FEDERAL COURT OF AUSTRALIA

Cumins v Deputy Commissioner of Taxation [2008] FCAFC 185

BANKRUPTCY – sequestration order made – appeal against sequestration order – argued bankruptcy notice invalid due to overstatement of total debt owing – payments made and / or credits allowed not included in bankruptcy notice – whether court should go behind bankruptcy notice – no misstatement found in bankruptcy notice – no failure to meet a requirement made essential by the Bankruptcy Act 1966 (Cth) – bankruptcy notice did not reasonably mislead debtor

BANKRUPTCY – notice of alleged misstatements under s 41(5) Bankruptcy Act 1966 (Cth) – appellant argued for extension of time to give notice under s 33(1)(c) – extension of time properly regulated by terms of s 41(6A) – once time for compliance with bankruptcy notice has expired there can be no doubt that an act of bankruptcy has been committed – no exceptional circumstances

PRACTICE AND PROCEDURE – request for leave to raise an argument not raised before primary judge – whether in interests of justice – argument sought to be put by appellant bound to fail – request refused

Bankruptcy Act 1966 (Cth) ss 33(1)(c), 40, 41(1), 41(5), 41(6), 41(6A), 41(6C)

Taxation Administration Act 1953 (Cth) s 8AAGA, Sch 1 s 18-15(1)

Adams v Lambert (2006) 228 CLR 409 cited

Anthony Hordern & Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1 cited

Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd (2008) 232 CLR 314 cited

Chamberlain v Deputy Commissioner of Taxation (1988) 164 CLR 502 cited

Coulton v Holcombe (1986) 162 CLR 1 cited

David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 cited

Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 cited

Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 cited

Re Bedford; Ex parte H C Sleigh (Qld) Pty Ltd (1967) 9 FLR 497 cited

Re Manion; Ex parte Custom Credit Corporation Ltd (in Liq) [1996] FCA 343 cited

Re Wilhelmsen; Ex parte Gould (1986) 11 FCR 107 cited

Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 cited

Wilson v Official Trustee in Bankruptcy [1999] FCA 1760 cited

Wren v Mahony (1972) 126 CLR 212 cited

BRIAN CUMINS v DEPUTY COMMISSIONER OF TAXATION

WAD 123 of 2008

BRIAN CUMINS v DEPUTY COMMISSIONER OF TAXATION

WAD 126 of 2008

NORTH, EMMETT & RARES JJ

9 December 2008

PERTH

THE COURT ORDERS THAT:

1.                  The appeal in WAD 123 of 2008 is dismissed;

2.                  The application for leave to appeal in WAD 126 of 2008 is refused;

3.                  The appellant is to pay the respondents costs of the appeal in WAD 123 of 2008 and the application for leave to appeal in WAD 126 of 2008.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                     Before the Court is an appeal in WAD 123 of 2008 against a sequestration order made on 30 May 2008 against the estate of the appellant.

2                     The primary contention of the appellant was the bankruptcy notice upon which the sequestration order depended was invalid because it overstated the total debt owing to the respondent, the petitioning creditor.   

3                     The bankruptcy notice was issued on 17 March 2006.  The Schedule to the bankruptcy notice set out the total debt owing as follows: 

SCHEDULE

4                     Item 1 referred to a judgment obtained in the Supreme Court of Western Australia on 15 June 2005 (a copy of which was attached to the bankruptcy notice), and item 5 set out the total of payments which had been received by the respondent from the appellant and credits allowed since the date of judgment.  Order 3 of the judgment was as follows:

3.         Judgment be entered for the Plaintiff against the Defendant in the sum of $38,084,522.24 together with further general interest charged pursuant to section 204 of the Income Tax Assessment Act and Division 1 Pt 11A of the Taxation Administration Act 1953 (“TAA53”) calculated upon an amount or amounts and for a period or periods, at the rates prescribed.

5                     However, the appellant contended that four classes of payments or credits had not been included in item 5 of the Schedule.  These were:

1.      Certain credits of general interest charges amounting to $31,007.72 which should have been allowed at the date of judgment.  The error which gave rise to the need for these credits arose from the original miscalculation of general interest charges. For instance, payments made by the appellant were credited later than when they were made to the respondent and general interest charges were calculated by the respondent on the balance unreduced by the payment.  Thus, the calculation of interest was greater than the amount to which the respondent was entitled (the missed credits).

2.      A credit of general interest charges owing from garnishee payments totalling $7,350 made by the appellant before the date of judgment but not credited to his account until after the date of judgment (the garnishee interest credits). 

