Best v Howle
[2011] FMCA 610
•12 August 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| BEST & ANOR v HOWLE | [2011] FMCA 610 |
| BANKRUPTCY – Notice disputing validity of bankruptcy notice – alleged overstatement of judgment debt – operation of section 41(5) of the Bankruptcy Act 1966 (Cth) – whether section 41(5) requirements met – whether bankruptcy notice rendered invalid by overstatement. |
| Bankruptcy Act 1966 (Cth), ss.33(1)(b), 41(5), 43, 44(1)(a), 52, 306 Builders’ Registration Act 1939 (WA), s.44(3) |
| Adams v Lambert (2006) 228 CLR 409; [2006] HCA 10 Australian Steel Co (Operations) Pty Ltd v Lewis (2000) 109 FCR 33; [2000] FCA 1915 Cumins v Deputy Commissioner of Taxation (2008) 172 FCR 425; [2008] FCAFC 185 Emerson & Anor v Wreckair Pty Ltd (1992) 33 FCR 581 Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 Muir v Jenks [1913] 2 KB 412 Olivieri v Stafford & Ors (1989) 24 FCR 413 Pillai v Comptroller of Income Tax [1970] AC 1124 Re Bedford; Ex parte H.C. Sleigh (Queensland) Pty Ltd (1967) 9 FLR 497 Re Riviere; Ex parte Original Mont de Piete Ltd (1919) 20 SR(NSW) 77 Roussi v Perpetual Nominees Ltd (2007) 215 FLR 216; [2007] FMCA 1994 Skouloudis v St George Bank Ltd (2008) 173 FCR 236; [2008] FCA 1765 Walsh v Deputy Commissioner of Taxation(1984) 156 CLR 337 |
| Butterworths Annotated Acts, Bankruptcy Act 1966, 2009 Edition |
| Applicant: | RICHARD JASON BEST AND MEREDITH ANNE BEST |
| Respondent: | WAYNE JOSEPH HOWLE |
| File Number: | PEG 216 of 2010 |
| Judgment of: | Lucev FM |
| Hearing date: | 24 March 2011 |
| Date of Last Submission: | 24 March 2011 |
| Delivered at: | Perth |
| Delivered on: | 12 August 2011 |
REPRESENTATION
| Counsel for the Applicants: | Mr P Patterson |
| Solicitors for the Applicants: | Taylor Smart |
| Counsel for the Respondent: | Mr M J McPhee |
| Solicitors for the Respondent: | M J McPhee |
DECLARES
That the bankruptcy notice issued 12 August 2010 is not invalid by reason of the respondent’s notice issued on or about 15 September 2010 under section 41(5) of the Bankruptcy Act 1966 (Cth).
ORDERS
The matter be remitted to a Registrar of this Court to deal with the Creditors Petition.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
PEG 216 of 2010
| RICHARD JASON BEST AND MEREDITH ANNE BEST |
Applicants
And
| WAYNE JOSEPH HOWLE |
Respondent
REASONS FOR JUDGMENT
Introduction
This is an application under the Bankruptcy Act 1966 (Cth)[1] by a married couple, Mr and Mrs Best, for a sequestration order[2] against the estate of the respondent, Mr Howle. Mr and Mrs Best filed a creditors petition against Mr Howle on 26 November 2010.[3] However, Mr Howle has issued a notice under s.41(5) of the Bankruptcy Act[4] asserting that the bankruptcy notice issued at the behest of Mr and Mrs Best[5] overstates the amount due, and is therefore invalid.
[1] “Bankruptcy Act”.
[2] Bankruptcy Act, ss.43 and 52.
[3] “Creditors Petition”.
[4] “Section 41(5) Notice”.
[5] “Bankruptcy Notice”.
Background facts
Mr and Mrs Best obtained an Order to Pay against Mr Howle in the Building Disputes Tribunal[6] on 12 March 2010 for an amount of $399,856.00, plus costs.[7] Paragraph 1 of the Order to Pay was relevantly in the following terms:
[6] “BDT”.
[7] “Order to Pay”.
Within 14 days the respondent shall pay to the complainants the sum of $399,856.00 inclusive of:
(a)The sum of $386,856.00 in respect of the necessary remedial costs associated with the construction of the extension to the existing premises and compensation for the destruction of the existing premises.
(b)The sum of $3,000.00 in respect of the remedial work to be completed to the shed.
