Written by Maggie Lau in July, 2010

In the administration of a small number of Bankruptcies, the Trustee’s investigations may reveal realisable assets which, if realised, would enable a full payment to Creditors. Alternatively, the Bankrupt may receive monies from a third party. Whatever the cause is, if the Trustee is satisfied that all the Bankrupt’s debts have been paid in full, the Bankruptcy is annulled by force of Section 153A of the Bankruptcy Act.

In such circumstances, not only do all Creditors receive 100 cents in a dollar on their admitted claims, Section 153A(1a) says that Creditors whose debts normally bear interest are entitled to interest up to and including the date when the cheque is cut and sent out to that Creditor. Some Creditors’ receive a larger amount than the claim they have proved due to interest being accrued after the commencement of the Bankruptcy.

For Creditors whose debts have interest components and have obtained Judgement from the Court, their debts accrue simple interest at the rate which applies to the jurisdiction of the Court. For example, the rate that applies to Judgements obtained from the NSW Local Courts from 6 March 2009 is 9%. For Creditors whose debts have interest components but they do not have Judgement, the debt bears interest at its usual rate as if the Bankruptcy never occurred. For example, if it is a debt on a credit card account, the rate that applies would be the usual commercial rate that applied before the Bankruptcy.

A Bankruptcy is not annulled unless all Creditors debts have been paid, including the interest to Creditors who normally earn interest on their debt, the costs of the Trustee for administering the Bankruptcy, and any statutory charges owed to the Insolvency and Trustee Service Australia.

An interesting scenario can arise when dealing with the ATO and seeking to effect the annulment of a Bankruptcy.

As discussed above, the Bankrupt’s debts must be paid in full for an Annulment pursuant to Section 153A to occur. In a recent publication of the Personal Insolvency Regulator, Mr Tomiczek of ITSA provided some insight in dealing with the claim of the ATO in seeking to effect an annulment. According to the Bankruptcy Act, the “Bankrupt’s debt” means all debts that have been proved in the Bankruptcy. The onus is on the Creditor to prove their debt in the estate. The onus is on the ATO to prove their debt in a Bankruptcy.

An obligation for Income Tax is imposed on a person who derives assessable income within the meaning of the Income Tax Assessment Act 1936 at the time such income is derived. However, due to the nature of self-assessment in the Australian taxation system, the ATO would not know the amount owed by the taxpayers until they file their Income Tax Returns or Business Activity Statements (“BAS’s”).

In other words, the ATO does not crystallise the taxpayer’s liability for Income Tax until the Assessment is made, and it will not lodge a claim in the Bankruptcy until such time. In fact, it is not uncommon that the ATO advises the Trustee that it has no claim as the Bankrupt has not lodged his or her Income Tax Returns or BAS’s.

As Trustees should not unnecessarily delay the administration of an Estate, it is not necessary or appropriate for Trustees to proactively pursue the Bankrupt to ensure that he or she brings their tax affairs up to date. If the Bankrupt does not bring his or her affairs up to date, the Trustee should proceed to continue with effecting the annulment of the Estate as soon as practicable.

In the event that the Trustee distributes the funds without regard to any claim that the ATO may have as the ATO did not lodge a proof of debt, and the Bankrupt brings their tax affairs up to date post the annulment of the Bankruptcy, and it is subsequently revealed that the ATO in fact has a claim against the Estate as at the date of Bankruptcy, the claim of the ATO, unlike other claims in the Bankruptcy, has not been paid despite the annulment.

Provided that the ATO did not previously prove in the Bankruptcy, the debt to the ATO has not been released by virtue of the Bankruptcy, nor the annulment there of. Accordingly, the ATO will be entitled to pursue the debt post the annulment of the Bankruptcy.