Croft v EROM Pty Ltd
[2005] FMCA 114
•11 February 2005
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| CROFT v EROM PTY LTD | [2005] FMCA 114 |
| BANKRUPTCY – Costs – whether amount due according to judgment entered or amount in reality due – amount of judgment revised after issue and service of Bankruptcy Notice – judgment set aside – whether notice under s.41(5) of the Bankruptcy Act served in timely manner. |
Bankruptcy Act 1966, s.41(5)
Bolt & Nut Co (Tipton) Ltd v Rowlands Nichols & Co Ltd [1964] 2 QB 10
Hughes v Justin [1894] 1 QB 667
James v Federal Commissioner of Taxation (1955) 93 CLR 631
Re Prossimo ex parte DeMarco (1952) 16 ABC 86
Seovic Civil Engineering Pty Ltd v Groeneveld (1999) FCA 255
Walsh v Deputy Federal Commissioner of Taxation (1984) 156 CLR 337
McAuliffe Williams & Partners v Pecoult [2003] FMCA 278 (as corrected)
Jones v Porsche CentrePty Ltd (2000) FCA 143
Secretary Department of Aviation v Ansett Transport Industries (1987) 72 ALR 188
Emerson v Wreckair Pty Ltd (1991) 101 ALR 315
Emerson v Wreckair Pty Ltd (1992) 109 ALR 539
Re Wilson & Williams; Wilson v Official Trustee in Bankruptcy BC9908304 (1999) FCA 1760
| Applicant: | JOHN CROFT |
| Respondent: | EROM PTY LTD |
| File No: | PEG110 of 2004 |
| Delivered on: | 11 February 2005 |
| Delivered at: | Perth |
| Hearing date: | 7 February 2005 |
| Judgment of: | McInnis FM |
REPRESENTATION
| Counsel for the Applicant: | Mr P Robinson |
| Solicitors for the Applicant: | Williams & Hughes |
| Counsel for the Respondent: | Mr M Blundell |
| Solicitors for the Respondent: | Solomon Brothers |
ORDERS
The Applicant Debtor shall pay the Respondent Creditor’s costs of the application together with the costs of and incidental to the issue and service of the bankruptcy notice dated 30 July 2004 and the costs of and incidental to the Debtor’s notice pursuant to s.41(5) of the Bankruptcy Act with the costs to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
PEG110 of 2004
| JOHN CROFT |
Applicant
And
| EROM PTY LTD |
Respondent
REASONS FOR JUDGMENT
The only issue between the parties relates to the question of costs. An application was made by John Croft (the debtor) for an extension of time for compliance with a Bankruptcy Notice. That application filed on 19 August 2004 related to a Bankruptcy Notice served upon the debtor by Erom Pty Ltd (the creditor) on 31 July 2004.
The Bankruptcy Notice had relied upon a debt due and payable namely a judgment of $256,697.32 being a default judgment entered by the creditor against the debtor in the District Court of Western Australia on 19 June 2004. The precise amount of the judgment sum was $254,941.98 with interest of $1,755.34 then resulting in the total claimed of $256,697.32. No issue was taken in relation to the stated amount of the judgment of $256,694.32. The debtor applied to the District Court to reduce the judgment by a sum of $23,334.60 and a Registrar of Court in fact duly varied the judgment accordingly on 24 November 2004.
Prior the variation of the judgment it is clear that the Bankruptcy Notice had been served and the application for extension of time for compliance with the Bankruptcy Notice filed with this Court. After the application had been filed the Court made further orders on 20 August 2004 adjourning the application and extending the time for compliance with the Bankruptcy Notice. Similar orders were made on 9 September 2004, 9 November 2004 and 3 December 2004. Orders were then made by consent on 23 December 2004 that the Bankruptcy Notice dated 30 July 2004 be set aside without prejudice to the rights of the parties to seek any orders as to costs against each other.
It seems to be common ground that the creditor conceded that the judgment in the action had been entered in the wrong amount namely had overstated the amount due by $23,334.60. That much appears clear from the Amended Default Judgment (see Annexure DPHE2 to the Affidavit of Dominique Pascal Hermann Engelter sworn 23 December 2004). I note further the extract of the transcript of the proceedings before a Deputy Registrar of the District Court of Western Australia on 24 November 2004 where the concession was made regarding the overstatement of the judgment by the creditor with the resulting variation of the judgment sum in the action.
