Course outline
Module 1
Module 1: Introduction to Bankruptcy Law in Australia
Introduction to Bankruptcy Law in Australia
Knowledge check
Q1. Which Australian legislation is the primary source of federal bankruptcy law for individuals?
- A. Corporations Act 2001 (Cth)
- B. Bankruptcy Act 1966 (Cth) ✓
- C. Insolvency Practice Rules 2016 (Cth)
- D. Australian Consumer Law
Why: The Bankruptcy Act 1966 (Cth) is the principal federal statute governing personal insolvency, including the process of becoming bankrupt, the powers of the trustee, and the obligations of the bankrupt. The Corporations Act 2001 deals mainly with corporate insolvency, and the Insolvency Practice Rules supplement it for corporate matters.
Q2. Under the Bankruptcy Act 1966 (Cth), what is the usual minimum debt amount a creditor must be owed before they can apply to have a debtor declared bankrupt?
- A. $1,000
- B. $5,000 ✓
- C. $10,000
- D. $20,000
Why: A creditor generally must be owed at least $5,000 (the threshold has been set at this level under the Bankruptcy Act) before filing a creditor's petition or bankruptcy notice that can lead to a sequestration order. This threshold is designed to prevent bankruptcy proceedings over trivial debts.
Q3. Who is typically appointed to administer a bankrupt person's estate in Australia?
- A. The Australian Securities and Investments Commission
- B. A registered trustee in bankruptcy ✓
- C. The presiding magistrate
- D. The debtor's employer
Why: A registered trustee in bankruptcy, who is a licensed insolvency practitioner, is appointed to take control of the bankrupt's property, investigate their affairs, realise assets, and distribute proceeds to creditors. The trustee acts as an officer of the court and independently administers the estate.
Q4. What is the standard length of the bankruptcy period for a first-time bankrupt in Australia, unless extended?
- A. 1 year
- B. 3 years ✓
- C. 7 years
- D. 10 years
Why: Under the Bankruptcy Act, a person is generally bankrupt for three years from the date of sequestration (the date the bankruptcy order is made). The period may be extended in certain circumstances, such as where the bankrupt fails to cooperate with the trustee or has previously been bankrupt.
Q5. Which of the following is an example of a debt that is generally NOT released upon discharge from bankruptcy in Australia?
- A. Credit card debt
- B. Unsecured personal loans
- C. HECS-HELP student debts ✓
- D. Medical bills
Why: HECS-HELP and other Commonwealth student loan debts are generally not released by bankruptcy, as they are governed by separate legislation and treated as a Commonwealth debt. Most unsecured debts such as credit cards, personal loans, and medical bills are typically released upon discharge, though certain debts such as fines, child support, and debts arising from fraud are excluded.
Module 2
Module 2: Insolvency Tests and Triggers
Insolvency Tests and Triggers
Knowledge check
Q1. Which two statutory insolvency tests apply under the Corporations Act 2001 (Cth) to determine whether a company is insolvent?
- A. The balance sheet test and the cash flow test ✓
- B. The cash flow test and the solvency ratio test
- C. The net asset test and the liquidity ratio test
- D. The going concern test and the balance sheet test
Why: Section 95A of the Corporations Act 2001 (Cth) sets out two tests for insolvency: the cash flow test (whether the company can pay its debts as and when they fall due) and the balance sheet test (whether its assets exceed its liabilities, including contingent and prospective liabilities).
Q2. Under the cash flow test, a company is considered insolvent if:
- A. Its total assets are less than its total liabilities
- B. It is unable to pay all of its debts as and when they become due and payable ✓
- C. It has not filed its annual financial statements with ASIC
- D. Its directors have resigned within the last 12 months
Why: The cash flow test in s95A(1) asks whether the company is able to pay all its debts as and when they fall due. Failing this test means the company is insolvent, regardless of the value of its assets.
Q3. Which statement about the balance sheet test is correct?
- A. It only considers current liabilities and ignores contingent liabilities
- B. It compares the company's current assets with its share capital
- C. It considers whether the company's assets exceed its liabilities, including contingent and prospective liabilities ✓
- D. It is satisfied automatically if the company has positive retained earnings
Why: Under s95A(2), the balance sheet test requires that the company's assets, fairly valued, exceed its liabilities, taking into account contingent and prospective liabilities. This is broader than simply looking at current debts.
Q4. Which of the following is a common statutory trigger that can lead to a creditor applying for a company to be wound up in insolvency?
