Re Schierholter; Ex parte Geis

Re SCHIERHOLTER; Ex parte GEIS (1978) 32 FLR 22
Bankruptcy

COURT

FEDERAL COURT OF AUSTRALIA

Nimmo(1), Franki(2) and Deane(1) JJ.

CATCHWORDS

Bankruptcy - Appeal against sequestration order - Understatement of amount of judgment debt and costs in bankruptcy notice - No waiver of excess - Whether notice bad-point not taken at first instance - Whether new evidence admissible on appeal - Bankruptcy Act 1966-1973, ss 40, 41.

HEADNOTE

The appellants appealed against the making of a sequestration order in respect of their estates. The act of bankruptcy on which the sequestration order against the appellants was based was non-compliance with the requirements of a bankruptcy notice claiming a sum of $2,735.95 for a judgment debt and costs due under a final judgment obtained by the respondent against the appellants in the County Court at Melbourne. By error, the sum claimed in the notice represented the claim and part only of the costs ordered under the judgment, although the point was not taken at first instance and the sole ground for opposing the making of the sequestration order was that the appellants were able to pay their debts.

By the time when the appeal came on for hearing, the respondent's debt had been paid in full, and provision had been made by the appellants to cover the respondent's costs both at first instance and on appeal. The respondent supported the setting aside of the sequestration order, and in the course of the appeal it was shown that, apart from a disputed debt to the Commissioner of Taxation (who did not oppose an order allowing the appeal), the appellants had no debts due and payable.

Held (per Nimmo and Deane JJ., Franki J., concurring): (1) No injustice or inconvenience would be caused, the circumstances of the case being extraordinary, by allowing the appellants to rely on the submission that the bankruptcy notice was bad, or to introduce additional evidence to help found the factual basis of that submission.

(2) The effect of the understatement of the amount due under the County Court judgment was to invalidate the bankruptcy notice, as the notice did not, as required by s.41 of the Act, require the debtor to pay "the judgment debt or sum ordered to be paid in accordance with the judgment or order".

Re H.B., (1904) 1 KB 94; Nirens v. Fowler Asphalt Pty. Ltd. (1966), 9 FLR 255; Re Jack; Ex parte C.V. Holland (Holdings) Ltd. (1959), 19 ABC 268; Re Munson; Ex parte Deputy Commissioner of Taxation (1977), 29 FLR 479, referred to.

(4) On the evidence, the effect of the invalidity was not waived by the appellants in the course of the hearing of the petition.

Re Jack; Ex parte C.V. Holland (Holdings) Ltd. (1959), 19 ABC 268; Re Munson; Ex parte Deputy Commissioner of Taxation (1977), 29 FLR 479, referred to.

(5) In all the circumstances, the error could not be regarded as covered by the provisions of s.306 of the Act. James v. Federal Commissioner of Taxation (1956), 93 CLR 631, referred to.

(6) The appeal should be allowed and the sequestration order made in respect of the estate of each of the appellants should be set aside.

HEARING

Melbourne, 1977, October 24; 1978, March 15. #DATE 15:3:1978

APPEAL.

T The material facts appear from the judgment.

F.G. Beaumont, for the appellants.

R.M. Johnstone, for the respondent.

Cur. adv. vult.

Solicitors for the appellants: Gleeson & Co.

Solicitors for the respondent: Aughterson, Giblett & Williams.

JUDGE1

MARCH 15.

The following judgments were delivered.

