The Bankruptcy Act 1966 (Cth) (‘the Act’) creates criminal offences that can arise from the behaviour of persons before and during bankruptcy. Prosecutions for bankruptcy offences can lead to a fine or a prison sentence.
General Procedure
Prosecuting Authority
The Australian Financial Security Authority (“AFSA”) Chief Executive is the appointed Inspector-General for bankruptcy matters. The AFSA investigates bankruptcy matters as delegates for the Inspector-General, and where appropriate, refers alleged offenders to the Commonwealth Director of Public Prosecutions (“CDPP”) for prosecution. The decision to prosecute rests with the CDPP.
Time Limits
Where an offence has a prescribed maximum penalty of a term of imprisonment of more than 6 months, the prosecution may be commenced at any time. In any other case, a prosecution must be commenced at any time within one year after the commission of the offence (Crimes Act 1914 (Cth) s15B).
Conduct engaged in prior to bankruptcy may constitute an offence retrospectively when the person subsequently becomes bankrupt.
A person may be prosecuted for an offence against the Act even if they have been discharged from bankruptcy or bankruptcy has been annulled (Bankruptcy Act 1966 (Cth) s 275(1) (“the Act”).
Standard and Onus of Proof
As criminal provisions, and unless otherwise indicated, these offences must be proven beyond reasonable doubt. The general principles of criminal responsibility under the Criminal Code Act 1995 (Cth) apply to offences under the Act (chapter 2 of the Criminal Code Act 1995 (Cth)).
Offences under the Act may be tried summarily or on indictment, whilst some specified offences may be dealt with by an infringement notice (Bankruptcy Regulations 2021 (Cth) ss 89-95). The offences detailed below cannot be dealt with by way of infringement notice.
Examinable Affairs
Examinable affairs, in relation to a person, means any of the bankrupt entity’s dealings, transactions, property and affairs and include the financial affairs of an associated entity insofar as these are relevant to the bankrupt entity’s examinable affairs (s 5(1) of the Act).
General Prohibitions and Obligations
Concealing or Disposing of Property
A person may commit an offence if they do not fully and truly disclose to the trustee all of the property of the person and its value (s 265(1)(a) of the Act).
This includes particulars of any disposition of property made by the person within the period of 2 years immediately preceding the date on which they became a bankrupt entity (s265(1)(b) of the Act). A failure or refusal to comply with the directions of the trustee to locate and/or deliver books and/or property that are in the possession of the bankrupt entity, including property being all or property of the property of the person, may also result in the person committing an offence (ss265(1)(c),(d)(e) of the Act).
Further, it is an offence if a person fails or refuses to fully and truly disclose to the trustee any information about their conduct and examinable affairs, omits material particulars from a statement, does not inform the trustee that a lodged proof of debt is false, or fails to give a full and proper explanation of any loss or depreciation of any part of their assets that occurred within two years immediately preceding the date on which they became a bankrupt (ss265(1)(ca)(f)(g)(h) of the Act).
These offences carry a maximum penalty of 12 months imprisonment (s265(1) of the Act).
It is a defence to an offence which requires full and true disclosure, if the person has disclosed the information to the best of their knowledge and belief (s265((1A) of the Act).
Further, in respect of any disclosure of property, a person will not have committed an offence if they show that the property has been disposed of in an ordinary way of their business or to meet ordinary expenses of their family (s265(2) of the Act).
A serious offence under this section arises if a person with the intention of obtaining the consent of his or her creditors or any of them to any matter relating to any of the bankrupt’s examinable affairs, makes a false representation to commit any fraud. The penalty for this offence is 5 years imprisonment.
An offence may also be committed where a person within 12 months prior to or after becoming a bankrupt (s 265(4) of the Act):
a) Conceals or removes any part of their property to a value of $20.00 or more;
b) Conceals a debt due to or by them;
c) Conceals, parts with, destroys, falsifies, alters or omits a material particulate relating to the person’s examinable affairs;
d) Otherwise than in the ordinary course of business, disposes of property obtained on credit but not yet paid for;
e) Prevents the production of a book relating to any person’s examinable affairs.
Any offence committed under this section carries a penalty of imprisonment for a period not exceeding 12 months (s 265(4) of the Act).
It is a defence for the person to show that he or she acted without intent to defraud any of the creditors (s 265(9) of the Act).
Answers to questions put to the bankrupt entity at an examination are admissible as evidence of a breach. It is no offence where the failure to disclose information during a public examination is a result of not being asked.
Obtaining Property or Credit by Fraud
A person who prior to or after becoming a bankrupt entity, either alone or jointly with another person, obtains property by fraud or incurs any debt or liability by fraud commits an offence. The penalty for an offence of this type is imprisonment for a period not exceeding 5 years.
Disposing of or charging property
A person who becomes bankrupt entity and disposes of, or creates a charge on, any property with intent to defraud their credits commits an offence.
Leaving Australia
It is an offence for a person who is bankrupt, to leave Australia or to prepare to leave and has the intent to defeat or delay their creditors. The penalty for such an offence is imprisonment for a period not exceeding 5 years.
An intention to defeat creditors may be absent if the departure from Australia was made in good faith in the ordinary course of business or involved a return to the place of the person’s country of origin. However, as below you must still obtain permission from your trustee in order to leave the country.
