Bankruptcy Law

Do you need to set aside a bankruptcy notice?

Non-compliance with a bankruptcy notice results in the debtor committing an “act of bankruptcy”.

An act of bankruptcy is one of the prerequisites to presenting a creditor’s petition in the Federal Circuit Court.

You have three (3) options if you are served with a bankruptcy notice, they are:

1. Pay to the creditor the amount of the debt; or
2. Make an arrangement to the creditor’s satisfaction for settlement of the debt; or
3. Apply to set aside the bankruptcy notice.

This article explains how to set aside a bankruptcy notice, and gives you a complete guide on the procedure for setting the bankruptcy notice aside.

What is Required for a Bankruptcy Notice?

To understand whether or not you can set aside a bankruptcy notice, you will first need to understand the requirements for a bankruptcy notice.

Section 41 of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”) says:

(1)  An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor:

(a)  a final judgment or final order that:

(i)  is of the kind described in paragraph 40(1)(g); and

(ii)  is for an amount of at least $5,000; or

(b)  2 or more final judgments or final orders that:

(i)  are of the kind described in paragraph 40(1)(g); and

(ii)  taken together are for an amount of at least $5,000.

Section 40(1)(g) of the Bankruptcy Act describes the judgment debt as:

final judgment or final order, being a judgment or order the execution of which has not been stayed

A final decision of the QCAT, which is also a monetary decision, that has also been filed in the registry of a court of competent jurisdiction (in accordance with section 131 of the Queensland Civil and Administrative Tribunal Act 2009) is a “final judgment or final order” for the purposes of section 41(1) of the Bankruptcy Act.

In Ferris v Queensland Building and Construction Commission [2015] FCCA 176 the applicant in an application attempting to set aside a bankruptcy notice on three (3) grounds, one of which was that the respondent did not have a final judgment or a final order against the applicant for the purposes of ss.40(1)(g) and 41 of the Bankruptcy Act.

Ferris argued that the UCPR Form 1 and the QCAT decision it was attached to, were not final judgments or final orders, and applied to set aside a bankruptcy notice.

The Judge Jarrett said:

The focus in this case on s.131 of the Act has been apt to distract from the more important question, namely whether a final decision of QCAT is, of itself, a final judgment or final order for the purposes of ss.40(1)(g) and 41 of the Bankruptcy Act. In my view they are either a final judgment or final order for the purposes of ss.40(1)(g) and 41 of the Bankruptcy Act. I do not need to decide which.

The application to set aside the bankruptcy notice was dismissed with costs.

So, a bankruptcy notice is founded on a final judgment or final order (which includes a registered QCAT decision) for $5,000.00 or more, the execution of which has not been stayed.

Section 41(3) of the Bankruptcy Act then says:

A bankruptcy notice shall not be issued in relation to a debtor … in respect of a judgment or order for the payment of money if … a period of more than 6 years has elapsed since the judgment was given or the order was made

So, the final judgment or final order cannot be older than six (6) years old.

Finally, section 41 of the Bankruptcy Act says:

The notice must be in accordance with the form prescribed by the regulations.

Regulation 4.02 of the Bankruptcy Regulations 1996 (Cth) (“Bankruptcy Regulations”) says:

4.02 Form of bankruptcy notices

(1) For the purposes of subsection 41(2) of the Act, the form of bankruptcy notice set out in Form 1 is prescribed.

(2) A bankruptcy notice must follow Form 1 in respect of its format (for example, bold or italic typeface, underlining and notes).

The Form 1 is contained in schedule 1 of the Bankruptcy Regulations.  See the bottom of this article for the Form 1 Bankruptcy Notice.

We will now discuss how to set aside a bankruptcy notice.

Application to Set Aside a Bankruptcy Notice

Rule 3.02 of the Federal Court (Bankruptcy) Rules 2016 (Cth) (“Bankruptcy Rules”) says:

(1)  An application to set aside a bankruptcy notice under the Bankruptcy Act must be accompanied by an affidavit stating:

(a)  the grounds in support of the application; and

(b)  the date when the bankruptcy notice was served on the applicant.

(2)  A copy of the bankruptcy notice must be attached to the affidavit.

The Application form to set aside a bankruptcy notice is the Form B2

The Affidavit to set aside a bankruptcy notice is the Federal Circuit Court Affidavit

Filing Fees for Federal Circuit Court Application

The application in the Federal Circuit Court for an application to set aside a bankruptcy notice are found on the Federal Circuit Court website.  The current fee (at the time of writing this article is $1,565.00. 

