Bankruptcy Notices – to issue or not to issue?

Bankruptcy Notices – to issue or not to issue?

By Daniel Fleming

April 18, 2017

Quick overview

  • A judgment creditor is not obliged to exhaust the conventional means of debt enforcement before applying for a bankruptcy notice.
  • However, judgment creditors should exercise caution before serving a bankruptcy notice, as the judgment debtor may have grounds to have the bankruptcy notice set aside.

Bankruptcy notices

It is not uncommon for a judgment creditor who has spent a great deal of money litigating a matter to final judgment, to then have to fight tooth and nail to have the judgment debtor pay the judgment debt.

Several options for enforcing a judgment are open to judgment creditors, including garnishee orders and writs for the execution of property.

In practice, these methods can take considerable time and cause the judgment creditor to incur further costs. In addition, there is no guarantee that any of these methods will result in the judgment creditor being paid the entire amount of the judgment debt.

Bankruptcy notices present an attractive option to judgment creditors seeking to recover a judgment debt. A recipient of a bankruptcy notice must, within 21 days after being served with the bankruptcy notice, do one of the following:

  • pay the entire amount of the debt claimed in the bankruptcy notice;
  • compromise the debt to the creditor’s satisfaction; or
  • file an application in the relevant court to have the bankruptcy notice set aside.

The time pressure which a bankruptcy notice applies to a judgment debtor obviously makes the issuance of a bankruptcy notice an attractive option to a judgment creditor.

A possible pitfall in issuing a bankruptcy notice

It is a well-established (though sometimes overlooked) principle that a petitioning creditor should not attempt to invoke the Court’s bankruptcy jurisdiction merely to place pressure on a recalcitrant debtor to pay his or her debts. That does not mean however that a judgment creditor must exhaust other debt enforcement options (such as writs for levy of property and garnishee orders) before issuing a bankruptcy notice.

However, if the judgment creditor knows that the judgment debtor is solvent and is able to pay the debt, then the issuing of the bankruptcy notice may be an abuse of process. The mere fact that the debtor is solvent will not in itself render the issuance of a bankruptcy notice as an abuse of process. However, if the debtor applies to have the bankruptcy notice set aside as an abuse of process, the Court will closely examine the facts and circumstances leading up to the issuance of the bankruptcy notice.

Whilst many applications to set aside bankruptcy notices as an abuse of process are desperate acts of debtors seeking to gain time, successful applications to set aside on this particular ground have been made and a creditor should ensure that it does not send any correspondence to the debtor prior to applying for the bankruptcy notice or that accompanies the notice, which could give even a hint of an improper purpose in issuing the bankruptcy notice.

The upshot is that judgment creditors do need to exercise a degree of care when corresponding with debtors and applying for a bankruptcy notice, and must genuinely intend to invoke the Court’s bankruptcy jurisdiction should the debtor not comply with the bankruptcy notice.

 

For more information contact Daniel Fleming on d.fleming@pigott.com.au

This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.