Sign of the times: electronic execution now embedded in the Corporations Act
On 22 February 2022, the Corporations Amendment (Meetings and Documents) Act 2022 came into force to modernise the Corporations Act 2001 (the Act). The amendment permanently embeds the temporary amendments for electronic signing that were due to expire on 31 March 2022 (see our earlier insight here).
Changes to the Corporations Act
The Bill amends the Corporations Act to allow:
- Electronic Execution of Documents;
- Companies to hold hybrid or virtual meetings; and
- Sign and provide meetings-related documents electronically
Electronic Execution
The changes introduced by the Bill will give companies the option of executing certain documents electronically and remove ambiguity around this process.
The Documents that can be signed electronically include:
- Deeds
- Agreements
- Any document for purposes of section 9 of the Corporations Act
These documents may now be signed in accordance with ss 126 and 127 of the Act by signing either a physical or electronic form of the document. Documents can be signed by way of split execution and different execution methods can be used.
Virtual meetings
Companies can now hold meetings of members either in person, hybrid or wholly virtual (but only if this is expressly required or permitted by the company constitution). If a member is attending a meeting virtually, they must be given reasonable opportunity to participate including by hosting it at an appropriate time and ensuring reasonable technology is used that allows a member to ask questions or make comments.
Sending meeting documents
The Bill permanently enables any documents relating to meetings to be signed and given electronically (regardless of the format in which the meeting will be held). The Bill also introduces a requirement for members to be notified of their right to elect to receive a document electronically or in physical form 'at least once' each financial year.
Implementation
The Bill will apply to documents executed on or the day after Royal Assent. For documents sent and meetings held the provisions will apply from 1 April 2022. If your company’s constitution does not currently permit virtual meetings, you will need to update it to allow the option to hold a virtual meeting after 1 April 2022.
A change of heart? Company debts no longer forgiven for love and affection
Three half years after first flagging the changes, the ATO has confirmed new rules regarding a company’s emotional abilities to forgive debt. This will have implications, particularly for family law and business breakdowns.
Background to changes
The commercial debt forgiveness rules were introduced in 1996 to resolve a perceived ‘gain’ that a person makes when a commercial debt that they owe is forgiven. The rules cancel out this gain by reducing tax losses, net capital losses, certain other deductions and the cost bases of CGT assets up to the ‘net forgiven amount’. There were exceptions to the commercial debt forgiveness rules, including where the forgiveness of the debt is for reasons of ‘natural love and affection’, i.e., a gift.
In mid-2003, the ATO published their non-binding comments, noting they believed that a debt from a company could be forgiven for reasons of natural love and affection, and this exemption could therefore apply. This interpretation was widely used in family breakdowns, in mitigating the tax implications of separation. Then on 6 February 2019, the ATO withdrew these non-binding comments.
On 2 October 2019, the ATO set out a question as to whether the exclusion for debts forgiven for reasons of natural love and affection require that the creditor be a natural person. What followed was a two and a half year wait for confirmation to this question.
Implication of changes
On 9 February 2022, it was confirmed by the ATO that the exclusion for debts forgiven for reasons of natural love and affection requires that the creditor is a natural person. This means advisors need to be cautious about relying on this particular exemption.
However, the ATO did clarify that the debtor need not be a natural person, meaning there could be situations where an individual forgives debt to a company or trust. However, more care will be need to be taken when advising on forgiveness of debt and the tax implications.
Liquidator fails to convince court to extend timeline to bring proceedings
A recent decision of the Queensland Supreme Court in Baskerville v Baskerville & Ors [2021] QSC 292 has clarified the exercise of judicial discretion to extend the limitation period for voidable transaction proceedings and examined the limitations of ‘without prejudice’ privilege.
Background
A liquidator was seeking an extension of time to commence proceedings pursuant to section 588FF(3)(b) of the Corporations Act 2001 (the Act). The relevant company went into liquidation on 11 July 2018 and two liquidators were appointed. By 23 April 2020, both these liquidators had resigned and were replaced with a new liquidator (the Applicant). The time limit for commencing voidable transaction proceeding was to expire on 11 July 2021. The application to extend was filed two days before that limitation period expired.
