FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - appeal against sequestration order made on creditor’s petition - judgment debt - substantial costs order arising out of Supreme Court litigation - allegations of fraud and collusion - contested hearing in Supreme Court - appeal to Full Court dismissed - special leave application to High Court dismissed - whether basis for going behind judgment

BANKRUPTCY - bankruptcy notice amended at time of issue to describe debtors as trustees of a specified family trust - debtors so described in the judgment debt - similar description inserted in petition - trial judge did not, in his reasons or initial minute of proposed sequestration order, propose that debtors be similarly described in that order - formal order as extracted referred to the estate of the debtors as trustees of the specified family trust - no issue raised before judge or by appellants on appeal about validity of bankruptcy notice - matter raised by Court hearing appeal - whether bankruptcy notice capable of misleading the debtors.

Re King; Ex parte The Commercial Bank of Australia Ltd [1920] VLR 490 approved

National Trustees Executors and Agency Company of Australasia Limited v Barnes (1941) 64 CLR 268 referred to

Australian Workers’ Union v Bowen (1946) 72 CLR 575 referred to

Corney v Brien (1951) 84 CLR 343 referred to

James v Federal Commissioner of Taxation (1955) 93 CLR 631 followed

Re Wimborne (1979) 24 ALR 494 referred to

J W Broomhead (Inc) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891 referred to

Commissioner of Australian Federal Police v Cornwell (1990) 98 ALR 677 referred to

Ling v Enrobrook Pty Ltd (1997) 143 ALR 396 referred to

EDWARD JAMES BRIDE and WENDY MARGARET BRIDE v KMG HUNGERFORDS (A FIRM)

No. WAG 149 of 1997

CARR, BRANSON & R D NICHOLSON JJ

PERTH

23 APRIL 1998

GENERAL DIVISION

On appeal from a judge of the Federal Court of Australia

MINUTE OF ORDERS

THE COURT ORDERS THAT:

1.         Paragraph 1 of the orders made on 26 November 1997 be varied by:

            (a)        amending the word “estate” to read “estates”; and

            (b)        deleting the words “as Trustees of the Pinwernying Family Trust”.

2.         The words referred to in paragraph 1(b) above also be deleted from the heading of any document filed in the appeal.

3.         The appeal otherwise be dismissed with costs.

4.         The appellants pay the respondent’s costs.

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

GENERAL DIVISION

On appeal from a judge of the Federal Court of Australia

REASONS FOR JUDGMENT

THE COURT:

INTRODUCTION

This is an appeal from a sequestration order made against the estates of the appellants by a judge of this Court on 26 November 1997.  The formal order concluded with the words “... as Trustees of the Pinwernying Family Trust”, a matter to which we return below.

FACTUAL BACKGROUND

The appellants’ estates have been the subject of two earlier sequestration orders.  On 6 September 1984 the appellants became bankrupt on their own petition.  They were unconditionally discharged from that bankruptcy on 14 February 1986.  On 6 November 1990 a sequestration order was made against the appellants’ joint and several estates.  We were not told whether that bankruptcy has been the subject of automatic discharge through effluxion of time, though that seems to be a reasonable inference.  But first it is necessary to go back somewhat further in time.

Until approximately 1983 the appellants had been involved in business as stock and feed producers, either on their own account in partnership, or as trustees of a family trust or through limited companies.  The respondent, a firm of accountants, was engaged in 1983 by Australian Bank Ltd (“the Bank”), which had provided finance to that business.  Initially, the respondent’s task was to carry out a financial investigation in respect of the business and to furnish a report to the Bank.  In August 1984 two accountants, being either partners in or employees of the respondent firm, were appointed by the Bank as receivers and managers of the business.  The report and the conduct of the receivership have given rise to much litigation between the parties to the present matter. 

One of those cases was an action in the Supreme Court of Western Australia in which the appellants sued the respondent for damages said to have arisen out of the preparation by it of the report which we have just mentioned.  On 10 June 1991, after a hearing which lasted 17 days, Murray J dismissed that action.  His Honour ordered the appellants to pay the respondent’s costs to be taxed.  The appellants appealed to the Full Court of the Supreme Court of Western Australia against Murray J’s judgment.  On 14 July 1994, after a hearing which lasted four days, the Full Court dismissed that appeal.  The appellants sought special leave from the High Court of Australia to appeal against the Full Court’s decision.  On 9 December 1994 the High Court of Australia dismissed the appellants’ application for leave to appeal from that judgment. 

