Bankruptcy carries with it a range of stigmas and impediments for the bankrupt.
Depending on your profession, it can also limit your ability to work.
The Bankruptcy Act 1966 (Cth) (Act) does not impose any blanket restrictions on employment in any trades or professions per se. However, particular industry associations or licensing authorities may impose certain restrictions or conditions should a member or licensee become bankrupt or enter into an arrangement under the Act.
In the legal profession, lawyers in every state must be “fit and proper” persons to hold a practising certificate.
In various jurisdictions (including Western Australia and for the purpose of this note, relevantly, New South Wales) there are defined “suitability” matters to be taken into account in making this assessment. In both states this includes consideration of whether a person is insolvent or under an administration.
The recent case of Barakat considered the interplay between bankruptcy and suitability to practice law.
The proceedings were appeals under section 108 of the Legal Profession Act 2004 (NSW) against decisions of the Council of The Law Society (Law Society) of New South Wales denying practising certificates for the year ended 30 June 2014 to each of the plaintiffs.
The Law Society contended that the conduct of the plaintiffs in entering into certain transactions after the point in time at which they realised that they probably could not pay all of their tax obligations and claims against them by former clients, warranted the conclusion that they were unfit to practice (impugned transactions).
Each of the impugned transactions involved the plaintiffs making dispositions of assets or substantial funds to associates knowing that they faced likely insolvency. They then offered compositions under section 73 of the Act to enable their bankruptcies to be annulled. The Law Society contended that, by their conduct in effecting those transactions, each of the practitioners sought to maximise their personal position and displayed a “reckless disregard“ for the interests of their creditors.
The plaintiffs’ former firm (a specialist personal injury litigation firm) had been subject to numerous claims by former clients in respect of the firm’s billing practices, but the Court was keen to emphasise that this had no bearing on the Law Society’s original decision.
The Court considered various authorities which had previously considered what was meant by “fit and proper”. The Court reached the view that the position at law was that for a practitioner to be considered fit and proper they must meet certain obligations beyond those imposed by law.
The Court emphasised that while an exhaustive statement of the scope of those obligations was not possible, what is required is more than just a demonstrated honesty and competence in dealing with clients, other practitioners and the court. It also extends to the assessment of a practitioner’s “character” - for example the management of personal finances in order to meet taxation liabilities and other debts (a recurring theme in these cases).
The Court also noted that while a finding of dishonesty was clearly sufficient to warrant the conclusion that someone was not “fit and proper”, it was not a necessary condition. In Wardell a “reckless disregard” for personal taxation obligations “as to amount to an intention to avoid them” was found to be sufficient to reach the same conclusion.
In determining that the plaintiffs were “fit and proper” persons and could therefore hold practising certificates, the Court ultimately found that the lawyers did not act dishonestly; while they clearly attempted to further their own interests they had also taken advice and attempted to consider the best interests of their creditors.
Lavan Legal comment
The interplay of the Act and (mostly state) professional regulations and laws varies depending on the professional area involved. However it is safe to say that bankruptcy can, depending on the circumstances leading up to that state of affairs, have significant consequences on a professional’s ability to carry on working.
This case is a useful reminder that professional conduct extends beyond the walls of the workplace and that fitness and propriety are concepts that while perhaps somewhat subjective, should not be left at the office on a Friday afternoon to be collected again on a Monday morning.
While self-instigated bankruptcy (and the range of compromises available under the Act) can often be a sensible way to address personal insolvency, professionals should consider the standards of their professional organisations and take appropriate advice before making any such decision.
 Barakat v The Law Society of New South Wales  NSWSC 773