Re Walsh
[1982] FCA 278
•13 DECEMBER 1982
No. B 2802 of 1982
Bankruptcy
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Lockhart J.(1)
Bankruptcy - bankruptcy notice - application to set aside notice on ground that sum specified in notice as amount due to creditor allegedly exceeds amount in fact due - whether overstatement determined at time of issue or service of notice - whether defect in notice fundamental - whether fundamental defect is determined by reference to the debtor in question or a hypothetical debtor - "prescribed form" of notice.
Bankruptcy Act 1966 ss. 41, 306
Bankruptcy Rules r.8
Bankruptcy - Bankruptcy notice - Application to set aside notice - Notice allegedly required payment of sum exceeding amount due - Relevant time as to amount due - Whether amount due to be considered as at time of issue or of service of notice - Whether notice invalidated by defect - Whether notice could mislead debtor - Whether court must ignore wilful frustration of creditor by debtor - Whether overstatement in notice of amount due necessarily vitiates notice - Bankruptcy Act 1966 (Cth), ss. 41(5), (6), 306.
Bankruptcy - Bankruptcy notice - Form of notice - "At 4.21 o'clock in the afternoon" added after date of notice - Whether notice thereby invalidated - Whether additional words formal or substantial defect or irregularity - Whether additional words could have misled or perplexed debtor - Bankruptcy Act 1966 (Cth), ss. 41(1)(a), 41(2) - Bankruptcy Rules, r. 8.
Judgment having been entered by the creditor against the applicant (debtor) in the Supreme Court of New South Wales, a bankruptcy notice was issued on 23rd June, 1982, at the creditor's request and served on the applicant on 30th June, 1982. The notice required the applicant to pay $23,258.41, the amount due from the applicant to the creditor at the time the notice was issued. At the time of service of the bankruptcy notice on the applicant it allegedly overstated the applicant's indebtedness to the creditor by $98.33. After the date shown on the bankruptcy notice the words and figures "at 4.21 o'clock in the afternoon" were added. The applicant applied to the Federal Court of Australia to set aside the bankruptcy notice on the grounds that the notice required him to pay more than was due by him to the creditor and that the inclusion of the abovementioned words and figures in the notice invalidated it.
Held: The application should be dismissed because - (1) The relevant time to consider the correct amount due by the debtor to the creditor for the purpose of determining the validity of a bankruptcy notice is the time of its issue.
(2) The applicant in this case could not conceivably have been misled by the alleged overstatement of the amount owing by the applicant to the creditor.
(3) If, contrary to the court's view, the addition of "at 4.21 o'clock in the afternoon" in the bankruptcy notice gives rise to a defect or irregularity, it could not be said that they could reasonably have misled or perplexed the applicant in this case.
Re A Debtor, 478 of 1908 (1908) 2 KB 684; Pillai v. Comptroller of Income Tax (1970) AC 1124; Re A Judgment Debtor, 530 of 1908 (1908) 2 KB 474; Re A Debtor, No 21 of 1950 (1951) 1 Ch 313, referred to.
Re Wimborne; Ex parte The Debtor (1979) 24 ALR 494, followed.
Re Child; Ex parte Child (1892) 2 QB 77, distinguished.
Sydney, 1982, December 13. #DATE 13:12:1982
APPLICATION.
Application to set aside a bankruptcy notice.
D.M. Bennett Q.C. and M. Cashion, for the applicant.
W.M. Gummow, for the respondent.
Solicitor for the applicant: Peter G. Kearney.
Solicitor for the respondent: B.J. O'Donovan, Commonwealth Crown Solicitor.
E.F. FROHLICH
THE COURT ORDERS THAT:1. The order for extension of time for compliance with the requirements of bankruptcy notice No. 2802 of 1982 previously made be varied so that the debtor may comply with those requirements up to and including 20 December 1982 but no longer.
2. The application be otherwise dismissed.
3. The debtor pay the creditor's costs of the application including reserved costs.
I propose to give judgment now notwithstanding that important questions of bankruptcy law arise for determination in this case. But I have reached a firm view as to the result and have been assisted by full and careful argument.Henry Frederick Walsh, the debtor, seeks to set aside a bankruptcy notice on the ground that it requires him to pay more than was due by him to the Deputy Commissioner of Taxation, the creditor.
On 19 August 1981 the creditor signed judgment against the debtor in the Supreme Court of New South Wales in the sum of $25,914.75. On 23 November 1981 a bankruptcy notice was issued at the request of the creditor requiring the debtor to pay the sum of $26,596.34, being the amount of the said judgment plus interest. The debtor applied to this Court to set aside that notice on the ground that it required payment of a sum which exceeded the amount in fact due. I set aside the notice on 28 May 1982.
