Benjamin v G.B. Franchising (In Liquidation)
[2008] FMCA 170
•26 February 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| BENJAMIN v G.B. FRANCHISING (IN LIQUIDATION) | [2008] FMCA 170 |
| BANKRUPTCY – Application to set aside bankruptcy notice – whether service of a bankruptcy notice by email effective – whether a company can be the creditor for the purposes of a bankruptcy notice where the order relied upon was in favour of the a natural person “in his capacity as liquidator of the company” – whether bankruptcy notice misleading – whether bankruptcy notice would cause a substantial injustice. |
| Bankruptcy Act 1966, ss.40(1)(g), 40(3), 41(2), 41(3), 306(1) Corporations Act 2001, ss.471A(1), 477(2)(a) Bankruptcy Regulations 1996, r.4.02 |
| Adams v Lambert (2006) 228 CLR 409 James v Commissioner of Taxation (1955) 93 CLR 631 Re Winterbottom; Ex parte Winterbottom (1886) 18 QBD 446 Van Reesema; Ex parte Australian Growth Resources Corporation Pty Ltd (1987) 75 ALR 311 |
| Applicant: | JOHN ROBERT BENJAMIN |
| Respondent: | G.B. FRANCHISING (IN LIQUIDATION) (ACN 105 196 389) |
| File Number: | MLG 1401 of 2007 |
| Judgment of: | Riley FM |
| Hearing dates: | 12 & 14 December 2007 |
| Date of Last Submission: | 21 January 2008 |
| Delivered at: | Melbourne |
| Delivered on: | 26 February 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr Cooke |
| Solicitors for the Applicant: | Poulton Elliot & Grey |
| Counsel for the Respondent: | Mr Wilson |
| Solicitors for the Respondent: | Williams Love & Nicol |
ORDERS
That bankruptcy notice number 36/07 be set aside.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 1401 of 2007
| JOHN ROBERT BENJAMIN |
Applicant
And
| G.B. FRANCHISING (IN LIQUIDATION) (ACN 105 196 389) |
Respondent
REASONS FOR JUDGMENT
Background
This is an application to set aside a bankruptcy notice. The notice was based on an order of the Supreme Court of the Australian Capital Territory that:
The respondent, John Benjamin, is to pay the applicant the sum of $82,507.97 so as to render the Company solvent.
The order was made in a proceeding that was said to be:
In the matter of GB Franchising Pty Ltd (In liquidation) (ACN 105 196 389) …(“the Company”)
The applicant, in the title of the proceeding, was:
Frank Lo Pilato in his capacity as Liquidator of the Company.
The bankruptcy notice is addressed to John Benjamin and states his address but does not expressly identify him as the debtor. Paragraph 1 of the bankruptcy notice reads:
GB FRANCHISING PTY LTD (IN LIQUIDATION) (ACN 105 196 389) claims that you owe the creditor a debt of $82,557.70, as shown in the Schedule.
The difference between the amount ordered to be paid and the amount claimed in the bankruptcy notice consists of interest. There is no issue about that. However, paragraph 1 of the bankruptcy notice does not say that GB Franchising Pty Ltd (In liquidation) (ACN 105 196 389) (“the company”) is the creditor, or otherwise indicate who the creditor is. Towards the end of the bankruptcy notice, it is said that:
The person who applied for this notice to be issued is:
Mr Frank Lo Pilato in his capacity as the duly appointed Liquidator of GB Franchising Pty Ltd (In Liquidation) (ACN 105 196 389)
who confirms by the following signature that he or she is the creditor/the creditor’s authorised agent
The notice does not say whether Frank Lo Pilato is the creditor or the creditor’s authorised agent. It appears to have been signed by Frank Lo Pilato. He gives his address for service as a firm of solicitors. Paragraph 4 of the notice says that payment of the debt can be made to those solicitors, whose name and address is given.
Statutory provisions
Subsection 41(2) of the Bankruptcy Act 1966 (“the Act”) provides that a bankruptcy notice “must be in the form prescribed by the regulations.” Regulation 4.02 of the Bankruptcy Regulations 1996 (“the regulations”) provides that:
Form of bankruptcy notices
(1) For the purposes of subsection 41 (2) of the Act, the form of bankruptcy notice set out in Form 1 is prescribed.
(2) A bankruptcy notice must follow Form 1 in respect of its format (for example, bold or italic typeface, underlining and notes).
(3) Subregulation (2) is not to be taken as expressing an intention contrary to section 25C of the Acts Interpretation Act 1901.
