Kleinwort Benson Australia Ltd v Crowl

[1988] HCA 34

HIGH COURT OF AUSTRALIA

Mason C.J., Wilson, Brennan, Deane and Gaudron JJ.

KLEINWORT BENSON AUSTRALIA LTD. v. CROWL

(1988) 165 CLR 71

1 July 1988

Bankruptcy

Bankruptcy—Notice—Formal defect or irregularity—Amount due on judgment debt—Understatement of interest due on debt—Notice demanding payment of amount comprising debt and understated interest—Validity—Bankruptcy Act 1966 (Cth), ss. 41(2)(a), 306(1).

Decisions

MASON C.J., WILSON, BRENNAN AND GAUDRON JJ: These three appeals were heard together. Each is an appeal from a decision of the Full Court of the Federal Court of Australia allowing by majority (Beaumont and Burchett JJ., Wilcox J. dissenting) appeals against sequestration orders made by Jackson J. on 6 May 1987 in respect of the estates of each of the respondents to the present appeals. By order of the Full Court the orders were set aside.

2. The sequestration orders made by Jackson J. were based upon findings that each of the respondents to these appeals had committed an act of bankruptcy by failure to comply with the requirements of a bankruptcy notice: the Bankruptcy Act 1966 (Cth) ("the Act") s.40(1)(g).

3. Each bankruptcy notice was as follows:

"WHEREAS KLEINWORT BENSON AUSTRALIA LIMITED a duly incorporated company having a place of business at Level 27, 60 Margaret Street, Sydney (hereinafter referred to as "the judgment creditor") has claimed that the sum of $1,399,085.81 together with interest thereon at the rate of 19.5 per centum per annum from 3rd July, 1986 which at 30th September, 1986 amounts to $43,352.49 making a total of $1,442,438.30 is due by you to it under a final judgment obtained by it against you in the Supreme Court of New South Wales on the 3rd day of July, 1986, being a judgment the execution of which has not been stayed.

THEREFORE TAKE NOTICE that within 28 days after service of this notice on you, excluding the day on which this notice is served on you, you are required:

(a) to pay the sum of $1,442,438.30 so claimed by the judgment creditor to the judgment creditor; or

(b) to secure the payment of the sum referred to in paragraph (a) to the satisfaction of the Federal Court of Australia or the judgment creditor or compound the sum so specified to the satisfaction of the judgment creditor:

AND FURTHER TAKE NOTICE that if, within the period set out above, you fail either to comply with either of the abovementioned requirements of this notice or to satisfy the Federal Court of Australia that you have a counter-claim, set-off or cross demand equal to or exceeding the sum specified in paragraph (a), being a counter-claim, set-off or cross demand that you could not have set up in the action in which the judgment was obtained, you will have committed an act of bankruptcy on which bankruptcy proceedings may be taken against you."

4. The bankruptcy notices understated the amount of interest due on 30 September 1986 by $23,171.10 (if the date on which judgment was given, 3 July, is not included in the calculation) or $23,918.01 (if 3 July is included in the calculation). The validity of each notice was challenged by reason of this understatement. Although other matters were raised in opposition to the making of the sequestration orders, the understatement of interest is the only matter relevant to the present appeal.

5. The essential requirements of a bankruptcy notice are found in s.41 of the Act. Section 41(2) provides the prescribed form of the notice, which must be such that it:

"(a) requires the debtor named in it, within the specified time ... to

(i) pay the judgment debt or sum ordered to be paid in accordance with the judgment or order; or

(ii) secure the payment of the debt or sum to the satisfaction of the Court or the creditor or his agent, if any, specified in the notice or compound the debt or sum to the satisfaction of the creditor or his agent, if any, specified in the notice; and

(b) states the consequences of non-compliance with the requirements of the notice."

