Perkes, R.D. v McIntyre, N
[1991] FCA 432
•31 JULY 1991
Re: RAYMOND DAVID PERKES
And: NEVILLE McINTYRE and ITALA BELINDA McINTYRE
Nos. G536 and 537 of 1990
FED No. 432
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND
THE AUSTRALIAN CAPITAL TERRITORY
GENERAL DIVISION
Davies,(1) Beaumont(2) and Burchett(3) JJ.
CATCHWORDS
Bankruptcy - Whether debtors committed acts of bankruptcy - whether bankruptcy notices valid - debtors claiming set-off - whether substantial defect in bankruptcy notices - bankruptcy notices not refer to set-off - bankruptcy notices issued when court would have prevented execution on judgment by reason of set-off - existence of debt not established - discretion to refuse to exercise sequestration order.
Bankruptcy Act 1966: ss. 41(3), 44(1)(a), 52(1)(c), 52(2)(b), 86.
HEARING
SYDNEY
#DATE 31:7:1991
Counsel for the appellant: Mr B. Coles
Solicitors for the appellant: Gye and Perkes
Counsel for the respondents: Mr P.R. Garling
Solicitors for the respondents: Price Brent
ORDER
The appeal be dismissed with costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
The facts have been described in the reasons of my brother Beaumont J. and I need not repeat them.
Mr McIntyre's state of indebtedness, if any, was determined by that of his wife, Mrs I.B. McIntyre. The situation as between Mrs McIntyre and the appellant, Mr R.D. Perkes and Mr C.A. Gye, at least the situation in principle, was fully explained in the proceedings between Mrs McIntyre and Messrs Gye and Perkes before Hill J. (1989) 89 ALR 460, the Full Court (1990) 22 FCR 260 and the High Court of Australia (1991) 98 ALR 393. The judgment of the High Court, which dismissed an appeal from the orders made by the Full Court, established that, as between Mrs McIntyre and Messrs Gye and Perkes, s.86 of the Bankruptcy Act 1966 (Cth) applied, for the dealings between them were mutual dealings within the meaning of that section, with the result that the section operated to produce a balance. As the High Court said at 401, "Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee."
However, Mr Perkes and his counsel appear to have proceeded upon the assumption that, as s.86 is self-executing in the sense that its operation is automatic and not dependent upon the option of either party, as to which see the High Court at 401, it was not necessary that an account be taken of the mutual dealings or that the result of the mutual dealings and of the set-off be ascertained and declared. This view was adopted notwithstanding that the result of the taking of the account as between Mrs McIntyre and Mr Perkes was neither self-evident nor agreed.
Section 86(1) of the Bankruptcy Act provides:-
"86(1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy -
(a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;
(b) the sum due from the one party shall be set off against any sum due from the other party; and
(c) only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be."
The section requires the taking of an account. That account will ordinarily, in the first instance, be taken by a trustee, or in the event of a dispute, by the Court in its bankruptcy jurisdiction. The issue may also arise in other proceedings. See the High Court at 400-1. The taking of the account may involve the finding of facts which are in dispute, the apportionment of sums which need to be apportioned, the appropriation of sums to an account or heading, the valuation of goods received or held or services provided as payment or consideration, the assessment of liabilities which have not been fixed in monetary terms, the adoption of appropriate rates of interest and so on. The task is to quantify the balance arising from the mutual credits, mutual debts and mutual dealings, that is to say, to ascertain the bottom line.
The task may in some cases be complex, as is shown by Hiley v Peoples Prudential Assurance Co (1938) 60 CLR 468 and Day and Dent Constructions Pty Ltd v North Australian Properties Pty Limited (1982) 150 CLR 85 where the principle was enunciated that, for the operation of s.86, it is sufficient that there have been mutual dealings out of which a debt arose and it is not necessary that, at the relevant date, the date at which the balance is to be determined, the liabilities have accrued into fixed liabilities. That principle was also explained and applied in the Gye, Perkes, McIntyre litigation, for at the relevant dates for the set-offs, the respective dates of the special resolutions accepting the Gye and Perkes' compositions, as to which see s.243 and the High Court at 401 and 404, the claims made by Messrs Gye and Perkes against Mrs McIntyre were merely claims for unliquidated damages, not provable liquidated debts.