There are no criteria within the Act for considering an extension, and thus the court had to decide whether it was just and fair to extend the limitation period. The onus was on the Applicant to show why the time limitation should not apply.
‘Without privilege’ correspondence
An important preliminary issue in this decision was whether to admit email correspondence that occurred on 31 May 2021 between the solicitor for the applicant and the second respondent that had been marked ‘without prejudice’. The exchange concerned a section 530B notice that the second respondent failed to comply with. The solicitor for the applicant ended an email by stating that if he provides the necessary information then they can look at avoiding litigation but that otherwise they have a barrister briefed and a claim should be ready to file against them well before 30 June 2021.
The classic rule of without prejudice comes from Field v Commissioner for Railways (NSW).[1] The rule states that negotiations to settle litigation should be excluded from evidence to allow parties to freely communicate without the pressure of the liabilities the correspondence could impose on them. However, there are exceptions to this rule.
The relevant exception for this case was a rule from Pitts v Adney,[2] which stated that the without privilege rule cannot be permitted to put a party into the position of being able to cause a court to be deceived as to the facts, by shutting out evidence which would rebut inferences upon which that party seeks to rely.
A critical part of the applicant’s case was that the applicant was not in a position to proceed. However, the email clearly stated that they were ready to file a claim before 30 June 2021. Therefore, the emails were held to be admissible.
Was it just and fair to extend the limitation period?
For the court to exercise its discretion to extend the limitation period, the Applicant had to show valid reasons for the delay and that the actual prejudice caused does not outweigh the case for granting an extension.
The Court looked at affidavits relied upon by the Applicant to identify relevant matters regarding the Respondents. The Applicant pointed to the fact that the liquidation was unfunded and that he had not been able to identify a reason for a nearly six-million-dollar transaction, meaning there could be an unreasonable director transaction claim.
The Respondent submitted that there had already been correspondence from the Second Respondent and that he had no further documents to provide. It was also argued that the Applicant’s case was vague in its details for what would be done in the intervening period.
The Court accepted the respondents’ submissions and specifically pointed to the periods between February 2019 - April 2020 and April 2020 – March 2021 where little work was done and there was no satisfactory explanation as to why that was so. The Court also held that the fact that the liquidation was unfunded was of little importance as section 588FF(3)(b) does not distinguish between funded and unfunded liquidations. Finally, the Applicant’s submission that they had sufficient material to commence proceedings prior to 30 June 2021 was a contradiction in the applicant’s position of not being ready to bring proceedings.
Therefore, the Court found that that the Applicant had not provided a satisfactory explanation for the delay and it was not fair and just in all the circumstances for the limitation period to be extended.
Lesson to be learned
Liquidators looking to pursue claims under Part 5.7B of the Corporations Act ought to heed the case law that makes it very difficult to convince a Court to extend the limitation period (often 3 years), even if the liquidation is unfunded.
[1] (1959) 99 CLR 285.
[2] [1961] NSWR 535.
Court dismisses application to terminate the winding up of a company
In the decision of Re Gulf Aboriginal Development Company Ltd [2021] QSC 310, the Queensland Supreme Court (Freeburn J) dismissed an application to terminate a winding up order after concerns were raised about the viability of the company. This case helps to understand the Court’s limits when exercising the discretion to revive a company.
Background
In February 1997, Century Mining Ltd (Century) entered an agreement with the State of Queensland and four different Native Title groups. Under this agreement, Century was required to make payments for the benefit of the Native Title groups in certain proportions.
The agreement contemplated that Gulf Aboriginal Development Company Limited (Gulf) would receive and distribute these payments on behalf of the Native Title groups. Gulf received administration fees from Century and also played a lobbying role, representing any cultural or environmental concerns of the Native Title groups.
