Re Morris, T.C. & anor Ex parte Wardley Australia Property Management Ltd
[1992] FCA 863
•26 AUGUST 1992
Re: THEODORE CONSTANTINE MORRIS and DIANE RACHEL MORRIS
Ex Parte: WARDLEY AUSTRALIA PROPERTY MANAGEMENT LIMITED
No. N N926 of 1992
FED No. 863
Number of pages - 12
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
BANKRUPTCY DIVISION
Foster J.(1)
CATCHWORDS
Bankruptcy - Practice and Procedure - amount due as judgment debt in "recital" portion of a bankruptcy notice overstated due to incorrect interest calculation - amount due in "notice" portion of bankruptcy notice incorrectly stated - whether discrepancies render notice invalid - whether debtor reasonably misled as to what is necessary to comply with the notice - whether defects substantive or merely formal.
Bankruptcy Act 1966 (Cth) - s 41(5), s 41(6), s 306(1)
Kleinwort Benson Australia Limited v Crowl and Ors (1988) 165 CLR 71
HEARING
SYDNEY
#DATE 26:8:1992
Counsel for the applicant: M.G. Scheib (Solicitor)
Instructed by: Tzoraras and Company
Counsel for the respondent: S. Epstein
Instructed by: Allen, Allen and Hemsley
ORDER
THE COURT ORDERS THAT:
1. The application be dismissed;
2. The applicant pay the respondent's costs of this motion;
3. Time for compliance with the bankruptcy notice be continued until further order of the Court.
Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
FOSTER J. In this matter the judgment debtors seek the setting aside of the bankruptcy notice which has been served upon them in these proceedings. The bankruptcy notice relates to a judgment obtained by the judgment creditor against the judgment debtors on 4 March 1992. The judgment was obtained in the Commercial Division of the Supreme Court of New South Wales. The judgment was in the amount of $72,568,380.94.
The bankruptcy notice in respect of this judgment was issued on 17 March 1992. The period of the bankruptcy notice was subsequently altered. The nature of the alteration and the circumstances of it do not appear to me to have any significance so far as the present application is concerned. The bankruptcy notice follows the form prescribed under the rules to the Bankruptcy Act 1966 (Cth) (the "Act"). It is necessary to refer to the terms of the notice in some detail having regard to the arguments that have been presented to me in relation to its claimed invalidity.
The bankruptcy notice recites that the judgment creditor, Wardley Australia Property Management Limited, has claimed the sum to which I have already made reference:-
"Together with interest thereon at the rate of 15 per cent per annum from 29 February 1992 until 4 March 1992 which amounts to $118,964.55 making a total of $72,687,345.49 (the judgment debt) together with interest upon the judgment debt at the rate of 17 per cent per annum from 4 March 1992 which at 17 March 1992 amounts to $438,904.46 making a total of $73,126,249.95 and no more is due by you to it under a final judgment obtained against you in the Supreme Court of New South Wales on the 4th day of March 1992, being a judgment the execution of which has not been stayed."
It is convenient to pause at this particular point in the setting out of the bankruptcy notice to observe that it is conceded that the ultimate calculation of the amount due is inaccurate insofar as the interest rates used for calculation were inappropriate having regard to the relevant directions given in the Rules of the Supreme Court. In fact, the rates of 15 per cent and 17 per cent respectively should, in accordance with those directions, have been in each case only 13 per cent. The result is that the ultimate calculation in this part of the bankruptcy notice amounts to an overstatement of the amount due under the judgment and consequential interest as at 4 March 1992 by an amount of $118,003.76.
This overstatement was clearly recognised on behalf of the judgment debtors. Recourse was had by them through their legal representatives to the provisions of s 41(5) of the Act. That section reads as follows:
"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."
A notice in those terms was duly given and reliance is placed in arguments put before the Court upon the overstatement which is contained in the passage to which I have just made reference.
The bankruptcy notice continues, relevantly, by stating:
"Therefore take notice that within 21 days after 18 June 1992, excluding that date, you are required: (a) to pay the sum of $72,754,869.25 and no more so claimed by the judgment creditor to the judgment creditor or, (b) to secure the payment of the sum referred to in paragraph (a) and no more to the satisfaction of the Federal Court of Australia or the judgment creditor or compound the sum so specified to the satisfaction of the judgment creditor."
The consequences of non-compliance with these requirements are set out in the usual way in the remainder of the notice. There is no need for me to set those matters out here.
