FEDERAL COURT OF AUSTRALIA

Ashdown v Kirk [1999] FCA 1263

BANKRUPTCY – application for sequestration orders – grounds raised on application not raised in setting aside application – whether Anshun applicable – defect in notice – rate of interest owed not specified – whether notice of a nullity

Bankruptcy Act 1966 (Cth)

Acts Interpretation Act 1901 (Cth)

Supreme Court Act 1995 (Qld)

Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589

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

Makhoul v Barnes (1995) 60 FCR 572

Bendigo Bank Ltd v Scerri [1999] FCA 1215 (3 September 1999)

RONALD CLIVE ASHDOWN AND HELEN IVY ASHDOWN v JUDE CHRISTOPHER KIRK

QG 7506 of 1998

RONALD CLIVE ASHDOWN AND HELEN IVY ASHDOWN v DEBORAH ANN KIRK

Q 7189 of 1999

DOWSETT J

13 SEPTEMBER 1999

BRISBANE

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

REASONS FOR JUDGMENT

1                     On 3 April 1997 the applicants obtained judgment against the respondents in the Supreme Court of Queensland in the amount of $250,000, with interest at 12 per cent per annum from 6 March 1995 to the date of judgment, amounting to $62,301.37, and costs, including reserved costs.  On 14 May 1998 a bankruptcy notice was issued on the application of the applicants.  The notice alleges that the amount of $343,868.43 is owing by the respondents to the applicants “as shown in the schedule”.  The schedule is as follows:-

2                     A copy of the order of the Supreme Court is attached to the bankruptcy notice, showing the amount of the judgment and the amount of interest (at 12 per cent per annum) to the date of judgment.  Also attached is a schedule as follows:-

            Judgment entered 3.4.97                                                                       $312,301.37

            Plus interest at 10 per cent – 4.4.97 to 3.4.98                                       $  31,230.14

                                                                                                                        $343,531.51

            Plus interest at 10 per cent – 4.4.98 to 13.5.98                         $    3,736.92

                                                                                                                        $346,868.43

3                     It is common ground that the debt has not been paid.  The applicants have petitioned in bankruptcy, seeking sequestration orders.  The female respondent was erroneously joined in petition No Q 7506 of 1998 but was dismissed from the proceedings at the hearing.  Numerous other formal amendments were also made.

4                     The respondents have previously applied to set aside the bankruptcy notice.  That application was heard by Kiefel J on 23 March 1999 and dismissed.  Nonetheless, when the petitions were called on, the respondents indicated that they wished to challenge the validity of the bankruptcy notice on grounds not raised before Kiefel J.  To allow such a course appears undesirable.  Further, in my view, it is probably contrary to the “extended principle” discussed by Gibbs CJ, Mason and Aitken JJ in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, especially at 598.  Their Honours, after discussing res judicata and issue estoppel, explained the “extended principle” as follows:-

The critical issue, then, is whether the case falls within the extended principle expressed by Sir James Wigram VC in Henderson v Henderson [(1843) 3 Hare, at 115 [67 ER at p 319]].  The Vice‑Chancellor expressed the principle in these terms:

Where a given matter becomes the subject of litigation in, and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case.  The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of the litigation and which the parties, exercising reasonable diligence, might have brought forward at the time.

5                     At 602-3 in Anshun, their Honours continued:-

In this situation we would prefer to say that there will be no estoppel unless it appears that the matter relied upon as a defence in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it.  Generally speaking, it would be unreasonable not to plead a defence if, having regard to the nature of the plaintiff’s claim, and its subject matter, it would be expected that the defendant would raise the defence and thereby enable the relevant issues to be determined in the one proceeding.  In this respect we need to recall that there are a variety of circumstances, some referred to in the earlier cases, why a party may justifiably refrain from litigating an issue in one proceeding yet wish to litigate the issue in other proceedings, eg expense, importance of the particular issue, motives extraneous to the actual litigation, to mention but a few.  See the illustrations given in Cromwell v County of Sac [(1876) 94 U.S. (24 Law.Ed., at 199)].

It has generally been accepted that a party will be estopped from bringing an action which, if it succeeds, will result in a judgment which conflicts with an earlier judgment.

6                     Later, at 603-4, their Honours said:-

The likelihood that the omission to plead a defence will contribute to the existence of conflicting judgments is obviously an important factor to be taken into account in deciding whether the omission to plead can found an estoppel against the assertion of the same matter as the foundation for a cause of action in a second proceeding.  By “conflicting” judgments, we include judgments which are contradictory, though they may not be pronounced on the same cause of action.  It is enough that they appear to declare rights which are inconsistent in respect of the same transaction.