The evidence before the Court was that in the years prior to liquidation, Gulf had poor management practices and failed to represent the Native Title groups in a meaningful way. They began to incur considerable losses from 2013 and their income almost exclusively came from Century.
The Court raised significant concerns with how Gulf operated. Gulf’s status as a charity was revoked in 2016 (backdated to 2013) following a review of their governance practices by the Australian Charities and Not-for-Profits Commission. The Court also outlined how Gulf’s directors spent large sums of money on things like flights and accommodation, but without a clear benefit to members. They also did not keep records of all transactions, as required to do so.
As a result of this mismanagement, the Native Title groups who were parties to the agreement resolved that they do not wish to be represented by Gulf and that Gulf should no longer be receiving payments on their behalf.
By the time a liquidation order was made on 28 November 2019, Gulf had amassed debts of over $600,000, as well as a debt owed to the Australian Taxation Office of $44,590.
Gulf in liquidation
Once Gulf was placed in liquidation, there was only $40,133 in assets, which was entirely consumed by the liquidator’s remuneration and expenses as well as legal fees and the petitioning of the creditor’s costs.
The creditors resolved to enter a deed of company arrangement (DOCA). This DOCA split the creditors into two classes. The first class of creditors were the ordinary creditors who were entitled to receive a dividend in the ordinary way and in accordance with priorities, as would be the case in a winding up, and their debts would be discharged once a dividend was received. On the Court’s calculation, the payment to ordinary creditors totalled $93,000 and represented a payment to each ordinary creditor of approximately 28.62 cents in the dollar.
The second group were the subordinated creditors who were entitled to subsequently recover their deferred debts and remained entitled to 100 cents in the dollar under the DOCA. The subordinated creditors subsequently executed a deed poll agreeing to reduce their debts to 20% of their admitted amounts, to operate in the event that the Court made an order terminating the winding up. This would equal $60,000.
Should the winding up order be terminated?
The liquidator brought an application asking the Court to terminate the winding up order under section 482(1) of the Corporations Act 2001 (Cth).
In such an application, the onus is on the applicant to make out a positive case that favours the terminating of the wind-up order. The application was made in circumstances where:
- the Native Title groups were against the application and had made other arrangements to receive payment from Century directly;
- allegations of fund mismanagement by directors had not been properly investigated; and
- there was no independent report about the solvency of the business.
The evidence also was that:
- Gulf would have little income other than an uncertain entitlement to the Century administration payments as Century was proposing to continue paying these to the Native Title groups directly; and
- the company would also be indebted to creditors for $60,000 with assets of only $35,000, meaning Gulf would automatically be insolvent if winding up was terminated.
The liquidator had provided evidence that the former management of Gulf had been removed and that they would start again under new management. The Court held that this was a neutral factor but that the absence of an independent business plan meant that Gulf’s revival would lead to considerable uncertainty.
On weighing up the factors, the Court held that the winding up should not be terminated.
This case illustrates some of the factors that will be taken into consideration when deciding whether to terminate a winding up order and that courts will be hesitant to revive companies that will be insolvent after revival.
Administrators allowed to sell company assets despite unusual sale process
In Goyal, in the matter of Cape Technologies Pty Ltd (administrators appointed) [2021] FCA 1654, the Federal Court used its discretion to permit the sale of a business in somewhat unique circumstances. The justification was that the sale maximised the chances of the business continuing in existence and resulted in a better return to creditors than an immediate winding up of the company. Whilst that justification is consistent with the object of voluntary administrations as set out in section 435A of the Corporations Act 2001, the sale process remains unusual.
Background
Cape Technology Pty Ltd (the Company) was established to develop a new financial operating system for businesses. The Company’s assets included tangible assets (comprising of cash) and intangible assets (comprising of work-in-progress associated with the development of the financial operating system).
The directors appointed administrators on 18 October 2021 and these administrators subsequently conducted a valuation of the Company. The evidence was that in the absence of any sources of revenue or funding, the administrators had insufficient funds to meet the ongoing operational costs of the Company. The administrators concluded that unless the business assets were sold, there would be no funds available for distribution to creditors, including employees, on a liquidation of the Company.
