Related Entity

From 1 December 2004, some forms associated with the bankruptcy process require a debtor or bankrupt to declare if they or their related entities are related to a creditor. For example, questions on whether a creditor is a related entity of the debtor/bankrupt are found in the form of statement of affairs.

In addition, from that date, a person who is authorised to become a controlling trustee (CT) or a person who becomes the trustee of a personal insolvency agreement, must each make a written declaration stating whether the debtor is a related entity of the CT or trustee, or of a related entity of the CT or trustee.

The requirement to disclose these relationships was considered appropriate to address concerns expressed in the Part X review (link to Part X report) that some debtors were able to manipulate the meeting process to enable 'friendly' creditors to vote in favour of their proposal. Those concerns included perceptions that some controlling trustees (and to a lesser degree, trustees) faced a conflict of interest or were biased towards the debtor.

The Part X review noted that if the debtor was required to disclose any significant relationship with creditors this may improve the confidence of creditors involved in Part X. This is particularly so in the case of creditors given the penalties that apply to making false statements or omitting material information. The review concluded that it may be desirable to increase the disclosure requirements in the Statement of Affairs of the debtor's or bankrupt's relationship with creditors.

In relation to concerns about a CT's conflict of interest or bias, the review proposed that they declare any significant relationships with the debtor in their initial report to creditors. This early disclosure would better prepare creditors about the options available to them prior to the actual meeting. In addition, the review proposed that performance standards be introduced to provide guidance to all participants on acceptable minimum standards of CT or trustee administration.

A new definition of 'related entity' was inserted into the Bankruptcy Act (section 5). The statement of affairs must include a statement identifying any creditor who is a related entity of the debtor or bankrupt. The Explanatory Memorandum to the Bankruptcy Legislation Amendment Act 2004 states:

Subsection 6A(2) provides for the form and content of a statement of affairs. Item 4 inserts new paragraph 6A(2)(b) that the statement referred to in subsection 6A(1) includes a statement identifying any creditor who is a related entity of the debtor or bankrupt. This will address a key policy objective of these reforms - that is, to strengthen the requirements for debtors to disclose all matters which may be relevant to creditors who are being asked to decide whether or not to vote in favour of the debtor's proposal.

Other forms such as the Statement of Claim and Proxy form (form 7) request a creditor to declare their relationship to the debtor. It should be noted that a creditor who is disclosed as a related entity by the debtor or bankrupt is not disqualified from voting, they will still be able to vote at the meeting.

The instruction sheet accompanying the Statement of Affairs explains:

9. Related creditors include:

i. your relatives, which include:
a. your spouse (includes de facto spouse),
b. your or your spouse’s parent/s and lineal ancestor/s and their respective spouses,
c. your or your spouse’s children or lineal descendants and their respective spouses,
d. your or your spouse’s brother or sister and their respective spouses,
e. your or your spouse’s uncle, aunt, nephew or niece and their respective spouses,

ii. a member of a partnership in which you or any of your relatives are a member.
Example: You owe $1,000 to your accountant. Your brother is a business partner of your accountant in a car dealership business. Then your accountant is a related creditor.

iii. a beneficiary or a trustee of a trust that is connected to you or your relatives (A trust is connected to you if any of your relatives is either a trustee or a beneficiary of that trust)
Example: You owe $1,000 to ABC Family Trust. Your son is a beneficiary of the trust. This would make the trustee of ABC Family Trust a related creditor, even though you may not be a beneficiary or trustee of this trust.

iv. a director of a company that is connected to you or your relatives (A company is connected to you if any of your relatives are directors of that company)
Example: You owe $1,000 to your financial consultant, Mr Joe Bloggs who is a director of XYZ Pty Ltd. Your nephew also happens to be a director of the same company. This makes Mr Joe Bloggs a related creditor even though he is not your relative.

v. a company in which any of your relatives is a director
Example: You owe ABC Pty Ltd $1,000. Your father in law is a director of this company. This would make ABC Pty Ltd a related creditor.

vi. a company that is related to the company above (Company A is related to another Company B if it is owned by Company B, or owns Company B, or both Company A and Company B are owned by a common Company C)
Example: You owe ABC Pty Ltd $1,000. Your father in law is a director of DEF Pty Ltd which owns ABC Pty Ltd. This would make ABC Pty Ltd a related creditor.