Costs of the Supreme Court action were taxed at $163,967.27.  It is common ground that those costs have not been paid.  On 20 June 1996 the respondent caused a bankruptcy notice, based on those costs, to be served on the appellants “as trustees of the Pinwernying Family Trust”.  The appellants did not apply to set aside the bankruptcy notice, nor did they comply with its terms by 11 July 1996 (being 21 days from the date of service of the bankruptcy notice and being the period fixed for compliance with it).  On 18 November 1996 the respondent lodged a petition in this Court seeking the sequestration of the appellants’ estates “as trustees of the Pinwernying Family Trust”. 

The appellants filed a notice of intention to appear and oppose the petition.  The male appellant, Mr Bride, swore an affidavit in opposition on 13 January 1997, which was before his Honour.  Mr Bride’s affidavit exhibited four volumes of documents.  There were three main bases for the appellants’ opposition to the petition and, in turn, for the appellants’ appeal against the judgment at first instance in this matter.  They were essentially as follows:

1.         The petition was brought by the respondent for an improper purpose, namely, to delay, defeat and thwart two other actions in the Supreme Court of Western Australia which we shall call “the pending Supreme Court actions”.  In the first of those actions (No. CIV 1570 of 1989) the appellants, as trustees of their family trust, sue the Bank, Southern Rolled Oats Pty Ltd [formerly Southern Foods (1986) Pty Ltd] and Milne Feeds Pty Ltd.  In the second of those actions (No. CIV 1804 of 1989) the appellants, again as trustees of their family trust, sue Messrs Peat Marwick Mitchell, a firm with which the respondent merged some years ago.  The pending Supreme Court actions seek to call into question the conduct of the receivers of the businesses formerly conducted by the appellants, including the sale of certain properties owned by the appellants;

2.         The Court should go behind the judgment for the abovementioned costs and enquire whether it was validly obtained; and

3.         The Court should have found that the appellants have an outstanding claim against the respondent in a greater amount than the judgment debt.  This was the subject matter of Action No. CIV 1804 of 1989.

THE DECISION AT FIRST INSTANCE

His Honour examined the history of the proceedings between the appellants and the respondent in the Supreme Court, both at first instance and on appeal in that Court.  Rather than attempt to summarise that analysis, we set it out in full below.

“THE JUDGMENT IN THE SUPREME COURT

The nature of the action brought in the Supreme Court of Western Australia is fully described in the judgment of Murray J which is reported as Bride and Another as Trustees for the Pinwernying Family Trust v KMG Hungerfords (1991) 109 FLR 256.  It is also summarised in the judgment of the Full Court.  It is not necessary to repeat the detail of it here beyond a reference to its salient features.

KMG Hungerfords was engaged in 1983 by the Australia Bank Ltd [sic] which had provided finance to the Brides’ business of stock and feed producers.  The engagement required the firm  to carry out a financial investigation in respect of the business and to report back to the Bank.  Bryan Guthrie Stewart (“Stewart”), under the control of Messrs de Crespigny and Norgard, partners in the firm, compiled the report.  It is alleged that KMG Hungerfords became the Bank’s financial controllers of the Brides’ business and affairs. 

Subsequently, Stewart was said to have been appointed “and unlawfully assumed the role of receiver/manager for the Bank”.  The appointment was said to be unlawful on the ground that the Brides were not in default in respect of the loan which they obtained from the Bank and no demand had been made for repayment. 

Allegations of negligence were made against KMG Hungerfords.  Stewart, allegedly lacking relevant competence and professional experience in the milling industry, was said to have produced a report factually incorrect and damning in its tone. The breach of duty of care on the part of  KMG Hungerfords allegedly lay in its failure to have appointed to the task for which it was engaged by the Australia Bank, a person of sufficient and relevant competence and skill. 

