Commissioner of Taxation v Hadidi
[1994] FCA 405
•23 JUNE 1994
DEPUTY COMMISSIONER OF TAXATION v MARCELLE HADIDI
No. G914 of 1993
FED No. 405/94
Number of pages - 17
Bankruptcy
(1994) 123 ALR 48
(1994) 51 FCR 453
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
BEAUMONT(1), WILCOX(2) AND HEEREY(1) JJ
CATCHWORDS
Bankruptcy - default judgment - settlement agreement - whether discharge at common law or release in equity of judgment debt in whole or part.
Bankruptcy - default judgment - settlement agreement - default of agreement - bankruptcy notice issued - effect of settlement agreement in context of bankruptcy notice - whether execution on judgment would have been stayed - whether bankruptcy notice bad.
Bankruptcy Act 1966, ss.40(1)(g), 41(2)(a), 41(3)(b).
HEARING
SYDNEY, 3 June 1994
#DATE 23:6:1994
Counsel and Solicitors Mr. M.R. Aldridge with
for Appellant: Mr. P.E. King instructed by
Australian Government Solicitor
Counsel and Solicitors Mr. R.H. Weinstein instructed
for Respondent: by Mr. M. Chahoud
ORDER
Appeal dismissed, with costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
INTRODUCTION
BEAUMONT AND HEEREY JJ This appeal from an order by Sweeney J dismissing a creditor's bankruptcy petition arises in the following circumstances:-
(1) On 7 February 1989, the appellant, the Deputy Commissioner of Taxation, obtained a default judgment in the District Court against the respondent, Marcelle Hadidi, in the sum of $48,419.49 on his claim for income tax and additional (penalty) tax and $85 for costs. On the same date, the appellant obtained a default judgment in the District Court against the respondent's husband, Toni Hadidi, in the sum of $50,760.44 on his claim for income tax and additional (penalty) tax and $85 for costs.
(2) Later in 1989, the tax agent acting for Mr. and Mrs. Hadidi approached the Australian Taxation Office with a view to negotiating a settlement of the claims made against his clients for primary and additional tax. A settlement of the dispute was reached in November 1989.
(3) The settlement was recorded in a file note made at that time by an officer of the Australian Taxation Office. It is headed 'Tony Hadidi Marcelle Hadidi' and reads as follows: "Mr Oygur (the tax agent) attended to-day (early Nov 89). Although PIF (payment in full) under a Settlement Offer of $75,000 could not be effected (Bank loan refused), Mr Oygur on behalf of the taxpayers put forward the following proposal:-
$15,000 on 9 Nov or 10 Nov 89 (Bk chq) $15,000 on 9 Dec or 10 Dec 89
$15,000 on 9 Jan. or 10 Jan. 89 (sc. 90) BAL ($30,000 on 28 Feb 90
I agreed to the Settlement Offer in those terms, for the following reasons:-
1) The Offer clears ALL Primary Tax (approx $47,000); 2) Not quite 40% of Penalties will be paid - bearing in mind that relief action extended over four (4) years; 3) Payments would be made within four (4) months - if legal proceedings were continued we would not be hearing the creditors' petition until AFTER that date; 4) If default occurs on any one payment of the arrangement, legal proceedings will be continued - T/A (tax agent) was notified to impress this upon taxpayers. Letter of confirmation to follow."
(The reference, in 3 above, to a creditor's petition is a reference to an earlier petition based on an earlier bankruptcy notice, none of which is of concern for our purposes.)
(4) Three payments, of $15,000 each, were made in November and December 1989 and in January 1990.
(5) By letter dated 14 February 1990, the Deputy Commissioner wrote to Mr. and Mrs. Hadidi's tax agent as follows: "INCOME TAX: Tony HADIDI
Marcelle HADIDI
Reference is made to your representations on behalf of the abovenamed taxpayers, with Mr R South of this office, wherein an Offer to Settle income tax due by the taxpayers was agreed to as follows:
Payments of: $15,000 on either 9/10 November 1989 $15,000 on either 9/10 December 1989 $15,000 on either 9/10 January 1990 Balance $30,000 by 28 February 1990. Receipt is acknowledged of the three payments each of $15,000.00.
You are notified that the balance sum of $30,000.00, to be paid by Bank Cheque on or before 28 February 1990, will be accepted as full and final payment of all outstanding income tax and additional tax for late payment, accrued on the taxpayers' accounts, to the year ended 30 June 1987. If you wish to discuss this matter please contact Mr Ray South on the above telephone number."
(6) The final payment of $30,000 was not made.
(7) On 12 April 1992, bankruptcy notices addressed to each of Mr. and Mrs. Haddidi were issued at the request of the Deputy Commissioner.
