Ynot Australia Pty Ltd v RAEBURN - [2012] FMCA 834

FEDERAL MAGISTRATES COURT OF AUSTRALIA

YNOT AUSTRALIA PTY LTD v RAEBURN

[2012] FMCA 834

BANKRUPTCY – Bankruptcy notice – validity – sequestration order – whether the bankruptcy notice was defective – rate of interest – amount of interest – notice defective – application dismissed.

Bankruptcy Act 1966 (Cth), ss.41, 52, 306
Uniform Civil Procedure Rules 1999 (Qld)
District Court of Queensland Act 1967 (Qld)
Supreme Court Act 1995 (Qld)
Supreme Court Regulation 2008 (Qld)

Adams v Lambert (2006) 228 CLR 409
Bendigo Bank Ltd v Williams (2000) 173 ALR 175
Re Godfrey Charles De Marco; Godfrey Charles De Marco v Australian & New Zealand Banking Group Limited [1997] FCA 759
GR Finance Limited v Francis Waldron [2009] FMCA 418
James v FCT (1955) 93 CLR 631
Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71
National Australia Bank v Westbrook [2000] FCA 246
Pillai v Comptroller of Income Tax [1970] AC 1124
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355

Applicant:

YNOT AUSTRALIA PTY LTD

Respondent:

RICHARD RAEBURN

File Number:

BRG 452 of 2012

Judgment of:

Burnett FM

Hearing date:

6 August 2012

Date of Last Submission:

6 August 2012

Delivered at:

Brisbane

Delivered on:

6 August 2012

REPRESENTATION

Counsel for the Applicant:

Mr D. Clarry

Solicitors for the Applicant:

Butler McDermott Lawyers

The respondent appeared on his own behalf

Solicitors for the Supporting Creditor:

Jones King Lawyers

ORDERS

That the Creditor’s Petition filed 24 May 2012 be dismissed.
That there be no order as to costs.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT BRISBANE