The creditor issued a second notice which was set aside by another Judge of this Court by consent.
A third bankruptcy notice was issued on 23 June 1982 at the creditor's request requiring the debtor to pay $23,258.41 which, according to the notice, represented the judgment debt of $25,914.75 less the sum of $2656.34, being the amount by which the judgment was reduced after it was signed. The bankruptcy notice was served on the debtor on 30 June 1982.
On 13 July 1982, within the time allowed by the notice for payment, the debtor gave notice to the creditor that he disputed the validity of the notice on the ground that the sum specified in it as the amount due exceeded the amount in fact due (sub-s. 41 (5) ) of the Bankruptcy Act 1966 ("the Act").
The judgment debt represents income tax liabilities of the debtor for the years ended 30 June 1975 to 1978 inclusive and additional tax for late payment. Between the signing of judgment and the issue of the first bankruptcy notice correspondence passed between the creditor on the one hand, and the debtor or persons apparently acting on his behalf, including Mr. Peter Clyne on the other hand, in which proposals to pay the judgment debt were made and rejected. The history of the matter is more fully set out in my reasons for judgment when I set aside the first notice.
Counsel for the debtor conceded for the purpose of this application that the bankruptcy notice in question here correctly states the amount due by the debtor to the creditor at the time the notice was issued. The debtor asserted that the relevant time to consider the correct amount due by a debtor to a creditor for the purpose of determining the validity of a bankruptcy notice is the time of its service, not issue. It is not disputed that payments were made on behalf of the debtor to the creditor between 24 June 1982 and 8.45 am Sydney time on 30 June 1982 totalling $98.33; the reason for the statement of the time of day will become apparent later. The debtor asserted that these payments made between the issue and service of the notice operated to invalidate the notice and to require that it be set aside.
Before turning to the submissions of the parties I will refer to some of the evidence. The creditor has many offices throughout Australia. Between 19 August 1981 when judgment was entered and 23 June 1982 when the bankruptcy notice was issued about 110 payments were made on behalf of the debtor on various days and at various times to about 24 different offices of the creditor in Australia. The payments varied in amount from $2.20 to $242.80, but most of them were in small denominations under $10.00 each. Indeed, each payment made after 8 June 1982 and on or before 23 June 1982 was of an amount less than $10.00. The offices of the creditor where payments were made were as far flung as Cairns, Darwin, Perth, Alice Springs, Adelaide, Hobart, Sydney and Melbourne. Some payments were made in capital cities and others in places including Mt. Gambier, Toowoomba, Wollongong, Lismore and Albury.
It is obvious that the debtor has embarked on a mischievous plan of making payments to the creditor in varying but generally small amounts all over Australia to take advantage of the administrative problems that necessarily beset an organization as large and widespread as the Department of Taxation in the hope that the creditor would fail to credit him with some payment, no matter how small. Plainly the debtor has done this to enable him to plead in courts that the particular claim in any bankruptcy notice issued at the request of the creditor overstated the amount in fact due and was therefore invalid within the principles laid down in In re A Debtor, No. 478 of 1908, (1908) 2 K.B. 684, and many other cases.
A bankruptcy notice sets in motion the whole process leading to bankruptcy and must, since the proceedings are of a quasi penal nature, be construed strictly. The effect of defects in bankruptcy notices has generally arisen in cases where the petitioning creditor claims that the defect is formal and therefore, by operation of s. 306 of the Act, does not invalidate the notice.
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) A.C. 1124 at p. 1135 per Lord Diplock who delivered the judgment of the Judicial Committee; In re A Judgment Debtor, 530 of 1908 (1908) 2 K.B. 474; In re A Debtor, No. 478 of 1908 (supra); and In 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 A.L.R. 494 (at pp. 499-500) that it is the latter to whom the Court looks to determine the validity of a bankruptcy notice. Sheppard J. took the same view in Re Preston; Ex parte The Commercial Bank of Australia Limited, 13 October 1982, as yet unreported.
In cases where petitions are undefended, generally nothing turns on this description but, where a debtor defends a petition and asserts that he could have been misled by some defect in the notice, it seems to me to be absurd to suggest that the courts must ignore facts which would negate the debtor's assertion. Re Wimborne is one illustration. It is difficult to imagine a better illustration of the point than the present case where the debtor has deliberately set out to frustrate the creditor and the law by engineering events designed to produce defects in bankruptcy notices which may be issued against him. He is not a debtor who could be confused by the alleged defect in the bankruptcy notice, he is the wilful source of the alleged confusion. To ignore the facts that establish this would be a mockery of the law.