NIMMO AND DEANE JJ. This is an appeal by Peter Adrian Schierholter and Judith Annette Schierholter, who are husband and wife, against a sequestration order (and order for costs) made, in respect of each of their estates by a single judge of this Court in the exercise of the bankruptcy jurisdiction. (at p23)

The act of bankruptcy upon which the sequestration order was based was, in the case of each appellant, non-compliance with the requirements of a bankruptcy notice dated 1st October, 1976, addressed to each of the appellants. The bankruptcy notice was issued by the registrar on the application of the respondent. It recited that the respondent had "claimed that the sum of $2,735.95 is due by you to him under a final judgment obtained by him against you in the County Court at Melbourne" and required the appellants, within fourteen days after service of the bankruptcy notice, to pay "the sum of $2,735.95 so claimed by the judgment creditor to the judgment creditor" or to make satisfactory provision for security for the payment of that sum. The main ground of appeal which has been argued before us is that that bankruptcy notice was bad by reason of understatement of the amount in fact due to, and claimed by, the judgment creditor under the final judgment mentioned in it. A number of subsidiary grounds were also relied upon. Reference will subsequently be made to two of these. The others were disposed of in the course of argument. (at p23)
The transcript of the substantive hearing before his Honour records that counsel appeared for both Mr. and Mrs. Schierholter. His Honour understood, and acted on the basis, that counsel so appeared. On the hearing of the appeal, counsel for the appellants (who had not appeared at first instance) submitted that Mrs. Schierholter had, in fact, been unrepresented in the proceedings before his Honour. The notice of appeal does not raise any point in that regard and there is nothing in the material before us to justify a finding by us that his Honour was in error in acting on the basis that counsel appeared for both Mr. and Mrs.Schierholter. Even if the point were open to Mrs. Schierholter, it has plainly not been made good. (at p24)
The substantive hearing of the petition took place on 22nd and 23rd June, 1977. To understand what occurred on those days however, it is necessary to make reference to the previous history of the matter before the court. (at p24)
The petition first came before the court on 10th February, 1977. The court was informed that negotiations were taking place between Mr. Schierholter and the respondent and the hearing of the petition was adjourned to 22nd March, 1977. On 22nd March, 1977, the court was informed that the parties had reached an agreement for the payment of the debt owing to the respondent by instalments and evidence was given by Mr. Schierholter in relation to the general financial position of himself and his wife. By consent, the petition was stood out of the list generally, liberty being reserved to any party to apply for its relisting. (at p24)
The petition was relisted, on the application of the respondent, on 15th June, 1977. The agreement which had been reached for the payment of the respondent's debt had not been honoured. Counsel who appeared for the appellants stated that he had "some ten minutes ago" received "what purports to be the brief of Mr.Schierholter, without being advised I was about to receive such a brief" and sought a short adjournment of the matter. The matter was allowed to remain in the list for a short period and was then, on the application of such counsel and over the opposition of counsel for the respondent, adjourned to 22nd June, 1977. His Honour directed that, if it was proposed to oppose the making of an order of sequestration, a notice of opposition and any affidavits in support be filed and served by 17th June, 1977. (at p24)
When the matter was called on the adjourned date, the transcript records a new counsel as appearing for both Mr. and Mrs. Schierholter. His plight was not dissimilar to that of his predecessor as counsel for the appellants. He informed the court that "in this matter I received a file relating to it at half-past-ten this morning". When asked whether there was anyone from his instructing solicitor's office to assist him, he indicated that "there was one gentleman here but he is required at the County Court and he said that he would try to make it back later on". The matter was stood down in the list. Upon the matter resuming, counsel advised his Honour that the situation was that his instructions had hardly improved. "My instructing solicitor", he informed the court, "is not presently available although his articled clerk has been giving me instructions. Unfortunately he has very little knowledge of the matter, he being handed a file last night". Counsel sought an adjournment of the matter. This was opposed on behalf of the respondent. Mr.Schierholter gave evidence in support of the application for adjournment. (at p24)
