FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - bankruptcy notice - application for extension of time for compliance - application filed one day after act of bankruptcy - whether power to extend time under ss 41(5), 41(7), 41(6A) or 33(1)(c) of the Bankruptcy Act 1966 (Cth) - s 41(6A) when application filed after the expiration of time fixed for compliance with the requirements of the bankruptcy notice - whether amount claimed in notice was an overstatement - mortgagee in possession of land - claim for overstatement for failure to account for agistment income and occupation rent during possession, failure to credit at the proper time the proceeds of the sale conversion of chattels - mismanagement of property - Counter‑claim, set‑off or cross demand equal to, or exceeding the debt claimed under s 41(7) - requirements for establishing - need to establish a prima facie case - whether bankruptcy notice defective because of an overstatement of the amount of interest - calculation of interest in a leap year - whether notice irregular on its fact because an understatement of the amount of interest claimed - whether notice defective because misleading and unclear what amount to be paid - use of the words “and not more” to define debt.

Bankruptcy Act 1966 (Cth):  s 33(1)(c), s 41(5), s 41(6A), s 41(6C), s 41(7)

Ebert v The Union Trustee Company of Australia Limited (1960) 104 CLR 346- followed and applied

Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 - followed

Re Clubb; Ex parte Clubb v Westpac Banking Corporation (1990) 93 ALR 123 - distinguished

Re The Bankruptcy Act 1966; Ex parte Commercial Banking Co of Sydney Ltd (1979) 23 ALR 522 - distinguished

Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 - applied

Re Farrugia; Ex parte Deputy Commissioner of Taxation (NSW) (1988) 80 ALR 651 - followed

Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378 - followed

Re Vella; Ex parte Seymour (1983) 67 FLR 287 - followed

Livestock Traders International Pty Ltd v Bui (1996) 22 ACSR 51 - considered

Graywinter Properties Pty Ltd v Dyer (1997) 15 ACLC 302 - considered

Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125 - followed

Streimer v Tamas (1981) 54 FLR 253 - followed

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

RE:  SHADDOCK; EX PARTE COMMONWEALTH BANK OF AUSTRALIA

VG 7800 of 1997

GOLDBERG J

MELBOURNE

9 APRIL 1998

IN THE MATTER OF EDWARD ARTHUR SHADDOCK

THE COURT ORDERS THAT:

1.         The application filed 10 December 1997 be dismissed.

2.         The applicant pay the respondent’s taxed costs of the application.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

IN THE MATTER OF EDWARD ARTHUR SHADDOCK

REASONS FOR JUDGMENT

The applicant applies to the Court for an order that the bankruptcy notice issued by the respondent dated 6 November 1997 and served on the applicant on 18 November 1997 be set aside.

Background

On 10 October 1995, the respondent obtained a judgment in default of defence in the Supreme Court of Victoria against the applicant that it recover possession of a farm property situated at Corbett Road, Galah, owned by the applicant and mortgaged by him to the respondent.  The respondent also recovered judgment for $231,654.12 together with interest and costs, a total of $237,091.62.  On 7 February 1996, the sheriff ejected the applicant from the property and the respondent took possession of the property as mortgagee.

The respondent sold the property on 25 March 1997 pursuant to contracts which provided for settlement 60 days thereafter or earlier by agreement.  The evidence did not establish the date on which settlement actually occurred but possession was given to the purchasers and on 5 June 1997, the respondent credited the applicant with the net proceeds of sale of $214,644.66.  Interest had accrued on the judgment debt and by 31 October 1997, after allowing for the proceeds of the sale of the property the balance of the judgment debt totalled $52,904.30.  On 6 November 1997, the respondent obtained the issue of a bankruptcy notice against the applicant in which it was claimed that the applicant owed the respondent $75,350.64 and no more comprising the balance of the judgment debt, together with interest.  The bankruptcy notice was served on the applicant on 18 November 1997 and it required the applicant, within 21 days after service on him of the notice, to pay to the respondent the amount of the debt or to make an arrangement to the respondent’s satisfaction for settlement of the debt.

On 10 December 1997, the applicant filed an application in the Federal Court seeking to set aside the bankruptcy notice on the ground that the applicant has a counter‑claim, set‑off or cross demand equal to, or exceeding the sum specified in the bankruptcy notice as owing to the respondent.  The application, as filed, was expressed to be made pursuant to s 41(6a) (sic) and (7) of the Bankruptcy Act 1966 (Cth) (“the Act).

Notwithstanding the terms of the application as filed, at the commencement of the hearing the applicant alleged two grounds for the setting aside of the bankruptcy notice:

(a)        the amount stated in the bankruptcy notice exceeds the amount due to the respondent;

(b)        he has a counter‑claim, set‑off or cross demand equal to, or exceeding the debt claimed in the bankruptcy notice which the applicant could not have raised in the Supreme Court proceeding:  s 40(1)(g) of the Act.  This ground was not pressed in final address.

