Kostezky, N.I. v Milder Elfman Szmerling Krycer Pty Ltd
[1995] FCA 186
•31 MARCH 1995
CATCHWORDS
BANKRUPTCY - formal defects or irregularities - effect of non compliance with Bankruptcy Act, 1966, s 41(1) upon validity of bankruptcy notice.
Bankruptcy Act 1966 Cth, s 41
Bankruptcy Rules, Rule 8
Re Pollard; ex parte Lensing Management Co Pty Ltd 33 FCR 284
NICHOLAS ILYA KOSTEZKY Ex parte MILDER ELFMAN SZMERLING KRYCER PTY
VN 1996/94
Olney J
Melbourne
31 March 1995.
IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION )
BANKRUPTCY DISTRICT OF THE )
STATE OF VICTORIA ) No VN 1996/94
Re: NICHOLAS ILYA KOSTEZKY
Debtor
Ex parte:
MILDER ELFMAN SZMERLING KRYCER PTY
Creditor
Coram: Olney J
Place: Melbourne
Date: 31 March 1995
REASONS FOR JUDGMENT
On 19 August 1994 a bankruptcy notice addressed to the debtor was issued on the application of the creditor. The notice was founded upon a judgment obtained by the creditor against the debtor in the Magistrates' Court at Melbourne on 2 October 1992. Pursuant to an order for substituted service, service is deemed to have been effected 23 December 1994. The period for compliance with the notice was 21 days after service. On 13 January 1995 the debtor filed an application seeking orders to set aside the bankruptcy notice and to extend the time for compliance. An affidavit was filed in support of the application in which it is alleged that the debtor claimed to have a set off or counter-claim against the creditor exceeding the amount of the judgment debt.
Upon the return of the debtor's application on 22 February 1995 the Registrar extended the time for compliance with the bankruptcy notice to 23 February 1995 and on the latter date the period was further extended to 22 March 1995, being the date to which the hearing of the application was adjourned.
In the time between the first return of the application and the hearing on 22 March 1995 a number of affidavits were filed. With one exception they all had to do with the question of whether or not the debtor had a set off or counter-claim exceeding the amount of the debt which could not have been set up in the proceedings in which the judgment was obtained.
On 21 March 1995 the debtor filed an affidavit raising for the first time the question of the form of the bankruptcy notice which he says does not comply with the Bankruptcy Rules. By the time the matter came on for hearing the debtor had abandoned his original grounds and pursued only the question of the validity of the notice.
The bankruptcy notice served on the debtor (omitting formal parts) was in the following form:
TO: NICHOLAS ILYA KOSTEZKY
of 32 BADRICK STREET, WARWICK, WESTERN AUSTRALIA, 6024
WHEREAS:MILDER ELFMAN SZMERLING KRYCER PTY., of 3rd floor,
3 WELLINGTON STREET, WINDSOR, VICTORIA 3181
(hereinafter referred to as "the judgment creditor") has claimed that the sum of $7,370.43 is due by you to them under a final judgment (or order) obtained by them against you in the Magistrates' Court at Melbourne on the 2nd day of October 1992, being a judgment (or an order) the execution of which has not been stayed:
THEREFORE TAKE NOTICE that within TWENTY-ONE (21) 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 $7,370.43 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 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 (or proceeding) in which the judgment (or order) was obtained, you will have committed an act of bankruptcy on which bankruptcy proceedings may be taken against you.
The notice was endorsed in the margin:
"Amended the 5th day of December 1994 in pursuance of the order of M. Ennis dated the 2nd day of December 1994"
Served with the bankruptcy notice was a copy of an order made by Deputy Registrar Ennis on 2 December 1994 as follows:
The Registrar Orders pursuant to Section 33(2)(b) of the Bankruptcy Act that:
Leave is granted to amend Bankruptcy notice No 1996 of 1994 by:
substituting "final judgment (or order)" for "final judgment/final order" wherever the latter occurs,
(ii)in paragraph (b) substituting "... referred to in paragraph (a) to the satisfaction of the judgment creditor..." for "... referred to in the last preceding paragraph to the satisfaction of the Federal Court of Australia or the judgment creditor...",
(iii)substituting "action (or proceeding)" for "action/proceeding",
(iv)in the Note on page 2, line 4 and 5 substituting "...sub-section 41(7) ..." for "... sub-section (7.) of section 41..." and by
on page 2 deleting "... (name of the solicitor for the judgment creditor, or the name of the judgment creditor, as the case may be)...".
Date Entered: 2 Dec 1994
M. ENNIS (Sgd)
DEPUTY REGISTRAR IN BANKRUPTCY
The debtor's point is a short one. He says that paragraph (b) of the bankruptcy notice is not in proper form because it fails to state that as an alternative to the payment of debt, the debtor could secure payment to the satisfaction of either
the creditor or of the Court. In the form actually served on the debtor, the bankruptcy notice referred only to the alternative of securing the debt to the satisfaction of the creditor and made no reference to his right to secure such payment to the satisfaction of the Court.
