Hussain v King Investment Solutions
[2007] FMCA 242
•6 March 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| HUSSAIN & ANOR v KING INVESTMENT SOLUTIONS | [2007] FMCA 242 |
| BANKRUPTCY – Bankruptcy Notice – extension of time − where extension of time for compliance ordered by the Registrar − where the extension was not known to the court when an application to set aside the bankruptcy notice was dismissed − where the debtor successfully appealed − where matter remitted to the court − where the debtor had applied to have the notice set aside on the basis of an overstatement of the amount owed − where the debtor failed to give notice under s.41(5) Bankruptcy Act that he disputed the validity of the notice on the grounds of overstatement until service of the application to set aside − where the debtor failed to comply with Rule 30.02(4) Federal Magistrates Court Rules by not serving the creditor within three days the application disputing the validity of the notice − whether the court should exercise its discretion to dispense with the service requirement under Rule 30.02(4) − whether prejudice to either party in dispensing with the Rule. BANKRUPTCY − Bankruptcy notice − validity − overstatement of amount − where bankruptcy notice sought full amount of the judgment debt − where debtor had previously paid $20,000.00 to the creditor in a separate arrangement − where as a consequence prima facie there was an overstatement − where the debtor sought to impeach items claimed on a schedule of a mortgage and loan provided to the court by the creditor − whether evidence given by the creditor to the court proved the debts owed − whether there was an overstatement on the notice − whether the notice consequently invalid. |
| Bankruptcy Act 1966, s.41(5) Federal Magistrates Court Rules 2001, rr.30.02(4), 9.04 Federal Magistrates Court (Bankruptcy) Rules 2000 |
| Hussain v King Investment Solutions Pty Ltd [2006] FCA 905 King Investment Solutions v Hussain [2005] NSWSC 1076 |
| Applicants: | FAHMI MUSTAFA HUSSAIN & MERAJ ATHER HUSSAIN |
| Respondent: | KING INVESTMENT SOLUTIONS PTY LTD ACN 077 985 392 |
| File number: | SYG3660 of 2005 |
| Judgment of: | Raphael FM |
| Hearing date: | 19 February 2007 |
| Date of last submission: | 19 February 2007 |
| Delivered at: | Sydney |
| Delivered on: | 6 March 2007 |
REPRESENTATION
| Solicitors for the Applicant: | Douglas Knaggs |
| For the Respondent: | Mr King, a director |
ORDERS
Bankruptcy Notice NN4161/05 issued on 28 October 2005 be set aside.
Respondent to pay the applicant’s costs of the application excluding the costs of the hearing on 21 March 2006 to be taxed, if not agreed, pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG3660 of 2005
| FAHMI MUSTAFA HUSSAIN MERAJ ATHER HUSSAIN |
Applicants
And
| KING INVESTMENT SOLUTIONS PTY LTD ACN 077 985 392 |
Respondent
REASONS FOR JUDGMENT
These proceedings have been remitted to me following a decision of Gyles J: Hussain v King Investment Solutions Pty Ltd [2006] FCA 905 in which his Honour allowed an appeal and set aside orders that I had made on 21 March 2006 dismissing an application to set aside a bankruptcy notice. In coming to my decision I had proceeded on the basis that no application for an extension of time for compliance with the notice had been sought or was granted. This was incorrect. It is now accepted that such orders were made by the Registrar. In the circumstances that pertain there had been no failure to comply with the notice and therefore no act of bankruptcy.
The grounds upon which the debtor sought to set aside the bankruptcy notice arose out of an alleged overstatement of the amount due to the creditor. This ground brought into play s.41(5) of the Bankruptcy Act 1966 (the “Act”) which is in the following form:
“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 or she disputes the validity of the notice on the ground of the misstatement.”
Gyles J held that an application to the court to set aside the bankruptcy notice on the grounds of an overstatement could constitute notice under s.41(5) and as such notice had been given; whilst the time for compliance with the notice had been extended by the Registrar there was no act of bankruptcy. But the debtor had not completely complied with the Federal Magistrates Court Rules 2001 (“the Rules”). Sub-rule 30.02(4) of the Rules (being the Rules that then applied) provided that:
“The application and accompanying documents must be served on the respondent creditor within three days after the application is filed.”
The “application” is here taken to be the application to set aside the bankruptcy notice although the rule applied equally to an application for an extension of time for complying with the bankruptcy notice. That apparently anomalous position has now been cured in the Federal Magistrates Court (Bankruptcy) Rules 2006 Part 3 where it is now clear that there is a difference between applications to set aside a notice and applications for extension of time. In the former case the application must be served within three days but in the latter case it is only the order of the court that has to be served within three days. In the instant case the application to set aside the bankruptcy notice and the Registrar’s order of 13 December were not served until 9 January although the solicitor for the creditor had become aware of the application on 20 December as a result of a search.
