Owners - Strata Plan No 14120 v McCarthy

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FEDERAL COURT OF AUSTRALIA

Owners – Strata Plan No 14120 v McCarthy [2017] FCA 242

Appeal from: The Owners – Strata Plan No 14120 v McCarthy (No.2) [2016] FCCA 2007
File number: NSD 1484 of 2016
Judge: FARRELL  J
Date of judgment: 14 March 2017
Catchwords: BANKRUPTCY – appeal against a decision by a judge of the Federal Circuit Court of Australia to set aside a bankruptcy notice – where amount stated as owing on bankruptcy notice exceeds amount due – whether notice complies with s 41(5) of the Bankruptcy Act 1966 (Cth) – where notice comprises various communications – notice found to be sufficient – appeal dismissed
Legislation: Bankruptcy Act 1966 (Cth) s 41(5)
Cases cited:

Re Serafino; Ex parte Classic Manufacturing Pty Ltd (1989) 86 ALR 283; [1989] FCA 159

Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120; [1999] FCA 255

The Owners – Strata Plan No 14120 v McCarthy [2016] FCCA 1583

The Owners – Strata Plan No 14120 v McCarthy (No.2) [2016] FCCA 2007

Date of hearing: 20 December 2016
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: General and Personal Insolvency
Category: Catchwords
Number of paragraphs: 32
Counsel for the Appellant: Mr D F Elliott
Solicitor for the Appellant: Grace Lawyers
Counsel for the Respondent: Mr D P Robinson SC
Solicitor for the Respondent: Cogent Lawyers

ORDERS

NSD 1484 of 2016
BETWEEN:

THE OWNERS - STRATA PLAN NO 14120

Appellant
AND:

CATHERINE ESTELLE MCCARTHY

Respondent

JUDGE:

FARRELL  J

DATE OF ORDER:

14 MARCH 2017

THE COURT ORDERS THAT:

1.The appeal is dismissed.

2.The appellant must pay the respondent’s costs as agreed or taxed.

3.Any costs payable by The Owners Corporation – Strata Plan No 14120 pursuant to order 2 be paid from contributions levied only in relation to Lots 2 and 3 and not Lot 1.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


REASONS FOR JUDGMENT

INTRODUCTION

  1. This is an appeal from orders made in the Federal Circuit Court of Australia (FCCA) on 18 August 2016: see The Owners – Strata Plan No 14120 v McCarthy (No.2) [2016] FCCA 2007. The primary judge set aside Bankruptcy Notice BN 180646 issued on 28 April 2015 and dismissed the creditor’s petition filed by the applicant (SP 14120) on 16 September 2015.  The primary judge also ordered that SP 14120 pay the costs of the respondent (Ms McCarthy) and that those costs be paid from contributions levied on lots owned by the other two owners in the strata plan.

  2. The orders were made following the separate determination of two questions in reasons published on 5 July 2016: see The Owners – Strata Plan No 14120 v McCarthy [2016] FCCA 1583. Unless otherwise indicated, references in these reasons to paragraphs of the primary judge’s reasons are references to this judgment, which I may also refer to as the July Judgment

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Details
Case
[2017] FCA 242
Decision Date

CaseChat Overview and Summary

The Owners – Strata Plan No 14120 brought an appeal against a decision by a judge of the Federal Circuit Court of Australia to set aside a bankruptcy notice. The appeal concerned the amount stated as owing in the notice, which exceeded the amount due. The central issue was whether the notice complied with section 41(5) of the Bankruptcy Act 1966 (Cth). The case involved various communications between the parties, which the primary judge found to be sufficient to alert the appellant to the misstatement. The appellant argued that the primary judge erred in this regard, but the court found that the communications were sufficient for the purposes of section 41(5).

The court examined the reasoning of the primary judge, who relied on the decision of the Full Court in Seovic Civil Engineering Pty Ltd v Groeneveld. The primary judge found that the debtor had to provide more than a mere assertion of a misstatement; the notice must enable the creditor to identify the alleged misstatement. The primary judge also adopted a "benevolent construction" of the debtor's notice, allowing for some imprecision. The court upheld the primary judge's finding that the notice given complied with section 41(5). The appeal was dismissed, and the appellant was ordered to pay the respondent's costs. The costs were to be paid from contributions levied only in relation to Lots 2 and 3, and not Lot 1.

