Dowd v Garde

[2011] FMCA 713

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DOWD v GARDE [2011] FMCA 713

BANKRUPTCY – Opposed Creditor’s Petition on the basis of an error in the Bankruptcy Notice where the stated sum does not equate to the amount contained in the four judgments attached – whether defect or irregularity curable under s.306 of the Bankruptcy Act 1966 – Bankruptcy Notice invalid – Creditor’s Petition dismissed.

Bankruptcy Act 1966 (Cth), ss.41, 306
Civil Procedure Act 2005 (NSW) ss.100, 101
District Court Act 1973 (NSW)
Federal Magistrates Act 1999 (Cth), s.77
Federal Magistrates Court Rules 2001, regs.4.02, 26.01
Federal Court Rules, O.35, r.8

Big River Group Pty Ltd v Visnic [2010] FMCA 276
Croker v Commonwealth [2010] FCA 1031
Deputy Commissioner of Taxation v Trapp [2008] FMCA 704
Farrugia v Farrugia [2000] FCA 385; (2000) 99 FCR 16
Filler v Haskell [2003] FCA 121
Glass v Demarco [1999] FCA 482
Hall v Poolman [2007] NSWSC 1330
Northam v Commonwealth Bank of Australia [1999] FCA 544
Pascoe v Boensch (No.9) [2008] FMCA 769
Rees v Bank of New South Wales (1964) 111 CLR 210
Re Davis; Ex Parte Deputy Commissioner of Taxation (1963) 19 ABC 100
Re Jackson; Conway v Conway [2000] FCA 1530
Re O’Keef, Ex parte Australian Factors Ltd (1963) 19 ABC 101
Re Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596
Sandell v Porter (1966) 115 CLR 666
Short v Crawley (No.39) [2008] NSWSC 1353
Snelgrove v Roskell [2007] FCA 122
Stankiewicz v Plata [2000] FCA 185
Trojan v Corporation of Hindmarsh (1987) 16 FCR 37
Vereker v Timbs [2001] FCA 1776
Walsh v Deputy Federal Commissioner of Taxation (1984) 156 CLR 337

Applicant: MARK DOWD

Respondent: PAUL GARDE

File Number: SYG 295 of 2011

Judgment of: Lloyd-Jones FM

Hearing date: 14 June 2011

Delivered at: Sydney

Delivered on: 14 September 2011

REPRESENTATION

Counsel for the Applicant: Mr D. Tynan

Counsel for the Respondent: Mr B. Skinner

Solicitors for the Respondent: Sweeney Tiggemann Solicitors

ORDERS

1. The Creditor’s Petition be dismissed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 295 of 2011

MARK DOWD

Applicant

And

PAUL GARDE

Respondent

REASONS FOR JUDGMENT

1. This is an Application for a Sequestration Order against the Respondent Debtor pursuant to s.43 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”). The Bankruptcy Notice Number 3106 of 2010 was issued on 26 July 2010 and was served on the Respondent Debtor on 9 August 2010. The Respondent Debtor took no action to challenge the validity of the Bankruptcy Notice within the period of time for compliance with the Notice. Consequently, the relevant date of the Act of Bankruptcy would be 31 August 2010. On 22 February 2010, the Applicant Creditor filed a Creditor’s Petition. The Creditor’s Petition was served by way of orders for substituted service made on 29 March 2011. On 18 April 2011, the Respondent Debtor filed a Notice Stating Grounds of Opposition to the Petition, setting out five grounds of objection. The Respondent notified the Applicant on 23 May 2011 that it proposed only to rely on the 1^st and 4^th ground of objection.

2. The matter was listed before Registrar Hedge in the Bankruptcy list on 14 June 2011 when an application was made for the matter to be transferred for hearing before a Federal Magistrate.  The matter was heard on that day and the decision reserved.

Notice Stating Grounds of Opposition to Creditor’s Petition

1. This was filed on 18 April 2011 on behalf of the Respondent Debtor indicating that he intended to oppose the petition on the following grounds:

   1. Bankruptcy Notice No. 3106/10 is defective in that it does not comply with the requirements of the Bankruptcy Act 1966, in that it is misleading and perplexing.

   Particulars

   (i) The sum alleged to be owing by the Respondent Debtor and claimed in the Bankruptcy Notice, namely $33,929.58, cannot be reconciled with the amount of the four judgments or orders attached to the Bankruptcy Notice as follows:-

   Judgment dated 25 June 2010  $325.00

   Judgment dated 25 June 2010   $32,158.06

   Order of Registrar Hannigan dated 23 October 2009  $1,078.27

   Judgment dated 25 June 2010  $1,219.47

   Total   $34,780.80

   (ii)  The computation of interest in respect of Local Court judgments asserts a total sum of $31,808.55 upon which interest is claimed whereas the total sum of Local Court judgments is $33,702.53.