We strongly advise engaging a bankruptcy solicitor if you want to make an application to set aside the bankruptcy notice, to increase your chances of success, and avoid adverse costs orders if you are unsuccessful.

How to Set Aside a Bankruptcy Notice

There are four (4) main grounds to set aside a bankruptcy notice, they are:

1. There is a defect in the notice; and/or
2. The judgment debt allowing the notice is disputed; and/or
3. The debtor has a cross-demand, set-off, or counterclaim which is equal to, or more than the judgment debt; and/or
4. The notice is an abuse of process.

I will explain these grounds in more detail below.

Defect in the Bankruptcy Notice

Bankruptcy notices are issued directly from the Australian Financial Security Authority (“AFSA”).  When applying to AFSA for a bankruptcy notice, you will have to ensure that everything is correct, because a bankruptcy notice can be set aside if it contains a defect.

However, section 306 of the Bankruptcy Act says:

Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.

So, as in a defect in a statutory demand, a defect in a bankruptcy notice will only allow the notice to be set aside, if substantial injustice has been caused.

In Kleinwort Benson Australia Ltd v Crowl [1988] HCA 34 the High Court of Australia said:

The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice

They reversed the previous decision in Australian Steel Company (Operations) Pty Ltd v Lewis [2000] FCA 1915 and said that a bankruptcy notice may not be set aside if the defect was “formal” rather than “substantive“. To be substantive, the High Court said that the defect be:

objectively capable of misleading the debtor as to what is necessary for compliance with the notice

In Adams v Lambert (2006) 228 CLR 409 the High Court of Australia said:

The composite expression “a formal defect or an irregularity”, in its application to a bankruptcy notice, conveys a meaning with elements of both inclusion and exclusion.

So a defect can be something which is in the notice but should not be, or something which is not in the notice that should be.  Also, it must include essential requirements and must not mislead or confuse a judgment debtor.

Types of Defects in a Bankruptcy Notice

Failure to attach the judgment

In Curtis v Singtel Optus Pty Ltd & Anor [2014] FCCA 1286 the judgment debtor applied to have the notice set aside as the judgment did not “attach” judgment/order founding the notice.  Judge Lloyd-Jones of the Federal Circuit Court followed a long line of precedents and said:

Reg. 4.02(2) provides that the bankruptcy notice must follow Form 1 in respect of its format but that regulation is not to be taken as expressing an intention contrary to section 25C of the Acts Interpretation Act. Thus, despite the use of the word “must” in regulation 4.02(2) strict compliance with Form 1 is not required.

… The application should be dismissed with costs awarded to the respondents.

Incorrect legislative provision for interest calculation

In Australian Steel Company (Operations) Pty Ltd v Lewis [2000] FCA 1915 the applicant alleged that because the prescribed form requires statement of provision under which interest claimed, incorrectly naming that provision allows for the bankruptcy notice to be set aside.  In their joint decision Black CJ, Heerey and Sundberg JJ said:

Could it be said that incorrect citation of the statute that prescribed that interest was payable by the debtor on a judgment debt could mislead the debtor as to the steps to be taken by the debtor to comply with the notice? The answer, obviously, is no … The bankruptcy notices are not invalid and the petitions must be set down for further hearing.

Incorrect calculation for Interest

Section 41(5) of the Bankruptcy Act says:

A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.

In Miao v Owners Corporation SP 31235U [2015] FCA 352 Beach J said:

Even if there was an error made in the interest calculations as claimed in the bankruptcy notice, in my view, such a defect would not invalidate the bankruptcy notice. Section 41(5) makes this clear (there was no notice at the relevant time), as does s 306 of the Act.

Misspelling of a Debtor in the Bankruptcy Notice

In Matheson v Scottish Pacific Business Finance Pty Ltd [2005] FCA 670 Kiefel J said:

Mr Matheson has referred me to the definition of ‘legal name’ in Black’s Law Dictionary … as ‘a person’s full name as recognised in law’. That does not however mean that a court document such as a bankruptcy notice or petition is void if the full legal name of the person is not provided. There is no doubt that Mr Matheson is the person named in the District Court proceedings and in these proceedings and that he has understood that to be the case. He has represented himself and appeared. There was no ambiguity created by the bankruptcy notice or petition. In any event if there was an irregularity in the mode of description, it is of a formal nature and one that can be validated by s 306(1) of the Bankruptcy Act … In my opinion, the petition notice does not cause any injustice as it was not likely to mislead the debtor.

