McDonnell v Fernwood Fitness Centre Pty Ltd

[2005] FMCA 877

FEDERAL MAGISTRATES COURT OF AUSTRALIA

McDONNELL v FERNWOOD FITNESS CENTRE PTY LTD & ANOR [2005] FMCA 877

BANKRUPTCY – Application to set aside bankruptcy notice – notice issued by two creditors with respect to several debts – notice declared invalid as creditors not joint creditors.

Bankruptcy Act 1966, ss.40, 41

Australian Steel Company (Operations) Pty Ltd v Lewis [2000] FCA 1915
AWU v Bowen (1945) 72 CLR 575
Buckland v Newsome (1808) 170 ER 1026
Ex parte Owen (1884) 13 QBD 113
Hall v Nominal Dependant (1966) 117 CLR 423
Klewer v Walton [2004] FCA 410
KleinwortBenson Australia Ltd v Crowl[1988] HCA 34
Low, In re; ex parte The Argentine Goldfields Limited [1891] 1 QB 147
McIntyre v Gye and Anor (1994) 122 ALR 289
Owners of Strata Plan No 5459 v Mason [1999] FCA 1137; (1999) 91 FCR 92
Re Mellick (1971) 19 FLR 1
Re Hamor (1968) 11 FLR
Re Soudakoff (1991)28 FCR 53 at 58
Re Tucker (1895) 73 LR 170
Scook v Sims Constructions Pty Ltd [2004] FCAFC 306

Applicant: RICHARD AUGUSTINE McDONNELL

Respondents: FERNWOOD FITNESS CENTRE PTY LTD
FERNWOOD INVESTMENTS PTY LTD

File Number: MLG 356 of 2005

Judgment of: Riethmuller FM

Hearing date: 30 May 2005

Date of Last Submission: 30 May 2005

Delivered at: Melbourne

Delivered on: 24 June 2005

REPRESENTATION

Counsel for the Applicant: Mr Galvin

Solicitors for the Applicant: Peter Speakman & Co

Counsel for the Respondents: Mr Arthur

Solicitors for the Respondents: Cahills

ORDERS

1. The bankruptcy notice issued by the respondents dated 25 November 2004 be set aside.

2. The respondents do pay the applicant’s costs of and incidental to the application, to be assessed.

3. Should the respondents seek different orders as to costs they have liberty to apply within 14 days.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 356 of 2005

RICHARD AUGUSTINE McDONNELL

Applicant

And

FERNWOOD FITNESS CENTRE PTY LTD and FERNWOOD INVESTMENTS PTY LTD

Respondents

REASONS FOR JUDGMENT

1. The applicant applies pursuant to section 41(7) of the Bankruptcy Act to set aside a bankruptcy notice on the following grounds:

   a)the applicant has a counterclaim, set-off or cross-demand exceeding the amount claimed from the bankruptcy notice;

   b)alternatively, the creditor named in the bankruptcy notice is not a judgment creditor of the applicant;

   c)further or alternatively, the applicant is not in truth and reality indebted to the judgment creditor.

2. At the hearing of the matter the applicant sought leave to proceed to argue the second ground, and have the matter listed for further hearing should the applicant be unsuccessful on this ground.  This course was accepted by the respondent on the basis that it had the potential to save a significant amount of time in the application. 

3. In the circumstances I agreed to adopt that course. 

4. The bankruptcy notice was issued in Form 1 describing the creditors as "Fernwood Fitness Centre Pty Ltd (ACN 056146788) and Fernwood Investments Pty Ltd (ACN 070675982)". 

5. The notice claims that the applicant, Richard Augustine McDonnell, owes the creditor a debt of $158,530.55 as shown in the schedule to the notice.  The schedule to the notice lists the amount of ‘judgments or orders’ as $131,344.14.  To this is added the sum of $27,146.41 by way of interest, calculations of which are contained in item 3 of the schedule.  No issue is taken with respect to the calculation of the interest.

6. The bankruptcy notice relied upon a judgment of Byrne J of the Supreme Court of Victoria on 18 December 2002 at Melbourne.  The order of the Supreme Court was under the heading "General Form of Order" and in the following terms:

   THE COURT ORDERS THAT:

   (1)  The defendants by 4.30 pm on 20 January 2003 pay to the solicitor for the plaintiffs the sum of $131,344.14 being the arrears of rental specified in paragraph 13 of the affidavit of Vicky Paddington dated 17 December 2002, and the arrears of instalment payments due in the month of December 2002.