6. Mis-statement of the amount due to a creditor is not necessarily fatal to the validity of a bankruptcy notice. Sub-sections (5) and (6) of s.41 of the Act make specific provision for overstatement, providing that a bankruptcy notice will not be invalidated by reason only that the sum specified in the notice as due exceeds the amount in fact due, "unless the debtor, within the time allowed for payment, gives notice to the creditor that he disputes the validity of the notice on the ground of the mis-statement": sub-s.(5). Although no specific provision is made in relation to understatement, s.306(1) of the Act 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 issue of a bankruptcy notice is a proceeding under the Act: Pillai v. Comptroller of Income Tax (1970) AC 1124, at p 1131.

7. Three questions arise as to the validity of the bankruptcy notices in this case: are they defective or irregular; if so, is the defect or irregularity substantive or formal; and if it is formal only, has it occasioned substantial and irremediable injustice?

8. It may be accepted that a bankruptcy notice which mis-states the amount due to the creditor is defective or irregular. Within this context the inclusion in the notice of an amount for interest due on a judgment debt poses particular problems. The bankruptcy notice is issued by the Registrar: s.41(1)(b). As the notice is not necessarily issued on the day of filing, the creditor is not always able to calculate precisely the amount due as at the date of issue. These problems are adverted to in some detail in Re Munson; Ex parte Deputy Commissioner of Taxation (1977) 29 FLR 479, at pp 482-483, and Re The Bankruptcy Act 1966; Ex parte Commercial Banking Co. of Sydney Ltd (1979) 23 ALR 522, at p 525.

9. Interest due on a judgment debt may, but need not, be included in a bankruptcy notice: In re Lehmann, Ex parte Hasluck (1890) 7 Morr 181; Re O'Keefe, Debtor; Ex parte Australian Factors Limited, Creditor (1963) 19 ABC 101; Re Mullavey; Ex parte Australia and New Zealand Banking Group Ltd (1977) 20 ALR 276, at p 283. It would seem that the reason for this is historical, rather than referable to the terms of s.41(2)(a)(i) of the Act which speaks of a requirement that the debtor pay "the judgment debt ... in accordance with the judgment" (emphasis added). In Re Manion; Ex parte Deputy Commissioner of Taxation (1979) 23 ALR 270 Lockhart J. expressed the view (at p 273) that "(a)lthough interest is necessarily and inextricably attached to the judgment debt ... it does not itself answer the description of the sum due by the debtor to the petitioning creditor under the final judgment." Whether that be so or not, the regularity of including interest in the amount claimed by a bankruptcy notice has long been accepted.

10. If interest is included in a bankruptcy notice it must be calculated: Re O'Keefe, at p 103. A notice claiming more by way of interest than that in fact due was held to be invalid in In re A Debtor (1908) 2 KB 684, where the mistake was held not to be merely a formal defect or irregularity. That position is now covered by s.41(5) and (6) of the Act, to which reference has already been made.

11. Until the decision the subject of the present appeals the Federal Court had accepted a distinction between the consequences attaching to the understatement of the judgment debt and understatement of interest due on the judgment debt. Understatement of the former, unless accompanied by a waiver of the excess, was accepted as a defect rendering the notice invalid: Re Schierholter; Ex parte Geis (1978) 19 ALR 113. Understatement of interest was accepted as a formal defect or irregularity attracting the operation of s.306(1) of the Act: Re Munson; Re Manion; Re The Bankruptcy Act 1966; and Re Preston; Ex parte Commercial Bank of Australia Ltd (1982) 45 ALR 105. It was argued on behalf of the respondents that that approach to understatement of interest was inconsistent with the decisions in In re H.B. (1904) 1 KB 94 and Re Schierholter.

12. In In re H.B. a creditor and debtor entered into an agreement in writing whereby the debt was fixed at a specified sum, and the debtor consented to judgment being entered against him for that sum which debt was to be paid by agreed instalments. After default in payment of the instalments a bankruptcy notice was issued requiring payment of the overdue instalments. The Court held the bankruptcy notice to be invalid. Vaughan Williams L.J. (at p.102) said that the notice required "the debtor to pay a debt in accordance with the terms, not of the judgment, but of an agreement". Romer L.J. (at p.103) said that the bankruptcy notice

"must state the amount that is claimed as remaining unpaid on the judgment debt. Clearly, in a bankruptcy notice the debtor is entitled to see from the notice exactly what is claimed to be due on the judgment debt. No doubt a sum might be claimed which is less than the real amount due, and that would not of course be fatal to the notice so long as the notice made it clear that nothing more was claimed to be due on the judgment beyond the amount specified in the notice. But a notice to pay part of a judgment debt, leaving any balance that may be due to be subsequently claimed, is, to my mind, clearly bad."

