Decline of bankruptcy as an enforcement tool and why there is still a place for it

the bankruptcy. However, Palermo sought to circumvent Foots by seeking that the costs order be made with retrospective operation to the date of bankruptcy pursuant to the broad discretion of the Court under section 79 of the Federal Circuit Court of Australia Act 1999 and section 32 of the Bankruptcy Act 1966.

Palermo argued that Foots did not consider retrospective orders but left such matters to the discretion of lower courts as appropriate, and the Court could therefore make such a retrospective costs order.

Judge Jarrett rejected Palermo’s argument. It did not grapple with the underlying proposition of Foots; that an obligation which arises after the date of bankruptcy is not provable in the bankruptcy and the obligation to pay costs does not arise until the making of the costs order.

His Honour indicated that even if the Court could make an order of the kind sought by Palermo, it would not be competent for Palermo to seek the order in the present circumstances. This is because such a step would be seen as enforcing a remedy (ie the claim for costs) in respect of a provable debt (ie Palermo’s underlying debt claim against the bankrupt) which is prohibited under section 58(3) without leave of the Court (no such leave having been sought or granted in the present case).

Ultimately, the Court was not satisfied that it should make a retrospective costs order and therefore ordered that the bankrupt debtor pay Palermo’s costs rather than it being paid from the bankrupt estate. This essentially left Palermo with a non-provable costs order against an impecunious bankrupt debtor, all of whose assets had vested in the trustee.

In order to participate in the

distribution of any assets as a creditor, it would be necessary for Palermo to enforce its costs order against the bankrupt, commence further bankruptcy proceedings and make the bankrupt bankrupt a second time, for no obvious useful benefit.

The takeaway

This case highlights the importance of obtaining specialist advice before filing a creditor’s petition or risk expending funds on proceedings without merit, which will not be able to be recovered.

*Ellen Ferris Solicitor Matthews Folbigg Ph: 02 9806 7456 Email: EllenF@matthewsfolbigg.com.au

*Stephen Mullette MICM Principal Matthews Follbigg Ph: 02 9806 7459 Email: stephenm@matthewsfolbigg.com.au

By Roger Mendelson*

There is no doubt that Bankruptcy as a legal enforcement tool is on the decline.

This is confirmed by the AFSA figures. The December 2019 quarter produced the lowest level since 1994.

Part of this decline may be due to the fact that the economy is in a reasonably sound spaces. However, there are other reasons, which include: z Many larger corporate creditors, such as banks, energy companies and telcos have either ceased carrying out bankruptcy or have high thresh-holds and also impose limits on buyers of their debt ledgers. z In an increasing number of cases, creditors are only prepared to carry the expense for larger debts. Cost is definitely a factor. Typical legal costs and disbursements would be $8,000 or $9,000 to carry out the process from issuing a Bankruptcy Notice to handling a

Petition. z The bankruptcy jurisdiction is highly specialised and there are less legal firms around with the expertise to properly handle the work.

When to use

There are circumstances where bankruptcy is still the most effective enforcement tool available to creditors. The obvious case is where the debtor has sufficient interest in real estate to cover the amount of the judgment plus debt costs. In addition, there will be cases where the debtor has access to assets, such as in a family trust or the family home being in the name of his wife or partner.

Negotiating tool

The reality is that there are some debtors who have a capacity to pay but understand how to “play the game”. This tactic will usually have been effective against most of the creditors he has had over the years.

In our experience, issuing and serving a Bankruptcy Notice is an effective tool in probably 80% of cases. It definitely needs to be followed up (after the 21 day period after service has expired).

If the debtor does not pay the judgment debt or enter into an arrangement within the 21 day period after service of the Notice, he is deemed to be insolvent and any time thereafter, a Bankruptcy Petition can be issued and served on him. This will lead to a hearing date and a high probability of a Sequestration (Bankruptcy) Order being made against him.

Only approximately 10% of Bankruptcy Notices issued by us on behalf of creditors proceeds

to a Petition. Most of the files will result in payment of some sort and our advice to creditor clients is to be realistic in terms of negotiation, including entering into instalment arrangements.

We will normally only recommend proceeding to a Petition in the event where the debtor has sufficient equity in real estate or there is a compelling case that he has access to sufficient assets to at least come up with a reasonable offer but refuses to do so.

Preconditions

There are many path-ways to Bankruptcy. However, by far the most common one used in debt collection is that a creditor obtains a judgment, including interests and costs of at least $5,000.00.

The minimum thresh-hold was increased from $2,000.00 in 2010 and is likely to increase again, at least by CPI since 2010.

Case study

As an example of how effective the process can be, I refer to a current file being handled by us on behalf of a finance creditor.

The judgment debt, including interest and costs was over $73,000.00. Extensive negotiations had taken place over 18 months, before, during and after the legal process. There was evidence that the debtor had disposed of real estate with a view to defeating the claims of creditors. Our client was prepared to accept $15,000 in full settlement.

The debtor, who had legal representation, ultimately rejected that figure and was made bankrupt.

The Trustee in Bankruptcy has recovered funds from the disposal of the property and expects to payout 100% of the judgment debt together with full Bankruptcy legal costs.

Conclusion

The lesson is that if you are handling commercial debts or large consumer debts and are dealing with a debtor who refuses to engage in meaningful discussions, Bankruptcy should be considered.

The fact that the process is used by less creditors than before makes the case to consider it more compelling. It means that there are many creditors out there who have a capacity to at least pay something meaningful but have learnt how to get away with it. For such creditors, Bankruptcy is the only process which will work.

*Roger Mendelson CEO Prushka Fast Debt Recovery Pty Ltd and is principal of Mendelsons National Debt Collection Lawyers Pty Ltd. Ph: 1800 641 617 www.prushka.com.au

“There are circumstances where bankruptcy is still the most effective enforcement tool available to creditors. The obvious case is where the debtor has sufficient interest in real estate to cover the amount of the judgment plus debt costs.”