The amounts in paragraphs (a) and (b) add up to $389,856.00, thereby making it evident that there was a typographical error in the Order to Pay the “sum of $399,856.00”.
The Order to Pay was registered with the District Court of Western Australia,[8] on 6 April 2010. Under s.44(3) of the Builders’ Registration Act 1939 (WA) the Order to Pay became a judgment of the District Court on that date. The District Court entered judgment for Mr and Mrs Best in the sum of $399,856.00 plus costs.[9]
[8] “District Court”.
[9] “First Judgment”.
On 12 August 2010, Mr and Mrs Best caused the Bankruptcy Notice to be issued. The Bankruptcy Notice was based on Mr Howle’s failure to pay the First Judgment sum of $399,856.00.
On 5 September 2010, Mr Howle was served with the Bankruptcy Notice. The Bankruptcy Notice asserted a debt owing of $408,072.22, being an amount in relation to the First Judgment, which was attached to the Bankruptcy Notice, in the sum of $399,856.00 plus interest of $8,216.22.
On or about 15 September 2010, Mr Howle’s lawyers wrote to Mr and Mrs Best’s lawyers. This was the Section 41(5) Notice, and was relevantly in the following terms:
I refer to the Bankruptcy Notice issued against my client in this matter dated 12th August 2010 and which was served on my client on the 4th September 2010.
Pursuant to section 41(5) of the Bankruptcy Act, please take notice, on behalf of your client, the judgment creditors referred to in the Bankruptcy Notice, namely Richard Jason Best and Meredith Ann [sic] Best, that objection is hereby taken to the validity of the bankruptcy notice and that my client Wayne Howle objects and disputes the validity of that Notice on the ground that there is a mis-statement in the said Notice of the amount said to be owing pursuant to the Order to Pay from the Building Disputes Tribunal dated 12th March 2010.
The dispute is that there is an overstatement on the face of the Order to Pay in the sum of $10,000. The amount ordered to be paid on the Notice is $399,856 and that is an error of the sum of $10,000, as is apparent from the Order to Pay itself.
You concede this error.
Accordingly my instructions are to say that the Bankruptcy Notice, based on the erroneous sum, in the Order to Pay, is invalid and the point will be taken, if any proceedings follow based on that Bankruptcy Notice.
On 11 October 2010 Mr and Mrs Best’s lawyers responded to the Section 41(5) Notice advising that they had written to the BDT regarding the Order to Pay. Relevantly, Mr and Mrs Best’s lawyers’ letter to the BDT pointed out that there was a typographical error in the amount payable under the Order to Pay which was stated to be $399,865.00 whereas the amount stated at paragraph 1(a) and (b) of the Order to Pay when added, totalled $389,856.00. A request was made that any error in the Order to Pay be corrected to reflect the correct amount payable.
Mr and Mrs Best’s lawyers’ letter to Mr Howle’s lawyers then proceeded to advise as follows:
We confirm the Bankruptcy Notice was served on your client on 5 September 2010. Accordingly, your client had until 27 September 2010 to file and serve an application seeking orders that the Bankruptcy Notice be set-aside or that the time for compliance with the Bankruptcy Notice be extended.
We note that your letter dated 15 September 2010 purports to be a notice pursuant to section 41(5) of the Bankruptcy Act (Cth) 1966 (“the Act”), however to date we have not been served with any application seeking to have the Bankruptcy Notice set-aside or the time for compliance with the Bankruptcy Notice extended. Accordingly, your client has committed an act of bankruptcy pursuant to section 40(g) of the Act.
With respect to the overstatement, we are of the opinion that in this matter the Court, having regard to the relevant principles, is unlikely to set-aside the Bankruptcy Notice: See Roussi v Perpetual Nominees Ltd [2007] FMCA 1994 [para 47-67] and Olivieri v Stafford & Ors (1989) 91 ALR 91.
Our clients are seeking the sum of $389,856.00 from your client, and if any overpayment occurs on your client’s part as a consequence of the error in the BDT Order, our client undertakes to refund the overpayment.
By reasons of the above, we are instructed to issue a Creditors petition against your client.
On 13 October 2010 Mr Howle’s lawyers wrote to Mr and Mrs Best’s lawyers by way of response to the 11 October 2010 letter. That letter essentially consists of matters in dispute which are now before the Court to determine.
