Kyriackou v Shield Mercantile Pty Ltd

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FEDERAL COURT OF AUSTRALIA

Kyriackou v Shield Mercantile Pty Ltd [2004] FCA 490

MICHAEL KYRIACKOU v SHIELD MERCANTILE PTY LTD (ACN 08 082 737 442) and OFFICIAL TRUSTEE IN BANKRUPTCY

V960 OF 2003

WEINBERG J
26 APRIL 2004
MELBOURNE


IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

V960 OF 2003

BETWEEN:

MICHAEL KYRIACKOU
APPELLANT

AND:

SHIELD MERCANTILE PTY LTD (ACN 08 082 737 442)
FIRST RESPONDENT

OFFICIAL TRUSTEE IN BANKRUPTCY
SECOND RESPONDENT

JUDGE:

WEINBERG J

DATE OF ORDER:

26 APRIL 2004

WHERE MADE:

MELBOURNE

CORRIGENDUM

Amendment to the Reasons for Judgment of Weinberg J delivered on 26 April 2004.

Insert the word “owe” in the third line of the quote that appears below [40] on page 16.  It should read:

“Shield Mercantile Pty Ltd (A.B.N. 48 082 737 442)
of Level 8, 167-169 Queen Street, Melbourne, Victoria 3000.
claims you owe the creditor a debt of $23,276.62, as shown in the Schedule”. 

I certify this is a true copy of corrigendum to the Reasons for Judgment of the Honourable Justice Weinberg.

Associate:

Dated:            14 May 2004


FEDERAL COURT OF AUSTRALIA

Kyriackou v Shield Mercantile Pty Ltd [2004] FCA 490

MICHAEL KYRIACKOU v SHIELD MERCANTILE PTY LTD (ACN 08 082 737 442) and OFFICIAL TRUSTEE IN BANKRUPTCY

V960 OF 2003

WEINBERG J
26 APRIL 2004
MELBOURNE


IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

V960 OF 2003

BETWEEN:

MICHAEL KYRIACKOU
APPELLANT

AND:

SHIELD MERCANTILE PTY LTD (ACN 08 082 737 442)
FIRST RESPONDENT

OFFICIAL TRUSTEE IN BANKRUPTCY
SECOND RESPONDENT

JUDGE:

WEINBERG J

DATE OF ORDER:

26 APRIL 2004

WHERE MADE:

MELBOURNE

CORRIGENDUM

Amendment to the Reasons for Judgment of Weinberg J delivered on 26 April 2004.

The third sentence in [42] on page 17 should read:

“Had the definition “the creditor” appeared below the first respondent’s name, as the form requires, there would have been no doubt whatever about the identity of that party.” 

I certify this is a true copy of corrigendum to the Reasons for Judgment of the Honourable Justice Weinberg.

Associate:

Dated:            29 April 2004


FEDERAL COURT OF AUSTRALIA

Kyriackou v Shield Mercantile Pty Ltd [2004] FCA 490

BANKRUPTCY – sequestration order made – claim that bankruptcy notice invalid – requirement of strict compliance with prescribed form – omission from notice of particular words – omission of “the creditor” under name of party claiming debt owed to creditor – omission of drafting notes – whether errors, and if so, whether errors of form or substance – notice invalid

Bankruptcy Act 1966 (Cth) ss 41(2), 306
Bankruptcy Regulations reg 4.02
Acts Interpretation Act 1901 (Cth) s 25C

The Australian Steel Company (Operations) Pty Ltd v Lewis (2001) 109 FCR 33 applied
Re Wimborne; Ex parte The Debtor (1979) 24 ALR 494 referred to
Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 applied
Re St Leon; Ex parte National Australia Bank Limited (1994) 54 FCR 371 discussed
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 referred to
Northam v Commonwealth Bank of…

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Details
Case
[2004] FCA 490
Decision Date

CaseChat Overview and Summary

The appeal before the court was brought by Michael Kyriackou, who was contesting a sequestration order made against him by a Registrar of the Federal Magistrates Court. The order was based on a creditor’s petition presented by Shield Mercantile Pty Ltd, which arose from Mr Kyriackou’s failure to pay a debt of $23,080.28, as adjudged by the Melbourne Magistrates Court. The core issue before the court was whether the bankruptcy notice served on Mr Kyriackou was valid. The appellant argued that the notice was defective as it failed to properly identify the creditor and the basis of the debt claimed, contrary to the requirements of the Bankruptcy Act 1966 and the associated regulations.