- A. The company changing its registered office address
- B. Failure to comply with a statutory demand for a debt of at least the prescribed amount within 21 days ✓
- C. The company announcing a dividend to shareholders
- D. A change in the company's auditor
Why: Under s459E and s459C, a creditor may serve a statutory demand for a debt exceeding the prescribed amount. If the company does not comply, or apply to set it aside, within 21 days, it is taken to be insolvent, providing a basis for a winding-up application.
Q5. A director who allows a company to incur debts while it is insolvent may face which consequence under Australian law?
- A. Automatic disqualification from holding any office for life
- B. Personal liability for debts incurred, under the insolvent trading provisions ✓
- C. Mandatory transfer of all personal shares to the company
- D. No consequence, since insolvency is a matter only for the company
Why: Under Part 5.7B of the Corporations Act, directors may be personally liable for debts incurred by a company when it is insolvent (insolvent trading) if they knew or suspected insolvency and failed to prevent the debt being incurred. Other sanctions, such as disqualification, may also apply but are not automatic.
Module 3
Module 3: Bankruptcy Process and Procedures
Bankruptcy Process and Procedures
Knowledge check
Q1. In Australia, which government body is responsible for administering the personal insolvency system, including the registration of bankruptcies?
- A. The Australian Securities and Investments Commission (ASIC)
- B. The Australian Financial Security Authority (AFSA) ✓
- C. The Australian Taxation Office (ATO)
- D. The Reserve Bank of Australia (RBA)
Why: The Australian Financial Security Authority (AFSA) administers the personal insolvency system under the Bankruptcy Act 1966, including registering debtor petitions and bankruptcy notices and overseeing registered trustees. ASIC regulates companies and financial markets, while the ATO handles taxation and the RBA sets monetary policy.
Q2. What is the most common way a person becomes bankrupt in Australia, starting the bankruptcy process?
- A. Being served a bankruptcy notice by a creditor and failing to comply within 21 days ✓
- B. Voluntarily signing a deed of arrangement with all creditors
- C. Receiving a court order to pay a single small debt
- D. Having a company they own go into liquidation
Why: A creditor can serve a bankruptcy notice for a debt of at least the prescribed amount; if the debtor does not pay, apply for a payment arrangement, or set aside the notice within 21 days, the creditor may file a creditor's petition leading to bankruptcy. Voluntary bankruptcy via a debtor's petition is also possible, but the creditor-initiated route is the most common starting point.
Q3. Once a bankruptcy is declared in Australia, which officer is appointed to take control of the bankrupt's property and administer the estate?
- A. A registered trustee ✓
- B. A magistrate
- C. The bankrupt's accountant
- D. A court-appointed mediator
Why: A registered trustee is appointed to the bankrupt's estate. The trustee takes control of the bankrupt's property, investigates the financial affairs, realises assets, and distributes proceeds to creditors according to the statutory priority rules.
Q4. What is the standard duration of a bankruptcy in Australia for a first-time bankrupt who has no unusual circumstances?
- A. Three years ✓
- B. Six months
- C. Ten years
- D. Permanently, until the debts are repaid in full
Why: Under the Bankruptcy Act 1966, a bankruptcy generally ends automatically after three years from the date of bankruptcy, though this can be extended in certain cases such as failure to cooperate with the trustee or failing to meet income contribution obligations.
Q5. Which of the following assets is typically NOT available to the trustee for distribution to creditors in a standard Australian bankruptcy?
- A. Cash in a bank account
- B. A second investment property
- C. Household items and personal effects of reasonable value ✓
- D. Shares in a listed company
Why: Certain items are protected from sale, including household items, clothing, tools of trade up to a limit, and other essential personal effects of reasonable value. Cash, investment properties, and shares are generally available to the trustee for distribution to creditors.
Module 4
Module 4: Rights and Obligations of Bankrupts
Rights and Obligations of Bankrupts
Knowledge check
Q1. Under the Bankruptcy Act 1966 (Cth), which of the following best describes a key obligation of a bankrupt?
- A. To pay all unsecured creditors in full within 12 months
- B. To cooperate with the trustee in the administration of the bankrupt estate, including providing information and documents ✓
- C. To continue operating any business without restriction
- D. To transfer all personal property to creditors immediately upon declaration
Why: Bankrupts have a statutory duty to cooperate with the trustee, which includes disclosing their property, income, and affairs, and providing books and records. This allows the trustee to realise and distribute the estate fairly.
Q2. Which of the following property is generally NOT available for distribution to creditors upon a bankrupt's bankruptcy in Australia?
- A. A bank account containing savings
- B. A motor vehicle owned outright
- C. Certain tools of trade up to a prescribed value ✓
- D. Shares in a publicly listed company
Why: The Bankruptcy Act exempts certain items from the bankrupt estate, including necessary tools of trade and household items up to prescribed limits, so the bankrupt can continue to earn a living and maintain basic needs.
