FEDERAL COURT OF AUSTRALIA

Bendigo Bank Ltd v Scerri [1999] FCA 1215

BANKRUPTCY – notice – formal defect or irregularity – amount due on judgment debt – notice referring to total debt owing comprising both judgment debt and interest 

Bankruptcy Act 1966 (Cth)– s 40(1)(g) and s 41(2)

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

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

BENDIGO BANK LTD V JOSEPH ANTHONY SCERRI

V 7329 OF 1999

JUDGE:          FINKELSTEIN J

PLACE:          MELBOURNE

DATE:            3 SEPTEMBER 1999

THE COURT ORDERS THAT:

The petition be dismissed.

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

REASONS FOR JUDGMENT

1                     Bendigo Bank Limited petitions for a sequestration order against the estate of Joseph Anthony Scerri.  The act of bankruptcy upon which the petition is based is the failure to comply with a bankruptcy notice that was founded on a judgment debt:  s 40(1)(g) of the Bankruptcy Act 1966 (Cth). 

2                     The petition, which is not opposed, was returnable before a registrar of the Court.  However the registrar was of the view that the bankruptcy notice might be defective and referred the petition to a judge. 

3                     The bankruptcy notice is in the form prescribed by reg 4.02 of the Bankruptcy Regulations.  It states (in par 1) that the petitioner claims that the debtor “owe[s] a debt of 20,088.71 as shown in the Schedule” and (in par 2) that “the debt is due and payable”.  The notice requires (in par 3) the debtor to pay “to the creditor the amount of the debt or to make an arrangement to the creditor’s satisfaction for settlement of the debt” within 21 days after the service of the notice.  A place for payment is nominated in par 4.  The notice warns (in par 5) that if the debt is not paid or settled, bankruptcy proceedings may be taken against the debtor.

4                     Paragraph 7 of the notice is important.  It provides:

“In addition, within the time specified in paragraph 3 above, you may file an application to the Federal Court of Australia for an order to set aside this Bankruptcy Notice on the specific grounds that:

(a)       you have a counterclaim, set-off or cross demand equal to or exceeding the sum specified in this Bankruptcy Notice as owing to the judgment creditor; and

(b)       in the action or proceeding in which the judgment or order mentioned in paragraph 2 of this Bankruptcy Notice was obtained, you could not have set up that counterclaim, set-off or cross demand*.

*          This means that, because of a legal obstacle, you could not have raised that counterclaim, set-off or cross demand in defence of the creditor’s court action against you.  It is not enough if, for example, you simply neglected or overlooked the matter.”

5                     The schedule to the notice takes the following form:

“1.       Amount of judgment or order                                                 $20088.71

2.         Legal costs if ordered to be paid and a specific

            amount was not included in the judgment or order

            (see Note 1, below) $

3.         If claimed in this Bankruptcy Notice, interest                                       $737.89

            accrued since the date of Judgment or order

            (see Note 3, below)

4.         Subtotal                                                                                   $20826.60

6                     Attached to the bankruptcy notice is a certified extract from the Magistrates’ Court of Victoria giving details of the orders that had been obtained by the petitioner against the debtor.  Those orders were:

“Order for                  $19147.77

 Costs                          $   592.50

 Interest                       $   348.44

Total                           $20088.71”

7                     As will be apparent from this summary of the contents of the bankruptcy notice, there is a difference between the amount of the debt alleged to be due to the petitioner in the body of the notice ($20088.71) and the total debt that is due to the petitioner as set out in the schedule ($20826.60).

8                     The schedule shows that the difference between the two amounts, namely $737.89, comprises interest.  Whether that sum is interest on the judgment debt or interest on some other amount is not stated, although it must be acknowledged that the form of the bankruptcy notice assumes it to be the former.  Accordingly, if interest is claimed the petitioner is required to state the provision under which interest is due.  However, that information was not provided.

9                     Three questions arise as to the validity of the bankruptcy notice.  First, does the bankruptcy notice mislead the debtor about what is necessary to comply with the notice by creating an uncertainty as to whether the debt of $20088.71 or $20826.60 is required to be paid or compromised by the debtor?  Second, does the bankruptcy notice mislead the debtor by failing to make clear whether, if he makes application to the Federal Court for an order to set aside the notice, he must show that he has a counterclaim, etc that is equal to or exceeds $20088.71 or $20826.60?  Third, does the bankruptcy notice fail to meet a mandatory requirement of the Bankruptcy Act by not specifying the provision under which interest is claimed? 