(8) In the case of Mrs. Hadidi, the bankruptcy notice was relevantly as follows:
"WHEREAS the Deputy Commissioner of Taxation one of whose address is 2-12 Macquarie Street Parramatta (hereinafter referred to as the 'judgment creditor') has claimed that the sum of $48,504.49 is due by you to him under a final judgment obtained by him against you in the District Court of New South Wales Parramatta on the Seventh day of February 1989 together with interest calculated at the rates prescribed in District Court Act from the Seventh day of February 1989 which at the First day of April 1992 amounts to $27,656.08 making a total of $76,160.57, the said judgment being a judgment the execution of which has not been stayed:
THEREFORE TAKE NOTICE that within fourteen days after service of this notice on you, excluding the day on which this notice is served on you, you are required -
(a) to pay the sum of $76,160.57 so claimed by the judgment creditor to the Registrar District Court N.S.W. Cnr George and Marsden Street Parramatta. (Emphasis added)
or
(b) to secure payment of the sum referred to in the last preceding paragraph to the satisfaction of the Federal Court of Australia or the judgment creditor or compound the sum so specified to the satisfaction of the judgment creditor.
..."
(9) In the case of Mr. Hadidi, the bankruptcy notice was relevantly as follows:
"WHEREAS the Deputy Commissioner of Taxation one of whose address is 2-12 Macquarie Street Parramatta (hereinafter referred to as the 'judgment creditor') has claimed that the sum of $50,845.44 is due by you to him under a final judgment obtained by him against you in the District Court of New South Wales Parramatta on the Seventh day of February 1989 being the amount of $50,845.44 and due under the said judgment since reduced by $45,000 interest amounting to $10,091.53 calculated on the daily balance of the judgment debt at the rates prescribed in the District Court Act from the Seventh day of February 1989 to First day of April 1992, making a total of $15,936.97 the said judgment being a judgment the execution of which has not been stayed: (Emphasis added)
THEREFORE TAKE NOTICE that within fourteen days after service of this notice on you, excluding the day on which this notice is served on you, you are required -
(a) to pay the sum of $15,936.97 so claimed by the judgment creditor to the Registrar District Court N.S.W. Cnr George and Marsden Street Parramatta. or
(b) to secure payment of the sum referred to in the last preceding paragraph to the satisfaction of the Federal Court of Australia or the judgment creditor or compound the sum so specified to the satisfaction of the judgment creditor.
..."
(10) After service of the bankruptcy notices upon Mr. and Mrs. Hadidi, the Deputy Commissioner presented creditor's petitions, relying upon an alleged failure to comply with the notices as acts of bankruptcy.
(11) As has been noted, Sweeney J dismissed the petition in this matter. His Honour also dismissed the petition against Mr. Hadidi. Although an appeal from this order was filed by the Deputy Commissioner in that matter also, the appeal did not proceed to a hearing as Mr. Hadidi subsequently presented a petition against himself.
THE REASONING AT FIRST INSTANCE
2. His Honour gave brief reasons in the present matter, stating that the fate of this petition turned upon the same issues as those raised in the case of Mr. Hadidi. In his reasons for dismissing Mr. Hadidi's petition, Sweeney J said:
"There was undoubtedly an agreement between the petitioning creditor and the agent of the debtors made in early November 1989, the best available evidence of which is to be found in the petitioning creditor's letter to the agent of the taxpayers dated 14 February 1990, in which he said that 'an offer to settle income tax due by the taxpayers was agreed to' and proceeded to set out the schedule of agreed payments. The debtors were notified that a payment by bank cheque of the 'balance sum of $30,000' made on or before 28 February 1990 'will be accepted as full and final payment of all outstanding income tax and additional tax for late payment, accrued on the taxpayers' accounts, to the year ended 30 June 1987'. There was no statement in that letter that, if there were any default in respect of that 'full and final payment', the whole of the agreement of early November 1989 would be struck down and the petitioning creditor would be free to proceed upon its judgments against the debtor and his wife, after giving each of them a credit of some unascertained amount in respect of the payments received, whether proportionate to their respective debts, or equally apportioned between them. The letter was also silent on the question whether interest upon the judgments was to be revived by any failure to make the final payment and if so, for any and what period.
I am satisfied that before the issue of the bankruptcy notice the Commissioner had agreed with the agent for the debtor and his wife that he would be content to accept their promises under the agreement in place of their liabilities under the judgments obtained against them. If that agreement has been broken, it is to him to seek a judgment to enforce it and, if successful, to issue a bankruptcy notice. The judgment against the debtor obtained on 7 February 1989 could not found the bankruptcy notice relied upon by the petitioner creditor (see In re a Debtor (1909) 16 Manson 205)."
