FEDERAL COURT OF AUSTRALIA

American Express International Inc v Held [1999] FCA 321

BANKRUPTCY – bankruptcy notice – whether bankruptcy notice was a nullity because a copy of the judgment or order relied upon by the creditor was not attached to it – whether the defect was substantive or merely formal.

Bankruptcy Act 1966 (Cth) s 43(1)(a), s 40(1)(g), s 40(1)(g), s 41(1), s 306(1)

Bankruptcy Regulations 4.02

Pillai v Comptroller of Income Tax [1970] AC 1124 followed

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

In re A Judgment Debtor [1908] 2 KB 474 followed

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

Commonwealth Bank of Australia v Horvath (Junior) (unreported, Finkelstein J, 24 February 1999) referred

Scerri v Cahill (unreported, Beaumont J, 17 March 1998) referred

Haros v National Australia Bank Limited (unreported, Ryan J, 24 November 1997) referred

In re Cartwright; Ex parte Cartwright v Baker [1975] 1 WLR 573 referred

Re Wimborne; Ex Parte The Debtor (1979) 24 ALR 494 referred

Re Wong; Ex Parte Kitson (1979) 27 ALR 405 referred

AMERICAN EXPRESS INTERNATIONAL INC (ACN 006 618 208) v ALEX HELD VG 7814 of 1997

KENNY J

MELBOURNE

29 MARCH 1999

THE COURT ORDERS THAT:

1.      The petition be dismissed.

2.      There be no order as to costs.

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

REASONS FOR JUDGMENT

BACKGROUND

1                     By a petition dated 20 November 1997, American Express International Inc. (“the petitioning creditor”) petitions for a sequestration order against the estate of Alex Held (“the debtor”).  The act of bankruptcy upon which the petitioning creditor rests its petition is the failure by the debtor to comply with a bankruptcy notice served on him in Australia on 19 July 1997:  see Bankruptcy Act 1966 (Cth), ss 43(1)(a) and 40(1)(g).

2                     The petition, served on the debtor on 20 December 1997, came before a Registrar of the Court on 11 February 1998.  The hearing was then adjourned to 11 March 1998.  Since February 1998, there have been at least ten further adjournments.

3                     Relevant to some of those adjournments was the debtor’s ill-health.  By an affidavit sworn on 13 November 1998, the debtor, who is unrepresented, deposed that he was 77 years of age and suffered from a severe heart condition.  (There are other references to the debtor’s medical condition elsewhere in affidavits filed by him from time to time in support of adjournment applications.) 

4                     In his affidavit of 13 November 1998, the debtor further deposed that he had been a textile yarn commission agent for over 40 years and that his business had failed only when the businesses of two major clients in Korea and Japan had collapsed.  He also deposed to his having negotiated terms of settlement with the petitioning creditor and to the imminent finalisation of his affairs with it.  In a subsequent affidavit of 4 December 1998, however, the debtor did not say anything of that settlement, which presumably had failed, but deposed instead to having an interest, as a consultant, in the overseas sale of two Russian-made helicopters, and to his expectation that he would receive sufficient funds from that sale to pay out the petitioning creditor.

5                     Notwithstanding that the petition has been regularly adjourned since February 1998, the petitioning creditor must be taken to have been aware, from early 1998, that the bankruptcy notice on which the petition relied was defective.  In early 1998, a Registrar of the Court drew the attention of the petitioner’s legal advisers to the fact that (1) no copy of the relevant judgment or order had been attached to the bankruptcy notice served on the debtor; and (2) the notice did not correctly state the address of the Victorian Registry of the Court.  As will be seen from what follows, each of those matters constitutes a defect in the notice. 

6                     Given the history of the proceeding in this Court and the circumstances of the debtor, I asked counsel for the petitioning creditor to assist me on the question of the validity of the petition.  This she did knowledgeably and fairly.  I am indebted to her.