A notice dated 22 December 2004 pursuant to s.41(5) of the Bankruptcy Act 1966 was forwarded by the debtor’s solicitors to the creditor’s solicitors. That notice states as follows:-
“NOTICE – SECTION 41(5)
TO: EROM PTY LTD (ACN 008 918 876)
The Debtor, JOHN CROFT, hereby gives notice that the amount claimed by EROM PTY LTD (ACN 008 918 876) in the bankruptcy notice dated and issued on 30 July 2004 against JOHN CROFT exceeded the amount in fact due (without any admission that the Debtor owes anything to the Creditor) and the validity of the bankruptcy notice is disputed on the ground of that misstatement.
The amount of the misstatement is $23,334.60; being the difference between $254,941.98 and $231,607.38. The bankruptcy notice was served for a judgment sum of $254,941.98. On application of the Respondent Creditor, the judgment sum was varied by Deputy Registrar Hewitt on 24 November 2004 to $231,607.38.
The judgment on which the bankruptcy notice was based has also now been set aside. Accordingly, no amount is owing to EROM PTY LTD (ACN 008 918 876).”
It is common ground that the judgment which was the subject of the Bankruptcy Notice was set aside by a Deputy Registrar of the District Court of Western Australia by orders made on 14 December 2004 together with further orders in relation to costs and other ancillary orders. Hence, it is clear that prior to the date upon which the notice was forwarded pursuant to s.41(5) of the Bankruptcy Act the order providing the basis for the judgment debt had been set aside. In the judgment of the District Court delivered on 14 December 2004 the learned Deputy Registrar succinctly summarises the background leading to the application to set aside the default judgment in the following passage:-
“In this action an order was made that the defendant give discovery of certain identified classes of documents by 22 April 2004. On 16 April the defendant’s (sic) swore an affidavit purportedly in compliance with that order and that document was served on 5 May 2004. On 11 May 2004 the plaintiff applied for a springing order and on 24 May 2004 the Court ordered that if proper compliance with the order for further and better discovery was not given within tens days judgment would be entered against the defendant. On 2 June the defendant swore a further affidavit of discovery which was not filed at the time and the time fixed by the order expired on the 3 June 2004. On 14 June 2004 the defendant served the plaintiff with a further affidavit of discovery together with that sworn on the 2 June 2004 each of which failed to satisfy the requirements of the order. On 17 June 2004 the plaintiff filed default judgment for failing to comply with the terms of the springing order. On 31 August 2004 the defendant filed an affidavit which satisfied the requirements of the order which had been originally made on 25 March 2004.”
It is also relevant to note that in the decision of the learned Registrar he states the following:-
“The judgment is a regular judgment and in my view the necessary matters to be canvassed have been correctly set out by counsel for the applicant in his argument before me and they are:
1.the conduct of the defendant and the reason that the springing order was not complied with;
2.that there must be demonstrated to be a defence on the merits and;
3.the justice of the case.”
Of further relevance in my view is the following extract taken from the learned Registrar’s judgment:-
“… It is suggested by counsel for the plaintiff that the defendant should have appreciated that the affidavits were not satisfactory and would not satisfy the terms of the order. I reject that proposition. The defendant engaged a certificated practitioner to represent him in this action and he was entitled to, and in my view clearly did, rely on the expertise of that practitioner to satisfy the requirements of the order. That the requirements were not satisfied is not a matter for which the defendant can be personally responsible. On that basis I am satisfied that there is a satisfactory explanation advanced by the defendant for his failure to comply with the terms of the orders which were made and I now turn to the more contentious issues which are raised by this application namely whether the defendant has a defence on the merits.”
It is noted that the default judgment originally entered by the creditor against the debtor appears to have arisen from what is described as a “springing order” made by a Registrar of the District Court of Western Australia on 24 May 2004 for failure to comply with earlier orders of that Court made in relation to discovery on 25 March 2004.