Sale of Business
Faced with these difficult circumstances, the administrators began conducting a sale process on a truncated timeline due to the Company’s poor financial situation. They began entering negotiations with two groups of directors and shareholders of the Company. One of these groups, BidCo made an offer that had to be signed before 12 noon on 1 November 2021. The other director had expressed interest, but facing time pressures, the administrators signed a head of agreement with BidCo to meet the deadline.
The first meeting of creditors was held on 4 November 2021 and At this meeting, the administrators informed the creditors inter alia:
- given financial constraints, the administrators were not able to conduct a traditional sale process;
- the directors and shareholders were given the opportunity to purchase the business of the Company;
- a bid had been accepted;
- they were being financially supported by the successful bidder while the sale process was underway;
- a court application would be necessary because of the unique circumstances of the sale.
The administrators gave creditors, shareholders and directors notice of the application and the orders being sought. There was no opposition.
Court’s Consideration
The decision notes that Section 90-15(3)(a) of the Insolvency Practice Schedule confers a broad power on the Court to make “an order determining any question arising in the external administration of the company”. The Court noted that the power in S90-15(3)(a) was “not appropriately exercised where the Court is being asked to do no more than sanction the making and implementation of a business or commercial decision in respect of which no particular legal issue is raised or in respect of which there is no potential to bring into question the propriety or reasonableness of the decision”.
The Court also noted that “courts have been prepared to sanction, by direction (such as now sought), an administrator’s exercise of that power where there is the potential for issues of “propriety or reasonableness” to be raised with respect to the making of the decision”.
The administrators application to the court was made because the administrators were concerned about the sale occurring in circumstances where:
- they had not publicly advertised the assets for sale;
- The period in which the assets had been offered for sale was limited;
- BidCo was a company owned and controlled by two directors of the company;
- The company’s creditors had not had the opportunity to vote on the sale; and
- The sale was not proposed as part of a deed of company arrangement.
The administrators were concerned that the circumstances could raise issues about the reasonableness and proprietary of that sale, particularly when there were some matters in dispute with the other director who also bid for the assets.
In addressing the circumstances of the sale, the administrators submitted that:
- due to the limited financial resources of the Company, there was financial ability for the Company to fund a traditional marketing campaign.
- while they would have preferred to negotiate with arms-length purchasers, they decided it was better to sell to someone who would appreciate and understand the business;
- they relied on section 435A of the Corporations Act which stated that an insolvent company’s affairs should be administered in a way that maximises the chances of the company continuing in existence.
The court agreed that, in the difficult circumstances, the administrators had taken justifiable and reasonable action to maximise the return to creditors and employees. The Court made orders approving the sale of business assets to BidCo; albeit being a related party.
Take outs
This case highlights a number of points, particulars for external administrators and their advisers:
- the Court will not usually provide judicial advice or direction where an administrator is making or implementing a commercial decision;
- the Court may exercise its discretion in appropriate circumstances, particularly where there is the potential for issues of “propriety or reasonableness” to be raised with respect to the making of the decision;
- the onus will be on the administrator to prove that they have taken all reasonable and justified steps in conducting a sale or process in the circumstances.
The Court also made an order restricting access to certain of the material files as commercially confidential until completion of the sale to prevent prejudice.
Employer v Employee - Super Guarantee Charge
The recent decision of the Trustee For Virdis Family Trust t/a Rickard Heating Pty Ltd [2022] AATA 3 showcases the never-ending debate of who is an employee versus a contractor. A business was forced to pay a superannuation guarantee charge after a worker was found to be an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (Cth) (the Act).
Factual Context
A cornerstone of the Superannuation Guarantee Scheme created under the Act, is that employers, who do not make superannuation contributions for the benefit of an employee (as defined by the Act) are liable to pay a Superannuation Guarantee Charge. The charge is equal to super contributions that should have been paid.
