Re O'Sullivan; Ex parte Bank of New Zealand

[1991] FCA 397

Re: RICHARD GUILFORD O'SULLIVAN
Ex parte: BANK OF NEW ZEALAND
No. P 345 of 1991
FED No. 397
Bankruptcy
30 FCR 112/102 ALR 206

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF NEW SOUTH WALES
Foster J.(1)

CATCHWORDS

Bankruptcy - Bankruptcy Notice - Formal defect or irregularity - s 306(1) Bankruptcy Act 1966 - Bankruptcy Notice signed by Registrar but not stamped - Issue of a Bankruptcy Notice by the Registrar - s 41(1) Bankruptcy Act 1966 - rule 7 Bankruptcy Rules - Rule making power in s 315 Bankruptcy Act 1966.

Bankruptcy Act 1966 - s 14A, s 41(1), s 306, s 315

Bankruptcy Rules - r 7, r 15, r 195

Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71

Pillai v Comptroller of Income Tax (1970) AC 1124

James v Federal Commissioner of Taxation (1955) 93 CLR 631

Re Williams, Ex parte Alberton Electrical Service Pty Ltd (1982) 43 ALR 552

Re DeIeso (1978) 45 FLR 396

Re Hatchett, Ex parte Shell Co. of Australia Ltd (1985) 71 ALR 291

HEARING

SYDNEY

#DATE 12:7:1991

For the debtor: Blessington Judd

For the creditor: Mr M.R. Aldridge

Instructed by: Kemp Strang and Chippendall

ORDER

The creditor's petition be dismissed.

The creditor pay the debtor's costs.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

This is an application for the setting aside of a creditor's petition for a sequestration order against the estate of Richard Guilford O'Sullivan (the "debtor"). Counsel for the debtor submitted that the Court could not be satisfied of the matters stated in the petition, as required by s52, Bankruptcy Act 1966 (the "Act"). By paragraph 4 of the petition it is alleged that the debtor committed an act of bankruptcy by failing to comply with the requirements of a bankruptcy notice. It was not contested that all of the copies of the relevant bankruptcy notice were signed by the Registrar, but none of them bear the appropriate stamp. It was submitted that this resulted in the bankruptcy notice not being a legally valid and effective bankruptcy notice. Accordingly, there had not been a non-compliance with a bankruptcy notice as claimed in paragraph 4 of the creditor's petition with the result that no sequestration order could be made against the debtor's estate.

1. It was conceded by Counsel for the debtor that, but for the omission of the stamp, the bankruptcy notice was otherwise in order and that, in any event, the debtor had suffered no prejudice as a result of the omission of the stamp. Consequently, the sole issue for decision is the effect of that omission.

2. Counsel for the petitioning creditor agreed that all the copies of the bankruptcy notice had not been stamped. He submitted, however, that on a correct application of the authorities, this in itself was not such a defect as to cause the bankruptcy notice to be invalid. He asserted that the omission of the stamp was merely a formal defect or an irregularity which, pursuant to s306(1) of the Act, would not invalidate the bankruptcy notice unless the Court was satisfied that substantial injustice had been thereby caused which could not be remedied by the Court. No such injustice was claimed.

3. The question of whether or not a defective bankruptcy notice is a legal nullity is answered by applying the test formulated by the High Court in Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71. In the joint judgment of Mason C.J., Wilson, Brennan and Gaudron JJ. at p 79, their Honours say:
   

"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."

1. This is a test with two distinct limbs. The second limb has its origin in the decision of the Privy Council in Pillai v Comptroller of Income Tax (1970) AC 1124. With respect to the provision in the law of Malaysia which is equivalent to s306(1), their Lordships say (at p 1135):
   

"What, then, is a `formal defect or irregularity' within the meaning of the section? This was discussed in relation to a bankruptcy notice in In re A Debtor (No. 21 of 1950), Ex parte the Debtor v Bowmaker Ltd (1951) Ch 313, in which the earlier authorities were considered. The test there laid down was whether the defect in the notice was of such a kind as could reasonably mislead a debtor upon whom it was served. If it was, the notice was not validated by the section notwithstanding that the particular debtor upon whom it was served was not in fact misled. If, on the other hand, it could not reasonably mislead the debtor it was a formal defect and validated by the section."

1. It was not put to me on the debtor's behalf that the bankruptcy notice served on him was of such a kind as could reasonably mislead a debtor. Accordingly the application of the second limb of the test does not fall for consideration in this case.