Stirling L.J. said (at pp.104-105):

"I do not think that the Act authorizes the issue of a notice in such a form. It appears to me that in reality the creditor is requiring payment of the debt, not simply in accordance with the terms of the judgment, but in accordance with the terms of the judgment as varied by the collateral agreement. I think this is a material departure from the terms of the statute. I do not think that the Legislature meant to make non-compliance with a judgment an act of bankruptcy so long as the terms of the judgment were controlled by an outside agreement which might be more or less difficult of construction. The result is that, in my opinion, the creditor will not be entitled to issue a bankruptcy notice until all the instalments provided for by the agreement have become payable."

13. It is clear enough from the terms of s.41(2)(a)(i) of the Act that a notice must require payment "in accordance with the judgment". A notice specifying payment in accordance with some other arrangement does not satisfy this requirement. On one view In re H.B. merely gives expression to this requirement, making it clear that a judgment debt will not found the issue of a bankruptcy notice whilst ever the obligation to pay in accordance with the judgment is suspended or qualified by operation of an agreement. With that proposition we agree. But cf. Pillai (at pp.1130-1131) as to partial discharge by agreement of the obligation.

14. In Re Jack; Ex parte C.V. Holland (Holdings) Limited (1959) 19 ABC 268, at pp 269-270 and in Re Schierholter (at pp 120-121), In re H.B. was viewed as authority for the proposition that any understatement of the judgment debt invalidated the notice unless it was clear that the excess was waived by the judgment creditor. We do not think that that proposition can be supported.

15. The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice: James v. Federal Commissioner of Taxation (1955) 93 CLR 631, at p 644; Pillai, at p 1135. In such cases the notice is a nullity whether or not the debtor in fact is misled: In re A Judgment Debtor, 530 of 1908 (1908) 2 KB 474, at p 481.

16. If the amount specified in a bankruptcy notice is in fact due and payment is claimed in accordance with the judgment, the essential requirements of s.41(2)(a)(i) - the only requirements presently relevant - are met. Understatement of the amount due, whether it be an understatement of the judgment debt or of interest payable thereon, will thus constitute a defect which is substantive rather than formal only if the understatement is objectively capable of misleading the debtor as to what is necessary for compliance with the notice.

17. It may be that, in a given case, understatement is capable of misleading the judgment debtor particularly if the notice is capable of producing uncertainty as to whether the debtor is required to pay the amount in fact due or the amount specified in the notice. In such a case uncertainty arises, not merely from the understatement, but from the understatement in the context of the particular bankruptcy notice. No such uncertainty arises if it is clear that payment of the amount specified in the notice will constitute compliance with the notice.

18. In the Full Court of the Federal Court, Beaumont and Burchett JJ. were of the view that each of the notices presently in issue was perplexing in that the body of the notices required payment of the "sum of $1,442,438.30 so claimed by the judgment creditor". The words "so claimed", it was said, referred back to the recital that the judgment creditor "has claimed that the sum of $1,399,085.81 together with interest thereon at the rate of 19.5 per centum per annum from 3rd July, 1986 which at 30th September, 1986 amounts to $43,352.49 making a total of $1,442,438.30 is due by you to it under a final judgment ...". The language of the recital, it was also said, made it clear that the obligation to pay interest at the correct rate was not qualified by the computation of interest and the resulting total sum. Although the recital negatives any waiver of entitlement to interest due, the body of the notice makes it clear that it was the sum of $1,442,438.30 that was required to be paid, secured or compounded. More importantly, the notice specified that it was failure to comply with the requirement to pay the sum of $1,442,438.30, or to secure or compound that sum, or to satisfy the Federal Court of the existence of a relevant counter-claim, set-off or cross-demand equal to or exceeding the sum specified in paragraph (a) i.e. $1,442,438.30, that would constitute an act of bankruptcy. There could thus be no uncertainty as to what would constitute compliance with the notice. The notice cannot be regarded as capable of misleading and accordingly cannot be said to be a nullity. The understatement thus constituted a formal defect or irregularity which attracts the operation of s.306(1) of the Act.