Creditor’s Solicitor as the Address for Payments

In E A Pugliese v The Chase Manhattan Bank Australia Limited [1993] FCA 454 Heerey J said:

The requirement of providing the address of the creditor was satisfied in this case by giving the address of the creditor’s solicitors, since that was a place where payment of the debt would be accepted, even though it was not a place where the creditor carried on business.

PO Box is not an address for service

In David Sarikaya v Victorian Workcover Authority [1997] FCA 1372 Black CJ said:

A post office box is not, in my view, the “address of a place” at which a document may be “left” for a person … Whether or not such a box is, in this context, the “address of a place”, it is not the address of a place at which a document may be “left” by way of service.

Others examples include:

James v Federal Commissioner of Taxation [1955] HCA 75 where a notice wrongly sought to restrict the debtor to paying debt to creditors at one particular place.

Re Gyngell; Ex parte Speedo Group Limited (1990) 27 FCR 531 where the notice contained the incorrect requirement that judgment debt be paid to Registrar of Local Court.

Re Beauchamp; Ex parte Beauchamp [1904] 1 KB 572 where the bankruptcy notice included the wrong address of creditor.

Re Celestine; Ex parte Monte Paschi Australia Ltd (1997) 71 FCR 399 where the bankruptcy notice contained the incorrect address of court.

As well as the bankruptcy notice being set aside for being defective, a notice can also be set aside if the judgment debt is disputed.

The Judgment Debt is Disputed

A judgment debt is disputed by either:

1. Paying the debt; or
2. Applying to set aside the judgment or order which the bankruptcy notice is based on.

Section 41(6A) of the Bankruptcy Act says:

(6A)  Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:

(a)  proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or

(b)  an application has been made to the Court to set aside the bankruptcy notice;

the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.

Section 41(6C) of the Bankruptcy Act says:

(6C)  Where:

(a)  a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and

(b)  the Court is of the opinion that the proceedings to set aside the judgment or order:

(i)  have not been instituted bona fide ; or

(ii)  are not being prosecuted with due diligence;

the Court shall not extend the time for compliance with the bankruptcy notice.

So, in an application to set aside, or extend time for compliance, the application to set aside the judgment must have been filed in the correct Court, and the affidavit material must raise genuine and arguable grounds for a defence which must have sufficient prospects of being successful.

Applications under this section cannot be made simply for the purpose of stalling the bankruptcy proceedings.

A judgment debtor may also have a cross-demand, set-off, or counterclaim.

Cross-demand, Set-off, or Counterclaim

Section 40(1)(g) of the Bankruptcy Act says in relation to a judgment, a debtor who can:

… satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained …

Rule 3.02(3) of the Federal Court (Bankruptcy) Rules 2016 says:

If the application is based on the ground that the debtor has a counter-claim, set-off or cross demand referred to in paragraph 40(1)(g) of the Bankruptcy Act, the affidavit must also state:

(a)  the full details of the counter-claim, set-off or cross demand; and

(b)  the amount of the counter-claim, set-off or cross demand and the amount by which it exceeds the amount claimed in the bankruptcy notice; and

(c)  why the counter-claim, set-off or cross demand was not raised in the proceedings that resulted in the judgments or orders to which the bankruptcy notice relates.

To satisfy this section of the Bankruptcy Act, the counter-claim, set-off or cross demand must:

1. Be equal to or exceed the amount of the judgment debt or sum payable under the final order; and
2. Why it could not have set up in the action or proceeding in which the judgment or order was obtained; and
3. Annex all of this evidence in an application to set the bankruptcy notice aside.

The relevant legal principles are contained in the case law.

In Guss v Johnstone [2000] HCA 26 the High Court of Australia said:

The state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.

In Vogwell v Vogwell (1939) 11 ABC 83 the Court decided that:

The offsetting claim must sound in money and it must be a claim that it is proper and reasonable for the debtor to litigate

In Ebert v Union Trustee Company of Australia Ltd [1960] HCA 50 the High Court considered the necessity for cross demand to be in same right (as trustee for example). The High Court of Australia said:

These considerations are enough to show in detail why it is that the appellant debtor does not possess a cross demand against the respondent trustee company.

In Glew v Harrowell, in the matter of Glew [2003] FCA 373 Lindgren J summarized it perfectly by saying that the Court must be satisfied of the following interrelated and sometimes overlapping matters:

1. They have a “prima facie case”; and
2. They have “a fair chance of success” or are “fairly entitled to litigate” the claim; and
3. They are advancing a “genuine” or “bona fide” claim.

