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Rights of Creditors:

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For creditors, there is nothing more frustrating than discovering that a person who owes them a debt declares bankruptcy. Once a debtor becomes a bankrupt, the process of recovering an amount of money that is owed by him or her is a lengthy and convoluted one.

There are two types of creditors: secured and unsecured. Generally speaking, unsecured creditors are creditors who do not have anything by way of security over the loan that they advanced to the debtor or the moneys that are owed by the debtor to the creditor. Secured creditors, on the other hand, are creditors who have a right to some asset or item of property that ordinarily belongs to the debtor and which is used as security for the loan or moneys owed by the debtor to the creditor.

Secured creditors are obviously in a better position to reclaim their debt. Nevertheless, the rights of creditors who have “provable” debts (which means debts that can be clearly established on the evidence) will change after the debtor declares bankruptcy.

Proving debts can be a difficult process in itself. If a creditor is concerned about ensuring that his interests are safeguarded, it is wise to seek appropriate legal advice from a law firm that has experience assisting clients in debt collection and bankruptcy matters.

Enforcement of Debts for Unsecured Creditors:

For unsecured creditors, an act of bankruptcy will convert their right to sue for the debt directly from the debtor into a right to lodge a claim with the trustee. This is called a “proof of debt” and establishes to the trustee that the creditor has a legitimate claim against the bankrupt for the stipulated amount. The bankrupt’s property will then be distributed among the creditors by the trustee.

An important point to remember is that when a debtor declares bankruptcy, the creditor is not permitted to pursue or continue any legal action against him or her. Leave of the Court can be obtained, and there are some actions such as garnishees against the Commonwealth, but generally speaking the rights of the creditor are significantly limited after an act of bankruptcy.

Any agency that has a debt transferred to it by a creditor should therefore be notified of the bankruptcy. This will prevent that agency from commencing proceedings against the bankrupt. That agency can then lodge a claim to the trustee and inform him or her that they are the creditor by reason of subrogation.

Unlike secured creditors, unsecured creditors have a right to vote at a meeting of creditors. This is because they are at a disadvantaged position and are therefore given that additional power in the bankruptcy process.

Enforcement of Debts for Secured Creditors:

It is important to note from the outset that bankruptcy does not affect the rights of secured creditors from dealing with their secured property. The position of a secured creditor is therefore much stronger compared to that of an unsecured creditor.  Because of their more advantageous position, secured creditors do not have a right to vote at the creditors’ meetings.

In the event that the security that the creditor holds is valued at less than the amount that the creditor claims against the debtor, the outstanding difference will be treated as an unsecured amount. The creditor will then be entitled to vote at the creditors meetings in respect of their unsecured interest.

There are procedures associated with how secured property is dealt with. A secured creditor will ordinarily be able to sell the secured property but will have to provide an account of the sale to the trustee to prove that the debt has been discharged, in whole or in part. The secured property may also be sold by the trustee who will satisfy the secured creditor’s debts and use the surplus funds resulting from the sale to pool with the other funds for distribution among the unsecured creditors.

Complications can arise in cases where the security claimed by a creditor is owned by a third party, or there is some other dispute concerning the title of the secured property. In these situations, the secured creditor will ordinarily be treated as an unsecured creditor. It is important to obtain legal advice and liaise regularly with the trustee so that the creditor’s interests are not dealt with adversely.

Dividends:

The Bankruptcy Act 1966 (Cth) sets out the charges and fees associated with administering the bankrupt’s trust property. Dividends will be paid to unsecured creditors in certain circumstances. Those charges and fees are approved by the creditors in meeting.  To participate in a dividend, the creditor must provide a proof of debt to the trustee. The forms for establishing a proof of debt can be obtained from the Insolvency and Trustee Services Australia, but completing it may require the services of a professional who has experience in this area of legal practice. Court proceedings can be instituted in the event that a proof of debt is disputed and the trustee rejects the lodged claim.

Rights to Appoint a Trustee:

A private trustee can administer the estate of the bankrupt, or an officer of the Insolvency and Trustee Services Australia can discharge this function. Creditors have the right to change any trustee if they so desire. These changes must be made by resolution under the legislative scheme, and during a meeting of the creditors.

Meeting of Creditors:

Both the trustee and the creditors can call for a creditors’ meeting. Note that a meeting called by a minority group of creditors may require that those calling the meeting to cover its expenses. The meeting will consider the following matters, in certain circumstances:

  • The debtor’s proposed scheme of arrangement;
  • The debtor’s proposed composition;
  • Any other proposals made by the debtor which aim to address the concerns and interests of the creditors;
  • The trustee will update creditors about the administration of the bankrupt’s estate;
  • Changes to the trustee in bankruptcy may be made in the meeting of creditors;
  • Proposed Debt Agreements and their administration will be considered where appropriate; and
  • Changes to the process of administering the bankruptcy will also be considered when need be.

The Creditors should be served with the following documents for their consideration:

  • Meeting Agenda;
  • Proof of Debt form;
  • Claim Form; and
  • Voting Form.

Depending on the nature of the bankruptcy, voting can be either in person, by postal ballot or even by proxy. Proxies must be tabled before the chair of the meeting and must provide an undertaking that they are not acting under a financial incentive to vote either way on any given motion.

The specific procedures are outlined in the Bankruptcy Act 1966 (Cth) and the Bankruptcy Regulations 2001 (Cth) and they contain provisions relating to notices and notice periods. Usually, creditors must be informed of meetings by the trustee with seven days notice.

Quorum for a meeting of creditors is one creditor who is entitled to vote and the trustee. If a creditor wishes to be represented by a solicitor or other lawyer, a power of attorney must be provided to the trustee before that lawyer can exercise any rights in respect of the creditor.

These procedural matters can be crucial in the event that there is a dispute about the validity of any decision made or action taken with respect to the matters addressed by the creditors in meeting. If a creditor is uncertain about the legality of a particular procedural matter, it is advisable that he obtain independent legal advice from a professional in the field.

Proving a Debt:

To satisfy the trustee that there is a debt owing to the creditor, the Proof of Debt form will have to outline the following matters:

  • The claimed amount that is outstanding on the account;
  • Particulars (details and evidence) of matters that lead to the debt having accrued, which can include a description of the agreement and its terms and conditions, under which the debt arose; and
  • In the event that the debt is secured, details of:
    • The identity of the secured property;
    • The estimated value of the secured property; and
    • The estimated shortfall of the claimed debts after the estimated value of the secured property is subtracted.

Entitlement to vote is contingent on a satisfactory Proof of Debt having been established.

If you are a creditor and you are requiring Legal advice so that you can clearly understand your rights, you may wish to make an appointment with one of our Bankruptcy & Insolvency Lawyers by contacting us by telephone on (02) 9233 4048 or email to info@navado.com.au. We look forward to being of assistance to you. 

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