Tzvetkoff v Kolyma Corporation Avv
[2009] FMCA 1085
•22 October 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| TZVETKOFF v KOLYMA CORPORATION AVV | [2009] FMCA 1085 |
| BANKRUPTCY – Application to set aside bankruptcy notice – requirement to state amount of judgment – whether failure to specify currency denomination a formal defect – whether inclusion of note 3 was a matter made essential by the Act. |
| Bankruptcy Act 1966, s.41 |
| Adams v Lambert (2006) 228 CLR 409 Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 James v Commissioner of Taxation (1955) 93 CLR 631 Pillai v Comptroller of Income Tax [1970] AC 1124 Parianos v Lymlind Pty Ltd (1999) 93 FCR 191 Re Kostezky; Ex parte Milder Elfman Szmerling Krycer Pty (1996) 67 FCR 101 Irani v Hollyburton UK Ltd [2007] FCA 1447 |
| Applicant: | DANIEL KIM TZVETKOFF |
| Respondent: | KOLYMA CORPORATION AVV |
| File Number: | BRG 706 of 2009 |
| Judgment of: | Wilson FM |
| Hearing date: | 22 October 2009 |
| Date of Last Submission: | 22 October 2009 |
| Delivered at: | Brisbane |
| Delivered on: | 22 October 2009 |
REPRESENTATION
| Counsel for the Applicant: | Mr Savage S.C. with Mr Coulsen |
| Solicitors for the Applicant: | Cronin Litigation Lawyers |
| Counsel for the Respondent: | Mr McQuade |
| Solicitors for the Respondent: | Corrs Chambers Westgarth Lawyers |
ORDERS
That Bankruptcy Notice No. 979 of 2009 be set aside.
That the respondent pay the applicant’s costs to be taxed if not agreed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 706 of 2009
| DANIEL KIM TZVETKOFF |
Applicant
And
| KOLYMA CORPORATION AVV |
Respondent
REASONS FOR JUDGMENT
On 13 July 2009 the respondent entered default judgment against the applicant in the Supreme Court of Queensland. The terms of the judgment appear at page 159 of the annexures to the affidavit of the applicant filed 9 October 2009. The judgment required the applicant to pay to the respondent the amount of US$43,553,047.10 including a specified sum for interest until 3 July 2009.
That default judgment remains in force. On 25 August 2009 the Official Receiver issued a bankruptcy notice at the request of the respondent directed to the applicant. That bankruptcy notice was served on 18 September 2009. The applicant has applied to set aside the bankruptcy notice. No issue is taken that the application has been brought within time nor that there is any procedural deficiency in the application.
There are two limbs to the argument that the bankruptcy notice should be set aside. The first is what I will describe as an argument as to the validity of the notice itself. The second relates more to the merits of the dispute underlying the proceedings in which default judgment was entered. Counsel who appeared for the applicant and the respondent both submitted that it was both efficient and sensible to determine the first matter before embarking upon the second, because if the bankruptcy notice is liable to be set aside because of a defect that is incapable of being excused there is no need for the court to consider the second limb of the applicant’s argument. I agree to pursue that course.
The factual matters underlying the applicant’s arguments are straightforward and not controversial. The bankruptcy notice, which is at pages 153 and following of the annexures to the applicant’s affidavit, requires payment in clause 1 of $44,066,137.79. The currency denomination of that payment is not specified. Absent the attached judgment, one would normally accept that it was required to be paid in Australian dollars.
In clause 2 of the bankruptcy notice reference is made by the creditor to the judgment relied upon by it. That judgment is attached to the bankruptcy notice. The judgment requires payment of a sum in US dollars.
If one turns to the schedule which forms part of the bankruptcy notice, in item 1 of column 1 there is provision for the amount of the judgment to be set out. The amount set out in column 2 corresponds exactly with the amount in the judgment in numbers but, again, does not specify the currency denomination of that sum. Further interest is claimed pursuant to the relevant section of the Supreme Court Act 1991.
The bankruptcy notice does not contain “note 3”, which I will return to. The applicant argues that the notice is, by reason of the failure to specify the currency denomination in which payment is required, fatally defective and liable to be set aside.