3.      PAYG payments totalling $9,516 received on behalf of the appellant by the respondent effectively on 14 August 2005.

4.      A rounding credit of 4 cents.

payments made or credits allowed not included

The missed credits and the garnishee interest credits

6                     The primary judge held that the bankruptcy notice did not misstate the total debt owing by failing to take into account the missed credits or the garnishee interest credits.  We agree with the reasoning and conclusion of the primary judge on this issue.

7                     There is no dispute that the missed credits and the garnishee interest credits should have been taken into account when the respondent calculated the amount for which she applied to the Supreme Court as the sum she claimed as the judgment debt.  Those credits should have been reflected in a reduced sum as the amount for which judgment was entered.  By mistake they were not.  Nonetheless, the judgment stood at the date of the issue of the bankruptcy notice.  The cause of action brought by the respondent merged in the judgment: Chamberlain v Deputy Commissioner of Taxation (1988) 164 CLR 502 at 510.  A judgment is never conclusive in bankruptcy but the Court may accept the judgment as satisfactory proof of the petitioning creditor’s debt.  In that sense that Court has a discretion; it may or may not so accept the judgment.  The question is whether there was in truth and reality a debt due to the petitioning creditor as claimed in the creditor’s petition.  Where substantial reasons are given for questioning whether behind the judgment there was in truth and reality a debt due to the petitioner, then the Court must go behind the judgment: s 52(1)(c) of the Bankruptcy Act 1966 (Cth) (the Act); Wren v Mahony (1972) 126 CLR 212 at 224-225.

8                     However, where the Court, at hearing of the petition, is satisfied that there was a real debt on which the judgment was founded, although judgment was entered for an amount greater than the sum truly owing to the judgment creditor, the Court is entitled to proceed to make the debtor bankrupt.  There is no principle that if a judgment is irregular, because it was entered for an excessive amount, the irregularity should necessarily invalidate subsequent bankruptcy proceedings: Re Bedford;  Ex parte H C Sleigh (Qld) Pty Ltd (1967) 9 FLR 497 at 499.

9                     The judgment created a new debt which bound the appellant.  Until that judgment was set aside it remained the measure of the debt payable by the appellant. 

10                  The bankruptcy notice speaks at the date of its issue:  Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 at 339; Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 at 587 (Emerson).  At that date, the judgment debt was $38,084,522.24 as recorded in item 1 in the Schedule to the bankruptcy notice.  The fact that the judgment sum might be or is reduced in the future does not invalidate the bankruptcy notice: Emerson 33 FCR at 587.  A court exercising bankruptcy jurisdiction may go behind a judgment, but would not do so if the grounds upon which the judgment is challenged are such that, if accepted, they would only support a finding that the amount of the debt would be reduced and would not support a finding that there was no debt at all: Emerson 33 FCR at 589.  It may also be relevant if the amount of the judgment would be reduced below the statutory minimum that supports a petition: Wilson v Official Trustee in Bankruptcy [1999] FCA 1760 at [40].  

11                  In the present case the Court would not go behind the judgment because it is common ground that the total debt payable (excluding any sum for interest due under Order 3) at the time of the issue of the bankruptcy notice was at least over $37,980,000 and the total of the amounts in question was under $40,000.  (The interest on the judgment due at the time of the issue of the bankruptcy notice was over $3,600,000.)

The PAYG payments

12                  We also agree with the reasoning of the primary judge that there was no misstatement in the bankruptcy notice in relation to the PAYG payments.  The primary judge, following Siopis J in an earlier challenge to the bankruptcy notice (Cumins v Deputy Commissioner of Taxation [2006] FCA 1847), held that under s 18-15(1) of Sch 1 of the Taxation Administration Act 1953 (Cth) (the Administration Act) the PAYG payments were required to be credited to the appellant when the assessment of the income tax payable in the year in question was made.  No credit was due until the tax liability of the appellant had been ascertained.  The assessment of the income tax payable by the appellant for 2005 was made on 21 July 2006.  The credit for PAYG payments to the respondent made by the appellant’s employer was given at that date in accordance with the statutory requirement.  The credit was not due to be made at the time when the bankruptcy notice was issued on 17 March 2006 and thus the bankruptcy notice did not fail to include credits for the payment of the PAYG amounts.   

The rounding credit

13                  Finally, we agree with the conclusion of the primary judge that the omission of the rounding credit of 4 cents did not produce a misstatement of the total debt owing.  Section 8AAGA of the Administration Act provides:

If the amount of the charge payable for any period is not a multiple of 5 cents, the Commissioner may round it down to the nearest multiple of 5 cents.