NoteUnder section 25C of the Acts Interpretation Act 1901, where an Act prescribes a form, then, unless the contrary intention appears, strict compliance with the form is not required and substantial compliance is sufficient; see also paragraph 46 (1) (a) of that Act for the application of that Act to legislative instruments other than Acts.
Form 1 begins as follows:
BANKRUPTCY NOTICE
This Bankruptcy Notice is prescribed, under subs. 41 (2) of the Bankruptcy Act 1966 ('the Act'), by r. 4.02 of the Bankruptcy Regulations.
Note Words appearing below in italics are for guidance in the completion of this Notice, and are not to be reproduced in the Notice.
To: ( name ) __________________________ ('the debtor')
of: ( address ) __________________________
__________________________
__________________________
This Bankruptcy Notice is an important document. You should get legal advice if you are unsure of what to do after you have read it.
1. ( name ) _________________________ ('the creditor')
of: ( address ) __________________________
__________________________
__________________________
claims you owe the creditor a debt of $ ( amount ), as shown in the Schedule.
2. The creditor claims that the debt is due and payable by you. A copy of the judgments or orders relied upon by the creditor is attached. At the time of applying for this Notice, execution of the judgments or orders had not been stayed.
3. You are required, within ( insert number in accordance with the note to this paragraph ) days after service on you of this Bankruptcy Notice:
(a)to pay to the creditor the amount of the debt; or
(b)to make an arrangement to the creditor's satisfaction for settlement of the debt.
Note The number of days to be inserted is 21 or, if an order has been made under subparagraph 40 (1) (g) (ii) of the Act, the number of days constituting the time fixed by the order.
4. Payment of the debt can be made to:
( name ) _________________________
of: ( address ) __________________________
__________________________
__________________________
Note The address must be within Australia.
In relation to the person who applied for the bankruptcy notice to be issued, Form 1 is as follows:
The person who applied for this notice to be issued is:
_________________________
( name )
who confirms by the following signature that he or she is the creditor/the creditor's authorised agent *:
(* delete as appropriate )
_________________________
( signature )
Sub-section 306(1) of the Act provides that:
Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.
Authorities
It is well established that a bankruptcy notice that could reasonably mislead the debtor is invalid, even if the debtor was not in fact misled: James v Commissioner of Taxation (1955) 93 CLR 631 at 644. For the purposes of s.306 of the Act, a bankruptcy notice is a proceeding under the Act: Adams v Lambert (2006) 228 CLR 409. In that case, the High Court said unanimously that:
[18] In its application to a bankruptcy notice, s 306 assumes the possibility of some failure to comply with a statutory requirement; that is, some defect or irregularity. In the present case, if there had been no failure to comply with a requirement of the Act and Regulations, there would be no issue as to the effect of s 306. In the event of such a failure, it must be asked whether the defect or irregularity is a formal defect or irregularity within the purview of s 306. If it is, then it becomes necessary to consider whether substantial injustice has been caused by the defect or irregularity, and whether the injustice cannot be remedied by an order of the court. The questions whether the defect or irregularity is a formal defect or irregularity, and whether substantial injustice has been caused and cannot be remedied, are separate and distinct, the latter question arising only if the former is answered in the affirmative. It may be accepted that, if a defect could cause substantial injustice, it may not easily be classified as a formal defect or irregularity. But the absence of claimed injustice does not conclude the separate question that arises under s 306 about whether the defect or irregularity is a formal defect or irregularity. Neither in Lewis (where the provision under which the interest was being claimed was stated to be s 101 of the Supreme Court Act 1986 (Vic) whereas it should have been s 100(7) of the Magistrates' Court Act 1989 (Vic)) nor in the present case was it suggested that substantial injustice had been caused by the defect or irregularity.
…
[24] The composite expression "a formal defect or an irregularity", in its application to a bankruptcy notice, conveys a meaning with elements of both inclusion and exclusion. A failure to comply with a requirement, to be found in the Act, imposed by reference to the regulations as to information to be furnished by the notice, is a defect or irregularity. So, in Kleinwort Benson Australia Ltd v Crowl, an erroneous statement of the amount of interest owing on a judgment debt was a defect or irregularity. What is excluded from the section is a defect or irregularity of such a nature that, reading s 306 in the context of the whole Act, it is not "a formal defect or an irregularity". What kind, or degree, of defect is to be regarded as having such a nature?
