Financial failure, bankruptcy and mental ill health – 2019

There can be a connection between a person’s mental health and their financial distress. In business, one can feed off the other, likewise in relation to personal debts. 

In the context of mental health training now being offered to insolvency professionals, through Mental Health First Aid, the following 2017 commentary is updated to 2019 and reissued.   

The impact

At a macro level, research shows

‘that additional mental health risks emerge in times of economic change. We know that people who experience unemployment and impoverishment have a significantly greater risk of mental health problems, such as depression, alcohol use disorders and suicide, than their unaffected counterparts. Men, in particular, are at increased risk of mental health problems and death due to suicide or alcohol use during times of economic adversity.

There is evidence that debts, financial difficulties and housing payment problems lead to mental health problems. The more debts people have, the higher the risk of many common mental disorders’.

See Actions to alleviate the mental health impact of the economic crisis, Wahlbeck & McDaid (2012) 11(3) World Psychiatry 139-145, references omitted.


At a micro level, if bankruptcy follows, it can provide some relief for the person’s mental state, or an exacerbation of it.  Bankruptcy law provides some protective structure for the person, but it also expects that person to be accountable.  The bankruptcy trustee has some responsibility in balancing the interests of protection and accountability, but how much is problematic. Case law has raised the prospect of a trustee being responsible to have a guardian appointed, and of being liable for causing a bankrupt’s mental ill health [1].

It cuts both ways as the article referenced suggests. From one direction, a person’s financial difficulties can adversely impact their mental health. The consequent loss of one’s home, standards of living, status and ability to support oneself and family can lead to a state of depression or can exacerbate an existing state.From the other direction, depression of a person in business can itself lead to the financial distress of that business, its symptoms being antithetical to the qualities of focus, resilience and clear thinking required in business, along with a readiness to seek advice and assistance.

These issues are invariably mixed. A depressed condition, whether pre-existing or prompted by the stresses of the business, can lead to financial failure, and then further illness.

While psychiatry and many other professional disciplines are particularly relevant in this area, how the law treats these issues is also important. The law generally tries to strike a balance between recognising an individual’s traits and circumstances and at same time drawing a limit on how far it can concede to a person’s individual mental condition or personality. Hence, we have the reasonable man test, and defences of illness and capacity.

Two issues raised by bankruptcy law

Several areas of law are relevant, but bankruptcy law presents at least two particular issues:

  1. It can provide in legal and even medical terms a palliative to financial distress, by way of relieving the debtor from the pressure of creditor demands and allowing a ‘fresh start’; and
  2. It also presents unique difficulties for the trustee in bankruptcy administering the person’s bankruptcy, in terms of what responsibility a trustee has for the health or capacity of the bankrupt.[2]

The balancing of interests in bankruptcy law

While bankruptcy does offer a debtor financial and psychological relief, the debtor also suffers social stigma, loss of assets, and personal restrictions.[3] A bankrupt is required to revisit and account for what led to their bankruptcy, and perhaps to confront their creditors in meetings and be publicly examined, each of which in themselves can be difficult and unpleasant reminders.

The Bankruptcy Act itself makes little concession to the bankrupt person, with ‘illness’ being available as some excuse for non-compliance with legal obligations.

More important are court processes and rules, concerning states of mind and capacity, litigation guardians and pro bono lawyers, and rules about vexatious litigants.  State guardianship laws are also important.

Leading up to bankruptcy

In the process leading up to bankruptcy, a person’s mental state can be a reason why a court might set aside a bankruptcy notice, or refuse or at least defer a creditor’s pursuit of a bankruptcy, or later annul a bankruptcy.

But bankruptcy needs to keep a balance between the rights of the debtor and those of the creditors.  Keeping that balance is evident in a case[4] where although medical evidence was accepted that the bankrupt presented her debtor’s petition at a time when she was

“incapable of making a fully informed decision, her decision-making being impaired by both her depression, her anxiety, her recovery from substance abuse and requirement for prescribed medication”,

her application for an annulment of her bankruptcy was refused, because she was nevertheless insolvent.