The question as to whether or not I should exercise my discretion to dispense with this rule of the court has also been remitted to me. At the hearing the judgment creditor was represented by a director of the company to whom I gave leave to appear notwithstanding Part 9 Rule 9.04 of the Rules. There also appeared Mr Mullette on behalf of the Deputy Commissioner of Taxation who was a substituted creditor on the petition. Mr Mullette urged me not to dispense with the rule and to dismiss the application saying that his client would be severely prejudiced if I should now find, well over a year after the bankruptcy notice was issued, that it was invalid. The requirement to issue a new bankruptcy notice in order to found a new act of bankruptcy would affect the relation back date and creditors generally. Mr Mullette accepted that his client could have issued its own bankruptcy notice but for reasons which are not relevant to these proceedings it did not do so. Mr King said that he would be prejudiced by having to continue these proceedings. But it is my view that the real prejudice to be suffered by the creditor would be that if I heard the matter there was a real possibility the bankruptcy notice would be found to be invalid. Mr Knaggs submitted that there was no real prejudice to the creditor as the matter had been remitted by Gyles J and the argument on all points could be heard on the day.
In my earlier decision I had expressed a view that I would not be inclined to grant the dispensation because of the failure of the debtor to give a separate notice under s.41(5) that he disputed the bankruptcy notice on the grounds of overstatement. If a debtor had done that the creditor could reconsider the notice and if necessary withdraw it and issue a new one without involving any court procedures and at a minimal cost. If a debtor waits, as he is now permitted to do, until he issues an application applying to set aside the bankruptcy notice to give the s.41(5) notice he is voluntarily invoking the assistance of the court with all the necessary costs involved. If a creditor, upon receipt of the application, accepts the overstatement and withdraws the notice it has a potential liability for costs on the application. Looked at in this way it can be seen that the requirement to serve the application within three days assumes considerable importance from a costs point of view. If the application is not served within that time the creditor may incur extra costs in one of two ways. Firstly, blind to the existence of the application it may instruct its solicitors to commence proceedings for a sequestration order or secondly it may be asked to pay the debtor’s costs for preparation of the evidence on the application during the period before service when it might have withdrawn the notice immediately upon receipt of the application.
It will be seen then that I do not consider a decision as to the waiver of the rule to be merely a question of weighing up convenience or one of lack of prejudice, although those matters will be a constituent of a proper decision. In this case the fact that the creditor was aware only a few days after the deadline that the application had been made and the intervention of the Christmas holidays inclines me towards dispensing with compliance with the rule. The only real prejudice suffered by the creditor apart from one that could be remedied by an order for costs is that by exercising my discretion in favour of the debtors the debtors may succeed in his application. I do not think it is appropriate to take into account the representations of the substituted creditor whose rights are entirely dependent upon the validity of the original act of bankruptcy.
The original judgment was one obtained by the creditor against the debtors following an application for summary judgment which was heard by Associate Justice McCready on 1 August 2005. His Honour gave judgment for possession of land and also for a sum of money, $151,430.00 being the product of an original loan of $95,000.00 and interest of $56,430.00. Interest under this loan, which was stated in the loan document to be for a period of two months, was expressed as being at either a higher rate of 118.8% per annum or a lower rate of 60%. The debtors had only managed two monthly interest payments on time. The majority of the payments sued for were at the higher rate. In September 2005 the creditor sought to enforce the writ for possession of land. After the Sheriff had appeared on the premises of the debtors one of them contacted the creditor and asked whether the creditor would hold off the eviction if the sum of $20,000.00 was paid. The creditor agreed and the money was paid. But no further money was forthcoming, so on 28 October 2005 the bankruptcy notice which claimed the amount due under the judgment that had by then been affirmed by Campbell J on appeal, King Investment Solutions v Hussain [2005] NSWSC 1076 was issued.
Clearly if a bankruptcy notice seeks the full amount of a judgment debt and the creditor has prior to its issue received $20,000.00 there is prima facie an overstatement of the amount due. In an affidavit sworn on 30 January 2006 Mr King states in respect of the $20,000.00 payment:
“13 The payment was accepted by the respondent and credited for interest owed by the applicants under the mortgage and loan, late payment penalty, preparation of discharge inclusive of GST and legal expenses paid. The amount of such items as at 5 September 2005 less the judgment debt total $20,322.42. Annexed hereto and marked with the letter “E” is a schedule of the mortgage and loan as at 5 September 2005.”