It was further alleged that KMG Hungerfords had acted fraudulently between February 1983 and August 1984 in respect of the affairs of the Brides.  In the April 1983 report, presented by KMG Hungerfords to the Bank, it was said to have deliberately and falsely misrepresented the assets of the Pinwernying Family Trust.  Other fraudulent statements of fact or opinion were said to have been made in the April 1983 report and a further report dated 29 January 1993.  Various other allegations of fraud were also made against KMG Hungerfords. 

The learned trial judge also identified a claim in the pleadings amounting to an allegation that the firm owed a fiduciary duty to the Brides and had breached that duty by using its position of involvement in the Brides’ business “dishonestly for the benefit of another party”. 

It was alleged that the Brides had suffered “loss of personal status due to eventual bankruptcy” and “extreme mental anguish and torment due to the eventual bankruptcy” as well as the loss of their family home and one hundred and four acres of rural land of which they were said to be the respective registered proprietors.  Damages by reason of loss of income and earnings were claimed. 

The action was brought by the Brides in their capacities as Trustees of the Pinwernying Family Trust.  In the event, the trial judge found that the business in respect of which their action was brought was owned and operated by them in partnership and not as trustees.  They therefore lacked standing to bring the claim, it having vested in the trustee in bankruptcy under a sequestration order which had been made on 6 November 1990.

Despite his finding adverse to their standing, Murray J went on to consider the substance of the claims made in case he was in error on the standing question.  The negligence claim would have failed for want of a relationship of proximity giving rise to a duty of care.  If there were a duty of care, the court was not persuaded that there was in any respect a breach of that duty by KMG Hungerfords.  No evidence could be found to sustain the conclusion that KMG Hungerfords had put incompetent people into the task or that the task had been carried out other than with an appropriate and reasonable degree of care and skill in the conduct of the investigation and the compilation of the report which followed it. 

On the fraud claims, it was his Honour’s opinion that the true cause of action pursued by the Brides was not deceit but the more limited cause of action described as “injurious falsehood”.  The action with respect to injurious falsehoods, having been based on fraud, the court would not find them made out except upon the clearest evidence.  There was, it was held, not only no persuasive evidence but no evidence at all of deliberate falsehood or error or of an intention by any such means to deliberately injure the Brides’ commercial interests.  Murray J said at 281:

“In my view it is abundantly clear that the evidence in this case does not meet the required standard of persuasion in respect of any of the alleged misstatements or the conduct which occurred thereafter.  There is nothing I think to establish deliberate falsehood, as part of a scheme by the defendant to injure the plaintiffs’ business so as to reduce its value for the purpose of enabling its acquisition upon favourable commercial terms by any person, let alone any specific person or entity.  So in my view, there is not only no persuasive evidence but no evidence at all of deliberate falsehood or error or of an intention by any such means to deliberately injure the plaintiffs’ commercial interests.”

THE APPEAL TO THE FULL COURT

Issues raised before the Full Court on appeal included the following:

1.             The refusal of the trial judge to allow the Brides to lead “similar fact evidence” of alleged conduct by KMG Hungerfords in unrelated matters said to have features in common with the conduct complained of in the present case.  On this matter, the Full Court declined to interfere with the discretion of the trial judge.

2.             The ruling of the trial judge that a subpoena served on Mr R.C. de Crespigny to testify for the Brides was not enforceable.  In his reasons for judgment the trial judge had commented that:

            “...upon all the evidence before me, it would seem to me that Mr de Crespigny, if he was present and able to give evidence would have been unlikely to add to the picture before me in any significant way.”

                The Full Court was of the view that nothing had been put before it on the part of the Brides to suggest that Murray J’s appraisal of the matter was in any way in error.

3.             The refusal of the trial judge to order that Mr J.C. Vaughan, who had acted as solicitor for KMG Hungerfords, produce certain documents which, according to Mr Bride, he had failed to produce in response to a subpoena duces tecum.  

                The Full Court held that the production of the additional letters was not subsequently pursued by Mr Bride.  The letters were included among the additional documents the subject of the Brides’ application for leave to have them admitted as further evidence on the appeal.  That application was dismissed at the hearing of the appeal.