Behind that outcome may have been the thinking in another case, where, at the hearing of a sequestration order, the court rejected a defence of illness in saying that bankruptcy would in fact assist the debtor’s medical state.

Once bankruptcy has occurred

Once bankruptcy has occurred, it is then difficult to undo.  If the person’s mental health is claimed to be relevant, the court needs to have evidence of that. In some cases, due to a lack of rigour, or experience, the medical evidence is sadly wanting.

In one case, a bankrupt sought to explain why he had failed to comply with obligations to produce documents in terms of his depression and anxiety. But the medical evidence, of a psychologist, was simply inadequate and the Judge rejected it as misinformed, casual and inconsistent. In the end, the bankrupt was jailed for contempt.[5]

Medical issues are important, but so are creditors’ rights. Neither judges, nor lawyers nor trustees are expected to make a formal assessment of mental ill health without expert advice.

In another case, the court had to decide whether the bankrupt should be permitted to travel to France with her two young children to be with her family after a bereavement. Again, the medical evidence of her claimed post-natal depression was poor, the judge descending into the detail of the medical report saying that there was

“no specific reference to the precise type and dosage of medication, no reference to whether … there is any referral for psychiatric treatment”.[6]

If evidence is acceptable, the court will act. In one case, a court agreed to relocate the public examination of a bankrupt away from the city where his business had failed to which he did not want to return.

The balance is not always easy to make. ‘Hoarding disorder’ is a condition in itself, but also a symptom of depression and bipolar disorder, and of obsessive compulsive disorder.[7]

A trustee confronted by a bankrupt’s unkempt and overflowing home, nevertheless has the legal obligation to take an inventory of what may appear to be rubbish, to decide what belongs to the estate and what is the bankrupt’s personal property and if necessary proceed to a sale.  The nature of the disorder is such that such actions might well be resisted, and themselves exacerbate the mental condition.

  1. The role of the bankruptcy trustee

From the trustee’s perspective, the bankrupt is not their client, in the way solicitors or accountants have clients.  The bankrupt is answerable to the trustee and is subject to the trustee’s direction. But at the same time, the trustee has a responsibility to ensure that the bankrupt is protected from creditor claims, and that the bankrupt’s private assets and affairs are acknowledged.

While certain processes to assist a trustee can be activated if litigation ensues – a forced sale of hoarded assets – in day to day dealings the trustee does not have any formal legal assistance.  The trustee must access whatever resources are available, through the bankrupt’s family of friends, or government or charitable resources.

Knowledge of the range of mental ill health and resources available is required of a trustee to both assist in explaining the bankruptcy and in dealing with the bankrupt. There are techniques that should or should not be used, in particular in dealing with vexatious conduct.

Mental health examples

Issues that may arise in varying degrees include

  • debts incurred from excessive consumer spending or grandiose business plans associated with the manic side of bipolar disorder;
  • a depressed person’s disorganised records and diminished memory, evident in interviews or examinations, sometimes seemingly feigned; untraceable losses from compulsive gambling;
  • querulous claimants and litigants;[8] and
  • the difficulty of dealing with sociopaths, whose lack of concern for the victims of what are often consumer scams can be confronting.

Guidance on capacity

While there is little formal guidance to assist bankruptcy trustees, and little in their training, some guidance can be taken from the responsibilities of lawyers to their clients, where in some cases an initial assessment of capacity must be made. NSW lawyers, for example, have access to guidance in determining a client’s mental capacity and their consequent responsibilities, and in interview techniques and other practical issues.[9]

Allowing for the fact that a bankrupt is not the client of the trustee, this guidance could be usefully adapted for insolvency professionals. 

How far does the trustee’s responsibility go?

But lawyers, and trustees, can be presented with ethical and legal dilemmas in dealing with mental health issues. For example, if a lawyer has concerns about the capacity of a client to give instructions, there is potential conflict between the lawyer’s duties to their client, including as to confidentiality, and their intervention to respond to the client’s incapacity.[10]

A trustee does not confront this exact dilemma, but at the same time the trustee does have some responsibilities to a bankrupt in relation to their health.