(It is convenient to note at this stage that in In re a Debtor, above, in setting aside a receiving order, Bigham J, with the concurrence of Darling J said (at 206):
"The question we have to decide in this case is whether at the date when the bankruptcy notice was served - 23 October - the company had a good petitioning debt. Undoubtedly there had been in the previous March a good petitioning creditor's debt. The company had recovered final judgment for pounds 127.9s.2d against the debtor, and had issued a bankruptcy notice founded on that judgment; but after that - on 9 March - an agreement was come to by the parties under which the debtor was to give a cheque for pounds 50, and was to pay the balance of the judgment debt by quarterly instalments of pounds 8.15s. each, together with three guineas costs. The effect of that agreement was to extinguish the old debt and to substitute for it a new contract.") (Emphasis added)
THE APPELLANT'S CONTENTIONS ON THE APPEAL
3. On behalf of the appellant, it is now submitted that, on the true construction of the agreement of compromise, only the making of the final payment of $30,000, and not merely the giving of the promise to make the payment, could operate to discharge the liability of Mrs. Hadidi to pay the full amount due under the judgment obtained against her; that is, the argument runs, an effective accord and satisfaction could not arise until the settlement agreement had been fully performed. Reference is made to the following observations by Lord Atkinson in Morris v Baron and Company (1918) AC 1 (at 35):
"...the general principle is that an accord without satisfaction has no legal effect, and that the original cause of action is not discharged as long as the satisfaction agreed upon remains executory. That was decided so long ago as 1611 in Peytoe's Case ... If, however, it can be shown that what a creditor accepts in satisfaction is merely his debtor's promise and not the performance of that promise, the original cause of action is discharged from the date when the promise is made..."
It is said, for the appellant, that the present case falls within the former category. Reliance is placed upon the circumstance that, in the terms of the compromise arrangement stated in the file note, it was said that payment "will be" accepted in final settlement. This, it is claimed, is an indication that there was intended to be no satisfaction here short of the full performance of the promise to pay the whole of the amount of $75,000.
It followed, the argument runs, that there was no effective accord and satisfaction in the present case, so that the original judgment debt remained outstanding. It was also submitted that the appellant was entitled to appropriate to the account of the respondent's husband the whole of the sum of $45,000 paid by the respondent and her husband under the settlement.
THE RESPONDENT'S CONTENTIONS ON THE APPEAL
6. Counsel for the respondent relied on the reasoning of the learned primary Judge. It was further said that when regard is had to the circumstance that $45,000 was paid to the appellant by Mr. and Mrs. Hadidi, and when the bankruptcy notice in the present matter is looked at in context, that is, in conjunction with the bankruptcy notice issued on the same date addressed to Mr. Hadidi, the bankruptcy notice addressed to Mrs. Hadidi is bad because it does not state how much is in fact then due. That is to say, this is not merely a case of overstatement, to which the provisions of s.41(5) of the Bankruptcy Act 1966 ("the Act") might apply; rather, it is a case of the notice misleading the debtor about the effect of complying with its terms.
CONCLUSIONS ON THE APPEAL
7. Although Sweeney J relied primarily on the existence of an accord and satisfaction in dismissing the petition, other questions were argued on the appeal. It will be convenient to consider them in turn.
(1) Was there a discharge at common law or a release in equity of the respondent's judgment debt in whole or in part?
8. In McDermott v Black (1940) 63 CLR 161, Dixon J said (at 184-5):
"An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed."
As to the position in equity, Dixon J said (at 187)
"A release, though not under seal, if given for consideration, was enforced by injunction, and so, too, was an agreement by simple contract not to sue. Accordingly they now constitute good equitable defences to legal demands..."
As Dixon J observed (at 189), the question of the "fairness" and "justice" of the agreement relied on would be taken into account by a court of equity in the exercise of its discretion to grant an injunction to restrain further proceedings at law. (See also Meagher, Gummow and Lehane, "Equity - Doctrines and Remedies", 3rd ed. at 792-3.) Thus, whilst the position at law depends upon the true construction of the accord agreement, equity makes a wider inquiry, looking at all the circumstances of the case.
In the present case, valuable consideration did, in our view, move from the respondent by her promise, which was implicit in the settlement agreement, that she and her husband would not dispute the appellant's claim for the total amount of $75,000 by way of primary and penalty tax. It will be recalled that the judgment obtained was a default judgment, that there had been no trial on the merits and that the amount of the penalty tax at least was in contention (cf. Re Selectmove, Court of Appeal, The Times, 13 January 1994).
The next question is the proper construction of the settlement agreement itself. Was the appellant accepting, in satisfaction of his rights under the judgments, the mere promise of Mr. and Mrs. Hadidi - or only the performance of that promise by payment of $75,000?
As has been noted, Sweeney J was of the view that the best available evidence of the agreement was the letter dated 14 February 1990. Although, with respect, there is force in that view, the fact that it was not written until three months had elapsed from the time of the making of the agreement detracts from its reliability for present purposes. By the time the letter was written, three payments of $15,000 each had already been made by Mr. and Mrs. Hadidi. Moreover, although the letter referred to a bank cheque for the sum of $30,000, no such stipulation was noted in the contemporary file memorandum.
As Sweeney J pointed out, the letter was silent on the consequences, if any, of any failure to pay the final instalment of $30,000. On the other hand, the file note did address the contingency of "default (occurring) on any one payment of the arrangement" by providing that "legal proceedings will (then) be continued".