For this reason, at 22 FCR 274, the Full Court made a declaration "as to the availability of set-off", a declaration which was not disturbed by the High Court. An earlier order to like effect may be seen in Mersey Steel and Iron Company v Naylor, Benzon and Co. (1882) 9 QBD 648 at 672 (affirmed (1884) 9 App Cas 434) where the Court ordered, inter alia:-
"Declare that the defendants are entitled to set-off against the (pounds) 1713 admitted to be due to the plaintiffs such damages as they the defendants may have sustained by reason of the failure or refusal of the plaintiffs to deliver to the defendants the remainder of the blooms deliverable under the contract. Reference to ascertain the amount of such damages."
Accordingly, once the issues of law had been established by the judgment of the High Court, the proper course for any of Messrs Gye or Perkes or Mrs McIntyre as wished to pursue in bankruptcy a claim, the subject of the mutual dealings, would have been to have an account taken by the Court of the mutual dealings and of the result of the set-off. Such an account would have established whether any sum was payable by one party to another, and if so, how much was payable. However, no proceeding for an account was instituted.
In the proceedings before the trial Judge, there was very little material. Mr Perkes relied upon the affidavits verifying his petitions, affidavits which said nothing as to the compositions of Messrs Gye and Perkes, as to the mutual dealings or as to the right which Mrs McIntyre had to a set-off. Counsel for Mrs McIntyre tendered a schedule, to the mathematical accuracy of which Mr Perkes attested in cross-examination, which on the face of it showed that the judgment entered by Mrs McIntyre against Mr Gye and Mr Perkes exceeded the total of the judgments which Mr Gye and Mr Perkes had against Mrs McIntyre.
In these appeals, counsel for Mr Perkes submitted several different calculations, all purporting to show that a taking of accounts would disclose that Mrs McIntyre owed a balance to Mr Perkes. But such calculations merely serve to emphasise the point that, when the matter came before the trial Judge, having regard to the operation of s.86(1) of the Act, it had not been established that any sum was payable by Mrs McIntyre to Mr Perkes. Counsel's calculations, for example, adopted the lesser interest rate under the now repealed s.112 of the Bankruptcy Act for the amount due on Mrs McIntyre's judgment while adopting the interest rate specified by s.94 of the Supreme Court Act 1970 (NSW) for the liabilities the subject of the Gye and Perkes' judgments. That was not an equitable way of accounting for liabilities arising out of mutual dealings. Indeed, s.112 would not seem to apply in the set-off. Moreover, counsel's calculations took into account an alleged amount of $44,505.46 said to have been paid to Mrs McIntyre in cash or in kind in respect of her judgment. As to that sum, there was no evidence before the trial Judge.
The formal order as to set-off which issued on the declaration of the Full Court read:-
"(2) Declares that pursuant to the Bankruptcy Act 1966 the appellant is entitled to have set-off moneys due to her by the respondent under a judgment entered in the Supreme Court of New South Wales on 24 June 1982 in proceedings No. 210 of 1982 (Newcastle Registry) against moneys due by her to the respondent under a judgment entered in the Supreme Court of New South Wales on 12 September 1988 (but with effect from 24 June 1988) in proceedings No. 14411 of 1984 (Sydney Registry)."
This order did not have the effect of setting-off the raw sums of each judgment. The declaration was of an entitlement to have set-off "moneys due to them ... under a judgment ... against moneys due by her ... under a judgment". Thus, amounts in respect of interest and moneys paid were matters to be taken into account in the ascertainment of the result of the set-off. The respective liabilities had to be adjusted on a proper and fair basis as at the date on which the set-off effected by s.86 took effect.
