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Bankruptcy without a bankruptcy notice

Feature Articles

Cite as: (2004) 78(4) LIJ, p.51

A summons for oral examination is a useful means of obtaining a clear, unambiguous statement from debtors that they intend to suspend payment of their debts.

By Ian Caudwell

In several recent decisions, the Federal Court has confirmed its strict approach towards defects and irregularities with bankruptcy notices. As a result, the mere mention of the expression “bankruptcy notice” may be enough to strike fear into the soul of even the most accomplished litigation practitioner.

However, there is a way around the problem in some circumstances: s40(1)(h) of the Bankruptcy Act 1966 (Cth) provides a useful means of obtaining a sequestration order without the need to serve a bankruptcy notice.

Problems with bankruptcy notices

The situations in which a person is deemed to have committed an act of bankruptcy are listed in s40 of the Bankruptcy Act. By far the most common act of bankruptcy is failure to comply with a bankruptcy notice: s40(1)(g). There are several other acts of bankruptcy including:

  • keeping house with intent to defeat or delay creditors (s40(1)(c)(iv));
  • where execution has been issued against the person under process of court and has been returned unsatisfied (s40(1)(d)(ii)); or
  • where a person signs an authority under s188 of the Act (s40(i)).

The policy reasons that lie behind the strict approach to bankruptcy notices were outlined by the High Court in Kleinwort Benson Australia v Crowl:

“Many, and possibly most, of the petitions in the bankruptcy lists of this country seek the bankruptcy of honest, albeit unbusinesslike or naïve, people whose indebtedness springs from causes which evoke sympathy rather than indignation. For such people, bankruptcy does not represent a game to be played to the frustration of their creditors. It represents a pronouncement of failure and humiliation attended by the fear of unknown consequences and the susceptibility to criminal punishment for what would otherwise be innocent conduct”.

The best recent example of this strict approach is the decision of the Full Federal Court in The Australian Steel Company (Operations) Pty Ltd v Lewis.[2] In this case, a bankruptcy notice which mistakenly referred to interest pursuant to the Supreme Court Rules instead of the Magistrates’ Court Rules was found to be invalid. This decision was followed by the Full Federal Court in the recent decision of Marshall v General Motors Acceptance Corporation.[3]

There are several other defects which can be potentially fatal. These include failing to attach a certified copy of the judgment,[4] omitting the word “or” between paras 3(a) and 3(b) of the notice,[5] and requiring compliance in a period other than 21 days.[6]

Suspending payment of debts

This article focuses on one of the less well-known acts of bankruptcy, one which does not depend on non-compliance with a bankruptcy notice. Under s40(1)(h), a person commits an act of bankruptcy “if he or she gives notice to any of his or her creditors that he or she has suspended, or that he or she is about to suspend, payment of his or her debts”.

The courts have taken a relatively generous view (in favour of creditors) as to what sort of utterance qualifies as a suspension of payment of debts. One of the most authoritative decisions as to the meaning of the section is the decision of Bowen LJ in In re Lamb; Ex parte Gibson and Bolland.[7] Dealing with the corresponding English statute, his Lordship put the matter as follows (at 32):

“We have in each case to ask ourselves, and in each case to answer the question, what is the reasonable construction which those who receive this statement of the debtor would have a right under the circumstances of the debtor’s case to assume, and would assume to be his meaning as to what he intends to do with respect to paying or suspending payment of his debts”.

In Re Hewson; Ex parte Sydney Stock Exchange Ltd,[8] a stockbroker told a meeting of a committee of management of his company that he was insolvent and that there was nothing he could do to pay his debts. When asked whether he thought he could borrow sufficient money to cover debts of the order of $500,000, he replied: “I realise that I could not get anywhere near that amount”. In reply to further questions he said that he was not able to pay for what he had been buying and that he was insolvent. The Court found that he had committed an act of bankruptcy.

In Fritz Heinrich Mader Ex parte: Lloyd Edward Henderso[9] Pincus J found, on an interlocutory basis, that the words “I haven’t any money and I can’t pay any debts. I am just not paying anyone any more because I can’t” were sufficient to show circumstances falling within s40(1)(h).

A more recent discussion as to the meaning of the words of the section is the decision of Phipps FM in Conn v Hanks & Anor.[10] In this case, the applicant creditor filed an affidavit deposing as to a conversation with the debtor. The affidavit read as follows:

“Ian Hanks, speaking on his own behalf and also on behalf of his wife, then had a conversation with me during which he said words to the effect of, ‘Look mate, you know my wife and I have lost a bundle in this business. We have no money to pay anyone, not you or anyone else, and we can’t see when we’ll have it in the future. We owe money all over the place and if anyone pushes us, they’ll get nothing’”.

In determining whether the above statements were sufficient to constitute an act of bankruptcy, Phipps FM referred (at 66) to the following criteria:

“The notice under s40(1)(h) may be given orally or in writing: ex parte Nickoll; re Walker (1984) 13 QBD 464. If the notice is given orally, it must be formal and not ‘mere casual talk’; ex parte Oastler; re Friedlander (1984) 13 QBD 471.

