Take Home Exam Essay Example for Free

Take Home Exam Essay 2. The decision in IATA v Ansett Australia Holdings (2008) 82 ALJR 419; [2008] HCA 3 allows contracting parties to ignore the effect of the pari passu rule to the detriment of general creditors. Discuss and examine the reasoning in the case. One of the principle aims of insolvency law is to provide an equal, fair and orderly procedure in handling the affairs of insolvents ensuring that creditors receive an equal and equitable distribution of the assets of the debtor. This is the pari passu (equal sharing) principle, which is generally regarded as being the foremost principle of insolvency law. The rule operates to ensure that creditors of the same priority receive an equal percentage return from the insolvents company’s assets. However, there are often many exceptions to the principle that overcome it such that there are often few assets to be shared, equally or not. Although not in the nature of a secured creditor, a creditor may enter into an arrangement with a debtor company that subsequently goes into liquidation that serves to give that creditor priority rights outside the liquidation. This can apply in clearing house arrangements in certain industries where payments between members of the clearing house are dealt with by mutual set off; in insolvency terms such an arrangement serves to negative the debtor/creditor relationship in respect of the obligations to which the arrangements apply. ‘Ansett collapsed on 12 September 2001 and administrators were appointed. It was then a member of the IATA Clearing House, which pays out airlines for services provided to other airlines in accordance with agreements between IATA and the airlines, including Ansett. International airlines regularly carry passengers and goods on behalf of other airlines. The Clearing House avoids the necessity for the airlines to make and receive numerous payments for such operations. Each month, airlines with a net credit balance receive a payment from the Clearing House while those with a net debit balance are obliged to pay funds into the Clearing House. The agreements between IATA and the airlines provided that settlement of amounts payable would be in accordance with IATA’s Regulations. IATA claimed to be a creditor of Ansett and alleged that Ansett had a net debit balance of $US4,370,989 outstanding as at December 2001.’ The high court in International Air Transport Association v Ansett Australia Holdings Ltd (2008) 82 ALJR 419 rejected an argument that this was contrary to public policy as being against the pari passu principle, as found by the House of Lords in British Eagle International Airlines v Compagnie Nationale Air France [1975] 2 All ER 390; [1975] 1 WLR 758. The house of Lords had decided that the IATA clearing house arrangements were against public policy because they sought to exclude certain property of the insolvent company from the pool available for the distribution to creditors and thereby infringed the pari passu rule. In the particular circumstances in Ansett, which was under a Deed of Company Arrangement, the administrators unsuccessfully claimed credits due to Ansett (but not processed through the clearing house) as at the commencement of the administration, contending hat the deed prevailed over the clearing house agreement. The High Court found that the IATA agreement and regulations applied and Ansett’s rights were not to debts owed to it by other members of the clearing house scheme, but rather the contractual right to receive payment from the IATA if, on clearance, a credit was due to it. Overall, the pari passu principle operates strictly, but it also operates within very confined limits. Apart from the explicit statutory exceptions that have been made, equal treatment of claims applies only among the general body of unsecured creditors. Secured creditors, and others such as those who have retained title to goods supplied to the debtor, are a separate group and are generally entitled to withdraw ‘their’ property that is left, that is, the unsecured property. 3. The automatic discharge available to most bankrupts under the current legislation is too lenient and encourages reckless business behaviour. Discuss. A person is automatically discharged from bankruptcy three years after filing their statement of affairs, unless there is an objection by the trustee. Also, a bankruptcy person can continue or start proceedings concerning their employment, such as unfair dismissal or harassment in the workplace. Any other legal proceeding commenced before bankruptcy are automatically stopped, but if the trustee believes that the proceedings have merit, and creditors are willing to fund the action and indemnify the trustee for costs then the trustee can continue them. Trustees must act reasonably, and they have a duty to consider whether the proceedings have merit and should be continued. After discharge from bankruptcy, the bankrupt is released form most of their outstanding debts, called provisional debts. On discharge, the bankrupt is relieved of any debt created by a provisional order and/or a final determination by the Victims Compensation Tribunal made before the date of bankruptcy. Many amendments have been made to the Bankruptcy Act 1966 in recent years to better balance the interests of debtor and creditor, to overcome the view that bankruptcy is â€Å"too easy† and to prevent debtors form using bankruptcy to evade their responsibilities. Although