On the material before him and as no account had been taken of the result of the mutual dealings, the trial Judge was well justified in holding that he was not satisfied that any sum was payable by Mrs McIntyre or Mr McIntyre to Mr Perkes. Section 52(1) of the Act requires that, at the hearing of the creditor's petition, there shall be proof of "(c) the fact that the debt or debts on which the petitioning creditor relied is or are still owing". In the light of the judgments of the Full Court and High Court, that proof was not provided. The matters I have discussed also suggest that the bankruptcy notices, on which the petitions were founded, were flawed and that the acts of bankruptcy relied upon were not established. However, having regard to the manner in which the hearing proceeded before the trial Judge and the absence of any notice of contention raising these issues, it is inappropriate that I consider them.
I would dismiss the appeals with costs.
JUDGE2
In these two appeals which were heard together, Raymond David Perkes appeals from orders made by a judge of the Court dismissing creditor's petitions presented by Mr Perkes pursuant to s.43 of the Bankruptcy Act 1966 ("the Act") seeking the sequestration of the estates of Neville McIntyre and Itala Belinda McIntyre. In order to understand the issues which arise on the appeals, it is necessary to refer to the history of the matters.
The history of the matters
On 24 June 1982, in proceedings in the Supreme Court of New South Wales, default judgment was entered for Mrs McIntyre as plaintiff against five defendants, including Mr Perkes and Clement Anthony Gye, in the sum of $224,000 (being $200,000 together with interest of $24,000). On 13 December 1982, the Supreme Court ordered that execution on the judgments be stayed pending determination of a cross-claim in the proceedings in deceit to be instituted by Messrs. Perkes and Gye against Mr and Mrs McIntyre.
On 3 April 1985, a meeting of creditors accepted a composition proposed by Mr Gye pursuant to Part X of the Act. On 28 June 1985, a meeting of creditors accepted a composition proposed by Mr Perkes pursuant to Part X. In the case of each composition, the creditors agreed to accept an assignment of designated property and an obligation to make specified payments of money to the trustee in full satisfaction of the relevant debtor's debts. The claim against Mr and Mrs McIntyre, the subject of the pending cross-claim in the Supreme Court, was not included in the property assigned to the Trustee. Mrs McIntyre did not seek to prove as a creditor in either composition.
The cross-claim in the Supreme Court was heard by Brownie J., who delivered reasons for judgment on 13 April 1988 and supplementary reasons on 17 June 1988. On the latter occasion, Brownie J. refused to enter judgment, as between Mrs McIntyre, on the one hand, and Messrs Gye and Perkes on the other, for the balance only of their respective claims. Brownie J. was of the view, having regard to the entry into the compositions, that each of Mr Gye and Mr Perkes should have judgment in the Supreme Court against Mr and Mrs McIntyre, and another party, in the sum of $636,500 plus interest, but that it should be left to this Court to determine any question of set-off under s.86 of the Act. On 12 September 1988, judgment was entered, as of 24 June 1988, that the McIntyres pay each of the cross-claimants, Messrs Gye and Perkes, the sum of $214,600.89.
By an application dated 8 June, 1989, Mr Gye sought a declaration that in his composition, Mrs McIntyre was not entitled to set-off the amount payable to her under the 1982 Supreme Court judgment. By another application dated 8 June 1989, Mr Perkes sought similar relief. The applications were heard by Hill J. in August 1989. Hill J. gave judgment in September 1989, declaring that Mrs McIntyre was not entitled to the set-off claimed (see (1989) 89 ALR 460). In April 1990, an appeal to the Full Court was allowed (see (1990) 22 FCR 260). The Full Court declared that Mrs McIntyre was entitled to have set-off moneys due to her by Mr Perkes under the 1982 Supreme Court judgment against moneys due by her to him under the 1988 Supreme Court judgment. In March 1991, an appeal to the High Court was dismissed (see (1991) 98 ALR 393).
