Kingsway Group Limited v Hawkins
[2010] FMCA 403
•18 June 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KINGSWAY GROUP LIMITED v HAWKINS | [2010] FMCA 403 |
| BANKRUPTCY – Creditor’s petition – whether defects in bankruptcy notice, affidavits verifying creditor’s petition or creditor’s petition – sequestration order. |
| Bankruptcy Act 1966 (Cth), ss.33, 41, 44, 47, 52, 306 Bankruptcy Regulations 1996 (Cth), reg.4.02 Federal Court of Australia Act 1976 (Cth), s.31A Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), rr.4.02, 4.04, 4.06 |
| Adams v Lambert (2006) 228 CLR 409; [2006] HCA 10 International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 Jensen v Queensland Law Society Inc (2006) 154 FCR 525; [2006] FCA 1206 Kingsway Group Limited v Diddy Boy Pty Limited & Anor [2009] NSWSC 1425 Marshall v General Motors Acceptance Corporation Australia (2003) 127 FCR 453; [2003] FCAFC 45 Re Sanders; Knudsen and Yates (t/as The Hargreaves practice) v Sanders (2003) 1 ABC(NS) 408; [2003] FCA 1079 Robert Hudson Junior v Thomas James Donald & Anor [1997] FCA 852 Sandell v Porter and Another (1966) 115 CLR 666; [1966] HCA 28 St George Wholesale Finance Pty Ltd v Spalla (2000) 181 ALR 682; [2000] FCA 1094 |
| Applicant: | KINGSWAY GROUP LIMITED ACN 089 265 127 |
| Respondent: | DAVID CHARLES HAWKINS |
| File Number: | SYG 1367 of 2009 |
| Judgment of: | Barnes FM |
| Hearing dates: | 6 & 13 May 2010 |
| Delivered at: | Sydney |
| Delivered on: | 18 June 2010 |
REPRESENTATION
| Counsel for the Applicant: | Mr Cutler |
| Solicitors for the Applicant: | Willis & Bowring |
| Respondent: | In person |
| Solicitors for the Supporting Creditor, Aranac (Contracting) Pty Limited: | Connery Partners Lawyers |
| Solicitors for the Supporting Creditor, Daren James Anderson: | ERA Legal |
| Counsel for the Supporting Creditor, Newball Pty Ltd: | Mr Arnott |
ORDERS
The applicant creditor be given leave to amend the creditor’s petition by deleting the words “29 April 2009” in paragraph four thereof and inserting the words “28 May 2009” in lieu thereof.
The need for service of the amended creditor’s petition upon the respondent debtor be dispensed with.
A sequestration order be made against the estate of David Charles Hawkins.
The applicant creditor’s costs (including any reserved costs) be taxed (in accordance with the Federal Court Rules) and paid from the estate of the respondent debtor in accordance with the Act.
Under the Bankruptcy Regulations a copy of this sequestration order be given to the Official Receiver in Sydney within 2 days.
THE COURT NOTES THAT:
The date of the act of bankruptcy is 28 May 2009.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1367 of 2009
| KINGSWAY GROUP LIMITED ACN 089 265 127 |
Applicant
And
| DAVID CHARLES HAWKINS |
Respondent
REASONS FOR JUDGMENT
These proceedings
On 9 June 2009 the applicant creditor Kingsway Group Limited (Kingsway) filed and presented a creditor’s petition seeking that a sequestration order be made against the estate of the respondent debtor David Charles Hawkins. The creditor’s petition recited that the debtor owed the creditor the amount of $2,633,989.55 pursuant to a judgment of the Supreme Court of New South Wales entered on 27 February 2009 but disclosed security over property to the value of $2,300,000.00 consisting of land comprised in a specified folio identifier at a particular address in Waverton, New South Wales (the Waverton property). The land was said to be valued at $2,300,000.00 leaving an unsecured debt of $333,989.55. The creditor’s petition stated that the respondent debtor committed an act of bankruptcy by failing to comply on or before 29 April 2009 with the requirements of a bankruptcy notice served on him on 19 March 2009.
The debtor opposed the making of a sequestration order on the basis of a notice stating grounds of opposition to the petition filed on 16 October 2009 which contains 11 grounds. However while Mr Hawkins stated that each of the grounds was pressed, he did not specifically address a number of the grounds in his submissions.
Background
On 27 February 2009 Fullerton J of the Supreme Court of New South Wales entered summary judgment in proceedings 12721 of 2008 in favour of Kingsway in the sum of $2,633,989.55 against a company known as Diddy Boy Pty Limited (Diddy Boy) and Mr Hawkins. Diddy Boy subsequently went into liquidation (Kingsway Group Limited v Diddy Boy Pty Limited & Anor [2009] NSWSC 1425).
Those proceedings had been brought by Kingsway against Diddy Boy as the borrower under a loan agreement with Kingsway dated 20 October 2006 and against Mr Hawkins (the director of Diddy Boy) as guarantor of Diddy Boy’s obligations under a Deed of Guarantee and Indemnity also dated 20 October 2006. The loan agreement had been entered into in connection with the purchase of the Waverton property. Kingsway held a mortgage over the Waverton property as security for the loan and pursuant to a power of sale under that mortgage entered into a contract to sell the property on 30 July 2008 for the sum of $2,300,000 with completion to take place on 22 September 2009.
In the Supreme Court proceedings Kingsway obtained summary judgment in relation to the amount owing under the loan. Fullerton J considered an amended defence (which the defendants were given leave to rely on) but was satisfied “having regard to all the evidence, and to the requisite degree of certainty, that the absence of defence [was] clearly demonstrated” (see Kingsway Group Limited v Diddy Boy Pty Limited & Anor at [18]).
The judgment of Fullerton J formed the basis for Bankruptcy Notice NN827 of 2009 issued on 9 March 2009 by the Official Receiver and served on Mr Hawkins on 19 March 2009.
On 9 April 2009 (the last day for compliance with the Bankruptcy Notice) Mr Hawkins commenced proceedings in the Federal Court of Australia to set aside the Bankruptcy Notice. He sought and was granted an extension of time for compliance with the Bankruptcy Notice. After two adjournments, Mr Hawkins’s application to set aside the bankruptcy notice was dismissed by the District Registrar of the Federal Court on 27 May 2009 on the basis that there were no proceedings on foot to set aside the Supreme Court judgment of 27 February 2009 and the District Registrar was not satisfied on the evidence before him that Mr Hawkins had any off-setting claim (see Hawkins v Kingsway Group Limited (No. 2) [2009] FCA 1336 per Emmett J at [6]).
On 9 April 2009 Mr Hawkins and Diddy Boy also filed a notice of intention to appeal against the judgment of Fullerton J in the New South Wales Court of Appeal. This did not amount to the commencement of a proceeding in the Court of Appeal and was outside the relevant period (see Hawkins v Kingsway Group Ltd [2009] NSWCA 399 per Basten JA at [33] – [34]). Subsequently Diddy Boy went into liquidation.
The creditor’s petition was filed and presented in this court on 9 June 2009. The first return date was 9 July 2009. The hearing was adjourned to 21 August 2009 as Mr Hawkins had not been served.
On 17 July 2009 Mr Hawkins filed a second application in the Federal Court to set aside the Bankruptcy Notice. As Emmett J observed in Hawkins v Kingsway (No. 2) (at [9]), even if this was intended to be an application for review of the District Registrar’s decision it was more than four weeks out of time.
On 24 July 2009 a registrar of this court made orders for substituted service of the creditor’s petition on Mr Hawkins.
