FEDERAL COURT OF AUSTRALIA

Glass v Demarco [1999] FCA 481

BANKRUPTCY – validity of bankruptcy notice – whether overstatement of amount of debt – date at which notice is considered to make a claim – whether notice suffers from formal defect or irregularity – whether substantial injustice caused to recipient

PRACTICE AND PROCEDURE – whether applicant should be given opportunity to seek leave to amend grounds of opposition - whether leave to adjourn petition should be granted

Bankruptcy Act 1966 (Cth), s41(5); s306

District Court Act 1973 (NSW), s85

Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337, considered

Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71, considered

Re Manion;  ex parte Deputy Commissioner of Taxation (1979) 23 ALR 270, considered

TIBOR THOMAS GLASS v GODFREY CHARLES DEMARCO

NG 8401 OF 1998

EMMETT J

1 APRIL 1999

SYDNEY

THE COURT ORDERS THAT:

1.                  The hearing of the petition be adjourned to 21 April 1999 at 10.15 a.m.

2.                  Leave be given to the debtor to file a Notice of Motion returnable on 21 April 1999 before Emmett J in the form initialled, dated with today’s date and placed with the papers.

3.                  The debtor file and serve no later than 12 April 1999 any further affidavits on which he seeks to rely on the hearing of the motion.

4.                  The petitioning creditor file and serve no later than 19 April 1999 any affidavits in answer to the debtor’s affidavits.

5.                  As a term of granting the adjournment, the sum of $50,000 be paid into court on or before 12 April 1999.

6.                  Liberty to restore the matter for mention on 14 April 1999 be reserved to the creditor if the sum of $50,000 is not paid into court on or before 12 April 1999.

7.                  The debtor pay the costs of today.

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

EX TEMPORE REASONS FOR JUDGMENT

1                     I have before me a creditor's petition based on non-compliance with a bankruptcy notice.  The bankruptcy notice was issued on 14 October 1998 and was served on the debtor on 5 November 1998.  Accordingly, if the bankruptcy notice was a valid bankruptcy notice, there was a failure on 27 November 1998 to comply with the requirements of the bankruptcy notice.

VALIDITY OF BANKRUPTCY NOTICE

2                     The debtor has filed a Notice of Intention to Oppose the Petition on the ground that no act of bankruptcy was committed because the bankruptcy notice is invalid.  The bankruptcy notice contains a claim that the debtor owes to the creditor:

“a debt of $48,164.38 as shown in the Schedule.”

3                     The Schedule is in the following terms:

4                     Note 2 is in the following terms:

“Interest accrued (item 3 of the Schedule)

If interest is being claimed in this Bankruptcy Notice, details of the calculation of the amount of interest claimed are to be set out in a document attached to this Bankruptcy Notice.  The document must state:

(a)       The provision under which the interest is being claimed; and

(b)               the principal sum on which the period for which and the interest rate or rates in which the interest is being claimed.”

5                     There is, in fact, attached to the bankruptcy notice a document entitled “Interest Accrued”.  It refers to item 3 of the Schedule and says:

“Interest is claimed on the Judgment Debt pursuant to section 85 of the District Court Act 1973 (NSW)

6                     It is apparent from that document that there is a miscalculation.  The period 1 September 1998 to 9 September 1998 is a period of nine days.  Interest on the sum of $47,004.72 at the rate of 9.5 per cent is $12.23 per day.  For nine days that would amount to $110.07.

7                     I have before me evidence by the agent of the creditor acknowledging that the document attached to the bankruptcy notice contained errors.  The creditor's agent, Mr Warwick Keay, said that the errors were as follows:

“(a)     At line six (6) the period should read 1/9/98 to 9/10/98 rather than 1/9/98 to 9/9/98

(b)       At line nine (9) the date should read 9/10/98 rather than 10/9/98.”

8                     Even then it appears that there was a miscalculation in that the interest for that period would have been $476.97 giving a total for interest of $1,159.50.  That difference it seems to me is probably de minimus although it may have some relevance to the question which I have to decide. 