It is to be observed that the amount referred to in paragraph (a) is not the amount referred to as being due under the final judgment in the earlier part of the bankruptcy notice. It is a noticeably smaller amount. Nothing has been put before me to indicate how the sum that the debtor is required to pay by the notice has in fact been calculated.
It may be observed, however, that it exceeds by some $200,000 the amount of the judgment debt. It would therefore appear to contain some component for interest although the amount of that component is substantially less than the amount claimed as being due in the earlier part of the bankruptcy notice. It is also less, quite obviously, than the amount contained in what is said to be the amount actually owing when properly calculated, namely, $73,008,246.19.
The question I have to decide is what effect, if any, do these discrepancies have upon the validity of the bankruptcy notice as served. A number of authorities have been cited to me in the careful arguments presented by the legal representatives for the judgment creditor and judgment debtor respectively. I have given consideration to those authorities but I consider that I can be fully guided in this matter by the decision of the High Court in Kleinwort Benson Australia Limited v Crowl and Ors (1988) 165 CLR 71, a decision in which the High Court gave consideration to the earlier authorities.
In that case the High Court had for consideration a bankruptcy notice which recited that the creditor claimed the sum of $1,399,085.81 together with interest at the rate of 19.5 per cent from 3 July 1986 "(w)hich, at 30 September 1986, amounted to $43,352.49 making a total of $1,442,438.30 due by the debtor under a final judgment."
The notice then required that the debtor pay the sum of $1,442,438.30 so claimed within 28 days after service, and further stated that if the sum was not paid or if the debtor failed to satisfy the Court that he had a counter-claim instead of a cross-demand equal to or exceeding the sum specified he would have committed an act of bankruptcy.
The notice understated, as a result apparently of some miscalculation, the amount of interest due by an amount of approximately $23,000. The High Court held that in those circumstances the understatement of the interest was only a formal defect or irregularity which fell within the provisions of s 306(1) of the Act, to which I will make reference later in these reasons. The notice in those circumstances was a valid notice. It may observed that the amount required by the notice in that case to be paid by the judgment debtor was the same amount that was stated to be due under the judgment with the accretion of interest. In the present case, as has been emphasised in argument to me, not even that degree of correspondence between the recitals of the notice and the requirement section of the notice obtains.
In the decision of the majority, earlier decisions were examined and important statements of principle were enunciated. Thus, the Court said in the majority judgment (at 78):-
"If interest is included in a bankruptcy notice it must be calculated: Re O'Keefe (1963) 19 ABC 101 at 103. A notice claiming more by way of interest than that in fact due was held to be invalid in In Re A Debtor (1908) 2 KB 684 where the mistake was held not to be merely a formal defect or irregularity. That position is now covered by ss 41(5) and 41(6) of the Act ..."
I have already, in these reasons, made reference to the provisions of s 41(5). The provisions of s 41(6) do not arise.
The majority of the Court provides the following exposition of the relevant law (at 79-80):-
"The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice... 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 a judgement, 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 amounts 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 Court considered the form of the notice and said as follows (at 80-81):-
"... the body of the notice makes it clear that it was the sum of $1,442,438.30 that was required to be paid, secured or compounded. More importantly, the notice specified that it was failure to comply with the requirement to pay the sum of $1,442,438.30 or to secure or compound that sum, or to satisfy the Federal Court of the existence of a relevant counter-claim or cross-demand equal to or set-off exceeding the sum specified ... that would constitute an act of bankruptcy. There could thus be no uncertainty as to what would constitute compliance with the notice. The notice cannot be regarded as capable of misleading and accordingly cannot be said to be a nullity. The understatement thus constituted a formal defect or irregularity which attracts the operation of s. 306(1) of the Act.
Section 306(1) operates automatically unless 'the court ... is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by order of the court'. In the present case no evidence was presented and no claim was made of actual injustice. There was thus no basis upon which an opinion could be formed to deny the operation of s. 306(1)."
The judgment creditor relies upon the passages to which I have made reference and the chain of reasoning demonstrated in the majority judgment. It is put on its behalf that those passages and that chain of reasoning are applicable in relation to the consideration of the present bankruptcy notice. It may be said at the outset, as indeed was said by the High Court in Kleinwort Benson (at 77) that:
"... a bankruptcy notice which mis-states the amount due to the creditor is defective or irregular."
