The Owners - Strata Plan No 14120 v McCarthy
[2016] FCCA 1583
•5 July 2016
FEDERAL CIRCUIT COURT OF AUSTRALIA
| THE OWNERS - STRATA PLAN NO 14120 v MCCARTHY | [2016] FCCA 1583 |
| Catchwords: BANKRUPTCY – Creditors petition – asserted invalidity of bankruptcy notice for overstatement of amount owing by $51.29 – law of appropriation of payments – principles relating to “benevolent construction” of an instrument – validity of s.41(5) notice under the Bankruptcy Act 1966 (Cth). |
| Legislation: Bankruptcy Act 1966, ss.30, 41(5) Civil Procedure Act NSW 2005 (NSW), s.107(2) |
| Cases cited: APX Projects Pty Limited v Owners Strata Plan No. 64025 (2015) 108 ACSR 515 Khouzame v All Seasons Air Pty Ltd [2014] FCA 1319 Knysh v CorralesPty Ltd (1989) 15 ACLR 629 |
| Applicant: | THE OWNERS - STRATA PLAN NO 14120 |
| Respondent: | CATHERINE ESTELLE MCCARTHY |
| File Number: | SYG 2555 of 2015 |
| Judgment of: | Judge Dowdy |
| Hearing date: | 23 March 2016 |
| Date of Last Submissions: | 11 April 2016 |
| Delivered at: | Sydney |
| Delivered on: | 5 July 2016 |
REPRESENTATION
| Counsel for the Applicant: | Ms A Smith. |
| Solicitors for the Applicant: | Grace Lawyers. |
| Counsel for the Respondent: | Mr David Robinson SC. |
| Solicitors for the Respondent: | Legal Aid NSW. |
ORDERS
The Court orders, pursuant to Rule 17.02 and Rule 17.03 of the Federal Circuit Court Rules 2001 (Cth), that the following questions argued at the hearing on Wednesday 23 March 2016 be decided separately from any other questions:
i.Whether the amount specified as the amount due to the petitioning creditor in bankruptcy notice BN 180646 issued on 28 April 2015 exceeds by the amount of $51.29 the amount in fact due to the petitioning creditor by the respondent debtor as at 28 April 2015.
ii.In the event that the answer to question (i) is in the affirmative, whether the respondent debtor in the circumstances gave to the creditor notice which complies with s.41(5) of the Bankruptcy Act 1966 (Cth) of the misstatement.
ANSWER
The Court answers both above questions 1(i) and (ii):
Yes.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 2555 of 2015
| THE OWNERS - STRATA PLAN NO 14120 |
Applicant
And
| CATHERINE ESTELLE MCCARTHY |
Respondent
REASONS FOR JUDGMENT
By a Creditor’s Petition presented on 16 September 2015 The Owners – Strata Plan No 14120 as judgment creditor (the creditor) in the amount of $9,560.37 seek a sequestration ordered against the estate of the respondent Catherine Estelle McCarthy (the respondent).
The act of bankruptcy relied upon was the respondent’s non-compliance on or before 2 June 2015 with the requirements of bankruptcy notice BN 180646 issued on 28 April 2015 and served upon her on 12 May 2015 (bankruptcy notice).
At the hearing Ms Angela Smith appeared for the creditor and Mr David Robinson SC appeared for the respondent.
The creditor relied upon a body of formal affidavit evidence which is, in my view, prima facie sufficient to prove its entitlement to a sequestration order against the respondent’s estate. Mr Robinson SC accepted this was the case, subject to the consideration and determination of the Notice of Opposition to Creditor’s Petition filed by the respondent on 21 November 2015 (Notice of Opposition), which was based on the assertion that the bankruptcy notice was invalid.
The Notice of Opposition contained four grounds, being:
(1)No act of bankruptcy has been proved.
(2)The Bankruptcy Notice issued on 28 April 2015 is the sum of two final judgments being 2013/00341447 entered 19 February 2014 and 2015/00065662 entered 13 April 2015 in the amounts of $4,407.89 and $7,429.38 respectively. Judgment 2013/00341447 was satisfied by payment to the creditor’s appointed agent prior to the date of issue of the bankruptcy notice.
(3)The bankruptcy notice is defective as it does not correctly record payments made by the debtor.
(4)In addition, notice was given on 1 June 2015 under s.41(5) of the Bankruptcy Act 1966 (Cth) of the overstatement of the amount in the bankruptcy notice.
Background Facts
The respondent, who is aged 58 years, is the registered proprietor and owner of a residential strata unit being Lot 1 in Strata Plan 14120 (the Strata Plan) and known as Unit 1/37 Coral Street, Alstonville in the State of New South Wales. It is one of the three units which comprise the Strata Plan and she purchased it in 2005.
For some time now the respondent has been in unfortunate circumstances. She works in an aged care home and has done so for approximately 9 years. She is in permanent part time employment and earns approximately $30,000 before tax and she started having financial difficulty servicing her mortgage and paying her strata levies soon after the purchase of her strata unit in 2005.
She asserts that from 2007 to 2012 she was almost up to date with her strata levy payments but towards the end of 2011 she was diagnosed with breast cancer and was off work for two months and fell behind.