   (2)  In default of payment in accordance with this order, the defence of the defendants be struck out.

   (3)  The defendants pay the costs of the application.

   (4)  There is liberty to apply.

7. The context in which this order was made was relied upon by the applicants.  The order followed an earlier order by Byrne J on 22 February 2002 in the following terms:

   1. Upon the P1aintiff (by their counsel) undertaking:

   (a) to forward a letter in a form to be mutually agreed upon between the respective solicitors for the parties to such persons identified in writing by the Defendants to the Plaintiffs’ solicitors by 22 February, 2002 (being Corporate Express, Prime TV Canberra, Prime TV Wollongong, AY Direct, FM104.7, Yellow Pages or like persons the subject of the allegations referred to in the affidavits of the First Defendant sworn 26 November, 2001 and 13 February, 2002);

   (b) to facilitate Defendants to advertise the Fernwood Fitness Centres located at;

   (i)      Shops 44 and 45 Tooronga Village Shopping Centre. 354 Tooronga Road, Hawthorn East in the State of Victoria;

   (ii)     65-67 Burelli Street, Wollongong in the State of New South Wales;

   (iii) Level l, Monaro House, 3 Lonsdale Street, Braddon in the Australian CapitalTerritory;

   (iv)    99 Bell Street, Preston in the State of Victoria; and

   (v)     Shop 1125A Westfield Shoppingtown, Belconnen in the Australian Capital Territory -

   (hereafter collectively referred to as “the premises”)

   in a form approved by the First Plaintiff in writing, the First Plaintiffs determination in relation to which will be provided to the Defendants within seven days of receipt by it of such proposed advertising, such approval not to be unreasonably withheld PROVIDED THAT the Defendants make no reference in such advertising to the “Fekala Health Spa” or any other business using the name “Fekala”;

   (c) to provide by fax to the Defendants within two business days of receipt by the Plaintiffs, copies of invoices statements, accounts, or any other notices relating to outstanding amounts referred to in paragraph 2(d)(ii) of these Undertakings together with any notices in relation to any increases in rental received by the Plaintiffs from the landlords or their agents of each of the premises.

   2. Upon the Defendants (by their counsel) undertaking:

   (a) to furnish to the First Plaintiff by intranet the DAB weekly reports (by 12 noon on each consecutive Monday and by 12 noon the Monday following the end of each month if the end of the month fills within the immediately preceding week) in accordance with clause 5(h) of the standard franchise agreement (being Exhibit “RMcD 1” to the affidavit of Richard Augustine McDonnell sworn 2 February, 2001 (“the franchise agreement”)) calculated from 15 February 2002, the first of which to be provided by 25 February, 2002;

   (b) to pay royalties and national advertising fees and any other charges and expenses duly rendered by the First Plaintiff in accordance with the franchise agreement together with GST (if applicable) in respect of each of the premises by 12.00 noon on each consecutive Tuesday (and by 12.00 noon on the Tuesday following the end of each month if the end of the month falls within the immediately preceding week) in accordance with the rates specified in paragraph 5 of the affidavit of Diana Margaret Williams sworn 6 December, 2001, to be calculated from 15 February 2002, the first of such weekly payments to be made on 5 March. 2002 and thereafter weekly;

   (c) to pay $10,000 per calendar month inclusive of GST (if applicable) to the First Plaintiff on account of the alleged arrears of royalties and national advertising fees outstanding by the Defendants in respect of the period 3 April, 2001 to I5 February 2002 on the 1^st day of each month commencing on 1 March, 2002 and ending on 1 October, 2002 save that, in the event that the bearing of this proceeding does not commence on 28 October, 2002, to continue paying the said sum of $10,000 per calendar month until the month immediately preceding the adjourned date of’ trial but in no event greater than the amount of royalties and national advertising as determined by the special referee in respect of the period 3 April, 2001 to 15 February, 2002 in accordance with paragraphs 10 - 12 of this Order;

   (d) to pay from time to time to the landlords or their agents of each of the premises:

   (i)      the rental; and

   (ii)     other moneys outstanding upon written notification of the amount to be paid by such landlords or by the Plaintiff as referred to in paragraph 1(c) of these Undertakings –

   under the respective leases of the premises in accordance with such leases and to provide verification and proof of such payment/s to the Plaintiffs by facsimile transmission on the same day upon which rental or other moneys is so paid -

   PROVIDED THAT time shall be of the essence in respect of the undertakings in paragraphs 1 and 2 hereof,

   THE COURT ORDERS AND DIRECTS THAT

   1.The proceeding is reinstated.