   (iii)  Interest in the sum of $7.44 is impermissibly claimed on an order made in the Federal Magistrates Court pursuant to s.101 of the Civil Procedures Act 2005.

   …

   4.  The Respondent debtor is solvent and is able to pay his debts as and when they fall due.

Evidence

1. Mr Tynan sought to read the following affidavits:

   a)Affidavit of Service by Malcolm Hill, process server, sworn 23 April 2010.   There was no objection to this affidavit being read.

   b)Affidavit of Mark Dennis Dowd, affirmed 13 June 2011. There was no objection to this affidavit being read.

   c)Affidavit of Mark Dennis Dowd, affirmed 6 May 2011.  Paras.3-7 were not read. 

   d)Affidavit of Mark Dennis Dowd, affirmed 29 April 2011.

2. Mr Skinner read the following affidavit:

   a)Affidavit of Paul Garde, sworn 14 April 2011. Paras.4, 8-11 were not read.

Amount claimed in the Bankruptcy Notice – ground 1

1. The Affidavit of Service of Malcolm Hill attaches the Bankruptcy Notice Number 3106 of 2010 claims that a sum of $33,929.58 is due and payable to the creditor.  The sum is said to be in accordance with the schedule in the Notice at p.5.  The schedule states the amount of the judgment or orders claimed totals $33,702.53.  Interest is claimed on the judgments in the sum of $227.05.  Note 2 of the schedule requires details of the amount of interest claimed to be set out in a document attached to the Notice and the principle sum on which the interest is being claimed must also be stated. 

2. Attached to the Bankruptcy Notice is the following:

   i)Certificate of Order, District Court at Sydney;

   ii)Local Court dated 25 June 2010 in the sum of $325.00;

   iii)Certificate of Determination of Costs, Assessment of Party and Party Costs, Form 2;

   iv)Certificate of Determination of Costs of Costs Assessment, Form 4, Assessment of Party and Party Costs;

   v)Local Court Judgment dated 25 June 2010 in the sum of $32,158.06;

   vi)Federal Magistrates Court Order dated 25 October 2009 in the sum of $1,078.27;

   vii)Local Court Judgment dated 25 June 2010 in the sum of $1,219.47.

   The total claimed in the Notice is $33,929.58.

3. The interest computation of $227.05 in the attachment to the Notice is comprised of two elements:

   a)Interest on the sum of $31,808.55 which is made up of two principle sums of $30,364.80 and $1,443.72.  Interest on this amount is calculated to be $219.61.

   b)Interest on the Federal Magistrates Court judgment dated 25 October 2009 calculated on the sum of $1,078.27.  This calculation is based on the sum of 9% per annum claimed under the Civil Procedure Act 2005 (NSW) giving a result of $7.44.

Respondent Debtor’s submissions – ground 1

1. Mr Skinner submits that the interest claimed in respect of the Federal Magistrates Court Order dated 25 October 2009 was in the sum of $1,078.27 and the calculation was based on a rate of 9% claimed under the Civil Procedure Act 2005 (NSW). Interest on judgments of the Federal Magistrates Court post-judgment is payable in accordance with s.77 of the Federal Magistrates Act 1999, which provides:

   1)  …

   (2)  A judgment debt under a judgment of the Federal Magistrates Court carries interest from the date as of which the judgment is entered.

   (3)  Interest is payable:

   (a)  at such rate as is fixed by the Rules of Court; or

   (b)  if the Federal Magistrates Court, in a particular case, thinks that justice so requires--at such lower rate as the Federal Magistrates Court determines.

2. The rate of interest in the Federal Magistrates Court is discretionary and may be set at a lower rate as determined, in accordance with the provisions of reg.26.01 of the Federal Magistrates Court Rules 2001 which states:

   Rate of interest

   For paragraph 77 (3) (a) of the Act, the rate of interest is the rate prescribed by the Federal Court Rules.

   Note    This rate applies to all proceedings other than family law or child support proceedings.  The Court may in a particular case determine a lower rate in the interests of justice: see paragraph 77 (3) (b) of the Act.

