Bankruptcy and mental incapacity

A son was obliged to ‘forum shop’ in order to assist his debt-laden father go into voluntary bankruptcy.  The father had suffered a stroke leaving him with severe cognitive impairment. The son tried to put his father’s estate into bankruptcy in Queensland, where the father lived, but had to eventually rely on WA guardianship laws to enlist bankruptcy protection.   

Reform of the laws is needed.

Any person can become mentally incapable through the wide range of illnesses and accidents that can befall any of us, whether permanent or temporary or sporadic.

A particular issue arises if the person who suffers that fate may be a debtor owing money to creditors.  While that person may need access to funds to support themselves in their condition, their creditors should remain under consideration.

Going back centuries, the law has attempted to provide a process for protection and care of those suffering mental conditions, although the terminology and medical categorization used then is now arcane.  The terms lunatic and idiot were accepted and formal means of describing mental incapacity, developing over time to the present legal terms of guardianship, mental illness and mental disorder.  The pervasive nature of a mental condition on a person was accorded more attention than the needs of those suffering physical infirmity.

Insolvency

If a person is insolvent at the time they suffer some impairment of their mental state, while they may be protected by virtue of their condition from claims by creditors, insolvency law, while it also offers protection to a debtor, also gives rights to creditors that should still be addressed. 

Access by the debtor to the protection of bankruptcy is problematic.

The Bankruptcy Act gives limited recognition to persons of “unsound mind”.  Section 308 provides that, subject to the Act, and for the purposes of the Act, “a person of unsound mind may act by a person authorised or empowered by law to act for him or her”. 

The history of that section goes back a long way.  In the 1883 English Bankruptcy Act, in legal terms used at that time, section 148 provided that “a lunatic may act by his committee or curator bonis”.[1]

Going back further, to the fourteenth century, English law recognised a distinction between idiots and lunatics, the former being persons born with mental impairment, the latter being those suffering some illness or accident that has impaired their mental condition.  The law then presupposed that idiots would never recover from their condition, but that lunatics could have lucid intervals, and that they might recover.  

SAL and JGL

Returning to modern times, a recent case involved a 61 year old man living in Queensland who suffered a stroke leaving him with significant cognitive impairment.  He had significant debts and virtually no assets.  His son took charge of his affairs and applied and was appointed as the financial administrator of the estate of his father under the Guardianship and Administration Act 2000 (Qld) by the Queensland Civil and Administrative Tribunal (QCAT).

That Act allows the Tribunal to grant an administrator a wide range of powers but these did not specifically refer to bankruptcy.

In response to his father’s significant debts, the son then prepared a voluntary debtor’s petition and a statement of affairs and presented it to the Official Receiver in Queensland under s 55 of the Bankruptcy Act.  The Official Receiver did not accept the petition, taking the view, based on the decision of the Federal Court of Australia in Orix Australia v McCormick[2], that the QCAT order did “not specifically allow for bankruptcy proceedings to be taken by the appointed administrator”.

Before commenting on that decision of the Official Receiver, the rest of the story is that the father had some minor item of property in WA, where he had lived – an unclaimed amount of 45 cents from an inoperative betting account with the TAB. Based on that, the son was able to apply for an administration order in Western Australia under the Guardianship and Administration Act 1990 (WA), Sch 2, Pt A of which allows a person appointed to “sequestrate the estate of the represented person, under the provisions of the bankruptcy laws”. 

An administration order for a person not resident or domiciled in WA is limited to the person’s ‘estate within Western Australia’. The Tribunal determined that the father’s estate in WA included his significant debts, exceeding $400,000, and his one WA asset, being the 45 cents.[3]

The Tribunal decided that it was in the best interests of the father to make an administration order in favour of the son in order to allow him to present a bankruptcy petition on behalf of his father: SAL and JGL [2016] WASAT 63. 

Comment

I have been unable to confirm that the bankruptcy occurred but there seemed to be no legal impediment, given section 308(c) of the Bankruptcy Act. It may well have been that the creditors received nothing but at least their rights were recognized and their debts explained.  In other circumstances, the estate of a bankrupt with significant assets who is mentally incapable would given creditors some return on their claims.

Section 308(c) might properly have allowed the petition to have been presented and accepted by the Official Receiver, wherever in Australia, based on the orders of the Queensland Tribunal. Orix Australia v McCormick concerned a donee of an enduring power of attorney presenting a debtor’s petition in order to make the donor bankrupt.  The circumstances there were that a man had accumulated significant debts which were then the subject of a number of creditor claims, putting pressure on the man and his family.  The man disappeared.  His son sought to make the father bankrupt through use of a power of attorney given him by his father.  The Federal Court said that going bankrupt was so significant and “personal” that it could not occur under a power of attorney. Section 308(d) of the Bankruptcy Act, that a person may act through an agent, did not assist.

Whether that decision should have had should have a bearing on the situation in SAL and JGL is another matter.  The English history of s 308 is extensive in authorizing and assisting in bankruptcy proceedings.  Little case law on this issue is available in the present day, and, until SAL and JGL, none on s 308(c).

NSW

The only other Australian state with a law similar to that in WA is NSW, with its NSW Trustee and Guardian Act 2009 which allows the NSW Trustee to “sequestrate the estate under the bankruptcy laws”.  The NSW Law Reform Commission is reviewing the 1987 Guardianship Act including its interaction with the NSW Trustee and Guardian Act. It has not so far addressed this issue. 

Reform

The Bankruptcy Act is Commonwealth law, and laws concerning health and capacity come under state legislatures.  Consideration should usefully be given to harmonising the various state laws, rather than requiring persons needing the assistance of the bankruptcy regime negotiate state jurisdictional issues. Also, the WA and NSW laws are quite archaic in their wording and legally meaningless unless the term “sequestrate” is read as a generic term.

Rather than relying upon state laws, the Bankruptcy Act should be amended to clarify and confirm that an appropriately appointed person is able to act on behalf of an insolvent debtor without reliance on state law authorizing bankruptcy.   

Other issues

This is but part of other issues being examined by the team available to Murrays Legal:

  • The responsibility of a trustee in dealing with a bankrupt with a mental condition;
  • Types of mental illness that can lead to financial default and bankruptcy;
  • Types of mental illness that can be induced by financial default and bankruptcy;
  • Vexatious litigants;
  • The consequences of mental infirmity of a director in corporate insolvency.

Comments invited.

[1] Committees or individuals appointed by the court to attend to the financial affairs of a person.

[2]  Orix Australia Corporation Limited v McCormick [2005] FCA 1032. I appeared in that matter for the Official Receiver.

[3] For technical legal reasons, the Tribunal determined that the Queensland administration order was not ‘recognised’ in Western Australia because the father had not ‘entered’ WA.

Photo: The former McLean Asylum for the Insane, Massachusetts, USA, to which Robert Lowell, was, at times, committed.  

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