These grounds were later expanded to include the submission that the amount stated in the bankruptcy notice understated the amount due and that the notice was invalid unless it made it clear that no more was claimed than the amount specified.

The factual basis for the grounds is the same:

(a)        When the applicant was ejected from the property by the sheriff on 7 February 1996 and the respondent took possession, there were chattels on the property and the applicant says he was refused access to collect them.  The purchasers have retained and converted the chattels.  The applicant did not lead direct evidence as to the value of these chattels.

(b)        Between 7 February 1996 and 5 June 1997 the respondent, as mortgagee in possession, was under a duty so to manage the land as not to permit it unreasonably to be damaged or caused to deteriorate in value.  Alternatively, it is said that the respondent had a duty to manage the property in such a way as to maintain its value so far as it was practicable and reasonable.  It is said that the respondent breached these duties.  The applicant says that when he was ejected from the property a paddock was ready for sowing but the manager, appointed by the respondent, failed to sow any sort of crop on the property or fill the dams as a result of which erosion occurred, which diminished the value of the land.  It is also said that the manager allowed the house and garden to fall into disrepair and allowed the land to become over grazed, all of which devalued the land.  The details of the loss said to be suffered by the applicant are contained in the County Court writ issued on 3 December 1997 against the respondent and the purchasers.  In this writ the applicant claims the return of the chattels, damages against the respondent in respect of the reduction in the value of the land, damages for conversion of the chattels and an accounting of the profits earned by the respondent while mortgagee in possession.  It is asserted by the applicant that the value of the land deteriorated by an estimated $130,000, which amount is based on valuation evidence.

(c)        The respondent failed to account to the applicant in respect of profits earned by it as mortgagee in possession by agisting stock on the land.  No amount is claimed as it is said that the profits cannot be determined until discovery of the respondent’s records and files.

(d)        The respondent was obliged to pay the applicant or allow him a credit for an occupation rent during the period it occupied the property.

(e)        The respondent received the net sale proceeds of the property some time before it credited that amount against, and in reduction of, the judgment debt.

The applicant then asserts a belief that the amount of the damages in respect of his proposed action against the respondent will exceed the amount which he owes to the respondent, but he does not quantify this amount in any way. 

In order to establish a counter‑claim, set‑off or cross demand under s 41(7) of the Act, it is insufficient for the applicant to assert the existence of such a counter‑claim, set‑off or cross demand.  In Ebert v The Union Trustee Company of Australia Limited (1960) 104 CLR 346 the High Court said at 350:

“The appellant cannot satisfy the Court that a cross demand exists by showing no more than that she propounds one and states how she suggests that she can make it out.  In Re Duncan; Ex parte Modlin, Street J said that the debtor need not satisfy the Court that there are a reasonable grounds for believing that he will establish his cross action, but only that he has a bona fide claim which he is fairly entitled to litigate.  This perhaps is expressed too favourably to the debtor.  In Re A Debtor Roxburgh J said:  ‘But not every demand will suffice.  A demand made in bad faith would not be good enough.  The debtor must satisfy the Court that he has a genuine demand ....  But in my opinion a demand must be more than bona fide:  the Court must be satisfied that it has a reasonable probability of success’.  Perhaps the standard may be expressed by saying that the debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter‑claim, set‑off or cross demand.”

The relevant test was also discussed by Lockhart J in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 at 437 ‑ 440 where his Honour expressed the opinion that the Federal Court should follow the decision of the High Court in Ebert’s case and continued (439):

“Hence a debtor must show that he has a prima facie case.  However, I do not understand Ebert’s case as deciding that this court must undertake a preliminary trial of the counter‑claim, set‑off or cross demand; rather this could must be satisfied that the debtor has a fair chance of success.”

Was the application filed out of time?

On the second day of the hearing the respondent raised the issue that the application to set aside the bankruptcy notice had been filed out of time and that the Court had no jurisdiction to entertain the application.

In the course of final addresses counsel for the applicant sought leave to amend the application to meet this issue.  The application as issued in its unamended form, claimed:

“On the grounds stated in the accompanying affidavit, the applicant claims:

1.         That the Bankruptcy Notice dated 6 November 1997 and served upon the debtor on 18 November 1997 be set aside on the grounds that the applicant has a counter‑claim, set‑off or cross demand equal to or exceeding the sum specified in the Bankruptcy Notice as owing to the creditors”.

The amendment sought was to make the following claims by the applicant:

“1.       That the time for giving of notice under s 41(5) of the Bankruptcy Act 1966 that the debtor disputes the validity of the Bankruptcy Notice the subject of this application on the ground that the sum specified in the Bankruptcy Notice as the amount due to the creditor exceeds the amount in fact due be extended to and including 11 December 1997.