The context of these documents was the signing of two separate default judgments in which, it appears, each debtor disputed at least part of the penalty tax component of the judgment debt. Although the judgments were in the sums of $50,000 and costs and $48,000 and costs, approximately speaking, thus a total of about $100,000, the overall compromise was in the amount of $75,000 only. It is common ground that upon payment of the total sum of $75,000, each debtor was entitled, both at law and in equity, to an unconditional discharge and release from liability under their respective judgments. It is an unlikely intention to impute to the parties that in November 1989 the appellant was agreeing to accept, in place of judgments totalling about $100,000, a bare promise by the respondent and her husband to pay instalments totalling $75,000, so that upon any default in payment the appellant would have to return to court and commence proceedings all over again on a fresh cause of action. Thus we do not agree with the reasoning of the learned primary Judge on the point which he found determinative.
It would be reasonable to assume a common intention that the debtors would receive credit against their liability under the judgment debts for any amounts paid.
But the question then arises as to the particular account to which the amounts paid on account of both debtors should be credited. As has been noted, the appellant purported to appropriate the whole of the amount paid to the credit of the account of Mr. Hadidi. None of it was credited to the account of the respondent. It is not evident to us how this course of action could be justified. There was no express provision to justify it, nor could a term be implied to that effect.
In the appropriation of payments under the law of account, the following propositions may be taken as settled: (1) On paying money to his creditor, the debtor may, at the time of payment, appropriate it to any particular debt, even though the creditor says that he takes it in payment of another debt. (2) If the debtor makes no appropriation to particular items, the creditor has the right of appropriation, and may exercise the right up to the last moment by action or otherwise. (3) If no express appropriation be made by either the debtor or the creditor, it may be implied or presumed (see, e.g. Williams, The Law of Account, at 42).
In the present case, there was no direct evidence with respect to the manner in which the three instalments of $15,000 were paid. Presumably, these were paid, and intended to be paid, by and on behalf of both debtors on account of their joint and several liability under the settlement agreement. The appellant's letter dated 14 February 1990, addressed to both debtors, acknowledges receipt of the three payments. The letter treats the payments as having been made (i) on behalf of both the respondent and her husband and (ii) pursuant to the settlement agreement - not the judgments. The letter amounted to an appropriation by the appellant of the sum of $45,000 towards satisfaction of the debtors' joint and several liability to pay the amount of $75,000 under the settlement agreement. It further follows, in our view, that it was not open to the appellant to appropriate the whole of the sum of $45,000 to the credit of the account of Mr. Hadidi as the appellant purported to do when he requested the issue of the two bankruptcy notices in April 1992.
We agree with Wilcox J that the failure to make the final payment of $30,000 amounted to a repudiation of the settlement agreement, which repudiation the appellant accepted by obtaining and serving the bankruptcy notices. However, it does not follow that the $45,000 which had been paid was held by the appellant on trust or in some kind of escrow so that he was liable to repay the sum to the respondent and her husband. The applicable principle is that stated by Dixon J in McDonald v Dennys Lascelles Ltd. (1934) 48 CLR 457 at 476-477:
"When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach."
The three instalments of $15,000, when paid, became the appellant's beneficial property. If a creditor in the position of the appellant became bankrupt, the payments would have formed part of his estate available to creditors. But as between the respondent and her husband, it is not clear to what extent their liabilities under their respective judgments should have been credited with the instalments paid. One possibility is apportionment pro rata to the respective judgment debts; the other is equality.
Therefore, although there was no entire satisfaction here, the respondent's liability was partially discharged or partially released both at law and in equity.
(2) What was the effect of the settlement agreement in the context of the bankruptcy notice?
23. The effect of the entry into an arrangement to compromise the judgment debt and to pay it by instalments upon the bankruptcy notice must now be considered.
Reference should first be made to the relevant provisions of the Act.
By s.40(1)(g) of the Act, it is provided that a debtor commits an act of bankruptcy if a creditor who has obtained against the debtor a final judgment or order, the execution of which has not been stayed, has served on the debtor a bankruptcy notice and the debtor does not comply with the notice or satisfy the Court that he has a counter-claim, set-off or cross-demand as there specified. By s.41(2)(a) of the Act, it is provided that a bankruptcy notice shall require the debtor, within a specified time, to pay the judgment debt or sum ordered to be paid in accordance with the judgment or order, or secure or compound the debt as there provided. By s.41(3)(b) of the Act, it is provided that a bankruptcy notice shall not be issued if, at the time of the application for its issue, execution of the judgment or order has been stayed.
Two points may be made here.
