Re Whittet, A.J

[1990] FCA 338

Re: ANTHONY JOHN WHITTET
No. 3746 of 1989
FED No. 338
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Einfeld J.(1)

CATCHWORDS

Bankruptcy - overstatement in bankruptcy notice - notice of dispute of the amount claimed - whether overstatement fatal to the notice - whether overstatement misleading - validity of bankruptcy notice

Bankruptcy Act SS 41(5) 41(6) 41 (6A)(6B)(6C)

HEARING

SYDNEY

#DATE 12:7:1990

Counsel and solicitor for Mr F P Carnovale
the Debtor instructed by Gillis Delaney

Counsel and solicitor for Mr M R Aldrige instructed by
the creditor Shaw McDonald

ORDER

The application is upheld and the bankruptcy notice is set aside.

The creditor to pay half of the debtor's costs.

Note: Settlement and entry of orders are dealt with in accordance with Rule 124 of Bankruptcy Rules.

JUDGE1

This is another case alleging that a bankruptcy notice contains an overstatement of the amount owing by the debtor. The matter commenced with a judgment in favour of Homebush Abattoir Corporation the respondent in the District Court of New South Wales on 17 March 1987 (plaint no. 7905 of 1983) against the debtor for $36,244. The debt remaining unpaid, the bankruptcy notice was issued on 5 October 1989. It claims interest as follows:

(a) from 17 March 1987 (date of judgment) to 1 November 1987, said to be 257 days, at the rate of 19.5% per annum, amounting to $4,975.52

(b) from 2 November 1987 to 1 March 1988, said to be 120 days, at the rate of 18% per annum, amounting to $2,144.40

(c) from 2 March 1988 to 28 February 1989, said to be 363 days, at the rate of 15% per annum, amounting to $5,405.07

(d) from 1 March 1989 to 30 August 1989, said to be 182 days, at the rate of 17% per annum, amounting to $3,072.16

1. The notice also claims taxed costs in the sum of $6,023.05, making what it says is a total of $57,864.20 due by the debtor.

2. The debtor does not challenge any of the facts alleged in items (b), (c) and (d) above or as regards costs. It is common ground that the bankruptcy notice could also have claimed interest from 31 August 1989 to 4 October 1989 (the day before its issue) at the rate of 21% per annum. Although there is a dispute as to how much actual money that would have added to the debt, there is no argument that if everything else in the notice had remained the same, the notice would have understated, not overstated, the amount due as at the date of the notice. As it is, the debtor alleges that item (a) and the eventual total amount allegedly owing represent an overstatement of $541.34. This seems to be because the dates quoted in item (a) represent 230 not 257 days. Because the first date is the date of judgment which must be omitted: Re Serafino; Ex parte Classic Manufacturing Pty Ltd (1989) 86 ALR at 287, the correct number of days should have been 229 days. It is common ground that the requisite notice of dispute of the amount claimed was given under section 41(5) of the Bankruptcy Act. This section states:
   41(5) A bankruptcy notice is not invalidated by
   

reasons 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 misstatement.

1. The debtor alleges that the overstatement is fatal to the notice: Walsh v. Deputy Commissioner of Taxation (1982) 47 ALR 751 per Lockhart J. at 755 (the Full Court did not deal with the point - see the same volume at 616; neither did the High Court - see (1984) 156 CLR 337 at 339); Re Serafino (above) at 287; Kleinwort Benson Australia Limited v. James Albert Crowl (1988) 165 CLR 71 at 76. Query contra Re Ronald David Greenhill; Ex parte Myer (NSW) Ltd (1984) 5 FCR 84 per Morling J.

2. Alternatively the debtor says that if the overstatement does not invalidate the notice per se, it should be set aside as misleading because it is not clear if there is a claim for interest for the date of judgment. It is pointed out that the periods claimed in items (b), (c) and (d) are in fact one day longer than claimed and that they should be 121, 364 and 183 days respectively, if the first and last days of each period are included.