3. At the relevant time, Order 35 r.8 of the Federal Court Rules provided:

   Interest on judgment

   The prescribed rate at which interest is payable under paragraph 52 (2)        (a) of the Act is:

          (a)    in respect of the period from 1 January to 30 June in any year  -- the rate that is 6% above the cash rate last published by the Reserve Bank of Australia before that period commenced; and

          (b)    in respect of the period from 1 July to 31 December in any year  -- the rate that is 6% above the cash rate last published by the Reserve Bank of Australia before that period commenced.

   Note    Subsection 52 (2) of the Act provides that interest is payable:

        (a)   at such rate as is fixed by the Rules of Court; or

        (b)   if the Court, in a particular case, thinks that justice so requires -- at such lower rate as the Court determines.

4. Mr Skinner submits that there is no nexus whatsoever between the rate of 9% claimed and the Civil Procedures Act 2005 and a rate of 10.5% under O.35 r.8 of the Federal Court Rules.  This is not a case of ‘understatement’ or ‘overstatement’.  It is a case in which the Applicant Creditor has not served a proper Notice giving the requisite particulars of the foundation of the debt.  He submits that the shortcomings indentified cannot be cured.

5. Mr Skinner submits that it has long been the practice that the Bankruptcy Notice must follow the judgment or orders upon which it is based. A related requirement is that the Notice must require payment in accordance with the judgments or orders. In this case, the foundation of the Notice being no less than four judgments and orders has resulted in inaccuracy. Mr Skinner acknowledges the change in attitude of the Courts since the decision in Adams v Lambert (2006) 228 CLR 409 but there remains in place some fundamental principles being:

   i)The Bankruptcy Notice, being a document which sets in motion a whole process leading to bankruptcy (which is in the nature of a criminal matter), must be very strictly and narrowly construed: Re a debtor [1951] 1CH313 per Harman J at 318.  This view has been a feature of bankruptcy law for a long time.

   ii)Not every deficiency in a Bankruptcy Notice is capable of being cured by an application of s.306(1) of the Bankruptcy Act.

   iii)A Bankruptcy Notice will be a nullity if it fails to meet an essential requirement of the Bankruptcy Act: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at [79] – [80] or could reasonably mislead a debtor.

6. Mr Skinner submits that the High Court accepts in Adams v Lambert (supra) at [25] and Kleinwort Benson (supra) at [79] that a consideration of the general purpose of the Act, and the particular purpose of the legislative scheme relating to Bankruptcy Notices, leads readily to a conclusion if the error could reasonably mislead a debtor as to what is necessary to comply with the Notice it is not merely a formal defect or irregularity.

Submissions for the Creditor – ground 1

1. Mr Tynan submits that the first ground of objection contends that the Bankruptcy Notice is misleading and perplexing on the basis that:

   a)The amount claimed in the Bankruptcy Notice is incorrect; and

   b)The claimed interest in relation to the Federal Magistrates Court judgment is calculated under the wrong statute.

2. Mr Tynan submits that the Bankruptcy Notice should follow the judgment and claim payment ‘in accordance with the judgment’: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 per Mason CJ, Wilson, Brennan, Deane and Gaudron JJ at [80]. Where the judgment debt is based on a cost order, the correct final judgment or order to specify is the order of the Court that costs be paid, and not the certificate qualifying the costs: Stec v Orfanos [1999] FCA 457 per Beaumont, Branson and Sundberg JJ at [15] and [17]. The test is whether the Bankruptcy Notice is likely to mislead or perplex is an objective one based on all the circumstances: Kleinwort Benson (supra).  The Court may look at facts extraneous to the Bankruptcy Notice: Worchild v Drink Nightclub (QLD) Pty Ltd [2005] FCA 863.

3. Mr Tynan submits that where a defect or irregularity in a Bankruptcy Notice is merely one as to form and not to substance, and which could not mislead or embarrass a debtor, such a defect will not invalidate the Bankruptcy Notice: Adams v Lambert (supra).  A Bankruptcy Notice must, while being read strictly, also be read sensibly and not perversely.  It must also be read as a whole, and be read in light of the facts extraneous to the Notice itself: Northam vCommonwealth Bank of Australia [1999] FCA 544 per Weinberg J at [22].

4. What is required for compliance with the Act (including s.41(2)) is substantial (rather than exact or strict) compliance with the form in terms of the practical effect of the Notice: Farrugia v Farrugia (2000) 99 FCR 16 per Katz J at [27] – [31]. Section 306(1) which exists to cure formal defects is available to cure defects or irregularities in form of Bankruptcy Notices which would otherwise be invalid for offending s.41(2) and the Regulations: Adams v Lambert (supra) per Gleeson CJ, Gummow, Kirby, Hayne, Callinan, Heydon and Crennan JJ at [18], [31]. Mr Tynan submits that the Bankruptcy Notice does not contain any defect or irregularity.

