You have judgment against a personal debtor – now what to do?
An action to make someone bankrupt is usually commenced by a creditor serving a bankruptcy notice. In order to proceed with a bankruptcy notice, a creditor must hold a judgment in an Australian Court which was entered within the last 6 years and which is for at least the threshold of $5,000.00. During the COVID-19 pandemic this amount has been temporarily increased to $20,000.
Two or more judgments may be included in the bankruptcy notice to exceed the statutory minimum.
Proceeding with a bankruptcy notice
Once judgment has been obtained for an amount above the threshold, an online application may be made to the Official Receiver, (an office created under the Bankruptcy Act and assisted by the Australian Financial Security Authority – AFSA), for the issue of a bankruptcy notice. Under the Bankruptcy Regulations, a bankruptcy notice can be served by post or electronically, among other means. However generally speaking it is often best to personally serve a bankruptcy notice, to ensure the bankruptcy notice comes to the attention of the judgment debtor, and to reduce arguments about whether the bankruptcy notice was properly served.
A bankruptcy notice must be served within 6 months of the date of being issued by the Official Receiver. Should the bankruptcy notice not be served within this time, an extension may be sought from the Official Receiver, provided this application is made prior to the expiration of the six month period.
I have served the bankruptcy notice – now what?
Once the bankruptcy notice has been served, the judgment debtor will have a period of 21 days to either:
- Pay the amount set out in the bankruptcy notice; or
- Make arrangements to settle the debt, to the judgment creditor’s satisfaction;
- Apply to the Court to set aside the bankruptcy notice.
Although the normal period to comply with a bankruptcy notice is 21 days, during the COVID-19 pandemic the 21 day period has been temporarily increased to six months. This temporary increase in the time for compliance with a bankruptcy notice will expire on 25 September 2020 unless otherwise extended.
Should the judgment debtor fail to take any of the above options within the specified period, the judgment debtor will have committed what is called an ‘act of bankruptcy’. Non-compliance with a bankruptcy notice is the most common, but not the only act of bankruptcy. Alternative acts of bankruptcy are set out in section 40(1) of the Bankruptcy Act 1966 (Cth).
If an act of bankruptcy is committed by a debtor, the creditor will be at liberty to then commence bankruptcy proceedings in the Federal Circuit Court of Australia or the Federal Court of Australia against the judgment debtor. This is known as a “Creditor’s Petition” and is a court process, distinct from a “Debtor’s Petition” which is the administrative form filed under the Bankruptcy Act when a debtor seeks to become bankrupt.
In order to commence bankruptcy proceedings, a Creditor’s Petition, together with the required supporting documentation, is required to be filed in the Court. A substantial filing fee is payable to commence such proceedings – which is at least one reason that commencing bankruptcy proceedings is not an action that should be taken lightly.
Once filed, the documents are then required to be served upon the judgment debtor. Because the documents are now Court proceedings, they must be personally served on the debtor, unless the Court makes a special order dispensing with personal service.
Once filed a Creditor’s Petition will be given a court date (which is listed on the sealed copy of the Creditor’s Petition). On this date the Court will review the evidence relied upon by the creditor.
Should all of the requirements be satisfied in the creditor’s evidence, a sequestration order will normally be made by the Court against the judgment debtor. The debtor will then be bankrupt. The Registrar may also provide an order for payment of the costs incurred by the petitioning creditor. These costs take priority as one of the first debts paid out of a bankrupt estate.
If a consent from a private trustee has been obtained and lodged, then he or she will become trustee of the bankrupt’s estate. Otherwise the Official Trustee (a statutory office under the Bankruptcy Act administered by AFSA) will become the bankruptcy trustee.
There are strict guidelines and requirements for bankruptcy proceedings. Contact Matthews Folbigg Lawyers for specialist advice and assistance with running your bankruptcy proceedings.
Sequestration Order made!
Upon the granting of a sequestration order, the debtor will be bankrupt and a trustee will be appointed to the debtor’s bankrupt estate.
A trustee will take steps to identify and secure assets of the bankrupt, and will begin investigations into the bankrupt’s examinable affairs in order to realise any amounts that may be recovered and distributed to creditors.
A bankrupt has various obligations to assist the trustee in administering the bankrupt estate, and must lodge a Statement of Affairs with the Official Receiver within 14 days of being notified of the making of the sequestration order. This is an important document setting out details of the bankrupt’s assets, income and liabilities and is a starting point for the trustee’s investigations and recovery actions.
Not all bankrupts include all claims of creditors in a statement of affairs, and if you are a creditor of a bankrupt, it is important to take steps to immediately lodge a proof of debt form with the trustee. This will ensure you are kept informed of progress in respect of the administration of the bankrupt’s estate, and are in a position to receive a distribution of any monies recovered.
It is important to note that, although a judgment may be enforced for a period of 12 years, bankruptcy proceedings which are based upon a failure to comply with a bankruptcy notice may only be commenced within 6 years from the date judgment was entered.
It is vital that the information provided in the bankruptcy notice is correct in order to avoid providing the judgment debtor the opportunity to seek for the bankruptcy notice to be set aside. This may lead to significant costs being ordered against a creditor, as well as the creditor’s own costs of the bankruptcy notice proceedings.
Due to the technicality of the information required in a bankruptcy notice and the different grounds of challenge which may be made by a Judgment debtor, we recommend that you seek legal assistance to proceed with bankruptcy action. In this regard, contact Matthews Folbigg Lawyers for specialist advice in bankruptcy proceedings.