THE PERILS OF AMBIGUITY IN BANKRUPTCY NOTICES

The Bankruptcy Act ('the Act') is prescriptive as to the form and content of bankruptcy notices. Courts have often observed that close observance of the rules is necessary in light of the serious consequences faced by debtors upon bankruptcy and failure to do so may result in the notices being rendered invalid.

Bankruptcy notices may be defective in such circumstances where the creditor is improperly identified, the judgment debt is incorrectly stated, or a time period for compliance is not stated. However, not all errors are equal, and a defect will not necessarily invalidate a bankruptcy notice.

WHEN WILL A DEFECT INVALIDATE A BANKRUPTCY NOTICE?

Where the defect could reasonably mislead the debtor as to what is required to comply with the notice, it will be deemed invalid. If the defect would not mislead the debtor, it is a formal defect which may be cured under section 306 of the Act.

Section 306 of the Act states that a formal defect does not invalidate a bankruptcy notice unless it causes substantial injustice to the debtor, and that injustice cannot be remedied by an order of the court. If a defect could reasonably mislead, or cause irremediable injustice to, a debtor the defect will invalidate the notice.

By way of example, in Re Wong; Ex parte Kitson (1979) 27 ALR 405, the omission of the word 'or' between two paragraphs in a bankruptcy notice was sufficient to invalidate the notice. The court found that the defect could reasonably mislead the debtor as to whether the debtor was required to comply with one or both of the conditions in order to avoid an act of bankruptcy.

Understatement of a debtor's time for compliance with a bankruptcy notice will also invalidate a bankruptcy notice. Such a defect cannot be cured under section 306 of the Act. It is a fundamental defect which is likely to mislead a debtor, who will be uncertain as to how long he or she has to satisfy the notice.

By contrast, understatement of the judgment debt on a bankruptcy notice constitutes a formal defect. This defect can only be corrected under section 306 of the Act, and only if the debtor could not be misled. To avoid invalidity in such circumstances, the creditor must make it clear that payment of the amount specified will constitute compliance with the notice.

IMPLICATIONS

As can be seen from the above examples, there is often a subtle difference between a defect which renders a bankruptcy notice invalid, and one which can be saved by section 306. The important thing to remember is that in the case of effective bankruptcy notices, 'clarity is king': the debtor should clearly and unequivocally know what he or she is required to do to avoid the commission of an act of bankruptcy.

Care must be taken to ensure that the requirements in the Act as to form and content are strictly complied with. Without careful drafting, judgment creditors run the risk that judgment debtors will set aside bankruptcy notices on the basis that they have been misled or would suffer injustice.