First Local Court Proceeding
On 28 November 2012 the creditor commenced a proceeding against the respondent in the Local Court of New South Wales at Sydney for the recovery of unpaid strata levies, interest and costs, incurred up to 27 November 2012 in the amount of $5,101.41. The respondent made some payments amounting to $2,031 after this proceeding had been commenced but on 26 April judgment was entered against the respondent for $4,445.29 (the first judgment debt).
On 19 July 2013 the respondent obtained orders in the Local Court that she could pay the first judgment debt in fortnightly instalments of $190 commencing on 16 August 2013.
Thereafter the respondent made some 16 instalment payments of $190 from around 15 August 2013 to 14 March 2014 which meant, to anticipate what appears in paragraph 35 of this judgment below, that a payment of the amount of $51.29 as of 15 August 2014 paid out and satisfied the first judgment debt in full.
Second Local Court Proceeding
The respondent failed to make ongoing strata levies to the creditor which accordingly on 12 November 2013 commenced a second Local Court proceeding against the respondent for the recovery of unpaid strata levies, interest and costs from 29 November 2012 up to 6 November 2013 in the amount of $2,902.93.
On 19 February 2014 the creditor obtained judgment in this second Local Court proceeding for $4,047.90 (the second judgment debt).
On a date which is not clear but which must have been after the second judgment debt was entered, the creditor issued a Writ for Levy of Property against the property of the respondent, based on the second judgment debt.
On 3 April 2014 the respondent then obtained an order in the Local Court that she could pay the second judgment debt by fortnightly instalments of $240 with the first payment due on 1 May 2014 (the $240 instalment order). The consequence of this order for payment by instalments was to stay execution and enforcement of the second judgment debt by force of s.107(2) of the Civil Procedure Act 2005 (NSW) including the Writ for Levy of Property.
There is then a contested issue of fact between the parties in relation to the $240 instalment order. The respondent on the one hand says that in anticipation of the making of the $240 instalment order she made a payment in that amount to the respondent on 27 March 2014. She then made another payment of $240 on 28 April 2014. The $240 instalment order was made by the Local Court on 3 April 2014 to operate as from 1 May 2014. It appears that she made a further seven payments of $240 up to and including 4 August 2014.
However, the creditor says that the respondent paid the sums of $240 (referred to in the preceding paragraph) into the wrong Direct Electronic Funds Transfer account operated by Macquarie Bank (DEFT account), being an account which had ceased to exist at the time the payments were made and these payments therefore were not in fact known to have been made by the creditor at the time they were made and not actually received by the creditor until June 2015. Nevertheless, the creditor does accept and I find that the respondent made, and the creditor accepted, the following three payments on these respective dates:
i)15 August 2014 $240
ii)12 September 2014 $240
iii)31 January 2015 $240
Total $720
For completeness, because the creditor did not, from its viewpoint, receive any amount of $240 before 15 August 2014 and therefore believed the respondent had not complied with the $240 instalment order, it re-activated the Writ for Levy of Property on 17 June 2014 on the basis that r.37.37 of the UCPR rendered the $240 instalment order ineffective because the respondent had failed to comply with it.
The Sheriff reported on 16 September 2014 and again on 15 December 2014 that he had been unable to make any levy under the said Writ.
Third Local Court Proceeding
The respondent further failed to make ongoing strata levies due to the creditor and accordingly on 3 March 2015 the creditor commenced a third Local Court proceeding against the respondent for the recovery of unpaid strata levies, interest and costs accruing from 13 November 2013 up to 26 February 2015 in the amount of $5,690.57.
On 13 April 2015 the creditor obtained judgment in this third Local Court proceeding for $7,429.38 (the third judgment debt).
Thereafter, on 12 May 2015 the bankruptcy notice was served on the respondent claiming $11,201.03 based on the total of the second judgment debt and the third judgment debt comprising a stated total (and of which no complaint is made by Mr Robinson SC) of $11,477.27 and interest thereupon, in the amount of $392.47 (again, a figure of which Mr Robinson SC makes no complaint), giving a sub-total of $11,869.74. From that sub-total the bankruptcy notice then deducts $668.71 for credit payments made by the respondent resulting in an asserted total debt claimed to be owed by the respondent of $11,201.03.
It is on this credit of $668.71 that Mr Robinson SC focuses his first attack on the validity of the bankruptcy notice. He submits, in short, that in truth and in fact an allowance should have been made for credit payments made by the respondent and received by the creditor of $720 rather than $668.71 because of the three payments of $240, totalling $720, received by the creditor, as recounted in paragraph 17 above.
Accordingly, so then the argument runs, because there has been a failure to credit $51.29 (i.e. $720 - $668.71 = $51.29) (being less than 0.5% of the total judgment debt amount) against the balance of the amount claimed there has been an overstatement in the bankruptcy notice such that the sum specified therein as due to the creditor exceeds the amount in fact due, and the respondent gave notice of this for the purposes of s.41(5) of the Bankruptcy Act 1966 (Cth) (the Act) by disputing the validity of the bankruptcy notice on the ground of the misstatement within the 21 day period after service allowed for payment. Accordingly the bankruptcy notice should be set aside by the Court as invalid and the Creditor’s Petition dismissed.
I interpolate at this point that whilst there is no express power in the Act to set aside a bankruptcy notice, such a power rises by necessary implication and is within the general powers of the Court conferred by s.30(1) of the Act: see generally the decision of Flick J in Khouzame v All Seasons Air Pty Ltd [2014] FCA 1319.