After Mr. Schierholter's evidence in support of the application for adjournment had been completed, his Honour invited his counsel to confer with Mr. Schierholter so that the court might be informed of the basis upon which the making of a sequestration order was opposed. Counsel accepted the invitation and subsequently informed his Honour that the only ground of opposition raised by Mr. Schierholter was that "he is in fact able to pay his debts". His Honour then refused the application for an adjournment and the substantive hearing of the petition commenced forthwith. Mr. Schierholter gave evidence as to the means of both himself and the second-named appellant. His Honour found that he was unprepared to rely upon him as a witness. Even without such a finding, it is difficult to see how his evidence could have persuaded his Honour that the appellants were able to pay their debts. No other basis for opposing the making of the sequestration orders was raised. His Honour, after hearing submissions, gave an ex tempore judgment and, as has been said, made a sequestration order in respect of the estate of each appellant. (at p25)
A subsidiary ground of appeal which has been pressed is that his Honour was in error in refusing to grant the further adjournment which was sought by counsel. This subsidiary ground of appeal has not been made out. The appellants did not dispute that the respondent's debt was owing to him. They had already had the benefit of a substantial adjournment after agreement had been reached to the payment of their debt by instalments. After their failure to honour that agreement, the matter had been re-listed after due notice to them. They had then had the benefit of a further adjournment as a result of the failure (either by them or their solicitor) to ensure that they were properly represented on the day the matter was re-listed. In the circumstances, the stage had clearly been reached where the respondent was, if he so desired, entitled to have his petition heard. (at p25)
The argument advanced in support of the main ground relied upon on the hearing of the appeal can be shortly stated. The County Court judgment referred to in the bankruptcy notice was, in fact, a judgment in respect of the amount of $3,631.55 plus costs. The costs payable under the judgment were, it was submitted, a total amount of $198.90 consisting of $104.40 being general costs on scale C which were taxed by the registrar and $94.50 being the costs of the application for final judgment. An amount of $1,000 had been paid before the issue of the bankruptcy notice. The amount outstanding under the judgment, in respect of judgment debt and costs, was therefore $2,830.45. If costs were ignored, the amount outstanding was $2,631.55. The amount claimed in the bankruptcy notice, $2,735.95, represented the amount of the judgment debt and part only of the costs which had been ordered to be paid under the judgment. The explanation of the lower amount claimed in the bankruptcy notice was, it was said, that the costs of the application for final judgment which had been expressly included in the order for costs had, by error, been ignored. (at p26)
This primary ground of appeal upon which the appellants now seek to rely was neither relied upon nor mentioned in the hearing before Sweeney J. Indeed, as has been said, his Honour was expressly informed that the only ground of opposition to the petition was that Mr. Schierholter was able to pay his debts as they fell due. In ordinary circumstances, the appellants would have had a formidable task to persuade this Court, on appeal, either to permit them to rely on the point or to introduce, on the hearing of the appeal, new evidence to help found the basis for it. The circumstances are not, however, ordinary. (at p26)
At the commencement of the appeal, the court was informed by counsel for the respondent that the respondent's debt had been paid in full and that provision had been made for an amount sufficient to cover the respondent's costs of the proceedings before the judge at first instance and in this Court. The respondent supported the appellants in seeking that the sequestration order be set aside. In the course of that hearing of the appeal, evidence was tendered showing that, apart from a disputed debt to the Commissioner of Taxation, the appellants had no debts due and payable. It was indicated on behalf of the Commissioner of Taxation that the commissioner did not oppose an order allowing the appeal. (at p26)
In the result, there is no opposition to our allowing the appellants to rely on the submission that the bankruptcy notice was bad or to introduce additional evidence to help found the factual basis of that submission. No injustice or inconvenience will be caused by our allowing the appellants to rely on that submission or to introduce that evidence. If the appellants are correct, they have been made bankrupt in circumstances where, if the point had been raised and the appropriate evidence placed before the judge at first instance, a sequestration order would not properly have been made. No purpose is to be served by their continued bankruptcy. We have, already, examined the additional evidence and heard the appellant's argument on the question of law. To insist that the appellants rely on their right to bring a fresh application, pursuant to s. 154 (1) (a) of the Act, to the court of first instance seeking an order annulling the bankruptcy would involve the prolonging of the period of uncertainty as to the appellants' status, the incurring of additional legal costs, the repetition, to the court of first instance, of the argument which we have heard and, conceivably, if such an application were unsuccessful, yet a third rendition of that argument upon the hearing of a fresh appeal to this Court. In all the circumstances, the additional evidence which has been tendered should be received and the appellants should be permitted to rely on the submission that the bankruptcy was invalid. (at p27)