   2. The Plaintiffs file and serve an Amended Statement of Claim by 11 March, 2001

   3. The Defendants file and serve a Defence and Counterclaim by 8 April 2002.

   4. The Plaintiffs file and serve a Reply and Defence to Counterclaim by 29 April. 2002.

   5. The Plaintiffs and the Defendants make discovery by 20 May, 2002.

   6. Inspection to be completed by 3 June, 2002,

   7. The proceeding be fixed for trial on 28 October, 2002 with an estimate of 10 days and the proceeding be referred to the Listing Master for pre-trial directions on a date to be fixed.

   8. The Plaintiffs’ solicitors serve a copy of this order duly authenticated on the Listing Master’s Associate with 14 days of authentication.

   9. In the event that the Defendants fail to comply with any of their undertakings to the Court referred to above under “Other Matters”, the Plaintiffs may (in addition to any other remedies or rights they may have), upon seven days written notice to the Defendants, being on their Summons filed 23 October 2001 for further hearing and determination.

   10. The question of the amount of royalties and national advertising fees and any other charges and expenses inclusive and exclusive of GST:

   (a) outstanding to 3 April, 2001; and

   (b) outstanding from 3 April, 2001 to 15 February, 2002-

   by the Defendants in accordance with the franchise agreement (or as otherwise agreed from time to time between the parties) in respect of each of the premises and in accordance with the rates specified in paragraph 5 of the affidavit of Diana Margaret Williams sworn 6 December 2001, be referred to a special referee.

   11. The special referee is to be a chartered accountant or a certified practicing accountant to be appointed by mutual agreement between the respective solicitors for the parties and in default of agreement, by 15 March, 2002, by the Senior Master.

   12. Direct that such special referee report in writing to the Court on the question referred to him stating with reasons, his decision or opinion.

   13.Costs reserved.

   14. All parties have liberty to apply upon 48 hours written notice.

   15. This Order be drawn up by the Plaintiffs solicitors and signed by a Judge pursuant to r. 60.04.

   16. The Plaintiffs’ Summons filed 23 October 2001 is adjourned sine die.

   17. Liberty to apply.

   18. Nothing in these Undertakings and Orders is intended to preclude the Defendants from raising against the Plaintiffs’ claim in this proceeding, any defences which they may be entitled including relief against forfeiture and in relation to jurisdiction

8. The orders and undertakings made on 22 February 2002 were the result of a summary judgment application filed by the respondents on

   
   

   23 October 2001.  The defendants in the Supreme Court action (including the applicant in these proceedings) failed to comply with the undertakings in the earlier order, which resulted in the plaintiffs bringing the matter back before Byrne J on 18 December 2002. 

9. As the defendants failed to comply with the order of 18 December 2002, the defence was struck out.  On 13 February 2002 the respondents applied for judgment in the matter pursuant to rule 21.04 of the Supreme Court Rules (Victoria).  The judgment ultimately entered pursuant to that application was in the following terms:

   1.Special leave is grated to bring this application before a Judge pursuant to r.77.03(2)(b) of the Supreme Court (General Civil Procedure Rules) 1996.

   2.The Defendant’s application for an adjournment be refused.

   3.The Plaintiffs have leave to amend the Amended Statement of Claim dated 12 March, 2002 by the substituting for the Prayer for Relief therein, the amended Prayer for Relief filed this day and initialled by the Judge and the same be deemed accordingly.

   THE JUDGMENT OF THE COURT IS THAT:

   1.The First Plaintiff recover possession of the land described in the indorsement of claim on the writ as Fernwood Fitness Centre, Tooronga Village situate at 354 Tooronga Road, Hawthorn East in the State of Victoria

   2.The Second Plaintiff recover possession of the lands described in the indorsement of claim on the writ as:

   (a) Fernwood Fitness Centre, Preston situate at 99 Bell Street, Preston in the State of Victoria; and

   (b) Fernwood Fitness Centre, Belconnen situate at Level 3, Shop 1/25A, Westfield Shoppingtown, Belconnen in the Australian Capital Territory -

   (c) Fernwood Fitness Centre, Wollongong, 645 Burelli Street, Wollongong, New South Wales;

   (d) Fernwood Fitness Centre, Braddon, Level 1, Monaro House, 3 Lonsdale Street, Braddon, Australian Capital Territory.

