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If you operate a small business, you may fall behind on paying your invoices from time to time. If you allow unpaid invoices to build up, this can expose you and your business to legal and credit risks. Your creditor, such as a supplier, may take steps to retrieve the money from you and initiate legal proceedings for debt recovery. If your creditor successfully obtains a judgement against you, they may take steps to enforce that judgement. If you do not, or are unable to pay the judgement sum, the court will serve you a bankruptcy notice as the final stage of the debt recovery process.

A bankruptcy notice is a significant risk for sole traders and individuals.

If you receive a bankruptcy notice, you will commit an ‘act of bankruptcy’ if you fail to:

  • comply with the bankruptcy notice; or
  • set aside the bankruptcy notice.

This article will explain what a bankruptcy notice is and the steps you can take to challenge or remove a bankruptcy notice.

What Is a Bankruptcy Notice?

A bankruptcy notice is a formal demand for money owed. A court will issue a bankruptcy notice either through a court order or court judgement. A creditor will try to get a bankruptcy notice issued to a debtor as a means to recover an outstanding debt. If a creditor successfully proves that someone owes them money, a court will determine the final judgement amount. Once the court does this, you will need to pay the judgement amount within 21 days.

Once a debtor receives a bankruptcy notice, they have two options: either pay the money owed, or challenge the bankruptcy notice.

It is important to note that any challenge to the bankruptcy notice must also occur within the 21 day timeframe. If the debtor does not respond to the bankruptcy notice or responds to the notice in an incorrect manner, this may constitute an act of bankruptcy. If that happens, the court will allow the creditor to commence bankruptcy proceedings.

What Is Bankruptcy?

Bankruptcy is a legal process used against individuals and sole traders who cannot pay their debts. This process can give relief to people in debt by allowing them to have a fresh start after a set period of time. During this period, a bankruptcy trustee has control of their funds and assets, apart from those set aside for daily use.

If an individual becomes bankrupt, a trustee in bankruptcy takes control of their finances for a set period. Apart from a small amount set aside for daily expenses, the trustee will recover debts owed to the bankrupt and use that money to:

  • pay creditors;
  • administer the bankrupt’s estate; and
  • sell off the bankrupt’s assets to pay creditors.

While bankruptcy can act as a ‘fresh start’, there are negative consequences as a result of a bankruptcy declaration for individuals and sole traders. For example:

  • some professional or licensing bodies impose restrictions in some trades or professions;
  • you have limitations placed on your ability to operate as a sole trader;
  • you cannot manage a trust account; and
  • unless you receive permission from a court, you cannot be a director of a company or manage a company.

Therefore, if you have received a debt notice and want to avoid bankruptcy and its consequences, you must either pay the debt or challenge the bankruptcy notice.

How Can I Challenge a Bankruptcy Notice?

You can challenge a bankruptcy notice through a number of methods. The most common methods are to:

  • apply to set aside a judgement;
  • apply to set aside a defective bankruptcy notice;
  • challenge the validity of a bankruptcy notice;
  • show the debt amount is overstated;
  • initiate a counterclaim, set-off or cross-demand; or
  • show there is an abuse of process.

1. Setting Aside a Judgement

In certain circumstances, you may be able to have the original judgement creating the debt set aside. For example, if a court makes a default judgement against you and it was incorrectly obtained, you can apply for the judgement to be set aside. If this is the case, the court will need to grant an extension beyond the 21 day compliance period. This may be a useful option if you believe that the case to have the judgement set aside has good prospects of success.

Generally, to set aside a default judgement you will need to show:

  • a reasonable explanation for the failure to respond or file a defence;
  • a defence to the claim; and
  • that you made an application to set the judgement aside without delay.

2. Defective Bankruptcy Notices

You can apply to have a bankruptcy notice set aside by the Court if it is defective. A notice may be defective if it is not:

  • based on a judgement of over $5,000 without interest;
  • issued within six months of filing, unless a court grants an extension;
  • based on a judgment that is over six years old;
  • issued with a time limit for compliance; or
  • attached with a copy of the judgment.

Therefore, if a bankruptcy notice does not meet these requirements, you may be able to argue that the notice is defective. If a notice is defective, it would be an injustice if the court were to allow such defects.

3. Validity of the Bankruptcy Notice

The court can find a bankruptcy notice invalid if there is a formal defect or irregularity. Some examples include incorrect names, addresses, judgement or debt amounts. If the relevant defect is likely to mislead the debtor, the bankruptcy notice may be set aside.

4. Showing an Overstated Amount

If there is some error in the bankruptcy notice regarding the amount owed to the creditor, you may be able to dispute the notice. You will need to provide proper details and evidence that the debt is incorrect or that it has been paid. In this instance, the creditor may issue an amended bankruptcy notice.

5. Counterclaim, Set-off or Cross-demand

If you have a counterclaim against your creditor, this may be grounds to have the bankruptcy notice set aside. In order to do this, you must show that:

  • your crossclaim is the same or greater than the debt of the bankruptcy notice;
  • your claim is genuine and has reasonable prospects of success;
  • you could not pursue the claim in the proceeding in which the creditor’s judgment was obtained; and
  • your claim is mutual between the creditor in the notice and the debtor.

6. Abuse of Process

If there has been an abuse of process, you can apply to the court to have the bankruptcy notice set aside. Creditors should only be issuing bankruptcy notices if they believe you are genuinely unable to pay your debts. A bankruptcy notice is not a tool to apply pressure to pay outstanding debts. If your creditor does not plan to follow through with the bankruptcy proceedings, you may be able to argue there has been an abuse of process. You will need to provide evidence of the creditor’s improper purpose or unfair pressure to succeed.

Key Takeaways

The court can issue a bankruptcy notice if your creditor believes you cannot pay your debts. Creditors typically issue bankruptcy notices after they have received a judgement against a debtor. You must respond to a bankruptcy notice within the specified timeframe or 21 days. There are steps you can take to have the bankruptcy notice removed. If you are a debtor or a creditor and require advice regarding bankruptcy or alternative debtor arrangements, get in touch with LegalVision’s insolvency lawyers on 1300 544 755 or fill out the form on this page.

How to Recover Unpaid Invoices

Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.

This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.

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Frequently Asked Questions

What is bankruptcy?

Bankruptcy is a legal process used against individuals and sole traders who cannot pay the debts that they owed. Bankrupts face consequences such as having limitations being imposed on your business activities.

What is a bankruptcy notice?

A bankruptcy notice is a formal demand for money owed. A court, through a court order or a court judgment, will issue a bankruptcy notice. If you receive a bankruptcy notice, you will need to pay the judgment amount within 21 days or challenge the bankruptcy notice.

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