This was illustrated in the case of a 76 year old woman, with limited English and no formal education who was made bankrupt. On an annulment application, medical reports said she presented as “acutely psychotic with prominent thought disorder and paranoid delusions”.  By a rather severe process of reasoning, the court considered that the trustee had constructive responsibility for knowing of this and that he himself should have applied to have a litigation guardian appointed.[11]

That may take the trustee’s responsibility too far. While it may often be that the trustee knows their bankrupt, in many cases a trustee will have difficulty contacting and hearing from, for example, someone who is depressed or cognitively impaired.  If the trustee were to become aware of the poor health of the bankrupt, it could be a valid action for a trustee to seek to have an agent or guardian appointed.  While the trustee has primary responsibilities to the creditors, such action and expenditure may serve to better allow the estate to be administered.


One probably unlikely case involved a claim by a bankrupt that his trustee in bankruptcy was responsible for his decline in mental health for which he claimed damages. This was raised in the context of whether a trustee owed a common law duty in negligence to the bankrupt apart from the statute law.  Based on the English statute, the Court considered such any common law duty may be owed although the case itself was not one “to decide the circumstances in which a duty in respect of loss caused to the bankrupt personally may arise or the nature of that duty”: Oraki v Bramston [2017] EWCA Civ 403, 24 May 2017.     

In the bankruptcy context mental distress and damage to credit and reputation can arise in the case of malicious prosecution of a bankruptcy petition, that is to say, against the petitioner, not against the trustee. But there was said to be no English authority, either way, on whether such a claim can be based on the negligent conduct of a bankruptcy leading to the bankruptcy being extended for longer than necessary.  But in European law, in GJ v Luxembourg  [2000] BPIR 1021, a company shareholder successfully claimed that a long delayed finalization of a liquidation breached Article 6 (1) of the European Convention for the Protection of Human Rights and Fundamental Freedoms, entitling him to compensation for anxiety, distress and feelings of injustice. But the Court of Appeal in Oraki was not ready to say whether on different facts an award for mental distress can be made in circumstances where a bankruptcy has been unnecessarily prolonged.

The same may well be the case in Australia and there is no precedent.  But a trustee may be ordered to pay the estate the value of any loss that it suffers as a consequence of undue delay by the trustee or other compensable conduct: s 90-15 Corporations/Bankruptcy Schedule.


Like judges, trustees are not required to be medical experts, and they should know their limits but they have some responsibility to understand and balance out what can be competing issues in the case of an individual bankrupt. While the bankruptcy Act is largely, and necessarily, neutral in describing a person who become bankrupt, the individual traits of the bankrupt have to be taken into account by the trustee in administering their estate.

[This is a continued study for university research purposes, and is a work in progress; updated as at 30.1.19.  Any comments are welcome: MM].

[1] One serious study of this link has examined morbidity following the GFC.

[2] This commentary applies also to liquidators in their dealings with directors and company officers, as relevant.

[3] “The relief of the pressure of the debts will only be positive if the stress and consequences of bankruptcy are less onerous than the consequences of not going bankrupt”: Bankruptcy Toolkit, Financial Rights Legal Centre 2014

[4] Trouton v Official Receiver in Bankruptcy [2014] FCCA 2345

[5] Ambrose (Trustee), in the matter of Peter Athanasas (Bankrupt) (No 2) [2008] FCA 1016.

[6] Jackson-Grose v Official Receiver [2002] FMCA 239


[8] Querulous Paranoia and the Vexatious Litigant, Dr G Lester.

[9] When a client’s mental capacity is in doubt – a practical guide for solicitors, NSW Law Society 2016. Capacity Toolkit, NSW Department of Justice, 2008.

[10] R v P [2001] NSWCA 473, discussed in Representing clients with diminished capacity, A Taylor, Law Society Journal, February 2010.

[11] The court can have a lawyer provide pro bono assistance under the court rules See Application of Official Trustee, in the matter of Kelly (No 5) [2016] FCCA 535.

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2 Responses

  1. Need help for my son who owned a bar during covid. Cost him his entire savings. Now needs to go bankrupt but is not mentally Capable of doing so because he is Bipolar. His Bipolar is major & his whole financial situation has set him into a massive deep depression. I have tried many avenues to do it for him but can’t do without his involvement

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