There is a common misconception from judgment debtors that should they obtain an order to pay by instalments, this will prevent the judgment creditor from enforcing its judgment. Whilst this is partially correct, there are important factors to consider especially in the context of bankruptcy and/or corporate insolvency proceedings.
Whilst it is correct that if an instalment order has been made, as long as the order is being complied with, a judgment creditor cannot proceed with further enforcement. The instalment order (during compliance) has the effect of staying enforcement until either, the instalment order is not complied with, or if the obligations under the instalment order have been completed. In the latter scenario, there would be no outstanding amount for the judgment creditor to pursue, as such, no requirement for further action.
Should the instalment order not be complied with, the judgment creditor can continue with enforcement proceedings.
However, how does an instalment order operate in the context of bankruptcy and corporate insolvency proceedings?
The answer is a question of timing.
The case law makes it abundantly clear that if an instalment order is made (and being complied with) prior to an act of bankruptcy or act of insolvency being committed, then the judgment debtor is able to rely on the stay of enforcement.
In short, when a bankruptcy notice or a statutory demand is issued, each respective document requires compliance within 21 days of the date of service. If the judgment debtor does not comply, either an act of bankruptcy (for the bankruptcy notice) or an act of insolvency (for the statutory demand) is committed by the judgment debtor.
Should either of the respective acts of bankruptcy/insolvency be committed, the judgment creditor is permitted to rely on the act of bankruptcy/insolvency to progress with a creditors petition (in the case of an individual) or winding up proceedings (in the case of a company debtor).
This issue was determined by justice markovic in ippolito v cesco, in the matter of cesco [2021] fca 656. At paragraphs [35]-[36] her honour stated the following:
[35] while the instalment orders are in place there is a stay on execution of the judgment debt. However, the instalment application was filed and the instalment orders made after the service of the bankruptcy notice, after mr cesco committed an act of bankruptcy by failing to comply with the requirements of the bankruptcy notice and after the creditors petition was presented.
[36] it is established, and did not appear to be in dispute, that if an act of bankruptcy occurs before the grant of an order staying the judgment on which the act of bankruptcy is grounded, a subsequent stay will not prevent the presentation of a creditors petition or the making of a sequestration order in the discretion of the court: see re padagas, ex parte carrier air conditioning pty ltd (1977) 30 flr 170 at 172: re schlekoff (1989) 22 fcr 407 at 408. The making of an instalment order converts a judgment debt into a debt payable at a certain future time within the meaning of section 44(1)(b)(ii) of the bankruptcy act.
In short, her honour held that the typical stay associated with an instalment order would not operate in staying bankruptcy proceedings in circumstances where the instalment order was sought and granted after an act of bankruptcy had occurred and the judgment creditor was permitted to proceed in obtaining a sequestration order.
Similarly, the same principles apply to winding up proceedings (being the equivalent enforcement method against a company judgment debtor).
In the matter of universal consultants group pty ltd [2016] nswsc 1508, his honour justice black considered a number of questions, summarised at paragraph [12] below:
[12] … The first is whether the company is solvent and the second is, if the company is not solvent, whether the court should exercise a discretion not to make a winding up order where an instalment order is in place. It should first be recognised that the plaintiff has the benefit of a presumption of insolvency arising from the company’s failure to comply with the demand. The effect of that presumption was summarised by a unanimous high court decision in australian securities and investments commission v lanepoint enterprises pty ltd (recs and mgrs. Apptd) [2011] hca 18; (2011) 244 clr 1 at [28] to the effect that:
“[w]here a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective, by an order setting it aside, the company is required to prove to the contrary of the presumption.
“noting the above, his honour held the following:
[18] it seems to me clear that the legislative purpose of the winding up provisions in the corporations act is to permit a creditor to wind up a company that is in fact insolvent, and to rely upon a presumption of insolvency arising from a creditor’s statutory demand, where the presumption of insolvency is not rebutted. I find it difficult to see why those provisions, which are plainly intended to serve a public purpose in preventing an insolvent company from continuing to trade, to the risk of its creditors generally, should be displaced by the fact that an instalment order has been made in respect of a particular debt. Plainly, if the effect of the instalment order is that the company can in fact meet its debts, including the payments due under the instalment order, as and when they fall due, then it should not be wound up. However, that is not because a winding up application in those circumstances would amount to an abuse of process, or be inconsistent with the statutory purpose, but because the company is not insolvent in that case. That is a matter which the company has not established in this application. I would, in any event, distinguish the decision in botany bay city council v parmtree pty ltd above, so far as it appears to me to involve more complex factual circumstances than the present application. The present application involves a straightforward case of a plaintiff which had the benefit of a presumption of insolvency, where a judgment debt had not been satisfied for a period, seeking to proceed to a winding up, where there is no evidence before the court which would in fact establish the company’s ability to meet the instalments which it is required to pay on an ongoing basis, and thereby establish its solvency.
In short, his honour states that the mere fact that an instalment order has been made (after an act of insolvency) does not stay the execution of the judgment. If the company was able to prove its solvency, then the court may exercise its discretion in refusing the order based on the company’s solvency. The question is in respect to the solvency of the company and not as to whether an instalment order is in place.
In our experience we see a number of judgment debtors, usually legally represented, attempt to disrupt a judgment creditors right of enforcement by obtaining instalment orders. Whilst it is true that being proactive and obtaining an instalment order will stay the enforcement of a judgment, it will not assist the judgment debtor in the event that an act of bankruptcy/insolvency has occurred.
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