On 29 July 2009 the second application to set aside the Bankruptcy Notice was dismissed with costs by a registrar of the Federal Court on the basis that there was no evidence that any appeal proceeding had been commenced in the Court of Appeal or “of the quantum or merit of any such proceeding” (see Hawkins v Kingsway (No. 2) per Emmett J at [11]).
The creditor’s petition was served on Mr Hawkins, in accordance with the orders for substituted service, between 30 July 2009 and 4 August 2009 (as attested to in the affidavits of Henry David Chapman and Susan Farrar sworn on 18 August 2009).
On 10 August 2009, after service of the petition, Mr Hawkins filed a summons in the New South Wales Court of Appeal seeking an extension of time to file an application for leave to appeal against the judgment of Fullerton J.
On 14 August 2009 Mr Hawkins commenced a third proceeding in the Federal Court. It was expressed as an application to set aside the Bankruptcy Notice and the order of the District Registrar made on 27 May 2009. That application was treated as an application for review of the decision of the District Registrar. It was dismissed on 23 September 2009 by Stone J (see Hawkins v Kingsway Group Limited [2009] FCA 1073). In her judgment, Stone J stated (at [9]):
The extent of the delay in seeking an extension of time and the paucity of the explanation of that delay would be a sufficient ground, in my view, to refuse an extension of time. In addition, however, a further obstacle confronting Mr Hawkins is that his application, should an extension of time be granted, has little if any chance of success. This is because on 17 July 2009, after the time to seek review of the District Registrar’s decision had expired, Mr Hawkins made a further application to set aside the bankruptcy notice or to extend time for compliance with it. That application was dismissed by Registrar Hedge on 29 July 2009, following a hearing at which Mr Hawkins was represented by counsel.
On 8 October 2009 Mr Hawkins filed a notice of motion in the Federal Court purporting to seek leave to appeal against Stone J’s judgment. Kingsway sought summary dismissal of the appeal. Emmett J dismissed the proceedings on 6 November 2009 (see Hawkins v Kingsway (No. 2)). In the course of his judgment his Honour referred to the numerous adjournments that had been granted in relation to the creditor’s petition and stated (at [36] – [38]):
It should also be borne in mind that the further delay of the bankruptcy petition could be prejudicial to Kingsway. The petition has been successively adjourned by reason of the currency of this proceeding. It is also important to realise and bear in mind that the failure of Mr Hawkins's application to set aside the bankruptcy notice is not fatal to his opposition to the bankruptcy petition. Certainly, had he succeeded in having the bankruptcy notice set aside, there would have been no act of bankruptcy committed by reason of his failure to comply with it. It has not been suggested that there is any other deficiency in the bankruptcy notice. Mr Hawkins at one stage suggested that the bankruptcy notice overstated the debt. However, that submission was misconceived. It was not suggested that the amount of the judgment debt of the Supreme Court was overstated in the bankruptcy notice.
It would clearly be open to Mr Hawkins, on the hearing of the bankruptcy petition by the Federal Magistrates Court, to seek further adjournment of the hearing of the petition, pending the determination of his application for leave to appeal from the orders of the Supreme Court of 27 February 2009. Alternatively, it would be open to him to submit to the Federal Magistrates Court that the petition should be otherwise dismissed within the discretion conferred by the Bankruptcy Act. That discretion would arise if the Court were satisfied that it is appropriate to go behind the judgment debt, upon which the bankruptcy notice and the petition are based.
If the Federal Magistrates Court were persuaded that, notwithstanding the summary judgment of 27 February 2009, Mr Hawkins is not truly indebted to Kingsway, the Court could dismiss the petition. Of course, once an act of bankruptcy has been committed, it cannot be undone. Nevertheless, matters of bankruptcy, insofar as they involve status, are areas where time limits are critical. I do not consider that there was any arguable error demonstrated on the part of Stone J in refusing to extend the time for seeking the review of the District Registrar’s order. In the circumstances, I consider that the appeal should be dismissed pursuant to s 31A.
On 30 November 2009 the Court of Appeal dismissed Mr Hawkins’s application for leave to appeal from the decision of Fullerton J (see Hawkins v Kingsway Group Ltd [2009] NSWCA 399).
In the meantime, the hearing of the creditor’s petition in this court was adjourned on a number of occasions pending resolution of the outstanding litigation. After the decision of the Court of Appeal the creditor's petition came before this court on 15 December 2009. The court was informed that the parties had agreed to settle the matter but required time to perform the agreement. The petition was adjourned until 19 February 2010. Further time was sought by consent on that date. The petition was adjourned to 10 March 2010. Settlement had still not been effected by that date and the matter was listed for hearing on 6 May 2010. On that date the creditor sought to proceed with the hearing of the creditor’s petition.
Mr Hawkins unsuccessfully sought a further adjournment of the hearing of the creditor's petition on the basis that he had been promised a loan from a third party (a Mr Alameddine) to enable him to pay his debts. He also took issue with the conduct of a solicitor who had been involved in his endeavours to obtain finance from an overseas source (whom he said had prevented funds being available to him). The adjournment application was refused.
The hearing
The hearing commenced on 6 May 2010. Mr Hawkins had terminated his former solicitor’s retainer to act in the proceedings on 3 May 2010. He consented to them withdrawing from the record. Leave was granted. Mr Hawkins then appeared on his own behalf. He did not seek an adjournment of the petition on the basis of obtaining further legal representation. However after the adjournment was refused Mr Hawkins contended that he had been unprepared to proceed with the hearing if his adjournment application was not granted. Hence the hearing commenced but was adjourned part-heard (after counsel for the creditor had identified the material relied on and had addressed the formal requirements of s.52 of the Bankruptcy Act 1966 (Cth)). Mr Hawkins was given access to the court file in order to clarify which affidavits and other documents he wished to rely on. Copies of such documents were sent to him by express post when he did not wait after the adjourned hearing to obtain such copies. In addition, Mr Hawkins was granted leave to file a further affidavit in court on 13 May 2010 in support of his grounds of opposition. Mr Hawkins also filed written submissions in court in relation to the grounds of opposition.
The hearing resumed on 13 May 2010, at which time Mr Hawkins addressed the grounds in his notice of opposition. I am satisfied that Mr Hawkins has had a proper opportunity to prepare and present his case, bearing in mind that it should have been apparent that, had his adjournment application not succeeded, the hearing would have proceeded on 6 May 2010. In any event, allowance was made thereafter to ensure that Mr Hawkins had a proper opportunity to present his case.
Grounds of opposition
In oral submissions Mr Hawkins observed that he did not intend to address in submissions any of grounds one to six in the notice of opposition that were based on the fact that at the time that the notice of opposition was filed there were proceedings before the Court of Appeal.
However he then stated that he pressed all the grounds in the notice of opposition and would address them.
Ground one
Ground one in the notice of opposition is as follows:
The Debtor is not indebted to the Creditor for the amount of $2,633,989.55 as the amount specified in the Judgment of the Supreme Court of New South Wales dated 5 March 2009 is an incorrect calculation of the mortgage debt then due to the Creditor by the company Diddy Boy Pty Limited (in liquidation) under Mortgage AC699298.
Mr Hawkins contended that judgment was entered incorrectly in the Supreme Court for the amount of $2,633,989.55 upon the statement of debt provided by Kingsway to the New South Wales Supreme Court when, according to his submission, the amount outstanding under the guarantee was $2,403,989.55 after deducting $230,000 (which was the first part of the deposit of $300,000 payable to Kingsway by the purchaser under the contract for sale of the Waverton property). The Waverton contract provided for payment of a deposit in two parts: $230,000 on exchange and another $70,000 on 10 January 2009, each part to be released to the vendor on the date of the contract and on the date of payment respectively.