Even if a judgment debtor cannot safisfy the requirements of the three (3) ways to set aside a bankruptcy notice mentioned above, the issuance of the bankruptcy notice may still be an abuse of process.

The Bankruptcy Notice is an Abuse of Process

In Lindholdt v Merritt Madden Printing Pty Ltd [2002] FCA 260 Weinberg J said:

It has been held that this Court can set aside a Bankruptcy Notice as an abuse of process in the exercise of its inherent jurisdiction … For example, if it is apparent that the purpose of a Bankruptcy Notice is to put pressure on a debtor to pay a debt rather than to invoke the Court’s insolvency jurisdiction, then the filing of the Bankruptcy Notice is itself an abuse of process.

It has been determined that an abuse of process usually falls into one of three categories succinctly outlined in Rogers v R [1994] HCA 42 following HWY Rent Pty Ltd v HWY Rentals (in liq) (No.2) [2014] FCA 449 when Judge Antoni Lucev said the three categories are:

1. The Court’s procedures are invoked for an illegitimate purpose; and/or
2. The use of the Court’s procedures is unjustifiably oppressive to one of the parties; and/or
3. The use of the Court’s procedures would bring the administration of justice into disrepute.

In Williams v Spautz [1992] HCA 34 the High Court of Australia said that an abuse of process is:

when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed

In Yarranova Pty Ltd v Shaw (No 2) [2014] FCA 616 Gordon J summerised the applicable principles:

There is a heavy onus on the person alleging the abuse of process. In any particular case, whether there is a use of the process or an abuse of it depends upon the purpose rather than the result … To establish abuse of process, more than mere assertion is required … It is an abuse of process for a judgment creditor to pursue bankruptcy proceedings “for the purpose of stifling litigation” … So, for example, if the purpose of the bankruptcy notice is to put pressure on a debtor to pay a debt rather than to invoke the Court’s jurisdiction in relation to insolvency, then the filing of a bankruptcy notice is an abuse of process.

Set aside a Bankruptcy Notice Summary

If you want to set aside a bankruptcy notice, you will need to prove:

1. There is a defect in the notice; and/or
2. The judgment debt allowing the notice is disputed; and/or
3. The debtor has a cross-demand, set-off, or counterclaim which is equal to, or more than the judgment debt; and/or
4. The notice is an abuse of process.

If you cannot, then it is unlikely that the bankruptcy notice will be set aside.

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Bankruptcy Notice Form 1

DEDICATED FOCUS – COMMERCIALLY MINDED – PROVEN RESULTS

GET A FREE FEE ESTIMATE TODAY

OR CALL: 1300 545 133 FOR A PHONE CONSULTATION

Wayne Davis

Wayne Davis, LLB, GDLP – Commercial litigation solicitor and legal practice director at Stonegate Legal Pty Ltd. Stonegate Legal focus on commercial litigation, debt disputes, the enforcement of money orders, and insolvency. Committee member of the Sunshine Coast Law Association. Committee member and volunteer lawyer with the Sunshine Coast Community Legal Service.

https://stonegatelegal.com.au/

Bankruptcy lawyers, or personal insolvency lawyers, can help a number of different parties to a bankruptcy proceeding.

If a party is not able to pay their debts when they are due and payable, they are legally insolvent.

If a person cannot raise the money needed to pay those debts then they can be made bankrupt.

During this process there will be:

1. Creditors – the person / company who is owed the debt;
2. Debtors – the person who owes the debt and is unable to pay the debt; and
3. Trustee – an entity appointed to manage the bankrupt’s financial affairs.

Bankruptcy lawyers work for creditors, trustees, and debtors.

What do Bankruptcy Lawyers Do?