First, to fall within the prohibition in s.41(3)(b), it is not necessary that there be in existence a formal order staying excecution. It is sufficient to bring the prohibition into operation if there exist circumstances under which the Court would, if applied to, prevent the issue of execution. In Penning v Steel Tube Supplies Pty. Ltd. (1988) 18 FCR 568, Woodward, Fisher and Spender JJ said (at 575-6):
"It appears to be settled law both in the United Kingdom and, at least at first instance, in this country, that the words in s.41(3) 'execution of the judgment or order to which it relates has been stayed' are not restricted to an order expressly staying a judgment. They have been construed as having a much wider meaning. In certain circumstances execution is deemed to have been stayed if the execution creditor is for some reason not in a position to issue execution upon his judgment."
Penning's Case was applied in Perkes v McIntyre, Full Federal Court, 31 July 1991, unreported, per Burchett J, in which a bankruptcy notice was issued before disputed accounts between the parties had been settled, and, accordingly, the notice was held to be bad on the ground that, in the circumstances, a stay of execution would have been granted at least until the accounts were settled. A similar approach was taken by another Full Court in McIntyre v Gye, 17 June 1994, unreported.
The second matter to be noted is that, in order to comply with s.41(2)(a), a bankruptcy notice must require payment in accordance with the judgment. The meaning of this provision has been considered in a number of cases.
In Re Feast (1887) 4 Morr 37, judgment for pounds 438.12.0. and costs was recovered against a debtor. Costs were taxed at pounds 37 and the creditor issued a bankruptcy notice in respect of the judgment debt and costs. An agreement was thereupon come to between the debtor and the creditor, by which the debt and costs were agreed at pounds 500., and the debtor agreed to pay pounds 100, at once, such pounds 100 including the pounds 37, taxed costs, pounds 25, costs of the bankruptcy proceedings, and pounds 38, part of the judgment debt, and the balance of the debt by monthly instalments of pounds 20; in case any instalment was not duly paid the whole amount then unpaid to be forthwith due and payable. The pounds 100, and some of the instalments were duly paid, but on default subsequently being made a bankruptcy notice for the unpaid balance was issued by the creditor. It was held that the agreement entered into was to the effect that, upon default of payment of any instalment, the unpaid balance was to become due under the judgment, and that the creditor was entitled to issue a bankruptcy notice in respect of the balance of the debt then due.
In Re Lomax; Ex parte City Bank (1892) 3 BC (NSW) 66, a creditor having recovered judgment against a debtor, took promissory notes maturing at different periods to the amount of the judgment debt. It was held that on the dishonour of the first promissory note, the judgment creditor had a right to issue a bankruptcy notice requiring the debtor to pay the amount of this promissory note, and that the issuing of the bankruptcy notice for a portion of the debt operated as an abandonment of the balance. Manning J said (at 66-7):
"The giving of these promissory notes did not do away with the judgment debt or affect it in any way, but was in effect giving time to pay the amount. It was a conditional payment, the undertaking being to meet the note at maturity. If it is not met, the condition is at an end, and the right at once revives to act on the judgment. Upon the first promissory note not being paid, a bankruptcy notice is taken out. This notice requires the debtor, Lomax, to pay the judgment debt, the amount of the promissory note. Clearly the amount due is in respect of the judgment, and if the bankruptcy notice is issued in respect of the promissory note it is clearly an admission that that is all that is due on the judgment. Treating it in that way, I think the proper course is to decide that this is all that is due on the judgment; for if a man chooses to issue execution on less than he is in a position to do, that must be taken as an abandonment of the rest."
In Re Vogel; Ex parte Anglo-Eastern Contract Co. (1913) 109 LT 325, creditors having obtained a judgment against a debtor, the debtor paid part of the debt under the judgment. Subsequently, an arrangement was entered into under which the debtor agreed to pay the balance of the debt, together with interest, at a later date. The balance of the debt was not paid on the stipulated date and further time to pay was granted and thereafter an additional sum was paid in reduction of the judgment debt. Subsequently, the creditors issued a bankruptcy notice for the amount of the balance of the debt. It was held that the creditors had not waived their judgment, but had merely postponed their recourse to it and that on the debtor's default in payment of the balance due on the stipulated debt, the creditor's rights revived so that the creditor was entitled to issue a bankruptcy notice for the balance of the judgment debt. Phillimore J said (at 326):
"The creditor in Re H.B. had precluded himself from doing what the creditor in Re Feast had been permitted to do until the whole sum became due; and he was issuing a bankruptcy notice upon an agreement and not upon a judgment.
The present case seems to me to be the case of Re Feast over again. The creditor has given away something - an extension of time - but he has not given away his rights under the judgment and the debtor has defaulted in payment and therefore has revived the judgment debt and the whole sum is now due and payable and a bankruptcy notice can issue for that amount."
In Re H.B. (1904) 1 KB 94, the parties settled litigation on terms, inter alia, that the debtor consent to judgment in an amount to be payable by instalments. The debtor paid only the first instalment. The creditor issued a bankruptcy notice for the total amount of the instalments then in arrear, as being "the amount due on the judgment". It was held that the bankruptcy notice was bad.