Critically, Mr Hawkins confirmed that he was not asking the court to go behind the judgment of Fullerton J. In any event, Mr Hawkins had the opportunity to ventilate any concern he had about the judgment of Fullerton J by appealing to the New South Wales Court of Appeal. As set out above, while he filed a notice of intention to appeal on 9 April 2009, filing of such a notice does not, under the Uniform Civil Procedure Rules 2005 (NSW), constitute the commencement of a proceeding in the Court of Appeal. On 10 August 2009 Mr Hawkins sought both leave to appeal and an extension of time to file an application for leave to appeal in the Court of Appeal. However the Court of Appeal found that “the prospects of [Mr Hawkins] succeeding in any appeal from [the decision of Fullerton J were] remote to the point that they do not justify a grant of leave to appeal” (Hawkins v Kingsway Group Limited [2009] NSWCA 399 at [31] per Tobias JA, with whom Basten JA agreed).
Kingsway has a valid and enforceable judgment in its favour for $2,633,989.55 which could properly form the basis for the Bankruptcy Notice.
Further, insofar as issue is taken with the debt relied on in the creditor’s petition, the petition relies on an unsecured debt of $333,989.55. The petition disclosed and made full allowance for the total sale price of $2,300,000 for the Waverton property (not just the deposit). As a secured creditor, Kingsway is “deemed to be a creditor” to the extent by which the amount of the debt owing exceeded the value of the security (s.44(2) of the Bankruptcy Act). It relied on such an unsecured debt of $333,989.55 and set out particulars of the security in the petition (see s.44(3) – (4) of the Act).
I am satisfied that there was owing by the debtor to the petitioning creditor a debt that amounted to $2,000 at the time of presentation of the creditor's petition within s.44 of the Bankruptcy Act and that Mr Hawkins is (and was at all relevant times) indebted to the creditor in an amount of at least $2,000 (see ss.41(1)(a)(ii), 44(1)(a) and 52(1)(c) of the Bankruptcy Act).
Ground one is not made out.
Ground two
Ground two is as follows:
The Debtor is not indebted to the Creditor for any amount as the Creditor was not entitled to exercise power of sale of the property at 16 Gasworks Road Waverton secured by Mortgage AC699298 as the Creditor had not complied with its obligations under that Mortgage by which it was able to exercise power of sale.
The claimed indebtedness of Mr Hawkins to Kingsway arose not under the mortgage but under a Deed of Indemnity and Guarantee of the loan to Diddy Boy, the former owner of the Waverton property.
This ground was not addressed in Mr Hawkins’s submissions. Mr Hawkins does not seek to go behind the judgment of Fullerton J. Insofar as he seeks to reagitate issues properly the subject of the Supreme Court proceedings, such issues have now been addressed by the Court of Appeal. The evidence before the court does not establish this ground or provide a basis upon which the court should exercise its discretion not to make a sequestration order, as discussed further below in relation to grounds five and six.
Ground three
Ground three recites that Mr Hawkins had lodged an appeal against the judgment of Fullerton J which, at the time the notice stating grounds of opposition was filed, was listed for hearing on 10 November 2009.
However Mr Hawkins’s application for leave to appeal to the New South Wales Court of Appeal has now been resolved. There is no evidence before the court of any other pending legal proceedings of relevance to these proceedings. This ground does not provide a basis on which the Court should either grant a further adjournment or dismiss the creditor’s petition.
Ground four
Ground four refers to Mr Hawkins’ application for leave to appeal against the judgment of Stone J of 23 September 2009 in Hawkins v Kingsway (see [16] above), which at the time of the notice of opposition had a first return date of 23 October 2009.
Again, this matter has now been resolved (by Hawkins v Kingsway Group Limited (No. 2) in which Emmett J set out in detail the circumstances leading up to the proceedings and dismissed the appeal summarily pursuant to s.31A of the Federal Court of Australia Act 1976 (Cth)). There is no evidence of any further proceedings in this respect and this ground is not a basis for further adjournment or dismissal of the petition.
Grounds five and six
It is convenient to consider these grounds together. Grounds five and six are as follows:
The Creditor has entered into a contract of sale of the property for which the Debtor gave a guarantee for a value that was substantially less than its then market value, upon terms and conditions of sale that were abnormal and prejudicial to the interests of the Debtor as guarantor of Mortgage AC699298.
The Creditor has acted recklessly and irresponsibly in relation to the exercise of the power of sale of the property at 16 Gasworks Road Waverton for which the Debtor gave a guarantee and had the Creditor not so acted the sale of the property would have realised an amount greater than the amount due to the Creditor under Mortgage AC699298.
These grounds were not addressed in oral submissions by Mr Hawkins. The court has not been asked to go behind the judgment of Fullerton J. Accordingly, I am satisfied that it is appropriate to accept the Supreme Court judgment as proof of the debt relied upon by the creditor. In any event, the issues raised in these grounds were ventilated in the Supreme Court and Court of Appeal proceedings.
In the amended defence relied on in the Supreme Court proceedings Diddy Boy and Mr Hawkins claimed that Kingsway had sold the Waverton property for less than its true market value and had breached its duty to Diddy Boy and Mr Hawkins with respect to the sale. According to Fullerton J, Mr Hawkins “accepted that in order to succeed on any such claim it would be necessary to establish that the mortgagee sale was either fraudulently conducted or conducted with reckless disregard for the interests of Diddy Boy as mortgagor and the applicant as guarantor” (at [8]). Kingsway conceded that as a matter of principle it had a duty in equity not to recklessly disregard the interests of Mr Hawkins as guarantor of the obligations of Diddy Boy in exercising its power of sale.
However Fullerton J rejected the claim that the property was sold at an under value. Her Honour also had regard to cl.7.1 of the Deed of Guarantee and Indemnity which provided that until the guaranteed money was paid in full and the borrower’s obligations discharged or released the guarantor must not (among other things) “raise or claim any set-off, counterclaim or defence available to any other Obligated Person in reduction of the Guarantor’s liability under this Deed”. Such a provision reflects the principle that any equitable rights Mr Hawkins had against Kingsway in his capacity as guarantor were subject to the contractual terms and conditions.
Fullerton J recognised that Diddy Boy’s right to claim damage or loss upon the sale of the property by Kingsway as mortgagee was reserved under the mortgage upon proof of fraud or reckless disregard of the interests of the mortgagor, notwithstanding the existence of cl.7.1. As Tobias JA pointed out in the New South Wales Court of Appeal (Hawkins v Kingsway Group Limited at [27]):
Nothing apparently was put to her Honour to suggest that cl 7.1 did not apply to the circumstances with which her Honour was faced. In particular nothing was put to her Honour to suggest that that clause was in any way invalid or that it was capable of being set aside under the Contracts Review Act 1980 as unjust. Nor were any of the other matters which are now the subject of the applicant’s written submissions to this court …which are unnecessary to repeat, advanced before her Honour. What the applicant says is had he known that cl 7.1 was in the guarantee he would not have executed it. He now alleges that he never read it. What is more, he asserts, without any evidence to support it, that he never had in his possession either a copy of the Deed of Loan between the respondent and Diddy Boy or a copy of the Guarantee and Indemnity which he had executed.
Tobias J found this assertion surprising (at [28]), given that it was said to be apparent from the manner in which Mr Hawkins had conducted the litigation that:
… although a litigant in person and not a lawyer, he has some reasonable working knowledge not only of the development industry in which he is engaged but also of some of the legal rights and obligations that he was entering into.
In any event, his Honour found that none of the matters Mr Hawkins sought to advance before the Court of Appeal as indicating error on the part of Fullerton J had been advanced before her.
