Creditors sometime apply for a bankruptcy notice without first formally demanding the debtor to pay the debt. In order for a bankruptcy notice to be issued the creditor must obtain a judgment against the debtor for a quantum of debt more than $5,000. The bankruptcy notice should be served within 21 days.
Service of a Bankruptcy Notice
If served with a bankruptcy notice you can:
- Pay the creditor in full within the time noted in the bankruptcy notice. Failing to do so would be considered an act of bankruptcy and you could be made bankrupt by the creditor. You will get a chance to be heard in court before you are made bankrupt.
- A bankruptcy notice may also be set aside in certain circumstances.
Setting aside a Bankruptcy Notice
The bankruptcy notice may be set aside on the following grounds:
- There is a defect in the bankruptcy notice, e.g. the amount of debt is incorrect;
- The debt does not exist;
- The debtor has a cross-claim against the creditor or a set-off equal to or more than the amount claimed in the bankruptcy notice; or
- the bankruptcy notice is an abuse of process
In Lord v Rankin [2011] FCA 478, the creditors served a bankruptcy notice on the debtors who were insolvency practitioners by profession. There was no suggestion that the debtors were in fact insolvent. The case was first brought before a federal magistrate who set aside the bankruptcy notice on the basis that the notice was not issued in the name of the creditor, the amount of debt was overstated and it was an abuse of process.
The Federal Magistrate stated that:
‘The proper purpose of seeking a sequestration order against the estate of a debtor is so that a debtor, who is unable to pay his debts as and when they fall due, should have his affairs controlled for the benefit of all his creditors and not just specific ones. Allied to this purpose is the prevention of the debtor incurring further obligations which he will not be able to meet. It is a public purpose. The bankruptcy process is not to be used for private ends.’
On appeal to the Federal Court, it was held that whether a bankruptcy notice was issued as an abuse of process is a question of fact for the trial judge and in that case the dominant purpose of issuing the bankruptcy notice was held to be embarrassing the debtors rather than securing payment of the debt.
It was further held that in case of an abuse of process there is no requirement for a particularly heavy onus to be met. The appeal was dismissed with costs
Sequestration Order
If the court following hearing the submissions of both creditor and debtor is satisfied that the debtor has not paid the debt, the court makes a sequestration order whereby the debtor is made bankrupt. A Trustee would then be appointed to manage the assets.
When the sequestration order is made, the debtor should pay the debt and complete a state of affairs. Failure to lodge your statement of affairs is an offence under the Bankruptcy Act and could lead to prosecution.
Setting aside a sequestration order
Often a sequestration order is made by the Registrar of the Court in absence of the debtor. The debtor may decide to lodge an application in the Federal Circuit Court to have the sequestration orders varied or set aside if it is made in absence of a party. The Court rules require the application to be made within 21 days of the sequestration order.
The creditor should be notified that an application has been filed with the Court to have the sequestration order reviewed.
The debtor must have sufficient grounds to oppose the sequestration order.
In case of a successful application for judicial review, the Court may order that the Sequestration Order be set aside and in that case the bankruptcy record may be removed from the National Personal Insolvency Index.
Alternatively the debtor could
- obtain annulment by paying all the debts in full including the costs of administration of the Trustee – Section 153A of the Bankruptcy Act 1966 (Cth); or
- propose a composition or scheme of arrangement for settlement of the debts with the creditors and if accepted by the creditor the bankruptcy will be annulled – Section 74 of the Bankruptcy Act 1966 (Cth)
The Court may also make an order annulling the bankruptcy if it is satisfied that a sequestration order should not be made or a debtor’s petition should not have been presented or should not have been accepted by the Official Receiver- Section 153B of the Bankruptcy Act 1966 (Cth).
The effect of an annulment of the bankruptcy is that the name of the bankrupt debtor will appear on National Personal Insolvency Index permanently and credit reporting organisations will keep records of bankruptcies up to 5 years.
Costs
The debtor may be ordered to pay the legal costs of the other parties even if the sequestration order is set aside successfully.
However the costs of administration of the bankruptcy, including the remuneration and expenses of a trustee, charges and expenses, incurred in administering a bankrupt estate, are granted a priority under the Act and are generally recovered from the proceeds of the property of the bankrupt – Section 109, Bankruptcy Act 1966 (Cth).
In case of the annulment of a bankruptcy under Section 153B, the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee – Section 154 (1)(b), Bankruptcy Act 1966 (Cth).
Any involvement with debt collection and bankruptcy issues whether as creditor or debtor will be extremely stressful for the parties who would require expertise advice to achieve the best possible outcome in a very unfortunate and strenuous situation.
Litigation Lawyers Sydney at Pavuk Legal can provide you with a sound legal advice in respect of bankruptcy claims, disputes of quantum of debt, debtor’s petition and/or creditor’s petition.
We can provide assistance for a range of related legal matters, including: corporate and employment law advice, shareholders, partnership and joint venture agreements, transferring, buying and selling a business, lease agreements, asset protection, estate and succession planning, business management and administration, employment contracts, employee rights, unfair dismissal and confidentiality agreements, advice in regard to tax law including capital gain tax.
For the full range of Legal Services that Pavuk Legal offers please go to: www.pavuklegal.com/services/
Many other essential estate planning hot topics for business owners is all found in the book Nobody Else’s Business. Nobody Else’s Business is about helping business owners live the life they want to live, now and in the future. It is the ultimate guidebook for succession planning of modern Australian businesses.
To purchase your own copy of Nobody Else’s Business please click here
