Last updated 30 November 2022
If a party to legal proceedings becomes bankrupt, no further action can be taken in that proceeding unless first approved by a court. However, if the bankrupt person is the plaintiff in an action involving a personal injury or wrongdoing to the bankrupt, their spouse or family, the bankrupt may continue the action in their own name and keep any compensation or damages awarded. Otherwise, the trustee will become the proper person to pursue the action or may elect to discontinue it (s 60 Bankruptcy Act 1966 (Cth) (Bankruptcy Act)).
Federal Circuit and Family Court of Australia orders
The Federal Circuit and Family Court of Australia (FCFCA) has exclusive jurisdiction over matters in which both family law and bankruptcy issues have arisen (s 35 Bankruptcy Act).
Transfers of property ordered or approved by the FCFCA before a person is bankrupt may not be overturned by a trustee, unless the trustee can show that the bankrupt person and the person to whom the property was transferred obtained the order from the FCFCA dishonestly, with a view to protecting the property from the bankrupt’s creditors.
When there is a dispute about the relevant share of jointly owned property with a non-bankrupt spouse, the FCFCA has the jurisdiction to decide how the proceeds are shared. Maintenance payments to a spouse or children are specifically protected from the trustee and cannot be recovered by the trustee for the benefit of creditors as preferential payments. However, bankruptcy will not protect a person from making child support payments or paying arrears of child support, as these continue regardless of bankruptcy.
Goods subject to a hire purchase agreement or other security interest
Generally, goods under hire purchase contracts will give rise to a security interest under the Personal Property Securities Act 2009 (Cth). If that security interest is not ‘perfected’, which is usually achieved by registration of the interest on the Personal Property Securities Register, when the person becomes bankrupt that property vests in the bankrupt and can be taken by the trustee as part of the bankrupt’s estate. However, if the hire purchase company has perfected its security interest, it may repossess the goods according to the terms of the hire purchase contract, which could include repossession rights when a person becomes bankrupt or if payments fall into arrears. If there is money still owing to the hire purchase company after it has sold those goods, the shortfall will be a debt provable in the bankruptcy.
Similar rules apply to security interests arising out of other financing transactions involving personal property such as bills of sale and certain types of leases.