On 26 November 2010 Mr and Mrs Best filed a Creditors Petition alleging that Mr Howle failed to comply on or before 27 September 2010 with the requirements of the Bankruptcy Notice served on him on 5 September 2010. The Creditors Petition alleged a debt of $389,856.00, that is, the correct amount of the indebtedness.
On 2 December 2010, the BDT issued an amended Order to Pay correcting the typographical error in the total sum payable under the Order to Pay.[10] The correction was in effect to reduce the amount payable by Mr Howle to Mr and Mrs Best from $399,856.00 to $389,856.00.
[10] “Amended Order to Pay”.
On 7 February 2011 Mr Howle filed a Notice Stating Grounds of Opposition to Petition in the following terms:
The Act of Bankruptcy relied upon in the creditors petition dated 26 November 2010 did not occur, as the Bankruptcy Notice relied upon, and served on 5 September 2010, is invalid by reason of the overstatement of the amount on the said Bankruptcy Notice, and notice within time pursuant to section 41(5) of the Bankruptcy Act … was provided to the Respondent’s [sic] by letter dated 15 September 2010.
On 18 February 2011, the District Court sealed the Amended Order to Pay as a judgment of the District Court.[11]
[11] “Second Judgment”.
Mr Howle has not, to date, made any application or obtained any order to have execution on the Second Judgment suspended or stayed in the District Court.
Legislation
Section 41(5) of the Bankruptcy Act, which is central to the resolution of the issues in this case, provides as follows:
(5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.
Mr and Mrs Best’s submissions
The Section 41(5) Notice
Mr and Mrs Best submit that:
a)the Section 41(5) Notice only relates to an overstatement in amounts claimed in the Bankruptcy Notice, where the amount claimed in the Bankruptcy Notice is greater by virtue of mathematical or typographical errors in calculating the amount owed;
b)section 41(5) of the Bankruptcy Act has no application where the judgment is for a greater amount than that owing by the debtor, but rather, is concerned with an overstatement in the amount owing under a bankruptcy notice and not a judgment;[12]
c)in the present case, the Bankruptcy Notice claimed the amount of the First Judgment as at the date of issuing the Bankruptcy Notice, 12 August 2010; and
d)as the Bankruptcy Notice followed the First Judgment, the Section 41(5) Notice does not invalidate the Bankruptcy Notice as the error lies in the First Judgment and not the Bankruptcy Notice.
[12] Citing Butterworths Annotated Acts, Bankruptcy Act 1966, 2009 Edition, para [80,915.55] page 135.
If s.41(5) is applicable, is the Bankruptcy Notice invalid?
Mr and Mrs Best submit that:
a)the Bankruptcy Notice must be examined as at the date it was issued,[13] and that as at 12 August 2010, the date of the Bankruptcy Notice’s issue, the First Judgment was entered against Mr Howle in favour of Mr and Mrs Best for the sum of $399,856.00, which is the same amount claimed in the Bankruptcy Notice;
b)the fact that a judgment might be reduced in the future, for any reason, does not in itself invalidate a bankruptcy notice;[14]
c)there is no principle that if a judgment is irregular, because it was entered for an excessive amount, the irregularity should necessarily invalidate subsequent bankruptcy proceedings;[15]
d)the Bankruptcy Notice is therefore valid and Mr Howle has failed to pay the amount owed to Mr and Mrs Best; and
e)Mr and Mrs Best submit that there is a real debt of $389,856.00 owing to them.
[13] Citing Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 at 339 per Gibbs CJ (with whom Mason, Brennan, Deane and Dawson JJ agreed) (“Walsh”); Emerson & Anor v Wreckair Pty Ltd (1992) 33 FCR 581 at 587 per Morling, Neaves and Spender JJ (“Wreckair”).
[14] Citing Wreckair at 587 per Morling, Neaves and Spender JJ.
[15] Cumins v Deputy Commissioner of Taxation (2008) 172 FCR 425 at 428 per North, Emmett and Rares JJ; [2008] FCAFC 185 at para.8 per North, Emmett and Rares JJ (“Cumins Appeal”).