The court examined the validity of the bankruptcy notice by closely scrutinizing its content and comparing it with the statutory and regulatory requirements. It held that a bankruptcy notice must strictly comply with the Act and Regulations, as it initiates a process leading to bankruptcy, which is described as “quasi-penal.” While formal errors in a bankruptcy notice do not necessarily render it invalid unless they cause substantial injustice, substantive errors generally lead to the notice being deemed invalid. The court found that the bankruptcy notice in question failed to meet an essential requirement by not clearly identifying the creditor and the basis of the debt, despite Mr Kyriackou being aware of these details. The court referenced Australian Steel & Tube Mills Pty Ltd v Australian Securities Commission to conclude that a bankruptcy notice which does not meet a requirement made essential by the Act is invalid. The critical defect identified was the notice’s failure to specify the creditor clearly, which the court deemed a substantive error that rendered the notice invalid.

In light of the invalidity of the bankruptcy notice, the court allowed the appeal and quashed the sequestration order made against Mr Kyriackou. The matter was to be stood over for further orders regarding the costs.

Orders

Orders of the court

1. The parties file and serve draft short minutes of order to give effect to these reasons for judgment, including appropriate orders as to costs, on or before 3 June 2004.

2. The matter otherwise be stood over to 17 June 2004 at 10.15 am.

Background

Background to the litigation

This is an appeal from a decision of a Federal Magistrate made on 8 October 2003, dismissing an application for review of a decision by a Registrar who, on 26 June 2003, made a sequestration order against the appellant, Michael Kyriackou. BACKGROUND FACTS The background to this appeal can be briefly summarised. On 22 May 2002, Shield Mercantile Pty Ltd, the first respondent, instituted proceedings against the appellant in the Melbourne Magistrates Court. The first respondent claimed, inter alia, that it was entitled to a sum of $20,400, which it contended was money had and received. On 16 January 2003, the Magistrates Court entered judgment in the sum of $23,080.28 in favour of the first respondent. That judgment included $20,651.36 in respect of the claim, $1,627.92 interest, and $801.00 costs. On 17 February 2003, the Official Receiver issued a bankruptcy notice on behalf of the first respondent. On 19 February 2003, that notice was served upon the appellant. On 17 April 2003, the first respondent presented a creditor’s petition in the Federal Magistrates Court arising out of the appellant’s failure to pay the sum demanded. On 26 June 2003, a Registrar made a sequestration order against the appellant’s estate. On 30 June 2003, the appellant filed an application for review of that decision. The case came before the Federal Magistrate on 8 September 2003. On that day his Honour heard, as a preliminary matter, a challenge to the validity of the bankruptcy notice. On 24 September 2003, his Honour delivered reasons for judgment, rejecting that challenge. On 8 October 2003, his Honour heard the substantive application for review. He delivered reasons for judgment that same day. He ordered that the application for review be dismissed, and that the creditor’s costs, and those of the Official Trustee, be paid out of the bankrupt estate. On 14 October 2003, the appellant lodged an appeal against that decision. The sole ground of the appeal is that the Magistrate erred in holding that the bankruptcy notice was valid. THE BANKRUPTCY NOTICE The attack upon the validity of the bankruptcy notice can best be understood by