Part 4: Bankruptcy and Winding Up

To conclude our 4 part series on debt recovery in the Local Court of New South Wales, we will consider the avenues of winding up and bankruptcy proceedings which are also available to creditors. Whilst these options are not traditionally intended for enforcement purposes, they can be an excellent tool for creditors in recovering debt from an individual debtor or debtor company.

  1. Winding Up:
    The Corporations Act 2001 (Cth) (“the Act“) governs the winding up process in Australia. Companies in debt can be wound up and a liquidator can be appointed to recover assets belonging to the company to be distributed to creditors of the company. The reason this is an effective enforcement tool is because prior to the winding up of a company, the debtor company is given various opportunities to attempt to negotiate a payment arrangement to the creditors.

I. Written Demand:

a.   As per section 459E, a written demand for payment must first be sent to the company.
b.   This can be done whilst the debt is not yet the subject of a judgment entered by the Court.
c.   If this is the case and the debt is not a judgment entered by the Court, the Act requires that an Affidavit by an officer of the creditor be sworn or affirmed and served along with the demand.
d.  If no response or payment is received within 21 days of service of the written demand, the debtor company is presumed to be insolvent.

II. Application:

a.   An application can be made to a Supreme Court or the Federal Court of Australia.
b.   The debt amount must exceed $2,000.
c.   The application relies on the presumption of insolvency arising within 3 months prior to the Application being made to the Court.
d.   Once an application is issued by the Court, various affidavits in support are served upon the company’s registered office, further documents are required in preparation of the hearing. This includes material which supports that the debt is outstanding and that an administrator or liquidator have not yet been appointed and that there is no application to oppose the application.

III. The Hearing:

a.   If the Court is satisfied that there is sufficient evidence in respect of the abovementioned requirements, the Court will wind up the Company and Order the appointment of a liquidator to collect the assets of the company to distribute to the creditors.

  1. Bankruptcy:
    Bankruptcy is the process whereby an independent trustee controls the estate of an insolvent person and distributes their assets to creditors. It is often a last resort for creditors as aforementioned, it is not intended for recovery purposes. However, it can be an effective method of debt recovery as it often prompts debtors to re-pay debt or negotiate a payment plan to re-pay the debt to avoid the stigma around being declared a bankrupt.

I. Bankruptcy Notice:

a.   Recovery via bankruptcy commences with the lodging of a bankruptcy notice with the Australian Financial Security Authority (“AFSA“) on a debt that is greater than $5,000.
b.   The debtor has 21 days from the date of service to comply with the notice by paying the full amount of the debt or by entering into a payment arrangement.

II. Act of Bankruptcy:

a.   The creditor bears the burden of proving the debtor has committed what is known as “an act of bankruptcy” as per section 40 of the Bankruptcy Act 1966 (Cth).
b.   An act of bankruptcy results from the debtor’s failure to comply with the requirements of a bankruptcy notice.
c.   Once this occurs, the creditor can commence bankruptcy in the Federal Court of Australia by obtaining the issue of a Creditor’s Petition by the Court.

III. Bankruptcy Proceedings:

a.   The Creditor’s Petition should be filed within 6 months of the act of bankruptcy.
b.   The Court will then list the matter for a sequestration hearing.
c.   At the hearing, if the Court is not satisfied that the debtor can repay the debt, the Court can make a sequestration order declaring the debtor bankrupt and appointing a Trustee to take over control of the debtor’s assets and liabilities and repay creditors who lodge a proof of debt with the Trustee, prioritising secured creditors.
d.   The costs of obtaining the sequestration order are usually paid out of the bankrupt debtor’s estate as a priority.
e.   Once a person is declared bankrupt, they remain as such for a period of 3 years when they may be discharged.

3. Changes to Insolvency Law as a result of COVID-19:
On 24 March 2020, as part of the economic response to Coronavirus, the Australian Government temporarily changed the time for compliance with Bankruptcy Notices and Statutory Demands to 6 months from 21 days.

Furthermore, the Government increased the debt threshold for both bankruptcy and winding up processes to $20,000. This change was put in place to allow debtors, whether they be personal or corporate, some breathing space and time to settle their existing debts. The changes came into effect on 25 March 2020 and are expected to be in place until at least August 2020.