EX TEMPORE REASONS FOR JUDGMENT

HIS HONOUR:   This matter comes on for hearing as a petition for the sequestration of the estates of the debtors.  The petition is based on an act of bankruptcy said to be non-compliance with a bankruptcy notice, served on 2 August 1996.

When the matter originally came before the court there were several matters raised in the rule 22 certificate and an adjournment was granted to enable the petitioner to deal with those matters.  In addition, the debtors indicated that there were grounds of opposition over and above the matters dealt with in the rule 22 certificate.

When the matter came on for hearing this morning, counsel for the debtors indicated that apart from the matters raised in the notice of opposition, the petitioner had failed to prove adequately the commission of an act of bankruptcy.  That submission led to a closer examination of the bankruptcy notice and in due course led to the submission on behalf of the debtors that the bankruptcy notice is defective in a manner which could not be cured by the application of section 306 of the Act.

The bankruptcy notice is unexceptional for approximately 50 per cent of the language used in it.  It gave the debtor notice that within twenty-one days after service the debtor was required either to pay a sum of money claimed to be a judgment debt or to secure the payment of that sum to the satisfaction of the Federal Court or the judgment creditor, or to compound that sum to the satisfaction of the judgment creditor.  However thereafter the notice departs from the form prescribed in the rules.

It provides that:

If within the period set out above and [sic] fail either to comply with either of the above-mentioned requirements of this notice, or to satisfy the Local Court of New South Wales that you have a counter-claim, set off or cross demand equal to or exceeding the sum specified in paragraph (a) ... you will have committed an action (sic) of bankruptcy on which proceedings may be taken against you.

The word "action" rather than "act" appears in the document.  The balance of the bankruptcy notice contains the note required by the prescribed form, stating that if the debtor has a counter-claim etc he may under section 41(7) of the Bankruptcy Act:

..... file an affidavit to that effect giving the details of the counter claim, set off or cross demand.

and that if the bankrupt does so the time for complying with the requirements of this notice shall be deemed to have been extended:

..... until the court determines whether it is satisfied that you have such a counter claim set off or cross demand.

It is easy enough to see how it is that the bankruptcy notice came to be prepared in that fashion.  The prescribed form contains much of the language which is set out in the bankruptcy notice in question, except that it assumes that some court other than the Federal Court may possibly exercise jurisdiction in bankruptcy, and hence rather than stating in the form the requirement to satisfy the Federal Court that the debtor has a counter claim, the rule refers to:

     ..... the [here insert the name of the court].

Nevertheless, while the error is explicable, that is not the question which the court must consider in determining whether or not there has been an act of bankruptcy upon which a sequestration order could be based.

In Re Gray; Ex parte Person to Person Financial Services Pty Limited (48 FLR 379 at 381), Lockhart J considered the principles to be applied when considering section 306 of the Act. The courts have said time and time again that bankruptcy notices must conform strictly to the requirements of the bankruptcy legislation and rules of court.  A formal defect or any irregularity within the meaning of section 306 is one that could not reasonably mislead the debtor.  If the defect is of such a kind as could reasonably mislead the debtor upon whom it was served, the defect is fatal to the notice.  The test is not whether the debtor was in fact misled. The court cannot inquire whether the debtor has in fact been misled or not. It is sufficient that there is good ground for saying that the debtor might be misled. In judging of the probability of the debtor being misled one is bound not to deal too liberally with the requisites of the notice because of the quasi-penal consequences which a bankruptcy involves.

Applying those principles, my view is that whether or not the debtor in this case was misled, there are reasonable grounds for concluding that the debtor could have been misled.  The bankruptcy notice is capable of giving to a reasonable person reading it an understanding that an act of bankruptcy could be avoided by satisfying the local court that there is a counter-claim and that by filing an affidavit with the local court the time for compliance with the bankruptcy notice would have been extended.

In the circumstances it seems to me that the defect is one which would not attract the application of section 306 and on that basis, in the light of the conclusion which I have reached, I have no option but to dismiss the petition.

I certify that this and the preceding four pages are a true copy of the Reasons for Judgment of his Honour Justice Emmett.

Associate:

Dated: 11 February 1997

Heard:        11 February

Place:        Sydney

Decision:     11 February

Appearances:  Mr M. Rollinson appeared, instructed by Teakle,                Ormsby, George for the applicant.

              Mr V. Kerr appeared, instructed by Barton & Co.                for the respondent.