5. Mr Tynan submits in the alternative if the Court finds there is a defect or irregularity, such defect or irregularity is not objectively capable of misleading the Respondent Debtor as to what is necessary for compliance with the Bankruptcy Notice for the following reasons:

   a)The Bankruptcy Notice is clearly calculated on three judgment debts (see [7 (ii), (v) & (vii)] above). In the particulars of this ground, the Respondent erroneously included an order of Registrar Hannigan dated 23 October 2009 in the sum of $1,078.27 in the calculation of the debt arising under the Bankruptcy Notice. However, the Applicant Creditor did not claim that sum as part of the Bankruptcy Notice, rather it is the Order that gave rise to the third judgment debt set out at [7(iv)] above.

   b)Although the Applicant Creditor stated the incorrect statutory provision in relation to the interest claimed on the third judgment debt, this amount is no more than a formal defect or error that does not give rise to substantial injustice to the Respondent Debtor: s.306 of the Bankruptcy Act. Where the interest is claimed in addition to the principle sum of the judgment debt, it must be specified and calculated: s.41(2) and reg.4.02; Farrugia v Farrugia (supra) at [5] – [7]. In Filler v Haskell [2003] FCA 121 at [10] – [30]. A Bankruptcy Notice simply claiming the amount of the judgment without reference to the statutory interest was held to be a valid notice.

   c)Mr Tynan argues that it could not be the case that the Respondent Debtor, a former costs assessor, could be misled as to the calculation of interest in the Bankruptcy Notice: Snelgrove v Roskell [2007] FCA 122. In support of this argument the Applicant Creditor submits that any defect or irregularity can be cured by s.306 of the Act. In Adams v Lambert (supra) the High Court held that the mis-description of a statutory provision concerning the calculation of interest stated in a Bankruptcy Notice was a formal defect or irregularity falling within the meaning of s.306(1) of the Act and did not invalidate the Bankruptcy Notice.

Consideration of ground 1

1. The first line of the schedule on p.5 of the Bankruptcy Notice gives the amount of the judgment or orders as $33,702.53.  This is the correct total of document 7(ii), (v) and (vii).  Although other source documents (Certificate of Order, Certificate of Determination of Costs – Federal Magistrates Court orders) relating to each of these three individual judgments have been attached to the Notice, they have not been included in the above sum. 

2. The confusion arises in respect of item 3 of the Schedule which is the interest accrued since the date of the judgments.  The calculation has been split into two parts, interest on the Local Court costs and interest on the Federal Magistrates Court costs.  In both of these calculations, the principle sum is not made up of individual components of the amounts of judgments that appears in the first line (item 1) of the schedule.  In the case of the Local Court, interest and the principle sum is recorded as $30,364.80 plus $1,443.75, equalling $31,808.55. Whereas the sum of the two Local Court judgments is $32,483.06 (attachment (ii) and (v)).  The source of the first figure used in this line of interest calculation have been taken from the Certificate of Determination of Costs, Form 2, Assessment of Party and Party Costs, (document (iii)) being $30,364.80).  The second amount comes from the Certificate of Determination of Costs of Costs Assessment, Form 4, Assessment of Party and Party Costs (document (iv)) being $1,443.75).

3. The explanation for this approach is contained in the affidavit of Mark Dowd, affirmed on 6 May 2011 which states at para.2 the following:

   I provided the respondent debtor copies of the certificate of determination of costs for $30,364.80 and a certificate of determination of costs assessment of $1,443.75 issued by Terrence M Ower, Costs Assessor on 28.04.10 the total of which is $31,808.55 and upon which total all interest for the Local Court must be calculated as the Civil Procedure Act 2005 – NSW does not authorise the giving of interest on any interest.

4. This issue was addressed by his Honour Driver FM in Deputy Commissioner of Taxation v Trapp [2008] FMCA 704 at [25] - [27].

   [25] There are essentially two issues raised by the debtor on the review, which are the same issues that were raised in opposition to the creditor's petition. The first is that the bankruptcy notice improperly claimed interest on interest contrary to s 101(6) of the Civil Procedure Act. The second is that the bankruptcy notice was misleading and confusing.

