Bankruptcy notice

What is this document?

A bankruptcy notice, pursuant to section 41 of the Bankruptcy Act 1966 (Cth), is a notice issued by the Official Receiver to a debtor upon a creditor’s application. It is a final demand for money in respect of a final judgment or order that:

• is for $5,000 or more (or two or more judgments taken together to be $5,000 or more)
• must be drafted strictly in accordance with the form prescribed by the regulations;
• must be validly served on a debtor; and
• must be complied with within 21 days (or the number of days outlined in the notice).

A debtor can have the time period for compliance extended if:

• proceedings are commenced to have the original judgment or order set aside; or
• an application is made to set aside the bankruptcy notice.

COVID-19 changes: The Coronavirus Economic Response Package Omnibus Act 2020 made some temporary amendments regarding bankruptcy notices. These amendments apply for 6 months commencing on 25 March 2020:

• the minimum amount for a creditor to issue a bankruptcy notice to a debtor is increased from $5,000 to $20,000;
• the timeframe to respond to a bankruptcy notice is extended from 21 days to six months of service.

What are the options for a response?

A debtor served with a bankruptcy notice has three options to take within 21 days of service (or six months of service for bankruptcy notices issued on or after 25 March 2020):

• Pay the amount owed in full;
• Negotiate an alternative agreement with your creditor; or
• Apply to the court to set aside the judgment or order that led to the bankruptcy notice being issued or to set aside the bankruptcy notice – and, at the same time, apply for an extension of the bankruptcy notice period to safeguard against its expiry. 

The usual grounds for setting aside a bankruptcy notice include:

1. a dispute of the judgment debt on which the bankruptcy notice is based;

This dispute relates to an application to set aside (or appeal) the judgment or order in respect of which the bankruptcy notice was issued.

2. existence of a counterclaim, set off or cross demand against the creditor;

Under s 40(1)(g) of the Bankruptcy Act 1966 (Cth), a debtor may have a counter-claim, set-off or cross demand against the creditor where:   

• the claim is monetarily equal to or exceeding the amount claimed in the bankruptcy notice; and   
• the claim could not have been set up in the same action or proceeding in which the judgment or order was obtained. 

You must provide material evidence of the alleged claim. The mere assertion that a claim exists will not be accepted by the court to set aside the bankruptcy notice.

3. a defect in the form or content of the bankruptcy notice;

The defect must be substantial and not procedural or be objectively capable of misleading or causing substantial injustice to the debtor.

Some examples of defects that may cause a bankruptcy notice to be invalid are:

• the creditor or debtor is improperly identified, 
• the judgment debt is incorrectly stated; or
• a time limit for compliance is not stated or it is incomprehensive.

4. the amount claimed is overstated or you do not owe the debt – you must provide sufficient evidence; or
5. a contention that the bankruptcy notice is an abuse of process.

A bankruptcy notice is considered an abuse of process when it is issued for an illegitimate purpose. For instance, if the creditor is aware that the debtor is solvent and able to pay the debt, the bankruptcy notice may be an abuse of process.

What is the legal effect of ignoring it?

If you do not take any appropriate action within the timeframe stipulated in the bankruptcy notice, you are deemed to have committed an “act of bankruptcy”. The creditor may rely on this to make an application to the Court for orders to bankrupt you. 

What documents and information do you need to give your lawyer?

If you have been served with a bankruptcy notice, you should seek legal advice as soon as possible and provide your lawyer with:

• the bankruptcy notice;
• the contract (if any) between creditor and debtor;
• information and receipt of any payments made to the creditor;
• information regarding the existence of dispute about the debt and the existence of a counterclaim, set off or cross demand; 
• information regarding whether you have financial capacity to pay the debt; and
• any other additional documentation required by your lawyer.