How does Bankruptcy commence?

A bankruptcy can commence either through a Debtor’s Petition (being initiated by the person in debt) or by a Creditor’s Petition (initiated by the creditor/s).

A Debtor’s Petition is made when a person in a dire financial situation with severe debt has come to the conclusion that the best possible solution for their situation would be to proceed with bankruptcy in order to satisfy their debts. The debtor will also lodge a ‘Statement of Affairs’, which, by law, must include all secured and unsecured creditors, all assets both floating and fixed, and a complete and comprehensive listing of all pertinent information regarding their personal affairs.

A Creditor’s Petition is where a creditor has obtained a judgement on their debt and has subsequently served a “Bankruptcy Notice” upon the debtor. The Bankruptcy Notice will contain an expiry date by which the debtor must satisfy the debt or come to an arrangement with the creditor, or the creditor may file a creditor’s petition to the Federal Court to obtain a sequestration order and bankrupt the debtor.

Even if the value of a person’s assets exceeds their debts, they still may be “insolvent” if they are unable to liquidate those assets in order to satisfy their debts. If a person has debts and is subsequently served with a bankruptcy notice, but is unable to satisfy the terms, then they are then bankrupt regardless of any available assets or funds.

Commencement of bankruptcy

1. If a person becomes a bankrupt on a creditor‘s petition and subsection (1A) does not apply, then the bankruptcy is taken to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period of 6 months immediately before the date on which the creditor‘s petition was presented.

          (1a)  If:

                     (a)  a person becomes a bankrupt on a creditor‘s petition that was based on breach of a bankruptcy notice; and

                     (b)  the time for compliance with the notice was extended under subsection 41(7); and

                     (c)  the Court making the sequestration order considers that the application under subsection 41(7) was frivolous, vexatious or otherwise without substantial merit;

then the bankruptcy is taken to have relation back to, and to have commenced at, the time that would have applied under subsection (1) of this section if the time for compliance had not been extended.

          (1B)  If a person becomes a bankrupt because of a sequestration order made under Division 6 of Part IV or under Part X, then the bankruptcy is taken to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period of 6 months immediately before the date on which the application for the sequestration order was made.

             (2)  The bankruptcy of a person who becomes a bankrupt as a result of the acceptance of a debtor‘s petition is taken to have relation back to, and to have commenced at, the time indicated in the following table.

 

Debtor‘s petition bankruptcy–time to which bankruptcy has relation back and time bankruptcy commences
	Circumstances in which debtor‘s petition was presented or accepted	Time to which bankruptcy has relation back and time of commencement of bankruptcy
1	Petition accepted by the Official Receiver under a direction of the Court	Time specified by the Court as the commencement of the bankruptcy
2	Petition presented when at least onecreditor‘s petition was pending against the petitioning debtor (whether alone, as a member of a partnership or as a joint debtor), and accepted by the Official Receiver without a direction from the Court	Time of the commission of the earliest act of bankruptcy on which any of the creditor‘s petitions was based
3	Petition presented when no creditor‘spetitions were pending but the debtor had committed at least one act of bankruptcy in the past 6 months, and accepted by the Official Receiver without a direction from the Court	Time of commission of the earliest act of bankruptcy within the 6 months before the petition was presented
4	Petition presented when no creditor‘spetitions were pending and the debtor had not committed any act of bankruptcy in the past 6 months, and accepted by the Official Receiver without a direction fromthe Court	Time of presentation of the petition

             (3)  A creditor‘s petition or a sequestration order made on a creditor‘s petition is not invalid by reason of the commission of an act of bankruptcy before the time when the debt that the petition was based upon was incurred.