Meanwhile, on 19 June 1989, bankruptcy notices were issued at the request of Mr Perkes addressed to Mr and Mrs McIntyre. Each notice required, inter alia, payment, within 21 days after service of the notice, of the sum of $214,600.89 said to be due under the 1988 Supreme Court judgment, together with interest, being a total sum of $247,055.60. Pursuant to the provisions of s.40(1)(g) of the Act, the notices required, as an alternative to payment, that the debtor satisfy the Court that he had a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt, being a counter-claim, set-off or cross demand that he could not have set up in the proceeding in which the judgment was obtained. Service of both notices was effected on 14 July 1989.
On 3 August 1989, both Mr and Mrs McIntyre filed affidavits pursuant to s.41(7) of the Act each claiming a set-off in respect of the amount owed under the 1982 Supreme Court judgment. By s.41(7) of the Act, where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has filed with the Registrar an affidavit to the effect that he has such a counter-claim, set-off or cross demand as is referred to in s.40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter-claim, set-off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied. It is common ground that an extension of time for compliance with the bankruptcy notice was effected by the operation of s.41(7) up to and including 27 September 1989 when Hill J. gave judgment refusing to declare the set-off claimed. It appears that no further extension of time was sought by Mr or Mrs McIntyre or granted by the Court, notwithstanding the appeal to the Full Court.
On 13 October 1989, Mr Perkes presented petitions for the sequestration of the estates of Mr and Mrs McIntyre, relying on acts of bankruptcy said to have been committed by failure to comply with the bankruptcy notices already mentioned. In June 1990, Einfeld J. heard the petitions. In August 1990, Einfeld J., for the reasons he then gave, dismissed the petitions. It will be necessary now to describe the course of the proceedings before Einfeld J. so far as presently material.
The proceedings before Einfeld J.At the hearing before Einfeld J., the solicitor for Mr and Mrs McIntyre indicated that, by reason of the set-off claimed, Mr and Mrs McIntyre denied that they had committed the acts of bankruptcy alleged. They also denied the existence of any debt, or any sufficient debt, to support the presentation of the petition (see s.44(1) of the Act). Reference was made to the circumstance that the High Court had granted special leave to appeal from the decision of the Full Federal Court.
Counsel for Mr Perkes indicated that there was an appearance in the matter on behalf of the Federal Commissioner of Taxation, apparently in support of the petitions. It appears that the Commissioner claimed to be owed approximately $600,000 by either Mr or Mrs McIntyre. Brief reference was made to an affidavit sworn on behalf of the Commissioner but no details were given to his Honour. Counsel for Mr Perkes indicated that he might tender the affidavit in reply. However, the matter was not further pursued. No other creditor appeared at the hearing before Einfeld J. or before us.
In each petition, an affidavit of debt sworn by Mr Perkes was read. In each affidavit, Mr Perkes stated:
"1. I am the Petitioner herein.
2. I have checked my accounting records relating to the abovenamed debtor and found that no payments have been made since the date of the presentation of the said petition.
3. The said debtor is still justly and truly indebted to me in the sum of $259,049.73 (being $214,600.89 as to Judgment and $44,448.84 as to interest) being the sum referred to in the said petition."
Mr Perkes was cross-examined with respect to the 1982 Supreme Court judgment, which was not mentioned in his affidavit of debt. Mr Perkes said:
"My view is that the composition entered into by me in June 1985 bring (sic) to an end once and for all any claims that McIntyre has against me under the sections of the Bankruptcy Act which apply to creditors, setoffs, (sic) the debt situation altogether."
An attempt was made in cross-examination to have Mr Perkes agree to certain calculations of interest under the 1982 Supreme Court judgment.
In order to understand the reasons given by Einfeld J. for dismissing the petition, it is necessary to refer to the reasoning in the decision of the Full Federal Court which was then available to his Honour. It will also be necessary to refer to the reasoning in the High Court.
