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Challenging a Bankruptcy Notice or Statutory Demand

By Bill Lambros

The recent Full Federal Court decision of Lamb v Sherman [2023] FCAFC 85 highlights the strict time requirements that apply in relation to bankruptcy notices and statutory demands. It is also a reminder of the importance of acting quickly and seeking proper advice urgently if you, as a debtor, are served with a bankruptcy notice or a statutory demand (in the case of a debtor company).

The most common act of bankruptcy relied upon by creditors to issue a creditor’s petition to apply for a sequestration order against an individual, to make the debtor a bankrupt, is the failure of the debtor to comply with a bankruptcy notice that has not been set aside by the Court.  A debtor has 21 days after being served with a valid bankruptcy notice to: (a) pay the amount specified in that notice, or (b) settle with the creditor, or (c) to prepare and file a Court process to challenge that notice and have it set aside.  Otherwise, that debtor is deemed to have committed an act of bankruptcy on that day.

A debtor who seeks to set aside a bankruptcy notice, must therefore act quickly to ensure that a Court application is filed in accordance with the Federal Court Rules before the time fixed for compliance with the bankruptcy notice expires.

In Lamb v Sherman Ms Lamb’s solicitors lodged an application to set aside the bankruptcy notice (served on her by Mr Sherman) using the Court’s electronic filing system at 4.37pm on the 21st day after she was served with it (15 June 2022).

On the following day, 16 June 2022, Mr Sherman filed his creditor’s petition to apply to make her a bankrupt.

Rule 2.25(3) of the Federal Court Rules stipulates that if a document is sent by electronic communication to a Registry, the document is, if accepted by the Registry, taken to have been filed:

  • if the document is received by 4.30pm on a business day – on that day, or
  • in any other case – on the next business day.

Ms Lamb’s application to set aside the bankruptcy notice was eventually dismissed by the Court.  The primary judge heard Mr Sherman’s creditor’s petition and made the sequestration order on the basis that an act of bankruptcy had occurred on 15 June 2022.

The Full Federal Court dismissed her appeal of that decision.  The Court decided that if Ms Lamb had lodged her application with the Court by 4.30pm on that day, then it would have been deemed to have been filed on 15 June 2022 under rule 2.25(3) of the Federal Court Rules.  But her application was lodged at Court 7 minutes after 4.30pm.  It was therefore deemed to have been filed on the next business day, being 16 June 2022.

The Court determined that Ms Lamb committed an act of bankruptcy on 15 June 2022 because she had not filed an application to set aside the notice within the prescribed timeframe.

The late filing of her application was fatal.  The Court also noted that the imposition of strict time limitations in cases such as this is consistent with the approach the High Court has taken in other similar areas, such as its decisions in applications to set aside statutory demands.

It is critical to seek advice about a bankruptcy notice or a statutory demand immediately after it is served on you or brought to your attention to maximise the time in which to determine the most suitable course of action to deal with it and then to act within the strict timeframes.

We offer and provide a full range of expert services to assist you with these and all other issues that arise in the areas of insolvency and debt recovery.  Do not hesitate to reach out to our team of experienced professionals who can advise and assist you.