Act of bankruptcy

In order for a creditor to commence bankruptcy proceedings against a debtor, an act of bankruptcy must occur. An Act of Bankruptcy is any one of a number of events listed in section 40 of the Bankruptcy Act 1966 (Cth) and these events reasonably indicate that a debtor is unable to pay their debts.

Pursuant to section 44(1)(c) of the Bankruptcy Act 1996 (Cth) the commission of an Act of Bankruptcy is a precondition to the presentation of a creditor’s petition in the Federal Court of Australia and the Act of Bankruptcy must have taken place within the six months prior to the petition being presented. A creditor’s petition is an application to the Court for a sequestration order against the estate of a debtor. Pursuant to section 43(2) of the Bankruptcy Act 1966 (Cth) upon making a sequestration order a debtor will become bankrupt.

The bankruptcy of the debtor will be deemed to have commenced for the purposes of claw-back actions at the date of the earliest act of bankruptcy within the six months before a sequestration order is made: see section 115(1) of the Bankruptcy Act 1996 (Cth). At this point all property that belonged to or was vested in the bankrupt prior to them becoming bankrupt, or has been acquired by the bankrupt after the commencement of the bankrupt, is property that is divisible among the creditors of the bankrupt and therefore vests in an appointed trustee.

The most common type of an Act of Bankruptcy is the failure to comply with a bankruptcy notice under section 40(1)(g) of the Bankruptcy Act 1966 (Cth). A Bankruptcy Notice is a formal demand for payment of a debt, in respect of a judgment or order that has been made within the previous six years against a debtor. The amount of the judgment (or judgments) must be at least $5,000 (or accumulatively at least $5,000). The Act of Bankruptcy will be deemed to have been committed if a debtor doesn’t comply with the demand within 21 days of it being served.