There may be circumstances in a bankrupt estate where the Trustee has realised assets or recovered funds by pursuing recovery actions and the bankrupt’s conduct may be frustrating a Trustee’s ability to distribute a dividend to creditors. However, despite a bankrupt failing to file a Statement of Affairs and which would set out the details of creditors, a Trustee can still distribute a dividend to creditors who have lodged a Proof of Debt and proved as creditors in the bankrupt estate. In order to do so, an application to the Court is required to be made under section 146 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act). This provision ensures that creditors, with an interest in the bankrupt estate, are not prejudiced by the bankrupt’s conduct in failing to file a Statement of Affairs.

Two recent decisions have dealt with these applications under section 146 of the Bankruptcy Act:

1. Joyce (Trustee), in the matter of Domach v Domach [2023] FCA 888
   In this case, the Trustee set out the significant attempts which had been taken to have the bankrupt comply with his obligations and lodge a Statement of Affairs including prosecution by AFSA and he was found guilty under section 54(1) of the Bankruptcy Act for failing to lodge a Statement of Affairs. Despite the bankrupt being found guilty of that offence, the Court was satisfied that there was still little prospect of the bankrupt complying with his obligation to lodge a Statement of Affairs. There were also issues with the bankrupt avoiding service of the originating process as well as his failure to appear at the hearing which demonstrated to the Court that the bankrupt had not cooperated with the Trustee and has no intention of doing so. The Court was satisfied with the evidence of the Trustee that she had made all reasonable endeavours to ascertain all assets and liabilities of the bankrupt and identify any unsecured creditors who may be entitled to receive a dividend.

   A further order which was made by the Court was that the bankrupt was not entitled to any surplus funds remaining after payment of the dividends to creditors until he has lodged his duly completed Statement of Affairs in the required form and the Trustee has dealt with the claims of any further creditors disclosed in the Statement of Affairs.

2. Harrison (Trustee), in the matter of Adorni v Adorni [2023] FedCFamC2G 656
   Interestingly, this was the bankrupt’s second bankruptcy and she had also failed to file a Statement of Affairs in the first bankruptcy which required the Trustee to make an application to distribute a dividend to creditors under section 146 of the Bankruptcy Act. Fast forward 9 years, and the Trustee in respect of the second bankruptcy was required to take the same steps and obtain orders under section 146. Upon the Trustee’s evidence, the Court was satisfied that all reasonable steps had been taken to notify the bankrupt of her obligation to lodge a Statement of Affairs and she had failed to provide one as well as failing to provide necessary assistance to the Trustee. There were very few creditors, together with the Trustee’s fees, and the Trustee wished to transmit three other properties to the bankrupt and pay any surplus to her. The conduct of the bankrupt was preventing the estate to be finalised and the bankrupt would benefit from the orders under section 146 of the Bankruptcy Act.

Based upon the case law, the following principles are relevant as to whether the Court should exercise its discretion to make orders under section 146 of the Bankruptcy Act:

1. It is not necessary to establish a wilful refusal or neglect by the bankrupt to file a Statement of Affairs but a mere omission to file a Statement of Affairs is sufficient;
2. The Court may require evidence that creditors are aware of the application or that the Trustee has taken necessary steps to determine whether there are other creditors;
3. The interests of creditors as well as the bankrupt will be taken into account, particularly where there is a surplus of assets over liabilities.

Catherine Pulverman of FCW Lawyers has considerable experience in this area and has acted on behalf of Trustees in making applications to seek the requisite orders under section 146 of the Bankruptcy Act. She would be happy to provide any necessary advice and issue such applications to the Court as may be required by Trustees and to ensure that the most cost-effective outcome is achieved in finalising a bankrupt estate.