Under this section the Commissioner was not bound to give the credit.  Rather it gave the Commissioner a discretion to make the rounding down.  The failure to include a credit to which the appellant was not entitled but which lay in the discretion of the respondent could not lead to a misstatement of the total amount owing.  Further, it was open to the primary judge to find that the rounding credit made on 19 July 2005 related to the post judgment general interest charges and, as no general interest charges were claimed in the bankruptcy notice for the period after judgment, no credit was due.  Even if, as the appellant argued, the rounding credit related to a pre-judgment general interest charge and the credit was erroneously excluded from the judgment amount, the judgment stood, as we have earlier explained, unless set aside, as the measure of the liability of the appellant.

14                  By a notice of contention the respondent raised the argument that the bankruptcy notice was not invalidated even if the failure to credit the 4 cents gave rise to an overstatement of the total debt owing.  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: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79.  Neither of these circumstances applied in the present case.  The overstatement was not the result of a failure to meet a requirement made essential by the Act.  The Act does not require an accurate statement of the total debt payable as a condition of validity of the bankruptcy notice: Adams v Lambert (2006) 228 CLR 409 at [31].  The overstatement of 4 cents did not mislead the appellant as to what was necessary to comply with the notice.  It clearly stated that the appellant was required to pay the stated sum of $38,051,066.24.  Other defects in a bankruptcy notice described as formal defects will only invalidate the notice if the Court is of the opinion that substantial injustice has been caused by the defect and the injustice cannot be remedied by an order of the Court: s 306 of the Act.  No injustice has been caused in this case if the notice was overstated by 4 cents.  Thus, even if the notice overstated the total debt payable by 4 cents, the notice was not thereby invalidated.

leave to raise a new argument

15                  Then, the appellant sought leave to raise a new argument on appeal.  He contended that the form of the bankruptcy notice prescribed by the Bankruptcy Regulations 1996 (Cth) required the respondent to itemise each credit allowed or payment made.  This detail, it was said, was to be specified under item 5 in the Schedule. 

16                  Leave to raise an argument not raised before the primary judge which argument involved statutory construction and no question of fact could be granted if it were in the interests of justice to do so: Coulton v Holcombe (1986) 162 CLR 1 at 7-8.  In our view it is not in the interests of justice to grant such leave because the argument proposed by the appellant is bound to fail.  

17                  The prescribed form of bankruptcy notice provides for the payments made and credits allowed to be stated as a single amount.  Where the Schedule requires details of the calculation of an item in the Schedule, it makes specific provision for providing details of calculation.  Thus, item 3 which deals with a claim for interest accrued since the date of judgments or orders is accompanied by a note which requires that details of the amount of interest are to be set out in a specified manner in a document attached to the bankruptcy notice.

discretion

18                  Finally, we agree with the primary judge that there were no discretionary reasons which would justify refusing to make the sequestration order.  On 12 May 2008 being the last day of hearing before the primary judge, an officer of the respondent, Deborah Jayne Thiele deposed that the amount of the outstanding debt was $37,983,152.29.  This debt was not disputed.

appeal against dismissal of motion seeking an extension of time

19                  In the course of the hearing of the petition before the primary judge on 15 April 2008, the appellant filed a notice of motion seeking an extension of time within which to give notice of the alleged misstatements of the total debt owing.  The motion was dismissed and, owing to the late filing of a notice of appeal, an application for leave to appeal against that dismissal was before this Court in WAD 126 of 2008. 

20                  Section 41(5) of the Act provides for a debtor to give notice disputing the validity of a bankruptcy notice as follows: 

(5)        A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.

21                  Section 33(1)(c) allows the Court to:

(c)               extend before its expiration or, if this Act does not expressly provide to the contrary, after its expiration, any time limited by this Act, or any time fixed by the Court or the Registrar under this Act (other than the time fixed for compliance with the requirements of a bankruptcy notice), for doing an act or thing or abridge any such time.

22                  The time for compliance with the bankruptcy notice expired on 25 August 2006.  Thus, the extension of time required for the appellant to give a notice disputing the validity of the bankruptcy notice was approaching two years.  The petition was presented on 15 December 2006.  The appellant argued that the Court had power under s 33(1)(c) to extend the time fixed by s 41(5) and relied upon Re Wilhelmsen; Ex parte Gould (1986) 11 FCR 107. 

23                  The primary judge noted the doubt expressed in Re Manion; Ex parte Custom Credit Corporation Ltd (in Liq) [1996] FCA 343 about whether the Court had jurisdiction to extend time after the petition had been presented, but assumed the necessary power for the purpose of argument.  He rejected the application on discretionary grounds. 