Vaughan Williams LJ said (at 101-2):
"The question which we have to decide is whether, at the time when that second bankruptcy notice was issued, it was a notice served on the debtor, within s.4, sub-s.1(g), of the Bankruptcy Act, 1883, 'requiring him to pay the judgment debt in accordance with the terms of the judgment.' I do not think it was. I think it was a notice requiring the debtor to pay a debt in accordance with the terms, not of the judgment, but of an agreement...
What the Act of Parliament seems to me to have intended was that it should be an act of bankruptcy if a debtor did not pay an amount which was adjudged to be due from him; and the question ought to be one turning upon the judgment, and not upon the construction of an agreement which may be more or less complicated, and possibly more or less difficult to construe."
His Lordship added (at 102-3; 105):
"...nothing I have said will prevent the creditor here from issuing a bankruptcy notice when all the instalments have become due, because then his bankruptcy notice will be 'in accordance with the terms of the judgment'; and I also wish to say that nothing in my judgment is at all meant to exclude the right to issue a bankruptcy notice when, whether by agreement or otherwise, the whole of the judgment debt has become due at the moment when the bankruptcy notice is issued. In such a case, as one often sees in an agreement - as where the whole debt is to become due upon the failure to pay one instalment - it may very well be that the bankruptcy notice could issue..."
A bankruptcy notice issued for a smaller sum than the judgment debt by reason of credit being given for amounts already paid is, in my judgment, a notice to pay 'in accordance with the terms of the judgment.'"
Romer LJ said (at 103):
"Now I think it is clear that, when you have a judgment in the form that we have here, a bankruptcy notice under the Act must require payment of a sum alleged to be due according to the terms of the judgment - that is to say, it must state the amount that is claimed as remaining unpaid on the judgment debt. Clearly, in a bankruptcy notice the debtor is entitled to see from the notice exactly what is claimed to be due on the judgment debt. No doubt a sum might be claimed which is less than the real amount due, and that would not of course be fatal to the notice so long as the notice made it clear that nothing more was claimed to be due on the judgment beyond the amount specified in the notice. But a notice to pay part of a judgment debt, leaving any balance that may be due to be subsequently claimed, is, to my mind, clearly bad."
Stirling LJ said (at 104-5):
"It appears to me that in reality the creditor is requiring payment of the debt, not simply in accordance with the terms of the judgment, but in accordance with the terms of the judgment as varied by the collateral agreement. I think this is a material departure from the terms of the statute. I do not think that the Legislature meant to make non-compliance with a judgment an act of bankruptcy so long as the terms of the judgment were controlled by an outside agreement which might be more or less difficult of construction. The result is that, in my opinion, the creditor will not be entitled to issue a bankruptcy notice until all the instalments provided for by the agreement have become payable.
I wish only to add that, in expressing this opinion, I am not departing from anything which was laid down in the case in the Court of Appeal of In re Feast ... which was referred to in the argument, and by which we are bound. The agreement there contained a stipulation that, if default should be made in payment of any of the instalments, the whole debt should become payable; and there was nothing inconsistent with that agreement in requiring payment of the whole debt when an instalment was omitted to be paid."
In re H.B. was considered in Kleinwort Benson Australia Ltd. v Crowl (1988) 165 CLR 71. In that case, Mason CJ, Wilson, Brennan and Gaudron JJ said (at 79):
"It is clear enough from the terms of s.41(2)(a)(i) of the Act that a notice must require payment 'in accordance with the judgment'. A notice specifying payment in accordance with some other arrangement does not satisfy this requirement. On one view In re H.B. merely gives expression to this requirement, making it clear that a judgment debt will not found the issue of a bankruptcy notice whilst ever the obligation to pay in accordance with the judgment is suspended or qualified by operation of an agreement. With that proposition we agree. But cf. Pillai ... as to partial discharge by agreement of the obligation."
In Pillai v Comptroller of Income Tax (1970) AC 1124, Lord Diplock said (at 1130-1):
"A judgment debt may, with the consent of the judgment creditor, be discharged in part, and where this has been done a bankruptcy notice may be issued for the balance remaining undischarged."
(See also Findlay v Ampol Petroleum (Victoria) Pty. Limited, Federal Court of Australia, unreported, 3 June 1993, per Heerey J)
(3) Was the present bankruptcy notice bad?
40. In Kleinwort Benson, above, Mason CJ, Wilson, Brennan and Gaudron JJ said (at 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 Federal Commissioner of Taxation ...; Pillai ... In such cases the notice is a nullity whether or not the debtor in fact is misled. ..."
In the present case, the bankruptcy notice did not, and, in accordance with the reasoning in Re H.B., could not, require payment by the respondent debtor in accordance with the terms of the compromise arrangement. Nor did the notice require payment of a part only of the judgment debt, as in Feast, Pillai or Vogel. Moreover, this was not a case of a mere deferment of the time for payment of the debt, as in Lomax.
