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Perspective

Carefully Review Judgment Debts: Grounds to Set Aside a Sequestration Order

Efficient Pure Plumbing Pty Ltd v Warren [2023] FCA 1301

Catherine Pulverman
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Where a creditor obtains a judgment debt which is more than the statutory minimum, being $10,000, a Bankruptcy Notice can be issued against the debtor seeking that the debt be satisfied within 21 days of service, failing which a Creditor’s Petition can be issued. If the debtor does not have grounds upon which he or she can rely upon to oppose the Creditor’s Petition, and the creditor is able to satisfy all of the required elements under section 52 of the Bankruptcy Act 1966 (Cth) (the Act), a sequestration order will be made. However, a bankrupt may be entitled to seek a review of a sequestration order provided that certain requirements are fulfilled – by raising several arguments in relation to defects in the original judgment debt which meant that the judgment debt fell below the statutory minimum of $10,000, a bankrupt successfully had the sequestration order set aside with costs against the petitioning creditor.

In Efficient Pure Plumbing Pty Ltd v Warren [2023] FCA 1301, the following facts are relevant:

  1. Four months after it was made, the bankrupt, Mr Warren, made an application for a review of the sequestration order – his delay arose because he was in prison (as a result of charges concerning the creditor’s claim). He was granted leave to file his application out of time upon the basis that his incarceration was a legitimate reason for not filing the application within the requisite timeframe;
  2. The judgment obtained in the Magistrates’ Court was for the sum of $2,880 but the order incorrectly stated that the claim was $3,880 and this order was subsequently amended upon requests made by Mr Warren to reflect the correct amount of the claim – the Bankruptcy Notice included the judgment amount of $3,880 rather than $2,880 and this was not noticed by the creditor’s solicitor until the hearing of the Creditor’s Petition;
  3. The judicial registrar in the Magistrates’ Court also ordered costs in the sum of $7,732.57 however, given the small amount of the claim, the proceeding was subject to costs caps under the arbitration rules in the Magistrates’ Court – the costs order should not have exceeded $2,582 (in the event that the arbitration went for more than 2 hours);
  4. The creditor claimed debts in the Bankruptcy Notice in the sum of $12,190.67 comprising the total amount of the judgment debt plus interest (incorrectly relying on the order which claimed $3,880 and the costs order brought the debt over $10,000);
  5. These errors in the judgment debt resulted in the issue of an erroneous Bankruptcy Notice and the issue of an erroneous Creditor’s Petition (the creditor also incorrectly stated in the Creditor’s Petition that it did not hold security over Mr Warren’s assets despite having an equitable charge in the quotation provided by the creditor to Mr Warren).

Upon consideration of the issues which required the creditor to prove the requirements under section 52 of the Act in order for the sequestration order to be made, and after two days of substantial submissions by the parties, the Court was satisfied as follows:

  1. The Court exercised its discretion to go behind the judgment debt and specifically in relation to the costs order which was not entitled to be made in that amount due to the costs caps in arbitration matters;
  2. The Court was not satisfied, as required by section 52 of the Act, that in truth and reality Mr Warren owed a debt which exceeded the statutory minimum of $10,000 as a prerequisite to the presentation of the creditor’s petition pursuant to section 44 of the Act – the creditor had not established that Mr Warren was liable for the costs component of the amended order. In other words, the creditor was unable to satisfy the Court that it was open to the Judicial Registrar to make the costs order in the amount of $7,732.57;
  3. As a result of this position, the debt which was actually owed to the creditor fell below the statutory minimum of $10,000 and the creditor was not entitled to issue a Bankruptcy Notice in respect of the judgment debt and therefore, it was not entitled to issue the Creditor’s Petition (and there were numerous defects contained in that Petition in any event).

Accordingly, the Creditor’s Petition was dismissed with costs (including the costs of the Trustee in relation to the administration of the estate for the period of about 8 months) and the sequestration order was set aside. This was a very costly error on the part of the creditor’s solicitor (even though the Judicial Registrar made the costs order in the first place, the creditor’s solicitor should have been aware of the costs caps and that it was not entitled to recover costs in that amount). There were arguments about the costs order and its legitimacy but the costs caps were applicable, notwithstanding the other provisions in the Civil Procedure Act 2010 (Vic) and where no offer of compromise was made.

Catherine Pulverman of FCW Lawyers has considerable experience in this area regarding enforcement of judgment debts and the issue or receipt of Bankruptcy Notices and Creditor’s Petition (whether it be acting for the creditor or the debtor). She has acted for clients in making applications for re-hearing to set aside judgment debts, applications to set aside Bankruptcy Notices (for reasons which include defects), opposing Creditor’s Petitions and making applications for review of sequestration orders. She would be happy to provide any necessary advice or act in relation to these issues as they can often involve complex arguments and must ensure that the most cost-effective outcome is achieved.

Catherine Pulverman
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