19. Section 306(1) operates automatically unless "the court ... 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". In the present case no evidence was presented and no claim was made of actual injustice. There was thus no basis upon which an opinion could be formed to deny the operation of s.306(1).

20. The appeals should be allowed and the orders of the Full Court of the Federal Court set aside. Ordinarily such orders, effecting a revival of the order made by Jackson J., would be sufficient to dispose of the appeals. However, since the appeals were instituted, sequestration orders have been made in respect of the estates of James Albert Crowl and Malcolm Charles Tucker. In each of these cases the appropriate order is that the sequestration order since made be amended so as to date from the day on which the original sequestration order was made by Jackson J. and be deemed to be made on the creditor's petition: In re Haynes, Ex parte Kibble (1890) 7 Morr 50; In re Johns, Ex parte Spears (1893) 10 Morr 190 and Clyne v. Deputy Commissioner of Taxation (1984) 154 CLR 589, at p 597. Accordingly, the matters of James Albert Crowl and Malcolm Charles Tucker should be remitted to the Federal Court for the making of appropriate additional orders.

DEANE J: It has long been a fundamental precept of the law of bankruptcy that "a bankruptcy notice, which is the foundation of a bankruptcy, attended as a bankruptcy is with penal consequences, is a matter in which great strictness is required" (per Cozens-Hardy M.R., In re A Judgment Debtor, 530 of 1908 (1908) 2 KB 474, at pp 476-477, see also James v. Federal Commissioner of Taxation (1955) 93 CLR 631, at p 644). A defect in a bankruptcy notice will invalidate it "except in the case of a merely formal defect" (per Vaughan Williams L.J., In re O.C.S. (A Debtor); Ex parte The Debtor (1904) 2 KB 161, at p 163, see also In Re a Debtor, No. 21 of 1950; Ex parte The Debtor v. Bowmaker Ltd (1951) Ch 313, at p 317). If a defect in a bankruptcy notice is other than a formal one, the notice itself is defective and failure to comply with it does not constitute an act of bankruptcy.

2. It is true that the strictness of the above rules leaves open the possibility of abuse by unscrupulous debtors. That is, however, an unavoidable concomitant of the protection of ordinary people faced with the threat of being made bankrupt. Many, and possibly most, of the petitions in the bankruptcy lists of this country seek the bankruptcy of honest, albeit unbusinesslike or naive, people whose indebtedness springs from causes which evoke sympathy rather than indignation. For such people, bankruptcy does not represent a game to be played to the frustration of their creditors. It represents a pronouncement of failure and humiliation attended by the fear of unknown consequences and the susceptibility to criminal punishment for what would otherwise be innocent conduct (see, e.g., per Griffith C.J., Hamilton v. Warne (1907) 4 CLR 1293, at p 1297). As Riley J., a noted Australian authority on bankruptcy law, sometimes pointed out to those appearing before him, the least that the courts can do is to insist that a person who seeks to subject another to the law of bankruptcy himself strictly observes the requirements of that law.

