In recent months, we have discussed statutory demands from the perspective of a defendant. This month’s article considers the issue of debt enforcement and collection from a different angle: what should creditors be aware of when seeking to enforce a debt against an individual using bankruptcy proceedings?
Initiating bankruptcy proceedings to recover a debt can be effective, but it anything but a simple collection tactic. Under the Bankruptcy Act 1966 (Cth), bankruptcy is a formal insolvency process, which courts expect to be used carefully and only in circumstances in which it is appropriate to do so.
To commence bankruptcy proceedings against an individual, a creditor generally needs to obtain a final court judgment of at least $10,000. The debt must be clear, liquidated, and immediately payable. Once such a judgment has been obtained, the creditor can apply for a bankruptcy notice from the Australian Financial Security Authority (AFSA).
A bankruptcy notice allows the debtor 21 days to pay or make satisfactory arrangements with the creditor with respect to the debt. If neither of these outcomes occur within the prescribed 21-day period, the creditor is then entitled to file a creditor’s petition with the Court seeking a sequestration order (i.e. a bankruptcy order).
Every detail in a bankruptcy notice must be accurate. Any errors in the amount owed, particulars of the parties involved, or failure to meet procedural requirements in serving the notice can render the bankruptcy notice invalid. Courts take a highly technical approach: even minor defects may derail proceedings.
An important point to note, and a key limitation, is that bankruptcy proceedings cannot be pursued in cases in which there is a genuine dispute over the debt. If a debtor can demonstrate that real questions exist about his or her liability for the debt, or raise a legitimate offsetting claim, a court will typically set a bankruptcy notice aside. In such cases, the dispute must be resolved through ordinary litigation rather than insolvency processes.
Even if a sequestration order is made, recovery of the debt is not guaranteed. If the debtor has few or no assets, the return to the creditor may be minimal despite the legal costs incurred. Creditors should therefore consider alternatives, such as garnishee orders or writs against property, which may be more efficient, proportionate, and which may offer better tools with which to claw back monies owed.
Even so, a sequestration order remains a powerful tool for creditors. For debtors, the consequences are serious: loss of property, restrictions on business activities, and lasting effects on creditworthiness.
Applying for a sequestration order is specialised, technical legal process. Rankin Business Lawyers can provide on-point legal advice and guidance to this end.
Ming Yip
Lawyer
