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Is a Bankrupt allowed to keep Tools of Trade

06 April 2016

Section 116(2) of the Bankruptcy Act 1966 ('the Act') specifies what property is exempt from realisation by a Trustee. As you can see from a quick read of that section, it can be quite extensive and convoluted.

To avoid confusion (and a VERY long post, which you would no doubt lose interest in before the end no matter how much coffee you have had).... let's take a look at just one type of exempt asset today: Tools of Trade.

Identifying Tools of Trade

Section 116(2)(c) of the Act refers to Tools of Trade being tools that are being used by a bankrupt in earning income by personal exertion and:

  • Has a value less than the prescribed threshold amount (the current threshold amount is $3,700 and it is updated each financial year), or
  • Is identified by a resolution passed by creditors before the tools are realised by the Trustee, or
  • Is identified by an order made by the Court on application of the bankrupt.

In the majority of bankruptcy cases I have seen, the Trustee has three options to determine the value of the bankrupt's tools of trade:

  • The Trustee may ask the bankrupt to provide him/her with a listing of the tools, photographs of the tools and an estimate of what the bankrupt believes their resale value to be. The Trustee may then send this information to a licensed valuer to confirm the bankrupt's estimates;
  • The Trustee may send his/her staff out to compile a list of the tools and take photographs of the tools. The Trustee may then send this information to a licensed valuer for a 'desktop valuation'. A desktop valuation is where the licensed valuer has not personally sighted the assets but provides a valuation based solely on the information they have been sent; or
  • The Trustee may send out a licensed valuer to inspect the tools, compile a listing of the tools, take photographs of the tools and provide a valuation of the tools.

The method the Trustee chooses can be influenced by:

  • How co-cooperative the bankrupt has been;
  • Any safety concerns he has for his/her staff;
  • How specialised the tools are;
  • The location of the tools; and
  • Whether the tools are likely to exceed the prescribed threshold amount.

Realisation of Tools of Trade

If the value of the bankrupt’s tools of trade exceeds the prescribed threshold amount and the tools have not been previously protected by a resolution of creditors or a court order resulting from an application of the bankrupt, then the Trustee has three options to realise the tools:

  • The Trustee may allow the bankrupt to select the tools they keep with the remainder to be surrendered to the bankrupt estate so that the value of the tools retained is below the current prescribed threshold amount. The Trustee will then auction the surrendered tools through a licensed auctioneer for the benefit of the bankrupt estate;
  • The Trustee and the bankrupt may come to an agreement whereby all of the tools are sold, with the bankrupt to receive a cheque for the current threshold amount from the net sale proceeds; or
  • The Trustee may come to an agreement with a third party (e.g. bankrupt’s spouse, family member etc.) for them to purchase the tools that exceed the prescribed threshold amount for a price that is not less than the value ascribed to those tools by the licensed valuer.

If you are still with me, and I hope that you are, you will now understand why I chose only one asset to discuss in this article. 

If you have any questions about this article, or any aspect of personal or corporate insolvency, please contact me on (03) 8636 3333.

Leanne O'Grady, CPA, RITPSupervisor (Insolvency Specialist)PCI Partners Pty Ltd