The debtor’s submissions
The debtor claims an entitlement to costs on the basis that the Bankruptcy Notice having been set aside he is entitled to the costs of and incidental to the application on the basis that costs should follow the event and further there are no exceptional circumstances in this case which would justify an order that costs should not follow the event. It was specifically submitted that in the present case the default judgment later varied and then set aside had been varied due to an overstatement and that the variation occurred after the issue of a Bankruptcy Notice. When issued the Bankruptcy Notice had claimed the wrong amount and it was submitted that the judgment entered for the wrong amount could properly be regarded as irregular (see Bolt & Nut Co (Tipton) Ltd v Rowlands Nichols & Co Ltd [1964] 2 QB 10 at 21,22; Hughes v Justin [1894] 1 QB 667 at 669). The Bankruptcy Notice it was submitted by the debtor should be interpreted strictly and the overstatement of the amount could not be regarded as a mere matter of formal procedure. It was argued there is no requirement for the debtor to actually be misled by the overstatement in the Bankruptcy Notice (see James v Federal Commissioner of Taxation (1955) 93 CLR 631 at 644). Having complied with the statutory requirements to have the notice set aside for invalidity, it was argued that the debtor was entitled to costs. The judgment it was claimed was wrong and the fact that the judgment was wrong was conceded by the creditor which it was now claimed cannot resile from that admission.
Reliance was sought to be placed upon the decision in Re Prossimo ex parte DeMarco (1952) 16 ABC 86 cited by the Full Court of the Federal Court in Seovic Civil Engineering Pty Ltd v Groeneveld (1999) FCA 255. It is relevant to set out the full paragraph in the Full Court’s decision where it cited re Prossimo as follows:-
“S16(2) of the 1913 Act was reproduced as proviso (ii) to s2(1) of the Bankruptcy Act 1914 (UK). It was, in turn, adopted as proviso (ii) to s53 of the 1924 Act referred to earlier. S53 of the 1924 Act stated that a bankruptcy notice was to be in the prescribed form and was to require the debtor to pay the judgment debt or the sum ordered to be paid in accordance with the terms of the judgment or order. In Re Prossimo, Clyne J described (at 89) proviso (ii) as in part creating an exception to the general rule that the bankruptcy notice should require the debtor to pay the judgment debt according to the terms of the judgment. The reference to the ‘amount actually due’ in proviso (ii) was intended to qualify the general rule and to require the bankruptcy notice to state the actual amount due. The second part of the proviso was intended to prevent, under certain conditions, a bankruptcy notice being invalid by reason of an overstatement of the amount actually due. But where the bankruptcy notice overstated the amount actually due and the debtor gave a notice in accordance with the proviso, the bankruptcy notice was invalid. In other words, the law as stated in In re a Debtor did not apply unless the debtor gave the creditor a notice complying with proviso (ii) to s53 of the 1924 Act.”
The creditor’s submissions
The creditor submitted that the debtor should pay the creditor’s costs of and incidental to the application and the issue and service of the Bankruptcy Notice. It was argued that the Bankruptcy Notice has been set aside and that this was resolved when the default judgment was set aside and the debtor had unnecessarily issued an invalidity notice under s.41(5) of the Act after the event which created what was described as a false issue and causing further costs. Even if the notice as to the validity could be regarded as relevant, it was submitted it was filed too late and the notice should be in fact a “timely notice” when the debtor disputes the validity of the Bankruptcy Notice under s.41(5) (see Walsh v Deputy Federal Commissioner of Taxation (1984) 156 CLR 337 at 339). It was argued the debtor should pay the creditor’s costs of the Bankruptcy Notice in circumstances where there was a regularly entered default judgment arising from a failure on the debtor’s part which caused the creditor to incur costs which would otherwise not have been incurred. It is not relevant that the Bankruptcy Notice is set aside and reliance was placed upon the decision of this Court in the matter of McAuliffe Williams & Partners v Pecoult [2003] FMCA278 (as corrected) at paragraph [55] as follows:-
“55.It is clear from the reasoning of the Deputy Registrar of the District Court that the judgment, although set aside, was regularly entered and it would be inappropriate for this Court sitting as a Court in bankruptcy to do anything otherwise than rely upon that finding of the District Court. Accordingly I am satisfied that the creditor had acted in a lawful and entirely appropriate manner by entering judgment in default of appearance and in accordance with the decision of the Deputy Registrar of the District Court I accept that the judgment so entered had been entered regularly.”
Reliance was also placed upon the decision of Jones v Porsche CentrePty Ltd (2000) FCA 143 per Tamberlin J at paragraph [5] as follows:-
“In the present case it is pointed out on behalf of Porsche that the Victorian judgment, which formed the basis of the Bankruptcy Notice, was entered after Jones had failed to file an Amended Defence within the required time. This default by Jones in failing to file resulted in the issue of the Bankruptcy Notice and gave rise to the application to set it aside. If the Amended Defence had been filed within time the present proceeding would not have been necessary.”
