Blanco v Employers' MUTUAL INDEMNITY Ltd - [2002] FMCA 38

FEDERAL MAGISTRATES COURT OF AUSTRALIA

BLANCO v EMPLOYERS’ MUTUAL INDEMNITY LTD & ANOR

[2002] FMCA 38

BANKRUPTCY – Review of registrar’s decision to make a sequestration order – defective bankruptcy notice – omission of reference to the Federal Court.

PRACTICE AND PROCEDURE – Whether the Court has a discretion not to set aside a sequestration order that should not have been made.

Acts Interpretation Act 1901 (Cth), s.48(2)
Bankruptcy Act 1966 (Cth), s.306
Federal Magistrates Act 1999 (Cth), s.104(2)

Atkinson v Oakleigh Holdings Pty Ltd [2000] FCA 1547
Australian Steel Company v Lewis [2000] FCA 1915
Barber v Bone Thorpe International Pty Ltd [2001] FMCA 4
BBC Hardware Ltd v Boutros (unreported, Federal Court of Australia, 6 March 1998, per Emmett J)
Bendigo Bank v Williams (2000) 98 FCR 377
Boorowa Shire Council v Booth [2001] FMCA 31
Farrugia v Farrugia (2000) 99 FCR 16
Kelly v deputy Commissioner of Taxation [2001] FCA 844
Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71
Lee v McNulty [2000] FCA 1519
Martin & Anor v Commonwealth Bank of Australia [2001] FCA 87
Shephard v Blueberry Farms of Australia (Corindi) Limited [2000] FMCA 2

Applicant:

TRACEY BLANCO

Trading as HEAVEN SENT BEAUTY CLINIC

First Respondent:

EMPLOYERS’ MUTUAL INDEMNITY (WORKERS’ COMPENSATION) LIMITED (ACN 003 201 885)

Second Respondent:

S D PASCOE

as trustee of the property of Tracey Blanco

File No:

SZ785 of 2001

Delivered on:

7 March 2002

Delivered at:

Sydney

Hearing Date:

7 March 2002

Judgment of:

Driver FM

REPRESENTATION

Solicitors for the Applicant:	Mr D Bowles Bowles Lawyers
Solicitors for the First Respondent:	Mr D McCrostie P W Turk & Associates
Solicitors for the Second Respondent:	Mr P Haylen Haylen McKenzie, Solicitors

ORDERS

The sequestration order made on 7 February 2002 is set aside.
The creditor’s petition is dismissed.
No order as to costs between the creditor and debtor.
The applicant debtor is to pay the fees and expenses incurred by the trustee to date, which are declared to be the sum of $9,000, to be paid within 42 days.
The applicant is to inform the Official Receiver in Sydney of these orders within two days of entry.

Note:Settlement and entry of these orders may be effected pursuant to the Federal Court Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SZ785 of 2001

