Bankruptcy law provides for a bankrupt’s property being vested in the trustee in bankruptcy, who may take possession of the property, sell it, and distribute the proceeds of a sale to the bankrupt’s creditors. Property that can be distributed in this way is called “divisible property”. Not all property is available for distribution to creditors, however. Certain other types of property are specifically exempted from distribution by s 116(2) of the Bankruptcy Act 1966 (Cth).
The law concerning the distribution of a bankrupt’s property delineates the meaning of “property” for its purposes. As provided for in s 5(1) of the Bankruptcy Act 1966, it is a broad definition, meaning: “real or personal property of every description … [including] any estate, interest or profit, whether present or future, vested or contingent” (emphasis added).
This broadness is emphasised by the case law – the property of a bankrupt covers a wide spectrum, including debt repayments, property from deceased estates, tax refunds and taxi licences! Consistent with the statute, a particular determinative criterion seems to be that the property is gain-producing – as Gibbs J quoted in Re Buckle (1969) 15 FLR 460: it is “every species of right, of which by any possibility profit can be made”. Accordingly, property also encompasses interests in companies and shares in partnerships.
This definition of property is of particular interest for the light it sheds on the legal system’s function more generally – in articulating and legitimising our system of private property. This is underlined by the Bankruptcy Act 1966 even as it specifies that certain types of property of a bankrupt are available for distribution to others.
An effective system for balancing the competing interests of bankrupts and their creditors would seem to be an essential requirement for the smooth operation of a market economy. In seeking to strike the necessary balance, the Bankruptcy Act 1966 with the Bankruptcy Regulations 1996 (Cth) exempt essentially personal items of a bankrupt’s property from distribution, including a wide range of household items – eg cutlery, beds, TV’s, washing machines, fridges, phones (one of each of certain items and depending on the circumstances of the bankrupt’s household) – and property of sentimental value. Section 116(2) of the Bankruptcy Act 1966 also exempts compensation and damages received by a bankrupt for personal injury from distribution, while property purchased from the proceeds of such an award is also not divisible property: Re Iskenderian; Ex parte Iskenderian Bros Pty Ltd (1989) 21 FCR 363 .
The distinction effectively drawn between private property (here understood as capital) and personal property, is conceptually interesting. And while the particular legislative scheme discussed provides for the former type of property being sold-off and the proceeds distributed while the latter is untouched in the case of bankruptcy, it nonetheless elucidates the parameters of our system of property and clarifies the premises on which it is based.
The law on the distribution of a bankrupt’s property to creditors is discussed in the updated The Laws of Australia Subtitle 3.9 “Property of the Estate”.
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