Re Kostezky; Ex parte Milder Elfman Szmerling Krycer Pty Ltd
[1996] FCA 455
•12 JUNE 1996
CATCHWORDS
BANKRUPTCY - Creditor's petition - Bankruptcy notice - Judgment debt partly satisfied before service of notice - Failure to describe amount still due as "balance" - Failure to set out credit - Whether notice confusing and perplexing - Grounds for refusing sequestration order - Claim by debtor for unliquidated damages arising out of work subject of fee on which judgment debt based - Whether sufficient cause to refuse order.
Bankruptcy Act 1966, ss.40(1)(g), 41(2), 52(2)(b), 306
Re Manion; Ex parte Deputy Commissioner of Taxation (1979) 23 ALR 270
Re Yu unreported (3 November 1995)
Kleinwort Benson Australia Ltd v. Crowl (1988) 165 CLR 71
Re Player (1962) 19 ABC 277
Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111
Vee H Aviation Pty Ltd v. BP Australia Ltd (1995) 13 ACLC 1,181
Edward Ward & Co v. McDougall [1972] VR 433
Eagle Star Nominees Ltd v. Merril [1982] VR 557
Indrisie v. General Credits Ltd [1985] VR 251
James v. Commonwealth Bank of Australia (1992) 37 FCR 445
D Galambos & Son Pty Ltd v. McIntyre (1975) 5 ACTR 10
NICHOLAS ILYA KOSTEZKY Ex parte MILDER ELFMAN SZMERLING KRYCER PTY (ACN 007 079 861) VP 570 of 1995
COURT:Sundberg J
PLACE:Melbourne
DATE:12 June 1996
IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION )
BANKRUPTCY DISTRICT OF ) No VP 570 of 1995
THE STATE OF VICTORIA )
BETWEEN:NICHOLAS ILYA KOSTEZKY
Judgment Debtor
AND:MILDER ELFMAN SZMERLING KRYCER PTY (ACN 007 079 861)
Petitioning Creditor
COURT:Sundberg J
DATE:12 June 1996
PLACE:Melbourne
MINUTES OF ORDER
The Court orders that:
The petition be adjourned to a date to be fixed to enable the debtor to prosecute proceeding No 6129 of 1993 in the Supreme Court of Victoria.
The period at the expiration of which the petition will lapse be twenty four months from 13 June 1995.
The costs, including any reserved costs, be reserved.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION )
BANKRUPTCY DISTRICT OF ) No VP 570 of 1995
THE STATE OF VICTORIA )
BETWEEN:NICHOLAS ILYA KOSTEZKY
Judgment Debtor
AND:MILDER ELFMAN SZMERLING KRYCER PTY (ACN 007 079 861)
Petitioning Creditor
COURT:Sundberg J
DATE:12 June 1996
PLACE:Melbourne
REASONS FOR JUDGMENT
SUNDBERG J:
Background
On 2 October 1992 the petitioning creditor obtained a judgment against the debtor in the Magistrates' Court at Melbourne for $10,844.07 made up of $7,344.70 on the claim, $1,145.37 interest and $2,354.00 costs. By the same order the creditor obtained judgment against the debtor's wife for $4,926.70. Although the order suggests that the total amount due is $15,770.77, it was common ground that the $4,926.70 was part of the $10,844.07, so that if the wife satisfied the judgment against her, the amount payable by the debtor would be to that extent reduced. The judgments were for unpaid fees for legal work performed by the creditor, which is a firm of solicitors.
On 6 May 1993 the debtor, his then wife, and two companies controlled by them sued the creditor in the Supreme Court of Victoria for damages for breach of retainer and negligence in connection with the legal work the creditor had performed for them between September 1985 and June 1988 in respect of an application to amend the title to certain land and an application to register a plan of subdivision of the land.
The bankruptcy notice
On 19 August 1994 the creditor caused a bankruptcy notice to be issued against the debtor. The notice claimed that the sum of $7,370.43 was "due ... under a final judgment (or order) obtained ... in the Magistrates' Court at Melbourne on the 2nd day of October 1992". The debtor did not comply with the notice, and on 19 April 1995 a creditor's petition was filed, the act of bankruptcy relied on being the failure to comply with the notice.
The debtor has opposed the petition on a number of grounds, one of which is that the sum claimed in the notice as the debt is not referable to any judgment amount in any order made on 2 October 1992.