“In Cropley’s Ltd v Vickery (1920) 27 CLR 321, it was held that two things are requisite; first an intention residing in the mind of the debtor that he will, as his own act, refuse to pay his debts as they fall due and secondly a communication of that intention to one of his creditors”.

Phipps FM found that the respondent’s statement showed an intention not to pay any creditors, and that the statement “if anyone pushes us they’ll get nothing” was a statement of intention to pay some only, but not immediately. It showed an intention to refuse to pay debts as they became due and it was a communication to one of the creditors. As such, it satisfied the requirement of the ground of bankruptcy.

It is clear from Phipps FM’s decision that the debtor need not actually use the words “I have suspended payment of my debts” (indeed, it is highly unlikely that a debtor would use such an esoteric expression). It is sufficient that the debtor uses words which imply that this is the case or which have a similar effect. Evidence from the creditor as to their understanding of the meaning of the words employed is also useful. In Moy v Briscoe,[11] Griffiths CJ put forward a threshold that is arguably quite easy for a creditor to cross:

“The question is the effect the communication would have had on the minds of the persons to whom it was addressed ... All that is required is that a communication, made seriously, should give the creditors or any of the creditors to understand from the state of the circumstances disclosed at the time that the debtor had suspended or that he is about to suspend payment”.

The tests in Cropley’s Ltd and Moy are quite different. In Cropley’s Ltd, the focus is on the intention residing in the mind of the debtor, whereas the test in Moy focuses on what the addressee understood the words to mean. It is therefore prudent for petitioning creditors to address both aspects. An affidavit should be filed as to both the details of the conversations between the debtor and the creditor (or his agent) and the creditor’s understanding of the import of the words. If the affidavit provides a verbatim account of the conversations it is less likely that problems of interpretation will arise.

Obtaining evidence

In a recent matter, I obtained a judgment against a debtor in the Melbourne Magistrates’ Court. My client was reluctant to proceed straight to a bankruptcy notice as he was concerned that the debtor might not have assets capable of being realised by a trustee in bankruptcy. As an interim measure, I was instructed to issue a summons for oral examination in order to determine the debtor’s financial position. Given that the debtor was located near Warrnambool, the summons was issued at the Warrnambool Magistrates’ Court. I appointed a local solicitor to act as my agent.

At the return of the summons, the debtor made a series of admissions as follows:

Q:

Can you pay all of your debts when they fall due?

A:

No.

Q:

Do you have any assets other than items of furniture needed for your basic comfort, personal clothing and similar personal effects which can be sold to raise money to pay those debts?

A:

No.

Q:

Do you earn a sufficient income to allow you to repay each of those debts within a reasonable time?

A:

I couldn’t even afford to pay interest on the money.

At the conclusion of the examination, the debtor signed a written acknowledgment as follows: “I cannot pay any of my creditors as and when the debts fall due. I have no money left and no assets to sell”. In general conversation, the debtor then said words to the effect of “I owe money all over the place” and “I cannot pay anyone” and “If I am pressed to pay, no-one will get anything”. The solicitor believed that the words of the respondent meant that he had suspended payment to each and all of his creditors in the ordinary course and that the respondent debtor intended to deal with his creditors collectively.

Following the summons, I issued a creditor’s petition. In paragraph 4 of the petition it was claimed that the act of bankruptcy was that the debtor had given notice to his creditors that he had suspended payment of his debts. An affidavit from the solicitor verifying paragraph 4 of the petition was filed, which gave details of the evidence given by the debtor at the return date of the summons. The admissions by the debtor were presented in a verbatim form. The registrar was satisfied that an act of bankruptcy had been committed and accordingly he made a sequestration order.

Conclusions

  1. In certain limited circumstances, s40(1)(h) offers a realistic alternative to proceeding with a bankruptcy notice.
  2. Both clients and their lawyers should take careful notes of any conversations held with a debtor, particularly concerning the intention of the debtor to pay.
  3. The key points are an intention in the mind of the debtor to suspend payment of his debts and an understanding in the mind of the creditor that the debtor intends to suspend his debts.
  4. A summons for oral examination is a useful means of obtaining a clear, unambiguous statement from debtors that they intend to suspend payment of their debts.

IAN CAUDWELL formerly practised in the commercial litigation department of O’Donnell Frampton Salzano. He is currently undertaking the Bar readers’ course.


[1] (1988) 165 CLR 71 at 81.

[2] (2000) 109 FCR 33.

[3] (2003) FCAFC 45.

[4] Re Scerri (1998) 82 FCR 146. The authority of this decision has been thrown into doubt by recent cases such as Kirk v Ashdown (1999) FCA 1664 and Marshall v General Motors Acceptance Corporation, note 3 above.

[5] Re Wong; Ex parte Kitson (1979) 38 FLR 207.

[6] Milton v HP Mercantile Pty Ltd (2002) FMCA 150.

[7] (1887) 4 Morr 25.

[8] (1967) 10 FLR 479.

[9] QLD P654 of 1986 Bankruptcy Deeds (Federal Court).

[10] (2001) FMCA 62.

[11] (1907) 5 CLR 56 at 62.

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