THE BANKRUPTCY NOTICE

7                     A bankruptcy notice may be issued by the Official Receiver on the application of a creditor in respect of “a final judgment or final order, being a judgment or order the execution of which has not been stayed”, providing the judgment or order is for an amount of at least $2000.  See Bankruptcy Act 1966 (Cth), ss 40(1)(g) and 41(1).  The Bankruptcy Act provides, in s 41(2), that a bankruptcy notice must be in accordance with the form prescribed by the Bankruptcy Regulations.  Those Regulations require a notice to be in accordance with Form 1:  see Reg 4.02.  Form 1 requires a creditor to specify the amount of the debt which he claims the debtor owes; to tell the debtor that a copy of the judgment or order upon which the creditor relies is attached to the notice; and, it must follow, to attach a copy of the judgment or order to the notice which is served on the debtor:  see clauses 1 and 2 of Form 1.  The terms of Form 1 also call on the debtor to pay the amount of the debt, or to make an arrangement to the creditor’s satisfaction for settlement of the debt:  see clause 3.  Form 1 also requires the creditor to tell the debtor (1) that bankruptcy proceedings may be taken against the debtor if the debtor fails to comply with the notice; (2) that the Court may, upon application by the debtor to it, extend the time for compliance; and (3) that the Court may, upon application by the debtor to it, set aside the bankruptcy notice:  see clauses 5, 6 and 7.  A Form 1 notice must inform the debtor of the address and telephone number of the Court Registry in the debtor’s State or Territory.  If the debt includes interest, the bankruptcy notice must specify the amount of interest and provide details of the calculation of the amount of the interest claimed, including the provision under which the interest is claimed, the principal sum, the period for which and the interest rate at which the interest is being claimed. 

8                     In the present case, the bankruptcy notice relied on by the petitioning creditor was issued in respect of a judgment in the sum of $23,994.02 and interest in the sum of $485.92.  The petitioning creditor had obtained the judgment against the debtor in the Magistrates’ Court on 12 May 1997.  No copy of the judgment was attached to the notice served on the debtor, notwithstanding that the notice, in clause 2, asserted to the contrary.  (It is not to the point to say, as counsel for the petitioning creditor does, that in applying for the issue of a bankruptcy notice under regulation 4.01, a creditor is not required to attach a copy of a relevant judgment or order to a copy of the draft notice.)  The notice served on the debtor also wrongly informed him that “the nearest Federal Court Registry … is located at 451 Little Bourke Street, Melbourne”.  The Victorian Registry was, at the relevant time, located at 450 Little Bourke Street.  (The notice also omitted to state the provision pursuant to which interest was claimed, but this omission had not been drawn to the petitioning creditor’s attention and was not the subject of submission.  For present purposes, I disregard it.)

THE VALIDITY OF THE BANKRUPTCY NOTICE

9                     Plainly enough, the bankruptcy notice served upon the debtor in this case was defective or irregular.  As s 306(1) of the Bankruptcy Act shows, it does not necessarily follow that the notice was invalid.  Section 306(1) provides:

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.

10                  The issue of a bankruptcy notice is a proceeding under the Bankruptcy Act:  see Pillai v Comptroller of Income Tax [1970] AC 1124 at 1131 and Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 at 77.

11                  A bankruptcy notice, being “the foundation of a bankruptcy”, is to be construed strictly:  see, e.g., In re A Judgment Debtor [1908] 2 KB 474 at 476-7 per Cozens-Hardy MR and James v Federal Commissioner of Taxation (1955) 93 CLR 631 at 644.  If a defect in a bankruptcy notice is other than formal, then the notice is invalid, with the consequence that it does not found an act of bankruptcy for the purposes of s 40(1)(g) of the Bankruptcy Act.

12                  Were any of the defects or irregularities in the bankruptcy notice served on the debtor substantive, and not merely formal?  (If all were formal, a further question would arise, namely, whether any of those defects occasioned substantial or irremediable injustice.  As will be seen, it is unnecessary to answer that further question.)