Orders

Orders of the court

1. The appeal is dismissed.

2. The appellant must pay the respondent’s costs as agreed or taxed.

3. Any costs payable by The Owners Corporation – Strata Plan No 14120 pursuant to order 2 be paid from contributions levied only in relation to Lots 2 and 3 and not Lot 1.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

However, SP 14120 says that the primary judge erred by finding that the 1 June 2015 communications were sufficient to enable SP 14120 to identify a misstatement in the Bankruptcy Notice by $51.29 in the amount said to be owing to SP 14120. SP 14120 says that a fair reading of the communications on 1 June 2015 leads to the conclusion that Ms McCarthy notified SP 14120 that only three of 24 payments had been allocated to her account, a different misstatement. BACKGROUND Ms McCarthy is the registered proprietor and owner of a lot in SP 14120. It is one of three residential apartments in the strata plan; they are located in a country town in New South Wales. She has been in “unfortunate circumstances” for some time. She struggled to service her mortgage repayments and pay strata levies soon after she bought the apartment in 2005: J[6]-[7]. Judgment debts SP 14120 commenced three sets of proceedings in the Local Court of New South Wales seeking to recover unpaid levies from Ms McCarthy. The proceedings resulted in three judgment debts being obtained against Ms McCarthy which were the subject of findings by the primary judge:(1)The first judgment debt was entered against Ms McCarthy on 26 April 2013 for an amount of $4,445.29. From the time the proceedings commenced until the first judgment debt was entered, Ms McCarthy had made payments amounting to $2,031. Ms McCarthy obtained orders that the first judgment debt be paid in fortnightly instalments of $190 each. She made 16 instalment payments from around 15 August 2013 to 14 March 2014, leaving an unpaid balance of $51.29 as at 15 August 2014: J[9]-[11].(2)The second judgment debt was entered against Ms McCarthy on 19 February 2014 for an amount of $4,047.90. On 3 April 2014, Ms McCarthy obtained an order that the second judgment debt be paid by fortnightly instalments of $240 each commencing on 1 May 2014. Ms McCarthy submitted to the primary judge that she made payments of $240 on 27 March 2014 and 28 April 2014 in anticipation of the instalment order being made. It appears that Ms McCarthy made a further seven payments up to and including 4 August 2014. SP 14120 submitted to the primary judge that Ms McCarthy made these payments to the wrong DEFT account with its bank, it did not know of the payments at the time they were made and it did not receive them until June 2015. Nevertheless, SP 14120 accepted, and the primary judge found, that Ms McCarthy made three payments of $240 each (totalling $720) which were received by SP 14120 on 15 August 2014, 12 September 2014 and 31 January 2015: J[12]-[17].(3)The third judgment debt was entered against Ms McCarthy on 13 April 2015 for the amount of $7,429.38. That judgment debt was based on SP 14120’s claim that Ms McCarthy had not paid strata levies between 13 November 2013 to 26 February 2015: J[20]-[21].Item 5 of the Bankruptcy Notice How SP 14120 arrived at the amount set out in Item 5 of the Bankruptcy Notice only became clear at the hearing before the primary judge. In considering whether there was an overstatement by $51.29, the primary judge noted that the position of SP 14120 developed in the following way:(1)In an affidavit sworn on 28 January 2016, before the hearing, a solicitor employed by the lawyers for SP 14120 (who had carriage of the matter) gave evidence that payments of $240 each had been received by SP 14120 on 15 August 2014, 12 September 2014 and 31 January 2015 in accordance with the orders made on 3 April 2014 for payment of the second judgment debt by instalments: J[53].(2)However, SP 14120’s position at the hearing relied on an affidavit sworn by the same solicitor on 15 March 2016. He said that on 15 August 2015 [sic 2014], SP 14120 received the first of three payments of $240 from Ms McCarthy. SP 14120 credited $51.29 out of the $240 instalment made on 15 August 2014 towards the final payout of the first judgment debt. It was because of this that SP 14120 allowed credit for only $668.71 in Item 5 of the Bankruptcy Notice as amounts received after the second and third judgment debts: see J[35]-[37].