3. To comply with the above rules, a bankruptcy notice must correctly state the amount of the debt upon which it is based. If interest is included in the claim under the bankruptcy notice, it must be accurately calculated and stated. Otherwise, the bankruptcy notice is invalid (Re McDonald; Ex parte Elder Smith Goldsbrough Mort Ltd. (1978) 18 ALR 505, at p 507). There are two qualifications which need to be made to that general proposition. The first is that, if the misstatement is "a mere clerical error ... which could not mislead or embarrass the debtor, because he could see on the face of the document ... what was the amount which was really claimed from him" (per Kennedy L.J., In re A Debtor, 478 of 1908, (1908) 2 KB 684, at p 691 explaining Ex parte Johnson. In re Johnson (1883) 25 ChD 112), the defect will be merely a formal one which may be cured pursuant to s.306 of the Bankruptcy Act 1966 (Cth) which deals with formal defects and mere irregularities. The requirement is not that the mistake did not actually mislead the debtor. It is that it could not have reasonably so misled him (Bowmaker, at pp 319-320, Pillai v. Comptroller of Income Tax (1970) AC 1124, at p 1135, James, at p 644). The second qualification is that the Bankruptcy Act, in s.41(5) and (6), contains express provisions which may operate to avoid the invalidating consequence of an overstatement of the judgment debt. There is, however, no such statutory provision excusing the consequences of understatement of the judgment debt.

4. The only point in relation to which I would depart from the reasoning of Beaumont J. and Burchett J. in the Federal Court is that I do not think that the relevant inquiry in the case of a bankruptcy notice which understates the amount of the debt owed to a judgment creditor is restricted to whether the notice is capable of misleading or embarrassing the debtor as to the manner in which he may comply with its requirements. A debtor faced with the demands of a bankruptcy notice is entitled to expect that the notice does not positively and significantly mislead him about the effect of compliance with its terms. If, for example, a bankruptcy notice significantly understates the total amount of the debt upon which it is based, it is but a partial answer to the problem to assert that it would be apparent to the debtor that he will comply with the terms of the notice if he pays the amount which it demands. A bankruptcy notice is an official document issued by a Registrar in Bankruptcy at the request and in accordance with information supplied by the judgment creditor (see Re Munson; Ex parte Deputy Commissioner of Taxation (1977) 29 FLR 479, at pp 480-481). If the bankruptcy notice positively misleads the debtor by understating to a significant extent the total amount of the identified liability to the creditor, it could reasonably mislead the debtor even about whether he is in fact insolvent and whether, having regard to his assets and the demands of other creditors, he should pay the amount demanded in the bankruptcy notice or allow his estate to be administered in bankruptcy. It is likely to produce injustice in that, if the debtor manages to comply with its terms on the basis that it accurately states the amount of the identified liability which it requires to be discharged, he may nonetheless be forthwith served with another bankruptcy notice issued on the application of the same creditor for the balance of a liability which the first bankruptcy notice had wrongly informed him would be discharged by compliance with the requirements of that notice.

5. Each of the bankruptcy notices in the present cases recited that the judgment creditor claimed that there was due to it "the sum of $1,399,085.81 together with interest thereon at the rate of 19.5 per centum per annum from 3rd July, 1986 which at 30th September, 1986 amounts to $43,352.49 making a total of $1,442,438.30 ... due ... under a final judgment". They went on to require the debtor to pay to the judgment creditor, or secure the payment of, "the sum of $1,442,438.30 so claimed" (emphasis added). In fact, interest at "the rate of 19.5 per centum per annum" on the stipulated sum for the stipulated period would amount to more than $23,000 in excess of the stated amount of interest of $43,352.49. It is common ground between the parties that the amount owing to the judgment creditor in respect of the judgment debt and interest as at 30 September 1986 was more than $23,000 in excess of the total sum of $1,442,438.30 referred to in the notices and that that excess was neither waived nor abandoned by the judgment creditor (cf. Re Schierholter; Ex parte Geis (1978) 19 ALR 113, at pp 119-121, and authorities there referred to). In the result, the notices were positively and significantly misleading about the amount of the liability which they required to be discharged. They were likely to mislead an ordinary debtor into believing that that debt was some $23,000 less than it actually was. If such a debtor sought to determine whether he was in fact insolvent, reliance upon what the bankruptcy notice stated would significantly distort his calculations. If the debtor, relying on the accuracy of what the bankruptcy notice asserted, complied with its demands, he would be liable to be served immediately with another bankruptcy notice demanding payment of the balance of the debt which, according to the first bankruptcy notice, would have been fully discharged.

