A creditor may bring bankruptcy proceedings against a debtor by filing a Creditor’s Petition in either the Federal Court or the Federal Circuit Court where the following four requirements are met:
- The debtor is an individual;
- The debtor has a connection to Australia at the time of the act of bankruptcy, for example, they either have a presence in Australia or a house or place of business within Australia;
- The debt owing is at least $5000; and
- There was an act of bankruptcy committed in the last six months prior to the presentation of the petition.
Creditor’s Petition – Act of bankruptcy
As mentioned above, when the Creditor’s Petition is heard in court, it must be established by the creditor that an act of bankruptcy was committed by the debtor within six months before the Creditor’s Petition was filed. The various acts of bankruptcy set out in section 40(1) of the Bankruptcy Act (1966), all demonstrate an inability of the debtor to pay their creditors. In our experience, the most common act of bankruptcy relied upon by creditors is a failure to comply with a bankruptcy notice (BA s 40(1)(g)).
A bankruptcy notice is basically a formal notice of demand, issued by the Official Receiver, which requires a debtor to pay a debt. A creditor may apply to the Official Receiver for a bankruptcy notice where they have obtained a judgment or order against the debtor for a least $5000, that is not more than six years old. Once the bankruptcy notice has been issued and served, a debtor has 21 days in which to pay the debt or dispute the bankruptcy notice, otherwise an act of bankruptcy will have been committed. Once an act of bankruptcy has been committed, the creditor will then be in a position to file a Creditor’s Petition.
Responding to a bankruptcy notice:
If a debtor has been been served with a bankruptcy notice, the following options are available to them:
- Pay the amount in the notice (or come to an arrangement to pay) within the time required;
- If the debtor disputes the bankruptcy notice, they must within the time for compliance, institute proceedings to:
- Set aside the judgment or order in respect of which the bankruptcy notice was issued or;
- Set aside the bankruptcy notice, for example on the grounds of substantive defect within the notice.
- The Court can extend the time for compliance with the bankruptcy notice.
- Within the time for compliance, apply to set aside the notice on the grounds that the debtor has a counter-claim, set-off or cross demand.
If the debtor does not do any of these three options, he/she will commit an act of bankruptcy on the 21st day. We note that whilst a debtor can challenge the bankruptcy notice within 21 days of service of the notice, concerns with respect to the validity of the bankruptcy notice may still be bought up at the Creditor’s Petition.
Extending time for compliance
Where a bankruptcy notice has been served on the debtor, the time to comply with the notice can be extended by the debtor applying to the Federal Court or the Federal Circuit Court if:
- The compliance time has not yet expired; and either
- The debtor has instituted proceedings to set aside the judgment or order; or
- An application to set aside a bankruptcy notice has been filed by the debtor.
However, if the court is of the opinion that the proceedings to set aside the judgment are either not instituted bona fide or are not being prosecuted with due diligence, then the court will not extend the time .
After the bankruptcy notice has expired
If the debtor fails to comply with the requirements of the bankruptcy notice, an act of bankruptcy has been committed and the creditor can then use this as grounds for petitioning the court for the bankruptcy of the debtor. The creditor can then file a Creditor’s Petition and serve it on the debtor. The petition will contain the date of the bankruptcy hearing.
At the hearing of the petition, the Federal Court or Federal Circuit Court may make a “sequestration order” (an order giving the trustee control of the debtor’s property) and make the debtor bankrupt (s 43).
If you need any further information regarding Creditor’s Petition and Bankruptcy, please contact us or call 1300 306 649 TODAY and speak to our skilled insolvency professionals.