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The orders were made following the separate determination of two questions in reasons published on 5 July 2016: see The Owners – Strata Plan No 14120 v McCarthy [2016] FCCA 1583. Unless otherwise indicated, references in these reasons to paragraphs of the primary judge’s reasons are references to this judgment, which I may also refer to as the July Judgment. Issue on appeal The primary judge answered “yes” to the following questions which are set out at J[28]:i.Whether the amount specified as the amount due to the petitioning creditor in bankruptcy notice BN 180646 issued on 28 April 2015 exceeds by the amount of $51.29 the amount in fact due to the petitioning creditor by the respondent debtor as at 28 April 2015.ii.In the event that the answer to question (i) is in the affirmative, whether the respondent debtor in the circumstances gave to the creditor notice which complies with s.41(5) of the Bankruptcy Act 1966 (Cth) of the misstatement. The issue raised on the appeal is whether the primary judge erred in answering “yes” to question (ii). The primary judge’s finding in relation to issue (i) is no longer in dispute. The Bankruptcy Notice was founded on the second and third of three judgment debts obtained by SP 14120 against Ms McCarthy for unpaid strata levies (see [11] below). SP 14120 served the Bankruptcy Notice on Ms McCarthy on 12 May 2015. Item 6 of the Bankruptcy Notice stated that the “total debt amount” claimed was $11,201.03. This amount was calculated by adding the aggregate of the second and third judgment debts ($11,477.27, which was Item 1 in the Bankruptcy Notice) to accrued interest ($392.47, which was Item 3 in the Bankruptcy Notice), and deducting an allowance for “payments made and/or credit allowed since judgment/s or order/s” ($668.71, which was Item 5 of the Bankruptcy Notice): J[22]. The misstatement in Item 5 (and therefore also in Item 6) arose from SP 14120’s failure to apply, in full, to the second judgment debt, the first of three $240 payments which SP 14120 acknowledges that it received from Ms McCarthy on 15 August 2014, 12 September 2014 and 31 January 2015. Instead, SP 14120 allocated $51.29 to the unpaid balance of the first judgment debt, which was not the subject of the Bankruptcy Notice. The result was that Item 5 of the Bankruptcy Notice stated that SP 14120 had credited an amount of $668.71 for payments received after judgment, not $720. For completeness, Ms McCarthy claimed to have made 24 payments of $240 each in accordance with an instalment payment order made on 3 April 2014. SP 14120 acknowledged receipt of only the three payments referred to in [5] at the time the Bankruptcy Notice was issued. There was a second ground of attack by Ms McCarthy on the Bankruptcy Notice relating to 21 payments of $240 made by electronic means to a Direct Electronic Funds Transfer (DEFT) account with SP 14120’s bank for which SP 14120 gave no credit to Ms McCarthy. SP 14120 says that those payments were made to the wrong account and SP 14120 did not receive them until June 2015. Whether or not the payments amounted to a pro tanto discharge of Ms McCarthy’s liability is a matter which must be decided by the FCCA if the matter is remitted back to the FCCA: J[26]-[27].

