FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - application to set aside bankruptcy notice - claim of two defects in the notice - amount of judgment or order overstated by $2.00 - consequently, amount of “total debt owing” overstated by $2.00 - application of Bankruptcy Act 1966 (Cth), subs 41(5) - in the alternative, whether “formal defect or an irregularity” for the purposes of Bankruptcy Act 1966 (Cth), subs 306(1) - whether incomplete attachment of the judgment or order relied upon constitutes a “formal defect or an irregularity” for the purposes of Bankruptcy Act 1966 (Cth), subs 306(1) - application to “go behind the judgment or order”.

Bankruptcy Act 1966 (Cth), subss 415(5), 41(6), 306(1)

Bankruptcy Regulation 4.02, Bankruptcy Form 1 (Bankruptcy Notice)

ROBERT HUDSON JUNIOR v THOMAS JAMES DONALD and STEPHEN WILLIAM MICHAEL WHALAN

NG 7501 of 1997

LINDGREN J

SYDNEY

12 AUGUST 1997

REASONS FOR JUDGMENT

(ex tempore)

INTRODUCTION

The applicant (“Mr Hudson”) applies to set aside bankruptcy notice NN 639/97 dated 8 April 1997. The respondents (“the Creditors”) are the creditors named in that bankruptcy notice. According to the affidavits that were read on the hearing before me, the bankruptcy notice was served on Mr Hudson on 20 April 1997.

The proceeding was commenced when Mr Hudson filed an application to set aside on 5 May.  In circumstances to which I will refer later, that application was dismissed by consent on 26 May by Deputy District Registrar Quinn.  Notwithstanding that fact, on 19 June Mr Hudson filed, also in this proceeding, a second application seeking an identical order setting aside the bankruptcy notice.  It is that second application with which I have to deal.  The Creditors have not sought dismissal of the second application as an abuse of process or otherwise summarily. The parties have treated the second application as superseding the original one.

BACKGROUND

The dispute between the parties goes back to an election of members of the Gosford City Council held on 9 September 1995. Mr Hudson was an unsuccessful candidate.  On 8 December 1995 he applied in the Local Court at Gosford under s 329 of the Local Government Act 1993  (NSW) for an order dismissing from civic office, five individuals, including the Creditors, who had been successful in the election. Section 330 provided that a person against whom an order of dismissal is made may appeal against the order on a question of law to the Supreme Court. But an unsuccessful applicant for an order of dismissal is given no right of appeal.

Following a hearing on 10 and 11 October 1996, Magistrate Cocks dismissed Mr Hudson’s substantive application on 11 October.  On 24 October he ordered Mr Hudson to pay the costs of the fourth and fifth respondents before him (the Creditors) “in the sum of $5540.00, including their own witness expenses, to be divided equally between those respondents”, that is, $2270.00 to each of the Creditors. It is that order on which the bankruptcy notice is founded.

On 26 May 1997, the application which Mr Hudson had filed on 5 May 1997 to commence the present proceeding, was before Deputy District Registrar Quinn. Mr Quickenden of counsel appeared for the Creditors and Mr Hudson appeared in person. Consent short minutes were handed up, signed by Mr Quickenden and by Mr Hudson. The Registrar made orders in accordance with them. The Court record is as follows:

“[First page]

...

Registrar making Order:                       Quinn.

Date of Order:                           26 May 97

Where made:                             Sydney

THE COURT ORDERS THAT:

1.            Application filed on 5.5.97 is dismissed

2.            Each Party bears his or their own costs of the Application.

3.            NOTED:(a)     The Applicant Debtor acknowledges the debt to the Respondents including interest in the sum of $5,867.54 (Five thousand eight hundred & sixty seven dollars & 54 cents) will be paid to the Respondents solicitors by bank cheque within 28 days from today (26.5.97)

                            (b)       The Applicant undertakes to the court not to raise any objection to the Bankruptcy Notice served on him on 20.4.97.

   R J Hudson (signed)                                                    R E Quickenden (signed)

   ...........................................                                         .........................................

   for Applicant [sic]                                                       for Respondents.

                                            M. Quinn (signed)

                                       ...................................

                                               REGISTRAR

                                                   Time: 10.45                 Date 26/5/97”

[Second page]

...

“Registrar making Order:         Quinn

Date of Order:                           26 May 97

Where made:                             Sydney

THE COURT ORDERS THAT:

               3.(c)     The Respondents undertake not to give any creditors petition within 28 days from today (26.5.97)

                 (d)      In the event the costs order for $5,817.54 is rescinded or set aside by a Court on or before 30.9.97 the Respondents agree to repay the sum of $5,817.54.