setting the notice out in full. “FORM 1Bankruptcy Act 1966BANKRUPTCY NOTICEThis Bankruptcy Notice is prescribed, under subsection 41(2) of the Bankruptcy Act 1966 (“the Act”), by r. 4.02 of the Bankruptcy Regulations.To: Michael Kyriackou(“the debtor”)of 140 Barry Road, Thomastown, Victoria 3074. This Bankruptcy Notice is an important document. You should get legal advice if you are unsure of what to do after you have read it.1. Shield Mercantile Pty Ltd (A.B.N. 48 082 737 442) of Level 8, 167-169 Queen Street, Melbourne, Victoria 3000. claims you owe the creditor a debt of $23,276.62, as shown in the Schedule.2.The creditor claims that the debt is due and payable by you. A copy of the judgments or orders relied upon by the creditor is attached. At the time of applying for this Notice, execution of the judgments or orders had not been stayed.3.You are required, within 21 days after service on you of this Bankruptcy Notice:(a) to pay to the creditor the amount of the debt; or(b)to make an arrangement to the creditor's satisfaction for settlement of the debt. 4. Payment of the debt can be made to:Comlaw Barrister & Solicitors 216 Glenhuntly Road, Elsternwick, Victoria 31855.Bankruptcy proceedings may be taken against you if, within the time stated in paragraph 3, above:(a)you do not comply with the requirements of either paragraph 3 (a) or paragraph 3 (b) above; and(b)the Court (that is, the Federal Court of Australia or the Federal Magistrates Court) does not extend, or is not deemed to have extended, the time for compliance with this Bankruptcy Notice (see paragraph 6, below). 6. The Court may extend the time for compliance with this Bankruptcy Notice if, within the time stated in paragraph 3 above, you apply to the Court on one or both of the following grounds:(a)that you have instituted proceedings to set aside the judgments or orders in respect of which this Bankruptcy Notice has been issued;(b)that you have filed with the Court an application (on one or more grounds, apart from the grounds mentioned in paragraph 7, below) to set aside this Bankruptcy Notice. 7. In addition, within the time specified in paragraph 3 above, you may file an application to the Court for an order to set aside this Bankruptcy Notice on the specific grounds that:(a)you have a counter-claim, set-off or cross demand equal to or exceeding the sum specified in this Bankruptcy Notice as owing to the creditor; and (b)in the action or proceeding in which the judgments or orders mentioned in paragraph 2 of this Bankruptcy Notice was obtained, you could not have set up that counter-claim, set-off or cross demand*. *This means that, because of a legal obstacle, you could not have raised that counter-claim, set-off or cross demand in defence of the creditor's court action against you. It is not enough if, for example, you simply neglected or overlooked the matter.8. You should note the following points carefully:(a)If you file, at the Court, an application mentioned in paragraph 6 (a) or (b), you must still comply with this Bankruptcy Notice within the time stated in paragraph 3 above unless the Court extends the time for you to comply. (b)If you file, at the Court, an application mentioned in paragraph 7 (a), you need not comply with this Bankruptcy Notice until the Court decides whether you have grounds for a counter-claim, set-off or cross demand. Whether you will have to comply at that stage will depend on the Court's decision. WARNING9. The information in paragraphs 6, 7 and 8 is based on provisions of section 41 of the Act. The information is a summary only, and not a complete statement of the relevant law. It might be unwise to rely solely on this summary. If you need a more detailed explanation, you should seek legal advice.Schedule