BRG 452 of 2012

YNOT AUSTRALIA PTY LTD

Applicant

And

RICHARD RAEBURN

Respondent

REASONS FOR JUDGMENT

The applicant seeks a sequestration order against the respondent. The following facts are not in contest. On 15 November 2011 the applicant obtained judgment in the Maroochydore Magistrates Court against the respondent in a sum of $159,215.11. That sum was made up of the principal claim of $141,557.59, interest of $13,542.99 and costs of $414.53. On 12 January 2012, the applicant caused a bankruptcy notice to issue. In the notice it claimed a debt of $159,215.11, that being the sum entered in the judgment, and it also claimed for a sum of $4,048.83 by way of interest, a matter that I will come back to in due course.
On 5 February 2012, the bankruptcy notice was served, however, the respondents did not answer or comply with the direction in the notice and, accordingly, on 27 February 2012 they arguably committed an act of bankruptcy. On 24 May, the applicants caused their creditor’s petition to issue and that petition was served on 5 June 2012. Subject to the debate which is the object of this judgment, the applicant has otherwise made out a prima facie entitlement to a sequestration order.
The respondent opposes the applicant’s application for sequestration. He claims that the judgment entered was for an excessive sum. He contends that it overvalues the capital due because the respondent was entitled to claim a setoff cross-claim or cross-demand on account of either:
a)about $8,800.00 in capital payments that were not allowed for in the judgment sum;
b)interest on the judgment being excessive;
c)about $14,236.00 in excess items and expenses which he claims were incurred and associated with the exercise of a power of sale, the subject of the mortgage underlying the principal judgment; and
d)$70,000.00 which he claims represents the value of the sale by the mortgagee and possession of the secured property at an undervalue.
These purported setoffs total approximately $96,300.00, thus, assuming or allowing the respondent’s case at its best, it would seem that plainly there would be no cross-claim set off or cross-demand that would equal to or exceed the capital sum incorporated in the judgement, that is, the sum of $141,000.00, as it would leave the respondent about $45,000.00 short of that sum. More significantly, the respondent contends that he will have a chance to set the judgment aside. He wants to bring an application in the Magistrates Court to that effect. At this stage, no application has been made and in his affidavit material filed in this application he contends that he will do so before 24 August.
In essence, the respondent seeks to claim that there are other sufficient grounds, pursuant to s.52(2) of the Bankruptcy Act 1966 (Cth) as to why a sequestration order would not be made. I reject that contention. Firstly, even if the respondent were to be given time to bring an application to set aside the judgment, and he succeeded in doing so, he would only be able to answer about $96,000.00 of the creditor’s claim, leaving the creditor entitled to judgment for about $41,000.00. That would be more than sufficient to warrant the relief that the creditor seeks today.
Secondly, I do not consider that he has any realistic prospects in any application to set aside the judgment. The judgment was regularly entered. The judgment was entered on 12 November 2011, which is about 10 months prior to any purported application. Any application to be made must be made expeditiously. This has not occurred. Finally, no satisfactory explanation has been given as to why he did not appear and has delayed in bringing his application to set aside judgment. It follows that I do not think that he has any realistic prospects of achieving the favourable exercise of the court’s discretion.
In any event, if that were not enough, the matters he complains of are not supported by any objective material. For instance, there is no material to demonstrate that the $70,000.00 alleged under sale is in fact a claim that has any basis. There is no explanation in relation to the $14,000.00 expenses as being unreasonable or unrealistic. Interest claimed appears to be as per the agreement and, furthermore, I would be cautious about a claim that there has not been a proper accounting of repayments, particularly in the absence of any evidence to suggest otherwise.
It follows, in my view, that there is no basis under s.52(2) to refuse what is otherwise a prima facie application. That only leaves one point for consideration, a point that could be fatal to the entire proceeding. The matter was raised as a matter of proprietary and proper practice by the applicant and it was done appropriately. The point is short. As I noted earlier, interest in the bankruptcy notice is in the sum of $4,048.93. From an examination of the bankruptcy notice, it can be seen that that interest sum, which is referred to in item 23 on page 1 of the notice, is computed in accordance with the “Schedule of Post-Judgment Interest Calculation,” which is an appendix to the notice itself.
The schedule has particular form and is required in its form by the regulations. The calculation observes that the interest is calculated as interest from 15 November 2011 to 12 January 2012. Under the heading “Statutory provision under which the post-judgment interest is being claimed,” the schedule states that this is “Pursuant to Clause 4 of the Mortgage.” The “Principal amount on which interest is claimed” is appropriately noted as $141,557.59. The rate of interest is noted as the mortgage rate of 18 per cent and the interest claimed as $4048.93. This is a function of those two figures, having regard to the period over which interest was due to be calculated.
The issue that arises relates to interest that has been calculated upon a basis provided for by the loan documents supporting the mortgage. Clause 7 of the mortgage document relevantly provides that:
“If the Mortgagee shall at any time obtain judgment for all or any of the moneys secured such judgment shall until satisfied bear interest at the rate applicable under clause 2 hereof.”
