How does a person end up in bankruptcy? Perhaps surprisingly the road to bankruptcy is a long one and requires many court filings before adjudication occurs.
Firstly, judgment needs to be obtained against the person. This in itself is an entire legal proceeding which can take many years if complex. The judgment obtained is not required to be for a monetary sum (such as for the removal of a caveat), but there must be some sort of monetary order made by the Court.
This could be for repayment of a loan, for losses owed to a company for breaches of director’s duties, or simply an order for costs issued by the Court. Any monetary amount ordered against the debtor is known as the judgment debt. In any event, the judgment debt must be at least $1,000.
Once the Court judgment has been sealed, the person/entity owed the money, known as the judgment creditor, is required to serve the judgment on the person owing the judgment debt (known as the judgment debtor).
If the judgment debtor fails to make payment of the judgment debt, the judgment creditor is entitled to apply to the Court for the issuing of a bankruptcy notice.
The bankruptcy notice
- alerts the judgment debtor to the judgment debt (but they should be aware of it already); and
- demands payment of the judgment debt; or
- invites the judgment debtor to enter into a payment arrangement; or
- requests that the judgment debtor satisfy the Court that they have a counterclaim, set-off or cross demand that equals or exceeds to the judgment debt and this could not be put forward in the proceeding where the judgment was obtained.
Bankruptcy notices are to be drafted per Form B2 of the High Court Rules 2016 (the Rules) and must be filed alongside a ‘request for issue of bankruptcy notice’ which must be drafted per Form B1 of the Rules.
Following receipt of the endorsed notice from the Court, the judgment creditor is required to get the notice served on the judgment debtor. The judgment debtor has 10 working days following the date of service to comply with the bankruptcy notice. If they fail to comply in the stipulated period, they commit an act of bankruptcy. See section 17 of the Insolvency Act 2006 (the Act).
This article focusses on the failure to comply with a bankruptcy notice constituting an act of bankruptcy, however, the Act sets out 11 other ways a person can commit an act of bankruptcy (see sections 17 – 28).
Following the act of bankruptcy, the judgment creditor has three months to file an application with the High Court to adjudicate the judgment debtor bankrupt (see section 13 of the Act). This application takes the form of Form B3 and must be accompanied by an affidavit per Form B4, and a summons to the debtor per Form B5 of the Rules. An affidavit of service of the bankruptcy notice should also be filed.
Once the endorsed copies are received from the Court, the judgment creditor is required to have the application for adjudication, which includes the date of the hearing, and the summons served on the judgment debtor. This must be served at least 10 working days prior to the hearing (see rule 24.16 of the Rules).
Following this, there are multiple steps the judgment creditor is required to follow to adjudicate the judgment debtor bankrupt:
- At least three working days prior to the hearing, file an affidavit outlining the judgment debt and the act of bankruptcy. The sealed judgment, affidavit of service of the bankruptcy notice and the affidavit of service of the adjudication application, and the bankruptcy notice must be annexed. See rule 24.19 of the Rules.
- Prior to the hearing, the following documents must be filed:
a. A ‘solicitor’s certificate’ as evidence as to the debt remaining outstanding;
b. A memorandum of counsel setting out the background to the proceeding, the service of the bankruptcy notice and the adjudication application, the act of bankruptcy committed, and the directions sought (the adjudication of bankruptcy and any costs sought).
c. Draft orders for the Court for the adjudication of the judgment debtor’s bankruptcy, per Form B16 of the Rules.
Following this, the hearing occurs and, provided the bankruptcy is not defended, the judgment debtor will be adjudicated bankrupt. On bankruptcy, the judgment debtor’s financial affairs will be managed by the Official Assignee. The judgment creditor (plus any other creditors of the judgment debtor) can file a proof of debt (being the sealed judgment plus any costs order) with the Official Assignee in hope to receive some recovery from the bankruptcy.
For the bankruptee, generally their affairs will remain under the administration of the Official Assignee for 3 years. The Official Assignee will take steps to realise any assets owned by the bankruptee for the benefit of their creditors. Upon discharge from bankruptcy, the bankruptee will be released from most debts owing by them (aside from those listed in section 304(2) of the Act).
Often there is no recovery made for the creditors of a bankrupt by the Official Assignee, but going through the process can at the very least give their creditors confidence that every effort has been made for repayment of the debt owing to them.
