The temporary amendments to insolvency laws made by the Australian Federal Government in response to the challenges of COVID-19 have creditors (including credit managers) feeling somewhat discouraged regarding whether they will still be able to pursue debtors to pay judgment debts during the period the temporary amendments are in operation.

However, in our view, there is no need for anyone to feel discouraged as the temporary new laws ultimately shouldn’t affect creditors’ ability to get judgment debts paid as the primary impact of the changes only relates to the issue of statutory demands and bankruptcy notices.

The new COVID-19 insolvency law rules¹ are currently only intended to apply until 25 September 2020. Therefore, subject to any decision by the Australian Government to extend the changes, after 25 September 2020, the former rules regarding statutory demands and bankruptcy notices will be reinstated.

Creditors who favour issuing statutory demands and bankruptcy notices may need to rethink their usual strategy until 25 September 2020. However, creditors should also consider what steps they may wish to take during the intervening period bearing in mind the period may be extended. That is, where the relevant debt meets the temporarily increased threshold amounts² a creditor may wish to issue a statutory demand or bankruptcy notice sooner rather than later to avoid any further delays if the temporary changes are extended beyond 25 September 2020.

To avoid debts accruing during the 6 month period and, in particular, if those debts are less than the temporarily increased threshold amounts, creditors can look at various underutilised enforcement options as an alternative to statutory demands or bankruptcy notices.

This article is a snapshot of some of the most effective avenues available to creditors to enforce a judgment debt. Whilst this article focuses on the position in Queensland, substantially similar options exist in all other Australian states and territories.

Statement of Financial Position/Enforcement hearing

The first step after a judgment is obtained is to ascertain the financial position of the debtor. This can be done by serving a Court document called a ‘Statement of Financial Position’ on the debtor.

A Statement of Financial Position is a comprehensive document which requires the completion of numerous questions relating to the debtor’s assets and liabilities including, for instance, whether the debtor owns any real and personal property (and the particulars of any security on the property), whether the debtor is owed money from a third party, the debtor’s wage (if employed), whether the debtor has any dependants, other debts such a credit card debts owed by the debtor and the debtor’s weekly living expenses. An online version of the Statement of Financial Position form for use in the Supreme, District and Magistrates Courts throughout Queensland can be found here.

To encourage debtors to honestly and accurately complete the Statement of Financial Position it must be signed by the debtor on oath or affirmation (i.e. requiring a Justice of the Peace, Solicitor or other suitably qualified witness to witness the debtor’s signing of the document) and it must be accompanied by supporting documents to substantiate the figures in the document.

If the Statement of Financial Position is not completed within 14 days (or not completed to creditor’s satisfaction within 14 days) then the creditor can apply for an enforcement hearing where the debtor will be examined on oath (i.e. in the witness box) about their assets and liabilities. In our experience, debtors who can access funds to make an offer to settle their debt will do so to avoid being examined in Court under oath.

The information in the Statement of Financial position will provide guidance as to which enforcement option will be most effective in getting the judgment debt satisfied (the options of which are set out below). Otherwise, this information may give a creditor a better idea of whether they are simply “throwing good money after bad” if the debtor appears to have little to no assets and large debts.

Enforcement warrant - seizure and sale of property

If the debtor owns any real property or personal property, a creditor can apply for an enforcement warrant for the seizure and sale of the debtor’s property.

This type of warrant authorises the Court appointed bailiff (often referred to in other states and territories as a Sheriff) to enter the debtor’s property and seize and sell the debtor’s real and/or personal property by public auction. The auction proceeds are applied to the judgment debt and associated expenses, less any existing mortgage or charge.

Once the warrant is issued by the Court, the Court appointed bailiff takes steps to sell the property and, importantly, the bailiff is in consistent contact with the debtor throughout this process (opening up a line of communication for negotiations).

After the warrant is issued, a writ is then registered against real property owned by the judgment debtor. This is helpful where the debtor is selling the property and the judgment creditor does not have a caveatable interest in the property.

In our experience, the possibility that the debtor may lose his or her home (or other significant asset) often creates enough leverage to get the debtor to pay the debt prior to the sale taking place.

Enforcement warrant - redirection of earnings/ garnishee order

If the debtor earns a significant wage, another option is an ‘enforcement warrant- redirection of earnings’, sometimes referred to as a garnishee order. This type of warrant directs the debtor’s employer to redirect part of an enforcement debtor’s earnings to the creditor. This is particularly useful where the debtor appears to have a substantial income but no substantive assets.

In considering whether to grant this enforcement warrant, the Court will have regard to evidence of the debtor’s employment, living expenses and other liabilities and if the amount the creditors seeks to have redirected will impose unreasonable hardship on the debtor.

Enforcement warrant - redirection of debt 

It is often the case that a debtor is owed money by a third party (which may even be the reason why the debtor hasn’t been able to pay you as a creditor). For example, a third party may owe the debtor money relating to outstanding invoices, money in a bank account, rent due to the debtor or the debtor may be expecting an insurance payout.

In these circumstances, the Court may issue an ‘enforcement warrant- redirection of debt’ which authorises the redirection of the debt owed by the third party to the debtor, directly to the creditor. The main requirements to obtain this type of warrant are that the debt payable by the third party to the debtor must be a specific debt and it must be “certainly payable” to the debtor.

Charging orders

A judgment creditor may apply to the QSC for a charging order over certain types of property held by the debtor. That property includes the debtor’s legal or equitable interest in annuities, debentures, stocks, bonds, shares, marketable securities and interests in managed investment schemes.

The charging order creates an equitable charge over the eligible property of the debtor and entitles the creditor to the same remedies as the creditor would have had if the equitable charge had been made in the creditor’s favour by the debtor. However, the creditor cannot take steps to recover its debt from the charged property until 3 months after service of the charging order upon the debtor.

This type of order prohibits the debtor from selling, transferring or otherwise dealing with the charged property and enables the Court to set aside any purported transfer or sale made in contravention of the order.

However, this type of application is narrower in scope that the warrants referred to above and more costly as it can only be made in proceedings in the QSC³. It therefore should only be considered where the debt is substantial and the debtor holds a substantial amount of eligible assets.

Implications

In these unprecedented times, the Government’s temporary amendments to insolvency laws have certainly impacted creditors’ use of statutory demands and bankruptcy notices. However, as set out above, there are a number of effective enforcement avenues available to creditors while they await the anticipated return to business as usual.

If you would like further information about enforcing a judgment debt in any jurisdiction in Australia, in particular during the operation of the temporary amendments to the insolvency legislation, please do not hesitate to contact us.

¹ Specifically found in Schedule 12 to the Coronavirus Economic Response Package Omnibus Act 2020 (Cth)

² The temporarily increased statutory minimum for both statutory demands and bankruptcy notices is $20,000

³ Charging orders in other states and territories extend to other assets including money on deposit in a financial institution including money held on trust for the debtor and funds paid into Court.