BMW v Collett
[2005] FMCA 801
•17 June 2005
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| BMW v COLLETT | [2005] FMCA 801 |
| BANKRUPTCY – Creditor’s Petition – Objection to Petition – Bankruptcy Notice defect – calculation of interest – allowance for credits – effective adjustment to default judgment by increasing debt – substantive or formal defect. |
| Bankruptcy Act 1966, s.306(1) Federal Court Rules, O.77, r.11(2) |
| Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 Australian Steel Co (Operations) Pty Ltd v Lewis (2000) 109 FCR 33 Project Blue Sky Inc. v Australian Broadcasting Authority (1988) 194 CLR 355 Marshall v General Motors Acceptance Corporation Australia (2003) 199 ALR 109 St George Wholesale Finance Pty Ltd v Spalla (2001) 181 ALR 682; BC2000004668; [2000] FCA 1094 SGRO v Liberty Funding Pty Ltd (2004) 207 ALR 625 |
| Applicant: | BMW AUSTRALIA FINANCE LIMITED |
| Respondent: | LINDA MARGARET COLLETT |
| File Number: | MLG 1358 of 2004 |
| Judgment of: | O’Dwyer FM |
| Hearing date: | 16 March 2005 |
| Delivered at: | Melbourne |
| Delivered on: | 17 June 2005 |
REPRESENTATION
| Counsel for the Applicant: | Mr T Ellis |
| Solicitors for the Applicant: | Wisewoulds |
| Counsel for the Respondent: | Mr P Fary |
| Solicitors for the Respondent: | Mills Oakley Lawyers |
ORDERS
The Applicant’s Petition presented on 21 October 2004 is dismissed.
The Applicant pay the Respondent’s costs (save for the costs of and incidential to the hearings on 1 February 2005, 21 February 2005 and
7 March 2005) to be assessed on the Federal Court Scale to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 1358 of 2004
| BMW AUSTRALIA FINANCE LIMITED |
Applicant
And
| LINDA MARGARET COLLETT |
Respondent
REASONS FOR JUDGMENT
Introduction
This proceeding comes before the Court on the Applicant Creditor’s Petition presented on 21 October 2004 which seeks a sequestration order against the estate of the Respondent Judgment Debtor
(the Respondent). By an amended Notice filed on 21 February 2005 pursuant to O.77, r.11(2) of the Federal Court Rules the Respondent opposes the petition.
The grounds stated in the amended Notice are:
“1.The Bankruptcy Notice (No. 948 of 2004) dated 23 June 2004 contains the following defects or irregularities:
a. The Applicant has failed to comply with the requirement in Note 2 of the prescribed Form 1 that the interest calculation schedule set out “… the principal sum on which, the period for which…” the interest is being claimed.
b. The Applicant has allowed in Column 5 of the Schedule an amount of $6,031.65 in respect of “The payments made and/or credits allowed since the date of judgments or orders” (emphasis added) but in the interest calculation schedule it applies the credits as if they arose on the date of the judgment or orders.
c. The amount of “… payments made and or/credits allowed…” (emphasis added) in Column 5 of the Schedule is incorrect upon the basis that it fails to give credit or sufficient credit for the Jaguar(sic) vehicle which was sold by the Applicant.
2.The matters set out in paragraph 1 herein:
a. Constitute a failure by the Applicant to comply with a matter made essential by the Bankruptcy Act 1966.
b. Alternatively, are reasonably capable of misleading the Respondent.
3.The Creditor’s Petition dated 21 October 2004 contains the following defects or irregularities:
a. The Applicant has failed to comply with the prescribed Form 150 which requires it to provide, in paragraph 1, a “Statement of reason for and details of the debt”. However, paragraph 1 of the Creditor’s Petition specifies that “The respondent debtor owes the applicant creditor the amount of $92,528.40 pursuant to a judgment obtained in the County Court of Victoria at Melbourne on 17 November 2003”. The sum of $92,528.40 is the total amount outstanding pursuant to the Bankruptcy Notice being $86,742.60 which is the balance of the judgment debt together with additional interest on the judgment debt of $5,785.80.
b. The Applicant has failed to comply with the prescribed Form 150 which requires the Applicant to “Give full details of the act of bankruptcy… on which you are relying, including details of any judgment on which a bankruptcy notice is founded”. However, paragraph 4 of the Creditor’s Petition does not include details of the judgment upon which the Bankruptcy Notice is founded.
4.The matters set out in paragraph 3 herein:
a. Constitute a failure by the Applicant to comply with a matter made essential by the Bankruptcy Act 1966.
b. Alternatively, are reasonably capable of misleading the Respondent.”