The material placed before us was, to some extent, unsatisfactory, in that it did not clearly show that the amount owing under the judgment in respect of costs and judgment debt was, in fact, $2,830.45. An extract from the County Court register (which had been lodged with the registrar at the time of the application for the issue of a bankruptcy notice but which was not referred to before the judge at first instance) was equivocal. Examination of the order recorded in the extract discloses, however, that the order giving leave to enter final judgment was in respect of a judgment "in the sum of three thousand six hundred and thirty-six dollars and fifty-five cents $3,656.55 with costs on scale C with costs included of this application fixed at $94.50". Reference to S.R. (Vic.) No. 336 of 1974 makes it, in our view, clear that the amount of $104.40 referred to elsewhere in the extract from the County Court register as "costs" was additional to, and not inclusive of, the amount of $94.50, which had been expressly allowed as costs of the application for final judgment. It follows that, at the time the bankruptcy notice issued, the appropriate amount owing under the judgment was $2,830.45 or, if costs were excluded, $2,631.55 and not the $2,735.95 referred to in the bankruptcy notice. Confirmation of that conclusion is to be found in the fact that in three separate affidavits of debt which were sworn and filed in the bankruptcy proceedings, the respondent expressly stated that the amount owing under the judgment was $2,830.45. (at p27)
Section 40 of the Bankruptcy Act 1966-1973 provides, for present purposes, that "a debtor commits an act of bankruptcy . . . (g) if a creditor who has obtained against a debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served . . . on the debtor in Australia . . . a bankruptcy notice under the Act and the debtor does not" within the time allowed comply with the requirements of the notice or satisfy the court that he has a counterclaim, set-off or cross-demand of the specified kind. Section 41 of the Act provides that a bankruptcy notice shall be in the prescribed form and that the prescribed form shall be such that the notice requires the debtor named in it, within the appropriate time to pay "the judgment debt or sum ordered to be paid in accordance with the judgment or order" or to secure or compound the pay ment of such debt or sum. The prescribed form requires specification of the amount claimed by the judgment creditor to be due by the debtor to him under the specified final judgment (or order) and requires payment to the judgment creditor or, where appropriate, the court or person specified in the judgment or order. (at p28)
It is apparent that the amount claimed in the bankruptcy notice was intended to include both the debt in respect of which judgment had been obtained and costs which were payable under the judgment. In fact, the amount specified included part only of the costs which the appellant had been ordered to pay. The three affidavits of debt which were sworn by the respondent and filed in the proceedings make it clear that the respondent was not abandoning his right to claim the extra $94.50 on account of costs which the appellant had been ordered to pay and which had been omitted from the amount specified in the bankruptcy notice. The costs had been ordered to be paid as "included" in a comprehensive order for costs. The question which therefore arises is the effect on the validity of a bankruptcy notice of specifying and including in it, as the amount due under a judgment, an amount which is less than the amount so due in circumstances where there is no waiver of the excess. (at p28)
In Re H.B. (1904) 1 KB 94 a judgment creditor had agreed with his debtor to accept payment of the debt by instalments. Default was made in the payment of three instalments. The remaining instalments did not become due and payable as a consequence of such default. The judgment creditor procured the issue of a bankruptcy notice in respect of the amount unpaid on the overdue instalments. The question arose whether that bankruptcy notice required the debtor "to pay the judgment debt in accordance with the terms of the judgment", as stipulated by the provisions of s. 4 (1) of the English Bankruptcy Act 1883. It was held by the Court of Appeal that it did not. In the course of his judgment, Romer L.J. commented: "Now I think it is clear that, when you have a judgment in the form that we have here, a bankruptcy notice under the Act must require payment of a sum alleged to be due according to the terms of the judgment - that is to say, it must state the amount that is claimed as remaining unpaid on the judgment debt. Clearly, in a bankruptcy notice the debtor is entitled to see from the notice exactly what is claimed to be due on the judgment debt. No doubt a sum might be claimed which is less than the real amount due, and that would not of course be fatal to the notice so long as the notice made it clear that nothing more was claimed to be due on the judgment beyond the amount specified in the notice. But a notice to pay part of a judgment debt, leaving any balance that may be due to be subsequently claimed, is, to my mind, clearly bad" (1904) 1 KB, at p 103 . In Nirens v. Fowler Asphalt Pty. Ltd. (1966) 9 FLR 255, at p 256 Clyne J., applied these comments of Romer L.J. to hold invalid a bankruptcy notice which had been issued under the Bankruptcy Act 1924 (Cth) and which required payment of only that part of a judgment debt which had been assigned. (at p29)