Ratio Decidendi

Legal Principle Established

The “ledger attached” listed 22 payments. There are three payments of $677 each listed as having occurred on 4 April 2013, 2 May 2013 and 29 May 2013. There are 16 payments of $190 each listed as having occurred between 15 August 2013 and 14 March 2014. There are three payments of $240 each listed; these are the payments made on 15 August 2014, 12 September 2014 and 30 January 2015. The bottom of the ledger page relevantly reads:14/03/2014 … 190.0015/08/2014 … 240.0012/09/2014 … 240.0030/01/2015 … 240.00The handwritten mark “>” appears between the dates 14/3/2014 and 15/8/2014 and between 12/9/14 and 30/1/2015. The words “24 payments” are handwritten below the table.Consideration by the primary judge of question (ii) The primary judge’s reasoning in determining question (ii) was informed by the decision of the Full Court (Hill, Sackville and North JJ) in Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120; [1999] FCA 255: J[61]. He said at J[64]-[67]:[64] In Seovic (supra) the Full Court considered the proper construction of s.41(5) of the Act and its meaning and effect. At page 127 ([30]) it was pointed out that this question of statutory construction was within an area of the law notorious for its technicality. At page 128 ([32–33]) the Full Court said:32.The notice the debtor is required to give, in order to challenge the validity of the bankruptcy notice by reason of an over-statement of the amount due, must do two things:Ÿfirst, it must give notice to the creditor that the debtor disputes the validity of the notice; andŸsecondly, it must give notice to the creditor that the debtor does so on the ground of “the misstatement”.Clearly enough, the expression “the misstatement”, as used in s 41(5), is a reference to the amount claimed in the bankruptcy notice being incorrect by reason of it exceeding the amount in fact due by the debtor to the creditor.33.It follows from the language of s 41(5) of the Bankruptcy Act that a debtor does not comply with s 41(5) simply by asserting in the notice to the creditors that the bankruptcy notice is invalid. The debtor's notice must at least give notice that the validity of the bankruptcy notice is disputed “on the ground of the misstatement”. What, then, is meant by the concluding words of s 41(5)?[65] At pages 128–129 ([36]) the Full Court set out its view that the debtor had to do more than simply assert that the amount specified in the bankruptcy notice exceeded the amount actually due. The Full Court said:36.While it is not strictly necessary for us to decide, we think that the better view is that a notice by the debtor which simply asserts, without more, that the amount specified in the bankruptcy notice exceeds the amount actually due, does not comply with the requirements of s 41(5) of the Bankruptcy Act. The expression “the misstatement” strongly suggests that the debtor must do more than merely assert that there is a misstatement in the bankruptcy notice. The subsection requires the debtor to provide sufficient information in the notice to enable the creditor to identify what is said to be the alleged misstatement. Only then does the debtor's notice displace the general rule established by s 41(5), that the bankruptcy notice is not invalidated only by reason that the sum specified therein as the amount due to the creditor exceeds the amount in fact due.[66] At page 129 ([37]) the Full Court stated the policy considerations and rationale behind the construction given by it to s.41(5) of the Act in the following terms:37.This construction of s 41(5) of the Bankruptcy Act is supported by policy considerations. The object of a debtor's notice under s 41(5) is to inform the creditor that the debtor disputes the bankruptcy notice and does so on the ground of a misstatement contained in that notice. The point of the notice is to draw to the creditor’s attention the misstatement, thereby giving the creditor the opportunity to consider, for example, whether the bankruptcy notice should be withdrawn and a fresh notice, correcting the misstatement, issued. If the creditor is given no hint in the notice as to the nature of the misstatement, there is a considerable risk that the debtor will be able to take unmeritorious advantage of minor errors (such as the small mistake in the present case) and that unnecessary and wasteful litigation will eventuate. It is no answer to say that the creditor can ask for particulars, since the debtor would not be obliged to give any until after litigation had been instituted. Indeed, a debtor wishing to take advantage of the technicalities of the law of bankruptcy might be well-advised to say as little as possible for as long as possible about the true nature of the alleged misstatement in the bankruptcy notice.[67] So far so good. However, the Full Court went on to offer to the debtor a potential tabula in naufragio by enjoining that a notice under s.41(5) of the Act should be given a “benevolent construction”. It said:38.This view of s 41(5) of the Bankruptcy Act does not mean that a debtor, who is quite likely to be unrepresented, must identify the misstatement with complete precision or specify the exact amount of the alleged excess of the claim. To borrow the language of Lockhart J in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 at 142, the Court should adopt a “benevolent construction” of the debtor’s notice. His Honour’s comments related to the then s 41(7) of the Bankruptcy Act, which provided for an automatic extension of time for compliance with a bankruptcy notice where the debtor filed an affidavit to the effect that he or she had “such a counter-claim, set-off or cross demand as is referred to in [s 40(1)(g)]”. Lockhart J held that the affidavit had to contain more than a mere assertion that the debtor had a counter-claim, set-off or cross-demand of the relevant kind. It was necessary to provide evidence in support of the debtor’s claims. However, having regard to the time limit for the filing of the affidavit and the difficulties facing an unrepresented debtor, a “benevolent construction” of the affidavit was warranted. Lockhart J’s approach was subsequently adopted by the Full Court: Eastick v Australia and New Zealand Banking Group Ltd (1981) 53 FLR 91.