Background
On 18 September 2003, the Applicant commenced proceedings in the County Court of Victoria against Ms Collett and David Collett claiming $92,210.82 pursuant to hire purchase agreements in respect of a BMW motor vehicle and a Jaguar motor vehicle.
Paragraph 10 of the Statement of Claim provides:
“10. The amounts currently due and payable by the Defendants to the Plaintiff pursuant to each agreement are as follows:
(a) BMW Agreement:
Payout figure valid to 12 September 2003 $30,097.63
(b) Jaguar Agreement
Balance owing at repossession date $203,735.11
Less Interest/Duty Rebate $ 29,381.92
Less Estimated Resale Value $118,000.00 $56,353.19
(c) Additional Expenses to Date:
Repossession/agents costs $ 1,760.00
Legal expenses incurred $ 2,000.00 $ 3,760.00
TOTAL OWING $90,210.82”
On 17 November 2003, the Applicant entered judgment against
Ms Collett for the amount of $92,774.25.
In December 2003, the Applicant sold the Jaguar vehicle for $109,072.10.
In January 2004, the Applicant sold the BMW vehicle for $14,959.55.
On 23 January 2004, the Official Receiver issued the Bankruptcy Notice on the application of the Applicant against Ms Collett claiming $92,528.40.
The Schedule to the Bankruptcy Notice provides the following calculation:
Column 1 Column 2 1. Amount of judgment or orders $92,774.25 plus 2. Legal costs if ordered to be paid and a specific amount was not included in the judgments or orders
(See Note 1, below)$ plus 3. If claimed in this Bankruptcy Notice, interest accrued since the date of judgments or orders
(See Note 2, below)
($5,785.80) 4. Subtotal $98,560.05 less 5. Payments made and/or credits allowed since date of judgments or orders ($6,031.65) 6. Total debt owing $92,528.40
Mr Stockdale, solicitor for the Applicant, has explained in an affidavit sworn by him on 16 February 2005 (the Stockdale Affidavit) how he arrived at the figure of $6,031.65 in the schedule:
“5. The Jaguar and BMW were eventually sold on behalf of the Applicant during December 2003 and January 2004 respectively, with the Applicant receiving net proceeds at different dates in January 2004 of $109,072.10 for the Jaguar (being a sum $8,927.90 less than the previous estimate provided for in the Writ) and $14,959.55 for the BMW.
6. After taking into account the $8,927.90 additional shortfall in the amount owing in respect of the Jaguar after its sale, crediting of the net sale proceeds from both vehicles resulted in an overall reduction of $6,031.65 in the debt amount owing by the Respondent to the Applicant, and therefore a credit in that net amount was applied to her benefit against the total of the County Court judgment debt. [*Subsequently when the Applicant's bankruptcy notice was issued, interest was calculated only on the reduced judgment balance of $86,742.60 (being the original judgment total of $92,774.25 less the credit of $6,031.65) from the date of judgment (even though the sale proceeds were received later and therefore the Applicant would have been entitled to claim additional judgment interest until the dates of receipt of the respective sale proceeds) – which was done specifically to avoid any potential confusion about how the interest was calculated.
As a result, if anything there the bankruptcy notice understates the interest to which the Applicant would be strictly entitled].”
Defects in Bankruptcy Notices
The general approach to the question of defects in Bankruptcy Notices and what effect such defects have was considered in Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71. That case considered the question of whether an understatement of interest invalidated a notice. In holding that the understatement did not, the High Court approached the question of invalidity in the following way:
“Three questions arise as to the validity of the bankruptcy notice in this case: are they defective or irregular; if so, is the defect or irregularity substantive or formal; and if it is formal only, has it occasioned substantial and irremediable injustice?”
In relation to the question of whether the defect or irregularity was substantive or formal, the majority stated (at pp. 79-80):
“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: James v FCT (1955) 93 CLR 631 at 644; [1956] ALR 79; Pillai v Comptroller of Income Tax [1970] AC 1124 at 1135. In such cases the notice is a nullity whether or not the debtor in fact is misled: Re a Judgment Debtor [1908] 2 KB 474 at 481.”
In the Full Court decision of Australian Steel Co (Operations) Pty Ltd v Lewis (2000) 109 FCR 33, when considering whether the interest provision in the notice was an essential one, the majority held it was and that a Bankruptcy Notice issued in breach of that requirement was invalid.
In deciding the interest provision requirement was essential, the majority applied a purposive test for validity, taken from the High Court decision in Project Blue Sky Inc. v Australian Broadcasting Authority (1988) 194 CLR 355. The majority in Australian Steel stated (at page 45):
“In our view the purpose of the requirement that the source of the creditor’s entitlement to interest be stated can only be to enable the debtor to verify that the amount claimed is in fact due.