Clause 2 of the mortgage document provided for interest to be paid upon so much as shall be set out which, by reference to the loan agreement, is in this instance 18 per cent. As I have noted, the sum of $4,048.93 has been calculated from the principal of the judgment sum from the date of the judgment to the date of the bankruptcy notice at this rate. The issue that arises, however, is whether or not the interest satisfies the requirement that it be a statutory provision under which post interest judgment is being claimed.
The provisions of the Supreme Court Act 1995 (Qld) deal with the matter of post judgment interest. That Act relevantly provides under s.48:
“Interest on debt under judgment or order
(1) Where a judgment is given or an order is made by a court of record for the payment of money in a cause of action that arose after the commencement of the Common Law Practice Act Amendment Act 1972, interest shall, unless the court otherwise orders, be payable at the rate prescribed under a regulation from the date of the judgment or order on so much of the money as is from time to time unpaid.”
The relevant Supreme Court regulation applies a rate of 10 per cent. See regulation 4, Supreme Court Regulation 2008 (Qld).
That, of course, is a significantly different rate from the loan agreement rate of 18 per cent, the rate employed for the calculation and, of course, a significant basis for the calculation, that is, the statutory basis for calculation as opposed to the contractual calculation. The applicant has correctly identified this matter and its effect, which is to misstate the sum which the respondent was required to satisfy in addressing the bankruptcy notice. There is some authority which supports the contention that the use of the contract rate does constitute an irregularity (see GR Finance Limited v Francis Waldron [2009] FMCA 418) and that the creditors’ entitlement to interest after judgment depends upon the operation of the Supreme Court Act and not the loan instrument; see generally Re Godfrey Charles De Marco; Godfrey Charles De Marco v Australian & New Zealand Banking Group Limited [1997] FCA 759.
It follows here that the interest claimed in the notice ought to have been $2,249.41 and not $4,048.93, a difference of $1,799.52. Although this itself is not a significant sum, the basis for calculation is critical, as my reasons indicate. It is a trite proposition that an act of bankruptcy premised upon noncompliance with a bankruptcy notice is a nullity and cannot found a petition; see generally National Australia Bank v Westbrook [2000] FCA 246. However, as has been pointed out to me, the matter has been considered and discussed in GR Finance Limited v Francis Waldron. In particular, commencing at page 25, the matter was considered by Barnes FM.
I should note that the facts of that case were slightly different insofar as in that case the judgment being considered by her Honour was one where the interest was calculated not only upon the principal sum but also interest on the interest sum but, otherwise, in all other respects, the material facts are on all fours with the facts in this case. Commencing at paragraph 25, her Honour stated:
“It is necessary to consider as a preliminary issue whether the bankruptcy notice failed to comply with the Bankruptcy Act and hence was defective or irregular, having regard to the operation of s.25C of the Acts Interpretation Act in relation to substantial compliance and all the circumstances of the case. If there is such a defect or irregularity it is then necessary to determine whether the defect or irregularity is “formal” within s.306(1). That question involves two levels of enquiry … The relevant enquiry at that point is whether the bankruptcy notice fails to meet a requirement made essential by the Bankruptcy Act or whether it could reasonably mislead a debtor as to what is necessary to comply with the notice (in which case it is a nullity whether or not the debtor is in fact misled). In Irani at [17] Middleton J stressed that these two aspects need to be addressed separately. If s.306(1) applies, consideration must be given to the issue of substantial injustice.”
In this case, the document attached to the bankruptcy notice is part of the bankruptcy notice. It does not state the provision or indeed any other legislative provision under which or the rate at which post judgment interest could be claimed. Instead it purports to a certain entitlement to interest under a mortgage simplicita. The principal sum and the interest rate at which the interest is claimed relate to the default judgment of 13 July. However, the document and the schedule to the bankruptcy notice overstate the post judgment interest that would be due to the creditor calculated in accordance with the Uniform Civil Procedure Rules 1999 (Qld) on the default judgment and, thus, the total amount due is overstated. Otherwise, there is no suggestion in this case that, notwithstanding the errors in the document attached to the bankruptcy notice, the notice substantially complied with form 1.
It is plain, to that end at least, that the notice does suffer from a defect in that the notice must state the provision under which interest is being claimed and this interest requires reference to the applicable legislation. It too requires reference to the appropriate rate. It follows, having regard to those two matters, that the interest and the total debt were overstated. The question then is whether this notice was, therefore, affected by a defect or irregularity. Hence, the critical issue is whether such defects or irregularity, in this instance, constitute a formal defect or an irregularity within s.306(1) of the Bankruptcy Act which would then, of course, enliven the court’s jurisdiction to entertain the prospect of an application to correct. The High Court in Adams v Lambert (2006) 228 CLR 409 addressed the issue of whether a particular misdescription in a bankruptcy notice of the statutory provision under which post judgment interest on a judgment debt was claimed constituted a formal defect or an irregularity within s.306(1) of the Act.
The court outlined the approach to be taken to such an issue, saying at [24]:
“The composite expression “a formal defect or an irregularity,” in its application to a bankruptcy notice, conveys a meaning with elements of both inclusion and exclusion. A failure to comply with a requirement, to be found in the Act, imposed by reference to the regulations as to information to be furnished by the notice, is a defect or irregularity. So, in Kleinwort Benson [Australia Ltd v Crowl (1988) 165 CLR 71], an erroneous statement of the amount of interest owing on a judgment debt was a defect or irregularity. What is excluded from the section is a defect or irregularity of such a nature that, reading s.306 in the context of the whole Act, it is not “a formal defect or an irregularity.” What kind, or degree, of defect is to be regarded as having such a nature?
[25] In some cases the answer to that question may be easy. In others, a difficult question of judgment may be involved.”
The matter for judgment was identified by Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71. In that case, the majority contrasted the concept of a formal defect or irregularity: when a defect or irregularity that renders a bankruptcy notice a nullity and it cannot be saved by s.306. To describe a defect as merely formal or to describe a notice as a nullity is, of course, to state a conclusion rather than a reason for reaching that conclusion. Even so, it is necessary to identify the question that arises for judgment. The majority referring to James v FCT (1955) 93 CLR 631 and Pillai v Comptroller of Income Tax [1970] AC 1124 summarises the exclusionary aspect of the meaning of a formal defect or irregularity by saying:
“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.”
The question of construction raised by the words, a formal defect or irregularity, is to be decided by reading s.306 in the context of the whole Act informed by the general purpose of the legislation and the particular purpose of the provisions relating to the bankruptcy notices. It is similar to the question that in former times would be explained by asking whether a statutory requirement was mandatory or directory. In Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, it was said:
“A better test for determining the issue of validity is to ask whether it was a purpose of the legislation that an act done in a breach of the provision should be invalid … In determining the question of purpose, regard must be had to “the language of the relevant provision and the scope and object of whole statute.”
There is a considerable body of authority to the effect that if no notice is given under s.41(5) Bankruptcy Act, the provision which provides that where the amount specified in the 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 the time allowed for payment has passed, which is evident here.
But s.41(5) makes it clear that an overstatement even of a large amount will not necessarily invalidate a bankruptcy notice. Here, the question rather comes back to the issue of defects. In this case, the matter comes back to compliance with the form as provided for in s.41 (2). Section 41 (2) provides that the notice must be in accordance with the form prescribed by regulations. The form which has been employed is, of course, the regulation form. The regulation form within its body provides for the schedule which in turn provides for the calculation of post judgment interest, although no statutory injunction can be found in the Act itself or the regulation for the provision of statutory interest.
The form clearly imports that requirement by reference to the “statutory provision” under which the post judgment interest is being claimed, in this instance the relevant provision being the Supreme Court Act and the Supreme Court Regulation. Arguably, the bankruptcy notice in this case failed to meet a requirement made essential by the Bankruptcy Act, in that it was not in accordance with the prescribed form and failed to specify the provision under which interest was claimed as provided for in the note to schedule in the prescribed form.
As her Honour FM Barnes noted at paragraph 35 of her judgment in GR Finance Limited v Francis Waldron:
“In Kleinwort Benson Mason CJ, Wilson, Brennan, and Gaudron JJ expressed the view (at 80) that if the amount specified in a bankruptcy notice was in fact due and payment was claimed in accordance with the judgment, the “essential requirements” of former s.41(2)(a)(i) of the Bankruptcy Act would be met. At that time s.41(2)(a)(i) provided that the prescribed Form of the notice had to be such that it “requires the debtor named in it, within [the] specified time … to … pay the judgment debt or sum ordered to be paid in accordance with the judgment or order …” …”
Her Honour suggests that it was clear enough, from the terms of s.41(2)(a)(i) of the Act that the notice must require payment in accordance with the judgment:
“A notice specifying payment in accordance with some other arrangement does not satisfy this requirement.”
In this case, the amount specified in the bankruptcy notice was not in fact due because of the overstatement of interest and the payment was not claimed in accordance with the judgment in that the interest claimed was expressed to be based on the mortgage or loan contract between the parties and not based upon the statutory provision provided for under the Supreme Court Act.
Arguably, in all the circumstances of this case, and particularly because of the overstatement of the amount due, the bankruptcy notice served on the respondent did not comply with an essential requirement of the Act, because the document contained the details of the calculation of an amount of interest and thereby misstated the provision under which the interest was claimed. As well as the interest rate, it follows that the calculation of the interest itself was incorrect. In Adams v Lambert, the High Court had concluded that the misdescription of the relevant section of the District Court of Queensland Act 1967 (Qld) as a provision under which interest was claimed in a document attached to a bankruptcy notice was a mistake that fell within the terms of and could be cured under s.306 of the Act.