9                     The debtor contended that there was an overstatement of the amount of the debt because on its proper construction the bankruptcy notice claimed an amount due as at 10 September 1998.  It is common ground that the amount owing as at that date was several hundred dollars less than the amount claimed in the bankruptcy notice itself. 

10                  In Walsh -v- Deputy Commissioner of Taxation (1984)156 CLR 337, Gibbs CJ said at 339:

“There is no doubt that a bankruptcy notice will 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 provided that the debtor gives timely notice under s41(5) of the Bankruptcy Act 1966 (Cth), as amended, that he disputes the validity of the notice on that ground.”

11                  Section 41(5) of the Bankruptcy Act 1966 (Cth) provides as follows:

“A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of mis-statement.”

12                  The question therefore is whether the bankruptcy notice on its proper construction can be said to specify an amount owing as at 10 September 1998.  If, on its proper construction, that is what the notice specifies, then there is good reason for concluding that the sum specified in the notice exceeds the amount for which the creditor was entitled to issue execution.  That is to say, the sum specified in the notice as the amount due as at 10 September 1998 exceeded the amount for which the creditor was at that date entitled to issue execution.

13                  Gibbs CJ went on to say in Walsh's Case the following:

“What has to be decided however, is whether the inquiry as to whether the notice overstates the amount due is to be made at the time of the issue of the notice or at the time of its service.  This question does not seem ever to have been distinctly decided, and in the cases to which we have been referred it did not fall for decision, either because the notice was erroneous if viewed at either date, or because the dates of service and issue were the same.” (at 339)

14                  His Honour went on to say:

“In form the notice speaks as at the date which it bears, that is the date of its issue and although service is essential to make non-compliance an act of bankruptcy, and, although the time fixed for compliance runs from the date of service, the notice must be understood as speaking as at the date of its issue and the requirements of the notice, for the purposes of s40(1)(g) of the Bankruptcy Act, must be ascertained in that context.” (at 340)

15                  As I have said, the bankruptcy notice bears the date 14 October 1998 and, in its terms, it expresses a claim that the debtor owes the creditor a debt of $48,164.38.  Certainly as I have indicated, it then refers to the Schedule.  Nevertheless, I consider the bankruptcy notice must be considered as making a claim that, as at 14 October 1998, the debtor owed the creditor the sum of $48,164.38.  The Schedule in fact showed interest which was in excess of that claimed as at 9 October 1998.  However, as at 14 October 1998, the amount of interest claimed was less than the interest to which the creditor was entitled under the District Court Act 1973 (NSW).

16                  In the circumstances I do not consider that section 41(5) has application.  The sum specified in the notice as the amount due is $48,164.38.  That did not exceed the amount in fact due.  Nevertheless, I consider that the bankruptcy notice does suffer from a formal defect or an irregularity because of the errors to which I have referred.  The debtor, however, relies on section 306 of the Bankruptcy Act which is in the following terms:

“(1)     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.”

17                  The question is whether the errors are any more than a formal defect or an irregularity and, if so, whether substantial injustice has been caused. I consider that the error is no more than a formal defect or irregularity.  It would be apparent to the recipient of the notice that interest is being claimed under section 85 of the District Court Act from 1 September 1998 at the rate of 9.5 per cent.  It is clear that the period specified is wrong.

18                  There would have been no difficulty for a recipient of the notice who was aware of the judgment debt and whose attention was drawn to the provisions of section 85 of the District Court Act to deduce that that interest was accruing on that debt at the rate specified.  It would be a simple matter to determine how much interest had accrued by 14 October 1998.  The calculation having been made, it would be apparent to the recipient that the amount claimed was in fact less than the amount actually due.  I do not consider that to be anything more than an irregularity or a formal defect.

19                  The next question is whether substantial injustice has been caused by the defect.  In Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71, the majority of the court said at 80:

“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 certainty arises if it is clear that payment of the amount specified in the notice will constitute compliance with the notice.”

