt, he was unable to become a director and if he made a lot of money, he would have to pay much of it to his trustee.

Billy considered what options were available to him and had a conversation with his trustee. His trustee explained the process of a Section 73 annulment and subsequently, Peter agreed to contribute the funds that would be offered to Billy’s creditors.

At the meeting, Billy’s creditors passed the Section 73 resolution and Billy’s bankruptcy was annulled that day. This was a great result for Billy and his creditors. Billy subsequently became a director and shareholder of Peter’s food delivery business and the business prospered.

In summary

Bankruptcy is a serious situation, so it is important to understand the process and know all the conditions and alternatives available so it can be handled in the best possible way, whilst also considering the interests of all parties involved.

It is also important to take action as quickly as possible and speak to a Trustee to ensure the right action is taken at the start, but also at the end to ensure that the bankrupt can get on to rebuilding their lives as quickly as possible after bankruptcy.

If you would like to explore how a Section 73 annulment could benefit you or a client, please contact Anthony Bagala at dVT Group on (02) 9633 3333 or by email abagaladvtgroup.com.au.