2.         That the Bankruptcy Notice dated 6 November 1997 and served upon the debtor on 18 November 1997 be set aside.

3.         Alternatively the said Bankruptcy Notice be declared to be void.”

Mr Nolan, who appeared for the respondent, opposed the amendment on the basis that as the act of bankruptcy, namely the failure to comply with the requirements of the notice before the expiration of the time fixed for compliance with the requirements of the notice, had occurred before the application was filed, there was no point in allowing the amendment as the application must fail.  It was submitted by Mr Nolan that the subject matter of the application to set aside the bankruptcy notice was removed once the act of bankruptcy was committed.  He submitted that the act of bankruptcy was committed by the end of 9 December 1997 and that that fact could not be retrospectively affected or treated as having ceased.  He relied upon Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378 especially at 381 and Re Vella; Ex parte Seymour (1983) 67 FLR 287 at 289.  He also relied by analogy on two decisions involving applications to set aside statutory demands under s 459G and s 459H of the Corporations Law namely, Livestock Traders International Pty Ltd v Bui (1996) 22 ACSR 51 and Graywinter Properties Pty Ltd v Dyer (1997) 15 ACLC 302.  In the former of those cases Jenkinson J said at 55:

“The statutory demand was still in effect at the end of the period for compliance and at that time the applicant was taken to fail to comply with the demand.  Once that had happened, the application for an order setting aside the demand lacked subject matter, in my opinion.”

In the latter of those cases it was said at 306:

“Once the time for compliance as fixed by the statute or extended by order has expired, the presumption specified in s.459C(2)(a) is immediately available and there is no longer any scope for bringing, reviving or continuing an application to set aside the statutory demand.”

Mr Sandbach submitted there was power to extend the time under s 41(5) of the Act and that by so doing the Court could determine the issue as to whether there was a misstatement in the amount specified in the bankruptcy notice as the amount due to the creditor.  The difficulty with this submission is that it does not pay sufficient regard to the provisions of s 41(6A) and s 33(1)(c) of the Act.  Pursuant to s 40(1)(g) of the Act, a debtor commits an act of bankruptcy if a creditor has served a bankruptcy notice on the debtor and the debtor does not, within the time specified in the notice, comply with the requirements of the notice or satisfy the Court that he has a counter‑claim, set‑off or cross demand equal to or exceeding the amount of the judgment debt, being a counter‑claim, set‑off or cross demand that he could not have set up in the proceeding in which the judgment was obtained.  As the bankruptcy notice was served on 18 November 1997 and required compliance within 21 days, the applicant had until the end of 9 December 1997 within which to comply with the notice. 

Section 41(6A) of the Act provides that where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice (that is to say before the end of 9 December 1997), either proceedings to set aside the judgment in respect of which the bankruptcy notice was issued have been instituted by the debtor or an application to set aside the bankruptcy notice has been filed with the Registrar, the Court may, subject to subs (6C) extend the time for compliance with the bankruptcy notice.  Section 41(7) provides that where, before the expiration of the time fixed for compliance (that is to say before the end of 9 December 1997), the debtor has filed an affidavit claiming he has such a counter‑claim, set‑off or cross demand as is referred to in s 40(1)(g) and the Court has not determined that issue, the time fixed for compliance is deemed to have been extended to the day on which the Court determines the issue.  No such application as contemplated by s 41(6C) or (7) was made prior to the end of 9 December 1997. 

Although s 33(1)(c) empowers the Court to extend any time limited by the Act or any time fixed by the Court or the Registrar under the Act for doing an act or thing, that subparagraph expressly excludes “other than the time fixed for compliance with the requirements of a bankruptcy notice”.  It follows from the relevant sequence of events that the act of bankruptcy occurred at the end of 9 December 1997. 

In Re Hanby; Ex parte Flemington Central Spares Pty Ltd (supra), Gibbs J (as he then was) said at 381:

“However, the critical time for determining whether an act of bankruptcy has been committed is the date on which the period limited by the bankruptcy notice expired ... At the time when the bankruptcy notice expired in the present case, namely 30 May 1966, the judgment had not been set aside and remained a final judgment.  Since the debtor had not by that date complied with the requirements of the notice, the act of bankruptcy was then completed.  It is not possible to say that by reason of subsequent circumstances an act of bankruptcy once committed ceases to have been committed or must be treated as though it had never been committed.”

This passage was relied upon by Morling J in Re Vella; Ex parte Seymour (supra) in concluding that the setting aside of a bankruptcy notice after the time for compliance has expired does not have the effect of annulling the act of bankruptcy already committed.  His Honour said at 288 ‑ 289:

“It is necessary to keep clearly in mind the effect of non‑compliance with the bankruptcy notice.  The effect was, of course, that the debtor committed an act of bankruptcy when she failed either to comply with its terms or to take appropriate action under s.41(6A).  The subsequent setting aside of the judgment did not alter the fact that the act of bankruptcy has already been committed.  The act of bankruptcy remained extant.  No doubt, in the exercise of its discretion the Court would not make a sequestration order if at the time of the hearing of the petition it was shown that the judgment debtor was not in fact indebted to the judgment creditor.  But the act of bankruptcy referred to in s.41(g) would be complete.”