20                  I do not consider there is any ambiguity about the claim in the notice.  The claim is for $48,164.38, not for any different amount.

21                  In Re Manion; ex parte Deputy Commissioner of Taxation (1979) 23 ALR 270, Lockhart J cited with approval at 277 observations made by Riley J in Re Munson; ex parte Deputy Commissioner of Taxation (1977) 7 ATR 560 at 563:

“In the present case I do not think it can reasonably be said that the debtor, who was accurately told by the bankruptcy notice that his judgment debt amounted to $26,364.08 and that the rate of interest on it was 10 per cent per annum could be perplexed or embarrassed by the interest on that debt being stated at $122.79 less than it really was.  In my opinion this is a proper case for the application of section 306(1) and I do not think that the bankruptcy notice should be held invalid.”

22                  The circumstances in the case before Lockhart J were slightly different from those before me.  In the bankruptcy notice in question in that case, a claim was made for the sum of $24,011.24.  In parenthesis the following appeared:

“$22,824.31 together with interest at the rate of ten dollars per centum per annum from 24th day of November 1977 to the date of this notice, $1,186.93.”

23                  One difference is that, in the claim made in the bankruptcy notice presently under consideration, there is no reference to the date of the notice itself.  Nevertheless, as I have said, I consider that the notice speaks as at the date it bears and that is certainly the view of Gibbs CJ in Walsh's Case.  In the circumstances, I do not consider that there is a material difference between the circumstances under consideration by Lockhart J and the matter which is before me.

24                  In any event, the principle is whether, considered objectively, the bankruptcy notice would perplex or embarrass the recipient.  For the reasons which I have indicated, I consider that the notice is unequivocal in claiming the sum of $48,164.38.  While it is necessary to make some calculations in order to determine that that sum is less than the amount in fact due, I do not consider that that need renders the bankruptcy notice perplexing or embarrassing.  In the circumstances, I do not consider this ground has been made out.

APPLICATION TO AMEND GROUNDS OF OPPOSITION

25                  The debtor has applied for leave to file a notice of motion seeking leave to amend the grounds of opposition to the petition.  That necessarily carries with it an application for an adjournment of the petition.  In support of the application, the debtor has filed an affidavit referring to disputes between the debtor and the creditor and companies related to them.  Some of those disputes are presently before the Supreme Court of New South Wales.  One suit in the Equity Division is, in fact, part heard before Simos J and the proceedings have been adjourned to 18 May 1999.

26                  The grounds sought to be relied on involve allegations of counter-claims, set-offs and cross-demands exceeding the amount of the creditor's judgment debt.  In addition, it is sought to raise the question of whether the debtor is, in fact, able to pay his debts, such that a sequestration order ought not to be made in any event.

27                  I consider it to be appropriate, notwithstanding the absence of any satisfactory explanation as to why these maters were not originally raised, to give the debtor the opportunity of ventilating them before me.  Accordingly, I propose to adjourn the hearing of the petition to 21 April 1999.

28                  I give the debtor leave to file a notice of motion returnable before me on that date in the form of a notice of motion which I have initialled, dated with today's date and placed with the papers.  I direct the debtor to file and serve no later than 12 April 1999 any further affidavits intended to be relied upon in support of the notice of motion.  I direct the creditor to file on or before 19 April 1999 any affidavits on which he intends to rely in answer to the debtor's affidavits.  As a term of the adjournment, I will require that there be paid into court on or before 12 April 1999 the sum of $50,000.  If that sum has not been paid into court on that day, I do not propose to entertain any application to amend the grounds of opposition based on the debtor's ability to pay his debts.  I reserve to the creditor liberty to restore the matter for mention before me on 14 April 1999 if the sum of $50,000 is not paid into court on or before 12 April 1999.  I order the debtor to pay the costs of today.

Associate:

Dated:              1 April 1999