Debt recovery and bankruptcy lawyers are able to give advice and assistance in all personal debt matters, from pre-bankruptcy advice to post bankruptcy advice.  This includes (but is not limited to):

1. Advice and assistance in relation to drafting or signing debt agreements, such as car financing agreements, home loan, agreements, mortgages, etc;
2. Advice and assistance in relation to all pre-bankruptcy proceedings, including advising on your rights, risks and liabilities;
3. Drafting lawyers letters of demand to a debtor foreshadowing bankruptcy action if the debtor does not attempt to pay their debts;
4. Drafting, filing and service of a bankruptcy notice on behalf of a creditor;
5. Advice and assistance with a debtor’s risks, rights, and liabilities when a debtor is served with a bankruptcy notice;
6. Advice and assistance with the validity of a bankruptcy notice, and the steps needed when attempting to resist a bankruptcy notice;
7. Advice and assistance on a creditors eligibility to present a creditor’s petition to the Federal Circuit Court of Australia;
8. Drafting, filing, and serving a creditor’s petition and all of the supporting documents needed in the bankruptcy proceeding;
9. Advice and assistance on a debtors eligibility to present a debtor’s petition to AFSA;
10. Drafting, filing, and serving a debtor’s petition and all of the supporting documents needed for AFSA;
11. Working with the trustee to realise assets of the bankrupt, including voidable transactions in bankruptcy, and all claims from trustees in bankruptcy;
12. Assistance in the negotiation of personal debt settlement agreements, personal insolvency agreements, and personal debt agreements;
13. Advice and assistance relating to a bankrupts rights and obligations during the bankruptcy;
14. Advice and assistance relating to a bankrupts rights and obligations after the bankruptcy;
15. Advice and assistance on how to secure an early release from bankruptcy; and
16. Advice and assistance in the Federal Circuit Court with defending or resisting bankruptcy proceedings.

What is Bankruptcy?

Bankruptcy occurs when a debtor is unable to pay their debts.

It can initiated by a debtor using a debtor’s petition, or a creditor after receiving a judgment debt using a creditor’s petition.

In either case, a bankruptcy trustee is appointed to manage the financial affairs of the bankrupt and realise assets and property of the bankrupt, to satisfy the debts to the creditors.

A bankruptcy lawyer can help you with your debtor’s petition, help you enforce your judgment debt with a creditor’s petition, and assist the bankruptcy trustee with the bankruptcy.

What is a Debtor’s Petition?

Section 55 of the Bankruptcy Act 1964 (Cth) (“Bankruptcy Act”) says:

Subject to this section, a debtor may present to the Official Receiver a petition against himself or herself.

Section 5 of the Bankruptcy Act says:

“Official Receiver” includes a person acting as an Official Receiver.

The official receiver is an appointment under statute.  On behalf of the Official Receiver, the Australian Financial Security Authority (“AFSA”) operates the day-to-day administration of bankruptcies, such as issuing bankruptcy notices, deciding debtor’s petitions, etc.

To petition for your own bankruptcy, a debtor must file a debtor’s petition and a statement of affairs with the Official Receiver.

If the debtor’s petition is accepted then the debtor has the option of appointing a registered trustee for the administration of the debtor’s estate, however creditors can change the trustee later.

Rejection of a Debtor’s Petition

Section 55(3) of the Bankruptcy Act also prescribes ways in the Official Receiver may reject a debtor’s petition, including if:

1. The petition does not comply substantially with the approved form; or
2. The petition is not accompanied by a statement of affairs; or
3. The Official Receiver thinks that the statement of affairs accompanying the petition is inadequate.
4. It appears from the information in the statement of affairs (and any additional information supplied by the debtor) that, if the debtor did not become a bankrupt, the debtor would be likely (either immediately or within a reasonable time) to be able to pay all the debts specified in the statement of affairs; and more.

If you are having financial problems and you are having trouble meeting your debts when they become due and payable, then contact our bankruptcy lawyers for advice and assistance with a debtor’s petition.

What is a Creditor’s Petition?

A creditor’s petition is an application to the Federal Circuit Court from a creditor applicant, to a debtor respondent, asking the Court for a sequestration order, making the debtor bankrupt.

A creditor or the creditor’s bankruptcy lawyer must follow these steps:

1. You must get a judgment from a Court over $5,000.00
2. Apply to AFSA for a bankruptcy notice;
3. Serve the bankruptcy notice and the judgment on the debtor;
4. The debtor commits an act of bankruptcy;
5. Present a creditor’s petition and supporting material to the Federal Circuit Court;
6. Serve the creditor’s petition and supporting material on the judgment debtor;
7. Prepare your final affidavits (affidavit of debt & affidavit of search);
8. If all is good, and the application is unopposed, the Court will make the sequestration order.

Judgment from a Court over $5,000.00

Section 41 of the Bankruptcy Act says:

An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor:

(a)  a final judgment or final order that:

(i)  is of the kind described in paragraph 40(1)(g); and

(ii)  is for an amount of at least $5,000; or

(b)  2 or more final judgments or final orders that:

(i)  are of the kind described in paragraph 40(1)(g); and

(ii)  taken together are for an amount of at least $5,000.

