A recent decision of the Federal Court provides a timely warning for businesses engaged in cross-border trade where debts may be expressed in a foreign currency. The take away point of the decision is that in issuing bankruptcy notices based on a judgment debt expressed in a foreign currency and allowing for payment in Australian currency, care must be taken to ensure the correct foreign exchange rate is applied.
Nathan Tinkler, former director of Australian Pacific Coal, has been declared bankrupt by virtue of a Federal Court order made a number of weeks ago. Mr Tinkler’s problems with solvency have been widely reported in the Australian media. The proceedings in the Federal Court, however, considered issues relating to the validity of a bankruptcy notice served on Mr Tinkler in which the judgment debt was expressed in US dollars.
The creditor in this matter, GE Commercial Australasia Pty Ltd, had filed a creditor’s petition against Mr Tinkler in mid-2015, which was opposed on the basis that he was solvent, and that there was no act of bankruptcy, as the creditor’s bankruptcy notice did not comply with the Bankruptcy Regulations 1966 (Cth), and was therefore invalid.
The basis for challenging the validity of the bankruptcy notice was that it did not comply with regulation 4.04, which allows for judgments or orders expressed in a foreign currency to be paid in a specified amount of Australian currency.
That provision requires the applicable currency exchange rate to be the equivalent in Australian currency as at the “telegraphic rate of exchange prevailing on the second day before the day” when the bankruptcy notice is lodged with the Australian Financial Security Authority (AFSA).
Mr Tinkler’s lawyers argued, among other things, that the correct exchange rate was not applied, and that the issue of the bankruptcy notice was not lodged until three or four days after the exchange rate applied to the bankruptcy notice was published.
The court held that the correct rate that answers regulation 4.04 is “… a rate that is published by a banking institution as generally available for the relevant date, or is published has having been generally available on that date…”. The effect of this is that after ascertaining the relevant exchange rate, a creditor needs to lodge the application for a bankruptcy notice with AFSA within two days. In Mr Tinkler’s case, the exchange rate was calculated as at 15 June 2015, and the application for the bankruptcy notice was lodged on 17 June 2015.
Regarding the date of the issue of the bankruptcy notice, the application was lodged on 17 June 2015, but due to a number of administrative issues it was not issued until 19 June 2015. As the court held that the regulation provided that the exchange rate must be calculated two days before lodgement, not two days before a bankruptcy notice is issued, this was not an issue
Due to his failure to successfully oppose the creditor’s petition, a sequestration order was made on 9 February 2016, and a trustee in bankruptcy was appointed to Mr Tinkler’s estate. Additionally, the court ordered that any proceedings by the trustee in bankruptcy be stayed to allow time for Mr Tinkler to appeal the decision. Today, that time lapsed and Mr Tinkler’s bankruptcy took effect.
The case highlights one of many issues that arise regarding the validity of a bankruptcy notice. Judgment creditors need to be wary in issuing bankruptcy notices generally, but particularly where they do business across borders, and they are enforcing a judgment debt that is not expressed in Australian dollars.