Zurcas v Bryantcraft Pty Ltd

[2010] FMCA 161

FEDERAL MAGISTRATES COURT OF AUSTRALIA

ZURCAS v BRYANTCRAFT PTY LTD [2010] FMCA 161

BANKRUPTCY – Application to set aside Bankruptcy Notice – consideration of validity of Notice – Costs Certificate attached to notice – consideration whether Costs Certificate an order of the Court.

Bankruptcy Act 1966, ss.33(1)(b), 40(1)(g), 41(5)
Trade Practices Act 1974

ANZ Banking Group Ltd v Menso [2006] FMCA 1522
Worchild v The Drink Club [2005] FCAFC 240
Commonwealth Bank of Australia v Horvath (Junior) [1999] FCA 143
Skouloudis v St George Bank [2008] FCA 1765

Applicant: ARTHUR ZURCAS

Respondent: BRYANTCRAFT PTY LTD

File Number: MLG 1552 of 2009

Judgment of: Burchardt FM

Hearing date: 3 February 2010

Date of Last Submission: 3 February 2010

Delivered at: Melbourne

Delivered on: 3 February 2010

REPRESENTATION

Counsel for the Applicant: Mr F. Sanna

Solicitors for the Applicant: Frank Anthony Sanna

Counsel for the Respondent: Mr J. Kohn

Solicitors for the Respondent: Indovino Lawyers

ORDERS

1. That Bankruptcy Notice No VN 2237 of 2009 be set aside. 

The costs of this proceeding are to abide and reflect the result of the County Court proceeding referred to in these Reasons for Judgment (namely matter number C1-09-01721), and in default of judicial determination in that proceeding, each party bear their own costs.

(Amended pursuant to Rule 16.05(2)(e) of the Federal Magistrates Court Rules (2001))

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 1552 of 2009

ARTHUR ZURCAS

Applicant

And

BRYANTCRAFT PTY LTD

Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

1. In this matter, as I perceive it, there are two issues presently the subject of controversy. First, was the Bankruptcy Notice in this case invalid, and if so – or if it is the subject of criticism, can it be amended? Secondly, does Mr Zurcas have a counter-claim that falls within the operation of s.40(1)(g) of the Bankruptcy Act 1966 (“the Act”). I note at the outset that no notice under s.41(5) has been given by Mr Zurcas.

2. Relevant background facts include the following.  On 12 November 2009 service of the Bankruptcy Notice was effected personally on

   
   

   Mr Zurcas.  On 2 December 2009 Mr Zurcas filed an application to set the Bankruptcy Notice aside, supported by an affidavit filed on the same date.  That affidavit put into evidence by way of exhibit a writ with statement of claim, and defence and counterclaim in a County Court proceeding.  It may be noted that Bryantcraft Pty Ltd was not a party to the statement of claim, it was merely joined to the proceedings by the counterclaim.  It should also be noted that there was no suggestion made in Mr Zurcas’ affidavit of any defect in the Bankruptcy Notice or that he had been misled in any way by it. 

3. The counterclaim against Bryantcraft Pty Ltd in that proceeding was on one view very limited.  The statement of claim relevantly pleaded loans to Mr Zurcas.  In paragraph 3, it was put that Mr Zurcas was a borrower jointly and severally with a company and various other parties and that the plaintiffs were the lenders.  The defence admitted paragraph 3 of the statement of claim and thus admitted a loan agreement had been executed.  However, when one turns to paragraph 4 of the statement of claim, which itemises a number of express terms alleged to subsist in the loan agreement, those were not admitted. 

4. They were neither admitted nor denied and one takes the purport of that to be that Mr Zurcas did not know whether those terms alleged were true or not.  Thus we know that some sort of loan took place, but not what its agreed terms might be said to have been.  Bryantcraft Pty Ltd’s conduct was said in the counterclaim to have constituted misleading and deceptive conduct within the meaning of the Trade Practices Act 1974, by promising in effect that the moneys loaned, whatever they were, would within six months have been refinanced at what was described as an interest obtainable from a bank. 

5. In circumstances where this was in fact never going to be possible, given that the loans as pleaded, and not admitted but not denied, amount only to $180,000, a claim that excess interest might have accrued thereon by virtue of the misleading and deceptive conduct was never likely, on one view, to have been very great, so the counterclaim would seem to me to have been, even within that framework – and assuming everything in Mr Zurcas’ favour –extremely modest. 