The Full Federal Court decision: see (1990) 22 FCR 260In reasons published on 6 April 1990, Pincus J. held that the damages claim and the debt did not fall outside s.86. He agreed with the orders proposed by Gummow and Von Doussa JJ. who said (at 272-3):
"Mrs McIntyre's judgments against Messrs Perkes and Gye constituted present debts to which they were subject on the days on which the special resolutions accepting their compositions were passed, 3 April 1985 and 28 June 1985. In respect of each debtor, the debt would have been a provable debt if he had become a bankrupt on the day the special resolution was passed. What on 3 April 1985 and 28 June 1985 were the unliquidated claims in tort against Mrs McIntyre (instituted on 7 January 1983) would not have been provable debts if, reversing the situation of the parties, it had been Mrs McIntyre who on either date in 1985 had compounded with her creditors.
But by the time of the institution of the present proceedings in this Court the compositions still being on foot, the claim of Mr Perkes and the claim of Mr Gye had merged in a present judgment debt. If an account were to be taken, then, consistently with the reasoning of the High Court in the Day and Dent Constructions case, one would ascertain in this case what was due from the one party to the other at the time of the taking of the account by the trustee of each composition, and not have regard simply to the state of affairs at the time of the commencement of the compositions in 1985. From this it would follow that the appellant was entitled to declaratory relief, confirming the right of set-off, rather than (as happened) each respondent obtaining declaratory relief denying the right of set-off."
Having considered the question of mutuality, Gummow and Von Doussa JJ. said (at 274):
"The present case involves the setting-off of what are now two judgment debts, there having been mutual dealings between the parties before the commencement of the compositions....
In each appeal the declaration made by the learned primary judge should be set aside, and there should be a declaration as to the availability of set-off to the appellant against the respondent."
The minute of the relevant order of the Full Court, entered on 19 April 1990, was in these terms:
"THE COURT
...
Declares that pursuant to the Bankruptcy Act 1966 the appellant is entitled to have set-off moneys due to her by the respondent under a judgment entered in the Supreme Court of New South Wales on 24 June 1982 ... against moneys due by her to the respondent under a judgment entered in the Supreme Court of New South Wales on 12 September 1988 (but with effect from 24 June 1988) in proceedings No. 14411 of 1984..."
The High Court decision: see (1991) 98 ALR 393
As has been said, after judgment was given by Einfeld J., the High Court (Mason C.J., Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ.) dismissed the appeal from the Full Federal Court.
The High Court said (at 397):
"In this court, it has been common ground that the appeal should be disposed of on the basis that Hill J. was correct in concluding that the stay of execution of Mrs McIntyre's judgment did not, while it subsisted, preclude proof of the judgment debt in either a bankruptcy or a composition. The appeals have also been argued on the basis that, for the purposes of s 86 of the Act, nothing turns either upon any variations in the parties to the Supreme Court action and counterclaim or upon the precise terms of the various Supreme Court orders which, as has been said, have not been placed before us. The length and multiplicity of the past proceedings in the Supreme and Federal Courts plainly make it desirable that this court dispose of the present appeals on the basis on which they have been argued and by reference to the particular questions which the parties have identified as being still in dispute. That being so, the issue of whether set-off is available or required can be determined on the footing that the situation does not significantly differ from that which would have existed if there had been, in each case, a judgment in Mrs McIntyre's favour against the relevant appellant alone (presumably for half the total amount) and a judgment in favour of the relevant appellant against Mrs McIntyre alone."
The High Court described the operation of s.86 as follows (at 401):
"Section 86 is a statutory directive ('shall be set off') which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee. The section is self-executing in the sense that its operation is automatic and not dependent upon 'the option of either party'...."
After discussing the authorities, the High Court said (at 403):
"...it is not disputed in the present case that the claim of Mrs McIntyre under her judgment against each of Gye and Perkes and the relevant countervailing claim against her for fraudulent misrepresentation are claims between the same parties in the same interests. The claims of the respective parties were, at the time of the special resolution accepting the relevant composition, also commensurable in the sense that they sounded or would ultimately sound in money: Mrs McIntyre's claim was, in each case, for a liquidated judgment debt; the claim against her was, in each case, for a pecuniary amount as compensation for the loss which had been actually caused by the fraudulent misrepresentation. It follows from what has been said above that the respective claims were 'mutual'... (T)hey were...in respect of 'mutual dealings' for the purposes of s.86."
