Imagine a man named Tim owes you money. For instance, Tim bought a car from you and he still needs to pay it off. That would make you an unsecured creditor. An unsecured creditor means that you simply have a right to payment. It would also make Tim a debtor, namely, he legally owes you money. Now imagine, after the agreed date of payment, Tim has not paid you. You have written letters demanding payment and phoned him on several occasions but still he has not paid. You have also gone to a lawyer and sued Tim by issuing a summons against him demanding the payment.
After you have exhausted all the above resources, this is where Compulsory Bankruptcy comes in. Compulsory Bankruptcy is where you (as the creditor) can make Tim (the debtor) bankrupt.
The steps to make Tim bankrupt are as follows:
- You must firstly get a judgment for the debt from the court. This can be granted if Tim, within the specified time period, has not filed a defence in court. If time runs out and Tim has done nothing, you will get a Default Judgment, meaning he has not opposed the case. You can then demand that Tim pays you.
- If Tim cannot pay you because he does not have the funds, you can try and make Tim bankrupt by presenting a creditor’s petition to the Federal Court, or Federal Circuit Court to have Tim, who must owe you more that $5000, made bankrupt.
There are certain requirements that must be satisfied to make your petition valid and successful.
Who can bring a petition?
Are you eligible to bring a petition?
Essentially, you have to be a creditor who has a legally enforceable claim.
Who can be sequestrated?
A sequestration order is a court order declaring Tim bankrupt. This means Tim’s divisible property is vested to a private trustee or Official trustee to sell the assets and repay his debts.
Individuals and partnerships can be sequestrated. Partnerships in this sense are not like companies and have no legal personality. This means that if the partnership cannot pay you, you can sequestrate each of the partners individually.
Territorial Connection to Australia
If Tim is not an Australian citizen, you must prove that he has a territorial connection with Australia. This means you must show that Tim is:
- present or ordinarily resident in Australia; or
- has a dwelling house or place of business in Australia; or
- carrying on business in Australia either personally or by means of an agent or manager; or
- a member of a firm or partnership carrying on business in Australia by means of a partner, agent or manager.
You must be owed at least $5000
As a creditor, you must show that Tim owes you at least $5000. Anything below that amount is invalid. However, if Tim owes you $4500 and you discover that Tim also owes Mary $500, you can bring the creditor’s petition against Tim jointly to make up the $5000. The debt of $5000 must be liquidated, in other words, a fixed sum as opposed to an amount the court still has to determine. It must also be payable now or at a fixed time in the future.
Acts of Bankruptcy
Importantly, you must demonstrate that Tim has committed an act of bankruptcy within 6 months prior to the presentation of the creditor’s petition: sections 43, 44 Bankruptcy Act. By satisfying this requirement, you have proven that Tim is unable to pay all of his debts as they fall due. A list of circumstances where there may be an act of bankruptcy are as follows:
- In Australia, Tim makes conveyance or assignment of his property for the benefit of the creditor generally;
- If Tim has done something that suggests voidable transactions. For example, he transfers or gives any of his property to avoid the trustee getting their hands on it;
- You can prove that Tim had the ‘intent to defeat or delay his creditors, departs or remains out of Australia, departs from his house or usual place of business, absents himself or begins to keep house’. For example, Tim leaves Australia without telling anyone, he may be trying to avoid his creditors and you can prove that he had the necessary intention;
- You can also prove an act of bankruptcy when the execution has been issued. Essentially, you send the sheriff to go execute the judgment. Either the sheriff has sold Tim’s property to repay the debts or he has held the property for 21 days and has not sold it. This indicates to the court and public that Tim cannot pay his debts; or
- Commonly, if you have obtained a judgment and the execution has not been stayed, and you have served a bankruptcy notice on Tim which demands payment or to settle or to raise a counter claim, set off or cross demand and Tim does nothing within 21 days of being served, then he has committed an act of bankruptcy.
If you can prove any of the above acts of bankruptcy, as well as the other requirements discussed, your creditor’s petition against Tim may generally be satisfied.
The inconvenience and complexity of collecting debts from a debtor is a testing and worrisome time for anyone. If you believe you need to file a creditor’s petition to make a debtor declare bankruptcy, get in touch with a debt recovery lawyer for legal advice about your particular situation.
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