Examining the Judgment the subject of the Bankruptcy Notice
Mr and Mrs Best submit that:
a)the Court has the discretion to go behind a judgment to see whether it can be challenged, but ought not do so if the grounds upon which a judgment is challenged would only support a finding that the amount of the debt would be reduced, and would not support a finding that there was no debt at all;[16]
b)the error in the First Judgment is typographical ($399,856.00 instead of $389,856.00), and even with the reduced amount, Mr Howle still owes Mr and Mrs Best $389,856.00, which is a real debt that is greater than the prescribed amount of $5,000.00;[17] and
c)even if the Court looked behind the First Judgment, the reduced amount is still a substantial and sufficient amount for the purposes of the Bankruptcy Notice.
[16] Citing Wreckair at 589 per Morling, Neaves and Spender JJ; affirmed in Cumins Appeal FCR at 428 per North, Emmett and Rares JJ; FCAFC at para.10 per North, Emmett and Rares JJ.
[17] Bankruptcy Act, s.44(1)(a).
Formal defect or irregularity
Mr and Mrs Best:
a)deny that there is a defect in the Bankruptcy Notice, however if the Court finds that there is a defect, then they rely upon s.306 of the Bankruptcy Act and state that the defect is an irregularity, or alternatively a formal defect, that has not caused any substantial injustice to Mr Howle, and the Court therefore has the power to amend rather than invalidate the Bankruptcy Notice; and
b)the issue of a Bankruptcy Notice is a proceeding for the purposes of s.306 the Bankruptcy Act.[18]
[18] Citing Pillai v Comptroller of Income Tax [1970] AC 1124 at 1131 per Lord Morris of Borth-y-Gest, Lord Pearson and Lord Diplock; Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 77 per Mason CJ, Wilson, Brennan and Gaudron JJ.
Any substantial injustice to the respondent
Mr and Mrs Best submit that:
a)there is no injustice caused to Mr Howle as a result of the alleged defect in the Bankruptcy Notice, as he has known at all material times, and at least from 15 September 2010 onwards, that he owes Mr and Mrs Best the sum of $389,856.00, even though the amount stated in the Bankruptcy Notice is for a greater amount;
b)they have, since being made aware of the error, only sought to recover $389,856.00;
c)Mr Howle has taken no steps to pay any amount whatsoever to them;
d)they have had to wait nearly a year to be able to obtain the fruits of the First and Second Judgments; and
e)they, rather than Mr Howle, are suffering the injustice of not being able to recover the sum owed to them by Mr Howle.
Mr Howle’s submissions
Bankruptcy Notice invalid by operation of s.41(5) of Bankruptcy Act
Mr Howle submits that the Bankruptcy Notice upon which Mr and Mrs Best rely is invalid by reason of the operation of s.41(5) of the Bankruptcy Act.
Mr Howle submits as follows:
a)the issue for determination in this matter is whether upon Mr and Mrs Best’s admission that the sum claimed in the Bankruptcy Notice is incorrect, they are entitled to rely on the Bankruptcy Notice in the Creditor’s Petition, in circumstances where a Section 41(5) Notice has issued within the required time;
b)Mr and Mrs Best’s position appears to be that as the error in the First Judgment was not corrected until after the Bankruptcy Notice was issued, the erroneous Bankruptcy Notice remains valid for the purposes of an act of bankruptcy;
c)the correct position is that once the Section 41(5) Notice was issued within the required time, and given there is no contest as to its accuracy in that it correctly stated the error in the Bankruptcy Notice, and the Bankruptcy Notice was then amended by Mr and Mrs Best, the Bankruptcy Notice is invalid and cannot be cured;
d)that Walsh:
i)is authority for the proposition that Mr Howle could not make payments, after the issue of the Bankruptcy Notice, and then seek the protection of the provisions of s.41(5) of the Bankruptcy Act; and
ii)is not authority for the proposition that Mr and Mrs Best can rely on the erroneous First Judgment, to support a Bankruptcy Notice which could no longer issue;
e)because Mr Howle could not comply with the Bankruptcy Notice, it being admitted to be erroneously overstated, and having made Mr and Mrs Best aware of the overstatement within the required time, no act of bankruptcy has occurred, and therefore the Creditors Petition should be dismissed;
f)the Amended Order to Pay reflects the sum actually awarded by the BDT ($389,856.00);
g)the Bankruptcy Notice, as served, contained a copy of the Order to Pay, for the greater amount ($399,856.00), and is therefore overstated;