In Re Jack; Ex parte C. V. Holland (Holdings) Ltd. (1959) 19 ABC 268 the petitioning creditor had recovered a judgment in the New South Wales District Court against the debtor for 148.9.0 pounds with costs of the action which had been taxed at 74.16.4. pounds After such taxation, the petitioning creditor caused a bankruptcy notice to be issued addressed to the debtor, requiring payment of the sum of 148.9.0 pounds described as being "the amount due on a final judgment" obtained by the creditor. On the hearing, Manning J. drew attention to the fact that the amount claimed as being "due on the judgment" was part only of the amount so due. In the course of his judgment, his Honour distinguished between the case before him where costs had been taxed at the time of the issue of the bankruptcy notice and the position which would exist if costs had not been taxed and went on to make the following observations which are of direct relevance to the present matter: "It is well established that, in a bankruptcy notice, the debtor is entitled to see exactly what is claimed to be due on the judgment debt. There is no objection to a sum being claimed which is less than the real amount due, so long as the notice makes it clear that nothing more is claimed to be due on the judgment beyond the amount specified in the notice. A notice to pay part of a judgment debt, leaving any balance that may be due to be subsequently claimed, is clearly bad" (1959) 19 ABC, at p 269 . (See also Re Munson; Ex parte Deputy Commissioner of Taxation (1977) 29 FLR 479 where, in the course of a judgment given in the exercise of the bankruptcy jurisdiction of this Court, Riley J. referred, without any indication of disapproval, to the above authorities and the comments of Romer L.J. and Manning J.). (at p29)
In the present case, costs had been taxed at the time of issue of the bankruptcy notice. There is, in any event, no question of a distinction being drawn between the amount of the debt in respect of which judgment had been obtained and the amount of costs payable under the judgment for the reason that it is apparent that that distinction was not drawn in the bankruptcy notice. The amount which the bankruptcy notice required to be paid was clearly, as has been seen, an amount in respect of both debt and costs. The amount was understated by reason of an error which was apparently made as regards the amount of the costs. There is no question, in the present matter, of the excess being waived or of the bankruptcy notice making it clear that nothing more is claimed beyond the amount specified. As has been said, the respondent, in three separate affidavits, made it clear that he persisted in a claim for the excess. In the light of the authorities to which reference has been made and which have not been challenged before us, the result is that the effect of the understatement of the amount due under the County Court judgment was to invalidate the bankruptcy notice. (at p30)
There is nothing in the evidence which would justify a finding that the effect of the invalidity was waived by the appellants in the course of the hearing of the petition (c.f. Re Jack; Ex parte C. V. Holland (Holdings) Ltd. (1959) 19 ABC 268 , and Re Munson; Ex parte Commissioner of Taxation (1977) 29 FLR 479 . Nor, in all the circumstances, is the mistake something which can properly be regarded as covered by the provisions of s. 306 of the Act (see James v. Federal Commissioner of Taxation (1956) 93 CLR 631, at p 644 ). (at p30)
The present position has been brought about as the result of the extraordinary approach which was adopted, either by the appellants or the solicitor acting for them, to the proceedings before the learned judge at first instance. It is difficult to avoid the conclusion that underlying that approach was the mistaken belief that the maintenance of a complete lack of preparation would ensure that the petition would not be heard. In these circumstances, the question was raised, on the hearing of the appeal, whether the appellants were prepared to undertake that, in the event that the sequestration order made in respect of the estates of the appellants was set aside, the appellants would undertake to pay to the official receiver any outgoings which he had incurred. It is noted that an undertaking to that effect was given. (at p30)
In the result, the appeal should be allowed and the sequestration order made in respect of the estate of each of the appellants should be set aside. The appellants should be ordered to pay the costs of the proceedings before Sweeney J. In view of the agreement reached between the appellants and the respondent, there should be no order as to the costs of this appeal. (at p30)