4.             Allegations of fraud.  The findings of the trial judge and the evidence before him were comprehensively reviewed by the Full Court.  The challenges to those findings were comprehensively rejected. 

                In the judgment of the Chief Justice, with which the other two members of the Court agreed, it was said at p 106:

                “I would only add with regret, that in my opinion, the nature of the allegations of fraud and conspiracy in this case and the lack of evidence in support of them, make it an example of the kind of case to which Lord Pearce referred in Rondel v Worsley [1969] 1 AC 191 at 257 when he said:

“The history of this case has, in its general lines, followed a pattern which is not unfamiliar.  Even in your Lordships’ House many hours are spent each year (and in the Court of Appeal the numbers are naturally larger) in listening to wholly unbalanced attempts to re-open, without justification, a case which a party has lost and which, by brooding over it, he can no longer see in an objective light.  Disgruntled by a decision, he reflects on various side issues (often quite irrelevant or at least not matters of decisive importance) of which he now considers that the judge failed to take any account or any sufficient account.””

His Honour, the Chief Justice said at 107:

                “The learned trial Judge described Mr Bride as an astute man, as well as being passionately convinced of the merits of his case.  I accept this assessment.  As difficult as it may be for him to accept it, the fact remains that as against these respondents there was no evidence to support the pleaded case in fraud or the broader allegations of conspiracy made at the trial which, unfortunately, extended to include persons who were not parties to the action.”

  5.           Negligence.  The Full Court also found that so far as KMG Hungerfords choice of Stewart was concerned, there was no evidence upon which it could be found that they owed the Brides a duty of care.  It went further and agreed with the conclusions of Murray J that even if there were a duty of care it had not been breached by the appointment of Stewart to carry out the task of investigation and report undertaken by KMG Hungerfords.”

His Honour then turned to the challenges which the appellants raised before him to Murray J’s judgment.  They were as follows:

       .    the fact that at the trial the appellants had no legal representation whereas the respondent was represented by “a team of lawyers”;

       .    a claim that Murray J was “misled as to the ownership and conduct of the business”.  This complaint related to an amendment to the defence which raised the question of the appellants’ standing.  The appellants said that this was an amendment which had re-opened an issue previously concluded in their favour before Master Ng in the Supreme Court of Western Australia;

       .    the non-production of documents pursuant to a subpoena served on a solicitor acting for the respondent, Mr J C Vaughan;

       .    Murray J’s decision that a subpoena addressed to a Mr de Crespigny be not enforced; and

       .    his Honour’s decision not to admit certain so-called “similar fact evidence”.

His Honour held that all of those matters fell “well and truly within the framework of the litigation at first instance and on appeal in the Supreme Court”.  His Honour further held that they either were so raised or were capable of being raised.  His Honour concluded in the following terms:

“This aspect of Mr Bride’s argument simply invites this Court to re-open litigation in the Supreme Court which has been tested on appeal and in respect of which special leave was refused by the High Court.  There is no basis to go behind the judgment.”

His Honour then referred to the pending Supreme Court proceedings.  It was the appellants’ contention that the petition was calculated to frustrate them from proceeding with those actions.  His Honour looked at the matters raised in those actions and the material put forward by the appellants.  He held that that material together with the “mere assertion of its correctness by Mr Bride does not constitute a basis for dismissing the petition”.  As to the suggestion that the petition was calculated to frustrate the pending Supreme Court proceedings, his Honour noted that the sequestration of the appellants’ estate would not have the necessary result of preventing the appointment of new trustees who could proceed with the pending Supreme Court actions.  His Honour further noted that the respondent was not seeking to nominate a trustee of the appellants’ estates and that there would be no basis for any collusive approach between the respondent and whoever was appointed as trustee of their estates.  His Honour found that the existence of the pending action against the firm with which the respondent had merged did not disclose any basis for either adjourning or dismissing the petition.