   R J Hudson (signed)                                                    R E Quickenden (signed)

   ............................................                                        .........................................

   for Applicant [sic]                                                       for Respondents.

                                            M. Quinn (signed)

                                       ...................................

                                               REGISTRAR

                                                   Time: 10.45                 Date 26/5/97”

On 19 June, Mr Hudson filed summons No 11829 of 1997 in the Common Law Division of the Supreme Court of New South Wales, seeking leave to appeal out of time against Magistrate Cocks' order for costs made on 24 October 1996. On the same day, he filed his second application in the present proceeding for an order setting aside the bankruptcy notice.

On 4 August, Barr J dismissed Mr Hudson's summons in the Supreme Court. There is not before me a copy of his Honour’s reasons but, according to affidavit evidence, his Honour said:

            “[T]here is no right of appeal from the Local Court to the Supreme Court regarding this matter and further, in any event, the Magistrate appears to have made the costs order correctly.”

Two days later, on 6 August, Mr Hudson filed in the Supreme Court a notice of appeal against Barr J’s order.

In relation to the events before Registrar Quinn on 26 May, Mr Hudson says that he felt pressured, over-awed and did not understand fully what was happening. He submits that in consequence he is not bound by his signed undertaking contained in par 3 of the short minutes of that date. I need not set out Mr Hudson’s more detailed account of what he says occurred on 26 May because I do not find it necessary, in disposing of the present application, to rely on Mr Hudson’s undertaking.

REASONING

In support of his application to set aside, Mr Hudson (who has appeared in person before me) relies on two defects in the bankruptcy notice and also asks the Court to “go behind” the judgment or order.

The bankruptcy notice refers to a claim by the Creditors that Mr Hudson owes them $5867.54 as shown in a Schedule. According to the Schedule, the sum of $5867.54 comprises $5542.00 [sic] as the amount of the judgment or order, legal costs of $68.00 and interest of $257.54. The bankruptcy notice states that a copy of the judgment or order relied on by the Creditors is annexed to it. It is common ground that there was annexed to the bankruptcy notice served on Mr Hudson a copy of a certified copy of Magistrate Cocks’ order relating to Mr Donald alone, and no copy of an order relating to Mr Whalan (a certified copy of that order was subsequently, on 11 June 1997, supplied to Mr Hudson by the solicitors for the Creditors).  The certified copy of the order annexed to the bankruptcy notice referred only to the sum of $2,770.00 and referred to it as being an amount which Mr Hudson was ordered to pay to Mr Donald for costs.

I will deal with the two defects in the bankruptcy notice first, and the invitation to go behind the judgment or order later.

First defect in bankruptcy notice: overstatement by $2.00

The first defect relied on by Mr Hudson is an overstatement by $2.00 in two figures. The amount stated in the notice as the “Amount of judgment or order” was $5542.00 but the correct amount was, as noted earlier, $5540.00. The hearing proceeded on the footing that the effect of this overstatement was that the amount of the “Total debt owing” was also overstated by $2.00: that it was wrongly stated to be $5867.54 rather than $5865.54.

While I have said that Mr Hudson “relies” on the overstatement by $2.00 in the “Amount of judgment or order” and in the amount of the “Total debt owing”, this statement calls for explanation and qualification. It was counsel for the Creditors who drew attention to the matter in closing submissions. Mr Hudson did not refer to the particular defect at all, but I have chosen to treat him as having relied on it. Counsel for the Creditors also raised the possibility that the amount of interest also may have been overstated by a few cents. There is, however, no evidence of an overstatement of interest. I proceed simply on the assumption in favour of Mr Hudson that he relies on the conceded overstatement by $2.00 in the two amounts mentioned.

There is ample evidence that there has never been a misunderstanding on the part of Mr Hudson as to the correct amount.  He was, of course, a party to the order made by Magistrate Cocks, which made it clear that the total amount of the order was $5540.00 and that this comprised two sums of $2770.00, one payable to each of the Creditors. According to an affidavit sworn by Mr Hudson on 6 May 1997, he “was present in the Local Court throughout the entirety of the proceedings which gave rise to the order for costs the subject of the Bankruptcy Notice.” There was annexed to that affidavit a copy of the last page of Magistrate Cocks’ “Reserved Order as to Costs”. That page included the following “formal cost order”:

“The Applicant to pay the costs of the 4th and 5th respondent [sic] in the sum of $5540.00, including their own witness expenses, to be divided equally between those respondents.

            NO ORDER AS TO COSTS OF 1ST, 2ND AND 3RD RESPONDENTS.”

As noted earlier, the certificate relating to Mr Donald annexed to the bankruptcy notice referred to the amount of $2770.00.