Having analysed, and rejected, several submissions put on behalf of Messrs. Gye and Perkes, the High Court said (at 409):
"It follows from the foregoing that the conclusion of the Full Court of the Federal Court that there should be a set-off in each of the present appeals was, on the basis upon which the appeals have been argued, correct."
The reasoning of Einfeld J.
Einfeld J. said:
"Each of these parties is in debt to the other. The Full Court has said that one debt may be set off against the other. The substantive issue here is whether there is a remaining debt upon which a sequestration order can properly be pronounced as between the creditor and the debtors and, if so, what the debt is. These questions depend upon the date at which the respective judgment debts of the creditor and debtors are set off against each other."
Einfeld J. referred to the statement in the reasons of Gummow and Von Doussa JJ. quoted above (22 FCR at 273) that -
"...(O)ne would ascertain in this case what was due from one party to the other at the time of the taking of the account by the trustee of each composition, and not have regard simply to the state of affairs at the time of the commencement of the compositions in 1985."
Einfeld J. said that:
"...(T)he consequence of the Full Court's judgment is either that only those debts can be set off which exist at the time accounts were taken, or another date will have to be fixed in the case of later debts which do not. ...(T)here should either be no set off in these particular circumstances or the set off must be calculated from the date the Perkes judgment took effect. As the Full Court has determined that there must be a set off in this case, I am constrained to fix the date of set off as 24 June 1988, despite the difficulties this seems to pose to the Part X trustee.
The creditor further submits that the related judgment debt to be paid by Mr and Mrs McIntyre to Mr Gye is to be offset against the judgment in favour of Mrs McIntyre. I reject that submission. In my view, this is a different case and in that sense a different debt. The Full Court only ordered that the debts applicable to the individual creditors/debtors are to be set off.
It is not necessary for me to calculate the accrued interest on the McIntyre judgment because the consequence of my findings is that if a set off is to take place, there is a balance owing to the debtors in any event. Accordingly there is no debt to found a sequestration order and the petition should be dismissed."
The submissions put in support of this appeal
On behalf of Mr Perkes, the following arguments are now advanced: (1) The majority of the Full Federal Court regarded the relevant right of set-off as relating to the respective judgment debts, not the claims underlying them. (2) Einfeld J. felt constrained in the present case to follow the majority in the Full Court, and to "fix the date of set-off as 24 June 1988". (3) However, the decision of the High Court shows that such an approach to Mrs McIntyre's rights of set-off pursuant to s.86 is wrong. (4) The High Court held that the availability of a set-off is to be determined on the hypothetical basis that a sequestration order was made on the date that the special resolution was passed approving the composition (i.e. 28 June 1985). That is the "decisive date" and it was at the time of the special resolution accepting the relevant composition that the claims of the respective parties were found to be commensurable. (5) Einfeld J. should have had regard to the effect of the offsetting claim by Mr Gye against Mrs McIntyre. Gye's composition preceded that of Mr Perkes. Upon the set-off operating, Mrs McIntyre's claim was satisfied pro tanto, so far as Mr Gye's separate claim extended against her. At common law, double recovery cannot be permitted and satisfaction pro tanto of Mrs McIntyre's judgment by one of the several judgment debtors operates to discharge pro tanto the liability of any other several judgment debtor. (6) Accordingly, Mr Perkes' claim against Mr and Mrs McIntyre was liable to be reduced only to the extent to which Mrs McIntyre's judgment had not been satisfied by the set-off effected at the time of the composition affecting Mr Gye. (7) His Honour erred in finding that "there was a balance owing to the debtors in any event". The calculation on which his Honour apparently relied for this conclusion not only failed to reflect the effect of the set-off qua Mr Gye, but also carried interest beyond the relevant date qua Mr Perkes. (8) Even if some residual unsatisfied claim existed in favour of Mrs McIntyre after the extinguishment of Mr Gye's claim by set-off, this was irrelevant to the present bankruptcy notices. (9) Mr McIntyre had no right of set-off at any time and he had not demonstrated that the judgment debt against him had by some means been discharged.