The second attack made on the validity of the bankruptcy notice is that it fails to give credit to the respondent for 24 payments made via electronic means to the DEFT account. The creditor answers this by saying that these 24 payments were not made to the correct DEFT account reference number and the total of the 24 payments was never actually received from the Macquarie Bank by the creditor until June 2015. The respondent counters this by responding that the Macquarie Bank was the appointed agent for the creditor and the 24 payments made to the Macquarie Bank constituted, as between the respondent and the creditor, a pro tanto discharge of her liability (the DEFT account issue).
At the conclusion of the argument at the hearing on the first basis of the respondent’s attack on the validity of bankruptcy notice, Mr Robinson SC raised the possibility of the Court determining the first attack separately from the attack based on the DEFT account issue. Ms Smith did not object to that course and having regard to the apparent complexity of the DEFT issue there seemed to me to be advantages in deciding first and separately whether Mr Robinson SC’s attack based on his first argument succeeded and thereafter, dependent upon the result, to then consider if necessary the DEFT account issue.
Accordingly, after consultation with the parties, I formulated and made the following order:
(1)The Court orders, pursuant to Rule 17.02 and Rule 17.03 of the Federal Circuit Court Rules 2001 (Cth), that the following questions argued at the hearing on Wednesday 23 March 2016 be decided separately from any other questions:
i.Whether the amount specified as the amount due to the petitioning creditor in bankruptcy notice BN 180646 issued on 28 April 2015 exceeds by the amount of $51.29 the amount in fact due to the petitioning creditor by the respondent debtor as at 28 April 2015.
ii.In the event that the answer to question (i) is in the affirmative, whether the respondent debtor in the circumstances gave to the creditor notice which complies with s.41(5) of the Bankruptcy Act 1966 (Cth) of the misstatement.
Consideration of Applicable Law
A bankruptcy notice which seeks an amount greater than that for which the creditor is entitled to issue execution at the date of issue of the bankruptcy notice is invalid, provided notice is given under s.41(5) of the Act.
As Gibbs CJ (with whom the other members of the Court agreed) said in Walsh v Deputy Commissioner of Taxation (Cth) (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.
The relevant date, at which the inquiry whether the amount specified in the bankruptcy notice is overstated is to be made, is the date of the issue of the bankruptcy notice.
It does not matter that the amount of the overstatement is small compared with the amount of the relevant judgment debt. In Croker v Commissioner of Taxation (2005) 145 FCR 150 Hely J held that a bankruptcy notice was invalid because it had overstated the quantum of the debt owing to the Commissioner of Taxation by an amount of $63, plus interest referable to the inclusion of the $63, when the balance of the debt owing to the Commissioner was $12,972.30 and the overstatement was not likely to mislead Mr Croker, as he was aware of the overstatement. In Re Serafino (1989) 86 ALR 283 a bankruptcy notice was set aside by Burchett J because of an overstatement by an excessive claim for $4 on a debt of $15,499.55.
An invalid bankruptcy notice is a nullity and of no effect and if proper notice of an overstatement under s.41(5) of the Act has been given the overstatement cannot be amended under s.33(1)(b) or cured by s.306(1): Skouloudis v St George Bank Ltd (2008) 173 FCR 236 per Edmonds J.
The first matter that I must now consider is whether or not in fact there was an overstatement in the bankruptcy notice of the amount due by $51.29.
The position of the creditor as espoused at the hearing was that on 15 August 2015 it received a first payment of $240 from the respondent (denying that it had received nine earlier payments of $240) and that it had credited $51.29 out of that instalment of $240 towards the final payout of the first judgment debt, so that the only judgment debts for which any claims were made in the bankruptcy notice were in respect of the second and third judgment debts.
The creditor relied upon two affidavits of Mr Marco Williams who was a solicitor in the employ of the solicitor of the creditor and having day to day carriage of the proceeding. He swore two affidavits, the first dated 28 January 2016 and the second dated 15 March 2016. In his second affidavit he set out to correct, in certain respects, paragraphs 10 and 16 of his first affidavit. Paragraphs 4 to 6 of his second correcting affidavit of 15 March 2016 said as follows:
(4)It has now come to my attention that the matters set out in paragraph 16 [i.e. of his first affidavit of 28 January 2016] of my affidavit are incorrect.
(5)Paragraph 10 of my affidavit should read:
The Respondent made payments in accordance with the Orders made on 19 July 2013, and on 15 August 2014 the first Judgment was paid in full by a final payment of $51.29.
(6)Paragraph 16 should read:
The Applicant received 3 payments from the Respondent in accordance with the Orders made on 3 April 2014, leaving a balance outstanding of $3,379.18. The first payment was apportioned between the First Judgment and the Second Judgment. The payments were apportioned as set out in the table below.
Date Amount Payments Balance remaining on Judgment First Judgment $4,445.29 15.08.2014 $51.29 $0.00 Second Judgment $4,047.89 15.08.2014 $188.71 12.09.2014 $240.00 31.01.2015 $240.00 Total $662.71 $3,379.18
It was because of the crediting of $51.29 out of the first of the three payments of $240 admitted to have been received by the creditor on 15 August 2014 from the respondent that credit for only $668.71 was given in the bankruptcy notice against the amounts of the second and third judgment debts, plus interest.