2. The first limb of the test in Kleinwort Benson in based on the decision of the High Court in James v Federal Commissioner of Taxation (1955) 93 CLR 631. In that case, the bankruptcy notice failed to comply with s 53, Bankruptcy Act 1924-1954, the then equivalent of s 41 of the Act. That section provided, inter alia, that the bankruptcy notice should require the debtor to pay the judgment debt or sum ordered to be paid in accordance with the terms of the judgment or order. In James the relevant costs order did not provide that the debtor pay the costs to the creditors at any particular place and, as the bankruptcy notice did so require, the High Court held it was in breach of s 53. The provision also stipulated that the bankruptcy notice should require the debtor either to pay the judgment debt or sum ordered to be paid or to secure or compound it to the satisfaction of the creditor. The bankruptcy notice in James additionally failed to comply with this requirement.

3. The High Court said at p 643:
   

"the other two objections prevail ... because (the bankruptcy notice) wrongly seeks to restrict the debtor to paying the debt to the creditors at one particular place and because it does not notify him that he may in the alternative secure or compound the debt to their satisfaction. In the first respect it is not in accordance with the terms of the order and in the second it is capable of misleading the debtor as to the manner in which he may secure or compound for the debt. The court cannot inquire whether the debtor has in fact been misled or not. In this case it is probable that he was not misled. It is sufficient that he could be misled. But strict compliance with the requisites of a bankruptcy notice is essential to its validity and in these two respects the bankruptcy notice does not comply with these requisites. The defects cannot be regarded as formal defects or irregularities. They are breaches of important provisions of s 53."

1. The principle that bankruptcy notices be construed strictly has often been stated: see In re a Judgment Debtor, 1908 2 KB 474 at 481; Re Wimborne, Ex parte The Debtor (1979) 24 ALR 494 at 499; and Re Williams, Ex parte Alberton Electrical Service Pty Ltd (1982) 43 ALR 552 at 558. Although it would appear that strict construction was originally seen as a means to serve the end of ensuring that the debtor was not misled, it now appears that strict compliance with the legislation should be regarded as an independent prerequisite to a bankruptcy notice's validity.

2. The underlying reason for the requirement of strict compliance with the legislation is simply that the consequences of bankruptcy are severe and that accordingly it is in the interests of society that the procedure by which the bankruptcy of a debtor can be brought about be both clearly defined and carefully observed. In the case of a creditor's petition, the responsibility to ensure that the procedure prescribed by law is strictly followed lies upon the creditor. This responsibility flows from the fact that the availability of the bankruptcy procedure serves the interests of the creditor. As Fisher J. says in Re Williams at p 558:
   

"Creditors who avail themselves of proceedings of this nature to enforce payment of debts must be prepared to adhere to the requirements of the Acts and Rules, however technical they may appear to be."

1. In this case, it was asserted that the provision of the Act breached by the bankruptcy notice was s41(1). No other provision of the Act was relied upon. Section 41(1) provides as follows:
   

"A bankruptcy notice-

a) shall be in accordance with the prescribed forms; and b) shall be issued by the Registrar."

1. As the bankruptcy notice was in accordance with the prescribed form, the only question to be determined is whether or not it was issued by the Registrar.

2. Section 14A of the Act provides that the Registrar shall have a stamp. Section 14A(3) provides:
   

"The stamp may be affixed on documents issued by the Registrar under this Act or the rules and on other documents as provided by the rules."

1. In my opinion, this provision is intended merely to empower the Registrar to make use of the stamp by affixing it to documents issued by him under the Act or rules. It is not inconsistent with a requirement dehors the section that the Registrar affix the stamp as part of the issuing process itself.

2. Issue by the Registrar is not otherwise dealt with by the Act itself. Section 315 of the Act, however, provides for the making by the Governor-General of rules or regulations that are necessary or convenient for carrying out, or giving effect to, the Act. Pursuant to this power, rule 7, Bankruptcy Rules has been made providing for the issue of bankruptcy notices by the Registrar.
   Rule 7(2)(b) provides:
   

"At the time when the application (for issue of a bankruptcy notice) is filed, the applicant shall furnish to the Registrar, for signature and stamping by the Registrar, so many copies of a form of bankruptcy notice as are required..."

Rule 7(5) provides:

"Where the Registrar is satisfied that application has been duly made to him for the issue of a bankruptcy notice and that the copies of the form of bankruptcy notice furnished to him in accordance with paragraph (2)(b) are in order for signature, the Registrar shall sign and stamp each of those copies and return them to the applicant."

Rule 7(6) provides:

"Where the Registrar issues a bankruptcy notice, the applicant shall file a copy of the notice."