There is no evidence before this court to support any allegation of reckless disregard of Mr Hawkins’s interests. The Waverton property did not sell at auction and was subsequently sold by private treaty. Mr Hawkins’s submission that the settlement period of 22 months provided for in the contract of sale was “extraordinary” does not provide a basis on which the creditor’s petition (based on an unsecured debt of $333,989.55 calculated after deduction of the price obtained by Kingsway on sale of the Waverton property as mortgagee) should be dismissed.
Insofar as the debtor might be seen to be taking issue with the estimate of the value of the security in the creditor’s petition such a claim is not made out. The evidence before the court is not such as to establish that the amount of the petitioning creditor’s debt is less than the amount prescribed by s.44(1)(a) of the Act so that the petition must be withdrawn or dismissed.
I am satisfied on the evidence before the court that the debt on which the petitioning creditor relies is an existing debt and is owing in the sense provided for in s.52(1) of the Act.
Grounds five and six do not provide a basis on which the petition should be dismissed or for the exercise of the court’s discretion not to make a sequestration order.
Ground seven
Ground seven is:
The Petition by the Creditor is defective in that the time for compliance with the bankruptcy notice as stated by the Creditor in its Petition is incorrectly given in paragraph (4) as being 29 April 2009, whereas the time for compliance was extended by Order of the Court until the Order by Registrar Wall on 27 May 2009.
It was conceded by counsel for the creditor that the date of the act of bankruptcy specified in the creditor’s petition (29 April 2009) was incorrect, as it did not take into account the last order for the extension of time for compliance with the Bankruptcy Notice made by the District Registrar of the Federal Court.
However the creditor sought leave to amend paragraph four of the creditor’s petition by altering the date of the act of bankruptcy to 28 May 2009 under s.33 of the Bankruptcy Act and to dispense with the requirement to serve the amended petition (see Part 7 of the Federal Magistrates Court Rules). Mr Hawkins opposed leave being granted, contending that the incorrect reference to the date of the act of bankruptcy was only one of the defects in the creditor’s petition.
It is fundamental that the act of bankruptcy relied on by a creditor be specified in the creditor’s petition. In this case it was correctly stated that the act of bankruptcy on which the creditor sought to rely was the failure by Mr Hawkins to comply with the requirements of a bankruptcy notice served on him on 19 March 2009.
Rule 4.02(1) of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) requires that a creditor’s petition be in accordance with Form 6. In turn, Form 6 includes a requirement that the date of the act of bankruptcy consisting of a failure to comply with a bankruptcy notice be specified in the creditor’s petition.
In theory, a formal defect or irregularity that could not mislead the debtor as to the fact that the act of bankruptcy relied on was the non-compliance with bankruptcy notice served on the debtor on 19 March 2009 may be cured (without amendment) under s.306 of the Act. As Kiefel J stated in Jensen v Queensland Law Society Inc (2006) 154 FCR 525; [2006] FCA 1206 at [34] – [35]:
The question whether a defect in the proceedings, in the nature of an error as to the date of act of bankruptcy referred to in the petition, is formal is to be answered by reference to whether any requirement as to it is essential, in the sense spoken of in Adams v Lambert. The requirement that the date of the act of bankruptcy in Form 6 be stated with accuracy may be regarded as necessarily implied. It could not be thought that the legislation would intend a wrong date to be stated. The question then is what was intended to in the event that there was an error as to the date? Regard should be had to the purpose of such a provision: Project Blue Sky v Australia Broadcasting Authority (1998) 194 CLR 355 at 381. The identification of the date of the act of bankruptcy may have importance for other transactions, in the event that an order for sequestration is made. If it is incorrect it should be amended. So far as concerns the debtor at the time when an order for sequestration is sought, that person needs to know is alleged as the act of bankruptcy in order to assess what course he or she should take. Obviously a debtor should not be misled about what is alleged, but it does not follow that in every case a debtor will be misled where a wrong date is given for the act of bankruptcy. The error is not of such a kind that it may be inferred in all cases that it will have an adverse effect upon the debtor. At least where the act of bankruptcy is the failure to comply with a bankruptcy notice, and there has been personal service, the debtor will be able to calculate the date when the act of bankruptcy was committed. And the debtor is to be taken to be aware that s 41(7) has the effect of extending the time fixed for compliance in the notice until the court’s determination of their application to set aside a bankruptcy notice, where they have applied before the expiration of that time. If a debtor is prejudiced by an error as to the date of the act of bankruptcy, s 306 will not apply.
It follows in my view that the error in question does not invalidate the petition. Section 306 may apply, since the appellant has not been prejudiced by it. Indeed he had always contended that the date was wrong. The petition should however be amended to reflect the correct position. There is nothing in the Act which would preclude an order for amendment and no reason is shown why it should be refused.
Similarly in this case there is no basis for finding that any prejudice was occasioned to the debtor by the mistake in the date of the act of bankruptcy.
Further, even if the incorrect date is properly characterised as a fundamental defect of more significance than a “formal defect or an irregularity”, such a defect of substance can be addressed by amendment under s.33(1)(b) of the Act with the leave of the court as sought by the creditor (see Matthews v Collet [2000] FCA 224 at [17] per Spender J, Bryant v Commonwealth Bank of Australia (Full Court of the Federal Court of Australia, 24 November 1995, unreported) and MacDonald v Official Trustee in Bankruptcy (2001) 107 FCR 72; [2000] FCA 140 at [23] – [28]).
I am satisfied that no injustice would be done by allowing such amendment (see Green v Solomon [2001] FCA 698). Mr Hawkins was involved in the proceedings in the Federal Court in which the extensions of time to comply with the Bankruptcy Notice were granted. I can see no basis for concluding that he is any worse off than if the correct date had been inserted in the creditor’s petition. The act of bankruptcy relied upon was committed within six months before presentation of the petition. The debtor does not dispute that there was non-compliance with the Bankruptcy Notice in the manner contended for by the creditor, except insofar as his grounds of opposition take issue with the validity of the Bankruptcy Notice. As discussed below, none of these grounds are made out. I am of the view that the amendment should be allowed and that the requirement to serve the amended petition should be dispensed with as sought by the creditor.
This ground does not establish a basis on which the petition should be dismissed.
Grounds eight and nine
Grounds eight and nine are as follows:
The Petition by the Creditor is defective in that the Affidavit by Peter Hatheier verifying the Petition refers only in paragraph (4)(c) to a search having been conducted of the Federal Magistrates Court and not a search of ITSA or a search of the Federal Court of Australia.
The Petition by the Creditor is defective in that the Affidavit Verifying Paragraph 4 of the Petition given by Donald Rae Wright refers only to a search of the Federal Magistrates Court and not a search of ITSA or a search of the Federal Court of Australia.
In written submissions Mr Hawkins contended that the creditor’s petition sought to rely on affidavit evidence of a “defective search” that was not cured by the subsequent affidavit of Mr Wright discussed below.
In his affidavit verifying paragraphs one to three of the creditor’s petition sworn on 5 June 2009 Peter Hatheier stated at paragraph four, subparagraph (c):
Having this day searched the records of this Honourable Court and the records of the Federal Magistrates Court of Australia (sic), no applications in relation to the Bankruptcy Notice have been made other than as deposed to in paragraphs (a) and (b) above.
Subparagraphs (a) and (b) referred to in paragraph four of the affidavit described Mr Hawkins’s applications to extend the time for compliance with and to set aside the Bankruptcy Notice.
Mr Hawkins took issue with this paragraph because it referred to searches of the records of “this Honourable Court” and of “the Federal Magistrates Court” instead of referring to the records of the Federal Court of Australia and of this court.
Ground nine is similar to ground eight except that it takes issue with the affidavit of Donald Rae Wright sworn on 5 June 2009 which verifies paragraph four of the petition and which also refers to a search of the records of “this Honourable Court” and of “the Federal Magistrates Court of Australia”.
