So far the courts in Australia have not had to deal with many creditors’ bankruptcy petitions against debtors in the current COVID-19 environment. What with the monetary threshold for a creditor to petition for bankruptcy now being $20,000, and response times for debtors to comply extended to 6 months, the bulk of petitions cannot proceed.
There is an argument for maintaining that threshold permanently, or otherwise restricting creditors’ pursuit of debtors to bankruptcy.
Too poor to go bankrupt?
At the moment, a debtor who cannot pay the creditor’s acknowledged debt has few bases on which to resist bankruptcy. The argument that there is little to be gained because the debtor has been financially wiped out by the impact of COVID-19 may not succeed, despite that impact being accepted knowledge and affecting many more; and despite the bankrupt being then subject to restrictions post-virus for 3 years as a result.
That defence of impecuniosity, in particular through no fault of the debtor, has not generally succeeded, at least in Australia. The high, or low, watermark was Re Darcey[1] which involved the pointless bankruptcy of a religious brother who had taken a vow of poverty; his impecuniosity was pleaded to no avail.
The law is more developed in England, although to the same general effect that, as the Court said in Re Field, “a person might indeed be too poor to be made bankrupt, but the burden of proof is heavy”.[2] More recently, Mr Justice Snowden has analysed some wider bases for refusal of a bankruptcy order.[3]
Whether COVID-19 is weighty enough to meet that heavy burden would rely on an argument that a debtor should not be made bankrupt when their insolvency results from what is the universal impact of COVOD-19 on the economy generally, well beyond the control of individuals or government.
It’s the economy …
There is some faint precedent, in New Zealand. Back in 1992, the NZ economy was in recession. Mr and Mrs Taylor were facing bankruptcy because of the collapse of his business which the Court said,
“can be directly traced to the political and economic developments which took place at the time [and but for which] he would probably have a thriving business today”.
The Court declined to make them bankrupt.[4] There appeared to be “no public interest” in doing so. Bankruptcy would not realise “one cent in the dollar”. “He cannot get a job and it is unlikely that he will get credit”. Bankruptcy would be “purely punitive and serve no practical or useful purpose”.
On the other hand, bankruptcy is a beneficial process, sought voluntarily, discharging provable debts and what can be the stress of creditor claims. Any company that the bankrupt owns can then also become the responsibility of the trustee.
What broader purposes are served by a creditor making someone bankrupt compulsorily needs to be assessed in each case, because the financial outcome for that and most creditors is generally minimal.
In fact, is there a case for rethinking the bankruptcy rights of creditors which the COVID-19 crisis might prompt?
Restrictions on creditors?
Academics[5] have argued for limitations to be placed on creditors’ rights to pursue bankruptcy, which they saw as being commonly used in England[6]
“for deleterious purposes inconsistent with the modern goals of bankruptcy”.
They suggested that involuntary bankruptcy based solely upon the debtor’s failure to pay a single debt (no matter how substantial) to a single creditor should be eliminated. The law could allow creditors to initiate a bankruptcy
“only if there is some hope that bankruptcy can solve the collective problem; that is, value is available for ratable distribution among creditors”.
They suggested that a “a front-end requirement of a showing of value would prevent massive waste and distraction from ill-advised creditor bankruptcy petitions”. There were expectations that creditors would have open access to credit and asset data to facilitate this, as well as effective debt recovery processes.
“Voluntary bankruptcy sought by debtor petition is and should be the modern norm, with involuntary cases limited to the narrow range of instances where such a case actually benefits the creditor collective.”
A further suggestion was to prevent creditors from abandoning an application for bankruptcy once it had begun.
“There is no proper justification for allowing a creditor to initiate a bankruptcy process simply to abandon it once the creditor receives preferential payment”.
They suggested “an aggressive sanctions mechanism” to prevent creditors from imposing undue burdens on the administrative process in lodging bankruptcy cases against patently impecunious debtors.
As to that, the Australian court practice of not allowing a petition to be dismissed[7] without an accounting from the debtor has long disappeared.
Australia
None of these ideas has seen light in Australia, our limited focus being on the amount of the threshold for a creditor to initiate a bankruptcy notice and petition, which was raised from $2,000 to $5,000, pre-virus. Although there is an ultimate discretion with the court, under s 52(2), the law is that if the creditor proves the relevant factors, it is generally ‘entitled’ to a sequestration order.
Anecdotally, both bankruptcy notices and petitions are used for debt recovery purposes, serving to focus the debtor’s attention by use of the term ‘bankruptcy’. If figures were publicly available, the progression might be that of say 12,000 notices[8] and 5,000 petitions each year, only around 1400 lead to a sequestration order. Creditors may well have collected many of their debts in that process, preferential or otherwise. In the end, court ordered bankruptcies account for only 10% of the total.
All this is premature, the usual approach being to wait for crises to happen before acting, at which time data would need to be extracted and ideas like these might be developed. In the meantime, debtors have the NZ Taylors’ case to argue.
[1] [1988] FCA 165.
[2] Re Field [1978] Ch 371 at 375G, Megarry VC.
[3] Edgeworth Capital (Luxembourg) S.A.R.L. & Anor v Maud [2020] EWHC 1469 (Ch) (08 June 2020)
[4] Re Taylor, ex parte Greenwood, B511/92, 1 September 1992. Discussed in Too poor, sick, proud or innocent to be bankrupt, [2001] 2(1) INSLB 17, Murray M.
[5] Involuntary bankruptcy as debt collection: multijurisdictional lessons in choosing the right tool for the job, Jason Kilborn & Adrian Walters, 87 Am. Bankr. L.J. 123 (2013)
[6] The Netherlands was also covered.
[7] See s 47(2).
[8] The fee payable to AFSA for each is $470.