3. There is no doubt that the creditor must accurately claim interest: Re Farrugia; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 1 at 2. Nor is the debtor required to do his own calculations nor respond to a notice where it is not apparent on its face what he should pay: Re McDonald; Ex parte Elder Smith Goldsbrough Mort Ltd (1978) 18 ALR 505 at 507. The question here is whether this notice qualifies for those categorisations.

4. The respondent says:
   1. that this notice is a case of understatement because it could have claimed interest up to 4 or 5 October 1989. If so, it will be corrected as a formal defect of the kind referred to in section 306 of the Act unless the debtor can establish injustice which he has made no attempt to do: see Kleinwort Benson at 81. If it is a substantive defect, the question will be whether the defect is capable of misleading or perplexing the debtor as to what had to be done to avoid bankruptcy. The argument includes an apparently novel proposition that section 41(6) implies that the debtor must make his own calculation so as to decide which of the options provided by that subsection to choose. If he had done so in this case, he could not have been misled by the error in the number of days;
   2. that there was no proper or valid notice of the overstatement under section 41(5) because although Registrars continually extended time for compliance under the bankruptcy notice and the section 41(5) notice was issued within one of those extensions, the subsection requires the notice to have been issued within the time allowed for payment in the bankruptcy notice itself;
   3. that even if it is an overstatement case, the overstatement is not fatal to the notice and that upon a consideration of whether it could have misled the debtor, a consideration which can be entertained, the conclusion should be drawn that it could not.

5. Section 41(6) states:
   

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 subsection (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.

1. I do not accept the respondent's argument that this is a case of understatement. Re Farrugia has decided that interest can be claimed up to any date and that a bankruptcy notice is not invalid because all possible interest is not claimed. I do not think that a debtor can be expected to know that when a cut off date is given in the notice, the creditor really meant to claim interest to the date of the notice. It may be true, as the Court was informed here, that as the Registry enters the date of the notice, and there may be some delay in its doing so, the practice has been followed since Farrugia of terminating the interest claim at about the time of lodgment of the notice, thus resulting on occasions in quite a time between the end of the interest claim and the date on the bankruptcy notice. But debtors would not know this and could not in any event be expected to guess that this was the reason why the interest claim stopped two months earlier than necessary. Furthermore, as section 41(6) deals only with overstatements, not understatements, I do not see that the suggested analogy can apply. Submission 1 fails.

2. As to submission 2, it seems to me that if this point was going to be taken, it should have been taken much earlier when extensions of time were being sought and granted or when the application to set aside the bankruptcy notice was filed on 10 November 1989. In any event, I do not think that the point is well taken for the reasons given in slightly different circumstances by Pincus J in Re Wilhelmsen; Ex parte Gould and Others (1986) 11 FCR 107 with which Burchett J agreed in Re Andrew George Clubb (unreported, 16 January 1990).

3. Submission 3 raises an issue which has been much debated in the cases but virtually always at first instance or by individual judges on appeal. Most of the cases are mentioned earlier and there is no point in my repeating them. I reviewed a number of them in Re Matthews Ex parte Hazet Tools Australia in a judgment given on 1 September 1987. See also Re Browne; Ex parte Spirulina Products Company Australia Pty Ltd (1985) 7 FCR 251 per Pincus J, Olivieri v. Stafford and Others (1989) 91 ALR 91 and at first instance (unreported, 16 March 1989). Perhaps in Kleinwort Benson (above) the High Court might be taken to have rolled back some of the broadening of the availability of validility of overstating bankruptcy notices brought about by the application of Mr Justice Lockhart's dicta in Re Walsh (1982) 47 ALR 751 at 753, viz:
   

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.

and at 754:

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.

and at 755, after reviewing some earlier decisions including Re Prossimo (1952) 16 ABC 86:

In my opinion the cases do not establish an invariable rule (I leave aside for the moment the effect, if any, of s 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.

As to s 41(5) and (6) his Honour said, also at 755:

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.