A similar conclusion was reached by Lockhart J in Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125 especially at 128 ‑ 129.  His Honour said at 128:

“The Court’s power under s.41(6A) to extend time for compliance with a bankruptcy notice may be exercised only where the proceedings to set aside the judgment or order in respect of which a notice was issued have been instituted, or the application to set aside the bankruptcy notice has been filed with the registrar, in each case before the expiration of the time fixed by the Court or the registrar for compliance with the requirements of the notice:  see the introductory words of sub‑s.(6A).”

Later in his judgment, Lockhart J said at 130:

“Plainly the power to extend time for compliance is in aid of the power to set aside the notice itself.  What is the point in extending time for compliance otherwise and for the purpose of enabling the Court to hear the application to set aside the notice without the occurrence of an act of bankruptcy in the meantime?  If it did occur this would be destructive of the very power itself.”

In Streimer v Tamas (1981) 54 FLR 253 the majority of the Full Federal Court (Deane and Ellicot JJ) held that s 41(6A) of the Act confers jurisdiction on the Court to make orders extending the time for compliance with the bankruptcy notice, notwithstanding the fact that at the time of the making of the order, the time for compliance with the bankruptcy notice has already expired provided that one of the two limbs of sub s(6A) has been fulfilled.  In that case, proceedings to set aside the judgment in respect of which the bankruptcy notice was issued had been instituted by the respondent and an application to set aside the bankruptcy notice had been filed before the expiration for the time fixed by the registrar for compliance with the requirements of the bankruptcy notice.  At 257 ‑ 258 their Honours said:

“Section 41(6A) introduced into Commonwealth bankruptcy legislation, for the first time, express provision on the subject of extending the time for compliance with the requirements of a bankruptcy notice.  The Parliament plainly turned its attention to the question of what steps needed to be taken before the expiry of the time which the bankruptcy notice fixed for compliance with its terms.  It specified two alternative steps, namely, the institution of proceedings to set aside the relevant judgment or order or the filing of an application to set aside the bankruptcy notice.  Subject to either of those steps being taken within the time limited for compliance, the power to extend time is conferred in general words.  It would, in our view, be contrary to the plain import of the words used by Parliament to construe s.41(6A) as requiring not only that one or other of the alternative express conditions precedent the jurisdiction be fulfilled within the time originally fixed for compliance but as also requiring that both the application for an order and any initial order be made within that time. Indeed, such a constricted construction would render otiose a large part of the subsection, namely, the words ‘before the expiration of the time fixed for the Court or the Registrar for compliance with the requirements of a bankruptcy notice’.”

Their Honours said that the construction of s 41(6A) which they preferred:

“does not mean that s 41(6A) operates so as restrospectively to divest rights to rely upon an act of bankruptcy which would otherwise exist.  What s 41(6A) does is to modify, by the introduction of a contingency, the actual and potential rights and liabilities resulting from failure to comply with the requirements of a bankruptcy notice within the time allowed by a notice in any case where, within that time, one of the two conditions specified in the subsection has been fulfilled”.

(See also Re Carter; Ex parte National Mutual Trustees Limited (1995) 57 FCR 185 and Re Riordan; Ex parte Direct Acceptance Corporation Ltd (In Liquidation) (1995) 63 FCR 147).

It follows from these authorities and the principles to which they refer that the Court has no jurisdiction to entertain the application presently before it.  The amendments proposed or sought by the applicant do not solve the problem of jurisdiction.  The act of bankruptcy remains.  It is true that in Re Clubb; Ex parte Clubb v Westpac Banking Corporation (supra) Burchett J held that the Court had power to extend the time for compliance with s 41(5) of the Act in circumstances where the notice had been given after the time allowed for payment specified in the bankruptcy notice.  It does not appear from the judgment whether the application to set aside the bankruptcy notice was filed within time.  However, Burchett J followed the decision of Pincus J in Re Wilhelmsen; Ex parte Gould (1986) 11 FCR 107, which his Honour said was directly in point and affirmed the Court’s powers.

In Re Wilhelmsen; Ex parte Gould (supra) Pincus J concluded that the time for giving a s 41(5) notice could be extended without affecting the time for compliance with the requirements of the bankruptcy notice.  It is not clear from the judgment as to whether the application to set aside the bankruptcy notice was filed before the expiration of the time fixed for compliance with the requirements of the bankruptcy notice.  It appears that the relevant notice for the purposes of s 41(5) was given independently of the application to set aside the bankruptcy notice but there was no evidence from which it could be concluded that the creditors received the notice within the required time.  It seems to be implicit in his Honour’s reasons that the application was filed within the required time.  At 109 his Honour said:

“To my mind, the question is whether it is implicit in s 41(5), read with s 33(1)(c), that one cannot extend the time for giving s 41(5) notice other than by extending the time for compliance with the requirements of the bankruptcy notice, under s 41(6A).  My conclusion on that point is in favour of the debtor, because, although a s 41(5) notice must be prima facie be given within the time allowed for compliance with the requirements of a bankruptcy notice (which time is briefly described as ‘time allowed for payment’), that is to be read subject to s 33(1)(c).  I think the time for giving a s 41(5) notice may be extended without affecting the time for compliance with the requirements of the bankruptcy notice.”