Section 41 of the Bankruptcy Act provides:
41(1) A bankruptcy notice:
(a)shall be in accordance with the prescribed form; and
(b)shall be issued by the Registrar.
(2) The prescribed form of bankruptcy notice shall be such that the notice:
(a)requires the debtor named in it, within a specified time (being the time referred to in subparagraph 40(1)(g)(i) or (ii), whichever is appropriate) 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.
Rule 8 of the Bankruptcy Rules provides:
For the purposes of paragraph 41(1)(a) of the Act, a bankruptcy notice shall be in accordance with Form 4.
So far as it is presently relevant Form 4 in Schedule 1 to the Bankruptcy Rules provides:
THEREFORE TAKE NOTICE that within 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 $ so claimed by the judgment creditor to (here insert "the judgment creditor" or, if the judgment or order requires payment to be made to a court or a person other than the judgment creditor, the name and address of the court or the other person to whom payment is required to be made);
or
(b)to secure the payment of the sum referred to in paragraph (a) to the satisfaction of the (name of the court) or the judgment creditor (or his agent whose name and address are ) or compound the sum so specified to the satisfaction of the judgment creditor (or his agent):
The bankruptcy notice as originally issued was (so far as paragraph (b) is concerned) in proper form but in the form as served after giving effect to the amendments sought by the creditor it was not in a form consistent with either
s 41(1)(a) or Form 4.
There is a good deal of learning and judicial authority concerning the effect of non-compliance with the statutory requirements in relation to bankruptcy notices. Unassisted by authority it would appear that the requirement of s 41(2)(ii) puts it beyond question that a bankruptcy notice that does not provide for the 2 separate options of securing payment of the debt as alternatives to payment of the debt is not a bankruptcy notice for the purpose of s 41(1).
In Re Pollard; ex parte Lensing Management Co Pty Ltd 33 FCR 284 Gummow J expressed the same opinion. At p 285 his Honour said:
...Section 41(2) of the Act specifies certain requirements for the prescribed form of bankruptcy notice. A requirement specified in par (a)(ii) is that the notice require the debtor named in it to "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 ...[emphasis supplied].
The bankruptcy notice is so drawn that the requirement is expressed in par B as being to secure the payment of the relevant sum simply "to the satisfaction of the Federal Court of Australia". There is no reference to the alternative, to payment being secured to the satisfaction of the creditor. That, in my view, is more than a
formal defect or an irregularity such as to attract the operation of s 306 of the Act.
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, and in such cases the notice is a nullity whether or not the debtor is in fact misled: see Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79-80. The bankruptcy notice presently in question fails, contrary to the requirement of s 41(2) of the Act, to notify the debtor that he may secure the payment of the debt to the satisfaction of the creditor as an alternative to securing the payment of the debt to the satisfaction of the court. Such a defect is a matter of substance and cannot be regarded as a formal defect or irregularity: cf James v. Commissioner of Taxation (Cth) (1955) 93 CLR 631 at 643-644; Re Merfield; Ex parte Comalco Aluminium Ltd (1984) 1 FCR 107. Because the defect in the bankruptcy notice is other than a formal one, the notice itself is defective and failure to comply with it did not constitute an act of bankruptcy.
The same reasoning is applicable in this case. The defect in the bankruptcy notice is not capable of being remedied by amendment. The notice was a nullity and no consequences can flow from the fact of it having been served on the debtor. It must be set aside.
In ordinary circumstances the debtor would be entitled to an order that the creditor pay the costs of the application. There are however special circumstances in this case which warrant a departure from the ordinary rule that costs follow the event.
The brief summary of the proceedings set out above demonstrates that from 13 January 1995 to 21 March 1995 the attack made on the bankruptcy notice had nothing to do with the issue upon which the debtor has been successful. That issue was only raised for the first time on the day before the hearing. The evidence shows that on 20 March 1995 the debtor's solicitors had sent to the creditor's solicitors a copy of a document in the form of, and said to be, an unsworn affidavit of the debtor which had been sent to the debtor for execution and of which a sworn copy would be provided prior to the hearing on 22 March 1995. The proposed affidavit (which was never filed) contained 20 pages of typescript and 7 exhibits. Nothing in the affidavit or the exhibits touched upon the form of the bankruptcy notice. Clearly, the debtor gave every indication of proceeding with his original case up until the last minute.
In the circumstances it would be unjust to make an order for costs which did not recognise the unnecessary cost and expense to which the creditor has been put by reason of the debtor's conduct. It is appropriate that there be an order that the debtor pay the creditor's costs including any reserved costs up to and including 21 March 1995 and that the creditor pay the debtor's costs of the hearing on 22 March 1995.
I certify that this and the preceding 6 pages are a true copy of the Reasons for Judgment of the Honourable Justice Olney.
Associate:
Dated:
Heard: 22 March 1995
Place: Melbourne
Judgment: 31 March 1995
Appearances:
Mr M.F. Wheelahan (instructed by Barker Gosling) appeared for the judgment debtor.
Mr P. Ginnane (instructed by Milder Elfman Szmerling Krycer Pty) appeared for the judgment creditor.
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