   3. The First Defendant forthwith vacate, quit and give up possession of the premises known as:

   (a) Fernwood Fitness Centre, Tooronga Village situate at 354 Tooronga Road, Hawthorn East, in the State of Victoria;

   (b) Fernwood Fitness Centre, Preston, 99 Bell Street, Preston, Victoria;

   (c) Femwood Fitness Centre, Wollongong, 645 Burelli Street, Wollongong, New South Wales;

   (d) Fernwood Fitness Centre, Braddon, Level 1, Monaro House, 3 Lonsdale Street, Braddon, Australian Capital Territory;

   (e) Fernwood Fitness Centre, Belconnen, Level 3, Shop 1125A, Westfield Shoppingtown, Belconnen, Australian Capital Territory.

   4. The Second Defendant forthwith vacate, quit and give up possession of the premises known as Fernwood Fitness Centre, Tooronga Village situate at 354 Tooronga Road, Hawthorn East, in the State of Victoria.

   5. The Second Defendant forthwith vacate, quit and give up possession of the premises known as Fernwood Fitness Centre, Wollongong, 645 Burelli Street, Wollongong, New South Wales.

   6. The Second Defendant forthwith vacate, quit and give up possession of the premises known as Fernwood Fitness Centre, Braddon, Level 1, Monaro House, 3 Lonsdale Street, Braddon, Australian Capital Territory.

   7. The Third Defendant forthwith vacate, quit and give up possession of the premises known as Fernwood Fitness Centre, Preston situate at 99 Bell Street, Preston in the State of Victoria.

   8. The Third Defendant forthwith vacate, quit and give tip possession of the premises known as Fernwood Fitness Centre, Belconnen situate at Level 3, Shop 1125A, Westfield Shoppingtown, Belconnen in the Australian Capital Territory.

   9. The First Defendant whether personally or by his employees, agents or howsoever otherwise be restrained from disclosing, communicating or using confidential information including client or customer lists with which he became acquainted through his position as franchise manager of the First Plaintiffs Fitness Centres located at:

   (a) Fernwood Fitness Centre, Tooronga Village, 354 Tooronga Road, Hawthorn East, Victoria;

   (b) Fernwood Fitness Centre, Wollongong, 645 Burelli Street. Woilongong, New South Wales;

   (c) Fernwood Fitness Centre, Braddon, Level 1, Monaro House, 3 Lonsdale Street, Braddon, Australian Capital Territory;

   (d) Fernwood Fitness Centre, Preston, 99 Bell Street, Preston, Victoria;

   (e) Fernwood Fitness Centre, Belconnen, Level 3, Shop l/25A, Westfield Shoppingtown, Belconnen, Australian Capital Territory.

   10. The Defendants and each of them return the Confidential Operations Manual together with all forms, stationery, business cards, advertising material and other printed matter used in the operation of the franchised businesses referred to in the previous paragraph.

   11. The Defendants and each of them take such action as may be required to transfer to the First Plaintiff:

   (a) all registrations (if any) relating to the use of the Marks or the Business Name of the First Plaintiff; and

   (b) all telephone numbers presently used by them.

   12. The Defendants and each of them whether by themselves or their agents are restrained, for fourteen days from the date hereof, from removing from the premises any equipment and from damaging the premises or the fittings and fixtures thereat and from removing from the premises anything in relation to the operation of the Fernwood business conducted thereon.

   13. The Defendants deliver up to the First Plaintiff copies of all relevant leases for gym equipment, water fountains, plants and other plant and office equipment and all bank files and credit direct debit records in relation to fortnightly members fees.

   14. The Defendants have reasonable access to the premises for fourteen days from the date hereof during normal business hours under the supervision of the Plaintiffs, or their duly authorized servants or agents, for the purposes of collecting and/or copying any business records owned by them or either of them

   15. The First Defendant pay the First Plaintiff damages to be assessed.

   16. The First Defendant pay the Second Plaintiff damages to be assessed

   17The Second Defendant pay the First Plaintiff damages to be assessed

   18. The Second Defendant pay the Second Plaintiff damages to be assessed.

   19The Third Defendant pay the First Plaintiff damages to be assessed.

   20. The Third Defendant pay the Second Plaintiff damages to be assessed

   21. The Defendants’ application for a stay of execution of the judgment pending determination of their Counterclaim be refused.

