Insolvency
Counting every dollar makes sense when issuing a bankruptcy notice
08 August 2011
Author


Autron Pty Ltd v Benk [2011] FCAFC 93

Background

The decision of the Full Court of the Federal Court of Australia handed down on 28 July 2011 serves as a reminder to creditors that a bankruptcy notice which does not satisfy the requirements of the Bankruptcy Act 1966 (Cth) (Act) in every respect, is liable to be ruled a nullity, regardless of the amount of the debt involved.

On 4 March 2009, Autron obtained judgment in the Magistrate’s Court of Victoria against Benk for the sum of $1,598.44.  

On 18 November 2009 a bankruptcy notice was issued, specifying Benk’s total indebtedness to be $2,090.24, which included the judgment sum, plus interest of $110.80 and costs of $381.00.

Autron relied on Benk’s non-compliance with the bankruptcy notice to file a creditor’s petition in the Federal Magistrates Court for the making of a sequestration order against Benk.

Upon hearing Autron’s creditor’s petition, and being satisfied as to the existence of the matters prescribed by section 52(1) of the Act and of Benk’s insolvency, the Registrar at first hearing nonetheless dismissed the petition on the basis that it failed to comply with section 44 of the Act, which relevantly provided at the time¹ (among other things):

    ‘A creditor’s petition shall not be presented against a debtor unless:

    (a) there is owing by the debtor to the petitioning creditor a debt that amounts to $2,000 or 2 or more debts that amount in the aggregate to $2,000….’

The Registrar found that post-judgment interest could not be relied upon to reach or exceed this statutory minimum amount.

A Federal Magistrate dismissed Autron’s application for a review of that decision.  

These proceedings

On appeal, the Full Court of the Federal Court of Australia was required to consider solely whether or not the bankruptcy notice itself complied with the requirements of section 41(1) of the Act.

Section 41(1) prescribes that a bankruptcy notice may be issued on the application of a creditor who has obtained one or more ‘final judgment(s) or final order(s)’ for at least the statutory minimum figure.

It was accepted by both parties that, if the bankruptcy notice failed to comply with this provision it would fail to meet an essential requirement under the Act and would therefore be a nullity².

The Court held that the legislature had chosen to condition the issue of a bankruptcy notice on the amount of the ‘final judgment’ or ‘final order’, not on the amount of the total debt for which the creditor seeks to have the notice issued (which might, as in this case, include accrued interest and costs).

It went further to say that ‘there can be no doubt’ that the minimum amount prescribed by s41(1) of the Act is an essential requirement for the issue of a bankruptcy notice and must be complied with.

In dismissing the appeal, the Court found that the bankruptcy notice did not satisfy the requirements of s41(1) because it included, as a component to make up the minimum amount, interest on the judgment, and therefore was not a bankruptcy notice for the purposes of founding an ‘act of bankruptcy’ under section 40(1)(g) of the Act.

It followed that without a relevant ‘act of bankruptcy’ the conditions required to present a creditor’s petition could not be met.

Lavan Legal comment

This case provides another reminder to creditors that issuing a bankruptcy notice should be done with care and due consideration.  It is not sufficient to say ‘close enough is good enough’ when preparing such a document, even if the total indebtedness of a debtor is not in doubt.

This Full Court decision may also be applicable to creditors issuing a statutory demand against a company pursuant to section 459E of the Corporations Act 2001 (Cth). That section (like section 41 of the Act) also provides a mechanism for creditors to pursue a ‘judgment debt’, provided the debt is above the statutory minimum under that Act³.

In either kind of proceeding where personal bankruptcy or corporate insolvency may result, the Courts always scrutinise each aspect of a creditor’s paperwork and will not hesitate to dismiss a proceeding, with the associated cost and delay to creditors, unless documents are technically and substantively correct in every respect.

For more information, please contact:

Alison Robertson                                  Daniel Butler
Partner                                                Solicitor
(08) 9288 6872                                     (08) 9288 6714
alison.robertson@lavanlegal.com.au       daniel.butler@lavanlegal.com.au


¹ This statutory minimum has since been increased to $5,000.

² See for example Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71.

³ Currently $2000.