Bankruptcy – Setting aside a bankruptcy notice

A bankruptcy notice is a demand for payment of money, issued by the Australian Financial Security Authority (AFSA) at the request of a creditor. A creditor is a person who is owed money.

The AFSA will issue a bankruptcy notice to a creditor who has obtained a final judgment, or two or more final judgments, worth $10,000 or more.

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

• comply with the bankruptcy notice within the time stated on the notice (usually 21 days); or
• apply to the court to have the bankruptcy notice set aside (cancelled) within the time stated on the notice (usually 21 days).

If you commit an act of bankruptcy, you give the creditor grounds to apply to the Federal Circuit Court for an order that you be made bankrupt (a sequestration order).

In this factsheet:

• “court” means the Federal Circuit Court.
• “the Act” is the Bankruptcy Act 1966 (Cth).
• “the Rules” are the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth).
• the FCC Rules” are the Federal Circuit Court Rules 2001 (Cth).
• “the Regulations” are the Bankruptcy Regulations 2021 (Cth).

Proper service of a bankruptcy notice

It is not necessary for a bankruptcy notice to be personally served. A bankruptcy notice may be validly served personally, by ordinary pre-paid post or by hand delivery to your address, as last known to the creditor. In some circumstances a bankruptcy notice can also be sent electronically (eg fax or email).

If the creditor can’t serve the bankruptcy notice in one of these ways, they could get an order from the court that will let them serve the bankruptcy notice a different way.

How to comply with a bankruptcy notice

There are two ways to comply with a bankruptcy notice:

1. Pay the amount set out in the bankruptcy notice in full in cash or its equivalent; or
2. Come to an arrangement to the creditor’s satisfaction, such as a payment plan. It is up to the creditor whether they accept a payment arrangement. It is always best to put the agreement in writing so you have evidence of the agreement.

Either of these must be done within the time for compliance set out in the bankruptcy notice (usually 21 days from the date of service).

Setting aside the bankruptcy notice

If grounds exist, you can apply to the court for the bankruptcy notice to be set aside (cancelled). If you make an application without grounds then you may be ordered to pay the creditor’s legal costs of answering your application, which will only increase the amount of your debt to them.

At the same time as you apply to set aside the bankruptcy notice, you should also request that the court extends the time for compliance with the bankruptcy notice, so that you don’t commit an act of bankruptcy while you wait for the court to hear your application.

A bankruptcy notice can be set aside on the following grounds:

1. There is a defect in the bankruptcy notice;
2. The debt on which the bankruptcy notice is based does not exist;
3. You have a counter-claim, set-off or cross demand, equal to or exceeding the amount claimed in the bankruptcy notice; or
4. The bankruptcy notice is an abuse of process.

Defect in the form or content of the bankruptcy notice

If the creditor has not complied with the requirements of the Act you may have grounds to apply for the notice to be set aside. Not every defect will make a bankruptcy notice invalid because some defects can, at the discretion of the court, be fixed under s 306(1) of the Act.

Generally, to be able to get the bankruptcy notice set aside because of a defect you will have to show that the defect has caused substantial injustice or confusion about what you must do to comply with the bankruptcy notice.

The following are examples of requirements which the court has found to be essential so a failure to adhere to these requirements may cause a bankruptcy notice to be invalid:

• The debtor’s and creditor’s name in the bankruptcy notice should be the same as the debtor’s and creditor’s name in the judgment;
• The bankruptcy notice needs to contain the address of the creditor and that address needs to be one at which it is reasonably practicable for the debtor to make payment (for example, a PO Box may not be sufficient);
• The bankruptcy notice must include a time limit for compliance;
• A copy of the judgment or order on which the bankruptcy notice is based must be attached to the notice;
• If post judgment interest is being claimed, details of the calculation must be set out in a document attached to the notice; and
• If payments have been made by the debtor or other reductions allowed to the amount, the total amount of these must be set out in a document attached to the notice.

The following have been found not to be substantial defects:

• The failure to include the ACN of the creditor if it is a company; and
• The creditor’s address to be listed as care of its solicitors (as long as payment can be reasonably made at the address shown).

Other general legal requirements to keep in mind include:

• The judgment or order relied upon must be worth at least $10,000 in and of itself – post judgment interest does not count towards the threshold amount;
• A bankruptcy notice may be issued for an amount less than $10,000 provided that the judgments or orders when pronounced were for an amount in excess of $10,000;
• A bankruptcy notice must be served within 6 months of its issue unless that time has been extended by the Official Receiver (reg 10 the Regulations);
• A bankruptcy notice must be based on a final judgment or order currently payable to the creditor. A final judgment has been defined as a judgment which finally disposes of the rights of the parties. This can include costs orders and any other awards, judgments and orders deemed to be final judgments or orders under s 40(3) of the Act;
• The final judgment or order must not be stayed (for example by an instalment order granted by the court that gave the judgment), both at the time of issue of the notice and at the time of its service. If a stay of execution is granted after service, it has no effect on the bankruptcy notice;
• The judgment or order on which the bankruptcy notice is based must not be more than 6 years old (s 41(3)(c)); and
• A bankruptcy notice is not invalidated by reason only of an overstatement of the amount specified as being due to the creditor, unless the debtor, within the time allowed for compliance with the notice, gives the creditor notice that he or she disputes the validity of the notice on this ground (s 41(5)).