THE APPEAL

As we have mentioned, the same grounds were advanced on appeal as were argued before the judge at first instance.  They were as follows:

That the Court should go behind the costs order made against the appellants in the Supreme Court

Mr Bride, who presented the appellants’ case, took us to various items of documentary evidence, some of which were before Murray J and some of which were not.  His evident purpose in doing this was to endeavour to persuade us that Murray J was in error in finding against him in the Supreme Court proceedings and that the Full Court also erred in dismissing the appellants’ appeal from Murray J’s judgment.  In particular (although there were other matters) Mr Bride sought to challenge Murray J’s conclusion that the appellants lacked standing in respect of their claims for loss of the business and its income, and their claims in respect of the family home and the rural land owned by them personally.  At this point it is worth bearing in mind, as French J observed, that Murray J, having so found on the question of standing, went on to decide all of the issues in the matter in case he should be found to be in error in his conclusion that the appellants lacked standing.  His Honour found that the appellants’ claims were without merit.  Accordingly, even if there were error on the matter of standing, the judgment would still have been the same.

Mr Bride, in effect, asked us to re-hear the matters which were in dispute in the Supreme Court.  This included the three matters, listed above, of non-production of documents by Mr Vaughan, the subpoena addressed to Mr de Crespignyand the decision not to admit certain so-called “similar fact evidence”. 

In the present matter, the debt upon which the petition is based did not exist until Murray J handed down his judgment and ordered the appellants to pay the costs of the action.  There was no debt which, at law, could be said to have merged into the judgment debt.  The judgment itself created the debt.  Nevertheless, we approach the matter on the basis that the question is whether sufficient reason has been shown for questioning the validity of the judgment.  In our view, no such sufficient reason has been shown in this appeal and we respectfully agree with the primary judge’s refusal to accede to the appellants’ request to go behind the judgment.  This is a very different case to, for example, Corney v Brien (1951) 84 CLR 343 where a default judgment for the cost of goods sold was shown to have been invalidly obtained because the transaction was one of hire purchase rather than sale.  It would be a truly exceptional case for a Court exercising jurisdiction in bankruptcy to go behind a judgment obtained after 17 days of hearing at first instance, a four day hearing before an appellate court and the dismissal of an application for leave to appeal to the High Court of Australia.  In our opinion, this is not such a case.  Nothing to which Mr Bride took us suggests that it is. 

Was the petition brought for an improper purpose, namely, to delay defeat and thwart the appellants’ two pending Supreme Court actions? 

Mr Bride submitted that the respondent could have no other reason for seeking sequestration of the appellants’ estate.  There was, he said, no prospect of any distribution to creditors.  Furthermore, so he submitted, within days of the sequestration order being made, the respondent (together with the other parties to the pending Supreme Court actions) had applied to the Supreme Court for orders that the appellants (as plaintiffs in those actions) provide substantial security for costs.  In doing so, those defendants relied on the fact that a sequestration order had been made against the appellants.  Mr Bride suggested that this was a major reason why Master Sanderson had made orders for substantial security for costs.  A careful reading of Master Sanderson’s reasons dated 3 February 1998 shows that Mr Bride is not correct in that regard.  Master Sanderson did not base the making of those orders on the fact of the appellants’ bankruptcy (see in particular p 9 of those reasons). 

In our opinion, the evidence does not establish the motive which the appellants claim.  In any event such an ulterior motive would not, in our view, in the present matter disentitle the respondent from obtaining a sequestration order.  As a reading of Master Sanderson’s reasons reveals, the appellants have not paid the respondent’s costs in the earlier Supreme Court proceedings.  There are substantial costs orders in other matters which remain unpaid.  We do not consider that, in those circumstances, a desire (had there been such a desire) to stifle the pending Supreme Court actions unless security for costs were provided, would disentitle the respondent from obtaining a sequestration order - see Re King; Ex parte The Commercial Bank of Australia Ltd [1920] VLR 490 at 510 (a decision of the Full Court of the Supreme Court of Victoria).

The appellants’ outstanding claims in the pending Supreme Court actions

Mr Bride contended that there was unrefuted evidence to show that the appellants have an outstanding claim against the respondent in a greater amount than the costs orders upon which the petition was based.  This turned out to be a reference to Mr Bride’s affidavit in which he swore to the facts pleaded in the statement of claim in those pending Supreme Court actions.  Mr Bride criticised the learned primary judge’s description of this as being “the mere assertion of [the] correctness” of the material exhibited to his affidavit.  In our view, the learned primary judge did not err either in refusing to dismiss the petition or adjourn the hearing of the petition pending the hearing of the two Supreme Court actions. 

