Proof of service of a bankruptcy notice – why it is, or why is it, so important?

A woman made bankrupt by a federal court registrar exercising judicial authority of the court has had her bankruptcy set aside because she was not properly served with the bankruptcy notice.  The creditor was her former husband and the sequestration order was made on 25 November 2021.

The facts

The lawyers for the creditor had emailed the bankruptcy notice to her email address in May 2021, and the creditor’s petition was later served in the same manner.

The Court – Judge Humphreys – referred to regulation 102 of the new Bankruptcy Regulations 2021, which requires a rather circuitous tracing exercise to s 28A of the Acts Interpretation Act 1901 and then to s 9 of the Electronic Transactions Act 1999, passing briefly to note that the Explanatory Statement to reg 102 says that “this includes personal service, service by post and service by electronic communication”.

The Court found that these laws require a debtor to first consent to be served by email.

The facts in this case were that the woman had replied by email to the creditor’s lawyer’s email without specifically acknowledging receipt of the notice.  But in a later affidavit, she deposed “I was served with the Bankruptcy Notice … which was served on me on 19 May 2021”.

The Court’s decision

While one older case authority had given the view that her affidavit amounted to an admission against interest and proved valid service – “remarkable to the point of absurdity, in that the defendant who, on his own affidavit admits that he received the writ … should be held not to have been served” – the Court held that her affidavit was not valid to prove service of the bankruptcy notice.

The Court was not satisfied that she ever consented to the service of the bankruptcy notice by email. While the Bankruptcy Act does allow lesser defects to be cured, even proof of actual receipt by a debtor of a bankruptcy notice does not permit the Court to cure an irregularity in the strict service required; nor can the need for strict compliance be waived by the debtor: Re Hanlin [1985] FCA 447; Re Ditford [1988] FCA 490.

As the Judge in this matter said, citing other authority, bankruptcy has technical rules, and apparently unjust results can flow from their application.

Comment

While this may be a just outcome – the Judge also had doubts about whether the debtor was insolvent – some unsatisfactory points to note about the law are these:

  1. The woman was made bankrupt and a trustee [unnamed] had the responsibility of the administration of her estate from 25 November 2021. What of the work done by the trustee and any expenses and remuneration accrued, and other legal impacts?  No mention or order was made in respect of those, and the trustee was not noted as appearing or explaining the progress of the estate.
  2. It was a registrar who made the November 2021 sequestration order and any challenge to the order entails a full de novo hearing by a Judge: Bechara v Bates [2021] FCAFC 34.  This is because of the perhaps rather constitutionally tenuous position of federal registrars in exercising judicial power: Harris v Caladine [1991] HCA 9; (1991) 172 CLR 84. While it may be administratively convenient to have registrars attend to the more routine sequestration orders, there will be cases where a challenge is subsequently made requiring a complete re-hearing.  Contentious matters, if they be known in advance, might better be referred to a Judge.
  3. Not only is there the cost of the re-hearing, but the unscrambling of the legal consequences of a sequestration order having wrongly been made can be difficult: see Robson v Body Corporate for Sanderling at Kings Beach CTS 2942 [2021] FCAFC 143.
  4. The same caution applies to the winding up orders of Federal Court registrars, see Deputy Commissioner of Taxation v ASIC [2013] FCA 623, although there appears to be no comparable constitutional concerns in state and territory Supreme Courts.  That may be relevant to a creditor’s choice of court.
  5. Then there is new Bankruptcy Regulation 102, about which queries have been raised as to its drafting and its lack of accommodation of peculiar service and notice issues in insolvency that have properly been accommodated in relation to corporate insolvency. Electronic delivery of documents in bankruptcy and liquidation – continued | Murrays Legal
  6. That also raises the fact that, while insolvency involves federal laws, there are separate legislative requirements for electronic service of insolvency documents depending on whether personal insolvency (handled by the Assistant Attorney-General and AFSA) or corporate insolvency (handled by the Treasurer and ASIC) is involved; and increasingly so generally, despite the harmonisation attempts in the Insolvency Law Reform Act 2016.
  7. From a broader perspective, the date of the service of the bankruptcy notice can determine the date of the act of bankruptcy and a whole range of further dates, including relation back, and the timing of challenge of voidable transactions. Formal determination of the date of service is therefore important.  As the Court in Re Hanlin said, in a case where the solicitor for the debtor purported to accept service on his behalf, the court is “entitled to be influenced somewhat by the undesirability of encouraging people to essay service of a bankruptcy notice in such an informal fashion”.
  8. But that then brings in the question of whether that should be so important. It goes beyond the purpose of this note to recount much of the history but the 1988 Harmer Report saw acts of bankruptcy and relation back as being fixed in 16th century concepts of acts of financial notoriety that served to warn others of the danger of dealing with someone who is in effect a prospective bankrupt. Relation back had been the subject of much squabbling – debate – between the states leading up to Australia’s first Bankruptcy Act of 1924 and it was retained. This was despite the drafter of the Act describing it as “a useless doctrine, approaching almost final extinction in the latest English legislation”. The Harmer Report ultimately recommended that relation back based on the concept of the act of bankruptcy be abolished, as being a “fictitious, artificial and abstract concept … rarely understood” [697]. This recommendation was ignored.
  9. So fundamental is the concept that if, at the eleventh hour, which could be up to two years after the petition is presented (see s 52(5) BA), the debtor raises some fundamental defect in a bankruptcy notice, the petition must be dismissed: Re Pollard [1991] FCA 640; (1991) 33 FCR 284; Re Kostezky [1995] FCA 1172.

As the Judge cited in this case, bankruptcy has technical rules, and apparently unjust results can flow from their application.

Australian bankruptcy law need substantial reform, and well beyond the issues raised in this case.

See Pegios in his own capacity and as trustee for Pegios Superannuation Fund v Arambasic [2022] FedCFamC2G 17.

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