I am therefore satisfied that an act of bankruptcy had occurred by the end of 9 December 1996 and that accordingly, the application filed on 10 December 1996 is ineffective to ground a jurisdiction in the Court to extend the time for compliance with the bankruptcy notice.  Although s 41(7) allows a deemed extension of time in circumstances where the debtor has filed an affidavit to the effect that he has such a counter‑claim, set‑off or cross demand as is referred to s 40(1)(g), that deemed extension only comes into operation in circumstances where the affidavit is filed “before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice”.  That did not occur in the instant case as the affidavit was only filed on 10 December 1997.

There is no point therefore, in allowing the amendments sought as they do not cure the jurisdictional defect created by the absence of the filing of the application on or prior to 9 December 1997.

I do not consider that the failure to file the application within the time period prescribed by s 41(6A) of the Act is a procedural irregularity capable of cure.  Section 33(1)(c) expressly disallows the power to extend the time fixed for compliance with the requirements of a bankruptcy notice.  In short, the defect which has occurred is fatal to jurisdiction and not a mere irregularity.  Notwithstanding recent dicta for a more flexible approach towards procedural irregularities, (see Emanuele v Australian Securities Commission (1997) 188 CLR 114; Re Saunders (A Bankrupt) [1967] Ch 60; Crayford Freight Services Ltd v Coral Seatel Navigation Co & Ors (unreported, Burchett, Ryan and Marshall JJ, 26 March 1998)), I consider the failure to file the application within the time prescribed by s 41(6A) as being a condition precedent to the exercise of the jurisdiction sought to be invoked by the applicant and not simply a procedural irregularity.

Did the bankruptcy notice overstate the interest payable?

At the commencement of the hearing Mr Sandbach, who appeared for the applicant, submitted that there was a threshold issue that the bankruptcy notice overstated the amount of interest due on its face.  The bankruptcy notice claimed that a debt was owing of $75,350.64 which included a component of $52,904.28 being interest accrued since the date of the judgment.  That interest component included interest of $51,702.85, being interest calculated on $237,091.62 for the period 11 October 1995 to 5 June 1997 inclusive, at 13.2%.  That period was said to be 603 days.  In fact it is 604 days, the judgment in respect of which it has accrued being given on 10 October 1995.  It was submitted by Mr Sandbach that that period of interest included the leap year 1996, which was a year of 366 days rather than 365 days.  He submitted that interest had been calculated at a daily rate for the leap year based on a daily rate calculated by reference to 365 days rather than 366 days.  It followed, he submitted, that the daily rate used for the leap year was higher than it would have been if a denominator of 366 had been used to determine the daily rate. 

In support of this submission he relied upon Re Clubb; Ex parte Clubb v Westpac Banking Corporation (1990) 93 ALR 123.  In that case Burchett J was faced with a calculation of interest in a bankruptcy notice for a period which included a leap year.  Different interest rates applied in respect of different periods during the leap year.  The creditor had determined the amount of interest on a daily basis by reference to a daily rate calculated by a denominator of 365 days and applied this daily rate to the relevant days in the leap year.  His Honour concluded that in respect of the leap year, the total charge for interest exceeded that which was allowed by the relevant statutory provision and that accordingly, the bankruptcy notice was invalid and he set it aside.  However, in the instant case there is no such excessive charge or calculation of interest.  If one approaches the whole of the leap year 1996 on the basis that interest is payable in respect of that year at the rate of 13.2% per annum, one reaches the figure of $51,702.85 specified in the bankruptcy notice.  That amount is determined in the following way:

(a)        interest on $237,091.62 for the period 11 October 1995 to 31 December 1995 (82 days) at 13.2% per annum equals $7,030.90;

(b)        interest on $237,091.62 for the period 1 January 1996 to 31 December 1996 (366 days) at 13.2% per annum equals $31,296.09; and

(c)        interest on $237,091.62 for the period 1 January 1997 to 5 June 1997 (156 days) at 13.2% per annum equals $13,375.86.

The total of these three amounts is $51,702.85, which is the same as the figure in the bankruptcy notice.  Put shortly, the situation with which Burchett J was faced in Re Clubb (supra) is not faced in the present bankruptcy notice.  In Re Clubb (supra), it was necessary to apply a daily rate of interest to particular periods or components of the leap year.  It is not necessary in the present circumstances to break up the leap year into separate components or different periods in order to calculate or use different rates of interest.  Accordingly, the circumstances are distinguishable from those which faced Burchett J in Re Clubb (supra).  Although the bankruptcy notice specified a period of 603 days the relevant period is 604 days commencing on the day after judgment and the figure found in the bankruptcy notice is consistent with a calculation by reference to 604 days.