   [26] The first objection fails by reference to the terms of s 101 of the Civil Procedure Act. That section relevantly states that the section does not authorise the giving of interest on any interest payable under that section. The debtor's contention is that the amount claimed as post-judgment interest pursuant to s 101 of the Civil Procedure Act improperly claimed interest on a pre-judgment interest component of the judgment debt.

   [27] There was a somewhat elaborate argument on behalf of the Deputy Commissioner as to whether the interest component of the judgment debt was indeed interest or not, which I shall deal with later. However, whether or not there was any claim for pre-judgment interest, it is clear, first that there was no claim for pre-judgment interest pursuant to s 100 of the Civil Procedure Act, and secondly, that even if there had been, s 101 of the Civil Procedure Act does not prevent a claim for interest on a judgment which includes a sum of pre-judgement interest. Subsection 101(6) simply prevents a claim of compound interest on a judgement. There is a similar prohibition in s 100 on a claim for compound interest up to judgment. The sections operate independently. On that basis I reject the first ground of opposition to the petition.

5. Similarly, his Honour White J in Short v Crawley (No.39) [2008] NSWSC 1353 considered the recoverability of interest and whether post-judgment interest may be awarded on a judgment sum comprising the principle and pre-judgment interest, and particularly the operation of s.100 and s.101 of the Civil Procedure Act. The defendants in that case were challenging the proper construction of s.101 of the Civil Procedure Act 2005 (NSW) and that interest should be calculated not on the judgment amount but rather the principle amount which forms part of the judgment, excluding pre-judgment interest. In addressing this issue, his Honour states:

   [15] This appears to me to be the plain meaning of ss 100 and 101. I do not accept that that construction involves any unfairness to a judgment debtor. The remedy for a judgment debtor liable for a judgment debt which includes a component of interest, who wishes to avoid paying interest on interest, is to pay the judgment debt within 28 days.

   [16] This construction of s 101 accords with the observations of Branson J in Re Jackson; Conway v Conway [2000] FCA 1530 at [11] and [12].

1. Re Jackson; Conway v Conway [2000] FCA 1530 was a matter which concerned a Bankruptcy Notice with the obligation to pay interest on the judgment debt which resulted in improperly claimed interest on interest. The judgment debt arose following a contested proceeding in the District Court of New South Wales. In those proceedings, the Respondent (who was the plaintiff before the District Court) alleged that the Applicant (who was the defendant before the District Court) had agreed to pay her $70,000 on 30 June 1995 and that, despite demands being made for payment, he had not paid her by 30 June 1995, or at any other time. On 13 June 2000, his Honour Acting Judge Cripps gave judgment in favour of the Respondent. His Honour found that the Applicant remained under an obligation to pay the Respondent $70,000. His Honour noted that interest up to the date of judgment was claimed in an amount of $41,449.59. The former orders of the District Court entered on 13 June 2000 were:

   1.  There be a verdict for the plaintiff in the sum of $111,449.59 inclusive of interest. 

2. The Applicant claimed that the Bankruptcy Notice should be set-aside as improperly claiming interest on interest, which the Applicant claimed that the Respondent is not entitled to claim post-judgment interest on the entire amount of the verdict entered in her favour but only on the principle sum of $70,000.  In addressing this issue, her Honour Branson J stated:

   [11] The significance of the concluding words of s85(2)(c), in my view, is to make clear that although, for the purpose of enforcement of the statutory obligation to pay interest on a judgment debt, the interest is to be treated as if it were part of the judgment debt, compound interest on the judgment is not permitted. That is, further interest on such interest is not payable. The paragraph, however, has nothing to say concerning the payment of interest on the judgment debt itself. That issue is governed by s85(1) read with the definitions of "judgment" and "judgment debt" contained in s84(1) of the DC Act. S84(1) provides:

   "In this Division, except in so far as the context or subject matter otherwise indicates or requires -

   judgment includes any order of the Court for the payment of an amount of money as costs or otherwise;

   judgment debt includes -

   (a) any amount ordered by the Court to be paid as costs or otherwise; and

   (b) any amount payable as provided by the rules as costs without any order of the Court."

   [12] The above definitions make it plain that the amount of the judgment debt upon which interest was payable, unless the District Court ordered otherwise, was the sum of $111,449.59 plus any amount ordered by the District Court to be paid as costs or any amount payable as provided by the rules as costs without an order of the District Court. Although the respondent obtained a costs order in her favour in the District Court, it has not been suggested that the judgment debt includes any amount representing costs. Interest is thus payable under s85(1) of the DC Act on so much of the sum of $111,449.59 as is from time to time unpaid. As no amount of the sum of $111,449.59 has been paid, the respondent was entitled by the bankruptcy notice to claim interest on the entire amount of the judgment debt of $111,449.59 at the rate prescribed for the purposes of s95(1) of the Supreme Court Act 1970 (NSW) (see s85(2) of the DC Act).