TRACEY BLANCO
trading as HEAVEN SENT BEAUTY CLINIC

Applicant

And

EMPLOYERS’ MUTUAL INDEMNITY

(WORKERS’ COMPENSATION) LIMITED

First Respondent

S D PASCOE

as trustee of the property of Tracey Blanco

Second Respondent

REASONS FOR JUDGMENT

I have before me for determination a notice of motion filed in this Court on 13 February 2002 by the applicant Tracey Blanco, seeking orders that a sequestration order made against her on 7 February 2002 be set aside, that the creditor’s petition leading to the sequestration order be dismissed and costs. The notice of motion has been accepted as an application under s.104(2) of the Federal Magistrates Act 1999 (Cth) for review of the decision of the registrar who made the sequestration order. The application was made within the time prescribed. The application is opposed by the petitioning creditor which is the respondent to these proceedings. The trustee of the property of the applicant has been joined as the second respondent and I have given leave for him to file material in Court today and to be represented to make submissions.
The applicant advances two grounds in support of her application. The first is that bankruptcy notice NN1069/01 issued on 15 May 2001 (which gave rise to the act of bankruptcy supporting the creditor’s petition) fails to make reference to the jurisdiction of the Federal Court of Australia in bankruptcy matters. The applicant submits that by omitting such a reference the bankruptcy notice fails to comply with a requirement made essential by the Bankruptcy Act 1966 (Cth) (the “Bankruptcy Act”) and with the form of notice prescribed by the Bankruptcy Regulations. Alternatively, the applicant submits that the omission of references in the bankruptcy notice to the jurisdiction of the Federal Court of Australia was likely to confuse or mislead a debtor in the position of the applicant.
It is common ground that the bankruptcy notice in issue included a reference to the Federal Magistrates Court at paragraph 5(b) but made no reference to the Federal Court. The consequence is that paragraphs 6, 7 and 8 of the notice also refer only to the Federal Magistrates Court. This is because paragraph 5(b) of the bankruptcy notice defines “the Court” that is referred to throughout the notice. The respondent concedes that paragraph 5(b) contains an error but submits that the error is formal only and that it can be remedied pursuant to s.306 of the Bankruptcy Act.
A review of a registrar’s decision to make a sequestration order proceeds as a re-hearing of the creditor’s petition: Martin & Anor v Commonwealth Bank of Australia [2001] FCA 87. However, this matter proceeded before me on the basis that the issue of validity of the bankruptcy notice should be determined as a preliminary issue. Nevertheless, both the applicant and respondent formally read affidavits in support of or in opposition to the creditor’s petition as well as relating to this application. The trustee also formally read the affidavit of Michael John Studman relating to the administration of the property of the applicant.
It is common ground that a bankruptcy notice will be held invalid as a nullity if it fails to meet a requirement made essential by the Bankruptcy Act or if it could reasonably mislead a debtor as to what is necessary to comply with the notice: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71. The parties differ, however, on the question whether the facts in this case properly lead to a finding of invalidity. If there is no breach of a requirement made essential by the Act and the notice is not misleading, then the error can be cured under s.306.
This Court has on several occasions held that it is bound to follow the most recent pronouncement of the Full Federal Court on what elements of the prescribed bankruptcy form are essential requirements. The most recent Full Court decision is Australian Steel Company v Lewis [2000] FCA 1915. As I pointed out in Shephard v Blueberry Farms of Australia (Corindi) Limited [2000] FMCA 2 the majority judgment in Australian Steel does not mean that all elements of the prescribed form are essential. The majority in that case stated that a purposive approach should be taken to resolve the question in each case and that the application of that purposive approach would result in the same outcome in nearly all of the decisions made since 1996 on the validity of bankruptcy notices. One of the decisions identified by the majority that would have been resolved differently by the purposive approach was Farrugia v Farrugia (2000) 99 FCR 16. In that case the bankruptcy notice was held invalid because it failed to include in bold certain words in bold in the prescribed form. It follows that inconsequential departures from the prescribed form will not invalidate a bankruptcy notice.
There is nothing in Australian Steel v Lewis which clearly resolves the issue before me today. The issue has, however, come before the Federal Court on three occasions, each involving a bankruptcy notice which failed to include a reference to the Federal Magistrates Court. In Lee v McNulty [2000] FCA 1519 his Honour Moore J held that a bankruptcy notice issued prior to the amendment of the prescribed form in 2000 (which amendment required for the first time a reference to the Federal Magistrates Court) contained a formal defect only which could be cured pursuant to s.306 of the Bankruptcy Act. His Honour noted, however, that the then pending judgment in three cases (including Australian Steel v Lewis) could have a bearing upon that conclusion and went on to say that if his view were not correct s.48(2) of the Acts Interpretation Act 1901 (Cth) (“the Acts Interpretation Act”) would nevertheless operate to preserve the validity of the bankruptcy notice because the amending regulations could not operate to retrospectively invalidate an otherwise valid bankruptcy notice.