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

WEINBERG J
It should be noted that Mr Gurvich, counsel for the Official Trustee in Bankruptcy, did not seek to be heard in relation to the validity of the bankruptcy notice. His client would only have an interest in the proceeding in the event that the bankruptcy notice was set aside. He would seek to be heard regarding the form of any orders that might be made.CONCLUSION I have concluded, albeit with some reluctance, that the appeal must be allowed. Australian Steel seems to me to require a finding that the bankruptcy notice did not comply with a requirement made essential by the Act. The purpose of a bankruptcy notice is to convey to the debtor the amount claimed by the creditor, and to give the debtor the opportunity to pay or secure that amount. It is important that a bankruptcy notice be prepared with great care. The courts require strict compliance with the Act and Regulations. The reason for this is that a bankruptcy notice sets in train the entire process leading to bankruptcy, a process that has been described as “quasi-penal”. Formal errors in a bankruptcy notice do not result in its invalidity unless they have caused substantial injustice. However, substantive errors will generally lead to the notice being regarded as invalid and of no effect. If a bankruptcy notice is invalid, any bankruptcy proceedings based upon that notice will be dismissed. One of the purposes that a bankruptcy notice must serve is to identify with clarity both who the creditor is, and who the debtor. It must also convey to the debtor how the debt that is alleged to be owing is said to have arisen. These are matters of substance, and not matters of form. In the present case, I am quite satisfied that the appellant was at all material times well aware of who the creditor was, and the basis upon which the debt was said to be owing. However, Australian Steel makes it clear that whether or not the debtor is actually aware of these matters is not the test. The bankruptcy notice must spell them out. The debtor is not required to put two and two together, and come to the obvious conclusion. It is not sufficient to say that the debtor must have known who the creditor was, and why the money was owing. The surrounding circumstances cannot substitute for what the bankruptcy notice must itself contain. The critical defect in the present bankruptcy notice was its failure to identify, or define, the creditor. It is true that the first respondent was named in the notice, and on more than one occasion. However, par 1 simply said: “Shield Mercantile Pty Ltd (A.B.N. 48 082 737 442)of Level 8, 167-169 Queen Street, Melbourne, Victoria 3000.claims you the creditor a debt of $23,276.62, as shown in the Schedule”. The Schedule to which reference was made contained two amounts which, when added together, came to the figure of $23,276.62. It referred to a judgment or order made in the Melbourne Magistrates Court on 16 January 2003 but did not specify in whose favour that judgment or order had been made. There was a certified extract from the Magistrates Court identifying the first respondent as plaintiff in a civil proceeding for “money received” against the appellant. That extract bore the date 16 January 2003, but did not include within it either the amount of $23,080.28, as contained in the first item of the Schedule, or the amount of $23,276.62, which was the total amount claimed in the bankruptcy notice.