1. Prior to 1980 the words "and stamping" and "and stamp" did not appear in these provisions. At that time rule 7 merely required the Registrar to sign the bankruptcy notice. Statutory Rule No. 386 of 1980 amended the rule by adding the stamping requirement.

2. It has been argued on behalf of the creditor that rule 7 does not prescribe the process of issue by the Registrar, that it merely requires the Registrar to sign and stamp the bankruptcy notice and that this is in addition to, and not an essential part of, the requirement contained in s41(1) that the Registrar issue the bankruptcy notice. Counsel for the creditor argues that failure to stamp the bankruptcy notice was merely a breach of the rules and not of the Act itself and that therefore it did not produce invalidity in accordance with the test in Kleinwort Benson.

3. I do not accept this argument. The Act requires that a bankruptcy notice be "issued" by the Registrar before it becomes a bankruptcy notice. It also says , in s 14A, that the Registrar may stamp bankruptcy notices which he issues. Apart from that, the Act is silent as to what will amount to, or what is involved in, the issue of a bankruptcy notice by the Registrar. But the rules made pursuant to the Act do deal with this matter. I find the proposition that rule 7 was intended to prescribe and define the process of issuing bankruptcy notices by the Registrar irresistible. Paragraph (2)(b) requires the Registrar to be furnished with copies of a form of bankruptcy notice for signature and stamping. Subrule (5) requires the Registrar, where he is satisfied that application for the issue of a bankruptcy notice has been made in accordance with paragraph (2)(b), to sign and stamp each of the copies and return them to the applicant. It does not say where application for a bankruptcy notice has been made, the Registrar is required to issue it. It says he is to sign and stamp it and return them to the applicant. Subrule (5) is followed immediately by subrule (6) which says where the Registrar issues a bankruptcy notice, the applicant shall file a copy of it. The meaning of rule 7 is, in my view, abundantly clear. The requirement that the Registrar sign and stamp the bankruptcy notice is not in addition to the act of issue. This requirement, together with the requirement that the bankruptcy notice be returned to the applicant, is the act of issue.

4. This conclusion is also consistent with decided cases. In Re DeIeso (1978) 45 FLR 396, Judge Rogerson held that a photocopy of a bankruptcy notice was not a bankruptcy notice because it had not been signed by the Registrar. In 1978, rule 7 was identical to the current rule 7, except the words "and stamped" did not follow the word "signed". At p 398 his Honour says with respect to rule 7(5):
   

"the use of the expression `copies of a form of bankruptcy notice'(his emphasis) indicates that a form of notice furnished to the Registrar does not become an actual bankruptcy notice until it has been signed, and issued as such, by the Registrar."

His Honour later says:

"there has been in this case more than a mere formal defect or irregularity, (within the meaning of s306), in a notice or in the service of a notice, and it is unnecessary to consider the question of whether or not substantial injustice has been caused. Nor has there been merely a noncompliance with the rules, under r195(1), but a noncompliance with s 41(1) and

(4) of the Act itself."

1. Clearly Judge Rogerson was of the opinion that a failure to sign the bankruptcy notice, as required by rule 7, was a failure to issue the bankruptcy notice, as required by s41(1). His Honour was of the opinion that a key element of the act of issuing a bankruptcy notice was "authentication" of the documentation. At p 398 his Honour says:
   

"They must also, in my view, be clearly authentic, official documents. Now bankruptcy notices are no longer sealed, nor even stamped, when they are issued. There are no official printed forms. All that authenticates a notice, and at the same time proves to the debtor that the steps necessary for the issue of a bankruptcy notice have been taken by the creditor, is the signature of the Registrar."

1. Although the reference in this passage to "proof to the debtor" may suggest his Honour viewed authentication as going to the issue of whether or not the bankruptcy notice is misleading, this is not the case. Instead, it is apparent from his Honour's judgment that his Honour considered that authentication went to compliance with an essential requirement of the Act, namely the requirement in s41(1) to which his Honour had already alluded. At p 399, his Honour concludes:
   

"Where there is some mistake in the contents of a bankruptcy notice the question as to whether the debtor could have been misled by it is clearly material (Re Hamor; Ex parte Deamer

(1968) 11 FLR 261 where the debtor, if he had complied with the incorrect notice, would have discharged his liability by so doing; and the defect was therefore treated as being purely formal). But since, as I have said, no bankruptcy notice at all has been served on the debtor, such considerations do not arise in the present case."