Counsel for the debtor submitted that an overstatement in a bankruptcy notice of the amount due by the debtor necessarily vitiates the notice provided the debtor gives the requisite notice under sub-s. 41 (5). This conclusion was said to arise both from judgment of the courts, in particular In re A Debtor, No. 478 of 1908 (supra) and Re Prossimo; Ex parte de Marco (1952) 16 A.B.C. 86, and from the terms of sub-ss. 41 (5) and (6) themselves. In re A Debtor, No. 478 of 1908, the bankruptcy notice required the debtor to pay the amount of the judgment debt due to the creditor and in addition a further small sum due by the debtor to the creditor. The English Court of Appeal held that this was not a mere formal defect and that the notice was invalid.
To say that a bankruptcy notice is necessarily bad because it overstates the amount which is in fact due by the debtor by no matter how small a sum is in my opinion too wide a proposition. Generally such a notice would be bad, but there may be circumstances which in a particular case would save the notice from invalidity.
In Re a Debtor, No. 478 of 1908, and Re Prossimo are illustrations of cases where bankruptcy notices were held invalid, but they must all be viewed in the light of the overriding question whether the mistake in the notice could reasonably mislead the debtor. Indeed, In re A Debtor, No. 478 of 1908, itself it seems to me that Farwell L.J. (at p. 690) and Kennedy L.J. (at p. 691) considered the effect on the validity of a bankruptcy notice of an overstatement of the amount due by reference to whether it could mislead or embarrass the debtor. The same analysis of that case was made also by Harman J. In re A Debtor, No. 21 of 1950 (supra) (at p. 320). I note that Harman J.'s judgment was approved by the Privy Council in Pillai's Case (at p. 1135).
In my opinion the cases do not establish an invariable rule (I leave aside for the moment the effect, if any, of sub-ss. 41 (5) and (6) ) that an overstatement in a bankruptcy notice of the amount due necessarily avoids the notice. It has this consequence if the overstatement could reasonably mislead the debtor on whom it is served, but not otherwise.
Section 41 of the Act provides that a bankruptcy notice under the Act shall be in the prescribed form and shall require the debtor to pay the judgment debt, or sum ordered to be paid, in accordance with the terms of the judgment or order, or to secure or compound for it to the satisfaction of the creditor or the Court, and shall state the consequence of non-compliance therewith and shall be served in the prescribed manner. Sub-sections 41 (5) and (6) provide:-
'41 (5) 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.
41 (6) Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with sub-section (5), he shall be deemed to have complied with the notice if, within the time allowed for payment, he takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it.'
These sub-sections are taken from s. 53 of the Bankruptcy Act 1924 which in turn was reproduced from the English Bankruptcy Act of 1914 and its predecessor the Bankruptcy and Deeds of Arrangement Act 1913. It has been said that these provisions were enacted to overcome the judgment In re A Debtor, No. 478 of 1908 (supra). Plainly enough, as long ago as 1913 the predecessors of sub-ss. 41 (5) and (6) were intended to ensure that, when courts would otherwise hold bankruptcy notices invalid on the ground of overstatement of the amount due the consequences of invalidity was not to follow unless the debtor gave the requisite notice under sub-s. 41 (5) or its then equivalent.
They are ameliorating provisions. They do not either in terms or in substance themselves invalidate anything. They save some bankruptcy notices from what otherwise would be invalidity, but the sub-sections are not based on an assumption that overstatement necessarily leads in every case to invalidity of the bankruptcy notice. It does where, but only where the debtor could be reasonably misled by the overstatement. As the debtor in this case could not conceivably have been misled by the alleged overstatement of $98.33, it follows that the bankruptcy notice is not invalid on that ground.
Before turning to the question whether it is the time of issue or service of a bankruptcy notice that determines the question of overpayment of the amount itself, I propose to make some brief observation pertaining to this case and generally. The law of bankruptcy is not intended to protect rascals, rather it should flush them out and deal with them fairly and according to law. In recent times there is a growing and disturbing tendency of unscrupulous debtors to use the technicalities that traditionally surround bankruptcy law to deliberately exploit the courts and the system they administer. The principles laid down by judges over many years relating to bankruptcy notices did not envisage this development. The courts must not aid the ruthless and cynical exploitation of the laws of insolvency by unscrupulous debtors.
I do not suggest for one moment that bankruptcy statutes should not be construed otherwise than according to their ordinary and natural meaning in the light of their evident purpose and guided by well established principles developed by the courts. But where the application of these principles would necessarily lead to a manifest absurdity or injustice, the courts must strain against it and ensure that the laws of insolvency are interpreted and applied firmly and fairly in the interests of debtors and creditors alike. If this means that some old principles laid down by the courts of yesteryear must go, then so be it. The law does not stand still impervious to changing times and conditions. If the laws of bankruptcy are allowed to become the haven or refuge of the rascal they have utterly failed the community which they are designed to serve.
In my view none of the cases to which I was referred by counsel deny the propositions which I have expressed but, if I should be wrong and if cases such as In re A Debtor, No. 478 of 1908, or Re Prossimo stand in the path of my conclusion, as they do not bind this Court, I would decline to follow them for the reasons I have given.
I turn to the submission of counsel for the debtor that the question whether overstatement of the amount due invalidates a bankruptcy notice should be determined at the time of service,not issue, of the notice. I do not perceive why the time of service of the notice determines this question. A bankruptcy notice can only say what it does, and this must be determined when the ink is dry namely, at the time of its issue. The argument on behalf of the debtor confuses the two quite separate questions of validity of a bankruptcy notice and any operation or effect which the notice might have. If a debtor complies with the requirements of a notice by paying the amount required, or securing payment of it, or compounding it, or satisfying the court that he has a counter-claim, set-off or cross demand of the kind referred to in para. 40 (1) (g) and sub-s. 41 (7) then he will not commit an act of bankruptcy and the notice has no relevant consequence.
Likewise, if a debtor pays the full amount of the judgment debt together with interest, if applicable, after a bankruptcy notice is issued but before it is served, then plainly the notice cannot be the vehicle for the commission of an act of bankruptcy. The researches of counsel revealed no case supporting the proposition that the relevant time to determine the correctness of the amount due by the debtor is the time of service of the notice, not the time of its issue. But counsel for the debtor relied strongly on an ex tempore decision of a Divisional Court in Re Child; Ex parte Child (1892) 2 Q.B. 77. The debtor Child, had acted as agent for the Queen Insurance Company, but in December 1888 he was dismissed from his employment. On 20 December 1888 judgment was obtained by the insurance company against the debtor the sum of one hundred and fifty-four pounds and seventeen shillings. An arrangement was thereupon come to between the manager of the insurance company and the debtor by which the latter assigned to the company certain books debts, together with the lease of a house and, under the same arrangement it was agreed that Child should be credited in the books of the company as against the judgment debt with the sum of one hundred and eighteen pounds being the amount due to him on renewals of policies of insurance effected with the company through his agent.
Nothing further was done until 13 November 1891, on which date a bankruptcy notice was served on Child by the company requiring him to pay to the Queen Insurance Company the sum of one hundred and fifty-four pounds and seventeen shillings as being the balance due on the final judgment obtained against him. On the same day on which the bankruptcy notice was served, a letter was written by Child to the company denying any indebtedness and pointing out that there was a balance due to him under the arrangement previously entered into. On 26 November 1891 he filed a general affidavit claiming this set-off. On 7 December 1891 application was made to the Registrar by Child in person to have the bankruptcy notice set aside, when the Registrar directed him to file, before 11 December 1891, a further affidavit setting out the particulars of his set-off and adjourned the hearing until 14 December 1891.
This further affidavit was not filed by 11 December, but was subsequently filed. At the hearing objection was taken that the affidavit had not been filed in time. The Registrar upheld the objection, refused to read the affidavit and also refused to set aside the bankruptcy notice. It was from that decision that the appeal was brought to the Divisional Court.
As reported in (1892) 2 Q.B. 77 Vaughan Williams J. is recorded as saying (at pp. 79 and 80):-
'I wish to state my view of this part of the sub-section' (namely, sub-s. 4 (1) (g) of the Bankruptcy Act 1883 (English) )" I think that under it a creditor who has obtained final judgment is not entitled to serve a bankruptcy notice in respect of any amount greater than that for which he could have issued execution, and that, thereafter, if the circumstances of the case are such that he has ceased to be entitled to issue execution for the whole amount of the judgment debt, he has ceased to be entitled to serve a bankruptcy notice for the whole amount of the judgment debt.'
The emphasis is mine.
Other references to serving a bankruptcy notice appear in his Lordship's judgment and in the judgment of Henn Collins J. Assuming the correctness of the report in the Law Reports of the judgment in Re Child, a matter to which I shall return soon, it does not support the argument of the debtor. Nothing turned there on any distinction between the times of issue and of service of a bankruptcy notice, which is the very point in question here. Nor can any observations of their Lordships be treated as bearing on this point. There is nothing in this report of Re Child to suggest that their Lordships turned their minds at all to the question involved in this case.
The facts of the present case would alone merit its description as bizarre, but any traces of doubt as to the accuracy of that description would vanish in the light of what I am about to say. The researches of counsel brought to light the following reports of Re Child in addition to the report in the Law Reports: (1892) 9 Morrell Bankruptcy Reports 103; 61 L.J. Q.B. 25; 66 L.T. 204; 8 T.L.R. 319; 40 W.R. 56; and 1891-4 All Eng. Reports.
Each of these reports of Re Child varies from the report in the Law Reports and from each other in some respects but, in all the reports except the Law Reports, the references by the members of the Divisional Court are to the issue of a bankruptcy notice and not to its service. For instance, in Morrell's Reports, Vaughan Williams J., after referring to para. 4 (1) (g) of the Bankruptcy Act 1883, is reported as saying (at p. 106):
'I do not think myself that that section entitles a creditor who has obtained a final judgment to issue a bankruptcy notice for any larger amount than that for which he could lawfully issue execution; and in my judgment if the circumstances of the case are such that the execution creditor has ceased to be entitled to issue execution for the whole of the debt then he has ceased to be entitled to issue a bankruptcy notice for the whole amount.'
Again, the emphasis is mine.
Counsel for the debtor sought to meet this problem of multiformity of reporting by urging the Court to adopt the report found in the Law Reports. I am unable to yield to that entreaty when confronted with the rather extraordinary position where only one report of Re Child uses the word 'serve' rather than 'issue' in relation to the bankruptcy notice there in question. Re Child has been referred to in many cases but, so far as the researches of counsel could show, the references have been in contexts involving the date of issue of bankruptcy notices. In my opinion, the relevant time for determining the correctness of the amount claimed in a bankruptcy notice as being due by the debtor is the time of issue of the notice, not the time of its service.
I pass to the remaining submissions of counsel for the debtor, all of which concerned the addition of the words and figures 'at 4.21 o'clock in the afternoon' after the date of the notice and before the signature of the Deputy Registrar in Bankruptcy who issued it.
Counsel for the debtor submitted that the inclusion of these words and figures in the notice invalidated it:
(a) because it constituted a substantial deviation from the prescribed form (Form 4);
(b) because it could cause the debtor on whose behalf payments were being made all over Australia to conjecture or wonder whether it was claimed that the balance of the judgment debt was said to be owing at 4.21 Perth time, Adelaide time or Sydney time; or
(c) because, by stressing the precise time of issue of the notice, it would cause the debtor on whose behalf payments were being made all over Australia to conjecture or wonder whether the time required by the notice for compliance with its requirements 'within 14 days after service of this notice on you excluding the date on which this notice is served on you' would be calculated from the precise moment of service.
The ingenuity of the argument is matched only by its fantasy. A bankruptcy notice is required to be in accordance with the prescribed form: para. 41 (1) (a) and sub-s. 41 (2). Bankruptcy rule 8 provides:
'For the purposes of paragraph 41 (1) (a) of the Act, a bankruptcy notice shall be in accordance with Form 4.'
I do not regard the addition of the words and figures in question as constituting such a deviation from the prescribed form as amounts to a defect or irregularity, whether formal or substantial. This debtor, who was prone to make payments to the creditor all over Australia, could only have been assisted by the presence of the words and figures complained of. To adopt the apt words of counsel for the creditor, they aided 'the precise crystallization of his fluid position'.
If, contrary to my view, the adoption of these words and figures gives rise to a defect or irregularity, it could not possibly be suggested that they could reasonably have misled or perplexed the debtor. It is obvious from perusing the bankruptcy notice that it was issued by a Deputy Registrar in Bankruptcy for the Bankruptcy District of the State of New South Wales and the Australian Capital Territory. Indeed, the Registrar's seal is affixed to the notice in various places including one place directly over the reference to the time of issue. It strains credulity too much to imagine that this, or for that matter any debtor could reasonably have thought that the notice was issued other than at 4.21 p.m. Eastern Standard Time. Further, this debtor must have known or be taken to have known when and where he made relevant payments.
It is a condemnation of the debtor in this case that he embarked upon a plan of making payments all over Australia at different times of the day which, due to time differences throughout the land, necessarily occasioned difficulty to the creditor in calculating how much was owed by the debtor at any previous time. The only worthwhile feature of his conduct is that it enables the Court to say that it has failed to achieve its objective and that other like cases, mercifully few thus far and hopefully none in the future, will meet the same fate.
I would dismiss the application with costs.
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