h)the act of bankruptcy relied upon in the Creditors Petition is the failure to satisfy the Bankruptcy Notice, in relation to a figure Mr and Mrs Best concede is in error;
i)the Creditors Petition filed claims the lesser figure but relies on the earlier Bankruptcy Notice and the purported act of bankruptcy flowing from the same, being the failure to pay the greater sum;
j)if Mr and Mrs Best’s position is correct, it effectively renders moot:
i)the operation of s.41(5) of the Bankruptcy Act; and
ii)the very purpose of the Bankruptcy Notice;
k)in this case, as distinguishable from Wreckair, the Court is not being asked to go behind the First Judgment at all, given it has been amended, and so, unlike Wreckair, this is not a matter where the judgment in question has been overturned on appeal, but rather the First Judgment was recognised as erroneous and sought to be amended by Mr and Mrs Best;
l)there was no requirement on Mr Howle to take any step in respect of the erroneous First Judgment, as Mr and Mrs Best themselves sought to amend the First Judgment;
m)the Bankruptcy Notice, which is based on the erroneous First Judgment, should be considered to be in error and invalid;
n)Cumins Appeal is distinguishable as no notice under s.41(5) of the Bankruptcy Act was issued in that case within the required time;
o)in this case, the Section 41(5) Notice issued within time, making Mr and Mrs Best aware of the error on the Bankruptcy Notice, and the error was not contested;
p)Mr and Mrs Best are seeking to have the Bankruptcy Notice amended, without application, by simply claiming the lesser sum on the Creditors Petition; and
q)the suggestion that the Bankruptcy Notice is a proceeding under the Bankruptcy Act in these circumstances is erroneous. In the event a Section 41(5) Notice is issued correctly, and within time, the Bankruptcy Notice is invalid ab initio, and it is therefore not possible to cure the defect in the Bankruptcy Notice.
Formal defect or irregularity
Mr Howle submits that if the Bankruptcy Notice is invalid, it cannot be amended, or cured, under s.306 of the Bankruptcy Act.
Case law - section 41(5) and the effect of an overstatement
As indicated above, s.41(5) of the Bankruptcy Act is central to the resolution of the issues in dispute.
In Re Bedford; Ex parte H.C. Sleigh (Queensland) Pty Ltd[19] the Queensland Supreme Court, having found that the judgment and bankruptcy notice were for an amount (4,227l 17s 8d) in excess of the debt due (3,927l 17s 8d), said that:
Nowhere in the judgments in that case can I find any statement that suggests that if a judgment for an excessive amount is not set aside, bankruptcy proceedings founded on it are bad, nor can I see in principle why if a judgment is irregular for this reason it should necessarily invalidate subsequent bankruptcy proceedings. The company in the present case has obtained a final judgment which has not been set aside and which, although irregular, is not null. My inquiry has shown that the judgment was founded on a real debt. A bankruptcy notice in the prescribed form was served. The amount stated in the notice was excessive but this does not invalidate the notice …. The act of bankruptcy … has therefore been proved.[20]
[19] (1967) 9 FLR 497 (“Bedford”).
[20] Bedford at 499 per Gibbs J. Bedford was decided under earlier Commonwealth bankruptcy legislation, however, that legislation, although different in form was substantively to the same effect as s.41(5) of the Bankruptcy Act. The case referred to in the first sentence is Muir v Jenks [1913] 2 KB 412.
In Walsh the High Court said:
There is no doubt that a bankruptcy notice will be invalid if the sum specified in the notice as the amount due to the creditor exceeds the amount for which the creditor is entitled to issue execution, provided that the debtor gives timely notice under s. 41(5) of the Bankruptcy Act 1966 (Cth), as amended, that he disputes the validity of the notice on that ground.[21]
and
… the [bankruptcy] notice must be understood as speaking as at the date of its issue and the requirements of the notice, for the purposes of s.40(1)(g) of the Bankruptcy Act, must be ascertained in that context. This reinforces the view that the amount which must be correctly stated is the amount of the judgment debt owing at the date of issue.[22]
[21] Walsh at 339 per Gibbs CJ (with whom Mason, Brennan, Deane and Dawson JJ agreed).
[22] Walsh at 340 per Gibbs CJ (with whom Mason, Brennan, Deane and Dawson JJ agreed).