It did not fail to meet a requirement made essential by the Act. This point was discussed by the High Court in Adams v Lambert, where it was stated at [13]:
“The evident purpose of the requirement to state the provision under which interest is being claimed is to assist the debtor to check the claim. Nevertheless, as Kiefel J pointed out in her dissenting judgment in Bendigo Bank v Williams [(2000) 173 ALR 175], such information is normally incomplete. It would tell a debtor who is represented by a lawyer something the lawyer would, or should, already know.”
It was said that an unrepresented debtor upon a reasonable inquiry would require further information in order to find the relevant rate of interest. The requirement in question is established by three levels of prescription. Section 41(2) of the Act states that the bankruptcy notice must be in the form prescribed by the regulations. Regulation 4.02 states that, for the purposes of s.41(2), the form that is in form 1 is prescribed. Notes to the schedule state that a document attached to the notice must state the provisions under which interest is being claimed. The use of the word “must” is significant, but should be kept in perspective.
A prescription as to a form to be followed will normally be expressed in language of obligation rather than of permission – that is the idea of form. Such prescription raises the question to be considered in the present case. It does not answer it. In Adams v Lambert the court continued that whether the requirement is made essential by the Act is to be decided by a process of statutory construction, as I have earlier discussed. It continued at paragraph 29:
“To describe an error or a deficiency in a bankruptcy notice as involving a failure to meet a requirement made essential by the Act is to state a conclusion reached after a consideration of the legislative purpose and an evaluation of the significance or importance of the error or deficiency in the circumstances of the case. That question is not answered by observing that there has been a failure to meet a requirement. In this respect, the majority in Lewis placed undue emphasis on the imperative terms of the Act and Regulations. If there were no failure to meet a requirement, there would be no defect or irregularity. Furthermore, as noted earlier, the fact that the requirement is expressed by the use of the term "must" is not conclusive. How otherwise might a requirement as to form be expressed?
[30] The misdescription of the relevant section of the District Court Act was not capable of misleading the respondent as to what he had to do to comply with the notice. This is not a matter of dispute. The question is whether the misdescription involved a failure to meet a requirement made essential by the Act. On the true construction of the Act, is it essential that there be no misdescription of the relevant section? Is it the purpose of the legislation that any slip, such as giving a reference to the statutory provision governing pre-judgment interest when what is intended is a reference to the provision governing post-judgment interest, should invalidate the notice? Is this so no matter how clear it might be from other parts of the notice that the claim is for post-judgment interest?
In this instance, an evaluation of the significance or importance of the particular error or deficiency in the circumstances of the case, in light of the legislative purpose of the Act and of the provisions relating to the bankruptcy notice, leads me to the view that there has been a failure to meet a requirement made essential by the Act. I agree, for instance, with the observations made by her Honour, Barnes FM, commencing at paragraph 46 of her judgment. As she noted, the High Court accepted in Adams v Lambert that the evident purpose of the requirement in note 2 of the schedule of the bankruptcy notice, under which interest was being claimed, was to “to assist the debtor to check the claim.”
However, such information is normally incomplete. Consistent with the approach taken by Keifel J, who was in dissent in Bendigo Bank Ltd v Williams (2000) 173 ALR 175 but referred to with approval in Adams v Lambert, in light of the legislative purposes of the Act, where a bankruptcy notice is based on a judgment, it is essential that any identification of the source of the entitlement to interest on that judgment should be made clear. That is so notwithstanding that the correct completion of the form prescribed in every respect is not a requirement made essential by the act.
In this case, when one has regard to the combination of the incorrect statements as to the source of the power to claim post judgment interest together with the rate which was applied, it does, in my view, go beyond some mistaken criterion and rather constitutes a substantive defect or irregularity such as to exclude the operation of s.306. To complete this, I note that, in contrast, some mistakes in the bankruptcy notice in this case suggest a source of entitlement which is completely separate from the judgment. The notice is, in that sense, akin to a notice that requires a debtor to pay a debt in accordance with terms not of the judgment provided but on some other basis.
Section 41(2)(a)(i) of the Bankruptcy Act, which required payment in accordance with the judgment, has been repealed. It is consistent with the purpose of the Act that the form of the bankruptcy notice is based on the judgment debt and that interest is claimed on the judgment and that forms a basis for the notice. Those matters, in my view, are matters of substance that must be made clear in the notice in the claim or the calculation of judgment debt in the notice itself. It follows, in this instance that, that not having been the case, the notice is defective.
Furthermore, and in the event that I am wrong on that basis, reading the bankruptcy notice as a whole and having regard to the significance and the importance of the mistake and the confusion which is likely to be caused to the debtor, it follows that, in my view, it is possible and indeed, it is the case, that the notice would be entirely misleading. And on that basis also, it follows that I think it is not simply a case of a defect in terms of interest but a defect that extends beyond that. The defect, in this case, is not simply a matter of the citation of the wrong Act or section of an Act in relation to the entitlement to interest on the judgment.
Not only was there a failure here to refer to any statutory right giving rise to the entitlement to interest on the judgment, but also the mortgage or loan document referred to did not provide an entitlement to post-judgment interest. The error in the notice was compounded by that reference and again likely to cause the debtor to be mislead. The error was plainly fundamental, going to a critical matter in the notice. It follows, in my view, that the notice is defective in a prima facie sense by reason of its reliance upon the incorrect basis for the claim and calculation of post-judgment interest.
Even if I were wrong on that matter, I am satisfied that the form of the notice, by simply claiming interest which could not be reconciled with that which was required to be considered, that is post-judgment statutory interest, is defective and would lead a debtor to be confused as to what indeed he would be required to do to satisfy the notice. It follows that the notice is defective. As I have earlier stated, if the notice is defective, it follows that the creditor’s petition too must fail and, accordingly, the application is dismissed. I do not propose to make any orders for costs.

I certify that the preceding thirty-eight (38) paragraphs are a true copy of the reasons for judgment of Burnett FM.

Date: 12 September 2012