24                  In view of our conclusion that there was no misstatement of the amount of the total debt owing in the bankruptcy notice it is not necessary for us to determine a number of other issues which were argued including whether a notice under s 41(5) was given, and, if not, whether the primary judge had power to extend the time within which notice might be given.  It follows from our conclusion that there was no misstatement in the bankruptcy notice that the primary judge was correct to dismiss the motion seeking an extension of time within which to give notice.  However, in view of the arguments addressed to the Court it is appropriate for us to express our view on the relationship between s 41(5) and s 33(1)(c). 

25                  Section 33(1)(c) relevantly provides that the Court may extend any time limited by the Act for doing an act or thing, other than the time fixed for compliance with the requirements of a bankruptcy notice.  That power must be considered in the context of s 41 and the scheme provided for in that section. 

26                  Under s 40, a debtor commits an act of bankruptcy in certain cases, including, under s 40(1)(g) for failure to comply with a bankruptcy notice.  Section 41 specifies the regime for bankruptcy notices.  Under s 41(1), the Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained a final judgment or order against a debtor.  The notice must be in accordance with the form prescribed by the Regulations.  Section 41(5) deals with giving notice when the amount due to the creditor is misstated in the bankruptcy notice.  Section 41(6) says, however, that, where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice in accordance with s 41(5) the debtor will nevertheless be deemed to have complied with the notice if, within the time allowed for payment, the debtor takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it. 

27                  Section 41(6A) provides that where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor, or an application has been made to the Court to set aside the bankruptcy notice, the Court may, subject to s 41(6C) extend the time for compliance with the bankruptcy notice.  Section 41(6C) is concerned with the bona fides of, and diligence with which, an application to set aside the judgment or order is made.

28                  Thus, s 41 lays down a strict regime for dealing with a bankruptcy notice.  That is essential, having regard to the consequences of failing to comply with a bankruptcy notice.  That is to say, failure to comply constitutes an act of bankruptcy.  It is critical, having regard to those consequences, to know that, when the time for compliance with a bankruptcy notice has expired, there can be no doubt that an act of bankruptcy has been committed.  Even if a sequestration order is not made on the basis of non-compliance, relation back period for a bankruptcy is determined by the date of the earliest act of bankruptcy within six months prior to the making of the sequestration order. 

29                  It is clear that s 33(1)(c) does not authorise the extension of time to comply with a bankruptcy notice.  The clear object of s 41(5) is to ensure that, before the time for compliance of the bankruptcy notice has expired, the creditor must be notified of any alleged misstatement of the amount due.  The limitation on the general power to extend time contained in s 33(1)(c) must be understood in the light of the specific power conferred by s 41(6A) to extend time for compliance. 

30                  In that context, s 41(5) must be construed as requiring that notice of a misstatement that might invalidate a bankruptcy notice must be given prior to the time when an act of bankruptcy would be committed by failure to comply with the notice.  Section 33(1)(c) should not be construed as authorising an extension of any time for giving such notice that does not extend the time for complying with the notice. 

31                  Otherwise, doubts could arise as to whether or not an act of bankruptcy has been committed.  So long as an attack on a bankruptcy notice, by reason of alleged misstatement of the amount due, is under consideration by the Court, the Court will extend the time for compliance.  That is to say, a bankruptcy notice should not purportedly be set aside after the time for complying with it has been expired.  Section 41(6A)(b) provides a mechanism whereby the Court can extend the time for compliance while the question of setting aside a bankruptcy notice is considered.  That is, s 41(5) is a specific provision prescribing the conditions and restrictions on, and the mode in, which the debtor may give notice disputing the validity of a bankruptcy notice on the ground of misstatement and supplants the generality of s 33(1)(c): see Anthony Hordern & Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1 at 7; David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 at 276; Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd (2008) 232 CLR 314 at [19].

32                  In any event, having regard to those considerations, even if there were power to extend the time for giving notice otherwise than by extending the time for compliance, the circumstances in which it would be exercised must be quite exceptional.  No such exceptional circumstances have been established in the present case.  Accordingly, the primary judge made no error in failing to make an order purporting to extend the time for giving notice under s 41(5) in respect of any alleged misstatement, assuming, contrary to our view, that there was a misstatement in the bankruptcy notice in the first place.

conclusion

33                  For these reasons the appeal in WAD 123 of 2008 will be dismissed and the application for leave to appeal in WAD 126 of 2008 will be refused with costs.

Associate:

Dated:         9 December 2008