The notice purported to require payment of the full amount of the judgment debt in accordance with the terms of the default judgment obtained. It purported to do so upon the footing that the appellant was entitled to appropriate to the account of Mr. Hadidi the whole of the amount of $45,000 already paid. But, as has been said, the appellant had no power to make that appropriation and the respondent was entitled to be credited with a share of that amount in reduction of her liability under the judgment, notwithstanding that the sum of $45,000 was paid by Mr. and Mrs. Hadidi on account of their liability under the compromise agreement. It would have to be established whether credit should be given to the respondent for an equal share of the repayments or whether there should be an apportionment pro rata. Whichever view were adopted, allowance would have to be made for the effect of payments made on the calculation of interest.
It must follow, in our opinion, that until an account had been taken in the District Court (see Meagher, Gummow and Lehane, op. cit. at 663), the appellant was not in a position to issue execution on the judgment, at least not for the whole amount of the judgment debt and interest. It may be that, after an account had been taken and the respondent credited with her share of the instalments paid, the appellant could have levied execution for the balance then ascertained to be due to the appellant, but that is another matter. As Davies J said of the analogous situation in Perkes v McIntyre, above (at 2), the amount due by the respondent under the judgment was "neither self-evident nor agreed". The present point is that, at the time of issue of the notice, the appellant was in no better position to levy execution than the judgment creditor in Perkes v McIntyre.
Since, in our opinion, the respondent would, upon application to the District Court, have been granted a stay of execution on the judgment at least until a proper account had been taken, it must follow that the provisions of s.40(1)(g) were not satisfied here. That is, there was not in the present case "a judgment or order the execution of which had not been stayed..." On the contrary, since a stay would have been granted, if sought, it must follow that the bankruptcy notice was bad.
Reference was made in argument to the provisions of s.41(5) and (6) of the Act which are as follows:
"41(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 disputes the validity of the notice on the ground of the mis-statement.
41(6) Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with subsection (5), he shall be deemed to have complied with the notice if, within the time allowed for payment, he takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it."
But the issue here is not overstatement of the amount claimed but whether execution on the judgment would have been stayed.
Finally, it should be noted that s.306 cannot assist the appellant. It applies to merely "formal" defects; yet the present question is one of substance.
The appeal should be dismissed, with costs.
JUDGE2
WILCOX J The major question argued at the hearing of this appeal was that decided by the learned primary Judge, Sweeney J: the nature of the agreement made between Ali Oygur, on behalf of Mr and Mrs Hadidi, and Ray South, of the Australian Taxation Office, in November 1989. In particular, the question was whether Mr South agreed that the Deputy Commissioner would abandon his claim to enforce the default judgments he had obtained against Mr and Mrs Hadidi in return for their mere promise to pay a total sum of $75,000, or whether the agreement to abandon the judgments was conditional upon actual payment of the $75,000.
Sweeney J held that the abandonment was made in return for a mere promise to pay. I agree with Beaumont and Heerey JJ in preferring the alternative view. It seems to me inherently unlikely that an informed creditor, holding judgments for about $100,000 against two debtors, would agree to abandon those judgments in return for a mere promise to pay $75,000. The promise might be broken immediately; the debtors might fail to make even the first payment. Yet, according to the view of the case adopted by Sweeney J, the creditor would be precluded from enforcing either judgment. He would have to start the litigation again; commencing fresh proceedings, presumably only for $75,000. From a creditor's point of view, there is little advantage in that type of arrangement.
Determination of the nature of the agreement is made more difficult by the circumstance that neither Mr South nor Mr Oygur gave evidence. The only relevant material is Mr South's file note, apparently made some time later, and the letter of 14 February 1990. Beaumont and Heerey JJ have quoted the terms of both documents. I need not repeat them. The file note contains a statement of Mr South's reasons for accepting Mr Oygur's offer. The fourth reason is:
"If default occurs on any one payment of the arrangement, legal proceedings will be continued - T/A (that is, Mr Oygur) was notified to impress this upon taxpayers."
If something like this was said, it is inconsistent with the notion that the Deputy Commissioner was prepared to abandon his entitlement to enforce the judgments in return for the debtors' mere promise to pay $75,000. On the contrary, Mr South was intimating that, if there was any default in payment, the Deputy Commissioner would press ahead with "legal proceedings"; that is, the bankruptcy proceedings referred to in the previous paragraph.
It is unfortunate that the Court was denied direct evidence of the agreement. Direct evidence would probably have put the nature of the agreement beyond controversy. In the absence of direct evidence, the Court must do its best, from such material as is available. If the Court is left in real uncertainty, the sufferer must be Mrs Hadidi. The Deputy Commissioner has a judgment against her for $48,504.49 plus interest since 7 February 1989. It is her case that there was an agreement by way of accord and satisfaction in respect of that judgment. The onus rests on her to establish the existence and terms of the agreement.