13                  What, then, is a “formal defect or an irregularity” in a bankruptcy notice for the purpose of s 306(1) of the Bankruptcy Act?  A defect is substantive and not formal if it means that the notice fails to meet a requirement made essential by the Act:  see James v FCT 93 CLR 631 at 644 and Kleinwort Benson 165 CLR 71 at 79.  Moreover, if the defect in the notice is of such a kind as could reasonably mislead a debtor as to a pertinent matter, it is not a formal defect and the notice cannot be validated by s 306(1):  see Pillai [1970] AC 1124 at 1135; James v FCT 93 CLR 631 at 644; and Kleinwort Benson 165 CLR 71 at 79-80. 

14                  Is the failure to attach a copy of the judgment or order relied upon by a creditor a failure to comply with an essential requirement of the Bankruptcy Act?  I think that it is.  The purpose of the requirement to be implied from clause 2 of Form 1 is to identify for the debtor the judgment or order upon which the notice is founded:  cf Commonwealth Bank of Australia v Horvath (Junior) (unreported, Finkelstein J, 24 February 1999).  In a case such as this, the identification of the relevant judgment or order is an essential element in establishing an adequate foundation for the bankruptcy notice which, in turn, is an essential element in establishing a sufficient foundation for the debtor’s bankruptcy. 

15                  In Commonwealth Bank of Australia v Horvath (Junior), Finkelstein J also concluded that the failure to attach a copy of the relevant judgment or order constituted a failure to comply with an essential requirement of the Bankruptcy Act.  So too did Beaumont J in Scerri v Cahill (unreported, 17 March 1998).  Cf Haros v National Australia Bank Limited (unreported, Ryan J, 24 November 1997) and In re Cartwright; Ex parte Cartwright v Baker [1975] 1 WLR 573.  As Finkelstein J observed in Horvath (Junior), it is important for the administration of justice that there be uniformity in the principles applied by judges in administering the bankruptcy law.  That consideration provides a further reason for holding that the bankruptcy notice served on the debtor was a nullity by virtue of the petitioning creditor’s failure to attach a copy of the relevant judgment or order to the notice. 

16                  If it mattered (and, in view of my conclusion, I do not think it does), I should think that the failure to attach a copy of the judgment or order underpinning the bankruptcy notice was a defect of such a kind which could reasonably mislead a debtor, notwithstanding that it did not actually do so.  It is, of course, not said in this case, as in Haros, that there is more than one judgment extant between the petitioning creditor and the debtor.  The debtor has not to date taken any steps to set aside the bankruptcy notice or to oppose the creditor’s petition.  He apparently concedes that he owes the debt referred to in the notice.  But the fact that the defect did not mislead the debtor is, as the authorities show, immaterial as to whether or not the defect was merely formal:  see, e.g., Pillai [1970] AC 1124 at 1135; James v FCT 93 CLR 631 at 644; and Kleinwort Benson 165 CLR 71 at 79-80.  In my view, the petitioning creditor’s failure to attach a copy of the judgment to the bankruptcy notice served on the debtor (who was unrepresented and then in his late seventies and who had, it seems, fallen on hard times when his business of forty years failed) was a defect which had the capacity reasonably to mislead:  cf Re Wimborne; Ex Parte The Debtor (1979) 24 ALR 494 at 499 and Re Wong; Ex Parte Kitson (1979) 27 ALR 405 at 410, both per Lockhart J. 

17                  I find that the bankruptcy notice served on the debtor was a nullity and that it did not found an act of bankruptcy for the purposes of s 40(1)(g) of the Bankruptcy Act.  Accordingly, the petition must fail.

18                  In light of the foregoing, it is unnecessary to consider the character of any other defect in the bankruptcy notice served on the debtor, and I do not do so. 

19                  For the reasons given, I would dismiss the petition.

Associate:

Dated:              29 March 1999