This means that you must have a judgment or final order of $5,000.00 or more, or two (2) or more judgments which total $5,000.00 or more to apply to AFSA for a bankruptcy notice.

Apply to AFSA for a Bankruptcy Notice

If you have a judgment from the Court which meets the requirement of section 41 above, then you can apply online on the AFSA website for a bankruptcy notice.

You have to be registered with AFSA to apply.

It is very important that the bankruptcy notice is completed correctly.  One of the ways in which a bankruptcy notice can be set-aside is if it is defective.

We strongly recommend getting a bankruptcy lawyer to complete the drafting of the bankruptcy notice.

The cost of issuing a bankruptcy notice from AFSA is $470.00.

Serve the Bankruptcy Notice on the Debtor

Once you have a completed bankruptcy notice, you will need to serve the bankruptcy notice on the judgment debtor.  You will have 6 months commencing on the date of issue of the bankruptcy notice.

A bankruptcy notice is not an originating process, but is a document, and so ordinary service is fine.

Regulation 16.01 of the Bankruptcy Regulations 1996 (Cth) (“the Regulations”) allows a document to be served on a debtor in the following ways:

(a)  sent by post, or by a courier service, to the person at his or her last-known address; or

(b)  left, in an envelope or similar packaging marked with the person’s name and any relevant document exchange number, at a document exchange where the person maintains a document exchange facility; or

(c)  left, in an envelope or similar packaging marked with the person’s name, at the last-known address of the person; or

(d)  personally delivered to the person; or

(e)  sent by facsimile transmission or another mode of electronic transmission:

(i)  to a facility maintained by the person for receipt of electronically transmitted documents; or

(ii)  in such a manner (for example, by electronic mail) that the document should, in the ordinary course of events, be received by the person.

If the debtor does not comply with the bankruptcy notice and so commits an act of bankruptcy, you will need to file an affidavit of service of the bankruptcy notice, so ensure that you keep evidence of service to annex to the affidavit.

If in doubt, bankruptcy lawyers can do this for you.

Act of Bankruptcy

A bankruptcy notice requires a debtor to comply with the notice.  If the debtor fails to comply with the bankruptcy notice within 21 days from being served, then they have committed an act of bankruptcy.

Section 40(1)(g) of the Bankruptcy Act says:

(1)  A debtor commits an act of bankruptcy in each of the following cases:

… (g)  if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:

(i)  where the notice was served in Australia–within the time specified in the notice; or

(ii)  where the notice was served elsewhere–within the time fixed for the purpose by the order giving leave to effect the service;

comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counterclaim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.

There are a number of other acts of bankruptcy, so it is worth reading all of section 40.

If the debtor commits an act of bankruptcy, then you have six (6) months to present the creditor’s petition to the Federal Circuit Court of Australia.

Present a Creditor’s Petition to the Court

Section 43 of the Bankruptcy Act says:

Subject to this Act, where a debtor has committed an act of bankruptcy … the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.

A creditor’s petition is an originating process and will need to be drafted correctly.

To commence proceedings, the creditor will need to draft and file the following documents:

1. Creditor’s petition; and
2. Affidavit of service of the bankruptcy notice; and
3. Affidavit of search; and
4. Consent to act as trustee.

These are all complicated legal documents and will need to be completed correctly.  We strongly recommend engaging bankruptcy lawyers to draft and file these documents.

Once drafted and filed with the Federal Court’s eLodgment system, you will be given sealed versions of the documents from the Court, with the return date for the hearing.

You will also need to pay the following filing fees:

1. A corporate applicant (if you are suing in your company name) will cost $3,475.00; or
2. If you are suing in your personal name $1,445.00.

Those sealed versions are to then be served on the debtor.

Serve the Creditor’s Petition on the Debtor

Personal service in the Federal Court jurisdiction is called “Service by Hand”.

Rule 6.06 of the Federal Circuit Court Rules 2001 (Cth) (“the Rules”) says (excepting for a few exceptions):

Service by hand is required for an application starting a proceeding or a subpoena requiring attendance of a person.

A creditor’s petition is an application starting a proceeding.

Rule 6.07 of the Rules says:

(1)  A person serving a document by hand on an individual must give a copy of the document to the person to be served.

(2)  However, if the person to be served does not take the copy of the document, the person serving it may put it down in the presence of the person to be served and tell the person what it is.

Once served, an affidavit of service of the creditor’s petition must be drafted and filed.

