Many creditors that resort to what is often the final / last step in dealing with an individual / natural person debtor (i.e. bankruptcy), are actually secured creditors.
In such cases, the creditor needs to ensure that before the creditor’s petition is filed they take steps to value the security interest and only if the debt exceeds that value by $5,000 or more, that they go on to complete the petition accordingly (with those details filled out), file and serve; see s 44(2) and (3) of the Bankruptcy Act.
If the balance of the debt is less than the $5,000 minimum, the creditor’s petition should not be filed and served. It is liable to be dismissed with costs awarded against the creditor.In Bryant v Commonwealth Bank of Australia FCA 1687, the Full Federal Court stated (at ):
– The requirements of s 44 were explained by Lockhart J in Re Wiggins; Ex parte Credit Assistance Pty Ltd  FCA 61:.
• The value of the security is only required to be an estimate by the secured creditor. However, the creditor needs to act in good faith;
• Of course, as Sheppard J observed in Re O’Leary; Ex parte Bayne (1985) 61 ALR 674 (at 682), the petitioning creditor’s estimate “must bear a close relationship to the realities of the matter..(and) not be arbitrary or capricious”;
Otherwise, the creditor can elect to surrender the security for the benefit of creditors generally (in the event that a sequestration order is made). However, creditors are often reluctant to do this.
GPA recently acted for a debtor in this type of scenario and successfully negotiated an outcome such that the creditor’s petition was dismissed. The secured creditor did not tick the security box on the petition, the debtor’s instructions (and documentary evidence) was that the creditor was indeed secured, the secured creditor – not wanting to surrender its security, agreed to have the petition dismissed.
Given the range of security interests that may exist, it is often prudent to check whether or not you are in fact secured. Note: just because you haven’t taken steps to register your security interest or perfect it (in the case of personal property); or lodged any dealing on title (real property) doesn’t mean that you are not secured. A security interest can even arise without a written document (see In the matter of Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors  NSWSC 852 (27 June 2013) for an example in the corporate context.
– Secured creditor is defined as a PPSA secured party with a PPSA security interest in respect of a debt owed by the debtor or a person holding a mortgage, charge or lien on property of the debtor as security for a debt due to him or her form the debtor; s 5(1) of the Act.In summary:
– Can a debtor whom is facing a creditor’s petition defeat the petition on the basis that the creditor is a secured creditor?
• Depending on the circumstances, yes. See above.
– What can a secured creditor do if they want to make an individual bankrupt? If you have security such that the excess of any debt after the value of the security interest is estimated is at $5,000 or more, you are likely to be able to proceed on that balance;
– Is a sequestration order based on a creditor’s petition that incorrectly claims the creditor was unsecured a nullity?
• If the grounds of opposition pleads to the issue, the creditor may be granted leave to amend in some cases (subject to the defect being inadvertent and the debt still meeting the unsecured threshold);
– What if a sequestration order has already been made?
• It may be a factor taken into account in any annulment or set aside application;
• Otherwise, if the security is not surrendered within time, it may be a contempt of court; s 44(5) and (6) of the Act;
For further reading: see Biondo v Baycorp Collections PDL (Australia) Pty Ltd & Anor  FCAA 1853.
If you have any questions regarding the content of this article or otherwise please contact Gavin Parsons and Associates on 02 9262 4471.