Bankruptcy is a legal process designed to serve a dual purpose. On the one hand, it provides relief to individuals who are unable to pay their debts. On the other hand, it creates a legal framework for creditors to recover debts owing to them by recalcitrant debtors.

Key Provisions of the Bankruptcy Act 1996

Under the Bankruptcy Act 1996 (“the Act”), individuals who become a bankrupt by either process are subject to a number of restrictions and obligations. One of the most significant obligations is the requirement to hand over certain of their assets, known as “divisible property” to the Trustee of their bankrupt estate for the benefit of their creditors.

Vesting of Divisible Property in the Trustee

One of the key provisions of the Act is section 58, which deals with the vesting of divisible property in the Trustee. Under this section, certain property belonging to the bankrupt at the time of the bankruptcy, as detailed in section 116(1) of the Act, automatically becomes vested in the Trustee. This gives the Trustee the power to sell or otherwise dispose of the property to pay off the bankrupt’s debts, provided it is economically viable to do so.

The Misconception of Automatic Revesting After Discharge

While the discharge of a bankrupt typically occurs after a period of three years, many individuals are under the common misconception that once a bankrupt is discharged, any divisible property not dealt with by the Trustee automatically revests with the bankrupt. However, this is not the case.

While a bankrupt may be discharged after three years, their divisible property remains vested in the Trustee for an additional six years from the date of discharge, pursuant to section 129AA of the Act. In certain circumstances, the 6-year period can be extended by three-year periods.

Implications for Former Bankrupts:  A Case Study

The fact that divisible property remains vested in the Trustee for six years from the date of the discharge, can have significant implications for individuals who have become bankrupt.

For instance, if a former bankrupt wishes to sell their property during this 6-year period, they will need to obtain the Trustee’s permission. In addition, any proceeds from the sale of the property will be paid to the Trustee rather than to the bankrupt, as the property is still considered an asset of the bankrupt estate.

Recently, we encountered a situation where a discharged bankrupt and his wife entered into a sale agreement with a purchaser not being aware that the former bankrupt’s 50% interest in the property was still vested with the Trustee. The purchaser was unaware of this until their solicitor conducted a title search of the property and discovered the Trustee’s caveat on the title.

Once the Trustee became aware of the sale, there was a period of negotiations between the parties regarding the distribution of the sale proceeds. Ultimately, an agreement was reached between the wife and the Trustee to split the proceeds equally, resulting in a significant recovery for the benefit of the creditors.

Conclusion: Awareness of Rights and Obligations Is Crucial

In conclusion, misunderstandings surrounding the revesting of divisible property under the Bankruptcy Act are common.  It is important for individuals who have been declared bankrupt to be fully aware of their rights and obligations concerning vested property, particularly regarding the revesting timeline pursuant to section 129AA of the Act.

Awareness and careful consideration of these details can prevent unexpected complications during the post-discharge period. 

If you would like to discuss how we can help with any bankruptcy situations, contact one of our experienced team at dVT Group at (02) 9633 3333 or by email at mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

By Trung Nguyen
August 2024