If you cannot personally serve the debtor by hand, then you may need to make an application for substituted service.  Read our article on substituted service of a creditor’s petition here.

The Court will Make the Sequestration Order

After you prepare and file your final affidavits, ensure that everything is drafted and filed correctly, and the debtor does not oppose the petition, it is likely that Court will make the sequestration order forcing the debtor into bankruptcy.

Alternatives to Bankruptcy for Debtors

Bankruptcy lawyers can offer advice and assistance regarding alternatives to presenting a debtor’s petition. There are a number of alternatives to consider before filing for bankruptcy, including:

1. Informal debt agreements; or
2. Formal Part IX Debt Agreements; or
3. Part X Personal Insolvency Agreements.

Alternatives to Bankruptcy for Creditors

Bankruptcy lawyers can offer advice and assistance regarding alternatives to presenting a creditor’s petition to the Federal Circuit Court.

There are a number of alternatives that the debtor may want you to consider before presenting your petition, including:

1. Informal debt agreements; or
2. Enforcement through the Queensland Courts; or
3. Formal Part IX Debt Agreements; or
4. Part X Personal Insolvency Agreements.

Informal Debt Agreements by Bankruptcy Lawyers

Bankruptcy lawyers can attempt to negotiate an informal debt agreement, usually in the form of a deed of settlement.

At this point however, a creditor may have had months, or even years, of broken promises to pay and protracted litigation, making it difficult to negotiate.

A debtor will need to negotiate for something more than simply a promise to pay.  A creditor may consider a deed simply another agreement which the debtor will not honour. 

It is likely that a debtor will need to leverage something else to attempt to get a creditor to agree, security for the judgment debt, interest on repayments, and/or payment of costs, for example.

A qualified bankruptcy lawyer will be able to negotiate a good deal in an attempt to avoid enforcement proceedings, including bankruptcy proceedings.

Enforcement through the Queensland Courts

At this point, the creditor has been forced to get a judgment against the debtor, and all of the associated costs that were incurred because of it.  From a creditor’s perspective, it may be understandable that they do not want to risk a further breach, or non-payment.

If an informal agreement cannot be reached, a creditor and/or a debtor might want to consider consenting to an enforcement warrant as an alternative to bankruptcy.

A warrant for redirection of earnings, or a warrant for redirection of debts, or an order authorising payment by instalments, for example.

A creditor may also consider other enforcement warrants, such as a warrant for seizure and sale of property which includes “all real and personal property”.  A debt recovery / bankruptcy lawyer will be able to advise and assist in relation to enforcement through the Queensland Courts, and enforcement warrants.

Part IX Debt Agreements

A Part IX (Part 9) Debt Agreement is an agreement between a debtor and creditors to repay the debt or debts to the creditor.

As the name suggests, a Part IX Debt Agreement is an agreement pursuant to Part IX (Part 9) of the Bankruptcy Act.

The debtor must give a written proposal, and a statement of the debtor’s affairs with the proposal, to AFSA for repayment of debts to the creditors.

Once a compliant proposal is accepted by AFSA it is then provided to the creditors so that all of the creditors can vote on the proposal.

If the majority of the creditors vote to agree to the proposal, then the Part IX agreement is accepted.

Pursuant to section 185 of the Bankruptcy Act, this then means that upon acceptance of the Part IX agreement, a creditor cannot apply for enforcement of, or enforce, a remedy against the debtor’s person or property in respect of a frozen debt; and an enforcement officer must not take action, or further action, to execute, or sell property under, any process issued by a court to enforce payment of a frozen debt owed by the debtor.

Basic Eligibility for Part IX Agreement

To be eligible for a Part IX debt agreement you will need to satisfy the following:

1. You must be insolvent – meaning that you are unable to pay your debts when they become due and payable;
2. You must not have been bankrupt; or had a Part IX debt agreement; or had a Part X personal insolvency agreement; within the last ten (10) years;
3. You must have unsecured debts of less than the threshold amount which is currently $113,349.60 – See here;
4. You cannot have assets which are more than the threshold amount which is currently $113,349.60 – See here; and
5. You cannot earn more after-tax income for the next 12 months to be than the threshold amount which is currently $85,012.20 – See here.

What does a Part IX Debt Agreement mean for me?

Although this debt agreement can be a good alternative to bankruptcy, it comes with a price.

Firstly, proposing a Part IX Debt Agreement is an act of bankruptcy. 

