08 6156 2700

If a person owes you a judgment debt but they are unable to pay, you have a number of options available to you. One of these options is to take steps to make the person bankrupt, which results in all the property of the debtor being vested in the debtor’s trustee in bankruptcy to pay towards the debtor’s debts. The most common act of bankruptcy is failure to comply with a bankruptcy notice.

1. What is a bankruptcy notice?

A bankruptcy notice is a creditor’s demand for payment of money from a debtor. A bankruptcy notice can be issued on the application of a creditor who has obtained a final judgment or order against a debtor amounting to at least the statutory minimum of $5000.[1] To be valid, the notice must be in the form prescribed by the Bankruptcy Regulations and served on the debtor giving 21 days for compliance.[2]

2. Complying with a Bankruptcy Notice

There are two ways to comply with a bankruptcy notice, being:

(a) paying the amount specified in full; or

(b) coming to an agreement that is to the creditor’s satisfaction as to the repayment of the money owed.

Should the debtor fail to comply with the bankruptcy notice during the 21 day period, or fail to apply to the Court to have the order set aside during the notice period, the debtor will have committed an ‘act of bankruptcy’ and the creditor can lodge a creditor’s petition to apply to the court to make the debtor bankrupt, this is known as a sequestration order.

3. Challenging a Bankruptcy Notice

A debtor may apply to the Court to set aside a bankruptcy notice before the time for the 21 day compliance with the notice has expired. Where a debtor has applied to have a bankruptcy notice set aside, the time for compliance with the notice is extended until a decision is made so they so not commit an act of bankruptcy whilst awaiting proceedings.[3]

There are a number of formal requirement to be satisfied in the supporting affidavit, including attaching the bankruptcy notice, stating the date of service and the sections of the Bankruptcy Act or Regulations under which the proceeding is brought and the relief sought. [4]

There are four key grounds to appeal a bankruptcy notice:

  1. there is a defect in the bankruptcy notice;
  2. the debt which the bankruptcy notice is based on does not exist;
  3. the debtor has a counterclaim or off setting against the creditor, equal to or greater than the amount claimed in the bankruptcy notice; or
  4. the bankruptcy notice is an abuse of process.

A. Bankruptcy Notice Defects

A defect in the bankruptcy notice refers to the requirements in the Bankruptcy Act 1966 not being satisfied. Such defects may include:

  1. a failure to correctly identify and address the debtor and creditor on the notice;
  2. a failure to specify a time limit on the notice;
  3. a failure to correctly calculate and identify the amount owing including any agreed reductions or previous repayments; and
  4. a failure to serve the bankruptcy notice within 6 months of it being issued.

B. Debt Does Not Exist

If the debtor claims the debt does not exist, the application to set aside must evidence that either the amount owing has been paid or the debtor has challenged the judgment on which the bankruptcy notice is based. It is not enough to show an intention to challenge the order or judgement, there must be an appeal filed with the relevant court and be able to demonstrate a genuine and arguable case.

C. Counterclaim or offsetting Claim

A debtor may also apply to set aside a bankruptcy notice where they have a claim against the creditor for an amount of money equal to, or greater than the judgment or order being sought. The debtor must establish the following:

  1. the full details of the counter-claim, set-off or cross demand;
  2. 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
  3. why the counter-claim, set-off or cross demand was not raised in the proceedings that resulted in the order or judgment to which the bankruptcy notice relates. Not having enough relevant information at the time of the proceedings will not be sufficient in demonstrating why, in law, the debtor could not have brought the claim in the original proceedings.

The cross-demand does not need to have any relation to the debt arising out of the judgment or order resulting in the bankruptcy notice. This means a debtor may even buy a claim against a creditor in order to have a cross demand.[5]

The test is phrased in a number of ways such as the debtor must establish a “prima facie” case or a “fair chance of success” but effectively the Court must weigh 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.

D. Abuse of Process

Finally, a court may set aside a bankruptcy notice where the debtor can demonstrate that its purpose is to impose unfair pressure on the debtor to pay the judgment or order debt, rather than a genuine effort to make the debtor bankrupt.

[1] BA 1966 ss41(1) and (5).
[2] BA ss41(2A) and (5).
[3] (BA s 41(6A)).
[4] (Fed Court (Bankruptcy) Rules r 3.02(1)-(2) and (r 2.01 (3))
[5] Re Judd; Ex parte Pike (1924) 24 SR (NSW) 537 at 539-540.