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The importance of getting it right at every stage of the personal Insolvency process.

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On 29 April 2020, the Honourable Justice Lee in Metledge v Hopkins [2020] FCA 561 dismissed a petition for bankruptcy due to a defect in the bankruptcy notice. This judgment highlights the importance of getting it right at every stage of the insolvency process.

The creditor’s journey

When a creditor considers bankruptcy as a means of enforcement, they have usually spent considerable time and money attempting to recover their debt through different means, ultimately turning to the Courts seeking a judgment.

Unfortunately obtaining a judgment against some debtors is only the start of the journey. Enforcing judgments and actually recovering your money can be where the arduous part of the road begins.

There are many means of enforcing a judgment, generally starting with issuing a summons for oral examination. These examinations allow a creditor insight into debtor’s financial position. This information is crucial when deciding which route of the enforcement process should be taken; which avenue will be the most cost effective and most likely to result in the debt being paid. Unfortunately, at the moment due to COVID-19 restrictions, examinations have been deferred until at least October 2020.

A sometimes used strategy to spur a debtor to pay a debt is the road of bankruptcy. Bankruptcy can be a preferred course of action for some creditors as it removes certain barriers that may otherwise not be overcome, for example, where a debtor owns multiple properties which are cross collaterised.

Importantly, a creditor must meet certain criteria to go down this path, such as meeting the minimum debt threshold, as bankrupting an individual is serious business and one that the Courts do not take lightly.

Laying a proper foundation

The first stage for a creditor in petitioning the Court to bankrupt an individual is to show that the debtor has committed an act of bankruptcy.

Section 40 of the Bankruptcy Act 1966 (Cth) outlines what these acts of bankruptcy are, the most common being the failure to comply with a bankruptcy notice (section 40(1)(g)).

Bankruptcy notices are issued through the official receiver Australian Financial Security Authority (“AFSA”) through their online portal. This process is a simple one where a creditor, or their representatives, complete the required fields as prompted and upload a certified extract of the Order made against a debtor.

Once this is done AFSA will review the application and if completed correctly according to the Order, will issue a bankruptcy notice. The bankruptcy notice is the foundation of the bankruptcy process – the concrete slab for our house.

The bankruptcy notice must be served on the debtor, who then has until the prescribed time on the notice to either pay the debt claimed or make arrangements to the creditor’s satisfaction to settle the debt. This is analogous to laying the foundations for a house.  This allows the debtor a final opportunity to pay the debt before moving forward.

If the debtor does not comply with the bankruptcy notice or get it set aside, they have committed an act of bankruptcy. At this stage a creditor can petition to the Court to bankrupt individual; this stage has many processes and intricacies, analogous to the various further stages to finish the house.

A creditor once having overcome all the requirements will find themselves before a Judicial Registrar or Judge seeking sequestration orders against the debtor due to his or her insolvency. When considering these orders, the Court will ensure that each of the steps and processes along the way have been duly complied with.  This is where a creditor can find itself in trouble.

A cracked foundation can topple the entire house

In Metledge v Hopkins [2020] FCA 561, the Honourable Justice Lee of the Federal Court of Australia heard a creditor’s petition where the debtor argued that there was a deficiency in the bankruptcy notice.

The creditor when stating their address at paragraph 2 of page 2 of the bankruptcy notice listed a P.O box rather than a physical address.  Remember, the bankruptcy notice is analogous to the foundations of a house.

In his judgment, Justice Lee considered the test in the Full court of the Federal Court in Australian Steel Company (Operations) Pty Ltd v Lewis [2000] FCA 1915; (2000) 109 FCR 33. Were the majority, Black CJ, Heerey and Sundberg JJ, made the following general observations:

Non-compliance with a bankruptcy notice is, by far, the act of bankruptcy most commonly relied on by creditors. Non-compliance does not merely provide means of proof of insolvency (cf the statutory demand in company winding-up proceedings). It is an act of bankruptcy in itself. Non-compliance with a bankruptcy notice not only has profound consequences for the debtor but also affects the rights and obligations of others. These are but some of the reasons why courts have required strict compliance with the legislative requirements for a bankruptcy notice.

Justice Lee determined that notifying the debtor that payment could be made to a P.O box was not appropriate in allowing the debtor the opportunity to either pay or offer to secure of compound the debt. Each of these options has to be available to the debtor in order to commit an act of bankruptcy.

The creditor’s petition was ultimately dismissed as the bankruptcy notice was determined by Justice Lee as invalid. Here the creditor found their house had been built on defective foundations, toppling the entire building. The creditor is now sent back to the start of their journey ultimately due to what may seem as an inconsequential part of filling out an online form.

The Courts in responding to the global pandemic of COVID-19 have changed the rules of bankruptcy making this complex process even more so.

The Dispute Resolution and Litigation team lawyers at MST Lawyers are well skilled in ensuring that the foundations are laid correctly so that the disaster in the above case does not happen to our clients.

We approach the collection of debts for our client with passion and enthusiasm and provide sound commercial advice to our clients. For more information please contact us on 03 8540 0200.