1. Indeed, in argument before me in the instant case, counsel for the creditor conceded that authentication was essential to the act of issue by the Registrar. He agreed that if an applicant for a bankruptcy notice took the forms into the Registry and handed them over to the Registrar who immediately handed them back without signing or stamping them or otherwise authenticating them, then no bankruptcy notice would have been issued.

2. It was put to me, however, that authentication could be achieved by signature alone. In Re DeIeso, only signature was prescribed by the rules and today, as both signature and stamping were prescribed, one without the other would suffice. It was said that whereas no authentication would be an invalidating defect, incomplete authentication would only be a formal defect or irregularity.

3. I do not accept this. The case of Re Hatchett, Ex parte Shell Co. of Australia Ltd (1985) 71 ALR 291 was decided after the amendments had been made to rule 7. In his judgment, Pincus J. says at p 293:
   

"In view of the amendments to the Rules made in 1980, the authentication must be by stamping as well as signature."(my emphasis)

Although at this point of his judgment, Pincus J. was considering a photocopy of a bankruptcy notice that was neither stamped nor signed, his Honour later needed to turn his mind to the case of a bankruptcy notice signed but not stamped. This arose because in Re Hatchett the affidavit of service of the bankruptcy notice swore that the deponent had served the debtor "with a copy of the bankruptcy notice signed by the Registrar". No reference to stamping was contained in the affidavit. In deciding the adequacy of the affidavit of service, Pincus J. was required to decide whether or not service of a bankruptcy notice of the type claimed to have been served in the affidavit would amount to service of a valid bankruptcy notice. By reason that the bankruptcy notice was not claimed to be both signed and stamped, his Honour concluded the affidavit of service was invalid. With express reference to the reasoning of Judge Rogerson in Re DeIeso, Pincus J. held that a defect beyond the saving power of s306 existed.

1. In short, Judge Rogerson has held that to issue a bankruptcy notice it must be authenticated, and Pincus J. has held that under the current legislative regime authentication requires both signing and stamping. That is, the requirements in rule 7, namely signing and stamping, are essential components of the requirement in s41(1), namely issuing. Therefore a breach of the rule 7 requirements is a breach of an essential requirement of the Act and beyond the saving power of s306(1).

2. Counsel for the creditor submitted that once the bankruptcy notice is issued by the Registrar it remains issued even if it is a defective notice or a potentially defective notice. This may be so in some cases, but not in the case where the defect goes to the very act of issue. In such a case, there is no issue at all and as s41(1) of the Act requires a bankruptcy notice to be issued by the Registrar, there is no bankruptcy notice.

3. I realise that if signing and stamping are essential characteristics of bankruptcy notices, then the words "signed and stamped by the Registrar" are otiose where they appear in subrule 15(a). This consideration, however, does not divert me from the conclusion that is, in my view, properly to be drawn from the plain language of rule 7.

4. Counsel for the creditor further submitted that if rule 7 did purport to require stamping as an essential part of the issuing procedure, in the sense that it purported to provide that an unstamped bankruptcy notice was not an issued bankruptcy notice, then rule 7, to that extent, was invalid as being beyond the rule-making power of s 315 of the Act. Section 315 only empowers the making of rules not inconsistent with the Act, including s 306(1), under which formal defects and irregularities are said not to invalidate bankruptcy notices unless substantial injustice would otherwise result.

1. With respect to this argument, my decision that signing, stamping and returning the bankruptcy notice to the applicant constitutes the act of issue itself necessarily results in upholding the validity of rule 7. As s306 only prohibits the making of rules which purport to render a bankruptcy notice invalid when that bankruptcy notice suffers only from a formal defect or irregularity, rule 7 is not affected by it, as the threat posed to bankruptcy notices by rule 7 goes to the act of issue by the Registrar. As the act of issue by the Registrar is an essential requirement of the Act under s41(1), a defect as to issue is not a formal defect or irregularity.

2. Rule 195(1) provides that non-compliance with the rules does not render a proceeding void unless the Court so directs. In conformity with the approach taken by Judge Rogerson in Re DeIeso, I find that, in as much as the failure of the Registrar to stamp the bankruptcy notice is a non-compliance with rule 7, the bankruptcy notice should be declared void under s195(1).

3. Accordingly, I hold that the non-compliance with a bankruptcy notice complained of in the creditor's petition has not been proved to the satisfaction of the Court and therefore I dismiss the creditor's petition.

4. I order the creditor to pay the debtor's costs, but in view of the fact that the invalidity arose as a result of an unfortunate error in the Registry, I recommend to the Attorney-General that consideration be given to payment of both the creditor's own costs and the debtor's costs by the Commonwealth under paragraph (a) of the Special Circumstances Scheme.