Olivieri v Stafford & Ors[23] is a judgment of a Full Court of the Federal Court in which the appellant contended that that the amount of a final judgment in the District Court of New South Wales, being $19,318.93, which was the same amount as the debt said to be owing under the bankruptcy notice, was overstated by an amount of $389, and that the bankruptcy notice was therefore invalid. The appellant had failed in an application to the District Court of New South Wales to set aside the final judgment. The majority in Olivieri upheld the validity of the bankruptcy notice and dismissed the appeal. A number of propositions emerge from the separate majority judgments, including that:
a)a court exercising bankruptcy jurisdiction has power to “go behind” the judgment relied on to found the bankruptcy notice so as to inquire into the existence of the alleged debt,[24] and does so on the basis that a bankruptcy notice which has been “issued for a debt which is liable to be set aside or varied such that the creditor does not have a debt upon which the bankruptcy proceedings can be founded” does not give effect to the provisions of the Bankruptcy Act;[25]
b)if the judgment relied upon to found the bankruptcy notice is a default judgment, the court exercising bankruptcy jurisdiction “will always “go behind” the judgment if there is what it regards as a bona fide allegation that no real debt “lay behind” the judgment”;[26]
c)the judgment stands as prima facie evidence of a debt until a court exercising bankruptcy jurisdiction goes behind the judgment;[27]
d)if a court exercising bankruptcy jurisdiction goes behind the judgment relied upon, the examination of whether there is a bona fide debt “extends to every aspect of the parties dealings”, and not merely limited transactions selected by creditor or debtor;[28]
e)a bankruptcy notice which accurately states the amount of a judgment, which a court exercising bankruptcy jurisdiction has not gone behind, does not overstate the amount due;[29] and
f)a court exercising bankruptcy jurisdiction will only reconsider the judgment relied on to found the bankruptcy notice to determine whether the bankruptcy notice should be set aside, and not merely to ascertain if the judgment debt should be reduced,[30] and hence the court should not go behind a judgment where “to do so would leave a substantial sum still due and owing but unpaid”.[31]
[23] (1989) 24 FCR 413 (“Olivieri”).
[24] Olivieri at 422 per Beaumont J.
[25] Olivieri at 429-430 per Gummow J.
[26] Olivieri at 422 per Beaumont J.
[27] Olivieri at 422 per Beaumont J.
[28] Olivieri at 424 per Beaumont J.
[29] Olivieri at 424 per Beaumont J.
[30] Olivieri at 431-432 per Gummow J, citing Re Riviere; Ex parte Original Mont de Piete Ltd (1919) 20 SR(NSW) 77 at 84 per Owen AJ.
[31] Olivieri at 432 per Gummow J.
In Wreckair the amount claimed in the bankruptcy notice to be due and unpaid was the amount of the judgment debt, but that amount was overstated by either $750 or $900 on a debt of $29,081.65.[32] On appeal to the Supreme Court of Queensland the judgment debt was reduced by the sum of $5,400. That appeal was determined after the validity of the bankruptcy notice had been argued before the Full Court of the Federal Court, but before judgment was delivered.[33] In Wreckair the Full Court of the Federal Court:
[32] Wreckair at 582, 584 and 585 per Morling, Neaves and Spender JJ.
[33] Wreckair at 586 per Morling, Neaves and Spender JJ.
a)citing Walsh said that:
i)the date as at which the inquiry whether the amount specified in the bankruptcy notice is excessive, that is whether it exceeds the amount in fact due, is the date of the issue of the bankruptcy notice; and
ii)a payment in reduction of the judgment debt made after the issue of a bankruptcy notice, but before the service of the bankruptcy notice will not invalidate the bankruptcy notice;[34]
b)said that once an act of bankruptcy has been committed, it remains an available act of bankruptcy even though the judgment on which it is based is set aside;[35]
c)found that:
i)the amount due by the appellants and the amount for which execution might issue was the amount stated in the judgment (at first instance in the Queensland District Court), and the bankruptcy notice claimed an amount in accordance with that judgment, and was therefore not for an amount exceeding that in fact due;[36]
ii)“[t]he circumstance that the amount of the judgment was subsequently reduced is not to the point”;[37] and
iii)it was not appropriate that a court exercising jurisdiction in bankruptcy, on an application to set aside a bankruptcy notice, go behind a judgment where the grounds for the application, if accepted, would only support a finding that the amount of the debt be reduced, and would not support a finding that there was in truth no debt at all.[38]
[34] Wreckair at 587 per Morling, Neaves and Spender JJ.