JUDGE2

FRANKI J. This is an appeal by Peter Adrian Schierholter and his wife Judith Annette Schierholter against a sequestration order and an order for costs made in respect of each of their estates by a single judge of this Court in the exercise of its bankruptcy jurisdiction. The judgment creditor was William Geis. (at p30)

I have had the benefit of reading the judgment of Nimmo and Deane JJ. in this matter, and there is no need for me to deal with the facts which are set out in that judgment. (at p30)
It is only necessary for me to consider the main ground of appeal which was argued before us. It was that the bankruptcy notice was bad by reason of the understatement of the amount in fact due to, and claimed by, the judgment debtor under the final judgment of the County Court mentioned in it. (at p30)
No question was raised before the learned trial judge about the validity of the bankruptcy notice and counsel who then appeared for the appellants unequivocally stated that the only ground on which he relied to oppose the making of the sequestration order was that the judgment creditors were able to pay their debts. (at p31)
The bankruptcy notice alleged a debt of ". . . the sum of $2,735.95 . . . due . . . under a final judgment . . ." and it went on to require payment of this sum or that payment be secured or compounded. The bankruptcy petition also alleged that the debtors were indebted to the judgment creditor for the same amount pursuant to the unsatisfied final judgment. On three occasions the judgment creditor swore affidavits that the amount owing in respect of the unsatisfied final judgment was $2,830.45 and no mention was made of $2,735.95. These affidavits were respectively dated 10th February, 1977, 22nd March, 1977, and 15th June, 1977. (at p31)
Had the issue been raised before the learned trial judge, the only sworn evidence was that the amount of the unsatisfied final judgment was $2,830.45 Neither the bankruptcy notice nor the petition are sworn to and I consider that it is clear that the bankruptcy notice was for a lesser amount than the unsatisfied judgment debt. For the reasons expressed by Nimmo and Deane JJ. with which I agree, it seems clear that upon the authorities, which have not been challenged before us, a bankruptcy notice does not comply with the requirement of s. 41 of the Bankruptcy Act 1966, where it specifies a lesser sum than the judgment debt, unless the notice makes it clear that nothing more is claimed to be due under the judgment debt. I note that the respondent actually supported the appellants in seeking that the sequestration be set aside. (at p31)
During the hearing before us a certified extract from the County Court Register dealing with the relevant judgment, which had been on the court file but which had not been brought to the learned trial judge's attention, was referred to by counsel for the appellant. (at p31)
I prefer not to express any view whether the certified copy of the County Court extract was properly before us. I doubt whether sufficient facts had been established for us to admit it as further evidence. I consider that I do not need to have regard to that extract in determining this appeal. (at p31)
I agree with the orders proposed by Nimmo and Deane JJ. (at p31)

ORDER

Order accordingly.

[1978] FCA 14

15 MARCH 1978