The circumstances in which a court will set aside a bankruptcy notice where the amount specified in it is a matter of uncertainty have been clarified most recently in Adams v Lambert (2006) 228 CLR 409 but the principles considerably predate the decision in that case.
The most useful authority in the present case, in my view, is the decision of the High Court in Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71. Admittedly, in that case the court was concerned with a situation which not infrequently arises, namely the inclusion of and calculation of claims for interest on judgment sums in a bankruptcy notice. Also, at the time of the decision of the High Court in that case s.41(2) of Bankruptcy Act 1966 (“the Act”) was in different terms to what it is presently. Nevertheless, the reasoning of the majority judgment in my view is determinative of the issue in this case.
At page 77 their Honours recorded that a bankruptcy notice which mis-states the amount due to the creditor is defective or irregular. In my view, the failure to insert the currency denomination, both in paragraph 1 of the bankruptcy notice and in the schedule, causes the bankruptcy notice in this case to be defective or irregular. Their Honours, in that case, eschewed the then accepted practice in the Federal Court to the effect that the mere understatement of a judgment debt invalidated the notice unless it was clear that the excess was waived by the judgment creditor: see at page 79.
Importantly, at page 80, their Honours said:
“If the amount specified in a bankruptcy notice is, in fact, due and payment is claimed in accordance with the judgment the essential requirements of section 41(2)(a)(i) - the only requirements presently relevant - are met. Understatement of the amount due, whether it be an understatement of the judgment debt or of interest payable thereon will thus constitute a defect which is substantive rather than formal only if the understatement is objectively capable of misleading the debtor as to what is necessary for compliance with the notice.
It may be that in a given case understatement is capable of misleading the judgment debtor, particularly if the notice is capable of producing uncertainty as to whether the debtor is required to pay the amount in fact due or the amount specified in the notice. In such a case uncertainty arises not merely from the understatement but from the understatement in the context of the particular bankruptcy notice. No such uncertainty arises if it is clear that payment of the amount specified in the notice will constitute compliance with the notice.”
There are a number of authorities of the Federal Court to the effect that a mere understatement of the amount of the judgment does not necessarily constitute a fatal defect. The difficulty and, in my view, the uncertainty created in the present case is that the bankruptcy notice in its terms does not state the currency in which payment is required to be made by the applicant.
As I said earlier, the bankruptcy notice taken separately from the attached judgment may reasonably be construed as requiring payment in Australian currency. However, as is made clear in Adams v Lambert the attachment to the bankruptcy notice forms part of the document. That judgment requires payment in US currency. The applicant debtor receiving the bankruptcy notice therefore receives a document in which an amount is claimed in precisely the same numerals as in the judgment but it is not made clear on the face of the bankruptcy notice itself that payment is required in US dollars or in Australian dollars. That in my view, is apt to mislead or cause uncertainty in the mind of the recipient.
In Adams v Lambert the court was concerned with the circumstances in which s.306 of the Act operates to excuse defects or irregularities. As is apparent from the terms of that section, for it to operate the defect or irregularity must be regarded as formal. Their Honours considered the meaning of the phrase “a formal defect or an irregularity.” As is apparent from the reasons at paragraph [24], the failure in this case to express the currency in which payment was required was a defect or irregularity.
Their Honours adopted the test specified in James v Commissioner of Taxation (1955) 93 CLR 631 and Pillai v Comptroller of Income Tax [1970] AC 1124 as informing the meaning of formal defect or irregularity in the following terms:
“The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act or if it could reasonably mislead a debtor as to what is necessary to comply with the notice.”
Thus, it is made apparent that there is a two-stage inquiry to the determination of the issue as to whether or not a defect is a formal defect or irregularity. At paragraph [28] their Honours considered the first element of that test, namely, the failure to meet a requirement made essential by the Act. At paragraph [31] their Honours, after referring to Kleinwort Benson Australia Limited v Crowl observed that it was essential that a bankruptcy notice state the amount claimed but posited the inquiry whether it is essential that the amount be correct.