This approach, with which I most respectfully agree, was not entirely affirmed by the High Court in the same case at (1984) 156 CLR 337 at 339:

There is no doubt that a bankruptcy notice will be invalid if the sum specified in the notice as the amount due to the creditor exceeds the amount for which the creditor is entitled to issue execution, provided that the debtor gives timely notice under s. 41(5) of the Bankruptcy Act 1966 (Cth), as amended, that he disputes the validity of the notice on that ground.

As to which Morling J in Re Greenhill (1984) 5 FCR 84 said at 86:

It is true that this dictum of the High Court was strictly obiter, but nevertheless it is precisely in point and it is strongly confirmatory of the correctness of the decisions in Re Prossimo, Re Murray and Re Williams.

Many changes to the Act including the insertion of subsections (6A) (6B) and (6C) into section 41, the removal of the penal consequences of bankruptcy and the general development in the cases towards relaxing the strict requirements of bankruptcy notices and recognising the increasing sophistication of debtors, were it not for the approach of the High Court in Kleinwort Benson, seem to give weight to the proposition that overstatements of interest will not per se invalidate bankruptcy notices even if a section 41(5) notice is duly given: see Olivieri (above) at 106 per Gummow J. However, I doubt that I am now free to decide that way, although my personal inclination would be to do so in this case.

1. In Kleinwort Benson at 82, Deane J reminded us that the strictest application of bankruptcy rules was still required:
   

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 of criminal punishment for what would otherwise be innocent conduct: see, e.g. per Griffith C.J., Hamilton v. Warne (1907) 4 CLR 1293, at p 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 observes the requirements of that law. To comply with the above rules, a bankruptcy notice must correctly state the amount of the debt upon which it is based. If interest included in the claim under the bankruptcy notice, it must be accurately calculated and stated. Otherwise, the bankruptcy notice is invalid: Re McDonald; Ex parte Elder Smith Goldsbrough Mort Ltd (1978) 32 FLR 11, at p 13; 18 ALR 505, at p 507. There are two qualifications which need to be made to that general proposition. The first is that, if the misstatement is "a mere clerical error . . . which could not mislead or embarrass the debtor, because he could see on the face of the document . . . what Kennedy L.J., In re A Debtor, 478 of 1908, (1908) 2 KB 684, at p 691, explaining Exparte Johnson. In re Johnson (1883) 25 Ch D 112., the defect will be merely a formal one which may be cured pursuant of s. 306 of the Bankruptcy Act 1966 (Cth) which deals with formal defects and mere irregularities. The requirement is not that the mistake did not actually mislead the debtor. It is that it could not have reasonably so misled him: Bowmaker (1951) Ch., at pp 319-320, Pillai v. Comptroller of Income Tax (1970) A.C. 1124, at p 1135, James (1955) 93 CLR, at p 644. The second qualification is that the Bankruptcy Act, in s.41 (5) and (6), contains express provisions which may operate to avoid the invalidating consequence of an overstatement of the judgment debt. There is, however, no such statutory provision excusing the consequences of understatement of the judgment debt.

1. If my interpretation of this decision and of the High Court's approach in Walsh is wrong, the question would then arise as to whether this bankruptcy notice could and should be treated as perplexing or misleading. If otherwise on foot, I do not think that a bankruptcy notice should fail merely because while the dates of the claim for interest are correct, someone has erred in adding up the number of days and therefore miscalculated the amount owing. On the other hand, the incorrect inclusion of the date of judgment is not an error of which a debtor could be expected to know.

2. In view of the calculation error, it is difficult to know if the date of judgment was included. The respondent did not argue that it was not, but did not concede that it was. However, the debtor took considerable time to challenge this bankruptcy notice and to give his section 41 (5) notice. No evidence was led that he was in fact misled or perplexed, and I think that it would be wrong to conclude that he could have been confused.

3. If permitted to do so, I would hold this bankruptcy notice to be valid. However, I think I am constrained by authority to hold otherwise. The application is upheld and the bankruptcy notice set aside. As to costs, the debtor appears to have applied or sought to set up a cross claim which was not proceeded with. The debtor should therefore have only half his costs.