What is an Act of Bankruptcy?

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Table of Contents

• Act of Bankruptcy
• Bankruptcy Notice 
• Challenging a Bankruptcy Notice 
• Key Takeaways
• Frequently Asked Questions 

Before a creditor can commence bankruptcy proceedings against a debtor, they must have a valid ‘act of bankruptcy’ to rely on. There are numerous ways that a debtor may commit an act of bankruptcy. However, the most common is the failure to comply with a bankruptcy notice. This article explores some of the more common acts of bankruptcy relied on, as well as the requirements for a valid bankruptcy notice. 

Act of Bankruptcy

An act of bankruptcy has a dual significance:

1. it is required to initiate a creditor’s petition. A creditor’s petition must be presented to the court within six months from the date of an ‘act of bankruptcy’. This timeframe is critical and cannot be extended; and
2. the act of bankruptcy can mark the date of commencement of the bankruptcy for the purpose of the trustee recovering property.  

Common Acts of Bankruptcy

There are a number of actions and inactions which constitute an act of bankruptcy. However, by far, the act of bankruptcy most commonly relied on and the easiest to prove is the debtor’s failure to comply with the requirements of a bankruptcy notice.

Indeed, some other acts of bankruptcy that have practical application include:

1. a debtor’s intent to delay or defeat creditors by, amongst other things, departing or remaining outside of Australia or departing from their home or usual place of business. The creditor has the onus of proving a debtor’s intention to delay or defeat;
2. when an order for execution (i.e. a writ for the levy of property in New South Wales) is returned by the Sheriff as unsatisfied. This results in the Sheriff selling the debtor’s property or the Sherrif holding the debtor’s property for 21 days. The failure to satisfy an order for execution infers that the debtor has insufficient assets to use to pay creditors.  
3. a debtor may attempt to persuade creditors to agree to a Part X personal insolvency agreement. To initial that process, the debtor must sign an ‘authority’ that allows a trustee to call a meeting of creditors. Further, if creditors do not accept the debtor’s Part X proposal, the signing of the authority is itself an act of bankruptcy entitling any of the creditors to petition for the debtor’s bankruptcy;
4. a debtor giving notice to any creditor that they have or will suspend payment of any debts owed; and
5. a debtor presenting a declaration of intention to present a debtor’s petition (discussed above). 

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Bankruptcy Notice 

A bankruptcy notice is a formal document that the Official Receiver may issue demanding money owed. They will not issue a bankruptcy notice unless the necessary criteria are met:

1. a creditor must have a monetary judgment entered against the debtor; and  
2. the amount of the judgment debt must exceed $10,000 and must be no more than six years old. 

A party must make the application for a bankruptcy notice online, and it incurs a lodgment fee of $470. Once issued, a bankruptcy notice must be served on the judgment debtor (the person or company ordered to pay money) via either:

• personal service; 
• by leaving it at the debtor’s last known residential address in an envelope marked to the debtor’s attention; or 
• by sending it via prepaid post to the debtor’s last known address.

Once served, a debtor has 21 days in which to make the payment or make an application to the court to have the bankruptcy notice set aside.  

Challenging a Bankruptcy Notice 

A debtor who wishes to challenge a bankruptcy notice must do so promptly, within the 21-day timeframe.  

Challenging the Judgment Debt

If a debtor believes that a judgment has been entered irregularly, they may challenge a bankruptcy notice. For example, this may happen in circumstances where a bankruptcy notice is founded on a judgment that has been entered by default. Here, a debtor would need to apply to the court to extend the time for compliance with the bankruptcy notice. Additionally, they must make a separate application seeking to set aside the default judgment. 

Application to set aside a defective bankruptcy notice

Generally, a minor defect will not be sufficient to set aside a bankruptcy notice. To have a bankruptcy notice set aside, a debtor must illustrate to the court that the bankruptcy notice will cause substantial injustice if it is allowed to stand because it:

• fails to meet an essential requirement under the Act; or
• could reasonably mislead a debtor regarding what is necessary to comply with the notice.  

Counterclaim or Set Off

A debtor can make an application to the court seeking to set aside a bankruptcy notice on the basis that they have a counterclaim or set off that is equal to or exceeding the amount claimed in the bankruptcy notice. The application has the effect of extending the time for compliance with the bankruptcy notice until such time as the court determines whether a counterclaim or set off exists. 

Key Takeaways

Whilst there are a number of different ‘acts of bankruptcy’ that you may rely on when commencing bankruptcy proceedings, the failure to comply with a bankruptcy notice is by far the most common and easiest to prove.  However, it is important to remember that your debtor has the right to challenge the bankruptcy notice.  If you are considering bankrupting your debtor, our experienced bankruptcy lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions