Re Spurr; Ex parte Werner

[1991] FCA 577

Re: JOHN C. SPURR
Ex parte: JAMES GORDON WERNER and ORS
No. V P506 of 1991
FED No. 577
Bankruptcy
(1991) 31 FCR 236

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
BANKRUPTCY DIVISION
Heerey J.(1)

CATCHWORDS

Bankruptcy - Bankruptcy notice - validity - effect of failure to indicate rate of interest applied.

Bankruptcy - Bankruptcy notice - validity - two inconsistent periods for compliance with requirements of notice - whether formal defect or irregularity - s.306(1) Bankruptcy Act 1966 - whether likely to mislead, perplex or confuse - relevance of debtor being in fact mislead.

Bankruptcy Act 1966: s.306(1)

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

Re McAlpine (1987) 80 ALR 29

Re McDonald (1978) 18 ALR 505

Re Walsh (1982) 47 ALR 751

Re Wong (1979) 27 ALR 405

Ex Parte Yeatman (1881) 16 LR Ch 283

HEARING

MELBOURNE

#DATE 4:9:1991

Solicitor acting as Counsel for : Mr C.C. Hussey
the Petitioning Creditor

Solicitors for the Petitioning Creditor : Hussey and Co

Counsel for the Debtor : Mr A. Ellis

Solicitors for the Debtor : Madgwicks

ORDER

The petition be dismissed.

The petitioning creditors pay the debtor's costs of and incidental to the petition, including reserved costs, such costs to be taxed in default of agreement.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

When this petition came on for hearing before me, a four month adjournment was sought by counsel on behalf of the debtor. The debtor's financial affairs were said to be in a somewhat transitional state. On the debit side he has to meet a liability imposed by the Family Court which will necessitate the sale or refinancing of a property. On the credit side he is expecting a legacy from his father's estate which should be paid by the end of the year.

1. It the course of discussion it was said by counsel that the bankruptcy notice was fundamentally defective. The grounds for that contention were briefly stated. It seemed to me better that I should deal with that point now.

2. Two of the grounds relied on by the debtor can be briefly disposed of. The first is that part of the concluding words of the bankruptcy notice have been obliterated. The words in question are "whether it is satisfied that". The short answer to that point is that in my opinion, on examining the notice itself, the words are not sufficiently obliterated to make it impossible to decipher them. In any event, as it happens, even if those words were deleted the sense of the notice would be in no way distorted. It would simply read:
   

The time for complying with the requirements shall be deemed to have been extended until the court determines whether you have such a counterclaim, set off or cross demand.

1. The second point relied on concerned the reference in the bankruptcy notice to interest. The notice recited that the petitioning creditors:
   

.....have claimed that the sum of $1,501.61 and no more (and this comprises the amount for which final judgment was entered $1,043.00 and interest on the said judgment debt of $458.61 calculated at the rates of interest as prescribed from time to time, pursuant to section 2 of the Penalty Interest Rates Act 1983 on the judgment debt from the 12th day of July 1988 to the 3rd day of April 1991 inclusive, any claim for further interest being abandoned) is due by you to them under a final judgment obtained by them against you in the Magistrates Court of Victoria at Echuca on the 12th day of July 1988, being a final judgment the execution of which has not been stayed.

1. There was some dispute as to whether the amount of interest was in fact correctly calculated, but the debtor does not in any event rely on that because no notice had been given within the time specified by s.41(5). What was said, however, was that the notice was defective because the notice should have indicated the actual rates of interest applied so that the debtor could check the calculation himself.

2. In my opinion there is no sound basis for this complaint. In Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71, Mason C.J., Wilson, Brennan and Gaudron JJ. said (at p 78):
   

If interest is included in a bankruptcy notice it must be calculated: Re O'Keefe (1963) 19 ABC at p 103. A notice claiming more by way of interest than 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.

Similarly in Re McDonald (1978) 18 ALR 505 it was said by Riley J. (at p 506):

.....where by a statute a judgment debt carries interest the judgment creditor may include in his bankruptcy notice a claim for interest.....

1. It seems to me that as long as the bankruptcy notice correctly states the amount of interest which is in fact due, the notice is valid and the debtor fails to pay that amount at his peril. No authority was cited which suggests there is any requirement to include in the notice all the information which would be necessary for the debtor to be able to recalculate the amount of interest to his own satisfaction.

2. The third ground taken is of more substance. After the passage that I have quoted above, the bankruptcy notice continued:
   

THEREFORE TAKE NOTICE that within 14 (21) days after service of this notice on you, excluding the day on which this notice is served on you, you are required:-

(a) to pay the sum of $1,501.61 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 the last preceding paragraph 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. (Emphasis added)

1. It is put on behalf of the debtor that the inconsistency between the periods of 14 days and 21 days is a fundamental defect in that it is likely to mislead, perplex or confuse the debtor as to his obligation.

2. I commence the discussion of this point by referring to a passage from the judgment of Deane J. in Kleinwort Benson. Although his Honour dissented in the result in that case, the following statement is in no way inconsistent with the judgment of the majority and, in my respectful opinion, is of considerable assistance in approaching issues of this sort, particularly as it was urged on me by Mr Hussey on behalf of the petitioning creditors that there has been a trend in the authorities towards some relaxation of the strict approach which the courts have traditionally applied to bankruptcy notices. Deane J. said (at p 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" per Cozens-Hardy M.R., In Re A Judgment Debtor (1908) 2 KB 474 at pp 476-477; see also James v Federal Commissioner of Taxation (1955) 93 CLR 631 at p 644. A defect in a bankruptcy notice will invalidate it "except in the case of a merely formal defect": per Vaughan Williams LJ., In re OCS (A Debtor) Ex parte The Debtor (1094) 2 KB 161 at p 163, see also In Re A Debtor No. 21 of 1950; Ex parte The Debtor v Bowmaker Limited (1951) Ch 313 at p 317. 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.

It is true that the strictness of the above rules leaves open the possibility of abuse by unscrupulous debtors. That is, however, an unavoidable concomitant of the protection of ordinary people faced with the threat of being made bankrupt. Many, and possibly most, of the petitions in the bankruptcy lists of this country seek the bankruptcy of honest, albeit unbusinesslike or naive, people whose indebtedness springs from causes which evoke sympathy rather than indignation. For such people, bankruptcy does not represent a game to be played to the frustration of their creditors. It represents a pronouncement of failure and humiliation attended by the fear of unknown consequences and the susceptibility to criminal punishment for what would otherwise be innocent conduct: see, e.g., per Griffith C.J., Hamilton v Warne

(1907) 4 CLR 1293 at 1297. As Riley J., a noted Australian authority on bankruptcy law, sometimes pointed out to those appearing before him, the least that the courts can do is to insist that a person who seeks to subject another to the law of bankruptcy himself strictly observe the requirements of that law.

1. Those comments are particularly apt in the present case where the petitioning creditors' debt exceeds the statutory minimum for the invocation of the court's bankruptcy jurisdiction by just $1.61, and then only because interest amounting to almost half the amount of the judgment debt had been allowed to accumulate over some 33 months.

2. The petitioning creditors relied on s.306(1) of the Bankruptcy Act 1966 which provides:
   

306. (1) 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.

1. However, s.306(1) only applies if the defect in question answers the description of a formal defect or irregularity. In Kleinwort Benson the majority, after discussing the particular bankruptcy notice in question, said (at p 80):
   

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.

1. Here the defect was in my opinion clearly capable of misleading in that on the face of the notice there is no indication to the debtor as to which of the two periods of 14 days or 21 days applies. The case is I think a stronger one than Re McAlpine (1987) 80 ALR 29. In that case the bankruptcy notice had been altered by hand. The number of days for compliance with the notice was typed as "14", but those figures were whited out and the figures "28" were written over in handwriting. There was no initialling of the correction or any stamping to indicate that the change had been made prior to the issue of the bankruptcy notice. Spender J. held that the notice was invalid. His Honour cited the following passage from the judgment of Lockhart J. in Re Wong (1979) 27 ALR 405 at p 414:
   

A debtor is not required to engage in the task of construing a bankruptcy notice and resolving questions of doubt or ambiguity. A bankruptcy notice ought to be clear and unambiguous. Noncompliance with its requirements constitutes an act of bankruptcy with quasi penal consequences. If it is equivocal, generally the equivocation must be resolved in favour of the debtor.