In answer to this Mr Robinson SC responded with the argument that the creditor was not entitled to credit, apportion or appropriate the sum of $51.29 out of the payment of $240 made on 15 August 2014 to pay out the first judgment debt because that payment of $240 had already been appropriated by the respondent to the discharge, in part, of the second judgment debt.
Appropriation of Payments
A general statement of the law relating to appropriation of payments is that of Lockhart J in Re Walsh; Ex Parte Deputy Commissioner of Taxation (1982) 42 ALR 727 at 728-729:
A debtor who owes two debts to a creditor is entitled to appropriate a payment which he makes to his creditor to one debt rather than to the other. If he omits to do so, the creditor may make the appropriation. If neither makes any appropriation, the law appropriates the payment to the earlier debt. If there is specific appropriation by the debtor cadit quaestio. In the absence of a specific appropriation it is a question of fact whether there was any appropriation by the debtor. To constitute an appropriation there must be more than an intention to appropriate by the debtor. I respectfully adopt the following passage from the judgment of Greene LJ in Leeson v Leeson [1936] 2 KB 156 at 162–3:—
When, however, he does not notify the creditor of his intention, and when the circumstances are such that the creditor receives the payment merely in satisfaction of the debts and the payment is not more appropriate to the payment of the one debt than to that of the other the creditor is entitled to make the appropriation. When it is said that there need not be an express appropriation of a payment, but that the appropriation can be inferred, that does not mean that appropriation of a payment can be inferred from some undisclosed intention in the mind of the debtor. It is to be inferred from the circumstances of the case as known to both parties. Any other view might lead to injustice, as the creditor's right to appropriate a payment would be defeated. When the matter is examined upon principle it will be found that an undisclosed intention in the mind of the debtor is not sufficient to support an appropriation. If authority is needed for that proposition it can be found in the judgment of Lush J in Parker v Guinness 27 Times LR 129 at 130 where he said: ‘What is to be considered is this. Is the true inference to be drawn from all the circumstances of the case that the debtor paid the moneys generally on account, leaving the creditor to apply them as he thought fit, or is the true inference that he paid them on account of special portions of the debt for the purpose and with a view to wipe these out of the account? His undisclosed intention so to do would, of course, not benefit him. It is what he did in fact, and not what he meant to do that is to be regarded.’ A debtor's undisclosed intention to appropriate a payment to one of two debts owed by him to a creditor cannot benefit him.
To similar effect Latham CJ in Visbord v Federal Commissioner of Taxation (1943) 68 CLR 354 at 370-371 said as follows:
If for some reason the Property Law Act (Vict.) did not apply in the case of the present receiver, the ordinary rule with respect to appropriation of payments would be applicable (Devaynes v. Noble; Clayton's Case; The Mecca). The debtor has the right when he makes a payment to appropriate the money to any of the debts owing to his creditor as he pleases, and, if the creditor takes the money, he is bound to recognize this appropriation. If the debtor does not make any appropriation when he makes the payment, the creditor is then entitled to make an appropriation, and he may do this at any time up to “the very last moment” (The Mecca). [citations omitted]
It is further clear law that there does not need to be an express appropriation by the debtor for appropriation by the debtor to be effective.
In Halsbury - Laws of England (4th Ed. 1974 Vol. 9) at paragraph 505 the following is stated:
An appropriation by the debtor need not be made in express terms, but must be communicated to the creditor or be capable of being inferred; it may be inferred where the nature of the transaction or the circumstances of the case are such as to show that there was an intention to appropriate. (citations omitted)
In Caltabiano v Electoral Commission of Queensland (No. 1) [2010] 1 Qd R 100 Fraser JA at page 132 ([111]) said as follows:
111.I understand the law to be that where the debtor intends to appropriate a payment to a particular account but there is no express appropriation communicated to the creditor, an appropriation may be inferred from circumstances of the case which reveal that the debtor does not intend to pay the money generally on account, leaving the creditor to apply the money as the creditor thinks fit, but that the debtor intends to pay the money to the particular account. One circumstance from which an appropriation may be inferred is that the nature of the transaction between the creditor and the debtor would demonstrate to a reasonable person in the creditor's position that the debtor must have intended that appropriation. All of the circumstances which bear on the question must of course be taken into account.
In the same case Fryberg J at page 136 ([133]) said as follows:
133.In my judgment, in the absence of an express or implied communication of an appropriation, it can still be held from the surrounding circumstances that a payer has made an appropriation, but only if those circumstances include either a belief in such an appropriation on the part of the payee or circumstances where a reasonable person in the payee's position would have had such a belief.
Slattery J in APX Projects Pty Limited v Owners Strata Plan No. 64025 (2015) 108 ACSR 515 at page 523 ([31]) said:
31.Equally, it is possible that in circumstances where a debtor fails expressly to communicate to the creditor the appropriation of a debt, the circumstances of payment may be such that the proper appropriation of the debt is implied. This may be the case, for example, where two debts of different amounts are owing and the amount paid equates to one of them.