On 5 November 2019, the employer lodged an objection to the Superannuation Guarantee Charge assessments made by the Commissioner of Taxation for each of the quarters from 1 October 2013 to 31 March 2018. The charge concerned a sub-contractor named Mr Pirie, who was engaged to do jobs for employer but had not been paid super.
The decision required a determination about whether Mr Pirie was an ‘employee’. This required a holistic analysis of Mr Pirie’s working relationship with the employer.
Section 12 of the Act defines the terms ‘employer’ and ‘employee’ in wider language than their ‘ordinary meaning’. The apparent objective is to widen the class of people who are to be treated as employees for the purpose of the Act and for the purpose of making superannuation contributions to these people.
Was Mr Pirie an employee for the purposes of the Act?
Mr Pirie began his employment with the employer on 19 September 2011 and had a letter of engagement that identified him as a sub-contractor/casual plumber. The terms of his employment were the same as those set out in the Plumbing and Fire Sprinklers Award 2010 and applicable legislation. The AAT Member pointed out that this was odd as awards generally only apply to employees.
There were a number of factors that pointed to Mr Pirie’s relationship being characterised as more of an employee than a contractor in that his letter of engagement clearly outlined obligations to his employer and how he must endeavour to promote and protect the interests of the employer.
In practice, Mr Pirie was told where he was required to work, how many hours he was required to work and if he was unable to work, he would notify the employer and another employee would do the work, he was unable to delegate jobs. The employer also paid for any materials required for a job and Mr Pirie would often wear a T Shirt containing the name of the employer and for a while his van did have signs advertising the name of the employer.
The employer submitted that Mr Pirie advertised his services as being available to others who may seek his services. While Mr Pirie acknowledged that he was free to, he rarely did as he was working full time hours for the employer.
When the AAT Member came to decide whether Mr Pirie worked under a contract that is wholly or principally for the labour of the employer, he held that Mr Pirie was an employee for purposes of the Act and therefore, the employer had to pay the superannuation charge.
This case is an important reminder about how tribunals and courts will always look to the conduct of parties rather than necessarily be constrained by the terms of a contract to characterise or determine the real working relationship.
Measures for electronic execution of documents extended into 2022
Due to continual work from home arrangements and difficulties posed by travel restrictions, both federal and state governments are extending temporary laws to allow documents to be signed electronically. However, the permanent implementation of these changes are still up in the air.
Federal Amendments
In August, the Federal Parliament passed the Treasury Laws Amendment (2021 Measures No.1) Bill 2021, which has extended the temporary measures for electronic signing until next year.
It amends section 127 of the Corporations Act to allow for signing of a copy or counterpart of a document, meaning that signatories do not need to sign the same document, as long as each copy or counterpart of the document includes the entire contents of the document.
It also means a document does not require a “wet ink” signature, as long as an accepted method is used to identify the person signing electronically and it indicates that person's intention in relation to the contents of the document. If a document is executed by the affixing of a common seal, the witnessing may take place via audio-visual link (e.g. Zoom).
The method used to electronically sign the document must be reliable, taking into account the circumstances and the nature of the document (programs like DocuSign or AdobeSign would likely satisfy this requirement).
These amendments are due to expire on 31 March 2022. There is not permanent legislation to allow electronic signing, however government consultations are ongoing.
Queensland Amendments
Queensland temporary measures for COVID-19 have been further extended to 30 April 2022 with the assent to the Public Health and Other Legislation (Further Extension of Expiring Provisions) Amendment Act 2021.
The State Government is now looking to make certain measures permanent with the Justice Legislation (COVID-19 Emergency Response—Permanency) Amendment Bill 2021. If this bill passes, the changes we have seen over Covid will remain in place permanently.
This amendment extends the temporary Covid measures to allow for more flexibility when signing legal documents. These arrangements allow for electronic signing and audio-visual witnessing for documents such as affidavits, statutory declarations, general powers of attorney for businesses and deeds. As with the Federal laws, the signing will have to be done with an accepted method.
Documents that will not qualify for electronic signing include enduring powers of attorney, wills, general powers of attorney by individuals and sole traders and some Titles Office documents.