As is mentioned above, the costs order upon which the petition was based was an order made against the appellants as plaintiffs in the proceedings before Murray J.  They were ordered to pay the respondent’s costs of the legal proceedings before Murray J.  They are personally liable to comply with such order.  However, the outstanding claim against the respondent upon which they rely is not a claim made by them personally.  The pending Supreme Court actions have been brought by them in their capacity as trustees of the Pinwernying Family Trust.  If they succeed in such actions any recovery by them will be as trustees of the Pinwernying Family Trust rather than personally.  Such actions cannot technically amount to claims by the appellants against the respondent in a greater amount than the costs orders upon which the petition was based. 

However, the fact that a debtor might otherwise be forced into bankruptcy by reason of a state of insolvency likely to be of short duration is capable of amounting to a
“sufficient cause” within the reasoning of s 52(2)(b) of the Act for a sequestration order not to be made: (Ling v Enrobook Pty Ltd (1997) 143 ALR 396 at 400-402).

The appellants purported to bring the proceedings before Murray J as trustees of the Pinwernying Family Trust.  If the appellants properly incurred legal costs in their capacity as trustees of the Pinwernying Family Trust, they would be entitled to an indemnity in respect of such costs from the trust property, assuming such property to be sufficient to provide such indemnity: (National Trustees Executors and Agency Company of Australasia Limited v Barnes (1941) 64 CLR 268; Commissioner of Australian Federal Police v Cornwell (1990) 98 ALR 677 at 681-682).  If such costs were improperly incurred by them as trustees, they would not be entitled to any such indemnity, at least, unless all beneficiaries of the trust requested the appellants to bring the proceedings and all were sui juris and also absolutely entitled (J W Broomhead (Inc) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891).  This Court is not in a position to reach any conclusion as to whether the appellants have any entitlement to an indemnity in respect of the costs of the proceedings before Murray J.

Funds could theoretically become available to the appellants as a result of the pending Supreme Court proceedings either by reason of the appellants being beneficiaries of the Pinwernying Family Trust entitled to the benefit of any judgment in favour of the plaintiffs in such proceedings or by reason of such proceedings resulting in a judgment in favour of the plaintiffs, against which any right of indemnity the appellants might have in respect of the costs order of Murray J could be enforced.  However, the material before the Court is insufficient to show even a likelihood that the pending Supreme Court proceedings will have the result that funds will become available to the appellants as a result of the pending Supreme Court proceedings so as to ensure that the appellants’ present state of insolvency will be shortlived.

The pending Supreme Court proceedings are not properly characterised as outstanding claims which the appellants have against the respondent.  French J rightly concluded that the appellants had not put forward any sufficient ground for the dismissal or adjournment of the petition.

THE FORM OF THE BANKRUPTCY NOTICE

The bankruptcy notice served on the appellants includes, after their respective names and addresses, the handwritten words “as trustees for the Pinwernying Family Trust”.  It appears that these words may have been added at the time that the bankruptcy notice was issued by the Deputy Registrar in Bankruptcy to achieve conformity with the description of the appellants as plaintiffs in the proceedings before Murray J.  It seems plain that the addition of these words to the bankruptcy notice was inappropriate.  The bankruptcy notice was properly addressed to the appellants personally.  Any act of bankruptcy which results from their failure to comply with the requirements of the bankruptcy notice would be an act of bankruptcy by them in their respective personal capacities.

The question of the form of the bankruptcy notice was not raised before French J.  Neither party raised it before this Court: the Court itself raised the issue and gave leave to the parties to file and serve written submissions touching on the form of the bankruptcy notice and the form of the sealed order of French J.