Finally, in the Full Court of the Federal Court decision of Knysh v CorralesPty Ltd (1989) 15 ACLR 629 at 634 it was said:
The critical question was whether [the creditor] appreciated at the time it received the payments that they were intended to be made by the [debtor] in satisfaction of his liability. It is apparent from the evidence… that the [debtor’s] intention was well understood by [the creditor] at the time the payments were made.
Whether a sum paid has been appropriated in a particular way or not is a question of law: Muir JA in Caltabiano (supra) at page 110 ([9]).
Having regard to the above stated legal principles I consider that there was, at the very least, an implied appropriation by the respondent of the payment of $240 made to the creditor at the date of payment being 15 August 2014 to the part discharge of the second judgment debt, with the result that the creditor was not entitled to appropriate any part of that amount, including the sum of $51.29, to finalise and discharge and pay out the first judgment debt.
First, in my view the circumstances were such that a reasonable person in the creditor’s position would have believed and assumed that the payment of $240 made and received on 15 August 2014 was being made pursuant to the $240 instalment order for payment of the second judgment debt. For present purposes I assume in the creditor’s favour that this was the first payment of $240 which it received, because it was not aware of any of the earlier payments of $240 asserted to have been made by the respondent, which went, so the creditor asserts, to the wrong DEFT account.
Nevertheless, the creditor was well aware the respondent had obtained the benefit of the $240 instalment order to operate from 1 May 2014 and it had been receiving up until 14 March 2014 regular payments of $190 from the respondent under the order for instalments in that amount made on 19 July 2013 by the Local Court in connection with payment of the first judgment debt.
Accordingly, in my view, when the creditor received the last instalment payment of $190 on 14 March 2014 in connection with the first judgment debt, leaving only a small balance payable to fully discharge that debt, it should reasonably have realized when it received the sum of $240 on 15 August 2014 that this amount was referable to the instalment order of 3 April 2014 made for the payment of the second judgment debt.
But there is more to it than this. The only evidence led by the creditor in relation to the creditor’s asserted appropriation of $51.29 to the first judgment debt is that given in the affidavits of Mr Williams. It is scanty. He says that his evidence is based on his knowledge of and belief in the records maintained by the solicitor for the creditor in respect of the debt owed by the respondent. However, his first affidavit of 28 January 2016 makes no mention of any appropriation of $51.29 to the first judgment debt. In fact his first affidavit appears to be misleading. Paragraph 10 says that the respondent made payments in accordance with the fortnightly instalment order for $190 made on 19 July 2013 “and on 15 August 2014 the first judgment was paid in full”, giving the impression that the first judgment debt was paid out by an instalment payment of $190. In fact, of course, the first judgment debt was purportedly paid in full on 15 August 2014, not out of any payments of $190, but by $51.29 purportedly appropriated out of the payment of $240 made on that date. Then, inconsistently with paragraph 10, paragraph 16 of his first affidavit asserted that the payment of $240 received on 3 April 2014 was under the $240 instalment order and reduced by that amount the second judgment debt.
In his first affidavit of 28 January 2016 under the heading of “Second Local Court Proceedings” Mr Williams stated in paragraphs 14 to 16 as follows:
14. On 19 February 2014 the Applicant gained Judgment against the Respondent in the second proceedings for an amount of $4,047.89 (the second Judgment).
15. On 3 April 2014 the Respondent Obtained orders in the Local Court that she was to pay the second Judgment by fortnightly instalments of $240 to commence on 1 May 2014.
16. The Applicant received 3 payments from the Respondent in accordance with the Orders made on 3 April 2014, leaving a balance outstanding of $3,327.89. Those payments are set out in the table below.
Date Amount Payments Balance remaining on Judgment Second Judgment $4,047.89 15.08.2014 $240.00 12.09.2014 $240.00 31.01.2015 $240.00 Total $720.00 $3,327.89
See paragraph 36 above for the corrections made by Mr Williams to his first affidavit.
No employee of the managing agent or member of the creditor gives any evidence as to the circumstances of the asserted appropriation of $51.29. There is no evidence of who purported to make the appropriation, or when it was made. There is no evidence that it was ever advised to the respondent. In these circumstances I assume and find that the appropriation was made by an unidentified person on behalf of the creditor at the date the bankruptcy notice was issued being 28 April 2015.
However, on the evidence led before me by the affidavits of Mr Williams, the creditor did in truth believe and assume that the first payment of $240 on 15 August 2014 was made on account of the second judgment debt. This is made clear, in my view, by paragraphs 14 to 16 of the first affidavit of Mr Williams of 28 January 2016 which makes abundantly clear that the creditor received the payment of $240 on 15 August 2014 on account of the second judgment debt.
Further, even the “correcting” second affidavit of Mr Williams still concedes in paragraph 16 that there were three payments of $240 received from the respondent in accordance with the $240 instalment order, including the first payment of $240 on 15 August 2014 (see paragraph 36 above).
Accordingly, in my view the payment of $240 on 15 August 2014 was as of that date appropriated by the respondent to the second judgment debt and the creditor was not subsequently entitled to appropriate it to the first judgment debt and accordingly there has been an overstatement of the amount in fact due by the respondent in the bankruptcy notice of $51.29.