Subsections 41(5) and (6) of the Bankruptcy Act 1966 (Cth) (“the Act”) provide:

“(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 mis-statement.

(6)          Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with subsection (5), he or she shall be deemed to have complied with the notice if, within the time allowed for payment, he or she takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it.”

The bankruptcy notice allowed twenty-one days after service, that is to say, until 11 May, for compliance.

Did Mr Hudson, by 11 May, give notice to the Creditors that he disputed the validity of the notice on the ground of the overstatement of either amount by $2.00? It is necessary to consider what Mr Hudson did by 11 May. On 5 May he filed the application by which the present proceeding was commenced.  On 7 May, he filed his affidavit sworn 6 May to which I referred earlier. In that affidavit, Mr Hudson complained that as to $600.00, the Magistrate’s order was “unenforceable at law” because, according to the affidavit, he (Mr Hudson) did not see the two Creditors attend to give evidence and they were not called to give evidence. This was not a complaint as to the overstatement by $2.00, or even by $600.00, but rather an invitation to go behind Magistrate Cocks’ judgment or order to the extent that it included the sum of $600.00. Paragraph 12 of Mr Hudson’s affidavit sworn 6 May is as follows:

“12.       The claim in the Bankruptcy Notice is in the sum of $5,867.54 claiming an amount of judgment or order in the sum of $5,542.00 but I have been served with an affidavit of Paul Tonkin sworn on 20th February 1997 being ‘Annexure A’ to the Bankruptcy Notice declaring that costs awarded but remaining unsatisfied are to the extent of $2,770.00.”

Again, the complaint made is not as to an overstatement by $2.00, but as to the absence of any annexed document relating to one of the Creditors.

In my opinion, Mr Hudson did not, by 11 May, give notice to the Creditors that he disputed the validity of the bankruptcy notice on the ground of the overstatement by $2.00, either in the amount of the judgment or order or in the amount of the total debt said to be owing.

How does subs 41(5) apply to the particular bankruptcy notice? Subsection 41(5) refers to an overstatement of “the amount in fact due”. Prior to recent amendments, Bankruptcy Rule 8 required that for the purposes of par 41(1)(a) of the Act, a bankruptcy notice be in accordance with the prescribed form, and the prescribed form of bankruptcy notice, Form 4, provided for a statement only of the amount which the judgment creditor claimed to be the sum “due by [the debtor] to him under a final judgment (or order) obtained by him against [the debtor]”. Since 16 December 1996, however, subs 41(2) of the Act has provided that a bankruptcy notice must be in accordance with the form prescribed in the Regulations, and Bankruptcy Regulation 4.02 has provided that the form of bankruptcy notice set out in Form 1 in Schedule 1 is prescribed.  Form 1 provides for a bankruptcy notice to state the amount which the creditor claims the debtor owes “as shown in the Schedule”. The Schedule is as follows:

(Amounts, where applicable, are to be inserted in column 2)

_____________________________________________________________________________

How do subss 41(5) and (6) apply to the new form?  Clearly, the expression in subs 41(5) “the sum specified in the notice as the amount due to the creditor” is apt to refer at least to the amount shown as “Total debt owing.” Does it also refer to the component parts of that amount, in particular, “Amount of judgment or order”? Although the contrary is arguable, I think that it does, at least in a case such as the present, where the overstatement in the “Total debt owing” is no more than a reflection of an overstatement in one of those elements. Except in a case of an arithmetical error of addition, an overstatement of the “Total debt owing” will always predicate an error in one or more of the component elements. To confine the operation of the subsections to a case where there is an overstatement only of the “Total debt owing” due to an arithmetical error of addition would be too narrow a construction. Where, as here, the overstatement of the amount of the “Total debt owing” is attributable to an overstatement in the amount of one or more components in the Schedule, the excessive specification of “the sum specified in the notice as the amount due to the creditor” to which subs 41(5) refers, extends to embrace the corresponding and causative excessive specification in the Schedule of an amount or amounts of the latter kind.

But if, contrary to the view which I have just expressed, subs 41(5) does not apply to the over-statement of the “Amount of judgment or order” in the present case, I think that subs 306(1) of the Act does. That familiar subsection is as follows:

“Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.”