Q3. During bankruptcy in Australia, what restriction typically applies to a bankrupt regarding credit?
- A. No restrictions apply to borrowing
- B. They may not obtain credit above a prescribed threshold without disclosing their bankrupt status ✓
- C. They are prohibited from holding any bank account
- D. They must repay all existing debts before obtaining any credit
Why: Bankrupts are generally prohibited from obtaining credit above a prescribed amount without disclosing that they are bankrupt, to protect lenders from being misled.
Q4. What is the typical length of the bankruptcy period for a first-time bankrupt in Australia under the standard bankruptcy process?
- A. Three months
- B. Six months
- C. Three years ✓
- D. Ten years
Why: In Australia, a bankruptcy generally lasts three years from the date of the bankruptcy declaration, after which the bankrupt is automatically discharged, subject to any extension or objection by the trustee or Official Receiver.
Q5. Which of the following is an obligation of a bankrupt in relation to their income during the bankruptcy period?
- A. They may keep all income without any contribution to the estate
- B. They must disclose income and may be required to make contributions from income above a threshold ✓
- C. They must hand over all income to the trustee
- D. Their income is automatically exempt from any contribution obligations
Why: Bankrupts must disclose their income, and where income exceeds the prescribed threshold, they may be required to make contributions to the estate for the benefit of creditors, while retaining an amount needed for reasonable living expenses.
Module 5
Module 5: Role of the Trustee in Bankruptcy
Role of the Trustee in Bankruptcy
Knowledge check
Q1. Under the Bankruptcy Act 1966 (Cth), who is typically appointed to administer a debtor's bankruptcy estate in Australia?
- A. The debtor's employer
- B. A registered trustee in bankruptcy ✓
- C. The Federal Court judge hearing the case
- D. The debtor's nearest family member
Why: In Australia, a registered trustee in bankruptcy is appointed to take control of the debtor's property, realise assets, and distribute proceeds to creditors. Trustees must be registered under the Bankruptcy Act and are regulated by the Australian Financial Security Authority (AFSA).
Q2. What is the primary duty of a trustee in bankruptcy in relation to the bankrupt's property?
- A. To keep the property for the bankrupt's personal use
- B. To gather in, realise, and distribute the property for the benefit of creditors ✓
- C. To transfer the property to the government without compensation
- D. To lease the property to the bankrupt at market rates
Why: The trustee's core function is to collect the bankrupt's divisible property (the bankruptcy estate), sell or otherwise realise its value, and distribute the proceeds to creditors in the statutory order of priority.
Q3. Which body oversees registered trustees in bankruptcy in Australia?
- A. The Reserve Bank of Australia
- B. The Australian Securities and Investments Commission only
- C. The Australian Financial Security Authority (AFSA) ✓
- D. The Australian Taxation Office
Why: AFSA is the Commonwealth agency responsible for the administration of personal insolvency and for the registration, regulation, and supervision of registered trustees, ensuring they meet professional and ethical standards.
Q4. What must a trustee in bankruptcy generally do regarding the bankrupt's financial affairs soon after appointment?
- A. Ignore the bankrupt's statement of affairs
- B. Investigate the bankrupt's affairs, including the causes of the bankruptcy and any unfair transactions ✓
- C. Immediately discharge the bankrupt
- D. Approve all creditor claims without review
Why: Trustees must investigate the bankrupt's affairs, review the statement of affairs, examine how the bankruptcy arose, and identify any voidable transactions such as preferences or transfers at undervalue that may be recovered for creditors.
Q5. What is the general effect of a trustee being appointed over a bankrupt's estate?
- A. The bankrupt retains full control of all property
- B. Property vests in the trustee, who takes control of the bankruptcy estate ✓
- C. All debts are automatically cancelled on appointment
- D. Creditors take ownership of the bankrupt's home immediately
Why: On the bankruptcy taking effect, the divisible property of the bankrupt vests in the trustee, who then holds it for the benefit of creditors. The bankrupt generally loses control over that property, though certain exempt assets may be protected.
Module 6
Module 6: Bankruptcy Versus Other Insolvency Options
Bankruptcy Versus Other Insolvency Options
Knowledge check
Q1. In Australia, which insolvency option is generally considered a formal alternative to bankruptcy for individuals with unsecured debts who want to avoid the bankruptcy process?
