If a debtor has been served with a bankruptcy notice, they must either pay the amount specified in the notice within the relevant time or they have to take steps to challenge the notice immediately. It is critical that a debtor does not ignore or incorrectly respond to the notice. A lack of or incorrect response may be deemed as non-compliance, meaning an act of bankruptcy will have been committed. If you wish to challenge a bankruptcy notice, you must do so in a certain way. This article sets out the common ways of challenging a bankruptcy notice.
21 Days to Act
The debtor must pay the amount or take action to set aside the bankruptcy notice within 21 days of service.
There are some avenues available to a debtor in respect of challenging a bankruptcy notice. A debtor may:
- Appy 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 counter-claim, set-off or cross-demand; or
- Show there is an abuse of process.
Set Aside a Judgment
If there is some issue with a judgment, for example, if a default judgement was obtained but there was some issue in obtaining it, the debtor could potentially apply to have it set aside. In this event, an application can be made to extend the 21 day compliance period until after a hearing is held in respect of the validity of the default judgment. Even if time has expired to comply with the bankruptcy notice, a court may still in certain circumstances decide to extend the time for compliance, although not where a debtor’s proceedings in respect of judgment have been instituted for an invalid reason or have been improperly carried out.
Defective Bankruptcy Notice
Given the severe consequences of a bankruptcy notice, they must be considered in a very strict sense, and a debtor should flag any defects. If a debtor were seeking not to comply with a defective bankruptcy notice, they would need to argue that a defect exists and that substantial injustice would be caused if the defect were allowed.
Validity of Bankruptcy Notice
Courts have found that bankruptcy notices are invalid if there is some formal defect or irregularity. Examples include incorrect names, addresses, judgement or debt amounts. If the relevant defect is likely to mislead the debtor the bankruptcy notice could be set aside.
If there is some error in the bankruptcy notice regarding the amount owed to creditors, the debtor may be able to dispute the notice, although proper details and evidence would need to be provided. In this instance, the creditor may look to issue a new bankruptcy notice.
Counter-claim, Set-off or Cross-demand
A debtor can seek orders from the court to set aside the bankruptcy notice on grounds that they have a counter-claim, set-off or cross-demand against the creditor. The claim must be at least equal to the judgement debt and the claim must not have been able to be set up in the proceedings related to the judgement or order.
Abuse of Process
If there is some abuse of process, the debtor can apply to the court to have the bankruptcy notice set aside. The main purpose of a bankruptcy notice is to bankrupt a debtor, not to simply act as a debt collection process with no intention of following through to bankruptcy. As a result, a creditor should not use a bankruptcy notice flippantly and certainly should not use if they believe that the debtor is actually solvent.
Any debtor that is served with a bankruptcy notice should consider whether they can challenge it on the grounds set out above, as you cannot go back once you have entered bankruptcy and assumed the consequences attached to it.
If you are a debtor or a creditor and require advice in respect of bankruptcy or alternative debtor arrangements, get in touch with our insolvency lawyers on 1300 544 755.