[25] In some cases the answer to that question may be easy. In others, a difficult question of judgment may be involved. The matter for judgment was identified by this Court in Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79-81. In that case, the majority [Mason CJ, Wilson, Brennan and Gaudron JJ] contrasted the concept of a formal defect or irregularity with a defect or irregularity that renders a bankruptcy notice a nullity that cannot be saved by s 306. To describe a defect as merely formal, or to describe a notice as a nullity, is, of course, to state a conclusion, rather than the reason for reaching that conclusion. Even so, it is necessary to identify the question that arises for judgment. The majority, referring to James v Federal Commissioner of Taxation (1955) 93 CLR 631 at 644, and Pillai v Comptroller of Income Tax [1970] AC 1124 at 1135, summarised the exclusionary aspect of the meaning of "a formal defect or an irregularity" by saying [at 79]:
The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice.
…
[31] Section 306, in its application to bankruptcy notices, makes it plain that some instances of non-compliance with the requirements as to the form of a notice will not invalidate the notice. The practical significance of an error or deficiency could vary according to the circumstances of each particular case. Errors or deficiencies in compliance with requirements as to form may involve questions of degree as well as of kind. At the same time, the decision in Kleinwort Benson Australia Ltd v Crowl shows that an error may be covered by s 306 even though it involves a substantial misstatement of an amount of money. It was essential that the bankruptcy notice state the amount claimed. Was it essential that the amount be correct? Section 41(5) made it clear that an overstatement, even a large overstatement, would not necessarily invalidate the notice. This Court concluded that it was not the legislative purpose that a substantial understatement should necessarily invalidate the notice. That is to say, accurately stating the amount of interest owing was not a matter of such importance that error necessarily resulted in invalidity. In the present case, overstatement or understatement of the amount of post-judgment interest owing would not necessarily have invalidated the notice. That is part of the context in which legislative purpose is to be considered in deciding whether the reference to s 83A rather than s 85 was fatal.
[32] In Australian Steel Co (Operations) Pty Ltd v Lewis (2000) 109 FCR 33, Gyles J [at 70] accurately identified the question as whether correct completion of the form prescribed by the regulations in every respect is a requirement made essential by the Act. Bearing in mind that, in the present case, the error could not have misled the respondent as to what it was necessary to do in order to comply with the requirements of the notice, it is difficult to understand how, consistently with Kleinwort Benson Australia Ltd v Crowl, the respondent could succeed without an affirmative answer to that question. In their dissenting reasons in Lewis, Lee J and Gyles J both gave a detailed account of the 1996 amendments to the Act and Regulations. It is unnecessary to repeat what they said in that respect. Lee J concluded [at 66]:
Properly construed, the Act and Regulations do not express an intention to create a new regime of strict compliance imposed on a judgment creditor issuing a bankruptcy notice. The tenor of the Act and Regulations is not consistent with that conclusion. An attempt has been made to recast the process of issue of a bankruptcy notice in terms more understandable to a judgment debtor, but the essential requirements of a bankruptcy notice remain as they have been stated by bankruptcy legislation over many years.
[33] Lee J also said [at 68]:
It cannot be correct that amendments to the Act that left undisturbed s 41(5) and (6) which state that a notice that demands payment of a sum that is unjustified or excessive is only invalid if a debtor gives notice within a prescribed period, introduced a new regime in respect of bankruptcy notices under which a judgment debtor could have such a notice set aside where the amount claimed is due in fact and there is no prospect that the debtor could be misled as to the steps to be taken to comply with the notice. The amending Act could not have contemplated that a mistaken citation of the source of entitlement to claim interest would be a substantive defect or irregularity in the notice so as to exclude the operation of s 306 of the Act.
[34] That view of the legislative purpose is persuasive. The effect of the majority view in Lewis is to attribute to the legislature an overwhelming preference for form over substance. That should not be done. Given that s 306 relieves against the invalidating consequences of some mistakes in the preparation of bankruptcy notices, the mistake that was made in this case falls within its terms.
Accordingly, the questions that must be asked in the context of this case are:
a)whether the bankruptcy notice contains a defect or irregularity;
b)if so, whether the defect or irregularity is formal; and
c)if so, whether substantial injustice has been caused by the defect or irregularity which cannot be cured by an order of the court.
The defects relied upon
The applicant said that the bankruptcy notice is invalid because:
a)it does not identify who the debtor is and who the creditor is;
b)the order requires the debtor to pay Frank Lo Pilato but the bankruptcy notice suggests that the company is the creditor;
c)the order attached to the bankruptcy notice requires payment to Frank Lo Pilato but the bankruptcy notice appears to require payment to the company;
d)in the section describing the person who applied for the bankruptcy notice to be issued, neither “the creditor” nor “the creditor’s agent” has been deleted, with the result that the debtor does not know whether Frank Lo Pilato is claiming to be the creditor or the creditor’s agent;
e)the bankruptcy notice says that payment can be made to a firm of solicitors at a particular address, but the order requires payment to Frank Lo Pilato so as to render the company solvent;
f)the bankruptcy notice does not give the address of the company, as required by paragraph 1 of the form, although it suggests that the company is the creditor; and
g)the bankruptcy notice does not follow the judgment relied upon.