the current legislation is thus quite lenient towards bankrupts, the consequent disadvantages of bankruptcy for the debtor suggest the current legislation is not an encouragement for reckless business behaviour. These consequences include; losing virtually all property (car and household property is protected), losing the ability to obtain credit or enter other commercial transactions without disclosing that they are bankrupt, carry on a business under an assumed name or firm name without disclosing their true name and that they are bankrupt, and any partnership of which the bankrupt is a member of is automatically dissolved by the bankruptcy, unless otherwise provided by the partnership agreement. Not only that but the bankrupt also cannot be a director of a company or a member of a local authority, a member of the House of Representatives or of the Senate . Overall, being bankrupt is public; a record of the bankruptcy goes on the National Personal Insolvency Index (an electronic public register), so bankruptcy can be searched by the public and may be advertised by the trustee, thus certainly affecting the bankrupt’s credit rating. Bankruptcy is normally a last resort. It had both advantages and quite serious disadvantages. There are also some debts from which the bankrupt person is not released from including: †¢Child support debts: The creditor can continue recovery action for child maintenance debts incurred before and during bankruptcy. The bankrupt is only released form liability for interest owing on such debts at the date of bankruptcy. †¢Bail bonds and court fines: The person is not released form debts arising form bail bonds and court fines. †¢Proceeds of crime: The person remains liable for pecuniary penalty orders under the federal Proceeds of Crime Act 1987. †¢Debts incurred through fraud: The person is not released from debts incurred through fraud or a breach of trust, including money owed to Centrelink or the ATO obtained through fraud or misrepresentation. †¢Unliquidated claims: The person is not released from debts arising from unliquidated claims which, although arising from something that happened before the bankruptcy, are not resolved at the date of bankruptcy. †¢Debts incurred since entering bankruptcy: The person is liable for any debts incurred since the date of bankruptcy. It is thus evident that whilst the automatic discharge after three years is quite lenient, it does not encourage reckless business behaviour as the consequences and disadvantages of entering bankruptcy often do not outweigh the advantages. 5. The question of what constitutes an uncommercial transaction is, in the light of authority, difficult to state precisely. Discuss the recent authority and the concept of uncommercial transaction. An ‘uncommercial transaction’ is defined broadly as a transaction that a reasonable person in the company’s circumstances would not have entered into in regard to: a)The benefits to the company of entering into the transaction b)The detriment to the company of entering into the transaction c)The respective benefits to other parties to the transaction of entering into it d)Any other relevant matter ‘Transaction’ is not defined but examples include a transfer, charge, guarantee, payment, obligation incurred, a release or waiver and a loan. Section 9 also provides that a transaction must be one ‘of the company’. That is, one to which the company is a party. This requirement has given rise to some difficulties in the context of unfair preferences. An uncommercial transaction is ‘a bargain of such magnitude that is could not be explained by normal commercial practice’. Section 588FB (2) makes it clear that the transaction does not need to involve a creditor of the company as a party nor does it prevent the transaction being uncommercial if it is a transaction that is given effect to, or is required to be given effect to, because of an order of Australian court or a direction by an agency. Section 588FB needs s 588FC, that is, an uncommercial transaction will not be voidable unless it is an insolvent transaction. Section 588FC provides: ‘A transaction of a company is an insolvent transaction of the company if, and only if, it is†¦ an uncommercial transaction of the company’ and: a)Any of the following happens at a time when the company is insolvent: (i)The transaction is entered into; or (ii)An act is done or an omission is made, for the purpose of giving effect to the transaction b)The company becomes insolvent because of, or because of matters including: (i)Entering into the transaction; or (ii)A person doing an act, or making an omission, for the purpose of giving effect to the transaction During the case of Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457 the question ask to the court was whether certain transactions involving grants of mortgages over the company benefited person due to their ‘uncommercial’ nature while the company was insolvent. The court help that the mortgages were uncommercial transactions under s 588FB(1) and that they were also insolvent transactions under s 588FC. In the case there was no evidence that the mortgages secured future advances; only previously unsecured debt. They were not granted in consideration of forbearance to sue by the creditors. The mortgages did attempt to grant security for partially statute-barred debts and this helped to show that the transactions were uncommercial. Under s 588FE(3), a liquidator will expect to have disgorged