Their Honours then stated:
“Section 41(5) made it clear that an overstatement - even a large overstatement - would not necessarily invalidate the notice. This court concluded that it was not the legislative purpose that a substantial understatement should necessarily invalidate the notice.”
Although their Honours were there speaking in terms of the calculation of interest, in my view that passage is authority for the proposition that the mere understatement of an amount whether of the judgment or of interest thereon is not sufficient of itself to invalidate a bankruptcy notice.
In my view, the gravamen of the defect in the present case is the failure to specify in the terms of the bankruptcy notice itself the denominated currency in which payment is required. In my view, it is an essential requirement of the Bankruptcy Act to state the amount of the judgment that is being sought. Here, whilst a figure is inserted, that figure is confusing having regard to the terms of the judgment attached to the bankruptcy notice.
In my view, the respondent has not complied with a requirement made essential by the terms of the Act, by failing to specify the currency in which payment is required.
A further argument relied upon by the applicant concerns the failure to include in the bankruptcy notice the “note 3” to which I earlier referred.
Regulation 4.04 deals with the situation where a judgment order has been obtained in a foreign currency. Regulation 4.04.2 provides:
(2) A bankruptcy notice to which this regulation applies must:
(a) contain a statement to the effect that payment of the amount of foreign currency expressed in the judgment or order may be paid in that foreign currency or by means of a specified amount of Australian currency that is stated to be equivalent to the amount of foreign currency; and
(b) set out:
(i) the applicable rate of exchange, being the rate worked out in accordance with subregulation (3); and
(ii) the conversion calculation; and
(iii) a statement that the conversion of the amount of foreign currency into Australian currency has been made in accordance with this regulation.
In the form of bankruptcy notice that is prescribed in Schedule 1 of the Act, “note 3” provides for a specific mechanism of calculating an Australian dollar equivalent of the amount that the debtor is required to pay. As I said, that section of the bankruptcy notice was wholly omitted in this case. The question is whether or not the failure to include “note 3” is a failure to include a matter made essential by the terms of the Act.
In that regard, counsel have referred me to the decision of Sackville J in Parianos v Lymlind Pty Ltd (1999) 93 FCR 191, in particular at paragraphs [16] and following. His Honour concluded that the inclusion of the notation 3 information and the calculation of an Australian dollar equivalent of the judgment sum was a matter made essential by the terms of the Act. His Honour’s decision has not been subsequently considered to the best of counsels’ researches. The question is whether the reasoning has been put into question by the subsequent decision in Adams v Lambert.
As Mr Savage, who appeared as leading counsel on behalf of the applicant, pointed out, his Honour’s reasoning in Parianos made specific reference to Kleinwort Benson Australia Ltd v Crowl which, in terms, was approved of by the court in Adams v Lambert. In my view, the failure to include notation 3 was a failure to include a matter made essential by the terms of the Act. I follow the decision of Sackville J. in that regard.
I conclude that both of the matters relied upon by the applicant were not a formal defect or irregularity. I should add that, taken in combination, those matters also lead to the conclusion that the bankruptcy notice is defective.
I should, for the sake of completeness, state my conclusion in respect of the second limb referred to by their Honours in Adams v Lambert. For reasons that are probably already apparent, I conclude that the bankruptcy notice in this case reasonably misleads a debtor as to what is necessary to comply with the notice because the debtor does not know whether to pay in Australian or in United States currency. In my view, that conclusion makes the reasoning in cases such as Re Kostezky; Ex parte Milder Elfman Szmerling Krycer Pty (1996) 67 FCR 101 beside the point.
In my view, the decision in Irani v Hollyburton UK Ltd [2007] FCA 1447 is also distinguishable. That case again concerned the inclusion of a claim for interest and Middleton J concluded at [17] that the failure to include an interest calculation did not satisfy the test of essentiality. However, in my view, the requirement to give the debtor the opportunity to pay the judgment debt in Australian currency and, for that purpose, to carry out the calculation required by “note 3” does satisfy that test of eventuality and the case is therefore distinguishable.
The bankruptcy notice will be set aside.
I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Wilson FM
Associate: Lynnette Chin
Date: 4 November 2009
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