   22.    The Defendants pay the Plaintiff’s costs of and incidental to            this proceeding including the costs of this application.

   23.    Liberty to apply.

   24.    Direct that this Order and Judgment be drawn up by the   Plaintiff’s solicitors and signed by a Judge.

10. In the Supreme Court proceedings the two respondents were plaintiffs, and the applicant in these proceedings one of three defendants.  The nature of the Supreme Court proceedings was an action by franchisors against the defendant and two related companies with respect to franchise agreements and lease or rental payments with respect to premises arising out of the operation of a business known as Fernwood Fitness Centres which operate fitness centres. 

11. As can be seen from the terms of the judgment ultimately entered pursuant to rule 21.04, the claims by each of the respondents against the applicant and the two related companies were, at best, a mixture of joint and several claims.

12. As a result, three issues arise for consideration with respect to the validity of the bankruptcy notice: 

    i)Whether the bankruptcy notice could be issued by two distinct creditors with respect to a composite debt (that is, debts owed to each of them, but severally not jointly).

    ii)Whether the solicitors referred to in the orders of 22 February are the appropriate persons to issue the bankruptcy notice.

    iii)Whether or not the orders of 22 February 2004 are final orders within the meaning of section 40 of the Bankruptcy Act.

General Principles

1. Section 40(1)(g) of the Bankruptcy Act provides for an act of bankruptcy in the following terms:

   40(1)(g)If a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:

   (i)      where the notice was served in Australia—within the time specified in the notice; or

   (ii)     where the notice was served elsewhere—within the time fixed for the purpose by the order giving leave to effect the service;

   comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;

2. Section 41(1) provides:

   41(1)          An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor:

   (a) a final judgment or final order that:

   (i)      is of the kind described in paragraph 40(1)(g); and

   (ii)     is for an amount of at least $2,000; or

   (b)     2 or more final judgments or final orders that:

   (i)      are of the kind described in paragraph 40(1)(g); and

   (ii)     taken together are for an amount of at least $2,000.

3. Strict compliance with the Act is required.  In KleinwortBenson Australia Ltd v Crowl[1988] HCA 34 the court said:

   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."

   …

   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 v. Comptroller of Income Tax [1970] AC 1124], 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.

4. The application of these principles was clarified in Australian Steel Company (Operations) Pty Ltd v Lewis [2000] FCA 1915; referred to the judgment of Deane J in Kleinwort Benson saying:

   24 In Kleinwort Benson Australia Ltd v Crowl (1998) CLR 71 at 81 Deane J said:

   "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 MR, In re A Judgment Debtor, 530 of 1908 [1908] 3 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 K.B. 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.

   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 C.L.R. 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."

5. The majority went on to explain that:

   41.    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 ten separate court jurisdictions, containing some twenty-two 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 par 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 1901 applies to the content of the form as well as its format (see Trustees of the Franciscan Missionaries of Mary v Weir [[2000] FCA 574; (2000) 98 FCR 447], par 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.

Can several creditors joint to issue one bankruptcy notice

1. The respondents argue that the order of 18 December 2002 amount to a joint judgment and therefore the bankruptcy notice must be issued by all of the judgment creditors.  In this regard the respondent relies upon Scook v Sims Constructions Pty Ltd [2004] FCAFC 306 (which followed and applied AWU v Bowen (1945) 72 CLR 575). The respondent says that these cases proceed upon principles from a number of older authorities: Buckland v Newsome (1808) 170 ER 1026; Ex parte Owen (1884) 13 QBD 113 and Re Tucker (1895) 73 LR 170.  The respondents also argue that the bankruptcy notice must follow the form of the judgment, relying upon Re Mellick (1971) 19 FLR 1 and Re Soudakoff (1991) 28 FCR 53 at 58.

2. In AWU v Bowen the bankruptcy notice was issued by only some of a number of joint creditors, in circumstances where there was no evidence of any authority on the part of two of the judgment creditors for the issue of the bankruptcy notice. The High Court confirmed that a bankruptcy petition must be presented by all of the joint judgment creditors. Latham CJ (at 583) pointed out that this flows from the fact that only one writ of execution can be issued for the one judgment debt to which joint judgment creditors are entitled.

3. It appears clear that the reason that a bankruptcy notice based upon a joint debt is not invalid if issued by all of the joint creditors, is that payment to one of the joint creditors is sufficient to discharge the debt: see Re Hamor (1968) 11 FLR at 261. The same cannot be said in this case where payment to one of the creditors would not necessarily discharge the other as the debts are several rather than joint.