The creditor seeks to avoid this result by submitting that it would be unreasonable to hold that the creditor should have inferred that the payment of $240 made on 15 August 2014 was referable to part discharge of the second judgment debt because the $240 instalment order made on 3 April 2014, some 15 weeks prior to the payment of $240 on 15 August 2014, had ceased to have effect either at the time the respondent first failed to comply with it on 1 May 2014 or at the latest on 17 June 2014 when the creditor reactivated the Writ for Levy of Property. In other words, the creditor says that from the time the $240 instalment order ceased to have effect any subsequent payments made by the respondent to the creditor could be regarded by creditor as simply unappropriated payments on general account made in discharge of the respondent’s indebtedness to the creditor and open to be appropriated by the creditor as it saw fit.
I do not accept this submission. It seems to me in the circumstances that, notwithstanding from the creditor’s viewpoint the $240 instalment order may have ceased to be operative, the specific figure of $240 received by the creditor on 15 August 2014 was not in that amount by some mere arithmetical coincidence, but rather it had a clear referability to the $240 instalment order, whether that instalment order remained legally operative or not.
In any event the reality of the position is, as I have said, that the affidavit of Mr Williams of 28 January 2016 makes clear that the creditor accepted the payment of $240 made on 15 August 2014 as being referable to the second judgment debt.
Notice of Overstatement Given to Creditor
Having found that the sum specified in the bankruptcy notice as the amount due as at 28 April 2015 exceeded the amount for which the creditor could execute by $51.29, I now turn to consider whether the respondent gave notice to the creditor which complied with s.41(5) of the Act. In this regard I am informed by the decision of the Full Court of the Federal Court in Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 87 FCR 120.
I first note that s.41(5) of the Act requires that the debtor “gives notice to the creditor”. There is no particular prescribed form of notice and in Hussain v King Investment Solutions (2006) 153 FCR 428 at pages 433-434 ([20]) Gyles J said as follows:
20.Subsection 41(5) is silent as to the method of giving notice. I can see no reason why it cannot be done by service of an application to set aside a bankruptcy notice in an appropriate form. It was faintly argued that this application was not in a form to give the necessary notice. I do not agree. Furthermore, it seems to me that the passage relied upon from Seovic Civil Engineering Pty Ltd v Groeneveld is neutral as to the point which arises here. As the application was served within the time allowed for payment, the subsection is satisfied. Failure to expressly advert to s 41(5) is not of any significance. It is true that ‘notice’ and ‘application’ are different words and that each is used in different parts of the Act. However, the two are not mutually exclusive. The section requires the giving of notice, not serving of a notice in any particular form.
As there is no prescribed method of giving notice for the purposes of s.41(5) of the Act I consider that it can be given orally, in writing or by a combination of both.
In Seovic (supra) the Full Court considered the proper construction of s.41(5) of the Act and its meaning and effect. At page 127 ([30]) it was pointed out that this question of statutory construction was within an area of the law notorious for its technicality. At page 128 ([32-33]) the Full Court said:
32.The notice the debtor is required to give, in order to challenge the validity of the bankruptcy notice by reason of an over-statement of the amount due, must do two things:
• first, it must give notice to the creditor that the debtor disputes the validity of the notice; and
•secondly, it must give notice to the creditor that the debtor does so on the ground of “the misstatement”.
Clearly enough, the expression “the misstatement”, as used in
s 41(5), is a reference to the amount claimed in the bankruptcy notice being incorrect by reason of it exceeding the amount in fact due by the debtor to the creditor.
33.It follows from the language of s 41(5) of the Bankruptcy Act that a debtor does not comply with s 41(5) simply by asserting in the notice to the creditors that the bankruptcy notice is invalid. The debtor's notice must at least give notice that the validity of the bankruptcy notice is disputed “on the ground of the misstatement”. What, then, is meant by the concluding words of
s 41(5)?
At pages 128-129 ([36]) the Full Court set out its view that the debtor had to do more than simply assert that the amount specified in the bankruptcy notice exceeded the amount actually due. The Full Court said:
36.While it is not strictly necessary for us to decide, we think that the better view is that a notice by the debtor which simply asserts, without more, that the amount specified in the bankruptcy notice exceeds the amount actually due, does not comply with the requirements of s 41(5) of the Bankruptcy Act. The expression “the misstatement” strongly suggests that the debtor must do more than merely assert that there is a misstatement in the bankruptcy notice. The subsection requires the debtor to provide sufficient information in the notice to enable the creditor to identify what is said to be the alleged misstatement. Only then does the debtor's notice displace the general rule established by
s 41(5), that the bankruptcy notice is not invalidated only by reason that the sum specified therein as the amount due to the creditor exceeds the amount in fact due.
At page 129 ([37]) the Full Court stated the policy considerations and rationale behind the construction given by it to s.41(5) of the Act in the following terms:
37.This construction of s 41(5) of the Bankruptcy Act is supported by policy considerations. The object of a debtor's notice under
s 41(5) is to inform the creditor that the debtor disputes the bankruptcy notice and does so on the ground of a misstatement contained in that notice. The point of the notice is to draw to the creditor's attention the misstatement, thereby giving the creditor the opportunity to consider, for example, whether the bankruptcy notice should be withdrawn and a fresh notice, correcting the misstatement, issued. If the creditor is given no hint in the notice as to the nature of the misstatement, there is a considerable risk that the debtor will be able to take unmeritorious advantage of minor errors (such as the small mistake in the present case) and that unnecessary and wasteful litigation will eventuate. It is no answer to say that the creditor can ask for particulars, since the debtor would not be obliged to give any until after litigation had been instituted. Indeed, a debtor wishing to take advantage of the technicalities of the law of bankruptcy might be well-advised to say as little as possible for as long as possible about the true nature of the alleged misstatement in the bankruptcy notice.”