   The Application to Set-Aside the Bankruptcy Notice was dismissed.

3. Then going to the interest on the Federal Magistrates Court the principle sum is recorded as $1,017.23 taken from the Order of Registrar Hannigan whereas in actual fact the amount that was used to calculate the total of the judgments was $1,219.47.

4. The reason for calculating interest on the Federal Magistrates Court judgment is unexplained as that judgment has been registered in the Local Court. Although the affidavit material read in these proceedings does not make reference to what procedure has been adopted here, it is to be assumed that a similar approach has been taken to that explained in para.2 of Mr Dowd’s affidavit affirmed 6 May 2011 and which is referred to in para.[22] above. All three judgments should have been calculated using s.101 of the Civil Procedure Act 2005 (NSW) as they were all judgments of the Local Court and in each case each one of these differs from the original source of the order because of the fees incurred in the registration.

5. The first Local Court judgment (document (ii)) given on 25 June 2010 in the sum of $325.00 does not appear in the interest calculations. It must be assumed that interest was not claimed in respect of this amount.  A judgment creditor is free to refrain from making any reference to interest in a Bankruptcy Notice and just demand the principle sum of the judgment debt.  In Croker v Commonwealth [2010] FCA 1031 his Honour Foster J at [21] stated:

   21.  It is true that the Respondent has not claimed interest in the Bankruptcy Notice. There is no obligation on the Respondent to do so.  A judgment creditor is free to refrain from making any reference to interest in the Bankruptcy Notice (Re Mullavey; Ex Parte Australian and New Zealand Banking Group Ltd [1977] FCA 17 at [9]-[10]; Re Wong; Ex Parte Kitson [1979] FCA 67; (1979) 38 FLR 207 at 216).

6. If a judgment creditor does demand payment of interest in addition to the principle sum of the judgment debt, which in this case the judgment creditor has sought payment for two of the judgments (document (v) & (vii)) then the creditor must calculate and specify in the notice the amount required to be paid: s.41(2), reg.4.02 and Form 1: Re Davis; Ex Parte Deputy Commissioner of Taxation (1963) 19 ABC 100.

7. The first amount on which interest is claimed is identified as the “Calculation of Interest on Local Court costs”. The source of the amount for this calculation is from the two cost certificates (documents (iii) and (iv)). This has apparently been done to avoid an alleged claim of interest but this appears to be a misunderstanding of the legislation.  The basis for the interest calculation is clearly stated:

   The period for which interest is claimed is from 25 June 2010 until 23 July 2010 – a period of twenty-eight days (28) days.

   The rate of interest is 9% per annum.

8. The date of 25 June 2010 has been directly taken from the Local Court judgment (document (v)), and the date 23 July 2010 is three days prior to the issuing of the notice by the Official Receiver. The relevant date for interest to be calculated to is the date of issue of the Bankruptcy Notice, which “speaks as at the date it bears”: Glass v Demarco [1999] FCA 482 per Emmet J at [12] – [23] citing Walsh v Deputy Federal Commissioner of Taxation (1984) 156 CLR 337; Vereker v Timbs [2001] FCA 1776 per Branson J at [11]; Farrugia v Farrugia [2000] FCA 385 per Katz J at [5]-[7] The rate of interest specified is 9% per annum is in accordance with the provisions of s.101 of the Civil Procedure Act 2005 and was the rate applicable to the relevant period.  The balance of the calculation is set out.  If the correct amount appearing on the judgment (document (v)) had been used, the appropriate interest would have been $224.28 which has resulted in an understatement of $4.67 in this part of the calculation.

9. The second amount on which interest is claimed is identified as the “Calculation of Interest on Federal Magistrates Court Costs”. The relevant judgment (document (vii)) has not been used but rather the Orders of Registrar Hannigan (document (vi)).  This again appears to be an attempt to avoid an alleged claim of interest on interest. The basis for the interest calculation clearly stated:

   The period for which interest is claimed is from 25 June 2010 until 23 July 2010 – a period of twenty-eight (28) days.

   The rate of interest is 9% per annum.