4. It is not appropriate that several creditors join together to issue a single bankruptcy notice. That is the effect of what is argued here. A notice by several creditors with respect to several debts fails to meet an essential requirement of the Act: that is that a notice be issued by ‘a creditor’. 

5. The section, prior to recent amendments, was considered by Emmet J in Owners of Strata Plan No 5459 v Mason [1999] FCA 1137; (1999) 91 FCR 92, where his Honour said:

   4.      The question is whether the bankruptcy notice is a "bankruptcy notice under the Act" within the meaning of section 40(1)(g). Section 41(1) provides as follows:

   "An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor a final judgment or final order that:

   (a) is described in paragraph 40(1)(g), and

   (b) is for an amount of at least $2,000."

   Section 41(2) provides that the notice must be in accordance with the form prescribed by the regulations.

   5. The solicitor for the petitioning creditor contended that, notwithstanding the language of section 40(1)(g), which refers to "a final judgment or final order", reliance may be placed on section 23 of the Acts InterpretationAct 1901 (Cth) which provides that in any Act, unless the contrary intention appears:

   "words in the singular number include the plural and words in the plural number include the singular."

   Thus, it was suggested that it is possible to read section 40(1)(g) by substituting plurals for the expressions "a final judgment" and "final order" and the words "judgment" and "order" where those terms appear in the provision.

   6.      However, I consider that a contrary intention appears in the Act. Section 41(1) does not easily submit itself to the substitution of plurals pursuant to section 23 of the Acts Interpretation Act. It would be necessary to read section 41 as saying that an Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor, final judgments or final orders that are described in paragraph 40(1)(g) and that are for amounts of at least $2,000. It would then be necessary to include various permutations and combinations of "final order" and "judgment" and "final orders" and "judgments" throughout paragraph (g). I do not consider that that is an appropriate technique of construction.

   7. More importantly, I consider that the scheme of section 40 and the idea of a bankruptcy notice is not consistent with the approach contended for. There are numerous paragraphs of section 40(1) specifying the cases in which an act of bankruptcy is committed. For the most part, the acts of bankruptcy relate to conduct initiated by a debtor. Paragraph (g), however, is in a different category. It enables a creditor to initiate a process whereby a debtor may commit an act of bankruptcy.

   8.      The authorities are clear that a bankruptcy notice must be unequivocal and unambiguous in requiring payment of the amount referred to in it. Prior to the 1996 amendments, payment of a judgment debt had to be made in accordance with the rules of the court in which the judgment was obtained. It would have been confusing and misleading to a debtor to be required to pay more than one judgment debt. It is unlikely that the amendments made in 1996 were intended to effect such a significant change in the notion of a bankruptcy notice. A bankruptcy notice, of its essence, requires the payment of a sum of money and not several sums of money. Once one allows the concept of plurality, there would be no limit on the number of judgment debts that might be the subject of a bankruptcy notice.

   …

   10.    In GPW Aussie Exports v Latin (unreported, 7 July 1998), Goldberg J considered the matter and declined to follow the decision of Beaumont J. His Honour observed that the application before Beaumont J was unopposed and that his Honour's reasons were given ex tempore and without the benefit of reference to authorities. Goldberg J, in his decision, referred to a line of authority commencing with In re Low; Ex parte The Argentine Goldfields Limited [1891] 1 QB 147. In none of the cases to which his Honour referred was section 23(b) of the Acts Interpretation Act, or any equivalent, considered. His Honour was, nevertheless, not persuaded to depart from that line of authority, having heard argument based on section 23(b).

   11.    I, with respect, agree with the observations made by Goldberg J. I am not satisfied that an act of bankruptcy has been committed, because I do not consider that the purported bankruptcy notice was a "bankruptcy notice" in accordance with the Act, for the reasons which I have briefly indicated. Accordingly, in my opinion the petition should be dismissed.

6. Whilst section 41 has been amended to allow a creditor to rely upon multiple judgements, it was not amended to allow for several creditors to join with respect to several debts. There appears to be good policy reasons for this: Claims by creditors joined with respect to several debts do not offer a reasonable opportunity to the debtor to comply by payment, in that payment of one creditor (with respect to several debts) does not discharge the indebtedness to the other creditor. I am therefore of the view that the notice does not meet an essential requirement of the Act.