10                  I have stated the questions in the above form, because the authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Bankruptcy Act or if it could reasonably mislead a debtor as to what is necessary to comply with the notice: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79-80.  I would add that a notice will also be a nullity if it could mislead the debtor as to the nature of the application he must make to set aside the notice.  In the case of a misleading notice, it does not matter whether the debtor has in fact been misled or not.  It is sufficient if he could be misled:  James v Federal Commissioner of Taxation (1955) 93 CLR 631 at 644.

11                  The first and second question should be considered together as there are issues that overlap.  The answer to each depends upon the proper construction of the bankruptcy notice.

12                  There is no doubt that if pars 1, 2, 3 of the notice are read in isolation, the only amount that the debtor is required to pay or compromise is the sum of $20088.71 which the schedule tells him is the amount of the judgment debt that was obtained.  The fact that the schedule states that the total amount owing to the petitioner is a greater sum does not detract from that conclusion.

13                  The difficulty, if there is a difficulty, arises from par 7 of the notice.  This paragraph finds it way into the prescribed form of bankruptcy notice, because of s 40(1)(g). It provides that a failure to comply with a bankruptcy notice will not constitute an act of bankruptcy if the debtor satisfies the Court that he has a counterclaim, set-off or cross demand equal to or exceeding the amount of the judgment debt obtained against him, being a counterclaim, etc that could not have been set up in the proceeding in which the judgment was obtained.

14                  Although s 40(1)(g) speaks of a counterclaim, etc equal to or exceeding the amount of the judgment debt, it must be taken to mean, in a case where the bankruptcy notice is founded on part only of a judgment debt such as when part of the judgment debt has been paid, that the debtor must satisfy the Court that he has a counterclaim, etc for that part of the debt that is claimed to be due.

15                  Here it is necessary to refer again to par 7.  It does not follow the language of s 40(1)(g): compare the form of notice in force prior to 16 December 1996.  It notifies the debtor that to avoid bankruptcy proceedings he may apply to the Federal Court for an order to set aside the bankruptcy notice on the ground that he has a counterclaim, etc “equal to or exceeding the sum specified in the bankruptcy notice as owing to the judgment creditor”.  To what sum is this a reference?  Is it to the total debt owing, namely $20826.60 or is it the debt specified in par 1?  The answer is by no means clear.  Indeed it seems to me that the position is sufficiently unclear to lead to the conclusion that the debtor could reasonably be misled as to his rights. 

16                  It might be said in this case that the difference between the two amounts is so small that it is unlikely to make any practical difference.  That is to say, if the debtor has a counterclaim, etc in the amount of $20088.71, he is also likely to have a counterclaim for the sum of $20826.60.  However, this could hardly be a sufficient answer.  To determine whether a bankruptcy notice is misleading, regard must be had to the terms of the document itself.  No further inquiry is called for. 

17                  Having found that the bankruptcy notice is misleading, because it fails to clarify the nature of the proceeding that the debtor must take in order to have the notice set aside, it follows that the notice is a nullity that cannot be cured by s 306(1) of the Bankruptcy Act.

18                  It is possible that the uncertainty created by par 7 could also lead the debtor to wonder whether the payment or arrangement to compromise the debt mentioned in paragraph 1 would satisfy the notice or whether he was required to pay or compromise the total amount due to the petitioner.  To put the matter another way, whilst pars 1, 2, 3 indicate that the debtor must pay or compromise the debt of $20088.71 to avoid bankruptcy proceedings, when par 7 and the schedule are also taken into account the position is not so clear.  However, I do not need to form a final view on this as part of the case. 

19                  It is also unnecessary to determine whether the failure to state the provision under which interest is claimed, is a failure to meet a mandatory requirement of the Bankruptcy Act.  However, it is as well that I should state my conclusion on this issue.  I can do so quite shortly.

20                  To my mind, there can be no doubt that when interest forms part of the amount claimed in the bankruptcy notice, the failure to specify the source of the obligation to pay that interest is a failure to meet a mandatory requirement of the Bankruptcy Act.  Section 41(2) requires a bankruptcy notice to be in accordance with the prescribed form and that form requires specification of the provision pursuant to which interest is claimed.  This is not an idle piece of information to provide to a debtor.  It enables him to decide whether the interest claimed is in fact due.  It also permits him to determine whether the amount of interest claimed is the correct amount. 

21                  It must be remembered that it has long been a fundamental precept of the law of bankruptcy that a bankruptcy notice, which is the foundation of a bankruptcy, is a matter in which great strictness is required: Kleinwort, above at 81 per Deane J (who was in dissent on other matters).  Except in the case of a merely formal defect, for which s 306 will provide a remedy, a defective bankruptcy notice is invalid and the failure to comply with it cannot constitute an act of bankruptcy.  The failure to specify the source of the obligation to pay interest could hardly be described as a formal defect.

22                  In the result, the petition will be dismissed.

Associate:

Dated:              3 September 1999