This bankruptcy notice clearly, in the recital portion, states that a sum is due which in fact is greater than the sum properly calculated which would be due under the judgment with appropriate accretions of interest. That fact was, of course, recognised on behalf of the judgment creditor by the giving of the notice to which I have already made reference. So far as that aspect of the bankruptcy notice is concerned, I would regard that recognised miscalculation as undoubtedly being a defect or irregularity falling within the provisions of s 306(1) of the Act. In the circumstances that there is no evidence before me of any injustice that could not be remedied by order of the Court, that defect would not result in invalidity.
It is the second matter which is heavily relied upon by the judgment debtor which has given me the greatest concern. The notice, as I have indicated, requires the payment of $72,754,869.25 and no more, as claimed by the judgment creditor. The amount so claimed makes no immediate reference to any amount referred to in any other part of the bankruptcy notice. By this I mean that there is no correspondence between that sum and the sum referred to as being due in the recital portion of the notice. To this extent, there is a factual difference between this notice and the one that was considered in Kleinwort Benson. This difference is quite properly emphasised in argument put on behalf of the judgment creditor, it being contended that in those circumstances the reasoning in Kleinwort Benson cannot be definitive of the result in this case.
It is important, however, to have regard to the passages which I have already set out from the judgment in Kleinwort Benson. There is no suggestion made in this case that the bankruptcy notice is a nullity in that it fails to meet a requirement made essential by the Act.
If it is to be a nullity it must be on the basis that it could reasonably mislead a debtor as to what is necessary to comply with the notice. What one has when reading the notice as a whole is a situation where an amount is claimed in the requirement section of the notice which is less than the amount said to be due in the recitals and is also less than the amount actually due when the calculation is carried out correctly. One therefore has relevantly an understatement of the amount properly payable to discharge the judgment and interest. Does this understatement "constitute a defect which is substantive rather than formal? According to the High Court "it will be so only if the understatement is objectively capable of misleading the debtor as to what is necessary for compliance with the notice."
It is necessary to bear in mind also the statement in the majority judgment that "no such uncertainty arises if it is clear that payment of the amount specified in the notice will constitute compliance with the notice." What, objectively, did the judgment creditors have before them when presented with this bankruptcy notice? They had a statement of an amount due and owing under a final judgment which was capable on examination of being shown to be an inaccurate statement, in that the wrong interest rates had been applied. This fact was indeed recognised during the currency of the notice and steps taken on their behalf as I have already indicated.
Additionally, they had a requirement that they pay the smaller sum which I have referred to, or that they secure the payment of it in the manner required by the Act. They were further told that if they failed to do either of those things then in certain circumstances an act of bankruptcy would be committed. It was necessary for them to consider what they had to do to comply with the notice. They were faced with a statement that they were required to pay the smaller amount "and no more so claimed by the judgment creditor." That amount could not properly be described in itself as being the amount "so claimed by the judgment creditor." It could, however, be regarded as being an amount less than the amount claimed by the judgment creditor but being an amount in excess of the bare amount of the judgment.
The question, as I see it, is whether, confronted with this set of words, they could properly be in a position where it could be said that they were objectively likely to be misled as to what was necessary to comply with the notice. Conversely, could it be said that it was clear to them that payment of the lesser amount would constitute compliance. I have not found the answer to this question particularly easy. It is not as clear a case as is Kleinwort Benson. I must ask myself objectively whether people presented with this document, would understand that if they paid the lesser sum, of $72,754,869.25 they would be complying with the notice despite the fact that there was reference in the section requiring compliance to the fact that that amount of money was the amount "so claimed".
I bear in mind authorities which have been cited to me that a notice should not place judgment debtors in a dilemma or require them to unravel the ambiguous. I give due regard to those authorities when read with the passage in the High Court in Kleinwort Benson to which I have made reference. I have come to the conclusion that despite all the imperfections to which I have made reference, this notice, when viewed as a total document, is not properly to be seen as objectively capable of misleading the debtors as to what was necessary for compliance. I do not think that despite those imperfections it creates the state of uncertainty referred to in the passage cited.
In my view it remains tolerably clear to anyone reading it that the payment of the sum in paragraph A will be sufficient, even though it differs from the amount referred to in the recital, to effect compliance with the notice. In those circumstances I reject this application to set aside the bankruptcy notice. It must be a situation where costs follow the event. Accordingly I dismiss the application with costs.
I will simply continue the order made by Mr Justice Sweeney, namely, that the time for compliance with the bankruptcy notice is extended until further order of the Court.
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