Section 40(1)(h) of the Bankruptcy Act says:

(1)  A debtor commits an act of bankruptcy in each of the following cases:

(ha)  if the debtor gives the Official Receiver a debt agreement proposal;

(hb)  if a debt agreement proposal given by the debtor to the Official Receiver is accepted by the debtor’s creditors;

(hc)  if the debtor breaches a debt agreement;

(hd)  if a debt agreement to which the debtor was a party (as a debtor) is terminated under section 185P, 185Q or 185QA;

An act of bankruptcy, like non-compliance with a bankruptcy notice, allows the creditors to present a petition to the Federal Circuit Court.

A Part IX debt agreement is registered on the National Personal Insolvency Index, a search of which will show your name, which may affect your credit rating and your ability to borrow.

A Part IX Debt Agreement will only cover unsecured debts, a secured creditor can still attempt to realise their security interest.

If you trade under a business name, being a name that is not your name, you have to disclose the Part IX Debt Agreement to all other people that you are in business with.

Part X Personal Insolvency Agreements

A Part X (Part 10) Personal Insolvency Agreement is another agreement between a debtor and creditors to repay the debt or debts to the creditors.

As the name suggests, a Part X Personal Insolvency Agreement is an agreement pursuant to Part X (Part 10) of the Bankruptcy Act.

Section 188 of the Bankruptcy Act says that a debtor may sign an authority naming and authorising a registered trustee, a bankruptcy solicitor or the Official Trustee to call a meeting of the debtor’s creditors and to take control of the debtor’s property.

A Part X Personal Insolvency Agreement is similar to bankruptcy in a number of ways, except that it allows the debtor more control over how the trustee deals with the assets, property, etc. and how it is to be distributed to creditors.

Basic Eligibility for Part X Personal Insolvency Agreement

There are less eligibility requirements for a Part X Personal Insolvency Agreement.  To be eligible, you simply need:

1. To be insolvent – meaning not able to pay your debts when they become due and payable;
2. To be present in, or reside in Australia or have a connection to Australia;
3. To have not proposed a Part X Personal Insolvency Agreement in the previous six (6) months.

What does a Part X Personal Insolvency Agreement mean for me?

Although a Part X Personal Insolvency Agreement can be a good alternative to bankruptcy, it comes with a price, and it is a harsher price than a debt agreement.

Firstly, entering into a Part X Personal Insolvency Agreement is an act of bankruptcy. 

Section 40(1)(l)(m) of the Bankruptcy Act says:

(1)    A debtor commits an act of bankruptcy in each of the following cases:

(l)  if, having been required by a special resolution of a meeting of his or her creditors so called to execute a personal insolvency agreement or to present a debtor’s petition, he or she fails, without sufficient cause:

(i)  to comply with the requirements of this Act as to the execution of the agreement by him or her; or

(ii)  to present a debtor’s petition within the time specified in the resolution;

as the case may be;

(m)  if a personal insolvency agreement executed by him or her under Part X is:

(i)  set aside by the Court; or

(ii)  terminated;

An act of bankruptcy, like non-compliance with a bankruptcy notice, allows the creditors to present a petition to the Federal Circuit Court.

A Part X Personal Insolvency Agreement is registered on the National Personal Insolvency Index forever, a search of which will show your name, which may affect your credit rating and your ability to borrow, and a default will appear on your credit file.

A Part X Personal Insolvency Agreement means that you will not be able to have any dealings with your assets (house or real property) without the consent of the trustee.

A Part X Personal Insolvency Agreement does not allow you to be the director of a company, and so if you are currently the director of a company (a trustee company of a self-managed-superannuation-fund, for example) then you will have to appoint another director.

What can Bankruptcy Lawyers do for me?

Bankruptcy Lawyers can do everything mentioned above and more.

If you are a debtor having difficulty paying your debts, or you are a creditor having difficulty getting paid from a debtor, then you should contact a debt recovery / bankruptcy lawyer.

DEBTORS – CREDITORS – TRUSTEES – PROVEN RESULTS

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OR CALL OUR BANKRUPTCY LAWYERS ON 1300 545 133

Wayne Davis

Wayne Davis, LLB, GDLP – Commercial litigation solicitor and legal practice director at Stonegate Legal Pty Ltd. Stonegate Legal focus on commercial litigation, debt disputes, the enforcement of money orders, and insolvency. Committee member of the Sunshine Coast Law Association. Committee member and volunteer lawyer with the Sunshine Coast Community Legal Service.

https://stonegatelegal.com.au/