The passing of this bill will hopefully provide more clarity on which particular documents can be electronically signed and how they can be authenticated by witnesses.
While it may have taken a global pandemic to see electronic signing laws streamlined, it is a positive to see the law adapting to the times and simplifying the execution processes for businesses around the country.
Director Identification Number applications are open: here’s what you need to know
On 1 November 2021, applications opened for directors to apply for a director identification number (DIN). This is a new regime in Australia and it is vital that all company directors are aware of how to obtain one.
What is a DIN?
A DIN is a unique 15-digit identifier given to a director, or someone who intends to become a director that will be kept by the individual permanently. The introduction of DINs was in response to a government effort to combat illegal phoenix activity. It is hoped that in the event of liquidation or administration, it will be easier to trace a director’s activities over time and prevent fraudulent director identities.
Who must apply?
The requirement to have a DIN extends to all persons appointed as a director, or an alternate director for companies registered under the Corporations Act, this includes foreign corporations trading in Australia. The application can be commenced through the Australian Business Registry Services website. It is free and can be done via the myGovID app.
When to apply?
Applications are open now and there are strict deadlines. For those who became directors before 31 October 2021, the deadline is 30 November 2022. If you become a director between 1 November 2021 and 4 April 2022, it must be done within 28 days of appointment. However, for those who get appointed after 5 April 2022, it will have to be done before your appointment.
Directors who fail to apply for a DIN by the deadline could face criminal or civil penalties of up to 5,000 penalty units (currently $1.1 million dollars).
With an estimated 2.1 million company directors in Australia, this requirement will affect a number of Australians.
International Bar Association releases report showing persistent mental health stigma in the legal profession
The report released last month by the International Bar Association (IBA), shows mental health issues are particularly prevalent in the legal profession and that many employers are not equipped with the skillset to proactively support individuals.
The report titled: Mental Wellbeing in the legal profession: a global study, did over 3200 surveys from around the world in law firms, bar associations and in-house legal departments. The overall findings paint a sobering picture. Despite increased awareness of mental health impacts within the profession, there remains significant work to be done to improve mental wellbeing within the profession.
Researchers used a World Health Organisation index which measured various factors to form a score out of 100 per cent, under which an individual who scores below 52 per cent is likely to need a formal assessment of their wellness concerns.
Demographic Discrepancies
There was an overall average score of 51 per cent, meaning the average individual who was surveyed is likely to need a formal assessment of their wellness. However, there were also noticeable differences in scores depending on certain factors. While men scored on average around 56 per cent, women only scored around 47 per cent. There were also clear discrepancies in age, with those aged 25-29 ranking on average at 43 per cent while those aged 60+ ranked at 64 per cent. Ethnic minorities also scored on average 47 per cent compared to their counterparts at 51 per cent.
The most commonly cited negative factors were stress, intense time demands, poor work life balance and high pressure. The positive factors were cited to be a sense of purpose, interesting work and connecting with others.
Room for improvement for employers
The report has revealed that despite increased awareness of mental health issues, many employees do not feel like they can have these discussions with their employer. When surveyed, 41 per cent cited a fear for potential impact on their career, including 32 per cent who indicated a fear of differential treatment, were they to raise such concerns.
These fears can be viewed in the wake of findings that while three quarters of workplaces had wellbeing initiatives in place, a third were actually providing funding and only 16 per cent said that all senior management had been given specific training on mental wellbeing.
Employers have a significant role to play in this discussion. Those who scored higher than the average for mental wellbeing indicated that their organisation had responded effectively to issues they had raised. However, where individuals indicated their firm or organisation did not respond effectively, levels of individual mental wellbeing were lower than average.
Not addressing mental health concerns can have significant impacts on the employer too as 46 per cent of respondents had considered taking time off, 26 per cent made a mistake and 32 per cent felt unable to perform due to mental health issues.