[35] Wreckair at 587 per Morling, Neaves and Spender JJ.
[36] Wreckair at 587 per Morling, Neaves and Spender JJ.
[37] Wreckair at 587 per Morling, Neaves and Spender JJ.
[38] Wreckair at 588-589 per Morling, Neaves and Spender JJ.
In Adams v Lambert[39] the High Court, having referred to the dissenting judgments in Australian Steel Co (Operations) Pty Ltd v Lewis,[40] said that the “view of the legislative purpose” of s.41(5) of the Bankruptcy Act that was “persuasive”[41] was that expressed in Lewis as follows:
It cannot be correct that amendments to the [Bankruptcy] 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.[42]
[39] (2006) 228 CLR 409; [2006] HCA 10 (“Adams”)
[40] (2000) 109 FCR 33; [2000] FCA 1915 (“Lewis”). The dissenting judgments were those of Lee J and Gyles J.
[41] Adams CLR at 421 per Gleeson CJ, Gummow, Kirby, Hayne, Callinan, Heydon and Crennan JJ; HCA at para.34 per Gleeson CJ, Gummow, Kirby, Hayne, Callinan, Heydon and Crennan JJ.
[42] Lewis FCR at 68 per LeeJ; FCA at para. 97 per Lee J, quoted at Adams CLR at 421 per Gleeson CJ, Gummow, Kirby, Hayne, Callinan, Heydon and Crennan JJ; HCA at para.33 per Gleeson CJ, Gummow, Kirby, Hayne, Callinan, Heydon and Crennan JJ .
In Roussi v Perpetual Nominees Ltd[43] this Court found that the bankruptcy notice did not overstate the amount due where the amount in the bankruptcy was identical to the amount of the judgment debt, and that the circumstances did not justify the Court going behind the judgment giving rise to the debt, because there would, in any event, remain a real and substantial debt owing.[44]
[43] (2007) 215 FLR 216; [2007] FMCA 1994 (“Roussi”).
[44] Roussi FLR at 230-231 per Nicholls FM; FMCA at paras 63-67 per Nicholls FM.
Cumins Appeal involved an appellant who appealed against a sequestration order made against his estate. The case involved an overstatement in the amount of the judgment debt, but was not a case involving a s.41(5) notice under the Bankruptcy Act. Whilst in Cumins Appeal the debtor argued, and the Full Court of the Federal Court agreed, that certain missed credits and garnishee interest credits ought to have been taken into account when calculating the judgment debt so as to reduce that debt,[45] the Full Court went on to observe that:
8 …, where the Court, at hearing of the petition, is satisfied that there was a real debt on which the judgment was founded, although judgment was entered for an amount greater than the sum truly owing to the judgment creditor, the Court is entitled to proceed to make the debtor bankrupt. There is no principle that if a judgment is irregular, because it was entered for an excessive amount, the irregularity should necessarily invalidate subsequent bankruptcy proceedings: Re Bedford; Ex parte HC Sleigh (Qld) Pty Ltd (1967) 9 FLR 497 at 499.
9 The judgment created a new debt which bound the appellant. Until that judgment was set aside it remained the measure of the debt payable by the appellant.
10 The bankruptcy notice speaks at the date of its issue: Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 at 339; Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 at 587 (Emerson). At that date, the judgment debt was $38,084,522.24 as recorded in item 1 in the Schedule to the bankruptcy notice. The fact that the judgment sum might be or is reduced in the future does not invalidate the bankruptcy notice: Emerson 33 FCR at 587. A court exercising bankruptcy jurisdiction may go behind a judgment, but would not do so if the grounds upon which the judgment is challenged are such that, if accepted, they would only support a finding that the amount of the debt would be reduced and would not support a finding that there was no debt at all: Emerson 33 FCR at 589. It may also be relevant if the amount of the judgment would be reduced below the statutory minimum that supports a petition: Wilson v Official Trustee in Bankruptcy [1999] FCA 1760 at [40].
11 In the present case the Court would not go behind the judgment because it is common ground that the total debt payable (excluding any sum for interest due under Order 3) at the time of the issue of the bankruptcy notice was at least over $37,980,000 and the total of the amounts in question was under $40,000. (The interest on the judgment due at the time of the issue of the bankruptcy notice was over $3,600,000.)[46]
[45] Cumins Appeal FCR at 427 per North, Emmett and Rares JJ; FCAFC at paras.5 and 7 per North, Emmett and Rares JJ.