It appears from an affidavit sworn on behalf of the petitioner on the day the petition came on for hearing that the amount claimed in the notice ($7,370.43) is calculated by deducting $4,926.70 from the amount of the judgment, leaving a balance of $5,917.37, and adding interest on the balance from 3 October 1992 (the day after judgment) until 13 August 1994 ($1,453.04). The deducted amount ($4,926.70) was paid by the debtor's wife, and satisfied the judgment against her.
The prescribed form
Section 40(1)(g) of the Bankruptcy Act 1966 provides, so far as relevant for present purposes, that a debtor commits an act of bankruptcy
if a creditor who has obtained against the debtor a final judgment ... has served on the debtor ... a bankruptcy notice under this Act and the debtor does not ... within the time fixed by the Registrar by whom the notice was issued ... comply with the requirements of the notice or satisfy the Court that he has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt ....
Section 41(1) requires a bankruptcy notice to be in the prescribed form. Sub-section (2) provides that the prescribed form shall be such that the notice
(a)requires the debtor ... within a 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 compound the debt or sum to the satisfaction of the creditor ...; and
(b)states the consequence of non-compliance with the requirements of the notice.
Form 4 is the prescribed form and reads, so far as relevant for present purposes:
Whereas (name and address of judgment creditor) (hereinafter referred to as 'the judgment creditor') has claimed that the sum of $... is due by you to him under a final judgment (or order) obtained by him against you in the Court of ... on the ... day of ... 19....
Debtor's contention
The debtor submitted that the notice does not follow the prescribed form because it does not explain the relationship between the amount claimed and the judgment debt. Reliance was placed on two cases: Re Manion (1979) 23 ALR 270 and Re Yu, an unreported decision of Lehane J (3 November 1995). In Manion the creditor had obtained judgment for $24,658.99 together with $26 costs. The bankruptcy notice recited that the creditor claimed that "the
sum of $24,011.24 is due by you to him under a final judgment ..., being the balance of a judgment ... ($22,824.31) together with interest at the rate of ten dollars per centum per annum from the Twenty Fourth day of November 1977 to the date of this notice ($1,186.93)". The difference between the amount of the judgment debt ($24,658.99 plus $26 for costs) and the $22,824.31 was due to a credit of $1,860.68 allowed by the creditor after the date of judgment. The debtor claimed that the notice left the reader uncertain whether the sum of $22,824.31 was the amount of the judgment or the balance due thereunder. Lockhart J held that although the notice left much to be desired, it would not so perplex a debtor that he could not readily understand it. It was tolerably clear that the sum of $24,011.24 was the total of $22,824.31 and $1,186.93. The deficiency in the notice was a formal defect or irregularity only, and was saved by s.306(1). However, at p.274 his Honour said:
[The notice] would be clearer if it stated in the space following the first dollar sign either the amount of the final judgment or the balance thereof due at the date on which the bankruptcy notice is issued. If it is the balance of the judgment that is claimed, that fact should be stated and the amounts paid or credited after judgment was signed should be specified.
In that case the notice claimed the balance of the judgment, though it did not state the amount of the judgment and the amount paid. In the present case the notice does not say that the amount claimed is the balance due under the judgment after payment of $4,926.70 by the debtor's wife.
In Yu the bankruptcy notice recited the creditor's claim that "the sum of $4,165,553.58 is due by you to the judgment creditor under a final judgment ... (less the amount received by the judgment creditor upon the sale of the secured property by Contract for Sale dated 14 April 1994) ...". It appeared that the judgment debt was $6,848,916.63, and that the
difference between it and the amount claimed resulted from an appropriation to the judgment debt of the proceeds of sale of a property over which the creditor had a mortgage securing payment of the judgment debt. Lehane J held that the recital was open to the construction that a sum less than $4,165,553.58 was due, and that this ambiguity was of a kind that could reasonably mislead the debtor and was not a formal defect or irregularity cured by s.306. His Honour said:
The amount of the judgment was $6,848,916.63. Clearly, what the creditor was seeking to claim by the bankruptcy notice was the balance of that judgment debt remaining after the appropriation to it of the proceeds of sale of property over which the creditor had a mortgage or other security of some kind. It is clear that when payments have been received by a judgment creditor in reduction of the judgment debt the balance only of the judgment debt may be claimed in a bankruptcy notice based on it: Re Manion; Ex parte Deputy Commissioner of Taxation (1979) 23 ALR 270; Re Walsh (1982) 47 ALR 751 (affd (1983) 47 ALR 616; (1984) 53 ALR 606).