Ratio Decidendi

Legal Principle Established

Established by: WEINBERG J

The majority in Australian Steel noted that Deane J had been in the minority in Kleinwort Benson, but concluded that nothing said by the majority in that case was in any way inconsistent with his Honour’s broad statement of principle. The majority in Australian Steel said at [25]:“… Not infrequently in the daily business of this Court sequestration orders are sought against debtors who are plainly insolvent and who have probably not been misled by defects in the bankruptcy notice served on them, yet the petition is dismissed. While it may be true in general terms to say that bankruptcy administration emphasises substance over form … such a statement needs to be substantially qualified when applied to bankruptcy notices.” (emphasis added) In Kleinwort Benson, the bankruptcy notice that led to the making of the sequestration order understated the amount of interest due. A Full Court of this Court had held that this defect should result in the sequestration order being set aside. By majority, the High Court reversed that decision. The joint judgment of the majority (Mason CJ, Wilson, Brennan and Gaudron JJ) said at 77:“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?” Their Honours continued at 79-80:“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; Pillai. 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.” (emphasis added, footnotes omitted) In Australian Steel, the majority interpreted this passage at [32] in the following terms:“Thus essentiality of the requirement which the notice fails to meet and capacity of the notice to reasonably mislead a debtor are alternative ways in which a defect or irregularity may be found to be “substantive”. It must logically follow that a notice which fails to meet a requirement made essential by the Act will contain a substantive defect even if the notice could not reasonably mislead a debtor as to what was necessary for compliance.” Finally, it should be noted that in Australian Steel, the majority made the following comments at [39]-[43] regarding the test for determining whether a requirement is made “essential” by the Act:“[39] Kleinwort Benson decides that a bankruptcy notice that does not contain a requirement made essential by the Act is not a valid notice. In Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 390-391 McHugh, Gummow, Kirby and Hayne JJ, after discarding the elusive distinction between directory and mandatory requirements as a test of validity, said: “A better test for determining the issue of validity is to ask whether it was a purpose of the legislation that an act done in breach of the provision should be invalid ... In determining the question of purpose, regard must be had to ‘the language of the relevant provision and the scope and purpose of the whole statute’.” In the light of this passage, it can be seen that a requirement is “made essential" within the Kleinwort Benson principle when the enquiry as to purpose discloses the intention that an act done in breach should be invalid. See also Deputy Commissioner of Taxation v Woodhams (2000) 199 CLR 370 at 383-385; 169 ALR 503 at 512-513. [40] In 1996 Parliament chose to make a form to be prescribed by regulation the sole criterion of whether a bankruptcy notice complied with the Act, with the consequence that an act of bankruptcy would be committed in the case of non-compliance with such a notice. This being the will of Parliament, it is not for a court to treat the terms of the prescribed form as inherently less important than a requirement specified in the Act itself, so as to attract a more lenient view in the case of non-compliance. Valid delegated legislation (and there is no suggestion that the present regulations are otherwise) is binding law because that is what Parliament has willed. As Lindgren J said in Re St Leon; Ex parte National Australia Bank Ltd (1994) 54 FCR 371 at 378 (obviously in relation to a pre-1996 notice): “... the statutory requirement that a bankruptcy notice be in accordance with the prescribed form is itself a requirement made essential by the Act.” [41] This proposition is a fortiori since the 1996 amendments as the majority in Bendigo Bank, correctly in our view, pointed out (at par 19). Moreover, this is a case where the 1996 amendments resulted in “a framework built on by contemporaneously prepared regulations”, in which case the latter may be a reliable guide to the meaning of the former: Hanlon v The Law Society [1981] AC 124 at 194. The law now is that a bankruptcy notice has to contain substantially more information than it did prior to the 1996 amendments. The law now is not just that a notice shall have certain characteristics stipulated in the Act. The notice “must be in accordance with the form prescribed by the regulations”.[42] In our view the purpose of the requirement that the source of the creditor’s entitlement to interest be stated can only be to enable the debtor to verify that the amount claimed is in fact due. The same purpose lies behind the requirement that a copy of the judgment relied on be attached to the notice. Bankruptcy notices can be served anywhere in Australia, a country with 10 separate court jurisdictions, containing some 22 levels of courts, each with its own statutory foundation, quite apart from tribunals and other bodies with power to make enforceable orders for the payment of money. The applicable interest rate can often be a matter of dispute: see for example EMCL Pty Ltd v Esanda Finance Corp Ltd [1999] FCA 978 at [58] et seq. That case dealt with the different issue of an award of interest by a court at the time of judgment, but it illustrates the potential for confusion and uncertainty as to applicable rates of interest in litigation in a multi-jurisdictional country. The form prescribed by the regulations provides the answer. Having regard to the purpose behind the requirement that the provision under which interest is being claimed, and correctly claimed, be included in the notice, that requirement is made essential by the Act, and a notice issued in breach of the requirement will be invalid.[43] Our conclusion is unaffected by reg 4.02(3). If that provision is to be taken as a statement that s 25C of the Acts Interpretation Act applies to the content of the form as well as its format (see Franciscan at 457 [16]), the failure to comply with a requirement in such a way that the purpose behind the requirement is thereby thwarted, cannot be excused under s 25C on the ground that there has been substantial compliance. Essentiality for the purpose of the Kleinwort Benson principle being determined by purpose, a provision as to substantial compliance, assuming it applies at all, cannot make unessential that which purpose reveals as essential. It can hardly be said that there has been substantial compliance with a prescribed form where the form fails to include information made essential by an enactment.”