Did Mr Perkes demonstrate that Mr and Mrs McIntyre had committed acts of bankruptcy?A creditor's petition for a sequestration order may be presented where a debtor has committed an act of bankruptcy (s.43(1)(a) of the Act). A petition shall not be presented unless, inter alia, the act of bankruptcy was committed within six months before the presentation (s.44(1)(c)). As has been said, the act of bankruptcy alleged is the failure to comply with the requirements of the bankruptcy notices. But the notices made no reference to the amount owing under the 1982 Supreme Court judgment notwithstanding the mutuality of the dealings between the parties in this connection.
In Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71, Mason C.J., Wilson, Brennan and Gaudron JJ. said (at 78-9):
"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....In such cases the notice is a nullity whether or not the debtor in fact is misled ...
If the amount specified in a bankruptcy notice is in fact due and payment is claimed in accordance with the judgment, the essential requirements of s.41(2)(a)(i) - the only requirements presently relevant - are met. Understatement of the amount due, whether it be an understatement of the judgment debt or of interest payable thereon, will thus constitute a defect which is substantive rather than formal only if the understatement is objectively capable of misleading the debtor as to what is necessary for compliance with the notice.
It may be that, in a given case, understatement is capable of misleading the judgment debtor particularly if the notice is capable of producing uncertainty as to whether the debtor is required to pay the amount in fact due or the amount specified in the notice. In such a case uncertainty arises, not merely from the understatement, but from the understatement in the context of the particular bankruptcy notice. No such uncertainty arises if it is clear that payment of the amount specified in the notice will constitute compliance with the notice."
Deane J., dissenting in the result, said (at 81):
"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'....A defect in a bankruptcy notice will invalidate it 'except in the case of a merely formal defect'...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."
A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he disputes the validity of the notice on the ground of the mis-statement (s.41(5)).
It will be recalled that the bankruptcy notices were served on 14 July 1989 and that on 3 August 1989, Mr and Mrs McIntyre swore affidavits claiming set-off. The hearing of the applications before Hill J. commenced on 10 August 1989. Thus, when the time for compliance with the requirements of the notices was running, there had been no adjudication on the question, plainly a complex and contentious one, whether Mr and Mrs McIntyre could set-off the 1982 Supreme Court judgment, and interest and, if so, at what date or dates. As previously noted, no mention of the 1982 Supreme Court judgment was made in the bankruptcy notices.
In my opinion, the bankruptcy notices should have made it reasonably clear to Mr and Mrs McIntyre what was required of them if they were not to commit acts of bankruptcy. In this context, the notice should have been framed in such a way as to accord with the declaration made by the Full Federal Court. That is to say, in my opinion, in order to be valid, the notices should have stated that there was a right of set-off in the terms of the Full Court's declaration and that Mr and Mrs McIntyre were required to pay the balance, which should have been specified, remaining after the set-off had been taken into account. That, of course, assumes that there was such a balance due; if not, there was no basis for the issue of bankruptcy notices. The notices made no reference to these matters, which were substantial, and not merely formal.
It follows, in my opinion, that the notices were invalid and that no act of bankruptcy was committed by Mr and Mrs McIntyre.
Was there owing to Mr Perkes by Mr and Mrs McIntyre a debt that amounted to $1,500?A creditor's petition shall not be presented unless there is owing by the debtor to the petitioning creditor a debt that amounts to $1,500 (s.44(1)(a)). It is clear that in an appropriate case, a bankruptcy court may, and should, go behind a judgment to ascertain whether the debt relied on is a good debt, a debt due in truth and reality (see, e.g. Wolff v Donovan, Full Federal Court, 30 May 1991, unreported). In the present case, it was known at the time of the hearing of the petition, that there was an entitlement to set-off arising out of the 1982 Supreme Court judgment. The actual balance of the account had not then been the subject of adjudication. But in the case at least of Mrs McIntyre, the set-off approximated the amount of the 1988 Supreme Court judgment. It was at least possible, on the taking of accounts between all interested parties, including Mr McIntyre, that no balance would be found to be owing to Mr Perkes. In my opinion, even if an act of bankruptcy had been committed, Mr Perkes did not establish the existence of the debt required by s.44(1)(a).