So far so good. However, the Full Court went on to offer to the debtor a potential tabula in naufragio by enjoining that a notice under s.41(5) of the Act should be given a “benevolent construction”. It said:
38.This view of s 41(5) of the Bankruptcy Act does not mean that a debtor, who is quite likely to be unrepresented, must identify the misstatement with complete precision or specify the exact amount of the alleged excess of the claim. To borrow the language of Lockhart J in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 at 142, the Court should adopt a “benevolent construction” of the debtor's notice. His Honour's comments related to the then s 41(7) of the Bankruptcy Act, which provided for an automatic extension of time for compliance with a bankruptcy notice where the debtor filed an affidavit to the effect that he or she had “such a counter-claim, set-off or cross demand as is referred to in [s 40(1)(g)]”. Lockhart J held that the affidavit had to contain more than a mere assertion that the debtor had a counter-claim, set-off or cross-demand of the relevant kind. It was necessary to provide evidence in support of the debtor's claims. However, having regard to the time limit for the filing of the affidavit and the difficulties facing an unrepresented debtor, a “benevolent construction” of the affidavit was warranted. Lockhart J's approach was subsequently adopted by the Full Court: Eastick v Australia and New Zealand Banking Group Ltd (1981) 53 FLR 91.
Judges regularly refer to giving a contract or instrument a “benevolent construction” but rarely actually state the meaning which the expression actually bears and carries. Synonyms of the term “benevolent” in the context of construction of documents are “charitable”, “generous”, “kindly” or “liberal”. However, obviously a “benevolent construction” cannot uphold a meaning and sense which is not reasonably and plausibly open as the true and proper construction.
I take the term “benevolent construction” to mean that in the applicable surrounding facts and circumstances, where there is a choice to be made between a construction that gives effect to an instrument or a document and one which renders it invalid, and both constructions are equally plausible, the Court leans towards that construction which validates the document or instrument: see Caltex Australia Petroleum Pty Ltd v Federal Commissioner of Taxation (2008) 173 FCR 359 at page 408 ([170]) and Lewison & Hughes, The Interpretation of Contracts in Australia (2012) at page 335 ([7.15]).
This sense of the term “benevolent construction” substantially accords with what Lindley LJ said of it in connection with patents in Needham & Kite v Johnson & Co (1884) 1 R.P.C. 49 at page 58:
I do not like the expression “benevolent interpretation”. I do not believe in it. The question is, whether a given construction is the true construction; but, of course, if any patent is capable of more constructions than one, the general rule would be applied that you would put upon it that construction which makes it a valid patent rather than a construction which renders it invalid. There is no particular benevolence in that. It is a general principle of interpretation applicable to all documents, but of course those who talk about the benevolent interpretation do not mean more than that.
As recorded in paragraph 5 above, ground 4 of the Notice of Opposition refers to notice under s.41(5) of the Act having been given on 1 June 2015.
The notice of 1 June 2015 is said to have been constituted by the following:
a)A telephone conversation on the morning of 1 June 2015 between Ms April Blair who was a solicitor at Legal Aid NSW (for the respondent) and Ms Marie Panuccio who was a law clerk employed by the solicitor for the creditor; and
b)An email sent after that telephone conversation at 11:34am on 1 June 2015 by Ms Blair to Ms Panuccio.
I find that in the telephone conversation of 1 June 2015 Ms Blair said words to Ms Panuccio, after introductions and pleasantries, to the effect of:
Our client has been served with a bankruptcy notice wrongfully in this matter because your client has failed to credit several payments made by her and on that basis your client had no right to take legal action against her or serve her with a bankruptcy notice.
The relevant portions of the email of 11:34am, 1 June 2015 are as follows:
Dear Marie,
I refer to our telephone conversation this morning.
As you are aware, we are assisting Catherine McCarthy in this matter.
As discussed this morning it appears as though your client has not credited our client’s fortnightly payments of $240 to her strata plan.
We are instructed that at some stage in the past our client was paying SMS $677 per month for strata fees. When she could not afford that, she applied to the Court to pay by instalments of $190 per fortnight, which was granted. It appears her payments of $190 per fortnight have been credited to her account by SMS. Following this, her payments increased to $240 per fortnight. It appears that SMS have only credited 3 of these payments to her account on 15 August 2014, 12 September 2014 and 31 January 2015 (please see the ledger attached).
We are instructed that our client has made payments of $240 per fortnight in accordance with that agreement. On that basis please find attached receipts for our client’s payments made. SMS have not credited her for 21 payments made.
We consider that your client’s conduct in failing to credit our client’s account for payments which were clearly made is quite serious. It appears that your client had no legal right to commence proceedings and obtain a judgment against our client in the circumstances. Please provide us with your client’s explanation as soon as possible.
Disposition
The telephone conversation of 1 June 2015 and subsequent email of that date are so related and contemporaneous that they should not be viewed and regarded separately and independently of each other but rather, if necessary, they should be viewed together for the purposes of deciding if notice has been given by the respondent pursuant to s.41(5) of the Act.