In Manion Lockhart J said, at 274: "If it is the balance of the judgment that is claimed, that fact should be stated and the amounts paid or credited after judgment was signed should be specified".
The present notice
In Manion the notice clearly stated that the debtor was not required to pay the whole of the judgment debt. The reference to "the balance of the judgment" sufficiently conveyed that some part of the debt had been paid or was no longer claimed, though the notice did not state how much. The debtor would have known the amount of the judgment debt, and from the other figures in the notice could have worked out that the amount paid was $1,186.93. So the failure to state that amount could not reasonably mislead him. In any event, there was no doubt as to the amount the debtor had to pay in order to satisfy the demand in the notice. In Yu, the vice lay in the ambiguous fashion in which the creditor had attempted to say that it was the balance of the judgment that was claimed. Had the notice said "after
taking into account the amount received" rather than "less the amount received", the notice would probably have been saved by s.306.
In the present case the notice does not claim the balance of the judgment. Both Lockhart J and Lehane J were of the view that when a balance only is claimed, that fact should be stated in the notice. Accordingly the notice is defective.
Section 306
Section 306(1) provides
Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.
A formal defect or irregularity is one that would not reasonably mislead the debtor. If the defect is of such a kind as could reasonably mislead the debtor, the defect is fatal. The question is not whether the debtor was in fact misled. It is sufficient that he could be misled. What does "mislead" mean in this context? In Kleinwort Benson Australia Ltd v. Crowl (1988) 165 CLR 71 the judgment debt was $1,399,085.81. The bankruptcy notice claimed interest at 19.5 per cent over a specified period, but understated the amount of interest by some $23,000. The total amount claimed ($1,442,438.30) was thus $23,000 short. The High Court held that the understatement of interest was a formal defect or irregularity within s.306. Mason CJ, Wilson, Brennan and Gaudron JJ said, at pp.80-81:
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) ... 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.
The amount claimed in the present notice was in fact due, and is claimed under the judgment. If a mistaken understatement of the amount of a judgment is a substantive rather than a formal defect only if capable of misleading the debtor as to what is required of him, the statement of an amount less than the amount of the judgment (due to the fact that part of it has been paid) should not be in a different position. The distinction drawn in Kleinwort is between a possible perplexity in the mind of the debtor as to what is required in order to comply with the notice and any other sort of perplexity. The present case is a good example of possible perplexity in the second sense. The debtor may well have been perplexed as to why only $7,370.43 was claimed of him. He would have known that judgment had been entered against him for $10,844.07. He had not paid any part of it himself. He is unlikely to have known that his wife had paid $4,926.70. They were estranged. On the very day the judgment in question was obtained, proceedings between them were listed for hearing in the County Court. So the debtor may well have been genuinely and reasonably perplexed as to why he was only required to pay $7,370.43. But he could have been in no doubt that all he had to do to avoid the commission of an act of bankruptcy on which bankruptcy proceedings might be taken was to pay $7,370.43. In Yu, on the other hand, the debtor may have been in some doubt as to what he had to do to avoid committing an act of bankruptcy. Did he have to pay $4,165,553.58 or some smaller unspecified amount? The defect in the present
notice is cured by s.306, and by failing to comply with the demand contained in it the debtor has committed an act of bankruptcy.
Discretion to refuse relief
The debtor then contended that although the debtor had committed an act of bankruptcy, in the exercise of my discretion under s.52, I should not make a sequestration order because of the existence of the Supreme Court proceeding to which I have referred. As a general rule a court sitting in bankruptcy is not an appropriate forum to decide a claim by the debtor that he is entitled to unliquidated damages in tort or for breach of professional retainer against the petitioning creditor. The appropriate course is for that court to form a view as to whether it appears that there is sufficient validity in the debtor's claim to justify a dismissal or adjournment of the petition. The usual course, where the debtor shows that he has a real claim to litigate, is to adjourn the petition to enable the claim to be tried in the ordinary courts. See Re Player (1962) 19 ABC 277, at p.282; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111, at pp.116,120; Vee H Aviation Pty Ltd v. BP Australia Ltd (1995) 13 ACLC 1,181, at p.1,183.