His Honour Heerey J was faced with the same situation in Atkinson v OakleighHoldings Pty Ltd [2000] FCA 1547. His Honour upheld the validity of the bankruptcy notice by reliance upon s.48(2) of the Acts Interpretation Act. Again, his Honour noted that the first element of Moore J’s decision in Lee v McNulty could be affected by the then reserved decision of the Full Court in Australian Steel Company v Lewis and expressly doubted whether that first element of Moore J’s decision was correct. His Honour said this:
…since the sole criterion of a bankruptcy notice now is that it “must be in accordance with the form prescribed by the regulations” (s.41(2)), and the sole raison d’être of the amending regulations was to require a notice to refer to the Federal Magistrates Court as well as the Federal Court, it is not easy to see why this is not a requirement “made essential by the Act”: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79. A court is not at liberty to hold that some matters expressly required to be stated are essential but others, also the subject of express requirement, are not: Bendigo Bank v Williams (2000) 98 FCR 377 at 389.
The last sentence in the quote from his Honour’s judgment was of course written prior to the judgment in Australian Steel v Lewis and does not detract from the proposition I derived from that case that not every element of the prescribed form is essential.
The only case I am aware of involving a relevantly defective notice issued after the regulations were amended is Kelly v Deputy Commissioner of Taxation [2001] FCA 844. In that case his Honour Katz J held invalid a bankruptcy notice which failed to include a reference to the Federal Magistrates Court at paragraph 5(b) of the notice. His Honour referred both to the decision of Moore J in Lee v McNulty and to the decision of Heerey J in Atkinson v Oakleigh. His Honour preferred the view taken by Heerey J in Atkinson and held that s.306 of the Bankruptcy Act could not save the bankruptcy notice because the omission of a reference to the Federal Magistrates Court was a breach of a requirement made essential by the Act in the sense used in Kleinwort Benson.
The only decision of this Court I have been referred to relevant to the issue is the decision of Federal Magistrate Raphael in Boorowa Shire Council v Booth [2001] FMCA 31. In that case Federal Magistrate Raphael was dealing with a notice issued prior to the amendment of the prescribed form and followed the decision of Heerey J in Atkinson. Boorowa Shire Council v Booth was decided after the decision of the Full Court in Australian Steel v Lewis and, in the light of that decision, Federal Magistrate Raphael felt it was necessary only to have regard to the operation of s.48(2) of the Acts Interpretation Act.
The situation is then that like Katz J, I am confronted by conflicting decisions of single judges of the Federal Court. None of those decisions was made on appeal from this Court and I am not strictly bound by them but they are of course persuasive. The trend of authority in the Federal Court, in my view, is against the validity of a bankruptcy notice which fails to make reference to both courts having jurisdiction under the Bankruptcy Act. No distinction can rationally be drawn between a bankruptcy notice which fails to include a reference to the Federal Magistrates Court and one which fails to include a reference to the Federal Court. In either case, following the purposive approach required by Australian Steel v Lewis, there is a breach of an essential requirement. This Court was given concurrent jurisdiction with the Federal Court in bankruptcy matters. Parliament intended by that legislative change to provide litigants with a choice of forum. The regulations were amended in 2000 in order to ensure that the prescribed form of bankruptcy notice included a reference to both Courts having jurisdiction. The obvious purpose for the change in the prescribed form was to ensure that debtors were made aware of the choice of forum. The omission of a reference to either Court effectively deprives debtors of that choice. Henceforth, any bankruptcy notice which fails to include a reference to both courts should be regarded as invalid.
If I am wrong in that conclusion I add that in my view the bankruptcy notice in this case was apt to mislead or confuse a debtor by omitting reference to the Federal Court. If a debtor had no prior knowledge of the jurisdiction of the Federal Court he or she may be left in ignorance of that jurisdiction or, if told of that jurisdiction, would be left to wonder whether the notice was wrong or the advice received was wrong. Similarly, if a debtor was aware of the jurisdiction of the Federal Court prior to receipt of the notice, the notice would be likely to cause the debtor doubt and perplexity. Accordingly, even if the omission of reference to the Federal Court were not a breach of an essential requirement the omission results in a misleading and confusing notice which cannot be cured by resort to s.306.