Did the bankruptcy notice understate the interest payable?

Mr Sandbach submitted that the bankruptcy notice was irregular on its face because there was an understatement of the amount of interest claimed and it was embarrassing as it was not clear to the applicant as to whether, if he paid the amount claimed in the notice, there would be no further liability imposed upon him by the respondent.  The reason for this is that in paragraph 1 of the bankruptcy notice, the respondent:

“claims you owe the creditor a debt of $75,350.64 and no more, as shown in the Schedule”.

The schedule identified that the total debt there specified of $75,351.24 was derived from calculations which included interest since the date of judgment of $52,904.28.  This amount was shown elsewhere in the notice as $52,904.30.  This amount represented interest up to and including 31 October 1997.  The bankruptcy notice was issued on 6 November 1997 and it was therefore said, that the bankruptcy notice did not claim interest for the period starting from and including 1 November 1997 to 6 November 1997.  In paragraph 2 of the bankruptcy notice the respondent claimed that “the debt is due and payable by you” and a copy of the judgment or order relied upon was attached.  Paragraph 3 of the bankruptcy notice was in the following form:

“You are required, within twenty‑one days after service on you of this Bankruptcy Notice:

(a)       to pay to the creditor the amount of the debt; or

(b)       to make an arrangement to the creditor’s satisfaction for settlement of the debt”.

Mr Sandbach submitted that because paragraph 3 did not refer to payment of the amount of the debt “and no more” and did not refer to making an arrangement to the creditor’s satisfaction for the settlement of the debt “and no more”, that the bankruptcy notice left it open to the creditor to come back later and claim further interest from the applicant.  Mr Sandbach submitted that if there is an understatement of the amount claimed, the bankruptcy notice has to make it clear that no more is claimed other than the amount specified.  He said that that had not occurred in the circumstances before the Court.  He relied upon Re The Bankruptcy Act 1966; Ex parte Commercial Banking Co of Sydney Ltd (1979) 23 ALR 522.  In that case the bankruptcy notice claimed that the total amount of “$1680.19 and no more” was due and notice was given that the debtor was required to pay the sum of $1680.19 and no more or secure the payment “of the sum referred to in the last preceding paragraph to the satisfaction” of the court or the judgment creditor.  It was said that because the requirement to secure the payment of the sum referred to in the last preceding paragraph did not refer to that sum “and no more” that there was a defect.  At 527 Lockhart J said:

“I see no reason in principle why a bankruptcy notice, claiming the amount of a judgment debt and statutory interest thereon, cannot in terms limit the date to which interest is calculated and claimed provided it is made clear that nothing more is claimed.  The judgment debtor knows where he stands.  He may comply with the notice and pay the total amount claimed or secure payment thereof and, if he does not do so, he will have committed an act of bankruptcy.”

Lockhart J concluded that in order for the notice to be valid:

“There ought to be consistency between paras (a) and (b) and the introductory paragraph of the bankruptcy notice.  If the words ‘and no more’ are to appear at all, they ought to appear in the same sense throughout the document in all relevant places.” (529)

In my view, the facts and circumstances before Lockhart J are distinguishable from those in the present case.  Before Lockhart J there was an inconsistency because the words “and no more” which were attached to the amount claimed and the amount required to be paid, but not to the amount required to be secured to the satisfaction of the Court or the judgment creditor. 

No such inconsistency appears in the notice before me.  The respondent claims the applicant owes the respondent “a debt of $75,350.64 and no more” and thereafter in paragraph 3 there is a requirement to pay to the creditor the amount of “the debt” or to make an arrangement to the creditor’s satisfaction of settlement of “the debt”.  In my opinion, the reference to “the debt” wherever appearing in paragraph 3 is a reference back to “a debt of $75,350.64 and no more”.  It was not necessary, in my opinion, to include the words “and no more” in sub‑paragraphs (a) and (b) of paragraph 3.  However, if the words “and no more” had been included in only one of sub‑paragraphs (a) or (b) of paragraph 3, then there would have been an inconsistency and potential confusion and embarrassment. 

I consider that the form of the notice before me is not such as being objectively capable of misleading the applicant as to what is necessary for compliance with the notice.  The relevant principle to be applied was identified by the majority of the High Court (Mason CJ, Wilson, Brennan and Gaudron JJ) in Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 at 79 ‑ 80:

            “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:  James v Federal Commissioner of Taxation; Pillai.  In such cases the notice is a nullity whether or not the debtor in fact is misled:  In Re A Judgment Debtor, 530 of 1908.

            If the amount specified in a bankruptcy notice is in fact due and payment is claimed in accordance with the judgment, the essential requirements of s.41(2)(a)(i) - the only requirements presently relevant - are met.  Understatement of the amount due, whether it be an understatement of the judgment debt or of interest payable thereon, will thus constitute a defect which is substantive rather than formal only if the understatement is objectively capable of misleading the debtor as to what is necessary for compliance with the notice.