The same purpose lies behind the requirement that a copy of the judgment relied on be attached to the notice. Bankruptcy Notices can be served anywhere in Australia, a country with 10 separate court jurisdictions, containing some 22 levels of courts, each with its own statutory foundation, quite apart from tribunals and other bodies with power to make enforceable orders for the payment of money. The applicable interest rate can often be a matter of dispute: see for example EMCL Pty Ltd v Esanda Finance Group Ltd [1999] FCA 978; BC9904104 at [58] et seq. That case dealt with the different issue of an award of interest by a court at the time of judgment, but it illustrates the potential for confusion and uncertainty as to applicable rates of interest in litigation in a multi-jurisdictional country. The form prescribed by the regulations provides the answer. Having regard to the purpose behind the requirement that the provision under which interest is being claimed, and correctly claimed, be included in the notice, that requirement is made essential by the Act, and a notice issued in breach of the requirement will be invalid.”
This approach has been affirmed by another Full Court in Marshall v General Motors Acceptance Corporation Australia (2003) 199 ALR 109.
Contentions
By her Notice of Opposition, the Respondent Debtor contends that she has identified defects in the Bankruptcy Notice which, in the alternative, are either fatal to the petition because they fail to comply with a matter made essential by the Bankruptcy Act 1966 (the Act) or are capable of misleading her.
In calculating the credit to be given, as set out in the Stockdale affidavit, the Applicant made an adjustment for the sale price actually realised for the Jaguar ($109,072.10), which was less than anticipated and allowed for in the default judgment ($118,000.00), and credited back the sale price ($14,959.55) realised for the BMW for which no allowance had been made in the default judgment. The net result was a credit to the Respondent of $6,031.65.
Row 5 of the prescribed form of Bankruptcy Notice requires the creditor to set out:
“Payments made and/or credits allowed since date of judgments or orders”
The Respondent contends that the Bankruptcy Notice is invalid by reason of the following:
(a)The Applicant has allowed in row 5 of the Schedule an amount of $6,031.65 in respect of “The payments made and/or credits allowed since the date of judgments and orders”, but in the interest calculation schedule it applies the credits as if they arose on the date of the judgment. No provision has been made for interest on the judgment debt to the date of sale of vehicles and consequential adjustment for interest properly required to be paid after sale. There is simply a calculation as from the date of the default judgment as if that judgment was entered when all the parties understood the net debt due after realisation of the assets over which the loans were secured.
(b)The amount of “… payments made and/or credits allowed …” in row 5 of the Schedule is incorrect on the basis that it fails to give credit or sufficient credit for the BMW vehicle which was sold by the Applicant. The Respondent contends that the allowance made for the sale of the Jaguar vehicle in the judgment should stand unaffected, despite the fact it realised a lesser price. It is contended further that the amount realised by the sale of the BMW vehicle should be fully credited and not be discounted by the loss sustained by the sale of the Jaguar vehicle. Should the Applicant have wished to make an adjustment to the allowance given for the sale of the Jaguar vehicle in the default judgment, the default judgment should have been set aside and amended to reflect the lesser price realised. Save for that course, the Respondent contends the Applicant is bound by the anticipated value of the Jaguar vehicle as stipulated in the default judgment.
The Applicant contends that the Respondent has not been misled.
In a letter by Mr Stockdale, solicitor for the Applicant, written on
20 April 2004 to the Respondent, there was given a full explanation of how the interest was calculated and on what principal sum such calculations were made, setting out fully the adjustments made arising out of the sale of the two vehicles.
The Applicant also contends that the interest calculated is less than would have been the case should it have been done as suggested by the Respondent and therefore, any defect is a formal defect capable of being remedied by the application of s.306(1) of the Act.
The Applicant contends that the notice clearly sets out the amount to be paid to avoid an act of bankruptcy.
In written contentions and submissions at the hearing the Respondent did not address grounds 3 and 4 of the Notice of Objection. It is assumed for the purposes of this judgment that those grounds were abandoned.
Determination
In my view, there are defects in the Bankruptcy Notice and the question, taking the approach adopted in Kleinwort Benson v Crowl, is whether such defects are substantive or formal. The defects I identify are:
(a)In calculating the principal sum on which interest should be calculated, the Applicant made an adjustment to the default judgment in respect of the debt owed on the Jaguar vehicle by increasing that debt in circumstances it was not entitled to do;
(b)In calculating the principal sum on which interest should be calculated, the Applicant failed to give a full credit for the sale of the BMW vehicle; and
(c)The calculation of interest was from the date of the default judgment without giving due regard to when credits should have applied.