10. The date of 25 June 2010 has been correctly taken from the Local Court judgment (document (vii)) and the date of 23 July 2010 is three days prior to the issuing of the notice by the Official Receiver. The rate of interest specified is 9% per annum is in accordance with the provisions of s.101 of the Civil Procedure Act 2005 and was the rate applicable to the relevant period. The balance of the calculation is set out. If the correct amount appearing on the judgment (document (vii) had been used, the appropriate interest would have been $8.40 which has resulted in an understatement of $0.96 in this part of the calculation.

11. The total of the errors made in the interest calculations due to the use of the incorrect source amounts has resulted in an understatement of $5.63 in respect of the whole calculation.

12. The learned authors of McDonald, Henry & Meek Australian Bankruptcy Law and Practice at RE.4.02.20 state that a failure to set out in a schedule to the Bankruptcy Notice a proper calculation of the interest claimed on the statutory “provision under which interest is being claimed” (as required by sub-para(a) of Note 2 of the Schedule to Form 1) accurately is not necessarily a fatal defect which invalidates the notice and can be cured by s.306 unless it objectively misleads the debtor about what must be done to comply with the notice: Adams v Lambert (supra) per Gleeson CJ, Gummow, Kirby, Hayne, Callinan Heydon and Crennan JJ. If the interest miscalculation leads to an understatement of the amount claimed, the error will not be incurable by s.306(1) and the notice liable to be set-aside for the understatement if it objectively misleads the debtor about what must be done to comply with the notice or otherwise cause injustice: Kleinwort Benson Australia Ltd v Crowl (supra) per Mason CJ, Wilson, Brennan, Deane and Gaudron JJ.

13. I am satisfied that the problem in the interest calculation in respect of this Bankruptcy Notice is totally due to the use of the incorrect amounts which were taken from the original certificate or orders and not from the judgments issued in the Local Court in respect of those respective judgments. This has resulted in a small understatement of the interest due on the two judgments on which it was claimed. Interest on the first judgment (document (ii)) was not claimed. The second issue was the use of the heading “Calculation of Interest on the Federal Magistrates Court Costs” which was in fact registered in the Local Court and was correctly calculated under s.101 of the Civil Procedure Act 2005 (NSW) although the incorrect judgment amount was used.

14. A Bankruptcy Notice claiming interest must quantify the amount of interest claimed and will be bad if it leaves it up to the debtor to calculate the amount of interest claimed: Re O’Keef, Ex parte Australian Factors Ltd (1963) 19ABC 101; Vereker v Timbs [2001] FCA 1776 per Branson J at [11] – [12], [15] – [16]; Farrugia v Farrugia (supra) per Katz J at [5] – [7].  The typical example of this error is where the Bankruptcy Notice provides interest which accrues at a particular rate per day, leaving the recipient of the notice to then perform a calculation as to the amount required. This is not the case with the Notice currently before this Court.

15. Counsel for the debtor contends that the Bankruptcy Notice in this case, fails to meet a requirement made essential in the Bankruptcy Act in that it is not in accordance with the prescribed form and the source in which interest was claimed as provided for in Note 2 to the Schedule in the prescribed form was incorrect. In this case the amount specified in the Bankruptcy Notice was not claimed in accordance with the judgment in that the interest claimed was based on the cost certificates and not the judgment orders. Counsel for the debtor made it clear in both written and oral submissions that in all circumstances the Bankruptcy Notice served on Mr Garde did not comply with the essential requirement of the Act because the document which contained details of a calculation of the amount of interest was not sourced from the judgment attached to the Notice. Section 41(2) of the Bankruptcy Act requires the Bankruptcy Notice to be in accordance with the form prescribed by the Regulations and the nature of the defects in this matter are such that the Notice did not meet the essential requirements of the Act in the sense considered in Adams v Lambert (supra) in relation to the claimed payment of interest because the source of entitlement relied upon was invalid.

16. The High Court in Adams v Lambert (supra) concluded that the mis-description of the relevant sections of the District Court Act 1973 (NSW) as the provisions under which interest was claimed in a document attached to a Bankruptcy Notice was a mistake which fell within the terms of, and could be cured under s.306. In that case it did not fail to meet ‘a requirement made essential by the Act’ as discussed by the High Court in Kleinwort Benson Australia Ltd v Crowl (supra) at [13] – [14]. The defect in issue in this matter is distinguished from mis-description of a relevant section of the District Court Act considered in Adams v Lambert (supra) and is not a mere ‘mistaken citation of a source of entitlement to claim interest’: Adams v Lambert (supra) at [33].