1. Mr Hussey argued that the debtor was not in fact misled. He said that the debtor is an estate agent and presumably has some knowledge of business matters. He said that the petition was not presented until a month after the service of the bankruptcy notice, by which time both periods had expired, but the debt had still not been paid. Therefore, it was said, the debtor was not in fact confused. Also, it was said that in the course of subsequent negotiations the debtor had admitted the debt.

2. It seems to me that all this is beside the point. Whether or not the debtor is in fact indebted, or has admitted indebtedness, the issue before the court is whether an act of bankruptcy has been committed, and that depends on whether there has been a failure to comply with a valid bankruptcy notice. If the notice is to be valid, it must make a clear and unequivocal demand on the debtor. Mr Hussey relied on Re Walsh (1982) 47 ALR 751 as authority for the proposition that the particular debtor must in fact have been misled. In that case Lockhart J. said (at p 753):
   

It has been long established that, if a defect in a bankruptcy notice is of such a kind as could reasonably mislead a debtor upon whom it is served, it invalidates the notice and cannot be validated by s.306: Pillai v Comptroller of Income Tax (1970) AC 1124 at 1135, per Lord Diplock who delivered the judgment of the Judicial Committee; Re a Judgment Debtor (No. 530 of 1908) (1908) 2 KB 474; Re a Debtor (No. 478 of 1908), supra; and Re a Debtor (No. 21 of 1950 (1951) Ch 313.

The question is not whether the debtor was in fact misled by the mistake in the notice but whether it could mislead him. Notwithstanding some confusion in the reported cases as to whether the invalidity of the bankruptcy notice is determined by reference to a hypothetical debtor or the particular debtor to whom the notice is directed, I held in Re Wimborne; Ex parte the Debtor

(1979) 24 ALR 494 (at 499-500) that it is the latter to whom the court looks to determine the validity of a bankruptcy notice.

1. In Re Walsh the debtor devised a particularly ingenious scheme which involved paying very small amounts to numerous offices of the Taxation Department after the issue of the bankruptcy notice in the hope that the amount claimed in bankruptcy notice would become excessive and the notice thereby rendered invalid. The scheme failed at all levels, the case ultimately finding its way to the High Court: (1984) 58 ALJR 368. Re Walsh therefore was not concerned with a defect on the face of the notice itself which might render its command ambiguous, confusing or perplexing.

2. Looking more generally at the question of the effect an allegedly invalid notice has on a debtor, the High Court in Kleinwort Benson has confirmed that an objective test is to be applied. At p 79 the majority said:
   

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: James v Federal Commissioner of Taxation

(1955) 93 CLR 631 at p 644; Pillai (1970) AC at p 1135. In such cases the notice is a nullity whether or not the debtor in fact is misled: In Re A Judgment Debtor No. 530 of 1908 (1908) 2 KB 474 at p 481.

1. The defect relied on in the present case was not something which the debtor could be said to have "engineered". The strictures which were justly levelled at Mr Walsh and his scheme by Lockhart J. in Re Walsh do not apply here.

2. The various factual matters relied on by Mr Hussey do not meet the central point which to my mind renders the notice invalid, namely that there are two inconsistent demands emerging from the same document.

3. Finally, Mr Hussey said the defect had been waived because this point had not been taken on previous occasions when the petition was before the court. He also contended that an agreement had been reached for the payment of the judgment debt, but that the debtor had not performed that agreement. He referred to Ex Parte Yeatman (1881) 16 LR Ch 283. But that seems to have been a case where, had the objection been taken at an earlier stage, the defect could have been cured.

4. Here the defect is, as I have held, not a formal defect or irregularity. The point is available to the debtor. Even if it was not taken as early as it might have been, that does not amount to a waiver. The evidence does not show any communication by the debtor to the petitioning creditors which might indicate that the point was being abandoned.

5. I therefore order that the petition be dismissed, and I will order that the petitioning creditors pay the debtor's costs of and incidental to the petition, including reserved costs, such costs to be taxed in default of agreement.