The first part of the enquiry into whether a defect is substantive or formal involves a consideration of whether the Bankruptcy Notice “fails to meet a requirement made essential by the Act”.
Following the decision in Australian Steel v Lewis, I am required to discern the purpose behind the requirement that is alleged to have been breached and determine whether, having regard to that purpose, it was intended that non compliance results in invalidity.
Having regard to the purpose behind the requirement to state the amount of credits and payments made (namely to inform the debtor as to how the amount claimed in the Bankruptcy Notice has been calculated), it can be inferred that the legislature intended that a Bankruptcy Notice issued in breach of that requirement be invalid. Similar considerations apply in relation to the characterisation of the interest provision requirement under consideration in Australian Steel.
In St George Wholesale Finance Pty Ltd v Spalla (2001) 181 ALR 682; BC2000004668; [2000] FCA 1094, Heerey J dismissed a petition in circumstances where the Creditor had recorded that “nil” payments made/credits allowed in circumstances where credits or payments amounting to at least $1,439,180.00 had been received.
In response to the argument that the defect was only “formal”, his Honour held at 32:
“If the Act requires a bankruptcy notice to be in the form prescribed by the regulations, and that form requires the creditor to state the payments made or credits allowed since the date of the judgment which founds the notice, and such payments or credits amounting to at least $1,439,180 have in fact been made, and a notice entirely omits that amount and claims the gross amount of the judgment, I do not see how it can be seriously argued that there has not been a failure to meet a requirement made essential by the Act or that such failure is not in respect of a substantive matter.”
The Schedule to the prescribed form of the Bankruptcy Notice makes provision for payments made or credits allowed since the date of the judgment or orders. In my view, a failure to account, or in this case, properly account, for a credit (i.e. the full sale price of the BMW vehicle) and erroneously setting off against that credit an amount lost on the realisation of the Jaguar vehicle is a failure on the part of the Applicant to comply with a requirement made essential under the Act and renders the Bankruptcy Notice a nullity. When making the adjustment it did in respect of the realised loss on the Jaguar vehicle, the Applicant was not reflecting the judgment debt as entered, but attempting to increase that base debt, in my view, improperly.
The Applicant is bound by the assessment placed by it on the value of the Jaguar vehicle when judgment was entered and is estopped from later adjusting the base level of debt set out in the judgment as it seeks to do.
Further, when interest is claimed in a Bankruptcy Notice, the Creditor is required to set out various particulars of the claim as provided in
Note 2 of the prescribed form of Bankruptcy Notice:
“Note 2: Interest accrued (item 3 of the Schedule)
If interest is being claimed in this Bankruptcy Notice, details of the calculation of the amount of interest claimed are to be set out in a document attached to the Bankruptcy Notice. The document must state:
(a) the provision under which the interest is being claimed; and
(b) the principal sum on which, the period for which, and the interest rate or rates at which, the interest is being claimed.
(NB: If different rates are claimed for different periods, full details must be shown)”
In my view, the Applicant failed to comply with Note 2 in that it failed to apply the full credit on the sale of the BMW vehicle, failed to set out the principal sum(s) on which the interest was (or ought to have been) calculated. The Applicant has failed to give sufficient credit to the Respondent for the BMW vehicle which is in itself a defect in compliance with the requirements of Note 2 to set out the principal sum on which interest is being claimed.
I am satisfied that the Applicant’s failure to comply with the requirements of Note 2 amounts to a failure to comply with a requirement made essential by the Act and that accordingly, the Bankruptcy Notice is a nullity.
It follows therefore that I reject the Applicant’s contention that any defects in the Bankruptcy Notice are merely formal and that they are overcome by reference to s.306(1) of the Act.
In respect of the Applicant’s contention that the Respondent cannot be said to have been misled having regard to Mr Stockdale’s correspondence to her I find that even should that be so, there has nonetheless been a failure to comply with essential requirements under the Act. (See also SGRO v Liberty Funding Pty Ltd (2004) 207 ALR 625)
Conclusion
On the face of the material submitted I am of the view the Bankruptcy Notice is defective in a manner where there has been failure to comply with requirements made essential by the Act. It follows therefore that the Bankruptcy Notice is invalid and the Petitioner’s application must fail.
Accordingly, I dismiss petition with costs.
I certify that the preceding thirty-seven (37) paragraphs are a true copy of the reasons for judgment of O’Dwyer FM
Associate:
Date: 17 June 2005
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