However in an affidavit sworn on 7 December 2009 Mr Wright, the solicitor for the applicant creditor, provided an explanation for the admitted errors in his affidavit of 5 June 2009 and in Mr Hatheier’s affidavit of 5 June 2009 which I accept. Mr Wright (who was not required for cross-examination) explained that this phraseology was used in Mr Hatheier’s affidavit because the affidavits and creditor’s petition had been prepared by Mr Wright with a view to their being filed in the Federal Court of Australia. However, by “oversight” of the firm’s registration clerk, the proceedings were instituted in the Federal Magistrates Court instead. It was pointed out that the cover sheet of the creditor’s petition bore the typed heading of the Federal Court of Australia and that the registry had inserted the word “Magistrates” in the title of the court at the top of the document and had sealed the alteration.
Importantly, Mr Wright went on to attest that the 5 June 2009 searches had been undertaken by him of the records of both the Federal Court of Australia and of the Federal Magistrates Court of Australia on the “Comcourts” database which covers both courts. A copy of the searches conducted on 5 June 2009 was annexed to Mr Wright’s affidavit of 7 December 2009. It was provided by Mr Wright to Mr Hatheier for the purpose of him swearing his affidavit.
It has not been established that there were “defective searches” although the references to the courts in which searches were conducted in the affidavits of 5 June 2009 were incorrect. I am satisfied on the basis of Mr Wright’s affidavit of 7 December 2009 that searches were conducted in both the Federal Court of Australia and the Federal Magistrates Court on 5 June 2009. I note that there is no suggestion that those searches failed to disclose the Federal Court applications that had been made by Mr Hawkins in relation to the Bankruptcy Notice at that time. In addition, 2002 proceedings in the Federal Magistrates Court involving Mr Hawkins were disclosed by such searches. It is clear that the searches of 5 June 2009 covered the records of both the Federal Court and the Federal Magistrates Court.
Insofar as it is intended to be contended that a sequestration order should not be made because the petition was not verified by the affidavit of a person with knowledge of the facts in accordance with s.47(1)(b) of the Act, in this case the creditor relied not only on Mr Hatheier’s affidavit but also on those of Mr Wright. While the 5 June 2009 affidavits verifying the creditor’s petition did not correctly state the courts in which searches were carried out, I am satisfied that there is evidence before the court at the time of the hearing correctly verifying the searches that were carried out.
As the contents of the petition were verified at the time of the hearing there is no basis on which the petition should be dismissed for want of sufficient evidence to establish the requisite facts (see s.52(1)(a) and Jensen v Queensland Law Society Inc at [27] – [28]) per Kiefel J). The failure to refer to the correct courts in the earlier affidavits is not such as to render presentation of the petition a nullity (see Macdonald at [31]) and the incorrect references to the courts in the affidavits verifying the petition are not defects such as to invalidate the proceedings. If they are to be regarded as defects, they are formal defects or irregularities curable under s.306 of the Bankruptcy Act, consistent with the principles in Adams v Lambert (2006) 228 CLR 409; [2006] HCA 10 on the basis that such defects are not such as to cause substantial injustice. There is no evidence to suggest that the debtor was misled or unfairly prejudiced by this error.
I note in that respect and relevant to other grounds, that Mr Hawkins sought to rely on the approach taken to s.306 of the Act by the majority of the Full Court of the Federal Court in The Australian Steel Company (Operations) Pty Ltd v Lewis (2000) 109 FCR 33; [2000] FCA 1915 (Lewis) in which the provision under which interest was claimed was incorrectly stated in a bankruptcy notice. The majority in that case held (at [42]) that such a requirement was made essential by the Act and that a bankruptcy notice issued in breach of such requirement would be invalid (and see Marshall v General Motors Acceptance Corporation Australia (2003) 127 FCR 453; [2003] FCAFC 45). Mr Hawkins contended on this basis that the various defects alleged in the notice of opposition in the bankruptcy notice, the creditor’s petition and the affidavits were not mere formal defects and irregularities able to be cured pursuant to s.306 of the Bankruptcy Act (see Bennell v American Express International Incorporated [2006] FCAFC 80). He conceded however, that he was not familiar with Adams v Lambert in which the High Court differed from the strict approach taken by the majority in Lewis in relation to whether an error or deficiency in a bankruptcy notice involved a failure to meet a requirement made essential by the Bankruptcy Act and whether errors or deficiencies in compliance with requirements as to form could be cured under s.306 of the Act. The High Court stated (at [4]) that Lewis was wrongly decided and should be overruled.
The High Court in Adams v Lambert considered the scope of s.306(1) of the Act. Section 306(1) provides:
Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.
The Court stated at [18]:
In its application to a bankruptcy notice, s 306 assumes the possibility of some failure to comply with a statutory requirement; that is, some defect or irregularity. In the present case, if there had been no failure to comply with a requirement of the Act and Regulations, there would be no issue as to the effect of s 306. In the event of such a failure, it must be asked whether the defect or irregularity is a formal defect or irregularity within the purview of s 306. If it is, then it becomes necessary to consider whether substantial injustice has been caused by the defect or irregularity, and whether the injustice cannot be remedied by an order of the court. The questions whether the defect or irregularity is a formal defect or irregularity, and whether substantial injustice has been caused and cannot be remedied, are separate and distinct, the latter question arising only if the former is answered in the affirmative. It may be accepted that, if a defect could cause substantial injustice, it may not easily be classified as a formal defect or irregularity. But the absence of claimed injustice does not conclude the separate question that arises under s 306 about whether the defect or irregularity is a formal defect or irregularity. Neither in Lewis (where the provision under which the interest was being claimed was stated to be s 101 of the Supreme Court Act 1986 (Vic) whereas it should have been s 100(7) of the Magistrates Court Act 1989 (Vic)) nor in the present case was it suggested that substantial injustice had been caused by the defect or irregularity.
Relevantly, r.4.04(1)(a) of the Federal Magistrates Court (Bankruptcy) Rules requires that the petition be accompanied by an affidavit stating (inter alia) that the records of the Court and the records of Federal Court of Australia have been searched and providing the results of the searches. This requirement does not appear in the Act or Regulations. Insofar as a failure to comply with the Rules is a defect to which these principles apply (a matter on which I was not addressed), I would be satisfied that it is a formal defect or irregularity able to be cured under s.306. There was not a failure to meet a requirement made essential by the Act. Having regard to the legislative purpose of the Act and the significance or importance of the error in all the circumstances (Adams v Lambert at [28] – [31]) such a defect is a formal defect or irregularity and is not one that could reasonably mislead the debtor in such a manner as to take it outside the concept of a formal defect or irregularity (Adams v Lambert at [27]). No injustice has been shown to have been caused by such error, given that the correct searches were in fact carried out.
If it is a question of dispensing with the requirements of the Rules, I would do so, given the correction in Mr Wright’s subsequent affidavit. More pertinently, while s.52(1)(a) requires proof of the matters stated in the petition (for which purpose the court “may” accept the affidavit verifying the petition as sufficient), on all the evidence now before the court (including the affidavit of Mr Wright sworn on 9 December 2009), I am satisfied with the proof of the searches in the records of this court and in the records of the Federal Court of Australia carried out on 5 June 2009.
Insofar as this ground refers to a search of the National Personal Insolvency Index maintained by the Insolvency and Trustee Service of Australia, the creditor filed an affidavit confirming that such a search was conducted the day before the hearing as required under r.4.06(3) of the Federal Magistrates Court (Bankruptcy) Rules.