Annexure “E” referred to in the affidavit is reproduced in Gyles J’s judgment and is repeated here:
Payout figures
| Hussain payout fiqures | |
| Principal | $95,000.00 |
| Annual Lower rate | 60% |
| Lower annual interest | $57,000.00 |
| Lower monthly interest | $4,750.00 |
| Lower daily Interest | $156.16 |
| Annual Higher rate | 118.8% |
| Higher annual interest | $112,860.00 |
| Higher monthly interest | $9,405.00 |
| Higher daily Interest | $309.21 |
| Amount | |
| Loan amount Advanced 17/12/2004 | $95,000.00 |
| Additional amount deposited to Bridgeport | $2,000.00 |
| Interest 17/12/04 – 16/1/05 at lower rate | $4,750.00 |
| Interest 17/1/05 – 16/2/05 at lower rate | $4,750.00 |
| Interest 17/2/05 – 16/3/05 at higher rate | $9,405.00 |
| Interest 17/3/05 –16/4/05 at higher rate | $9,405.00 |
| Interest 17/4/05 –16/5/05 at higher rate | $9,405.00 |
| Interest 17/5/05 –16/5/05 at higher rate | $9,405.00 |
| Interest 17/6/05 –16/7/05 at higher rate | $9,405.00 |
| Interest 17/7/05 – 16/8/05 at higher rate | $9,405.00 |
| Interest 17/8/05 – 5/9/05 – daily rate $309.20 x 19 days | $5,874.80 |
| Late repayment penalty | $9,405.00 |
| Preparation of Discharge inclusive of GST | $330.00 |
| Legal expenses paid 16/8/05 | $5,000.00 |
| Legal expenses paid 16/8/05 | $2,462.62 |
| Total | $186,002.42 |
| Less paid by Borrowers | |
| Paid 17/12/04 | $4,750.00 |
| Paid 24/1/05 | $4,750.00 |
| Paid 24/1/05 | $4,750.00 |
| Total paid by borrowers | $14,250.00 |
| Total owing as at 5/9/05 | $171,752.42 |
| Less Judgment Debt | - $151,430.00 |
| Amount outstanding above judgment debt | $20,322.42 |
The debtors sought to impeach certain of the items claimed. The first item was that of $2,000.00 described as “additional amount deposited to Bridgeport”. The fact that no details of this figure had been provided was referred to at the first hearing before me and was mentioned in my judgment. It would have been clear from at least that point that there was a dispute about this amount. Annexure “E” is not a business record. It is a document prepared solely for the purposes of these proceedings. It therefore constitutes not evidence but assertions. Some of these assertions can be proved, for example, the amount of the principal debt or the amount of the interest payments by reference to other documents that had been produced as evidence e.g. the mortgage itself or the judgments of the New South Wales Supreme Court, but in the case of others there are no supporting documents. The Bridgeport moneys are such.
The next item impeached by the debtors was the interest from 17 February to 16 March. The debtor claimed that this was shown to have been paid on 24 January 2005 and therefore interest at the higher rate could not have been claimed. In evidence Mr King told me that the inclusion of the payment as the third item in the column “less paid by borrowers” was a mistake due to the transposition of a “cell” from the spreadsheet. I accept that evidence which has the effect of both deleting one of the items paid and leaving in the figure of $9405.00 for interest due on 17 February.
The next matter was the late repayment penalty. Mr Knaggs, on behalf of the debtors, argued that this had merged with the judgment. I am saved from a consideration of this complex question by noting [139] of Campbell J’s judgment where his Honour says:
“[139] The mortgagors also attacked other clauses in the mortgage, including certain clauses which provided for damages for late payment, and which fixed the rate at which legal fees could be charged. However, none of those other clauses entered into the calculation of the monetary amount for which judgment was given in the Court below. Thus, it is unnecessary to decide whether those other clauses are penal.
[140] Insofar as the appeal attacks the quantum of the monetary judgment in the Court below, it will be dismissed.”
I cannot see in the light of those words that the debtors can now argue that these payments were merged into the judgment. The debtors can still argue that it is a penalty but they must do that in a court of competent jurisdiction.
The debtor also sought in respect of the sum of $9,405.00 “late repayment penalty” to argue that the amount claimed was wrong. The right to make a late repayment penalty is found at clause 132 of the mortgage:
“If the MORTGAGOR discharges after the EXPIRY DATE the MORTGAGOR must pay interest at the HIGHER RATE from the EXPIRTY DATE onwards and additionally pay the DAMAGES FOR LATE REPAYMENT. This clause does not detract from the MORTGAGOR’s covenant to repay on the EXPIRY DATE.”