However, taking first the telephone conversation, I consider that clear notice was given to the creditor, as required by Seovic (supra) at page 128 ([32]) that the respondent as debtor disputed the validity of the bankruptcy notice. Indeed, that was said in express terms by Ms Blair saying words to the effect that the creditor had no right to serve the respondent with a bankruptcy notice.
Further, whilst there is no express reference to the bankruptcy notice in the email of 1 June 2015, there is an implicit disputing of its validity by the statement in the email to the effect “that your client had no legal right to commence proceedings and obtain a judgment against our client in the circumstances”.
That leaves the issue of whether or not by the notice of 1 June 2015 the respondent disputed the validity of the bankruptcy notice on the ground of “the misstatement” and provided sufficient information in the notice to enable the creditor to identify what was said to be the alleged misstatement.
I have come to the view that the notice of 1 June 2015 in terms of the telephone conversation and email, whether regarded either cumulatively or independently, did provide sufficient information to enable the creditor to identify the alleged misstatement. A more than sufficient “hint” as to the nature of the misstatement was thereby given.
Ms April Blair in the telephone conversation expressly stated that several payments made by the respondent to the creditor had not been credited. The email expressly stated that the creditor had not credited the respondent’s fortnightly payments of $240. It is true that the email contained a number of inaccuracies in terms of the assertions made and seemed to have more in mind some 21 payments of $240 said to have been made by the respondent but which the creditor says were made to the wrong DEFT account. The email expressly asserts the making and crediting of the payments of $240 made on 15 August 2014, 12 September 2014 and 31 January 2015. However, what seems to me to be very significant for the purposes of determining whether the notice of 1 June 2015 was valid for the purposes of s.41(5) of the Act is the lack of knowledge which the respondent had of the purported appropriation of $51.29 out of the payment of $240 made on 15 August 2014 to the final discharge of the first judgment debt and not to the second judgment debt.
There is no evidence before me that the respondent was ever told at any relevant time of the fact that $51.29 of the payment of $240 on 15 August 2014 had been appropriated to the first judgment debt. The bankruptcy notice itself makes no reference to any appropriation of $51.29. Mr Marco Williams in his first affidavit of 28 January 2016 makes no reference to a figure of $51.29. He there credited the payment of $240 of 15 August 2014 against the second judgment debt. It is only in his second affidavit of 15 March 2016 that there was any reference to the asserted appropriation by the creditor of $51.29 out of the payment of $240 on 15 August 2014 to the first judgment debt.
It is not necessary for notice to be given to the debtor for an appropriation by a creditor to be effective. However, it obviously would be good practice to give such notice. The law concerning the appropriation of payments made to different debts may be reasonably well known to banking and finance lawyers, but not in my experience necessarily to lawyers generally, and certainly not to the general public. The simple fact is that on the evidence before me the respondent did not and could not have known that the amount of $51.29 had been deducted and credited, not to the second judgment debt to which I have found she had appropriated it, but rather to the first judgment debt. I consider that with her limited means of knowledge it was sufficient for the purposes of notice under s.41(5) of the Act for her to simply identify the fact that several credit payments of $240 made by her had not been credited by the creditor.
This particularly follows even the more so if the Court adopts a “benevolent construction” of the notice given on 1 June 2015. The “benevolence” adopted is that the notice of 1 June 2015 is not invalid because there was no actual precise identification of the actual misstatement and no specification of the exact amount of the excess of $51.29 and that otherwise the notice sufficiently identified the ground of the misstatement.
Conclusion
In my view, a fair reading of the notice given to the creditor on 1 June 2015, having regard to the surrounding circumstances and the respondent’s lack of knowledge, was such as to alert the creditor to the nature of the misstatement made in the bankruptcy notice. In Seovic (supra) at pages 129-130 ([39]) the Full Court said that the debtor’s notice under s.41(5) of the Act under consideration in Re Serafino (supra), which was simply to the effect that the interest claimed in the applicable bankruptcy appeared “to be excessive of the amount due under the terms of the judgment relied [on]” was likely to have been sufficient to alert the creditor to “the misstatement”. In my view, the notice given here in this case by the respondent was at least as sufficient as that given in Re Serafino.
Accordingly, for the above reasons, I consider that the answers to the questions formulated in paragraph 28 above should be in the affirmative as to both. Upon delivery of these reasons I will give the parties an opportunity to consider and make submissions upon the future course of the proceeding.
I cannot forebear from saying that I have come to this decision with some regret. The respondent’s unfortunate financial circumstances call for sympathy, but they do not lie at the feet in any way of the applicant or its members and the financial well-being of a residential strata plan, especially one with only three members, must necessarily depend on the requisite strata body financial contributions being made in a timely way. In no other area of the law in 2016 would an error in computation of a debt of $51.29 lead to the invalidation of a serious legal instrument, such as the bankruptcy notice here. I cannot see that any injustice has been caused to the respondent by the overstatement of $51.29, let alone substantial injustice. Nevertheless, the answers to the two separate questions posed in paragraph 27 above seem to me to be dictated by the present state of the law considered in this judgment.
I certify that the preceding eighty-six (86) paragraphs are a true copy of the reasons for judgment of Judge Dowdy
Date: 5 July 2016
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