Whether the application was brought within time
However, there is a preliminary question, namely, whether the application to set aside the bankruptcy notice was brought within time. It was said that time began to run from the time when the applicant was served with the bankruptcy notice by email. If that service is not effective, the respondent accepted that the application was brought within time.
I am not satisfied on the balance of probabilities that the applicant was served with the bankruptcy notice by email. He said on oath that he did not receive the bankruptcy notice until he received it in the mail. The respondent’s solicitor said that he had served the applicant at an email address that included a misspelling. I do not accept that this dispatch constituted good service. The respondent’s solicitor also claimed that he sent a copy of the bankruptcy notice to the applicant in 2007 at an email address that the applicant admitted having used in 2003. It is possible that the email address that the bankruptcy notice was sent to was one that the applicant, by 2007, did not check often if at all. While the regulations permit service by electronic means, they do not facilitate proof of service. In all the circumstances, I am not persuaded, on the balance of probabilities, that the applicant was effectively served by email. For the purposes of establishing service, it is obviously preferable to serve bankruptcy notices personally.
Whether the bankruptcy notice should be set aside
It is clear that the bankruptcy notice contains a number of defects. Primarily, it does not expressly identify the debtor or the creditor. However, it is apparent from a fair reading of the bankruptcy notice that John Benjamin is the debtor who is required to pay the amount claimed. The lack of identification of the creditor is more problematic.
The structure of the notice suggests that the company is the creditor. Paragraph 1 of the form of the bankruptcy notice is such that the entity named in that paragraph is to be defined as the creditor. However, the bankruptcy notice in this case did not so define the entity set out in paragraph 1, namely, the company. Moreover, the bankruptcy notice in this case did not include the creditor’s address. While not including the creditor’s address would often be insignificant, the failure to include the creditor’s address in this case deprived the debtor of a means of clarifying who was alleged to be the creditor.
The difficulty with the creditor not being expressly identified is exacerbated by the fact that paragraph 1 of the bankruptcy notice suggests that the company is the creditor while the judgment relied on indicates that Frank Lo Pilato is the creditor. However, towards the end of the bankruptcy notice, Frank Lo Pilato says that he is both the creditor and the creditor’s agent. The form requires that either “the creditor” or “the creditor’s agent” be crossed out. This was not done in the present case.
These matters are clearly defects or irregularities in the sense that the bankruptcy notice does not comply with the relevant form. The defects or irregularities are formal in the sense that they reflect a departure from the requirements of the form prescribed by the regulations. The remaining question is whether they constitute a substantial injustice that cannot be cured by an order of the court. The defects or irregularities would constitute such an injustice if they could reasonably mislead a debtor.
The respondent argued that the defects or irregularities identified by the applicant could not reasonably mislead the debtor. The respondent submitted that, contrary to the applicant’s submission, Frank Lo Pilato and the company are not separate entities. The respondent relied on s.477(2)(a) of the Corporations Act 2001 which provides that a liquidator of a company may bring or defend any legal proceeding in the name of and on behalf of the company. The respondent said that Frank Lo Pilato could have brought the proceedings in the Supreme Court of the Australian Capital Territory in the name of the company. However, the fact is that he did not do so. He brought that proceeding in his own name, albeit in his capacity as the liquidator of the company.
The respondent also relied on s.471A(1) of the Corporations Act 2001 which provides that:
While a company is being wound up in insolvency … a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company.
This provision does not assist the respondent. It simply prohibits the officers of the company from exercising certain powers while the company is being wound up. Other provisions entitle the liquidator to exercise those powers. One of them is to bring proceedings in the name of the company. However, the liquidator did not use that power in this case. In my view, neither of the provisions relied on by the respondent support the argument that the company and Frank Lo Pilato, for the purposes of the bankruptcy notice, are the same entity.
The respondent then argued that Frank Lo Pilato is both the creditor and the agent for the creditor. This submission seems to be based on the view that Frank Lo Pilato is the creditor, because the order was expressly made in his favour, and the creditor’s agent, because he obtained the order as agent for the company. The corollary of that is that the company would be the creditor. The submission that two entities with different names, one a natural person and the other a corporation, could both be the creditor under the one judgment highlights the confusion that the bankruptcy notice might generate.