6. Nor would the defect in the bankruptcy notice be rendered either insignificant or merely formal if a debtor upon whom it was served actually performed the calculation of interest to which it referred. All that would do would be to indicate to the debtor that there was a significant mistake in the notice. It would not identify what the mistake was. If the debtor was unaware of the heights which court rates of interest had reached in New South Wales, he would be likely to guess (wrongly) that the stated rate of interest of 19.5 per centum per annum should have been a considerably lower figure. Alternatively, the debtor might speculate about whether there had been an overstatement of the judgment debt which constituted another element of the calculation of total interest. If that were so, the amount demanded would be an overstatement of the amount actually owed. If the debtor had the good fortune to divine that the error lay not in the elements of the calculation but in the calculation itself, he would, unless he was well informed, be likely to be perplexed about how much he was required to pay to avoid committing an act of bankruptcy. Each bankruptcy notice expressly identifies the debt upon which it is based as the amount of the judgment debt plus interest calculated up to 30 September 1986. An ordinary debtor who identified the mistake as lying in the actual calculation would inevitably be led to ask whether, in a context where the body of the bankruptcy notice expressly identified the debt which had to be paid as the debt "so claimed", he was required to pay the amount mistakenly alleged to be due or the amount which was actually due on a correct calculation. If the debtor was not an ordinary one but was aware of the decision in Ex parte Johnson, he would be aware that it had been held by the English Court of Appeal that the mistaken understatement of the debt in the body of a debtor's summons in an amount which could not sustain a bankruptcy order should be read as indicating the correct larger amount where the error was obvious from accompanying particulars and the debtor "had the means of correcting" it. If such a debtor felt that the only safe course was to act on that basis, he would necessarily be required to do what all the cases say he should not be required to do, namely, to calculate for himself the amount of the debt which he was required to pay to avoid committing an act of bankruptcy (see, e.g., Re Thomas E. Davis; Ex parte Deputy Commissioner of Taxation (1963) 19 ABC 100, Re O'Keefe, Debtor; Ex parte Australian Factors Limited, Creditor (1963) 19 ABC 101). Be that as it may, it seems to me that the proposition that an ordinary debtor who realized that the stated amount of the debt "so claimed" was mistaken could not be perplexed by the mistake for the reason that he could not fail to appreciate that the notice required him to pay only the mistakenly calculated amount and not the correct amount is patently unsound.

7. There is one further matter which should be mentioned. Senior counsel for the appellant creditor drew attention to the procedural difficulty in calculating the precise amount of interest up to the date of the bankruptcy notice in circumstances where a petitioning creditor will ordinarily be unaware, in advance, of the precise date upon which a bankruptcy notice will issue. There are, however, a number of accepted ways of avoiding that difficulty without waiving or abandoning the entitlement to interest. One way is to refrain from including interest in the debt upon which the bankruptcy notice is based (see, e.g., Re McDonald; Re Mullavey; Ex parte Australia and New Zealand Banking Group Ltd. (1977) 20 ALR 276, at pp 282-284). Another is to follow the course adopted in the present case, namely, to include in the debt upon which the bankruptcy notice is based interest only up to a specified date (see, e.g., Re Munson, and see generally, S. Cavanagh, "The Requisites of Bankruptcy Notices - A Survey of Recent Cases" Australian Law Journal, vol. 54 (1980), 278, at pp.280-282). All this however has little relevance to the present cases since it could not be, and has not been, suggested that the error of more than $23,000 in the statement of the debt in the bankruptcy notices in the present cases was the result of any such difficulty.

8. The appeals should be dismissed.

Orders

Appeals allowed with costs.

In the matter of Kleinwort Benson Australia Ltd v. Delia Mary Crowl, order that the orders of the Full Court of the Federal Court be set aside and in lieu thereof order that the appeal be dismissed with costs.

In each of the matters of Kleinwort Benson Australia Ltd v. James Albert Crowl and Kleinwort Benson Australia Ltd v. Malcolm Charles Tucker, order that the orders of the Full Court of the Federal Court be set aside, that the respondent pay the appellant's costs of the appeal to that court, and that the matter be remitted to that court for the making of orders in accordance with the judgment of this Court.