6. What were far less modest, potentially, were counterclaims against

   
   

   Mr Indovino who is the principal, as I understand it, of Bryantcraft Pty Ltd’s solicitors in this proceeding.  On 2 December 2009 and obviously ex parte, Registrar Luxton extended the time for compliance with the Bankruptcy Notice and that doubtless is what provoked the application on 19 January 2010 by Bryantcraft Pty Ltd in this proceeding.  That sought to set aside the orders of Registrar Luxton and relied upon an affidavit of Mr Weinberg, filed on the same day.  Relevantly, that affidavit pointed to the failure by Mr Zurcas to comply with interlocutory orders made by Anderson J in the County Court proceeding. 

7. It also pointed to the failure of Mr Zurcas to quantify his claim.  It should be noted that the County Court matter is listed for trial on

   
   

   15 February 2010.  Despite the optimism of Mr Sanna, I would personally doubt that the case will be able to proceed on 15 February 2010, although it is of course not a matter for me.  Leaving aside any listing issues, the lack of quantification of the claim would seem to present difficulties.  I note that Mr Sanna, who appears for Mr Zurcas, remains of the view that those difficulties may be overcome but to the extent that it is relevant, I would myself rather doubt that that is the case. 

8. Finally, I should mention an amended application filed by Bryantcraft Pty Ltd by leave and without objection on 1 February 2010 that seeks to amend the Bankruptcy Notice should that be necessary.  This brings us to the very important preliminary issue as to the validity of the Bankruptcy Notice.  The Bankruptcy Notice says in paragraph 2 – and it has, I think, been exhibited by both sides, nothing turns on that – but in paragraph 2 what the Notice says is – and I quote:

   “The creditor claims that the debt is due and payable by you. 

   
   

   A copy of the judgments or orders relied upon by the creditor is attached.  At the time of applying for this Notice, execution of the judgments or orders had not been stayed.”

9. That ends the quotation.  The important phrase for these purposes is the words, “judgments or orders”.  The first document annexed to the Notice, however, is not an order or a judgment.  It is a Certificate of Taxation on its face.  It reads, and I quote under the heading Certificate of Taxation:

   “I certify that pursuant to Order 62, rule 46(3)(ca) of the Federal Court Rules, the bill of costs of the Respondent has been taxed and allowed in the sum of $1,943.00.”

10. It is then dated and signed under the seal of the Court for Registrar Moore.  Order 62, sub-rule 46(3)(ca) of the Federal Court Rules deals with circumstances in which a Certificate of Taxation may be issued if there is no Notice of Objection, but it goes no farther than that. 

11. What is relevant is Order 62, Rule 45 and I will read out all of it. 

    
    

    Rule 45(1):

    “On completion of taxation, the taxing officer shall issue a sealed certificate of taxation with sufficient number of office copies as are needed for the parties responsible for the payment of costs.”

12. Sub-rule(2):

    “The certificate of taxation must be served on the party responsible for its payment.”

13. Sub-rule(3), and I interpolate this is important:

    “If, after 14 days from the date of service of the certificate of taxation, the costs remain unpaid then the Registrar shall, at the request of a party in whose favour the costs are awarded, draw up, sign and seal an order in favour of that party for the sum shown in the certificate of taxation and enter the same.”

14. Here it is plain from the documentation annexed to the Bankruptcy Notice that whether there was or was not an order taken out by the Registrar, it was not annexed to the Bankruptcy Notice.  Indeed, there has been no suggestion that such an order has been made. 

15. This then brings us to the decision, as it transpires, of the Federal Magistrates Court in a case to which counsel for Bryantcraft Pty Ltd referred me, namely Menso.  Counsel did not have the case with him and from his recitation it was plain that this had to do with the amount of time he had been briefed prior to the hearing and it is entirely to his credit, and in the proper discharge of his obligations as a member of the Bar and as an Officer of the Court, that it was brought to my attention.  Mr Kohn deserves credit for that, because it was not a case that helped his client’s case. 