            It may be that, in a given case, understatement is capable of misleading the judgment debtor particularly if the notice is capable of producing uncertainty as to whether the debtor is required to pay the amount in fact due or the amount specified in the notice.  In such a case uncertainty arises, not merely from the understatement, but from the understatement in the context of the particular bankruptcy notice.  No such uncertainty arises if it is clear that payment of the amount specified in the notice will constitute compliance with the notice.”

The majority of the Court referred to the English Court of Appeal decision In re H B [1904] 1 KB 94 and rejected the proposition that that decision was authority for the principle or proposition that any understatement of a judgment debt invalidates a bankruptcy notice unless it is clear that the excess is waived by the judgment creditor.

In any event the applicant’s submission is foreclosed by the decision of the Full Court of the Federal Court (Sweeney, Lockhart and Burchett JJ) in Re Farrugia; Ex parte Deputy Commissioner of Taxation (NSW) (1988) 80 ALR 651 in which the Court held that where a bankruptcy notice claimed interest to a date prior to the date of the issue of the notice and did not in express terms, abandon or waive any claim for interest accruing after the date specified in the notice, it was not defective by reason only of that fact.  The Court had before it a number of decisions in which the opinion had been expressed that where only part of the interest due under a judgment was claimed, the notice was defective unless any claim to the remainder of the interest was clearly abandoned.  The Full Court said at 655:

            “If a bankruptcy notice claims interest on a judgment debt, it must be so expressed that it is clear that all that is claimed by the creditor from the debtor in the notice is the amount or the amounts specified, so that the debtor is informed that if he wishes to comply with the requirements of the notice he may do so and that, if he does not, he shall commit an act of bankruptcy.

            It is a question of interpretation of the bankruptcy notice in each case whether this requirement is complied with.  But it is not necessary that the notice state in terms that any right to future accruals of interest on the judgment is abandoned or waived.  There is no reason in principle why this should be so.  All that is necessary is that the bankruptcy notice should clearly and unequivocally state what the debtor is required to do to avoid the commission of an act of bankruptcy.  Such clear and unequivocal statement in turn requires an accurate statement of the amount which the debtor is required to pay, secure or compound.”

The Court disagreed with the conclusion in the earlier cases that it was essential for the creditor to abandon his claim for interest after the date named in the notice.

In the bankruptcy notice in Re Farrugia; Ex parte Deputy Commissioner of Taxation (NSW) (supra) the judgment debt was specified together with interest calculated between two dates, the latter date of which was three days before the date of the issue of the bankruptcy notice.  The notice required the debtor to pay the sum specified which included the amount of interest.  The notice did not in terms waive or abandon any claim for interest after the date three days before the issue of the bankruptcy notice.  The Court was satisfied that the notice complied with the requirements of s 41(2) of the Act, namely that it required the debtor to pay the judgment in accordance with the judgment.  The Court continued (657 ‑ 658):

“It is true that it does not in terms state that the creditor abandons or waives its claim for interest accruing beyond 26 June 1987, but we see no basis in law for such a requirement. 

            By deciding that interest is claimed from 21 July 1986, being the date of the judgment, to 26 June 1987, in the sum of $2,018.94, making a total of $12,018.94 which must be paid in order to avoid the commission of an act of bankruptcy, the bankruptcy notice complies with s 41(2).  There is no doubt, on a perusal of this notice, as to what the creditor is claiming from the debtor, namely the sum of $12,018.94 having two components:  first, the balance due under the judgment being the amount for which judgment was signed against the debtor less moneys subsequently paid by the debtor; and, secondly, interest thereon to a nominated date.”

The case stated before the Court was answered as follows (659):

“The bankruptcy notice is not defective by reason only of the fact that it claims interest to a date prior to the date of the issue of the notice and does not in terms abandon or waive any claims for interest accruing after the date specified in the notice.”

In my opinion, the notice before the Court is similarly not defective. 

Did the amount specified in the bankruptcy notice exceed the amount due to the

creditor?

In case I am incorrect in my conclusion that the application to set aside the bankruptcy notice was filed out of time I should refer to the submissions by the applicant that the sum specified in the bankruptcy notice as the amount due exceeded the amount in fact due.  In his final address, counsel for the applicant did not press the submission that the applicant had such a counter‑claim, set‑off or cross demand as is referred to in s 40(1)(g) of the Act.  He relied simply on the submissions that the amount claimed in the bankruptcy notice was overstated.  The overstatement was said to arise as a result of:

(a)        a failure to account for agistment income received whilst the respondent was in possession of the mortgaged property;

(b)        a failure by the respondent to account for an occupation rent while it was in the possession of the mortgaged property;

(c)        the failure by the respondent to give credit at the proper time for the proceeds of sale.  The judgment debt was not reduced until 5 June 1997 but it appeared from the contract of sale which was in evidence that the settlement date was on or about 24 or 25 May 1997;

(d)        the respondent’s conversion of the chattels;

(e)        the respondent’s mismanagement of the farm property.