7                     The “issue” in the proceedings before Kiefel J was the validity of the bankruptcy notice.  It would be reasonable to expect that the respondents had, at that time, raised all relevant challenges to such validity.  Had counsel for the applicants submitted accordingly, and subject to any submissions from the respondents, I would have acceded to a submission that the respondents ought not be allowed to raise new grounds of attack on the validity of the bankruptcy notice at this stage.  However counsel made no such submission, indicating that he felt constrained from so doing by the decision of the Full Court in Makhoul v Barnes (1995) 60 FCR 572.  That was a case in which, at the hearing of a petition, the judgment debtor sought to challenge the validity of the debt.  This issue had previously been canvassed on an application to set aside the bankruptcy notice, which application had been dismissed by consent.  It was submitted that the debtor “was thereafter estopped from raising at the hearing of the petition the question whether underlying the judgment upon which the petitioning creditor relied, that being the judgment upon which the bankruptcy notice was founded, there lay a true debt.”  See Makhoul at 578.

8                     On the hearing of a petition, the Court may have to inquire into the validity of the judgment debt, either to establish the petitioner’s status as a creditor or to determine whether an act of bankruptcy has been committed.  If either question has been resolved in earlier proceedings to set aside the bankruptcy notice, it is difficult to see how, consistent with Anshun, that question can be revisited at the hearing of the petition.  Makhoul appears to establish that whereas on an application to set aside the bankruptcy notice, it is the validity of that notice which is in issue, at the hearing of the petition, the issue is whether the Court should, in the exercise of its discretion, make a sequestration order.  I would have thought, however, that if resolution of the relevant issue at the later stage requires consideration of a matter previously resolved (eg, validity of the notice or existence of the debt), then there is a real risk of conflicting judgments as contemplated in Anshun.  I would not have thought that the decision in Makhoul necessarily disposes of the precise question which might have arisen in the present case, but in the absence of any submissions as to the matter, it is not necessary for me to consider it further.

9                     The respondents have raised a number of new issues.  The first concerns the date of service of the bankruptcy notice.  The process‑server who served it (Mr Phillips) was cross‑examined with a view to establishing that his affidavit of service was incorrect as to the date of service on Mr Kirk.  He said that it was served on 13 November 1998 and that he had made a contemporaneous note of the date of service.  Mr Kirk claimed that he was served on 21 November.  It appeared in the course of cross-examination that he had previously sworn that the service date was 20 November.  In the circumstances, I have a clear preference for the evidence of Mr Phillips and accept his evidence as to service of the bankruptcy notice.  It is not necessary to take this matter further.

10                  The respondents also sought to cross-examine the male applicant as to two other matters relating to the bankruptcy notice.  The first was the petitioners’ residential address at the relevant time.  The second was whether or not McGillivrays Solicitors had authority to receive payment of the debt as indicated in the bankruptcy notice.  Neither matter was put in dispute by the respondents’ material, save that in para 15 of an affidavit filed on 31 August 1999, Mr Kirk said that he thought it unusual that McGillivrays should be named in the bankruptcy notice because other firms had acted for the applicants at various times in the past.  As I understand it, proceedings in bankruptcy are conducted on affidavit, and the parties raise by their affidavits the issues which are to be ventilated at the hearing.  Cross-examination is permitted to undermine credibility, to put the contrary case and to clarify the content of the affidavits, but the issues for determination are defined by the affidavits.  It is not appropriate for a party to go on a fishing expedition under the guise of cross-examination.  For that reason, I declined to permit cross-examination of the male applicant upon those two matters, no dispute about which had been raised in the material.

11                  In the end, the respondents resist the petitions on two bases:-

·          that the petitioners failed to comply with the requirements of section 41(2) of the Bankruptcy Act 1966 (Cth) (the “Act”), regulation 4.02 and Form 1 in not giving appropriate particulars of the source of  the obligation to pay the interest claimed in the notice and of the calculation thereof; and

·          that, for similar reasons, the bankruptcy notice was misleading.

12                  For present purposes, the relevant statutory and regulatory provisions are as follows:-

Section 41

(1)       An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against the debtor a final judgment or final order…

(2)       The notice must be in accordance with the form prescribed by the regulations.

(3)       …

(4)              …

(5)           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 the misstatement.

(6)           Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with subs (5), he or she shall be deemed to have complied with the notice if, within the time allowed for payment, he or she takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it.