In my view, the defects or irregularities in the bankruptcy notice could have reasonably misled the debtor about who was claiming to be the creditor and to whom the bankruptcy notice required the debtor to pay the amount claimed. This created a substantial injustice which, in my view, could not be cured by an order of the court. It is no answer to say that the debtor could simply have paid the amount demanded to the solicitors nominated in the bankruptcy notice and that would have provided a sufficient discharge. In my view, the debtor could have had no confidence that any money he paid under the bankruptcy notice would have provided an effective discharge of the judgment debt in favour of Frank Lo Pilato.
There is a further difficulty with the bankruptcy notice. Sub-section 41(3) of the Act relevantly provides that a bankruptcy notice shall not be issued to a debtor except on the application of a creditor who has obtained the final order on which the bankruptcy notice is based or who is deemed to be such a creditor pursuant to s.40(3) of the Act. That subsection provides that a person who is entitled to enforce a final order is deemed to be a creditor who has obtained a final order for the purposes of a bankruptcy notice served under s.40(1)(g) of the Act. The company as such did not obtain the final order in this case. A question then arose as to whether the company could enforce the judgment given in favour of Frank Lo Pilato in his capacity as the liquidator of the company.
The respondent submitted in relation to this point that, given the terms of the orders that were made:
Frank Lo Pilato had to apply for the Bankruptcy Notice in his capacity as liquidator of the Company and he had to name the Company as creditor because the debt was due to the Company.
The respondent submitted that the company was entitled to enforce the order because the order was in favour of Frank Lo Pilato in his capacity as liquidator of the company. I do not accept these arguments. A company and its liquidator are separate legal entities, although the liquidator often acts as the agent of the company. I see no reason why Frank Lo Pilato in his capacity as liquidator of the company could not have applied for the bankruptcy notice to be issued and could not have been identified in the bankruptcy notice as the creditor.
In Van Reesema; Ex parte Australian Growth Resources Corporation Pty Ltd (1987) 75 ALR 311, the Full Federal Court concluded that a number of bankruptcy notices were invalid. In that case, the order relied on required payment to the receivers and managers of a company but the bankruptcy notice was issued on the application of the company. It was said at [26]:
We readily understand that it can be said, in a loose sense, that all the orders for costs were made for the benefit of the Company. But we do not think that this is a sufficient basis for holding that the orders made in the Supreme Court are a sufficient basis for the issue of the bankruptcy notices …. The orders, in terms, require the payment of costs to the receivers and managers. If the debtor, in conformity with s.41(2), had paid the costs to the receivers and managers, he would have complied with the requirements of the bankruptcy notices. The wording of s.41(2)(a)(i) of the Bankruptcy Act is unambiguous. A bankruptcy notice must require the debtor to pay the judgment debt or sum ordered to be paid "in accordance with the judgment or order". Even if it be accepted that the orders for costs were made for the benefit of the Company we do not think it can properly be said that the bankruptcy notices … required the debtor to pay the costs in accordance with the judgments or orders upon which the notices were based. They were therefore invalid.
Although the particular legislative provisions that were central to Van Reesema have been amended and moved within the Act, it seems to me that the relevant principle is unchanged. Additionally, in Van Reesema, the Full Federal Court referred to Re Winterbottom; Ex parte Winterbottom (1886) 18 QBD 446. In Winterbottom, a bank had obtained judgment against a debtor. A bankruptcy notice against the debtor was subsequently issued on the application of the liquidator of the bank. The bankruptcy notice required the debtor to pay the liquidator the amount under the order obtained by the bank. The court held that the notice was bad because it was not in the name of the bank.
The respondent accepted that the bankruptcy notice must be in the name of the entity to which the debt is due. However, the respondent argued that the debt was due to the company in this case because the order was in favour of “Frank Lo Pilato in his capacity as liquidator of the company.” I do not accept this argument. Winterbottom makes it clear that, at least where bankruptcy notices are concerned, a liquidator is not synonymous with the company of which he is the liquidator.
The respondent said that the order was not made in favour of Frank Lo Pilato personally, but only in his capacity as the liquidator of the company. However, the fact remains that the bankruptcy notice suggested that the company was the creditor when the creditor was the liquidator in whose favour the order relied upon was made. For these reasons also, the bankruptcy notice must be set aside.
Accordingly, it is unnecessary to deal with the other reasons advanced for setting aside the bankruptcy notice.
I certify that the preceding thirty (30) paragraphs are a true copy of the reasons for judgment of Riley FM
Associate: Jacinta Stute
Date: 26 February 2008
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