Hence, contrary to Mr Hawkins’s contention, the searches were not defective. Searches were carried out in the records of both the Federal Magistrates Court and the Federal Court of Australia. Even if the incorrect reference to “this Honourable Court” and the Federal Magistrates Court in the affidavits are defects, they are not such as to invalidate the creditor’s petition or warrant its dismissal given the evidence before the court at the hearing.
Ground 10
Ground 10 is as follows:
The Petition by the Creditor is defective in that it relies upon an application for the issue of a bankruptcy notice that is undated and so the Debtor does not know the date upon which the applicant for the bankruptcy notice Donald Rae Wright claims that the amount due in the Schedule to the bankruptcy notice are claimed as being due.
In written submissions Mr Hawkins contended that as the creditor’s petition sought to rely on an “undated” bankruptcy notice, the debtor did not know the date upon which the creditor claimed that the amount stated was due.
In oral submissions Mr Hawkins clarified that while he acknowledged that the Bankruptcy Notice bore the date of 9 March 2009 on which it was issued by the Official Receiver, it was his view that a date should also be inserted on the bankruptcy notice to indicate when the application for the notice to be issued was signed. He conceded that he was not aware of any requirement in the Bankruptcy Act, Regulations or Rules or in the prescribed form for bankruptcy notices for such a date.
There is no evidence of such requirement before the court. It has not been established that there has been any failure to comply with the prescribed form or with statutory requirements for a bankruptcy notice (see reg.4.02 of the Bankruptcy Regulations 1996 (Cth)). In particular, insofar as this is a contention that the Bankruptcy Notice was not properly signed, this has not been made out. The prescribed form provides for and specifically contemplates that a bankruptcy notice can be signed on behalf of a corporate creditor by someone such as a solicitor. No issue was taken with the authority of Mr Wright to sign the form as the creditor’s authorised agent.
Further, it is abundantly clear that when read as a whole the Bankruptcy Notice claims that the debt was due at the time of issue of the Bankruptcy Notice. The absence of a date beside Mr Wright’s signature is not a defect in the Bankruptcy Notice and hence no question of curing such a defect arises.
As the High Court stated in Adams v Lambert at [18]:
In its application to a bankruptcy notice, section 306 assumes the possibility of some failure to comply with a statutory requirement: that is, some defect or irregularity. In the present case, if there had been no failure to comply with a requirement of the Act and Regulations, there would be no issue as to the effect of s 306.
No issue as to the effect of s.306 arises in relation to the matters contended for in ground 10. This ground is not made out and the debtor’s contentions do not establish a basis on which a sequestration order should not be made.
Ground 11
Ground 11 is as follows:
The Petition by the Creditor is defective in that it relies upon a bankruptcy notice issued by the Official Receiver on 9 March 2009 to which the Schedule of the debt claimed is wrong in that as at the date of issue the payments made to or credits allowed since the date of judgment is noted as being ‘Nil’ whereas the Creditor had received and banked $300,000 to the account of the debtor being the deposit received and released under the sale contract.
This was the main ground relied upon by Mr Hawkins. He contended that the Bankruptcy Notice was defective because the Schedule to the Bankruptcy Notice made no allowance under the heading “[p]ayments made and/or credits allowed since date of judgments or orders” for the fact that Kingsway had received a deposit in connection with the sale of the Waverton property.
In exercise of its power of sale under the mortgage, Kingsway had entered into a contract for the sale of the Waverton property over which it held security. Under the contract of sale it was entitled to a deposit of $300,000, the first part of which ($230,000) was payable on the date of the contract (that is, 30 July 2008) and the second part of which ($70,000) was payable on or before 10 January 2009. The contract also provided that the amount of $230,000 was to be released to the vendor forthwith and that the amount of $70,000 was to be released to the vendor on the date of payment.
Mr Hawkins pointed to the fact that the Schedule in the Bankruptcy Notice provided for specification of “[p]ayments made and/or credits allowed since date of judgments or orders” to be deducted from the amount of judgments or orders, costs and interest claimed in calculation of the total debt owing. The Bankruptcy Notice contains the amount of $0.00 beside this heading. In effect, Mr Hawkins’s contention was that this was incorrect and constituted a defect in the Bankruptcy Notice on the basis that Kingsway should have inserted in the Bankruptcy Notice the sum of $300,000 as credits allowed since the date of the judgment or order, because the contract for the sale of the Waverton provided for the deposit to be released to Kingsway on dates that pre-dated the date of issue of the Bankruptcy Notice. On this basis Mr Hawkins contended that as at the date of issue of the Bankruptcy Notice the full deposit of $300,000 had been paid by the purchaser to Kingsway and received, banked and credited to the ledger of the borrower and set off against the debt then outstanding that was guaranteed by Mr Hawkins and that this amount should have been deducted from any amount claimed in the Bankruptcy Notice.
Mr Hawkins submitted that the creditor's petition should fail because of this and the other suggested defects in the Bankruptcy Notice on the basis that, as stated in Lewis, meticulous and correct attention to the requirements of form were necessary for the validity of a bankruptcy notice. It was contended that the insertion of an overestimated amount was more than a simple error, as discussed in Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71; [1988] HCA 34, and that, together with the other suggested defects in form, it was reasonable that a debtor might be misled as to what was necessary to comply with the bankruptcy notice. It was submitted that the suggested defects could not be cured under s.306 of the Bankruptcy Act. As indicated, Mr Hawkins, who was self-represented, told the court that he was not familiar with the decision of the High Court in Adams v Lambert.
Mr Hawkins also submitted that there had been an overstatement of the amount due. When asked if he was claiming that he had given a notice to the creditor under s.41(5) of the Bankruptcy Act, he suggested that this had been done in the application to the Federal Court to set aside the bankruptcy notice.
Counsel for Kingsway submitted that it was common ground that the exchange of contracts on the Waverton property and the payment of the $230,000 part of the deposit to Kingsway by the purchaser had occurred before the 27 February 2009 judgment of Fullerton J for the sum of $2,633,989.55. The date of payment of the second part of the deposit (due on or before 10 January 2009) was not specifically addressed. It was pointed out however that the Bankruptcy Notice claimed the amount of $2,633,989.55 in accordance with the judgment of Fullerton J and that a copy of the orders of the Supreme Court was annexed to the Bankruptcy Notice. On this basis, insofar as the deposit was paid before the judgment, it was not a payment made or credit allowed since the date of judgment.
Mr Cutler also contended for the creditor that while Kingsway had received the deposit, there was no evidence that it had been credited to the account of the debtor as Mr Hawkins submitted. Reference was made to cl.6 of the special conditions in the contract for sale of the Waverton property, headed “Mortgagee Exercising Power of Sale”, which provided:
b. If any proceedings to set aside this contract or restrain completion of it are commence (sic) in any court of competent jurisdiction and if any order is made setting this contract or restraining completion of it, the vendor may by written notice to the purchaser rescind this contract and the provision of clause 19 will apply. The vendor is obliged to do all things reasonably necessary to effect completion including litigating to judgement any proceeding which may be instigated by the mortgagor.
c. The purchaser agrees that if the vendor is restricted or prohibited through any means in giving title in accordance with this contract by the completion date, then the completion date shall be extended to such period of time as the vendor may reasonably require in all the circumstances to give title to the purchaser. However, if the vendor is not able to deliver title and effect completion within eighteen (18) months of the completion date due to a court judgement in favour of the mortgagor returning the property to the mortgagor, after the mortgagee has taken all reasonable steps and their best endeavours to oppose such an order, then either party may rescind this contract by notice in writing to the other side and clause 19 will apply.