DiscretionEven if, contrary to the views I have expressed, Mr Perkes had established the matters previously mentioned, I would have exercised the discretion in s.52(2)(b) of the Act to refuse to make a sequestration order. In my view, in the absence of any evidence of actual insolvency or of any prejudice to the general body of the creditors of Mr and Mrs McIntyre, there are strong discretionary reasons for not bankrupting Mr and Mrs McIntyre in the present circumstances. As has been said, the working out of the set-off is itself a complex and contentious matter which should be permitted to proceed in the ordinary civil courts. It is not, in my view, appropriate that this kind of matter, where there is a bona fide dispute, should be dealt with by the pursuit of a creditor's petition for a sequestration order.
I would dismiss the appeal, with costs.
JUDGE3
There may be a number of reasons why these appeals should fail. However, a sufficient reason, in my opinion, is to be found in the decision of Beaumont J. in Re Solomon; Ex parte Reid (1986) 10 FCR 423, which was approved by a full court in Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568. In the latter decision (at 575-576), the joint judgment of the full court referred to s. 41(3) of the Bankruptcy Act 1966, where it is provided (inter alia) that a bankruptcy notice shall not be issued in relation to a debtor: "(b) if, at the time of the application for its issue, execution of the judgment or order to which it relates has been stayed". Their Honours said:
"It appears to be settled law both in the United Kingdom and, at least at first instance, in this country, that the words in s. 41(3) `execution of the judgment or order to which it relates has been stayed' are not restricted to an order expressly staying a judgment. They have been construed as having a much wider meaning. In certain circumstances execution is deemed to have been stayed if the execution creditor is for some reason not in a position to issue execution upon his judgment."
A number of decisions support this proposition. Among them is In re A Debtor. Ex parte The Debtor (1908) 1 KB 344, a decision of the Court of Appeal. In that case, Fletcher Moulton L.J. (at 349) said:
"In other words, when there are circumstances under which the Court would, if applied to, prevent the issue of execution, those circumstances may bring the case within the interpretation which the Court has put upon the words `execution having been stayed.'"
It seems to me that the present case is a plain example of the situation to which Fletcher Moulton L.J. was referring. At the time of the issue of the bankruptcy notices, the court, if applied to, would have prevented the issue of execution on the ground that the judgment debtors were entitled to a set off in respect of the sum owed under the prior judgment. Until the question was clarified whether any outstanding balance at all was owing, and if any outstanding balance was owing how much the amount of it was, it would have been unthinkable to permit execution to proceed. Indeed, at an earlier stage, when apparently execution of the 1982 judgment against the appellant was threatened, a stay was granted to the appellant pending the hearing of his cross-claim. Plainly, the object was to save him from having to pay under the judgment before the ascertainment of the correct final balance. No reason at all has emerged why relief of that kind should be seen as one-way traffic.
There is a second strand to the line of authorities which was followed in Re Solomon, and in the later decision of the full court. That strand is exemplified by In re Sedgwick, Ex parte Sedgwick (1888) 5 Morr 262. In this case, Lord Esher M.R. referred to the "equity" which arises when a creditor issues a bankruptcy notice, having himself taken action which "actually and in fact prevents the debtor from paying". The question, his Lordship said (at 264), is "whether in the eyes of any person of ordinary fairness in business it will be said that the creditor has in a business sense prevented the debtor from paying". If it were necessary to press the analysis past the proposition laid down by Fletcher Moulton L.J. to which I have referred, it would have to be said here that the appellant, by not paying the moneys due to the debtors under the judgment obtained by them in the Supreme Court, would be regarded in the eyes of any person of ordinary fairness in business as preventing in a business sense the respondents from paying under the judgment on which he relied.
I would dismiss the appeal with costs.
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