In my opinion the overstatement by $2.00 in the “amount of judgment or order” is a “formal defect or an irregularity” within the scope of subs 306(1), in that the defect “is one that could not reasonably mislead the debtor [Mr Hudson]”: see, for example, Re Gray; Ex parte Person to Person Financial Services Pty Ltd (1980) 48 FLR 379 (Lockhart J) at 381. In determining whether Mr Hudson, as the particular debtor served, could reasonably be misled, it is well established that the Court may consider the factual context extraneous to the terms of the actual notice: see, for example, Re Wimborne; Ex parte Debtor (1979) 24 ALR 494; Clyne v Deputy Commissioner of Taxation (Cth) (1982) 42 ALR 702; and Re Williams; Ex parte McCourt (1983) 76 FLR 133. I find, on the evidence noted earlier, that Mr Hudson could not reasonably have been misled, embarrassed or confused by the overstatement by $2.00 in the amount of the judgment or order in the present case. No injustice has been caused by it. Accordingly, subs 306(1) operates to prevent that overstatement from invalidating the bankruptcy notice.

If Mr Hudson had given notice to the Creditors by 11 May that he disputed the validity of the bankruptcy notice on the ground of the mis-statement by $2.00 in “the sum specified in the notice as the amount due to the creditor”, a question would have arisen whether the bankruptcy notice must, as a matter of law, be set aside, or subs 306(1) remained available with the potential to save the notice from invalidity. Clearly, since Mr Hudson did not give such notice, I am not called upon to explore this question nor deal with the authorities favouring the opposing views. (The issue was referred to by Sackville J in Re Murdoch; ex parte Australia & New Zealand Banking Group Limited, unreported, 7 October 1994, and more recently, in Re Demarco; ex parte Australia & New Zealand Banking Group Limited, unreported, 29 July 1997, where notice was given pursuant to subs 41(5), Beaumont J considered that subs 306(1) was available, but did not operate on the facts to save the particular notice from invalidity). I indicate, however, that if notice had been given by Mr Hudson and if subs 306(1) is available in such a case, I would not have set aside the notice. My reason for not doing so would have been, as explained above, that Mr Hudson could not reasonably have been misled, embarrassed or confused by the mis-statement and no injustice has been caused by it.

In the result, by reason of subs 41(5) alone or, in the alternative, by reason of subs 41(5) as to the overstatement in the “Total debt owing” and subs 306(1) as to the overstatement in the “Amount of judgment or order”, I would not set aside the bankruptcy notice on the ground of the first defect relied on by Mr Hudson.

Second defect in bankruptcy notice - incomplete attachment of judgment or order relied on

The second defect on which Mr Hudson relies is that, as noted earlier, there was not attached to the bankruptcy notice a copy of the judgment or order relating to Mr Whalan.  The way in which Mr Hudson put his case in this respect is that Bankruptcy Regulation 4.02 requires the attachment of the certificate.  It does not do so in terms.  However, again as noted earlier, the prescribed form of bankruptcy notice (Form 1) refers to the attachment of “[a] copy of the judgment or order relied upon by the creditor”. In the present case, for lack of a document relating to Mr Whalan, the attachment was incomplete.  So far as "Annexure A" to the present bankruptcy notice revealed, Mr Hudson had been ordered to pay only $2770 to Mr Donald. Should the absence of a copy of a judgment or order relating to Mr Whalan lead to a setting aside of the bankruptcy notice? 

Again, I think the question is answered by subs 306(1) and the fact that Mr Hudson could not reasonably have been misled, embarrassed or confused. Nor has any injustice been caused by the incompleteness of the annexure. Mr Hudson knew that the attachment was incomplete, as his affidavit sworn 6 May, referred to earlier, demonstrates. He also knew that Magistrate Cocks had made an order which operated identically as regards the two Creditors. He must have known that a copy of the judgment or order relating to Mr Whalan would be, mutatis mutandis, identical in form to that relating to Mr Donald which was annexed to the bankruptcy notice. I would also refuse to set aside the bankruptcy notice on the ground of the second defect.

Invitation to go behind judgment or order

The Court has jurisdiction to go behind a judgment or order on which a bankruptcy notice is based, even in the context of an application to set aside the notice as distinct from that of the hearing of a creditor’s petition (the basis of the jurisdiction was examined by Gummow J in Olivieri v Stafford (1989) 24 FCR 413 (FC) at 427-432).

Mr Hudson has not attempted to show that both Magistrate Cocks (whose reasons for the costs order which he made are in evidence before me) and Barr J fell into error. I do not regard the fact that Mr Hudson did not see the Creditors in attendance at the Local Court at Gosford on 10 or 11 October 1996 as sufficient to warrant my going behind the learned Magistrate’s order.

CONCLUSION

In the result, neither ground advanced for the setting aside of the bankruptcy notice is made out.

This is not, of course, a hearing of a creditor’s petition and I express no view as to what will happen on the hearing of any such petition.

1.         I dismiss the application brought by application filed on 19 June 1997.

2.         I order the applicant debtor to pay the costs of the respondent creditors of that application.

Associate:

Dated:              26 August 1997