It was pointed out that cl.19 provided for rescission of the contract and included a provision that (normally) if a party exercised a right to rescind expressly given by the contract or any legislation, “the deposit and any other money paid by the purchaser under this contract must be refunded”. In these circumstances, Kingsway submitted that the deposit would not have been credited to reduce Mr Hawkins’ indebtedness pursuant to the Supreme Court judgment until completion of the sale, because of the mechanism for rescission and the possibility that a refund may be required.
It was also pointed out that Mr Hawkins had exercised his right to appeal against the Supreme Court judgment, including in relation to the amount of the judgment and submitted that the issue of defects in the Bankruptcy Notice had been fully agitated in the earlier proceeding in the Federal Court.
Reliance was place on the fact that in Hawkins v Kingsway Group Limited (No. 2), which involved a summary dismissal of an appeal from the decision of Stone J, pursuant to s.31A of the Federal Court of Australia Act, Emmett J referred to the matters raised by Mr Hawkins in prior proceedings and stated (at [36]):
It has not been suggested that there is any other deficiency in the bankruptcy notice. Mr Hawkins at one stage suggested that the bankruptcy notice overstated the debt. However, that submission was misconceived. It was not suggested that the amount of the judgment debt of the Supreme Court was overstated in the bankruptcy notice.
As Mr Cutler observed, while Emmett J also referred to the fact that it would be open to Mr Hawkins to submit in these proceedings that the petition should be dismissed within the discretion conferred by the Bankruptcy Act if the court was satisfied it was appropriate to go behind the judgment debt, Mr Hawkins did not seek to persuade the court that it was appropriate to go behind the judgment debt.
In essence, Mr Hawkins’s argument is that there is a defect in the Bankruptcy Notice because the Schedule did not “credit” an amount of $300,000 that should have been credited to him.
First, there is no evidence before the court to support Mr Hawkins’s contention that the deposit was “credited” by Kingsway against the amount of the debt due after the time of judgment and before the bankruptcy notice was issued. Secondly, even if the release of the deposit to Kingsway under the contract for the sale of the Waverton land is of itself such as to amount to a payment received or credit allowed in relation to the debt owed by Mr Hawkins to Kingsway as guarantor of the debt of Diddy Boy Pty Limited (in liquidation) (see Re Taylor and Others; Ex parte Taylor and Others v Bill Acceptance Corporation Ltd (1985) 8 FCR 568), and if there is an issue about the date of payment of the second part of the deposit, it has not been established that Mr Hawkins gave notice to the creditor disputing the validity of the Bankruptcy Notice on the ground that the Bankruptcy Notice overstated the debt due within s.41(5) of the Bankruptcy Act.
Section 41(5) of the Act provides:
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.
A bankruptcy notice is not liable to be set aside by reason only of an overstatement of the amount in fact due in the absence of a s.41(5) notice.
The court was not addressed on the application of s.41(5) in circumstances in which it was contended that a bankruptcy notice had failed to include in the Schedule the credits received by the judgment creditor and to take such credits into account in reduction of the judgment debt claimed, except insofar as Mr Hawkins claimed that his applications to set aside the bankruptcy notices constituted a s.41(5) notice. Mr Hawkins’s bare assertion that his applications to set aside the Bankruptcy Notice constituted such notice is not made out on the evidence before the court. In that respect only the first application was filed within the time allowed in the Bankruptcy Notice for payment. The basis for such application is described in Hawkins v Kingsway (No. 2) at [6]. Emmett J does not refer to any s.41(5) argument in such application.
In this case the debtor’s contention is that there is an error in one of the items in Column 2 of the Schedule (Item 5) which means that when items 1 to 5 are added up they produce an excessive “total debt owing” in Item 6. In my view that is a situation in which a s.41(5) notice is required. There is no evidence before the court of such a notice.
I note that in Deputy Commissioner of Taxation v Cumins (No 5) (2008) 72 ATR 398; [2008] FCA 794 Gilmour J rejected a contention that a bankruptcy notice that underpinned a creditor’s petition was invalid because it overstated the amount in fact due by not including in Item 5 of the Schedule payments made and/or credits to which the debtor was entitled relating to the period after the judgment and before the date of issue of the bankruptcy notice where no notice in accordance with s.41(5) had been given by the debtor to the creditor.
Relevantly, Gilmour J rejected the proposition that a s.41(5) notice was not required where there were said to be omitted credits and payments in item 5 of the Schedule (at [29] – [33]). As his Honour indicated, the expression “the sum specified in the notice as the amount due to the creditor” in s.41(5) is apt to refer not only to the amount shown as “total debt owing” in Item 6 of the Schedule, but also to the component parts of that amount. Lindgren J stated in Robert Hudson Junior v Thomas James Donald & Anor [1997] FCA 852 at [31] “Except in a case of an arithmetical error of addition, an overstatement of the "Total debt owing" will always predicate an error in one or more of the component elements” (cf St George Wholesale Finance Pty Ltd v Spalla (2000) 181 ALR 682; [2000] FCA 1094 discussed in Cumins at [29] – [33]).
In Cumins Gilmour J also considered a contention that where a notice in terms of s.41(5) was required but not given in respect to alleged missed credits or payments in the Schedule, the bankruptcy notice was nevertheless invalid and a nullity that could not be saved by the operation of s.306 of the Act (on the basis that proper completion of Item 5 in the Schedule was a requirement made essential by the Bankruptcy Act). It had been contended in Cumins that the missed payments and credits could reasonably mislead a debtor in the position of the respondent as to what was necessary to comply with the notice, in particular because the respondent had not personally made the payments or made the calculations for credits in issue in Cumins and so could have no idea of what was or was not comprised in the figure that was provided for payments or credits.
A similar submission was made by Mr Hawkins about the validity of the Bankruptcy Notice in this case (although it does not appear to be submitted that he was unaware of the provisions of the contract of sale). However, as Gilmour J stated in Cumins (at [63]):
… A bankruptcy notice is not liable to be set aside by reason only of an overstatement unless the debtor gives notice to the creditor under s41(5). I have found that such notice was required but not given. Accordingly, in my opinion, s306 does not arise for consideration. I agree with what Sackville J said in obiter in Re Murdoch; Ex parte Australia & New Zealand Banking Group Ltd [1994] FCA 737 at p 10 that where no notice under section 41(5) was given then the bankruptcy notice would not be invalid even if the overstatement of the amount due is capable of misleading the debtor. His Honour’s remarks sat in the context of his consideration of s306 of the Act in respect of an overstatement in a bankruptcy notice but where no notice under s41(5) had been given. The parties had proceeded on the assumption that s306 had application in those circumstances. His Honour doubted the correctness of the assumption that the case was decided on the basis of it. His Honour’s doubt was in my opinion, soundly based. (Emphasis added)
Gilmour J also pointed out (at [64]) that in Adams v Lambert the bankruptcy notice in question referred to an incorrect statutory provision under which interest was claimed. That case “did not concern any asserted overstatement in the bankruptcy notice of the amount due” and s.41(5) had no application. Hence Adams v Lambert is of no assistance in dealing with the nature of the interrelationship between s.41(5) and s.306. The same may be said about the earlier decisions in Kleinwort Benson Australia Limited v Crowl; The Australian Steel Company (operations) Pty Ltd v Lewis; Marshall v GMAC Australia and Bennell v American Express International Incorporated on which Mr Hawkins relied but which did not relate to circumstances of the nature in issue in this case.
Hence, insofar as the debtor contended that there was an overstatement in the Bankruptcy Notice of the amount due (because credits were not allowed), in such circumstances a s.41(5) notice is required. There is no evidence of such notice and hence the Bankruptcy Notice is not invalidated by any overstatement of the amount due. Section 306 does not arise for consideration.
Ground 11 is not made out as a basis to dismiss the petition.
