By David Burley a Law Clerk of Matthews Folbigg Lawyers in our Insolvency, Restructuring and Debt Recovery Group.
Roderick Group Pty Ltd (in liq), in the matter of Vlahos v Vlahos [2024] FedCFamC2G 1439 (“Vlahos v Vlahos”) is the latest case in which the court has reinforced the importance of paying close attention to detail when applying for a sequestration order. The case dealt with an application for the review of a sequestration order made against the estate of Mr Vlahos. The pivotal issue was whether Mr Vlahos had been properly served with a bankruptcy notice, an act required under the Bankruptcy Act 1966 (Cth). Mr Vlahos contended that he had not been properly served due to an incorrect postcode being used in the address (even though he himself had provided that same post code). The implications of this argument and the subsequent decision carry significant consequences for creditors in serving bankruptcy notices and proceeding with creditors petitions, and also for trustees in bankruptcy appointed under sequestration orders which might be liable to be set aside.
The Service Issue
At the heart of the case was the issue of service. A bankruptcy notice must be properly served on the debtor. In this case, the creditor served the notice by post to Mr. Vlahos’s last known address, as Mr Vlahos himself had recorded it in earlier court documents. However, this address included an incorrect postcode, which Mr. Vlahos claimed invalidated the service. Ultimately, the court found that the incorrect postcode constituted a failure to properly address the notice, as required by the legislation governing service of bankruptcy notices. For more information on how to properly serve a bankruptcy notice, see this article.
Implications for Creditors
Creditors should consider this decision carefully when serving documents in the leadup to obtaining a sequestration order. Even if the creditor can start again and ultimately succeed with properly served documents, in the meantime the creditor will have suffered serious delay, wasted significant costs, and incurred a large costs bill for the debtor’s costs of invalidly served proceedings. And there remains the question of who should pay the Trustee’s fees. Attention to detail and getting service right are well worth it to avoid disastrous consequences of getting it wrong.
Implications for Trustees
For trustees, this case illustrates the importance of understanding whether there might be an issue with the sequestration order which resulted in an appointment, and the associated possibility of having a sequestration order set aside, as happened in this case. This outcome impacts trustees in two key ways:
- Trustee Costs and Remuneration – When a sequestration order is set aside due to improper service, liability for payment of the trustee’s costs incurred up to that point may become a contentious issue. In Vlahos v Vlahos, the trustee sought to recover costs related to the administration of the estate and the proceedings leading up to the order being set aside. The court allowed the trustee to formalize this application, emphasizing that trustees must be prepared to justify their costs, particularly when sequestration orders are successfully challenged. However any such application will of course incur further costs for the trustee. And recent authorities have suggested that it is quite possible that a court may look to the petitioning creditor to meet a trustee’s costs in such circumstances, which may make for an awkward conversation with a valued referrer.
- Due Diligence in Bankruptcy Proceedings – Trustees should consider checking to ensure that all procedural steps leading up to their appointment were correctly executed, including service of notices. Improper service, even when the error may seem minor (such as a postcode error), can unravel the entire process, leaving trustees to deal with the fallout from procedural missteps that occurred before their appointment.
Conclusion:
The decision in Vlahos v Vlahos highlights the strict requirements that petitioning creditors must adhere to in bankruptcy proceedings. Creditors must be vigilant in ensuring that all documents, including bankruptcy notices, are properly served to avoid unnecessary adverse decisions. Additionally, when orders are overturned, trustees may need to take steps to recover costs associated with their administration up to that point. This case serves as a reminder that in bankruptcy matters, attention to procedural details is crucial, as even minor errors can have significant legal and financial ramifications.
Read the decision here.
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