A bankruptcy notice is invalid if it is capable of misleading the debtor and the Court cannot inquire whether the debtor has in fact been misled or not:  James v Federal Commissioner of Taxation (1955) 93 CLR 631 and in particular at 644.  In James the basis for the Court’s decision appears to be confined to the fact that the bankruptcy notice was capable of misleading the debtor as to the manner in which he might have secured or compounded for the debt.  The High Court found another defect, namely that the bankruptcy notice required payment of the debt at a particular place, whereas there was no such requirement in the judgment upon which the bankruptcy notice was founded.  Subsequent cases have applied the ratio decidendi in James as extending to defects which are capable of misleading the debtor on other pertinent matters - see, for example Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71; Clyne v Deputy Commissioner of Taxation (1982) 42 ALR 703 at 706.  However, in Re Wimborne (1979) 24 ALR 494, Lockhart J observed (at 500):

“It is clear from the cases to which I have referred that, although the courts draw a definite distinction between the possibility of the debtor being misled and the question whether he was misled in fact, the latter being an impermissible field of inquiry, it is the capacity of the bankruptcy notice to mislead the debtor to whom the notice is directed that matters, not some hypothetical debtor.”

To judge the capacity of the notice to mislead, the Court is not confined to the terms of the notice itself.  In Wimborne (at 500) Lockhart J made the finding on the capacity of the notice in the context of the conduct of proceedings in the Supreme Court of New South Wales and the High Court.  In Clyne at 706 he accepted it was well established that the court may “look at facts extraneous to the notice”, citing Wimborne.  The High Court in James relied (at 644) on In Re A Debtor; Ex parte The Debtor v Bowmaker Ltd (1951) 1 Ch 313.  In Pillai v Comptroller of Income Tax [1970] AC 1124 at 1135 (relied upon by the High Court in Kleinwort at 80) the Privy Council accepted that Bowmaker had laid down that the test of whether the defect was formal or not was whether it “could reasonably mislead a debtor upon whom it was served”.  Once the concept of “reasonableness” is before the Court, some regard must be had to the personal circumstances and knowledge of the debtor.  That inquiry is strictly limited, however, to circumstances and knowledge relevant to the capacity of the notice to mislead and cannot transgress into the area of whether the debtor has in fact been misled.

We do not think that the bankruptcy notice in this matter had the capacity to mislead the appellants in any relevant respect, by reason of the handwritten words referred to above.  The critical question is whether, by the insertion of those words, the appellants could have been misled into thinking that they could only satisfy the debt from moneys which were available to them from the Pinwernying Family Trust.  The question might also arise of whether they could have been misled into thinking that a failure to comply with the bankruptcy notice might lead to their bankruptcy in some form of limited capacity.  We consider that the appellants could not reasonably have been misled in these regards.  They knew that the Supreme Court had held (both at first instance and on appeal) that they had no standing to bring those proceedings as trustees of their family trust.  They must be deemed to have known that they were personally liable for the costs awarded against them when those proceedings were dismissed.  Apart from the initial description of them as being trustees for the Pinwernying Family Trust, there was nothing in the bankruptcy notice, whether in the recitals or in its operative parts, to suggest that the debt had to be paid out of or secured by recourse to trust property.

In the circumstances the irregularity in the bankruptcy notice is to be regarded as a formal defect or irregularity which has not caused any substantial injustice. 

We find support for this view in the decision of Clyne J in Re Bowen; Ex parte The Australian Workers’ Union (1945) 13 ABC 275.  It was there held failure to describe in the bankruptcy notice the judgment creditors in the manner in which they were described as defendants in an equity suit (in which an order for costs was made against the plaintiffs) was a formal defect.  The decision was affirmed on other grounds on appeal in Australian Workers’ Union v Bowen (1946) 72 CLR 575.

The inappropriate language of the bankruptcy notice was repeated in the creditor’s petition.  For the same reasons as we have concluded that such language in the bankruptcy notice amounted to a formal defect or irregularity and has not caused any substantial injustice, we conclude that the repetition of such language in the creditors petition is to be similarly characterised.  The proceedings consequent on such bankruptcy notice and petition are therefore not invalidated (s 306 of the Act).  Paragraph 1 of the sealed order of French J ought, however, to be varied by the deletion of the words “as Trustees of the Pinwernying Family Trust”.  It may be noted that the order as proposed by his Honour did not include such words.  They should be deleted from the heading of any document filed in the appeal.

CONCLUSION

For the foregoing reasons the appeal will be dismissed with costs.

Associate:

Dated:              23 April 1998