- A. Debt Agreement ✓
- B. Voluntary Administration
- C. Receivership
- D. Liquidation
Why: A Debt Agreement is a formal arrangement under Part IX of the Bankruptcy Act 1966 that allows an individual to repay a negotiated portion of unsecured debts without becoming bankrupt. Voluntary Administration and Liquidation apply mainly to companies, and Receivership involves secured creditors appointing a receiver.
Q2. Which of the following best describes a Personal Insolvency Agreement (PIA) in Australia?
- A. A court order that automatically discharges all debts after three years
- B. A binding agreement between a debtor and creditors, proposed by an insolvency practitioner, to repay debts under agreed terms ✓
- C. A government-funded loan to cover unpaid tax debts
- D. A company restructuring plan approved by ASIC
Why: A Personal Insolvency Agreement is a formal, legally binding arrangement under Part X of the Bankruptcy Act 1966. It is proposed by an insolvency practitioner and must be approved by creditors, often allowing debts to be compromised without bankruptcy.
Q3. What is a key difference between bankruptcy and a Debt Agreement in Australia?
- A. Bankruptcy is always voluntary, while Debt Agreements are always imposed by courts
- B. Bankruptcy typically lasts three years and involves a Trustee taking control of certain assets, whereas a Debt Agreement generally does not involve a Trustee taking control of assets ✓
- C. Debt Agreements permanently remove all debts, while bankruptcy does not
- D. Debt Agreements require the debtor to surrender the family home, while bankruptcy does not
Why: In bankruptcy, a Trustee in Bankruptcy is appointed to administer the estate and may sell non-exempt assets to pay creditors, with the bankruptcy usually lasting three years. A Debt Agreement avoids a Trustee taking control of assets and allows the debtor to repay a negotiated amount over time.
Q4. Which insolvency option is primarily designed for companies rather than individuals in Australia, allowing an administrator to take control with the aim of saving the business?
- A. Debt Agreement
- B. Personal Insolvency Agreement
- C. Voluntary Administration ✓
- D. Bankruptcy
Why: Voluntary Administration under Part 5.3A of the Corporations Act 2001 allows a company that is insolvent or likely to become insolvent to appoint an administrator who investigates options, typically with the goal of saving the business or achieving a better return for creditors than liquidation.
Q5. Why might an individual with significant income and assets prefer a Personal Insolvency Agreement over bankruptcy?
- A. Because a Personal Insolvency Agreement allows them to avoid all tax obligations
- B. Because bankruptcy would require surrender of all assets, whereas a PIA can allow them to keep assets while repaying creditors under agreed terms ✓
- C. Because bankruptcy is only available to people with no income
- D. Because a PIA is always cheaper and requires no creditor approval
Why: A Personal Insolvency Agreement can be tailored to let the debtor retain assets, such as a home, while committing to repayments proposed to creditors. Bankruptcy generally results in a Trustee administering assets for creditors, so a PIA can be preferable for those wanting to protect property, though creditor approval is required.
Module 7
Module 7: Discharge, Exit, and Life After Bankruptcy
Discharge, Exit, and Life After Bankruptcy
Knowledge check
Q1. In Australia, what is the standard period after which a debtor's bankruptcy is automatically discharged if they have not been subject to a bankruptcy extension?
- A. 6 months
- B. 3 years ✓
- C. 7 years
- D. 10 years
Why: Under the Bankruptcy Act 1966 (Cth), a debtor is generally discharged automatically three years after the date of the bankruptcy, unless the period is extended, for example because of non-compliance with obligations such as providing information or making contributions.
Q2. Which of the following best describes the effect of a bankruptcy discharge on the bankrupt's debts?
- A. All debts, including HECS-HELP debts and child support, are permanently erased.
- B. The bankrupt is released from most provable debts that existed at the date of bankruptcy, though some debts are not released.
- C. Debts are transferred to the bankrupt's spouse after discharge.
- D. Debts remain fully enforceable until repaid in full.
Q3. Which type of debt is generally NOT released by bankruptcy discharge in Australia?
- A. Unsecured credit card debt
- B. Personal loans from banks
- C. Child support and fines owed to government
- D. Debts owed to unsecured trade creditors
Q4. What is the name of the public record that lists a bankrupt's details, including bankruptcy status, and which remains accessible for a period after discharge?
- A. The Creditors Register
- B. The National Personal Insolvency Index (NPII)
- C. The Australian Business Register
- D. The Electoral Roll
Q5. After discharge from bankruptcy in Australia, what is a common practical restriction that may still apply to the former bankrupt?
- A. They are prohibited from opening any bank account.
- B. They may be restricted from acting as a company director without court permission, for a period after discharge.
- C. They must repay all debts before voting in elections.
- D. They lose the right to rent any property permanently.