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Bankruptcy Notice and Creditor's Petition

November 6, 2016

 

 

 

Bankruptcy Notice

 

A bankruptcy notice is simply a formal notice of demand requiring a debtor to pay a debt (issued by the Official Receiver, a government body, upon application by a creditor).

 

Whilst it is covered in more detail below, in order to issue a Bankruptcy Notice, first, a creditor must have a final court judgement against the debtor.

 

To meet the requirements (of an application to the Official Receiver to issue a notice) a creditor has to show that:

  1. a final judgment or order has been made against the debtor. This must be for a sum of at least $5000, or a combination of judgments that together add up to $5000. The judgment must be attached to the notice; and

  2. a bankruptcy notice relating to that judgment has been issued; and

  3. the debtor has failed to:

    • comply with the notice, or

    • set up a satisfactory case for a counter-claim, set-off or cross demand equal to or exceeding the judgment debt.

The application to the Official Receiver is merely an administrative one and does not involve a court appearance or similar (just a lodgement of a form).

 

The Official Receiver will not grant a notice when (other than cases of formal defects in the application):

  1. Execution of the judgment has been stayed; or

  2. For a money order: has been more than 6 years since judgment was given or order made.

Defects in a Bankruptcy Notice

 

Non-compliance with the requirements for a bankruptcy notice can lead to defects or irregularities in the notice.  A defect in a bankruptcy notice is characterised as either a “formal” defect or a “substantial” defect.

 

A defect or irregularity in a notice is substantial if it fails to meet a requirement made essential by the Bankruptcy Act 1966, or is one which “could reasonably mislead a debtor as to what is necessary to comply with the notice”: Kleinwort Benson Australia Ltd v Crowl (1988) 19 ALR 1.

 

Service of a Bankruptcy Notice

 

Personal service is not required for a bankruptcy notice, but it is certainly preferred by the court.

Service of the bankruptcy notice overseas is permissible if necessary.

 

Debtors Response to a Bankruptcy Notice

 

The purpose of a bankruptcy notice is to give the debtor notice of the amount claimed, and an opportunity to pay that amount. A debtor is normally given 21 days to comply with a bankruptcy notice that is served within Australia.

 

If the debtor pays the amount within the relevant time period, there is no act of bankruptcy, as the bankruptcy notice has been complied with.

 

Alternatively, the debtor can apply to the court for an order setting aside the bankruptcy notice on the grounds that the debtor has a counter-claim, set-off or cross-demand at least equal to the amount claimed.

 

This application must be made within the time for complying with the notice, and operates to automatically extend the time for compliance with the notice until the Court makes a determination on the debtor’s claim.

 

The debtor must demonstrate that the counter-claim, set off or cross demand, could not have been set up in the proceeding in which the judgment was obtained.

 

The debtor must also demonstrate that there is sufficient substance to the claim.

 

If the court is satisfied by the counter-claim, etc, there is no act of bankruptcy and the matter ends (save for an argument as to costs).

 

The debtor can also seek an extension of time for compliance with the bankruptcy notice, in cases where the debtor institutes proceedings to set aside the judgment on which the bankruptcy notice was based, or where the debtor applies to set aside the bankruptcy notice.

 

However, the Court will refuse an application for extension where the proceedings have not been instituted bona fides or are not being prosecuted with due diligence.

 

Failure to comply with a bankruptcy notice is an “act of Bankruptcy” which can be relied upon to file a Creditor Petition.

 

Creditor's Petition

 

One or more creditors of an insolvent debtor can commence proceedings to “bankrupt” a debtor. The proceedings are commenced by way of a creditor’s petition seeking a sequestration order against the debtor’s estate.

 

The requirements for a successful creditor’s petition are:

  1. a debt of at least $5,000;

  2. an act of bankruptcy (ie, expiry of a Bankruptcy Notice) committed by the debtor in the previous 6 months; and

  3. the required connection to Australia by the debtor.

If these requirements are satisfied, the Court may make a sequestration order against the estate of the debtor. On the making of the sequestration order, the debtor becomes bankrupt.

 

$5,000 Debt

 

This does not have to be a single debt owing to the creditor in question, but can consist of several debts owing to the same creditor, or several creditors, added together.

The debt must be a liquidated sum, both at the time of presentation of the creditor’s petition, and at the date of the act of bankruptcy relied upon, and the debt must be payable immediately or at some certain future time.

 

Hearing a Creditor's Petition in Court

 

The creditor’s petition must be presented within 6 months of the act of bankruptcy relied upon (ie, the expiry of the Bankruptcy Notice).

 

The debtor is entitled to appear at the hearing to oppose the petition.

 

Opposing a Creditor’s Petition

 

One issue that can arise is whether the creditor is able to prove the debt is owed by the debtor. The existence of a judgment is not conclusive of the existence of the debt for bankruptcy purposes: Wren v Mahony (1971-72) 126 CLR 212.

 

However, there will usually need to be sufficient reason to go behind the judgment. For example, the Court may be willing to go behind the judgment if the judgment was obtained by default, or where it is alleged that there was fraud or collusion in relation to the judgment.

 

Also, if a debtor is able to satisfy the Court that he or she is able to pay his or her debts, the Court may dismiss the creditor’s petition. Again, this is a discretionary power, and the Court will have regard to the public interest as well.

 

This defence is often argued when the debtor is unwilling to pay a particular debt (eg on a matter of principle), even though he or she is able to pay.

 

Solvency must be proved on the basis of the debtor having assets that are readily realisable: Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372.

 

The Sequestration (Bankruptcy) Order

 

At the hearing of the creditor’s petition, the Court will require the creditor to prove the following:

  1. the matters stated in the petition;

  2. service of the petition (personal service is required, unless an order for substituted service is made under s309(2)); and

  3. that the debt (of at least $5,000) is still owing (s52(1).

If the court is satisfied with the proof of these matters, it may make a sequestration order against the debtor.

 

Upon the Court making the sequestration order against the debtor's estate, the debtor becomes bankrupt.

 

If a registered trustee has consented to act, then the Registrar will issue a Certificate of Trusteeship to that person.

 

If no such consent has been received by the Official Receiver, the Official Trustee becomes, by force of law, the trustee.

 

If you are having difficulty enforcing a judgment debt against an individual, please contact Grauf O'Brien Lawyers so that we can advise you as to the best course of action to facilitate a recovery.

 

Alternatively, if you have been served with a Bankruptcy Notice or a Creditor’s Petition, you should immediately seek legal advice as to how best move forward given the significant implications set out above.  Grauf O'Brien Lawyers is able to assist in this regard.

 

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