In circumstances where the judgment was regularly entered it was argued it is inappropriate for the Bankruptcy Court to challenge or otherwise examine that for the present purposes. The debtor it was argued cannot collaterally attack the judgment of the District Court as this would amount to an abuse of process (see Secretary Department of Aviation v Ansett Transport Industries (1987) 72 ALR 188 at 197).
The creditor also relied upon the debtor’s proceedings accepting a variation of the judgment rather than making a submission that the judgment was irregular as providing a further basis upon which it would be inappropriate for the debtor to now proceed to attack the judgment.
Section 41(5) has no application in circumstances where the judgment on which the Bankruptcy Notice was based was for a greater amount than that owing.
Reference was made to the law as stated in Emerson v Wreckair Pty Ltd (1991) 101 ALR 315 at first instance which was upheld by the Full Court of the Federal Court on appeal in Emerson v Wreckair Pty Ltd (1992) 109 ALR 539 where the Full Court relevantly states the following:-
“In the instance case, the amount specified in the notice, viz $33,642.29 was the sum of the amounts stated in the judgment ($29,081.65 and 4560.64). Whatever pre-existing obligation there was between the appellants and the respondent merged in the new obligation created by that judgment: Corney v Brien (1951) 84 CLR at 353-4. The amount due by the appellants to the respondent and the amount for which execution might issue was the sum of the amounts stated in the judgment. The notice, therefore, claimed an amount that was in accordance with the judgment. It did not specify as the amount due to the respondent an amount exceeding the amount in fact due. The circumstance that the amount of the judgment was subsequently reduced is not to the point.”
In a Bankruptcy Notice the “amount due” according to the creditor’s submissions is simply the amount of the judgment whether or not an error was made in calculating that amount not the amount which is in truth and reality then due to the creditor. It was argued the High Court gave as a practical reason for this position the fact that it is ordinarily within the knowledge of the debtor whether or not any payments have been made. Reference was made to the affidavit of Lisa Marie Back sworn 21 January 2005 filed on behalf of the creditor where the deponent states at paragraph 9.5 that the debtor had refrained form swearing any belief that the payment referred to in correspondence had been made.
It was argued that the decision of Emmett J in Re Wilson & Williams; Wilson v Official Trustee in Bankruptcy BC9908304 (1999) FCA 1760 in applying the decision of the Court in Emerson is relevant to the present case where the debtor’s complaint is that the default judgment was entered for an amount greater than the amount of debt that was owing (see paragraphs [38] and [39] as follows:-
“38.Reliance was placed on a decision of Morling J in Re Greenhill ex parte Myer (NSW) Ltd (1984) 5 FCR 84. Morling J held that an overstatement in the bankruptcy notice of the amount actually due rendered the notice invalid. In that case, the judgment had been entered, apparently erroneously, for some $200 in excess of the amount actually owing. If that decision is correct, then it would add considerable force to Ms William’s contention. However, with the greatest respect to his Honour, I am not persuaded that it is a correct recognition of principle.
39.A bankruptcy notice must require the debtor to pay the judgment debt, in accordance with the judgment. The pre-existing obligation, which the judgment is intended to enforce, will have merged in the new obligation created by the judgement – see Corney v Brien (1951) 84 CLR 343 at 353-354. It may well be that there may be good grounds for setting aside a judgment that was entered for an excessive amount. Further, it may be that this Court, as a Court of Bankruptcy, would go behind a judgment in order to determine whether there was, in fact, anything due. Following the entry of a judgment, however, the amount due by the judgment debtor to the judgment creditor, and the amount for which execution might issue, is the sum stated in the judgment. Where a bankruptcy notice claims that amount, it cannot be said that it claims an amount that exceeds the amount in fact due. By reason of the judgment itself, the amount of the judgment is due.”
It was submitted that once judgment is entered if the Bankruptcy Notice claims the amount stated in the judgment there is no scope for complaining that the notice claims an amount exceeding the amount in fact due. Contrary to the submissions of the debtor it was argued that he must show that he could have been mislead by the overstatement and has failed to do so (see James v FCT (1959) 93 CLR 631 at 644). In any event it was argued the debtor could not have been misled given that he was aware of the facts and relevant information though refrained from divulging precise details to the Court.