If a person, without the written consent of the trustee, to leave Australia or do an act preparatory to leaving Australia they may commit an offence which carries a penalty not exceeding 3 years (s272(1)(c) of the Act).
General Concealment
A person shall not with intent to defraud the creditors of a bankrupt, conceal or receive property from a bankrupt or make a false claim, declaration or statement of account that is untrue in any particular. An offence against this section carries a penalty of imprisonment for 5 years.
Further a person may commit an offence if the person disposes of, receives, removes, retains or conceals property that has been seized and knows that it has been seized. The penalty for an offence of this nature is imprisonment for 12 months.
Business activities during bankruptcy
Sole Trader
A person can be a sole trader during bankruptcy in Australia, but it is essential to comply with specific legal obligations.
As a bankrupt sole trader, a person will be limited from entering into certain transactions without informing the other party or parties to the transaction that he or she is an undischarged bankrupt. The transactions are those which involve, either alone or jointly:
- obtaining credit above a set amount;
- obtaining goods or services by giving a bill of exchange, cheque or promissory note;
- entering into a hire-purchase agreement or a contract or agreement for the hiring or leasing of any goods;
- obtaining goods by promising to pay; and
- obtaining money by promising to supply goods or
The bankrupt entity must also disclose their true name and the bankruptcy to any person with whom the bankrupt deals where the bankrupt carries on business under a name other than his or her own (s 269 of the Act).
Contracts in contravention of this prohibition are unenforceable by the bankrupt entity.
As the bankrupt entity’s property includes choses in action, the entity will generally be unable to commence or continue legal proceedings (s60(2) of the Act).
Business During Bankruptcy
A person is permitted to run a business during the bankruptcy period, although, there are guidelines that must be adhered to.
By way of example if someone were a self-employed plumber who has declared bankruptcy, that person could continue to work and operate their business while bankrupt. In a similar way, a bankrupt person is permitted to establish a new business while bankrupt. But in both cases the business will be required to meet certain obligations:
- A business operating in these circumstances must contain your full name, allowing customers, partners and other stakeholders to search for your name on the National Personal Insolvency Index (NPII). You can change your business name to fulfil this obligation if you choose to do so.
- If a person’s business name does not contain their name, they are required to tell people they do business with that they are bankrupt.
- During a person’s bankruptcy, they may also be required to make compulsory payments towards repaying creditors. The amount of money they pay depends on a variety of factors, including their annual income and the number of dependents they are responsible for. Compulsory contributions are calculated so as to not impact reasonable living expenses, but a person’s required contributions could limit their ability to reinvest in their business.
AFSA places no restrictions on a person’s ability to work during bankruptcy. However, some professional and licensing bodies may restrict your ability to work in certain industries, such as construction, accountancy and real estate (See Australian Financial Security Authority, Employment Restrictions at www.afsa.gov.au.)
Partnership Agreement During Bankruptcy
Subject to any agreement between the partners, every partnership is also dissolved by the death or bankruptcy of any partner (Partnership Act 1895 (WA) s 44).
Running a Company During Bankruptcy
Under Australian regulations, companies are a distinct legal entity and are different to other types of businesses like sole traders. Public and private companies are owned by their shareholders and are required to be operated by one or more directors and secretaries.
During bankruptcy, a person is not permitted to act as the director of a company as they are a disqualified person (Corporations Act 2001(Cth) ss 206B(3), 206B(4)). Similar to other assets, any shares a person owns in a company will be passed to their bankruptcy trustee.
Depending on the circumstances and the value of the shares, a bankrupt person’s trustee may sell the shares to repay creditors. In some cases, the trustee may also apply to have the company placed into court liquidation to realise the value of the shares and repay creditors.
You can resume your duties as a director once you have been discharged from bankruptcy or meet the terms of your personal insolvency agreement.
The Effects of Bankruptcy on Business Ownership
Once you have been discharged from bankruptcy, there are no restrictions on running a business or company. Bankruptcy typically lasts for 3 years and 1 day. While you are permitted to operate a business post-bankruptcy, you may face additional challenges.
A past bankruptcy may present two key obstacles to establishing a new business or carrying on an existing one:
- Listing on the NPII – If you become bankrupt, your details will be permanently listed on the National Personal Insolvency Index (NPII). The NPII is publicly searchable and contains key information about you and your bankruptcy. Future customers, partners, investors and other stakeholders may choose to search the NPII and base their business decisions on your listing (Bankruptcy Regulations 2021 (Cth) Pt 13.).
- Obtaining new credit – Credit reporting agencies are permitted to keep your bankruptcy information on file for 5 years, or for 2 years following the end of your bankruptcy, whichever is later. This may affect your ability to obtain new sources of credit, such as small business loans or credit cards (Bankruptcy Regulations 2021 (Cth) Pt 13, cl 82).
Should you or someone you know be charged with an offence, it is essential you receive legal advice from an experienced criminal defence lawyer at any early stage. To discuss your options, call Hugo Law Group in Sydney, NSW (02 9696 1361), Canberra (02 5104 9640), Perth (08 6255 6909) or Northern NSW (02 5552 1902) to make an appointment to speak to one of our lawyers.