The respondent submitted that in order to succeed in any submission that the amount in the bankruptcy notice was overstated the applicant must establish that, when fixing the amount claimed in the bankruptcy notice, the respondent failed to take into account an amount or amounts it was liable to take into account in reduction of the judgment debt.  A bankruptcy notice will be held to be invalid if the sum specified in the notice as the amount due to the creditor exceeds the amount for which the creditor is entitled to issue execution:  Walsh v Deputy Commissioner of Taxation (1984) 58 ALJR 368.  Accordingly, it was said that the claims relating to the retention of the chattels and the mismanagement of the farm were not properly characterised as leading to an overstatement but more appropriately, were to be considered as the subject matter of a counter‑claim, set‑off or cross demand.  There is substance in this submission because it would not be possible for the creditor to be able to determine the extent of the claim for damages for conversion of the chattels or mismanagement of the farm in fixing the amount claimed in the bankruptcy notice. 

As I have noted earlier in these reasons, where a debtor wishes to rely upon a counter‑claim, set‑off or cross demand equal to, or exceeding the amount claimed in the bankruptcy notice, the debtor is required to do more than simply assert the existence of such counter‑claim, set‑off or cross demand.  In my opinion the same principle applies where an overstatement in the amount claimed in the bankruptcy notice is asserted.  I consider that the principles identified in Ebert’s case (supra) apply equally to a claim of overstatement.

It was submitted that a mortgagee has obligations to account to a mortgagor in respect of the proceeds obtained on the sale of a mortgaged property and to pay an occupation rent unless the property was only occupied for the purposes of sale.  It was submitted that no credit had been given for agistment income or for any surplus of that agistment income after deducting expenses or for any occupation rent.  It followed, it was said, that as no such credit was given there was an overstatement of the amount claimed in the bankruptcy notice.  The respondent had put into evidence statements of income received by the manager it had placed on the subject property.  That evidence showed that income of approximately $4,400 in agistment fees had been paid to the manager as follows:

22 August 1996 to 21 September 1996                                   $1,823.80

22 September 1996 to 21 November 1996                             $1,600.00

22 November 1996 to 21 December 1996                              $1,000.00.

The accounts which recorded these amounts also contained items of expenditure which, when taken into account, left a net surplus of the order of $1,340.43.  It was submitted that this amount should be deducted from the amount specified in the bankruptcy notice.  However, there was also evidence from the respondent that it incurred total expenses of $65,509.16 in fees and expenses paid to the manager for managing the property during the period from taking possession as mortgagee to the sale of the property and a copy of the record of realisation and recovery costs incurred by the respondent was tendered in evidence.  Other costs were also incurred, for example, on 31 January 1997 a cost of $3,110.65 was incurred in favour of Wimmera Malley Water.  These amounts were sufficient to eliminate any credit to which the applicant might otherwise have been entitled in respect of the agistment fees. There was no other evidence that the respondent had made a profit in respect of running the farm and the costs included substantial management fees paid to the manager.

So far as the occupation rent is concerned I am satisfied that the respondent was not obliged to pay an occupation rent in respect of its occupation of the property whilst it was mortgagee in possession as it was only in possession for the purpose of sale.  It was submitted that the fact that it was in possession for almost one and a half years was demonstrative of the fact that it was in possession for an unreasonable time.  However, the evidence discloses that the respondent took possession of the property on or about 9 February 1996 and in the same month, engaged WesFarmers Dalgety Limited in Swan Hill to act as its agent in respect of the sale of the property.  On 12 April 1996 that agent auctioned the property but it does not appear the auction was successful.  There were attempts made from time to time to sell the property but to no avail.  I am not satisfied on the evidence before the Court that there is any basis for the applicant’s claim that the respondent was obliged to pay the applicant an occupation rent in respect of its period of occupation as mortgagee in possession.

It was also submitted that there was a failure to give a credit for the net amount of the proceeds of sale immediately they were received.  Although the contract of sale provided for settlement 60 days after the day of sale which was 25 March 1997, so that settlement was due on 24 or 25 May 1997 there was no evidence as to what was in fact the actual date of settlement.  According to the bankruptcy notice the net proceeds of the sale of the property were applied in reduction of the judgment debt on 5 June 1997.  There was no evidence as to when those proceeds were received, and in my opinion, the extent to which there may have been a failure to apply the proceeds in reduction of the judgment debt immediately upon receipt, in respect of which there was no evidence, sounds in the nature of a counter‑claim, set‑off or cross demand.

Ultimately all the matters complained of by the applicant in respect of what was said to be the overstatement of the judgment debt, including claims relating to the conversion of the chattels and the mismanagement of the property were other matters which sounded in the nature of a counter‑claim, set‑off or cross demand and are not appropriately described as resulting in an overstatement of the judgment debt.

The application will be dismissed with costs.

Associate:

Dated:              9 April 1998