Bankruptcy & Creditor’s Petition

What is bankruptcy?

Bankruptcy is a legal status governed by the Bankruptcy Act 1966 (Cth).  If a person is declared bankrupt it means they are unable to pay their personal debts.

If declared bankrupt, a bankruptcy trustee will be appointed to take control of the bankrupt’s financial interests, income and assets.  The bankruptcy trustee will then determine all claims on the bankrupt’s estate and pay those creditors from any available funds (if any).

A bankruptcy will normally last 3 years, and the bankrupt will then be released from all their personal debts incurred prior to being declared bankrupt.

A person can declare themselves bankrupt by completing a debtor’s petition, known as a voluntary bankruptcy.  If you are thinking of applying for bankruptcy, then visit the Australian Financial Security Authority’s (referred to as AFSA) website for details on how to do that.

What is a Creditors Petition?

Where lawyers are needed is in the case of a creditor’s petition.  A creditor’s petition is the process of making someone bankrupt, involuntarily, by court order, which is called a sequestration order.

A creditor simply refers to somebody who is owed money by the person, who is referred to as the debtor.

Currently, a creditor must be owed $5,000 or more to be able to apply to the court for a creditor’s petition and make someone bankrupt.

That person must have committed an ‘act of bankruptcy’ which is defined in Section 40 of the Bankruptcy Act 1966 (Cth).

The most well-known and common act of bankruptcy that supports a creditor’s petition is a failure to comply with a bankruptcy notice.

What is a Bankruptcy Notice?

A bankruptcy notice is a formal notice issued by AFSA that is based upon a court judgment or order that is for an amount of more than $5,000 and is less than 6 years old.

A fee is payable to AFSA for issuing the bankruptcy notice.  It must then be served on the person within 6 months.  Once served, the person has just 21 days to pay the amount of the bankruptcy notice or take some other action (to set it aside).

If the person fails to pay the amount stated on the bankruptcy notice within the 21 days, then they have committed an act of bankruptcy.

What is a sequestration order?

A creditor can then apply for a creditor’s petition with the court for a sequestration order.  However, they must do so within 6 months of the act of bankruptcy.

Filing a creditor’s petition is essentially an application to the court to make a sequestration order against the debtor and appoint a Trustee to manage their affairs.  It needs to be supported by several affidavits to prove that the correct steps have been taken to allow the court to make such an order.

Application fees are payable to the court for filing a creditor’s petition and any legal costs incurred in the bankruptcy proceedings can be recovered in priority to other creditors, subject to any monies being available.

The application will then be allocated a hearing date and all parties must attend the hearing to determine if a sequestration order ought to be made or not.

There are ways to contest, challenge or oppose a creditor’s petition.  Common grounds for opposing a creditor’s petition include:

  • The debtor did not receive the bankruptcy notice correctly, non-service.
  • The bankruptcy notice or creditors petition, or supporting affidavits suffer from a substantial defect or non-compliance with the rules.
  • The debtor received the bankruptcy notice and paid it.
  • The debtor received the bankruptcy notice and agreed a repayment arrangement.
  • The debtor is challenging the underlying judgment debt and has taken steps to dispute it.
  • The debtor can pay all of their debts when payable and is therefore solvent.
  • The debtor has some other exceptional circumstances why the sequestration order ought not be made against them.

Any grounds opposing the creditor’s petition will need to be supported by appropriate affidavits and evidence to prove the matters raised challenging it.

Is it worth making someone bankrupt?

Faced with a potential bankruptcy, debtors often pull out all the stops to pay the judgment debt that is owed by them immediately.

A bankruptcy can have a detrimental effect on certain professions and trades that determine a bankruptcy as a disqualifying feature that might prevent them continuing in their profession or at least stifle it in some way.

Making someone bankrupt is perhaps the most drastic way of enforcing a debt against a debtor.  However, it is sometimes the best and only option available, especially when the debtor has no identifiable assets (could be hiding them) or you believe they may look to off-load assets to someone else to avoid paying you.

If the debtor is genuinely unable to pay the debt to you, then making them bankrupt is not going to change that.  We also find that creditors will very rarely ever receive the full amount of their debt owed and will ordinarily need to accept a proportionate amount.  The remaining debt will then be written off and the bankrupt released from liability to pay it.

How to proceed?

Because of the serious consequences of being declared a bankrupt, the courts take a very hard-line approach to getting every document involved in the process correct.

Strict compliance with the requirements of the Bankruptcy Act 1966 (Cth) and the court rules is required.  Failing to comply with those requirements may mean you get caught up in an application to set aside the bankruptcy notice or the creditor’s petition.

The simplest spelling or typographical errors can make the whole process void and open to challenge, meaning you must start the process again and might be susceptible to an adverse legal costs award.  That can be a very expensive process and means you may then need to commence the whole process once again.

It is therefore important to ensure every detail is correct before commencing the process.

If you are thinking of making someone bankrupt, or are looking to challenge a bankruptcy, contact us to discuss your situation and we can advise you on the best way to proceed.