Enforcement of Judgment Debts: considerations when pursuing different options

Financial Services

Enforcement of Judgment Debts: considerations when pursuing different options

There are a range of different processes which are available to a creditor for enforcement of a judgment debt and those who are seeking to do so should thoroughly weigh up the avenues available to them to determine which would be the most appropriate enforcement mechanism. The reason for caution is that, whilst there are many avenues to choose from, some may only be appropriate in certain circumstances and choosing the wrong mechanism or more than one simultaneously, could deliver unexpected results and additional costs.

In respect of the methods that creditors can use to enforce judgment debts include:

    • A Bankruptcy Notice for an individual or a Creditor’s Statutory Demand for a corporation;
    • Warrant to Seize Property;
    • Warrant of Seizure and Sale of real estate;
    • Attachment of earnings – this mechanism allows a creditor to be paid directly from the debtor’s income; and
    • Attachment of debt – this is a direction to third parties such as a debtor, a bank or other financial institution, to pay the debt using funds from the debtor’s bank accounts, rent owed to the debtor or other people who are indebted to the debtor.

However, it is important to note that the process is not as simple as just adopting a particular enforcement mechanism and proceeding, especially if it is a Bankruptcy Notice or a Creditor’s Statutory Demand. The Courts have warned creditors about using the procedure for Creditor’s Statutory Demands as debt recovery mechanism and should only be relied on to enliven the Court’s jurisdiction in respect of the insolvency of the debtor. In particular, in accordance with the principles established in Re Sterling; Ex parte Esanda Pty Ltd (1980) 30 ALR 77, the Court can set aside a Bankruptcy Notice if it is apparent that the purpose of the Notice was only to put pressure on the debtor to pay the outstanding debt. The creditor must have reasonable belief to suspect that the debtor is in fact insolvent and should not issue a Bankruptcy Notice or Creditor’s Statutory Demand where the creditor knows that the debtor is solvent and able to pay its debts.

It is also important to consider enforcement mechanisms and whether the creditor is entitled to utilise both enforcement mechanisms concurrently. Whilst a creditor can proceed with any enforcement options they desire, care should be taken if they choose to engage in more than one process at once, particularly if it is a Bankruptcy Notice or Creditor’s Statutory Demand. According to the decision of Wilshire-Smith v Mellor Olsson (1995) 57 FCR 572, a creditor cannot rely upon a Bankruptcy Notice where they had taken separate enforcement action at the same time as the issue of the Bankruptcy Notice which prevented the debtor from paying the amount owing. Similarly, for this same reason, a Creditor’s Statutory Demand could be set aside for “some other reason”, or the winding up proceedings dismissed in circumstances where a creditor has engaged in unconscionable conduct or their conduct could give rise to substantial injustice (where the creditor has engaged in parallel enforcement mechanisms).

Pursuant to sections 119(1) and 119(2) of the Bankruptcy Act 1966 and section 570(1) of the Corporations Act 2001, once bankruptcy proceedings or winding up proceedings have been issued, a Sheriff who has been engaged by the creditor to seize and sell property cannot continue to pursue this process on behalf of the creditor. In addition, the Sheriff cannot pay any of the proceeds of such enforcement until the proceedings have been dealt with. Once proceedings have been issued, the creditor, or its solicitors, has an obligation to notify the Sheriff and request that no further steps be taken.

Accordingly, whilst all available avenues of enforcement should be pursued, if a Bankruptcy Notice or Creditor’s Statutory Demand is being considered, the creditor should cease (or not concurrently pursue) any other enforcement process as it could be likely that future proceedings may be dismissed along with an adverse costs order.

The team at Wisewould Mahony have considerable experience in the enforcement process of judgment debts and advising clients as to which mechanisms are most preferable to their matters.