The damages for late repayment are referred to in Annexure “A” to the mortgage and described as follows:
“In the event the mortgagor repays the loan late the mortgagor will have to pay the higher rate of interest from the expiry date onwards as well as an additional sum equal to one months interest for every month or part of a month overdue.”
The debtor argues that “one months interest is interest at the lower rate” but this is one of those mortgages which requires interest to be paid at the higher rate and allows it to be paid at the lower rate if it is paid on time. As Campbell J said at [136]:
“The interest rate under the present mortgage was 118.8% pa, reducible to 60% pa if paid within 7 days of the due date. There is no doubt that both the higher rate and the lower rate are very high rates of interest….”
And at [138]
“One requirement for a provision in a contract being a penalty is that it states a consequence which is agreed to follow from breach of one of the provisions of the contract. The structure of the interest clause in the present case is not like that. Rather, the interest clause in the contract involves a promise by the mortgagors to pay interest at 118.8%, and a promise by the mortgagee that, if the mortgagors pay the interest on time, or no more than 7 days late, the mortgagee will accept interest at 60%. A clause structured in that way is not regarded as a penalty: Wallingford v Mutual Society (1880) 5 App Cas 685 at 702.”
It follows from Campbell J’s reasoning, which I would respectfully adopt, that the interest rate is 118.8% and therefore the figure for the late repayment penalty of $9,405.00 is correct.
The final matters impeached by the debtors are the legal expenses. The debtors’ obligation to pay legal expenses is found in clauses 61 and 62 of the mortgage. Clause 62 relevantly states:
“These costs and expenses are to be on an indemnity basis. The liability of the DEBTORS for the costs and expenses will arise immediately upon the LENDER becoming liable to pay the same. The costs and expenses form part of the DEBT and will carry interest at the HIGHER RATE from the date the liability arises until the date of payment by the DEBTORS.”
Once again there is no proof in the affidavit of Mr King that those sums were incurred by the company in relation to these debtors, charged by the company’s solicitors in the amount set out or paid (although I accept this latter is not a requirement). What Mr King has deposed to in paragraph 13 of his affidavit is a conclusion. The figures set out in the annexure do not establish that conclusion, they merely repeat and break down the assertion into two separate amounts. I would have expected, and it would not have been difficult to provide, copies of the solicitor’s accounts so that it could be seen that the moneys demanded fell within clause 62. To the extent that this has not been provided I cannot be satisfied that there was truly such a debt owed by the debtors to the creditor.
The amount claimed in Annexure “E” was $171,752.42. To that sum must be added $4,750.00 representing the amount alleged to have been paid on 24 January 2005 which was not so paid. There must be deducted from this sum of $176,502.42 the $2,000.00 relating to Bridgeport concerning which there has been no evidence at all and the sum of $7,462.62 representing the legal expenses which I am not satisfied were properly incurred. This leaves $167,039.80. The judgment debt was $151,430.00. This leaves a balance of $15,609.80 which could have been absorbed by the $20,000.00. But that would produce an overpayment of $4,390.20. I find that the amount claimed in the bankruptcy notice was therefore overstated by the amount of $4,390.20 and as it has been held that proper notice was given under s.41(5) of the Act the bankruptcy notice must be found to be invalid.
There are two sets of proceedings on foot. These proceedings which are to set aside the bankruptcy notice and proceedings under SYG973 of 2006 being a creditor’s petition filed on 31 March 2006, some ten days after my original judgment in the matter and before the appeal was filed. It is those proceedings in which the Deputy Commissioner has become the substituted creditor. It would seem to follow from the decision that I have just made concerning the bankruptcy notice that these proceedings must also be dismissed but I will refrain from making any order and require the parties to relist the matter before me within fourteen days if no agremeent is reached and consent terms are not filed.
In regard to the principal matter SYG 3660 of 2005 the costs of the first hearing before me were remitted by Gyles J. As his Honour said the mistake in relation to those proceedings was the mistake of the court. There is some suggestion that the mistake came about because the Registrar’s orders were placed in the correspondence part of the file and it is certainly the case that no-one came back to me before the orders were entered asking that they be set aside on the grounds that I had made the decision under a mistake. I think that the appropriate order to make in relation to those first proceedings is that each party pay its own costs. In regard to the proceedings heard on 19 February 2007 I believe that the respondent should pay the applicants’ costs. The respondent has been on notice since the first hearing that the payment schedule was under attack and it could have remedied the situation but failed to do so.
I certify that the preceding eighteen (18) paragraphs are a true copy of the reasons for judgment of Raphael FM.
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