Reasoning
In my view this Court is bound by the authority of the decision of Emmett J in Re Wilson which followed the decision of the Full Court in Emerson v Wreckair. The amount due at the time of the bankruptcy notice was issued must be the amount of the judgment. It is not appropriate for this Court to go behind that judgment despite the fact that after the judgment was entered by default as a result of the springing order in this case, it was subsequently varied with the amount being reduced and ultimately set aside. It is the amount due at the date the bankruptcy notice was issued which is relevant. The mere fact that the amount due was subsequently reduced does not of itself in my view invalidate the bankruptcy notice.
Having regard to the chronology of events it is my view that the debtor cannot rely upon the provisions of s.41(5) of the Bankruptcy Act. Whilst technically the extension of time granted as a result of numerous hearings pending the outcome of the application to set aside the default judgment may effectively have meant that the issuing of the notice under s.41(5) occurred within the time allowed for payment under the bankruptcy notice that does not in the circumstance of this particular case provide a proper basis upon which I can conclude that the notice was issued in a timely manner. The discrepancy in the amount was known to the debtor for many months and certainly was known to the debtor at or about the time the bankruptcy notice was served. It was incumbent upon the debtor at that point in compliance with s.41(5) of the Bankruptcy Act to then provide the appropriate notice which in this case was only provided after the judgment debt was in fact set aside. A debtor cannot simply use a provision of that kind against the backdrop of the chronology which has been recited in this judgment to then assert that the bankruptcy notice itself was invalid. Whilst s.41(5) provides an opportunity to challenge the validity of the bankruptcy notice by reason only that the sum specified in the notice is the amount due exceeds the amount in fact due, it does not provide a basis upon which this Court should go behind the judgment and nor does it support a contention that at the time the bankruptcy notice was issued it was invalid and that the amount due was not then due. I am satisfied the amount due in this instance was the amount stated in the bankruptcy notice being the amount of a judgment despite the fact that ultimately that amount was varied with what might be described as the acquiescence of the creditor.
This matter has had a somewhat unfortunate history and to some extent it may be arguable that the default judgment was entered through no fault of the debtor. That may be a matter for other proceedings or claims by the debtor against those then acting for and on his behalf. Nevertheless it does not provide this Court with a proper basis upon which it should go behind what I find to be a regularly entered judgment leading to a bankruptcy notice being issued for the amount due namely the amount of the judgment which at the time of issue was valid. The costs and expenses incurred by the creditor as a result of issuing the bankruptcy notice and responding to the application in this Court should be paid by the debtor. It is the debtor through his own conduct who has caused the entering of a default judgment which as I have indicated I accept on the findings of the Deputy Registrar was a regularly entered judgment. It is not for this Court to necessarily question the desirability of a creditor in those circumstances acting quickly to issue a bankruptcy notice as I can see no reason which would prevent a creditor in those circumstances from exercising the rights it undoubtedly has to execute a judgment and/or otherwise exercise those rights available under the bankruptcy legislation.
I otherwise accept the submissions on behalf of the creditor that in this case the Court should follow the decisions to which I have referred of the Full Court of the Federal Court in Emerson v Wreckair as followed by Emmett J in Re Wilson and I do not accept that this Court is bound by or should follow the reasoning of the Court in Re Prossimo. To follow the reasoning in Re Prossimo would lead to uncertainty following a regularly entered judgment as it would require parties to virtually ignore a judgment of that kind and to then further analyse what might actually be due at any given time rather than simply permitting a creditor to rely on the amount due in accordance with the judgment which had been regularly entered. It is clear to me that s.41(5) provides a remedy in relation to overstatement which in this case I have found was not exercised in a timely manner and/or which in any event I am satisfied is not an appropriate basis upon which I should accept that the creditor should pay the debtor’s costs. I further find that in any event at least until the default judgment was set aside there had been a regularly entered judgment which properly formed the basis upon which an amount due could be claimed under a bankruptcy notice and that the amount due at the time of issue of the bankruptcy notice was the amount of that judgment.
For those reasons it follows that the debtor should pay the costs of the application including the costs of and incidental to the issue and service of the bankruptcy notice.
Accordingly the order of the court will be as follows:-
The Applicant Debtor shall pay the Respondent Creditor’s costs of the application together with the costs of and incidental to the issue and service of the bankruptcy notice dated 30 July 2004 and the costs of and incidental to the Debtor’s notice pursuant to s.41(5) of the Bankruptcy Act with the costs to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of McInnis FM
Associate:
Date: 11 February 2005
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