any uncommercial transaction, which qualifies as an insolvent transaction, if it was entered into, or an act was done for the purpose of giving effect to it, during the two years ending on the relation-back day. A time period of four years ending on the relation-back day applies to uncommercial transactions, which qualify as insolvent transactions involving related entities of the company. The time is even greater where the uncommercial transaction as an insolvent transaction was entered into for the purpose of defeating, delaying, or interfering with, the rights of any or all of its creditors in a winding up. In such circumstances the transaction is voidable under s 588FE(5) if it was entered into, or an act was done for the purpose of giving effect to the transaction during the 10-year ending on the relation-back day. 8. Discuss in 750 words any particular aspect of insolvency, which has interested you and say why it is of practical importance. – Effects of bankruptcy on property. The effects of bankruptcy on property is particularly of practical importance as it is a substantially key concept in the area if insolvency. It covers essential aspects including divisible property, property a bankrupt can keep, the bankrupt’s home, money and goods received and property previously disposed of. Beginning with divisible property, a trustee can take certain of a bankrupt’s property, in Australia or elsewhere (subject to the law of the country where the property is). Property the trustee can take to pay creditors include: †¢The bankrupt’s interest in a house †¢Cash in the bank †¢Jewellry †¢Stocks, shares and debentures †¢Fixtures and fittings †¢Gifts and legacies under a will †¢Crops The trustee’s decision about what to do with the assets available for sale and distribution among creditors will depend on what they are. If the assets have little value, the trustee may ask the bankrupt to find a buyer rather than incur the expense that might be involved if the trustee had to find one. The trustee may even be prepared to accept less than market value where costs will be saved by not seizing and selling the goods. Secondly, the property a bankrupt can keep is listed in the Bankruptcy Act . These include: †¢Ordinary clothing †¢Necessary household goods †¢Tools or trade if they are to be used to earn income, up to the value of $3500 †¢Most policies of life insurance, endowment assurance, endowment or annuities †¢Amounts paid to the bankrupt under certain rural assistance agreements between the Commonwealth and the states. A bankrupt can keep a vehicle used for personal transport in which they have a net equity or up to $7050 to the bankrupt form the proceeds so they can buy another. The trustee may not take money received as damages or compensation for personal injury or death to the bankrupt of their family, defamation payments, or any property bought with or mostly with, that money. Thirdly, if a bankrupt owns, or is purchasing a home, the trustee normally sells the home if there will be a surplus after paying the mortgage and sale costs. If the home is owned jointly by the bankrupt and someone who is not bankrupt, the trustee either: †¢Becomes registered as a tenant-in-common of the home with the non-bankrupt person or, †¢Lodges a caveat on the title to protect the bankrupt’s interest. Non-bankrupt joint owners have first option to buy the bankrupt’s interest in the home form the trustee. If they cannot afford to do so they may agree with the trustee to sell the home, and receive an equal share of any money left over after the mortgage and costs are paid. Fourthly, at any time during the bankruptcy the trustee may take any money (excluding accumulated income) or other items the bankrupt receives, such as gifts, lottery winnings or money received under a will. If the bankrupt does save up and buys items that are nit protected during bankruptcy, these may also be taken by the trustee in certain circumstances. However a bankrupt’s accumulated income held in a bank account is protected. Finally, some debtors, seeing the threat of bankruptcy, try to put their property beyond the reach of creditors by transferring it to others, often family members. Property can be reclaimed by the trustee if it was: †¢Given away or sold in the five years before bankruptcy for less than its full value, or †¢Given away or sold at any previous time with the intention of defeating creditors. Transfers or property under a maintenance agreement before the bankruptcy are not affected unless fraud can be established. This it is evident that the effects of bankruptcy on property are a vital area of insolvency and one of practical importance. Bibliography Australian Bankruptcy Act 1966: with Regulations and Rules. Also includes Forms, Charges Acts, Index. Consolidated to 1 October 2008.. 9th ed. North Ryde, N.S.W.: CCH Australia, 2008. Print. Duns, John. Insolvency: law and policy. Oxford: Oxford University Press, 2002. Print. Goldie, Cassandra. Community legal education handbook. 2nd ed. Redfern, NSW: Redfern Legal Centre Pub., 1997. Print. Lewis, A. N., and Dennis J. Rose. Australian bankruptcy law. 10th ed. Sydney: Law Book Co. ;, 1994. Print. Nichols, P. W.. Bankruptcy Act 1966. 2009 ed. Sydney: LexisNexis Butterworths,, 2009. Print. Symes, Christopher F., and John Duns. Australian insolvency law. Chatswood, N.S.W.: LexisNexis Butterworths, 2009. Print. http://www.hcourt.gov.au/assets/publications/judgment-summaries/2008/hca3-2008-02-6.pdf