I have referred in general terms to the Supreme Court proceeding. The statement of claim can be summarised as follows:
(a)The debtor and his wife owned land at Warrandyte, and the corporate plaintiffs owned adjacent land.
(b)In early 1985 the plaintiffs borrowed $760,000 to finance the subdivision of the land for the purpose of selling the lots to be created thereby.
(c)Later in 1985 the plaintiffs engaged Branicki Milder & Co to act as their solicitors in conducting an application to register a plan of subdivision in relation to the land and to obtain separate certificates of title to each lot.
(d)The solicitors were aware of the borrowing in (b).
(e)There were terms of the retainer that the solicitors would exercise the skill, diligence and care of reasonably competent solicitors, and would do all things necessary to ensure the subdivision went through, and the certificates of title were issued, as quickly as possible.
(f)The solicitors also owed the plaintiffs a duty of care to act in the manner required by the terms in (e).
(g)The solicitors breached the terms and duty in (e) and (f), and as a result the registration of the plan and the issue of the certificates of title were delayed, and the plaintiffs were unable to sell the lots or complete their sale until after October 1988, and have suffered unspecified loss as a consequence.
(h)In September 1988 the creditor became assignee of the solicitors' practice including its assets and liabilities, and as a result is liable to the plaintiffs.
The statement of claim is verified by a detailed affidavit sworn by the debtor in which, amongst other things, he sets out the way in which loss of over $700,000 is computed. The creditor relied on a detailed affidavit sworn by Mr Milder in the Supreme Court action, in which the debtor's allegations are refuted.
Having read the pleadings and the affidavits, I am satisfied that the debtor (and the other plaintiffs) have a real claim to litigate. The fees upon which the judgment debt is based are the fees charged for the work which the debtor claims was negligently performed. The debtor's claim thus impeaches the judgment debt in the sense described in the cases on equitable set-off. See for example Edward Ward & Co v. McDougall [1972] VR 433; Eagle Star Nominees Ltd v. Merril [1982] VR 557; Indrisie v. General Credits Ltd [1985] VR 251; James v. Commonwealth Bank of Australia (1992) 37 FCR 445; D Galambos & Son Pty Ltd v. McIntyre (1975) 5 ACTR 10. In those circumstances, it would in my view be unjust to make a sequestration order and thus deprive the debtor of the opportunity to have the claim determined in the appropriate forum. I propose to adjourn the hearing of the petition so that the Supreme Court proceeding can be determined.
The creditor's petition was presented on 13 June 1995. It will lapse on 13 June 1996 unless I order otherwise: s.52(4). I will order under s.52(5) that the period at the expiration of which the petition will lapse be twenty four months from 13 June 1997. I will reserve the costs.
I certify that this and the preceding nine pages are a true copy of the reasons for judgment of the Honourable Justice Sundberg
........ ........ ........ ........ ........ ........ .
Associate
12 June 1996
Counsel for the Petitioning Creditor: L Rowland
Solicitors for the Petitioning Creditor: Milder Elfman Szmerling Krycer Pty
Counsel for the Judgment Debtor: M J Crennan
Solicitor for the Judgment Debtor: Finlay E Davis
Date of Hearing: 23 May 1996
Place of Hearing: Melbourne
Date of Judgment: 12 June 1996
On 19 August 1994 a bankruptcy notice addressed to the debtor was issued on the application of the creditor. The notice recited that the creditor
has claimed that the sum of $7,370.43 is due by you to them under a final judgment (or order) obtained by them against you in the Magistrates' Court at Melbourne on the 2nd day of October 1992....
It then required the debtor with twenty one days after service of the notice
(a)to pay the sum of $7,370.43 so claimed by the judgment creditor to the judgment creditor; or
(b)to secure the payment of the sum referred to in paragraph (a) to the satisfaction of the judgment creditor or compound the sum so specified to the satisfaction of the judgment creditor.
The notice concluded in the customary form.
The debtor applied to set aside the bankruptcy notice on the ground that paragraph (b) was not in proper form because it failed to state that as an alternative to the payment of the debt, the debtor could secure payment to the satisfaction of either the creditor or the Court. Paragraph (b) did not refer to the Court. Olney J set aside the notice on this ground.
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