Effect of bankruptcy-bankruptcy and liquidation, Financial Accounting

Effect of bankruptcy

A D of A made for the benefit of creditors generally will be an act of bankruptcy and therefore a bankruptcy petition may be presented against the debtor within 3 months of its execution by a creditor who has not assented to the D of A (but if such creditor has been served by the trustee under the D of A with a notice of the execution of the D of A the time is reduced to 1 month).  The trustee should therefore not act under the D of A for 3 months after its execution unless all creditors have assented to it because if the debtor becomes bankrupt the D of A will be void and the doctrine of relation back will apply, the trustee having to account to the trustee in bankruptcy for all dealings with the debtor's property; however all expenses properly incurred by the trustee of the D of A in the performance of his duties must be paid to him by the trustee in bankruptcy as a first charge on the estate.

Normally if a D of A is void the trustee under the D of A must account for dealings with the debtor's property even if a bankruptcy petition is presented after the lapse of 3 months from the D of A. But, in the latter event, if the D of A is void by reason only that

(a) The requisite assents from the creditors have not been obtained or
(b) In the case of a D of A for the benefit of three or more creditors, by reason only that the debtor was insolvent at the time of the execution of the D of A and that the D of A was not registered in accordance with the DAA and the trustee did not know and had no reason to suspect that it was void, the trustee is not liable to account for dealings with the debtor's property which would have been proper had the deed been valid.

Posted Date: 12/13/2012 1:36:48 AM | Location : United States







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