7. Whilst these arguments are the basis that (prior to the amendments) only one judgement could be relied upon in a notice (see In re Low; ex parte The Argentine Goldfields Limited [1891] 1 QB 147) the principle remains, and its practical import is greater, in cases of several creditors.

8. A bankruptcy notice issued by creditors on a joint judgment, where the creditors had subsequently severed their rights (thereby creating several debts owed to each of them solely) was similarly held to be defective in McIntyre v Gye and Anor (1994) 122 ALR 289

9. Even if the non-compliance is not with respect to an essential requirement of the Act, such a notice is clearly confusing to the debtor.  Thus, even if it does comply with the essential requirements of the Act, I would set it aside on the basis that it could reasonably mislead a debtor as to what is required to comply with the notice.

10. I also note that paragraphs 2, 3 and 7 of the Notice refer to ‘the creditor’ yet there are two creditors in this case.  The paragraphs become nonsensical in the context of this case. 

11. For these reasons the bankruptcy notice should be set aside.

12. I have considered the argument that this would leave the creditors unable to issue a bankruptcy notice on this form of order. This is correct and is the natural result of the terms of the order. It seems apparent that it was an interlocutory machinery provision and never intended to be an order enforceable by execution, thus explaining its form.  If I am incorrect as to the Supreme Courts intent, then the respondent will need to seek amendment of the order under the slip rule to place it in a suitable form for enforcement.

The bankruptcy notice is issued by the correct creditors

1. The form of the order, as set out above, provides for payment to the solicitors.

2. The question of who the appropriate applicant should be is referred to Klewer v Walton [2004] FCA 410. In that case Tamberlin J considered a bankruptcy notice with respect to a judgment debt payable to the Registrar of the local court. In considering the matter His Honour said:

   13. The respondent referred to and relied on the judgment of In re A Debtor [1929] 2 Ch 146, where an order of the Divorce Court directed payment by the co-respondent to the solicitors of the petitioner of his costs of the suit. A bankruptcy notice was issued by the solicitors against the debtor for payment. The Court of Appeal held that the solicitors were not "creditors" within the meaning of the Bankruptcy Act 1914 (UK), who could present a bankruptcy notice against the co-respondent. In the course of his judgment, Lord Hanworth MR, with whom Lawrence and Sankey LJJ, agreed, said:

   ‘ ... there is the same intention to indicate that the person at whose suit proceedings are taken must be the principal, the person in whose interest those proceedings are necessary. In my opinion the petitioning husband in this case was the person who was really the principal, for whose indemnity legal proceedings were necessary. The solicitors were merely acting as a necessary part of the machinery, under which the sum enured for the benefit of the petitioner; but they were not the principals as against the debtor.’

3. In the circumstance of this case I am satisfied that the terms of the order for the moneys to be paid to the solicitors are effectively a machinery provision, with respect to the judgment for the benefit of the applicants. The fact that the judgment is for several debts that have been joined in the form in which it was issued is a matter, however, that is relevant to the other issues argued before me.

Whether the orders are final orders

1. In this case the terms of the orders make it clear that a payment must be made to the solicitors for the creditors, failing which judgment would be entered. The terms of the judgment that was ultimately entered provided for the assessment of damages, and a separate judgment with respect to each of the plaintiffs. Having regard to the history of undertakings and orders in this matter it appears to me that the order that is relied upon to support the bankruptcy notice would not be considered a final order in the sense of an order that finally determined the rights of the parties in a particular cause pending between them: see Hall v Nominal Dependant (1966) 117 CLR 423 at 433.

2. However, that is not the end of the question having regard to section 40(1)(g) of the Bankruptcy Act when read with section 40(3)(b). Having regard to the terms of the orders and their contexts it appears to me that the effect of the orders was to grant to the applicant McDonnell the option to either making the payment to the solicitors for the respondents, or having his defence struck out. He chose (or was unable to avoid) the latter option, and in that sense that order was conditional. This is confirmed by the form of the orders ultimately taken out in default, which are awaiting assessment of damages.

3. It appears likely that these are not orders on which executions could proceed in the same manner as a final order as it is not possible to determine from the face of the order how much of the joint sum each creditor is entitled to receive. However, in view of my finding with respect to the first issue I do not need to finally determine this point.

1. I therefore make orders to set aside the bankruptcy notice.

I certify that the preceding thirty-six (36) paragraphs are a true copy of the reasons for judgment of Riethmuller FM

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