In the view I take, there is no real problem. The best evidence is the file note, which was tendered without objection and not challenged. The file note is consistent with earlier file notes of Mr South (September 1989 and 1 November 1989) when he recorded his rejection of smaller offers by Mr Oygur and summarised communications in which Mr Oygur made apparent the Hadidis' difficult financial position. Against that background, I find it inconceivable that Mr South would have agreed to surrender the Deputy Commissioner's right to enforce the judgments in return for mere promises to pay. I agree with Beaumont and Heerey JJ on this aspect of the case.
Regrettably, however, I cannot agree with their Honours in relation to the fate of the appeal. The difference between us arises out of matters not addressed by Sweeney J but raised by the respondent's notice of contention.
I accept much that my colleagues have written. I agree that the three instalments were paid, and intended to be paid, "on behalf of both debtors on account of their joint and several liability under the settlement arrangements." I agree that "all parties intended that the payment of the sum of $45,000 be appropriated towards satisfaction of the debtors' joint and several liability to pay the amount of $75,000 under the compromise agreement." But I do not agree that it follows that it was not open to the Deputy Commissioner to appropriate, when he did, the whole sum of $45,000 to Mr Hadidi's account. It was certainly not open to him to do so while the compromise agreement remained in force. During that time, the Deputy Commissioner held the $45,000 on account of the total moneys ($75,000) due from the debtors under the compromise agreement. It would have been a breach of that agreement for him to have appropriated any part of the instalments to some other account, such as Mr Hadidi's judgment debt.
However, all this changed on 28 February 1990, when the debtors failed to make the final payment ($30,000) due under the compromise agreement. Their failure constituted a fundamental breach of their obligations under the compromise agreement. Their breach creates a situation whereby, if the Deputy Commissioner chose to accept the breach, the compromise agreement would come to an end. Both parties would then be returned to the positions they occupied before the agreement was negotiated in November. The Deputy Commissioner did choose to accept the breach. He waited a long time before doing so. However, before the debtors made any relevant move, the Deputy Commissioner took a step that was inconsistent with an intention to maintain the compromise agreement; he issued bankruptcy notices founded on the default judgments. Once he did this, the compromise agreement came to an end. The Deputy Commissioner no longer held the $45,000 on account of the debtors' liability under the compromise agreement. There was no longer such a liability.
It is probably correct to say that, when the Deputy Commissioner accepted the debtors' repudiation of the compromise agreement, he came under an obligation to repay the $45,000 to the debtors. But it is not necessary to determine that question. It is academic; the Deputy Commissioner was entitled to offset moneys owed by him to the debtors against moneys owed by them to him. The usual rules regarding appropriation of payments, summarised by Beaumont and Heerey JJ, applied. The Debtors could have given directions to the Deputy Commissioner as to the appropriation of the $45,000, all to one or other account or shared between them in specified proportions. If they had done so, the Deputy Commissioner would have been bound by their direction. But they did not. Accordingly, the Deputy Commissioner was entitled to appropriate the money between the accounts as he saw fit. It must be remembered that the instalments were received from the debtors on account of their several liabilities under the compromise agreement as well as their joint liability. The Deputy Commissioner exercised his right of appropriation by crediting the whole sum to Mr Hadidi's account. As I see the matter, he was entitled to do this and to pursue Mrs Hadidi for the full amount of her judgment debt.
If I am wrong, and the Deputy Commissioner was obliged to repay the money in cash to both debtors, this only means that Mrs Hadidi has a counter-claim against the Deputy Commissioner which she is entitled to offset against the judgment debt. If even that is wrong, and the obligation was not one of repayment but of appropriation, the Deputy Commissioner being obliged to appropriate half the $45,000 to the account of Mrs Hadidi, this only means that the bankruptcy notice overstates the amount owing. That would not constitute a fatal defect. Section 41(5) of the Bankruptcy Act provides:
"(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 disputes the validity of the notice on the ground of the misstatement."
On the view taken by Beaumont and Heerey JJ, it was open to Mrs Hadidi to give notice that she disputed the validity of the bankruptcy notice on the ground that it misstated the amount in fact due. Had she done so, this Court could have promptly resolved the matter. She did not take that course, with the result that s41(5) operates to prevent invalidity. Even so, Mrs Hadidi was not left without remedy. Section 41 goes on:
"(6) Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with sub-section (5), he shall be deemed to have complied with the notice if, within the time allowed for payment, he takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it."
If Mrs Hadidi wished to assert that the Deputy Commissioner was obliged to credit half the $45,000 to her account, she should have paid the amount claimed by the bankruptcy notice, less $22,500 and the interest claimed thereon. She did not do this.
In my opinion, the bankruptcy notice served on Mrs Hadidi was valid. The appeal should be allowed and the orders made by Sweeney J set aside. The hearing of the petition should be remitted to a Judge sitting at first instance for further consideration and, if appropriate evidence is adduced, the making of a sequestration order. The respondent should pay the appellant's costs of the appeal and of the hearing before Sweeney J.
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