I’ve just received a Creditor’s Petition. What now?

Creditor’s petitions are presented in Australia under section 43 (1) of the Bankruptcy Act 1966 (the Act).

A pre-requisite for presenting a creditor’s petition is that the person who owes the creditor a debt (the debtor) must have committed ‘an act of bankruptcy’ (section 40 (1) of the Act). This usually occurs after the debtor has failed to respond to a bankruptcy notice. Before 25 March 2020, a bankruptcy notice could be issued for a minimum amount owing of $5,000. However, since the advent of COVID-19, the minimum amount temporarily increased to $20,000. A judgment for the amount owing obtained from a Court is normally used as the basis for issuing a bankruptcy notice.

Presenting a creditor’s petition, as described in the Act, means filing a Form B6 Creditor’s Petition under the Bankruptcy Rules 2016 in the Federal Circuit Court together with several other prescribed affidavits to support the application. Upon filing, the Court allocates a hearing date for the creditor’s petition to be heard, endorses this on the petition, and returns the documents to the creditor to be served on the debtor.                  

Serving a creditor’s petition on a debtor means the creditor’s petition and associated documents, must be given personally to the debtor who owes the creditor money. This must be done five clear business days before the hearing, or the hearing will need to be adjourned to a later date.   

Once the creditor’s petition has been served on the debtor, and at least five clear business days has elapsed, the creditor’s petition hearing can proceed. If the debtor does not attend the hearing, a sequestration order will be made against the debtor effectively declaring the debtor to be bankrupt (section 43 (2) of the Act).    

If a sequestration order is made and the debtor is declared bankrupt, a bankruptcy trustee will be appointed by the Court to administer the debtor’s financial affairs. The trustee will distribute the debtor’s divisible assets amongst their creditors. This can include part of any income they are receiving and the family home if there is equity available.

The minimum period for bankruptcy is three years. However, there is scope for this to be extended to up to eight years if the debtor is unco-operative and it is in the interests of the debtor’s creditors to do so.

After three years the debtor is automatically discharged from bankruptcy, but a record of their bankruptcy will remain permanently available to anyone searching the National Personal Insolvency Index database. This may adversely affect the debtor’s ability to obtain credit or finance in the future even after their discharge from bankruptcy.

The alternative to bankruptcy due to failing to attend a creditor’s petition hearing, is for the debtor to arrange to be represented at the hearing and to oppose the creditor’s petition. Common grounds relied on to oppose a creditor’s petition are:

• An act of bankruptcy was not committed because the bankruptcy notice was not served, or was compromised
• The amount claimed is not owed by the debtor because it was paid, or the judgment relied on is being set aside
• The debtor is able to pay their debts and is not insolvent
• The debtor has arranged to pay the debt by instalments
• There is a genuine and arguable claim against the creditor for an equivalent amount
• Any defect in the material or procedures required to obtain a sequestration order sufficient for the Court to decline to make a sequestration order

If the debtor’s opposition to the creditor’s petition is successful, the petition may be dismissed by the Court.