The debt on which the bankruptcy notice is based does not exist.

Because a bankruptcy notice must be based on a final judgment or order, to prove that the debt on which the bankruptcy notice does not exist you would need evidence that:

• You have paid the creditor the amount owing under the judgment or order; or
• You have commenced proceedings to set aside the judgment or order (for example, by commencing an appeal).

It is not enough to say in your application to set aside the bankruptcy notice that you will commence proceedings to set aside the judgment or order or that you have the grounds to do so – you must have filed the documents with the court that handed down the original order. You must also be able to provide the Federal Circuit Court with evidence that shows you have a genuine and arguable case in that original court that you are diligently prosecuting. If you do not commence proceedings to set aside the judgment or order in the original court before filing your application to set aside the bankruptcy notice, the Federal Circuit Court will have no power to extend the time for compliance with the notice under sections 41(6A) and 41(6C) of the Act, and you will have committed an act of bankruptcy.

There is some support in case law for the proposition that you can ask the court to “go behind the judgment” on an application to set aside a bankruptcy notice but only in order to establish that the court should not accept the judgment as proof of the debt. For more information on asking a court to go behind a judgment, please see the LawRight factsheet Bankruptcy – Opposing a creditors petition.

Counter-claim, set-off or cross demand

There are two things you will need to demonstrate to the court to succeed under this ground:

1. That you have a counter-claim, set-off or cross demand equal to or exceeding the amount claimed in the bankruptcy notice. Simply stating that you have a counter-claim, set-off or cross demand will not be enough. You must satisfy the court that the demand is genuine and has a reasonable probability of success; and
2. The counter-claim, set-off or cross demand could not have been set up in the action or proceeding in which the creditor obtained the judgment on which the bankruptcy notice is based. Failure to take advantage of the opportunity to counter-claim or other personal circumstances which prevented you from pursuing a cross-claim (like not having relevant evidence at the time, or a lack of legal advice or knowledge), will not be sufficient.

Abuse of process

If you can prove that the purpose of the bankruptcy notice is to put pressure on you to pay the debt, rather than a genuine effort by the creditor to invoke the court’s jurisdiction in relation to insolvency, then you may be able to get the bankruptcy notice set aside because it is an abuse of process. You will need evidence of a collateral purpose or undue pressure to succeed on this ground.

How to apply

To apply for the bankruptcy notice to be set aside you will need to prepare, file and serve the following documents:

• Application (Form B2); and
• Affidavit.

Application

The requirements for an application to set aside a bankruptcy notice can be found in rule 3.02 of the Rules.

There are two types of orders you can apply for: final orders and interim orders.

Final orders should include the ultimate outcome you want and the legislative basis on which the court has power to grant that outcome. An example would be: That bankruptcy notice number BN0000 issued on 1 January 2015 (“Bankruptcy Notice”), which was served on me on 1 February 2015, be set aside under section 30(1) of the Bankruptcy Act 1966. A copy of the Bankruptcy Notice accompanies this application.

Interim orders should include any outcomes you want before the application is finally decided and the legislative basis on which the court has power to grant that outcome. An example is: That the time for compliance with the Bankruptcy Notice be extended up to and including 7 days after the determination of this application (as amended, if amended) by the Court under section 41(6A) of the Bankruptcy Act 1966.

Affidavit

Your application must be accompanied by an affidavit which sets out the grounds in support of your application and the date when the bankruptcy notice was served on you. You will also need to attach a copy of any application you have made to set aside the judgment or order underlying the bankruptcy notice. It is important that your affidavit complies with rule 3.02 of the Rules otherwise your application may be considered defective and an extension of time to comply with the bankruptcy notice may not be granted.

For more information about preparing an affidavit, see LawRight factsheet Drafting an Affidavit.

Filing

Once you have completed your documents they need to be filed (lodged) with the court. You can file your documents online or in person at the Federal Circuit Court Registry.

There will be a filing fee payable to lodge your application. In certain circumstances you can apply for a waiver of this fee (see LawRight factsheet Fee waiver guide – Federal Circuit Court for more information).

Serving your documents

Your stamped application and affidavit must be personally served on the creditor within 3 days after the documents are filed.

For an individual, personal service means that the document must be taken to the person, the person must be identified as the person named on the document, and the document handed to them. If the person refuses to take the document, the person serving it may put the document down in the presence of the person to be served and tell the person what the document is.

For a corporation, personal service requires you to go to the registered office of the corporation and to leave a copy of the documents with a person in the service of that corporation. The registered office of a corporation can be different from the company’s principal place of business. You should obtain a current company extract from the Australian Securities and Investment Commission which will show the company’s registered address.

If you are not comfortable serving a creditor yourself, you can get a bailiff of the court or a process server to do it for you for a fee.

Financial advice

If you do not think you have any grounds to apply for the bankruptcy notice to be set aside, or if you are not sure whether you should spend the time and money to apply because of your wider financial circumstances, you should seek financial advice.

For free financial counselling you can contact:

• National Debt Helpline on 1800 007 007

• Salvation Army on 1300 363 622