16. If one turns to Menso, it is cited as ANZ Banking Group Ltd v Menso [2006] FMCA 1522. It is a decision of Wilson FM given on

    
    

    13 October 2006.  I have spoken with his Honour and he tells me it was not the subject of appeal and on an search, it does not appear to have been the subject of any adverse further comment by either any member of this Court or more importantly, any member of the Federal Court.  If I can quote from paragraph [8] of that decision - each case turns on its facts-but this is a relevant quotation:

    “The principal issue for determination is whether the assessments of costs attached to the bankruptcy notice in this case were each a final judgment or order, whether within the ordinary meaning of that phrase as used in the Act, or within the extended meaning given to it by s 40(3)(b) of the Act, by which the debtor was obliged to pay the creditor a sum of money not less than the prescribed amount. As Branson J observed in Franks v Warringah Council [2003] FCA 1047 ; (2003) 131 FCR 287 at [17] consideration of authority discloses the importance, so far as the law of bankruptcy is concerned, of the particular regime in force in the relevant jurisdiction for the assessment and recovery of legal costs. This is because the status of an order of an officer of a court authorized to assess the amount payable under an order of a court which requires the payment of unquantified legal costs is dependent on the terms of the statutory instrument governing the relevant order or certificate.”

17. At paragraph [35], his Honour, having considered a case called Stec v Orfanos discussed by Branson J in Frank v Warringah Council went on to say:

    “However, the decision highlights that the issue to be resolved is whether the order of the Registrar assessing costs is, of itself, enforceable, as an order of the court.”

18. At paragraph [45], his Honour went on to refer to a case to which I will come in a moment.  He said:

    “In Worchild v The Drink Nightclub (Qld) Pty Ltd (2005) 224 ALR 339 the Full Federal Court held that an order of the Deputy District Registrar of the Federal Court was a final order capable of founding a bankruptcy notice. Order 62 r 45(3) Federal Court Rules provides that where costs remain unpaid 14 days after taxation, the registrar shall, at the request of the party in whose favour the costs are awarded, draw up, sign and seal an order in their favour.”

19. His Honour went on in paragraph [46]:

    “It can immediately be seen that, in those circumstances, due to the wording of the legislation, the obligation to pay derives from the order of the Registrar, which operated as an order in its own right. Their Honours considered that the sufficiency of attaching only the order of the Registrar depended on whether the order is one for the payment of money. Unlike a certificate of taxation, an order under O 62 r 45(3) directs the payment of money. Their Honours said at [10] that an important element in determining whether an order is final or not is whether it is capable of enforcement and execution. The Court applied the decision of von Doussa J in Re Draper; ex parte Australian Society of Accountants, in which his Honour said that even if there were any doubt about that matter it is removed by the provisions of s 40(3)(b). Re Luckins; ex parte Columbia Pictures Industries (1996) 67 FCR 549 at 559.”

20. And they went on to detail more about that.  If one turns to

    
    Worchild v The Drink Club

    , to which I have referred and which is cited at [2005] FCAFC 240, at paragraph [2], the following emerges from the judgment of the Full Court:

    “On 24 May 2004 Cooper J made an order for costs against the appellant and in favour of the respondents jointly.  Taxation of costs followed.  The amount certified was not paid by the appellant and an order pursuant to O 62 r 45(3) of the Federal Court Rules was made.”

21. Their Honours detailed the fact – detailed the terms of the order and the fact that the order had in deed been made.  At paragraph [8] the Full Court went on to say:

    “A bankruptcy notice may be based upon a final judgment or final order of the kind described in s.40(1)(g) of the Bankruptcy Act, such as to found an act of bankruptcy: section 41(1)(a) Bankruptcy Act. A certificate of taxation is not such an order: Re Crump; Ex parte Crump (1891) 64 LT 799. It is not one for the payment of money. In any event a certificate is not required to be attached to a bankruptcy notice in Form 1. It is however essential that the judgment relied upon by the creditor as founding the bankruptcy notice be attached: Australian Steel Company (Operations) Pty Ltd v Lewis ‑ ‑ ‑

    Followed by citations

    Non-compliance with such a condition would invalidate the notice.”

22. In paragraph [10] they reinforce this point by stating:

    “In our view the order of 26 November 2004 is a final order within the meaning of the Bankruptcy Act, one in which the respondents’ rights were ascertained and given effect to.  Unlike a mere certificate of taxation, an order made under O 62,

    
    

    r 45(3) of the Federal Court Rules directs the payment of money.”

23. If one goes back to Menso, one notes at paragraph [58] that his Honour said:

    “The critical question in the present case is whether the failure to attach the correct orders to the bankruptcy notice can be described as a formal defect or an irregularity.”