17. Counsel for the debtor contends that the provisions under which the interest was claimed was a failure to comply with the requirements made essential by the Act and could not be cured by s.306. The mistake in the Bankruptcy Notice in this matter suggests a source of entitlement to interest completely separate from the judgment. This error is accentuated by the absence in the Notice of the explanation that is contained in the affidavit of Mark Dowd affirmed 6 May 2011 at para.[2]. The defect in this case is not just a matter of citation of the wrong Act or section of a wrong Act in relation to the entitlement of interest on a judgment. Errors of this nature did not require payment in accordance with a judgment and meant that the document in relation to the interest claimed in no way met its purpose for providing information about the interest claimed under the Bankruptcy Notice to ‘assist the debtor to check the claim’: Adams v Lambert (supra) at [13].  The Bankruptcy Notice failed to meet a requirement made essential by the Act.  The defect is not a ‘formal defect or irregularity’ capable of being cured within s.306 of the Act. The Bankruptcy Notice is invalid.

The Respondent Debtor’s submissions – ground 4 – solvency

1. Mr Skinner, in his written submissions, submits that the Respondent Debtor is solvent and is able to meet his debts as and when they fall due.  On this alternative ground, the Petition, as a matter of discretion, should be dismissed: Re Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596, confirmed in Trojan v Corporation of Hindmarsh (1987) 16 FCR 37. In oral submissions, Mr Skinner indicated that if his client was unsuccessful on the first ground, then he would seek the indulgence of the Court of 7 days grace in which to pay the debt.

Submission for the Creditor – ground 4 – solvency

1. Mr Tynan in his written submissions contends that the Respondent’s affidavit sworn 14 April 2011, in support of his Grounds of Objection, does not establish that the Respondent was solvent in April 2011, nor is he solvent now.   The cash flow test is generally viewed as the appropriate test for assessing the Respondent’s solvency in this area: Pascoe v Boensch (No.9) [2008] FMCA 769 at [18]. Since this involves an assessment of the debtor’s ability to meet debts as and when they fall due and requires the consideration of the debtor’s ability to convert assets into cash in a relatively short period of time: Rees v Bank of New South Wales (1964) 111 CLR 210. An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation of that asset and produce cash: Hall v Poolman [2007] NSWSC 1330 per Palmer J; Sandell v Porter (1966) 115 CLR 666 per Barwick CJ at 670.

2. Mr Tynan submits that it is not for the Court to guess when funds may become available.  It is for the Respondent Debtor to establish by way of admissible evidence the date upon which the funds are likely to become available so that the Court may consider whether or not it is reasonable: Big River Group Pty Ltd v Visnic [2010] FMCA 276 at [9]. It is not sufficient for the debtor to establish merely that he has assets exceeding the value amount of his liabilities, but are not presently realisable: Stankiewicz v Plata [2000] FCA 185 per Sackville, Drummond and Dowsett JJ at [26] – [32].

3. Mr Tynan submits there is no evidence that the Respondent has taken any steps to pay his debts to the Applicant Creditor, Mr Dowd. Further, there is no evidence that the Respondent Debtor can or will realise the funds necessary to satisfy his debt to the Applicant Creditor within a relevantly short time. Although the Respondent Debtor has a mortgage over a property at 96B Valley Road, Hazelbrook, the Court should not accept the Respondent’s evidence as to the equity he holds in that property. The evidence only shows that the Respondent Debtor purchased the property for $325,000 and paid the deposit of $16,250.00. He secured a $211,250.00 loan from Perpetual Trustees Victoria Ltd/ Opportune Home Loans for which, on the Respondent Debtor’s evidence, as at 31 December 2010, $208,420.00 remains outstanding. There is no evidence that the Respondent Debtor personally contributed any other amounts to the purchase of the property. Further, there is evidence that the Respondent Debtor has defaulted on this loan (annexure ‘B’ of his affidavit).

4. Mr Tynan submits that there is no relevant (current) evidence of the value of the property, or the timeframe in which the Respondent Debtor would be able to, let alone, be prepared to sell the property for use of whatever equity he has in the property as security to raise capital to service his debt to the Applicant Creditor. There is no evidence that the Respondent Debtor is able to realise superannuation, nor is there any evidence that if he could, he would realise it in a relatively short period of time. The Respondent Debtor has no evidence that he has access to any cash or any other assets which are realisable in a relatively short timeframe. Mr Tynan contends that in these circumstances, the Respondent Debtor cannot be said to be solvent.

Consideration of solvency

1. As the Bankruptcy Notice is invalid and the Petition is dismissed, the issue of solvency was not considered.

I certify that the preceding forty-seven (47) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM

Date:  14 September 2011