Regulation 4.02

(1)               For the purposes of subsection 41(2) of the Act, the form of bankruptcy notice set out in Form 1 is prescribed.

(2)               A bankruptcy notice must follow Form 1 in respect of its format (for example, bold or italic typeface, underlining and notes).

(3)               Sub-regulation (2) is not to be taken as expressing an intention contrary to section 25C of the Acts Interpretation Act 1901.

13                  Section 25C of the Acts Interpretation Act 1901 (Cth) provides:-

Where an Act prescribes a form, then, unless the contrary intention appears, strict compliances with the form is not required and substantial compliance is sufficient.

14                  Paragraphs 46(1)of the Acts Interpretation Act provides:-

Where an Act confers upon any authority power to make, grant or issue any instrument (including rules, regulations or by-laws), then:-

            (a)        unless the contrary intention appears, expressions used in the instruments so made, granted or issued shall have the same meanings as in the Act conferring the power, and this Act shall apply to any instrument so made, granted or issued as if it were an Act and as if each such rule, regulation or by-law were a section of an Act;  …

            (b)        …

15                  It seems that sub-reg 4.02(3) is designed to avoid any suggestion that sub‑reg 4.02(2) is inconsistent with s 25C of the Acts Interpretation Act.  It follows that substantial compliance with the prescribed form is sufficient unless the contrary intention appears.

16                 Form 1

            Form 1 contains the form of bankruptcy notice and relevantly provides with respect to interest (in Note 2):-

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 at which, the interest is being claimed.

(NB:    If different rates are claimed for different periods, full details must be shown.)

17                 Section 306(1)

            Section 306(1) of the Act 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.

18                  Section 47 of the Supreme Court Act 1995 (Qld) authorises a Court to award interest on a judgment up to the date of such judgment, at a rate which is in the discretion of the Court.  The learned trial Judge exercised this direction in the present case, adopting an interest rate of twelve per cent.  This section “does not authorise the giving of interest upon interest”.  Sub-section 48(1) of the same Act provides for interest on judgments as follows:-

Where judgment is given or an order is made by a court of record for the payment of money in a cause of action that arose after the commencement of the Common Law Practice Act Amendment Act 1972, interest shall, unless the court otherwise orders, be payable at the rate prescribed under a regulation from the date of the judgment or order on so much of the money as is from time to time unpaid.

19                  Sub-section 48(1) contains no mention of “interest upon interest” but authorises interest on moneys owing pursuant to a judgment.  It may be inferred that ten per cent is presently the prescribed rate.  No suggestion to the contrary was made, nor was the accuracy of the calculation challenged.  Although the respondents submit to the contrary, relevant particulars of the calculation were provided.  The attached schedule clearly identifies the principal, the interest rate and the relevant period.  It is submitted that “there is no explanation as to how the amount of $312,301.37 is calculated”.  This is simply incorrect.  That sum is described as “Judgment entered 3.4.97.  A copy of the relevant judgment is attached.  The amounts of the judgment and interest referred to therein total $317,301.37.  Although that arithmetical exercise is not carried out in the document, the inference is inescapable that the “Judgment” referred to in the schedule is the total of the two sums mentioned in the attached judgment.

20                  It is also submitted that “there is no explanation of the application of the different rates of interest” as required in Form 1 (Note 2).  This is also incorrect.  It is clear that interest at twelve per cent to the date of judgment is included in the amount of the judgment.  Only interest claimed on the amount of that judgment must be explained in the notice.  This has been done in the schedule.  There is also some ill-defined complaint about the applicants’ claiming “interest upon interest”.  I raised this matter in oral argument, prompted by an imperfect recollection of the relevant statutory provisions.  The restriction in s 47 of the Supreme Court Act does not appear in s 48, which provides for interest on moneys outstanding pursuant to judgments.  There is no reason why this should not include any part of a judgment which represents interest.  The only criticism which can be made of the bankruptcy notice is that it does not specify the provision pursuant to which interest is claimed, that is s 48 of the Supreme Court Act.  It is said that this is an invalidating defect and in any event, is misleading.  It is also said that the difference between the rate adopted by the learned trial Judge (twelve per cent) and that prescribed pursuant to s 48 (ten per cent) contributes to that misleading effect.