Other Issues
Insofar as Mr Hawkins’s submissions might be taken to involve a contention that the debt claimed is not still owing, it is important to note that in the creditor’s petition allowance was made for security in the amount of $2,300,000, which left an unsecured debt of $333,989.55 claimed to be owing at the time of presentation of the creditor’s petition. The evidence before the court does not support any claim that this did not meet the requirement of a genuine estimate of the value of the security. As explained in the affidavit verifying the creditor’s petition sworn by Mr Peter Hatheier on 5 June 2009, the land over which security was held was sold by the creditor as mortgagee exercising power of sale under a mortgage. Although the sale had not been completed at the time of presentation of the creditor’s petition, allowance was made in the petition for the value of the security based on the sale price.
In his affidavit of 5 May 2010, Mr Hatheier attested that the sale had been completed on 11 November 2009 for the price of $2,300,000 inclusive of the deposit and that the debt of $333,989.55 was still owing to the applicant. On the evidence before me, I am satisfied that the requirements of s.52(1)(c) of the Act are met.
In oral submissions Mr Hawkins also suggested that the Bankruptcy Notice was defective on the basis that on its face it did not contain anywhere in it a reference to, or copy of, the judgment or order of the Supreme Court of 27 February 2009, but simply referred in the Schedule to the amount of judgments or orders. It was contended that there should have been a specific reference to the particular judgment in question in the Schedule. Mr Hawkins submitted that the judgment referred to in the Bankruptcy Notice could have been some other judgment, such as a judgment obtained by any one of the creditors represented at the hearing, because the notice failed to recite what judgment it was that Kingsway relied upon. On this basis it was submitted that Kingsway had not given any certainty to the respondent by identifying the judgment upon which it relied.
However this argument overlooks the fact that annexed to the Bankruptcy Notice was a copy of the order of the Supreme Court of New South Wales dated 27 February 2009 in the sum of $2,633,989.55, being the amount of the judgment or order relied on in the Schedule to the Bankruptcy Notice. Paragraph two of the Form of Bankruptcy Notice makes clear the connection between the amount claimed and this order in that it states that:
A copy of the judgments or orders relied upon by the creditor is attached.
The affidavit of service of the Bankruptcy Notice attaches a document said to be a true copy of the Bankruptcy Notice, to which is annexed a copy of the order of the Supreme Court consistent with paragraph two of the Bankruptcy Notice. I am satisfied on the basis of the affidavit of service of the bankruptcy notice sworn by Henry David Chapman on 20 March 2009 that a copy of the order of the Supreme Court of New South Wales dated 27 February 2009 and relied upon by Kingsway was annexed to the Bankruptcy Notice issued and served on Mr Hawkins.
The findings I have made in relation to the suggested “defects” in the Bankruptcy Notice and otherwise mean that there is no need to consider Mr Hawkins’s contention that if one considered the defects cumulatively s.306 ought not to be available to cure such defects because of the prejudice that would be caused and had been caused to the respondent (which was said to be manifest from the fact that three supporting creditors were represented before the court at the hearing).
The grounds in the notice of opposition are not such as to satisfy me that the petition should be dismissed or that a sequestration order should not be made against the debtor.
Section 52(1) requirements
I am satisfied on the evidence before me as to service of the Bankruptcy Notice on Mr Hawkins and that he committed the act of bankruptcy alleged in the creditor’s petition by failing to comply with the requirements of Bankruptcy Notice NN827 of 2009, albeit that the date of the act of bankruptcy was not as stated in the creditor’s petition but was 28 May 2009. This was within six months of presentation of the petition. As set out above, I am of the view that leave should be granted to amend the petition to include the correct date of the act of bankruptcy and to dispense with the requirement of service of the amended petition on Mr Hawkins.
The applicant has filed further affidavits of final search and final debt. On the evidence before the court I am satisfied with proof of the matters required by s.52(1) of the Bankruptcy Act, including the matters stated in the petition, that the petition was presented in correct form, was for a debt of more than $2000 and was served on the debtor, and that the debt on which the petitioning creditor relies is still owing.
Section 52(2) of the Act
Mr Hawkins put evidence before the court that he had an agreement with a Mr Alameddine to advance him the sum of $900,000 and to employ him, provided the hearing was adjourned to a date not before 3 June 2010. In his affidavit evidence he acknowledged the existence of two supporting creditors and his awareness that another creditor had sought to appear. However Mr Hawkins did not put before the court complete evidence as to his financial position, in particular as to whether he had any other debts or even the precise extent of his indebtedness to the supporting creditors. His evidence was that he had not incurred any debts since the adjournment of the matter on 15 December 2009.
I am not satisfied on the evidence before the court that he is able to pay his debts in the sense required by s.52(2)(a) of the Act.
In his affidavit of 5 May 2010 Khaled Alameddine attested that he was prepared to “pledge” that on or before Thursday, 3 June 2010 he would pay the amount of $900,000 from his bank account in London to Mr Hawkins to enable him to pay his creditors provided that the proceedings before the court were adjourned to that date or a date thereafter but not otherwise. This evidence is not such as to establish that the debtor is able to pay his debts as provided for in s.52(2)(a) of the Bankruptcy Act. Mr Alameddine’s offer was conditional on there being an adjournment until after 3 June 2010. Such an adjournment was not granted. In those circumstances Mr Alameddine’s evidence was that he would not make any payment on behalf of Mr Hawkins and there is no evidence before the court of any such payment.
While a capacity to borrow money to pay debts may suffice to meet the requirements of s.52(2) of the Act (Sandell v Porter and Another (1966) 115 CLR 666; [1966] HCA 28), the evidence before the court in this case does not establish that Mr Hawkins has assets, or that he is in fact capable of sourcing or raising moneys to be borrowed by sale, or mortgage or pledge within a relatively short time (Sandell v Porter at 670). Nor has he established any capacity to pay for, secure or otherwise satisfy any new debt such as that proposed (conditionally) by Mr Alameddine. In any event, given the conditional nature of the offer from Mr Alameddine, it is not necessary to consider the extent to which an ability to pay one’s debts includes an ability to pay debts from the money of other people (as to which, see the views expressed in International Alpaca Management Pty Ltd v Ensor [1999] FCA 72 compared to Lewis and Another v Doran and Others (2004) 184 FLR 454; [2004] NSWSC 608 at [116]).
The debtor bears the onus of proof under s.52(2)(a) (see Re Sanders; Knudsen and Yates (t/as The Hargreaves practice) v Sanders (2003) 1 ABC(NS) 408; [2003] FCA 1079). Mr Hawkins has not satisfied the court of his ability to pay his debts within s.52(2)(a) of the Act
Section 52(2)(b) of the Act – discretionary considerations
Mr Hawkins contended that he had made arrangements to secure money to pay his creditors. However, as set out above, Mr Alameddine’s offer was conditional on an adjournment being granted to 3 June 2010 or thereafter and there is no evidence of any such payment.
Mr Hawkins also took issue with the time taken to complete the contract for the sale of the Waverton property. The proceeds of this sale reduced the ultimate indebtedness of Mr Hawkins by virtue of the security held by Kingsway as mortgagee. The settlement time is not such as to establish a basis on which the court should exercise its discretion not to make a sequestration order.
Mr Hawkins has not satisfied the court that for any of the reasons raised in the notice of opposition, in submissions or otherwise, or for other sufficient cause a sequestration order ought not to be made (see Cain v Whyte (1933) 48 CLR 639; [1932] HCA 6).
Accordingly a sequestration order should be made against the estate of David Charles Hawkins with the usual order as to costs.
I certify that the preceding one hundred and twenty-six (126) paragraphs are a true copy of the reasons for judgment of Barnes FM
Associate:
Date: 18 June 2010
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