What To Do When Served With A Bankruptcy Notice
What is a bankruptcy notice?
Under the Bankruptcy Act 1966 (Cth), a bankruptcy notice is a formal demand served on a debtor who owes a creditor at least $10,000.00. It requires the debtor to pay the amount specified in the notice within 21 days of being served.
If the debtor fails to comply with the notice within that time, they are taken to have committed an act of bankruptcy. The creditor may then rely on that act to apply to the Court for a sequestration order which, if granted, makes the debtor bankrupt.
I am a debtor in the bankruptcy notice, what do I do now?
Once the bankruptcy notice has been served, you have 21 days from the date of service to take steps to deal with it. During this time, you must do one of the following to avoid committing an act of bankruptcy:
- Pay the full amount stated in the bankruptcy notice to creditor;
- Come to an arrangement with the creditor to resolve the debt, such as entering into a payment arrangement or other agreed resolution; or
- File an application with the Court to have the bankruptcy notice set aside.
What happens if I do nothing within the 21 day period?
If the debtor does not comply with the bankruptcy notice within 21 days, the debtor will commit an act of bankruptcy under section 40(1)(g) of the Bankruptcy Act 1966 (Cth). The Creditor who served the bankruptcy notice may then present a creditor’s petition based on the act of bankruptcy seeking an order that the debtor be made a bankrupt.
Setting aside the Notice
As the debtor, you may seek to set aside the bankruptcy notice for a number of reasons. Common grounds include challenging the judgment or order on which the Notice is based, appealing the judgment, or identifying an error in the bankruptcy notice, such as an incorrect debt amount. These are frequently relied upon as a basis for applying to set aside a bankruptcy notice. From our experience, some of the reasons for challenging a bankruptcy notice includes:
- Where the bankruptcy notice is defective;
- The amount being claimed is overstated;
- There is a counter-claim, set-off or cross demand; or
- It is an abuse of process.
Defects in the bankruptcy notice
Bankruptcy notices are issued by the Australian Financial Security Authority (AFSA). When applying to AFSA for the issue of a bankruptcy notice, it is important to ensure that all information is accurate and complete. A bankruptcy notice may be set aside by the Court if it contains a defect or irregularity that causes substantial injustice.
Failure to attach the judgment
A bankruptcy notice may be set aside because the creditor failed to attach a copy of the judgment. In Curtis v Singtel Optus Pty Ltd & Anor [2014] FCCA 1286 the judgment debtor applied to have the bankruptcy notice set aside as the judgment did not ‘attach’ judgment/order founding the notice.
Incorrect legislation 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.
Incorrect calculation of interest
A bankruptcy notice will not be rendered invalid merely because the amount specified as owing exceeds the amount actually due. However, if a debtor intends to rely on that misstatement to challenge the validity of the Notice, the debtor must notify the creditor of the dispute within the 21-day compliance period. Failure to do so may result in the debtor being precluded from raising the misstatement as a ground for setting aside the Notice.
Section 45(5) of the Bankruptcy Act relevantly provides:
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.
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 noticed is based. It is not enough to show an intention to challenge the order or judgment, there must be an application filed in the relevant court and be able to demonstrate a genuine and arguable case.
Counterclaim or off-setting 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:
- the full details of the counter-claim, set-off or cross demand;
- 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
- 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 arise out of the same transaction or relate to the judgment or order that forms the basis of the bankruptcy notice. It is open to a debtor, in some cases, to rely on a claim they have acquired, such as by assignment for the purpose of raising a cross-demand against the creditor.
Abuse of process
A court may set aside a bankruptcy notice if the debtor can establish that it was issued for an improper purpose, namely, to place undue or unfair pressure on the debtor to pay the judgment debt, rather than to pursue genuine bankruptcy proceedings.
What are the consequences of failing to successfully set aside a bankruptcy notice?
Failing to set aside a bankruptcy notice allows the creditor to proceed with a creditor’s petition, potentially leading to the debtor being declared a bankrupt. Bankruptcy carries serious implications, including the sale of assets to pay debts, restrictions on travel, and long-term impacts on the debtor’s ability to obtain credit.
How can we help
If you have recently been served with a bankruptcy notice, and would like assistance in understanding its implications, our experienced team of solicitors is here to help. Contact Rostron Carlyle Rojas Lawyers today to discuss your legal options and protect your interests.
The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.
