By Parnia Firouzabadi a Law Clerk of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group. Receiving a bankruptcy notice demanding payment of money can be a stressful and overwhelming experience, particularly if you are unfamiliar with the process of responding to the notice and the legal implications of failing to do so.
Often the hardest, but most critical step is to act quickly. Do not ignore a bankruptcy notice, as failing to respond to the notice within the required timeframe will result in committing an ‘act of bankruptcy.’ This should not be taken lightly, as this will give the creditor (and in fact any creditor who is aware of it) the basis to make an application to the court for an order to be made against you declaring you bankrupt. This order is known as a ‘sequestration order’ and will mean that you will lose control of your assets, and your estate will be managed by a bankruptcy trustee, either the government (the Official Trustee) or a private trustee (a Registered Trustee). The trustee will take control of your assets, administer your financial affairs, and deal with creditors.
So remember, don’t panic, but also don’t leave it for too late to act! There are options and steps you can take to deal with a bankruptcy notice and avoid it leading to bankruptcy, depending upon your circumstances.
At Matthews Folbigg Lawyers, our specialised team can assist you with understanding all your options in relation to the bankruptcy notice, including reaching an agreement with your creditor, taking steps to set aside the notice on legal grounds, or if necessary, taking steps to deal with all of your creditors, formally or informally.
What is a Bankruptcy Notice?
A bankruptcy notice is a formal statutory demand for payment of an amount of money owed issued by a creditor against a debtor. It is issued pursuant to section 41 of the Bankruptcy Act 1966 (Cth) (“the Act”). Once you have been served with a bankruptcy notice the clock is ticking – so time is critical! As a debtor, you will only have 21 days to comply with the notice or apply to set aside the notice in a bankruptcy court. Failure to do so will mean that you have committed an ‘act of bankruptcy’ which is the basis for a creditor’s petition being filed in court for your bankruptcy
What Do I Do Now?
Upon receipt of the bankruptcy notice, as a debtor you will have 21 days to either:
- pay the creditor the full amount of debt claimed in the notice;
- reach an arrangement with the creditor for the settlement of the debt; or
- make an application to the court to extend time for compliance with the notice and/or set aside the notice on the basis of certain grounds.
Can I Challenge the Bankruptcy Notice?
In Australian Securities and Investments Commission v Forge [2003] FCAFC 274 at [27], the Full Federal Court noted that there is “no general discretion to set aside bankruptcy notices that are valid in form and not an abuse of process”. Therefore the grounds on which a notice may be set aside must relate to the “form or content of the notice, service of the notice or the existence of the debt upon which the judgment, and, in turn, the notice is founded”.
What Does This Mean?
Generally, as a debtor, the grounds which you may be able to rely on to set aside the bankruptcy notice might include the following
- That there is a defect or irregularity in the notice which is capable of causing “substantial injustice”. Generally, a bankruptcy notice may be defective if it fails to meet an essential requirement under the Act. For example, where:
- the notice is based on a judgment that is statute barred (that is, may no longer be recovered by the creditor).
- the notice was not served within time (that is, within six months), and an extension was not granted (see: regulation 10 Bankruptcy Regulations 2021 (Cth)).
- the debt claimed in the notice is less than the prescribed statutory minimum (currently $10,000 see: regulation 10A Bankruptcy Regulations 2021 (Cth)).
- the debt specified in the notice exceeds the actual amount due (see: Grant v Green & Associates Pty Ltd [2021] FCA 934).
- the notice does not have a final judgment or order of the court attached, for example it merely annexes a cost assessors certificate (see: Thomas v Raftopoulos [2020] FCCA 3515).
- That the notice is an abuse of process. This would include circumstances where the bankruptcy notice has been issued for an “improper purpose”. For example, in Young v Cooke [2017] FCA 26 at [104] Justice Gleeson in the Federal Court held that if the purpose of the bankruptcy notice is to “put pressure on a debtor to pay a debt, rather than to involve the Court’s insolvency jurisdiction, the issuing of the bankruptcy notice will be an “abuse of process”. However given all bankruptcy notices are issued in respect of a judgment debt by a judgment creditor, determining an improper purpose involves more than a mere assertion and can be quite difficult to prove.
- There are grounds on which you believe to have a “counterclaim, set-off or cross-demand” against the creditor (see: s 40(1)(g) of the Act). Again this will require more than mere assertion and must be a claim which the debtor “could not have set up in the action or proceeding in which the judgment or order was obtained”. This means it is not possible to sit on your hands when proceedings are commenced and try and raise a proper counter-claim in response to a bankruptcy notice issued once a judgment has been obtained.
If you have been served with a bankruptcy notice, remember don’t panic, but also don’t delay responding to the notice! The clock is ticking…and there are serious consequences involved with failing to respond to a valid bankruptcy notice within the required time frame, one of the most serious being possible sequestration proceeding in which you may be declared bankrupt by the court! At Matthews Folbigg Lawyers, our specialised team can assist you with understanding the requirements of or contesting a bankruptcy notice, depending on your circumstances.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