[46] Cumins Appeal FCR at 427-428 per North, Emmett and Rares JJ; FCAFC at paras.7-11 per North, Emmett and Rares JJ.
A little later in Cumins Appeal the Full Court observed that:
The Act does not require an accurate statement of the total debt payable as a condition of validity of the bankruptcy notice: Adams v Lambert (2006) 228 CLR 409 at [31].[47]
[47] Cumins Appeal FCR at 429 per North, Emmett and Rares JJ; FCAFC at para.14 per North, Emmett and Rares JJ.
Mr Howle relied upon Skouloudis v St George Bank Ltd.[48] In Skouloudis the debtor, Mr Skouloudis, had issued a s.41(5) notice under the Bankruptcy Act alleging overstatement on the basis of a payment of more than one million dollars prior to the issuance of the bankruptcy notice by the respondent bank. After service of Mr Skouloudis’ s.41(5) notice, this Court allowed the bank to amend the bankruptcy notice to reflect the amount said be due after the payments made prior to the issuance of the bankruptcy notice.[49] The Federal Court held that the bankruptcy notice was invalid because of the overstatement, and that an invalid bankruptcy notice was not able to be amended under s.33(1)(b) of the Bankruptcy Act once a valid s.41(5) notice under the Bankruptcy Act had been served.[50]
[48] (2008) 173 FCR 236; [2008] FCA 1765 (“Skouloudis”).
[49] Skouloudis FCR at 238 per Edmonds J; FCA at para.2 per Edmonds J.
[50] Skouloudis FCR at 245-246 per Edmonds J; FCA at paras.35-36 per Edmonds J.
Consideration
In this case, and having regard to the background facts and the cases set out above, it is clear that:
a)the First Judgment created a new debt in the sum of $399,856.00 in favour of Mr and Mrs Best;
b)at the date of issue of the Bankruptcy Notice the judgment debt was $399,856.00 as stated in the First Judgment;
c)the judgment debt of $399,856.00 as stated in the First Judgment was an error, as the amount owing by Mr Howle to Mr and Mrs Best was in fact $389,856.00;
d)at the date of issue of the Bankruptcy Notice there was, in truth and reality, a debt of $389,856.00 due by Mr Howle to Mr and Mrs Best, and, as between people building a house and their builder, that is a substantial debt,
e)the debt of $389,856.00 owed by Mr Howle to Mr and Mrs Best is not disputed, and remains outstanding;
f)on the basis that the judgment debt in the First Judgment is reflected in the Bankruptcy Notice, and that there remains outstanding a substantial debt, amounting to 97.5% of the judgment debt in the First Judgment, there would be no cause to go behind the First Judgment against Mr Howle, notwithstanding that the First Judgment has been varied by the Second Judgment; and
g)the Second Judgment confirms that there is a substantial debt still owing.
In the above circumstances the Bankruptcy Notice is not rendered invalid by the Section 41(5) Notice as:
a)the Bankruptcy Notice did not at the date of its issue overstate the amount owing under the First Judgment; and
b)there was, and still is, a real and substantial undisputed debt owing which makes it unnecessary to go behind the First Judgment (which, in any event, has been varied by the Second Judgment to reflect the real and substantial undisputed debt still owing, which debt is specified in the Creditors Petition).
Skouloudis is distinguishable, and does not assist Mr Howle’s argument because in that case, unlike this case, there was an overstatement in the bankruptcy notice by reason of the payment of more than one million dollars (which was about half the debt owing) prior to the issuance of the bankruptcy notice.
In the circumstances, it is unnecessary to consider whether, under s.306 of the Bankruptcy Act, there is a formal defect or irregularity in the Bankruptcy Notice.
Conclusion
The Court has concluded that the Bankruptcy Notice is not rendered invalid by the Section 41(5) Notice. There will be a declaration accordingly.
There will be an order remitting the matter to a Registrar of this Court to deal with the Creditors Petition. In that regard, the Court notes that there has recently been a Notice of Appearance filed by Citigroup Pty Limited, as a supporting creditor.
The Court will hear the parties as to costs.
I certify that the preceding forty (40) paragraphs are a true copy of the reasons for judgment of Lucev FM
Date: 12 August 2011
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