Reflection/Future Challenges
Covid-19 has increased the levels of awareness of mental wellbeing among firms. When those surveyed were asked what lessons the industry should learn from the pandemic, the top responses were more flexible working practices (more work from home, better work-life balance) and more of a wellbeing focus.
The IBA concluded by stating there is the: “unprecedented opportunity that we have as a profession to focus on mental wellbeing in the post-Covid era, as well as the enormous groundswell of support and interest in this subject that is emerging worldwide. The challenge now is to continue building on this work in order to build the supportive, inclusive, and well-led profession that we all want to be part of.”
The IBA report set out 10 principles for both institutions and individuals to better combat wellness issues in the legal profession, prioritising the need for good policies and training to help combat negative mental health.
On 27 October, our Practice Manager Justice Fletcher attended an ALPMA Seminar titled: Leading Wellbeing in the Legal Profession. This session focused on equipping leaders with the tools to develop a workplace framework to create a mentally healthy team have the skillset to proactively support and assist it.
Justine said she found the session: “very informative ... with shocking statistics on mental wellbeing in the legal industry and how mental illness is now the number one cause of personal leave in Australia”
The key takeaway from this is to ensure all employers are equipped to proactively support those struggling with mental health and for individuals to know how to look after yourself and don’t be afraid to speak up if you need help.
Bankruptcy Notice set aside due to administrative errors
The recent case of Grant v Green & Associates Pty Ltd [2021] FCA 934, shows the importance of checking bankruptcy notices for errors, particularly ones that could invalidate the notice.
Factual Background
A Bankruptcy Notice was served by Green & Associates (Green) on Ms Nerez Grant (Ms Grant) on 13 May 2021 for $27,802.87 for which she had to pay or make arrangements to pay within 21 days. The Bankruptcy Notice contained three errors.
The first error in the Bankruptcy Notice was that it specified that the address to make payment to was Ms Grant’s personal address, rather than the creditor’s address. The second error was that same address issue was repeated in the Bankruptcy Notice for the address where service of documents was to be sent to. The final error was that the wrong debt amount was specified. The Creditor also did not take into account a garnishee order which had been made by the Local Court for $1,113.29 which should have been deducted from the amount in the Bankruptcy Notice.
As a result, Ms Grant filed an application within the 21-day deadline, seeking an order that the Bankruptcy Notice be set aside. Green did not dispute that the errors were present in the Bankruptcy Notice, but contended that there errors were not substantial enough to justify that the Bankruptcy Notice be aside.
Should the errors cause the notice to be set aside?
Relevantly, two provision of the Bankruptcy Act 1966 (Cth) were applicable. The first was s 41(5) which states that a bankruptcy notice is not invalidated by an incorrect sum that exceeds the amount unless the debtor within time fixed for compliance notifies the creditor. The other provision was s 306, which states that a formal defect will not invalidate a bankruptcy notice unless the Court is of the opinion that substantial injustice has been caused by the defect. The address and the incorrect amount were dealt with separately.
When it came to the incorrect amount on the notice, Green relied on s 41(5). The creditor submitted that Ms Grant did not submit the relevant notice disputing the amount within the “time fixed” as required by the Bankruptcy Act, as she did not serve the affidavit to them within the initial 21 days of the bankruptcy notice. It was submitted that the “time fixed” definition does not encompass any court ordered extensions, like the one that Ms Grant received.
Ms Grant contended that the application was sent to Green within the extended timeframe and also Green acknowledged that the debt on the bankruptcy notice was incorrect.
Wigney J agreed with Ms Grant, stating that time fixed would encompass any extensions given by the Court. He concluded that by the operation of s 41(5), the notice was automatically invalid.
It was therefore not necessary to make a conclusion on the address error. However Widney J did state that the error would be unlikely to cause substantial injustice under s 306. Ms Grant would have noticed that the address to pay on the notice was her personal address and would have been able to easily rectify this error.
However, due to the overstatement of the debt, the notice was set aside. This case highlights the importance of taking into account any other amounts paid including garnishee orders when sending a bankruptcy notice and checking for any administrative errors.