24. Then he went on to say in the same paragraph:

    “There is no injustice, let alone substantial injustice, caused to the respondent by the form and content of the bankruptcy notice in the present case.  The respondent well knows from the content of the bankruptcy notice how much he is required to pay, and the source of the obligation to pay.”

25. His Honour then went on to deal, at paragraph [59], with the case of Horvath, to which I will come in a moment, and directed his attention to the decision of the High Court in Adams v Lambert.  At paragraph [61] his Honour was quoting from the judgment of the High Court, I think in Project Blue Sky Incorporated, and said:

    “At [18] their Honours said:  “The question is whether the defect or irregularity is a formal defect or irregularity, and whether substantial injustice has been caused and cannot be remedied, are separate and distinct, the latter question arising only if the former is answered in the affirmative.”

26. He went on to say in paragraph [62]:

    “At paragraphs [24] to [28] their Honours reasoned that deciding whether there is a formal defect or irregularity must be decided as a process of statutory construction, in the context of the Act as a whole, informed by the general purpose of the legislation and the particular purpose of the provisions relating to bankruptcy notices.”

27. I should withdraw what I said, I think I have been quoting from

    
    Adams v Lambert

    .  Having observed that the authors of Australian Bankruptcy Law and Practice might have been overly cautious in their assessment of Adams v Lambert, his Honour went on at paragraph [65] of Menso to say:

    “In my view, the High Court went further than the learned authors suggest.  It clarified the question of how one is to determine whether a defect in the bankruptcy notice is a “formal” defect or irregularity.  This is to be done by looking at the defect or irregularity against the scheme and purpose of the Bankruptcy Act in order to see whether there is a shortcoming in a matter made essential by the Act. [66] Where, as in the present case, the whole bankruptcy process is founded on a judgment or order, and the failure to comply with that judgment ‑ ‑ ‑

28. Then he refers to sections of the Act:

    ‑ ‑ ‑ in my view it is an essential requirement of the Act that the judgment or order relied upon be attached to the bankruptcy notice. It is not sufficient for the creditor to be able to say that there is no injustice because the debtor is not misled, or that the relevant judgment order is referred to in another document attached to the bankruptcy notice. In those circumstances, it could not be said that the omission of the judgment or order relied upon was a formal defect or irregularity.”

29. Finally, I should refer just briefly to the case of Horvath, which is Commonwealth Bank of Australia v Horvath (Junior) [1999] FCA 143 to which I have referred as being a judgment of Finkelstein J. At paragraph [13], his Honour was referring to authority and about halfway through the paragraph was citing authority from – I think it was a decision from the Divisional Court in Chancery, In re Cartwright[1975] 1 WLR 573 where Goulding J relevantly said:

    “Then comes the question whether we should regard the shortcomings of the notice as a formal defect or irregularity which should be cured by the court in its discretion under section 147 of the Bankruptcy Act 1914 [the counterpart of s 306 of the Australian legislation].  The case is rather different from anything that subsequently occurs in bankruptcy proceedings because the failure to comply with the notice is the very act of bankruptcy on which all the rest is founded.  Unless, therefore, you have a notice that fulfils the statutory requirements, you cannot fairly say that a debtor has committed an act of bankruptcy by not complying with it…

    On the whole, it appears to me, although the debtors do not seem to have been misled in any way in the particular circumstances, that we should be departing from the course mapped out by reported authority if we were to overlook or attempt to cure the shortcomings of the notice in the present case.”

30. Walton J expressed his agreement with the judgment of Goulding J. He also said at [578]: 

    “It seems to me that the petitioning creditor got it wrong; he got the whole foundation of his judgment wrong.  Notwithstanding the fact that anybody of reasonable intelligence - and that certainly includes the debtors because they were not in fact misled - could see what he really meant to have said, seems to me to be nihil ad rem.  You have not, in fact, got a proper bankruptcy notice giving the requisite particulars of the foundation of the debt.”

31. His Honour Finkelstein J went on to say in paragraph [14] of Horvath:

    “It follows, in my opinion, that the bankruptcy notice is a nullity and cannot be validated by s.306(1).”

32. Here, the Taxation Certificate is clearly not an order and this is a formal irregularity or defect. But then one has to consider the application to amend, pursuant to s.33(1)(b). Section 33(1)(b) of the Act gives the Court an overarching power relevantly to allow the amendment at any time of any written process, proceeding or notice under the Act, but an invalid notice is not a notice under the Act.