21                  Had the amount claimed, including the claim for interest, been in excess of the amount due, the matter would have been regulated by subs 41(5) of the Act.  The bankruptcy notice would only have been invalid if the debtor, within the time prescribed for payment, had given notice to the creditor disputing the validity of the notice on that ground.  Such an overstatement is, presumably, one of the most serious errors which can be made in a bankruptcy notice.  After all, the notice is intended to be a demand which indicates to the judgment debtor what he or she must do in order to avoid bankruptcy.  To claim more than is due would create a serious dilemma for the judgment debtor - whether to pay the amount claimed in order to avoid bankruptcy or to dispute the amount, probably aggravating an already perilous financial situation.  The inclusion of subs 41(5) makes it clear that even an error of that magnitude will not automatically lead to invalidity.  It seems unlikely that less serious defects should do so.

22                  The best guide to the consequences of non-compliance with the Act is to be found in the decision of the High Court in Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71.  That case concerned a bankruptcy notice which claimed less than the amount due as a result of an error in calculating interest.  The majority (Mason CJ, Wilson, Brennan and Gaudron JJ ) held that interest can, but need not be claimed in a bankruptcy notice and that the provisions of subs 306(1) apply to irregularities in a bankruptcy notice.  Their Honours observed (at 77):-

Three questions arise as to the validity of the bankruptcy notices in this case:  are they defective or irregular; if so, is the defect or irregularity substantive or formal; and if it is formal only, has it occasioned substantial and irremediable injustice?

It may be accepted that a bankruptcy notice which misstates the amount due to the creditor is defective or irregular.

23                  At 79-80 their Honours continued:-

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:… .  In such cases the notice is a nullity whether or not the debtor in fact is misled: … .

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.

24                  In Kleinwort, the claim was for less than the total amount due.  Thus the amount claimed in the bankruptcy notice was, in any event, due as their Honours observed at page 80.  The “essential requirements” of the section were satisfied and the failure to state the full amount of the debt was not “a requirement made essential by the Act”.

25                  The failure to refer to s 48 of the Supreme Court Act as the relevant “provision” justifying the claim for interest certainly constitutes non-compliance with the Act.  It would be difficult to treat the notice as substantially complying with the relevant requirement so as to invoke the protection of s 25C of the Acts Interpretation Act as there was no attempt to comply with that requirement.  Thus it is necessary to consider the approach adopted by the High Court in Kleinwort.

26                  Having accepted that there is a defect or irregularity, I must determine whether the requirement in question is essential pursuant to the Act.  That is a matter of construction.  Although the relevant provisions are in language which might be thought to be prescriptive, the reference in reg 4.02(3) to s 25C of the Acts Interpretation Act suggests something less than an expectation that there will be strict compliance with its provisions.  Similarly, as I have already observed, the express, and relatively liberal treatment in s 41 of an overstatement of the debt suggests that less serious defects should not be fatal to the validity of a bankruptcy notice.  If the claim for interest were unjustified or excessive, the matter would have fallen for resolution pursuant to subs 41(5).  It seems most unlikely that the Act places the debtor in a better position where the amount claimed is correct, but not justified in detail.  I conclude that the defect is not as to an essential requirement of the Act.

27                  It is next necessary to determine whether the defect was objectively capable of misleading the respondents as to what was necessary for compliance with the notice.  There is no suggestion that the amount claimed was incorrect.  The only conduct necessary in order to comply with the notice was to pay that amount.  There was no room for misunderstanding.

28                  As to the possibility of confusion concerning the different interest rates, the bankruptcy notice, with attachments, made it clear that the Supreme Court had awarded interest at twelve per cent until judgment and that the applicants were claiming interest at ten per cent thereafter.  The respondents may not have understood why there was a difference in the rates, but that is not a misunderstanding as to what they had to do to comply with the notice.  It is the latter kind of misunderstanding which is contemplated in Kleinwort.

29                  In the circumstances, I consider that the defect did not nullify the bankruptcy notice and that it was therefore an irregularity to be dealt with pursuant to s 306(1).  I can see no reason to conclude that any substantial injustice has been caused by that irregularity.

30                  Since writing the above, my attention has been drawn to the decision of Finkelstein J in Bendigo Bank Ltd v Scerri [1999] FCA 1215 (3 September 1999).  His Honour treated as fatal an omission to identify the provision under which interest is claimed.  I have come to the contrary conclusion, although I must say that my initial impression, which I disclosed in the course of argument, was otherwise.  Had the view expressed by Finkelstein J been part of the ratio of the decision in question, I would have been inclined to follow it.  However his Honour clearly disposed of the case on another basis.  I should adhere to the considered view which I have outlined above.

31                  In those circumstances, as I understand it, there should be sequestration orders.  I will hear submissions as to the forms of the relevant orders and as to costs.

Associate:

Dated:              13 September 1999