The administration of the following bankrupt estate is ongoing and names have been changed to protect privacy.
Sam became bankrupt in January 2019 after his related company was liquidated and the ATO issued a Directors Penalty Notice (DPN) of circa $250K. He voluntarily became bankrupt and before lodging his Debtors Petition, he was advised about the effects of bankruptcy including after acquired assets and in particular the effect of an inheritance. His independently wealthy parents had long separated and after obtaining legal advice his mother chose to change her will.
The bankruptcy was primarily straight forward - two over encumbered properties, a small income contribution assessment and no dividend was expected for creditors. Sam struggled mentally with the demise of his company and his resulting personal financial problems however, over the course of the bankruptcy his mental health improved greatly, and he was looking froward to his discharge in January 2022.
But in November 2021, 3 months before discharge, the landscape changed.
Sam's estranged father died unexpectedly, and he was bequeathed $400K in the will. As the beneficial entitlement devolved on Sam whilst he was an undischarged bankrupt, his inheritance automatically became an after-acquired asset in the bankrupt estate. At this time, creditor claims were forecast at $5.2M, the major creditors being an estimated insolvent trading claim from the liquidator and the ATO.
The deceased estate was substantial, and the familial affairs were complicated. Sam's father had remarried later in life and the new partnership resulted in an infant child. Sam and his adult brother wished to contest the will, which in their opinion unjustly provided for the new wife and infant. But given the bankruptcy, who has the right to pursue a claim under the Family Provision Act 1972, and what would happen to any additional monies that resulted?
The case law around this issue is vexed however, the predominant position is traceable to Coffey v Bennett [1961] VR 264T which suggests that the right to such a claim is a personal one which does not vest in the bankruptcy trustee. As such, Sam was free to pursue a claim. However, the bankrupt estate would be entitled to any amount gained by such a claim unless Sam and I entered into a formal agreement that provided otherwise.
Whilst Sam and his family commenced negotiations regarding the will, I provided a further report to creditors and issued notice of my intention to declare a dividend. What transpired changed the landscape again.
After the bankruptcy commenced, the ATO had received a dividend from the liquidation and lodged a revised claim in the bankruptcy for $28K - a significant decrease from the $250K DPN. But of greater impact was that the liquidator had resigned, the company was now deregistered and as a result ASIC were in control of the company. The liquidator had not lodged an insolvent trading claim in the bankrupt estate before he resigned and ASIC declined to take any proactive steps. The liquidator did not respond to my communications and apparently was not minded to apply for the company, and his role as liquidator, to be reinstated. I can only assume that he no longer thought an insolvent trading claim had merit.
The current estimate to pay all debts and costs of the estate and annul the bankruptcy is currently $220K but the deceased estate is yet to be settled. The expectation is that whatever the outcome, Sam's beneficial entitlement will allow for the creditors to be paid in full and for the bankruptcy to be annulled.
Key takeaways:
- Anyone facing bankruptcy should be made aware that an inheritance devolving on them whilst they are bankrupt will vest in their bankruptcy trustee. It is their choice as to whether they wish to have the discussion with a potential benefactor about reconsidering the provisions of their will.
- If a company is deregistered, ASIC are unlikely to take any proactive action to realise assets for the benefit of the company or its creditors.
- The sands of time can change a landscape dramatically. In this case the final proved creditor pool was less than 2% of what Sam thought it would be when he became bankrupt. If he had known this in January 2019, he would not have filed for bankruptcy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