33. That brings us to the case of Skouloudis, which is one of the authorities helpfully provided by counsel for Bryantcraft Pty Ltd, and that is Skouloudis v St George Bank. Here I am concerned with the appeal to the Federal Court, constituted by Edmonds J and the citation is [2008] FCA 1765. Edmonds J said at paragraph [35] of the judgment:

    “If a bankruptcy notice is a nullity and of no effect, it is not a notice under the Act:  see Circle Credit Co-Op  v Lilikakis ‑ ‑ ‑ 

    (And citation is given) – “Chandramouli v Wallader”, (once again citation is given)

    It must be a notice under the Act to be subject to the court’s power of amendment in s.33(1)(b). In short, I am of the view that the learned Federal Magistrate had no power to cure the invalidity of the Bankruptcy Notice by amendment in reliance on s.33(1)(b) of the Act and that the Bankruptcy Notice should have been set aside.”

1. So the conclusion that those authorities seem inexorably to me to lead to is that the Notice was invalid and cannot be amended and therefore the application to set aside must be granted. But I will also rule on the application in the alternative, under s.40(1)(g), which asserts a counterclaim. I can indicate shortly that I accept the submissions of Bryantcraft Pty Ltd.

2. First, the counterclaim is not properly articulated.  There is no real indication as to what the case is.  The counterclaim does not in fact plead the loan agreements that by implication are admitted in the defence.  There is no indication pleaded as to what would happen if the loans had in fact been renegotiated at bank rates.  It would seem to me the counterclaim would at least at this level of articulation fall foul of the authorities to which I was referred by counsel for Bryantcraft Pty Ltd. 

3. It would also seem to me, to the extent that this is able to be discerned, that it would have been able to be set up as a counterclaim to the proceedings in the Magistrates Court which gave rise to two of the three Court orders annexed to the Bankruptcy Notice, albeit that that might have required uplifting.  I do note that the Taxation of Costs Certificate is in proceeding described as MLG 315 of 2009 in this Court about which, as far as I am aware, I have been told nothing at all.  Whether it could have been raised as a counterclaim in that proceeding must remain moot. 

4. I also note that it is quite clear that Mr Zurcas was not misled by any deficiency in the Bankruptcy Notice.  He has filed an application under the Judgment Debt Recovery Act on 22 January 2010, in which he admitted indebtedness in respect of $4,275, ordered respectively against him by the Magistrates Court of Victoria on 19 May 2009 and 21 September 2009.  He has paid, I think, some $1,125 of that money but he admits a debt of $3,110. 

5. All of this would, in my view, have been extremely relevant if I had discretion available to cure what I am led to believe is the incurable error in the Bankruptcy Notice.  But they are not presently, for the reasons I have described, of any great applicability.  I would therefore order that the Bankruptcy Notice be set aside.  Are there any ancillary matters or any other applications in relation to costs? 

   RECORDED    :    NOT TRANSCRIBED

6. The ordinary rule in proceedings of course is that costs follow the event, but the Court retains an overarching discretion to be exercised judicially.  There are a number of reasons why I think that costs in this case ought not follow the event.  In saying this, I would wish to emphasise that these remarks imply and state no criticism of either counsel, bearing in mind that the ultimate reasons I have delivered, although they ended upon a trail indicated very properly by Mr Kohn in Menso, have really essentially come from my own researches. The fact is, however, that the primary claim made by Mr Zurcas in his materials had more to do with the counterclaim point under s.40(1)(g), it seems to me, than the deficiency in the Notice, which certainly did not mislead Mr Zurcas, because he has filed an application in the State Magistrates Court expressly avowing a measure of indebtedness to the creditor.

7. In my view, the proper course is to order the costs of this application –I will describe it as a proceeding (it encompasses everything) the costs of this proceeding, including any reserved costs – follow the result of the County Court proceeding and I will put the proper identification into the order. 

8. I will also tidy that up, the order, because I do not mean the result, I mean it is to be the same as, and in default of judicial determination in that proceeding, each party bear their own costs. 

I certify that the preceding forty-one (41) paragraphs are a true copy of the reasons for judgment of Burchardt FM

Associate:  Ms B Evans

Date:  3 February 2010