I conclude, therefore, that the bankruptcy notice in issue in these proceedings is invalid and a nullity. The applicant has committed no other act of bankruptcy. Therefore, there was no act of bankruptcy which could support the creditor’s petition. There was no basis for the sequestration order made on 7 February 2002. In the ordinary course I would in consequence set aside the sequestration order and dismiss the petition.
Mr Haylen, for the trustee, submitted to me that it was open to the Court to exercise a discretion not to grant the relief sought by the applicant, having regard to the events leading up to and following the making of the sequestration order. This presents something of an intellectual conundrum. On the one hand, the review of a sequestration order made by a registrar involves rehearing of the creditor’s petition. If there was no basis for the sequestration order then it should not have been made and ought to be set aside. On the other hand, time has moved on since the making of the sequestration order. There is authority that it is open to the Court to have regard to considerations relevant to an annulment application on the review of a registrar’s decision to make a sequestration order: BBC Hardware Ltd v Boutros (unreported, Federal Court of Australia, 6 March 1998, per Emmett J). That is what I did in Barber v Bone Thorpe International Pty Ltd [2001] FMCA 4. There will be circumstances in which it is reasonable and proper to decline to set aside a sequestration order that should not have been made in the interests of creditors, and having regard to the public policy considerations arising from the Bankruptcy Act. Such cases ought not to be common. The legislature has drawn a distinction between the review of a registrar’s decision and an annulment application. The former is subject to a short time limit while the latter can be made years after a sequestration order. Clearly, the significance of the administration of a bankrupt’s estate increases as time passes. In most cases a review application will be determined within a short time after the sequestration order is made and events following that sequestration order will not be particularly significant.
In the present case the sequestration order was made only one month ago and the conduct of the debtor has not disentitled her to the principal order that she seeks. I will, therefore, set aside the sequestration order and dismiss the petition.
The applicant also seeks her costs of this application. The respondent seeks its costs of this application and asks that no costs order be made in respect of the hearing of the creditor’s petition. The trustee seeks payment of his fees and expenses and has produced evidence that those fees and expenses are $9,000, including the costs of representation in these proceedings. The applicant has paid $5,000 into a trust account towards those fees and expenses but submits that the respondent creditor should bear the cost, given that the creditor was responsible for issuing the defective bankruptcy notice and obtaining the sequestration order based upon it. The respondent creditor submits that the applicant should bear those costs because the applicant did nothing in response to the bankruptcy notice and chose not to appear or be represented at the hearing of the creditor’s petition. The applicant only obtained legal advice and representation after the sequestration order was made.
I have decided to make no order as to costs either of these proceedings or of the creditor’s petition. I have decided that the applicant should pay the fees and expenses of the trustee which I am satisfied amount to $9,000 reasonably incurred. The applicant has been wholly successful in these proceedings but if she had appeared at the hearing of the creditor’s petition it is distinctly possible that that hearing would have been adjourned to enable her to obtain legal representation, which may well have resulted in no sequestration order being made. In addition, the creditor did not act unreasonably or irresponsibly in issuing the bankruptcy notice and pursuing a creditor’s petition based upon it. The bankruptcy notice contained an error but the creditor could not be sure until today that the error was one which invalidated the bankruptcy notice. Neither has the applicant debtor acted irresponsibly or improperly. She was unwise in failing to respond in any way to the bankruptcy notice and unwise in failing to appear at the hearing of the creditor’s petition. This case has, however, been resolved on a technical legal point of which the debtor was almost certainly ignorant. This is the first occasion in which this Court has had the opportunity to conclusively rule on the point and the proceedings therefore serve the public interest. It is nevertheless commonly the case that the debtor must bear the fees and expenses incurred by a trustee when a bankruptcy is set aside or annulled and that is the principle that I think should apply in this case.
The trustee sought payment of his fees and expenses within 28 days. I consider that time to be too short but will order payment to be made within 42 days.

I certify that the preceding eighteen (18) paragraphs are a true copy of the reasons for judgment of Driver FM

Associate:

Date: 7 March 2002