FEDERAL COURT OF AUSTRALIA

Bendigo Bank Ltd v Williams [1999] FCA 1546

BANKRUPTCY – bankruptcy notice - omission of provision under which interest claimed –defect or irregularity – substantive or formal defect

Bankruptcy Act 1966 (Cth) ss41, 43, 306(1)

Bankruptcy Regulations reg 4.02

Bendigo Bank Limited v Scerri [1999] FCA 1215 followed

Ashdown v Kirk [1999] FCA 1263 not followed

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

BENDIGO BANK LIMITED v GARY JOHN WILLIAMS

VG 7562 of 1999

GOLDBERG J

12 NOVEMBER 1999

MELBOURNE

THE COURT ORDERS THAT:

1.                  The petition dated 20 August 1999 and filed on 25 August 1999 is dismissed.

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

REASONS FOR JUDGMENT

1                     On 25 August 1999 Bendigo Bank Limited (“the applicant”) filed a Creditor’s Petition seeking a Sequestration Order under s 43 of the Bankruptcy Act 1966 (Cth) (“the Act”) against the estate of the respondent Gary John Williams.  The act of bankruptcy relied upon in the Petition is the failure of the respondent to comply with a bankruptcy notice dated 9 April 1999 which was founded on a Judgment obtained in the Melbourne Magistrates’ Court at Melbourne on 11 February 1999.

2                     The Petition, which is not opposed, was returnable before a Registrar of the Court.  The Registrar referred the Petition to a Judge because of the decisions in Bendigo Bank Limited v Scerri [1999] FCA 1215 and Ashdown v Kirk [1999] FCA 1263.

3                     The issue for determination is whether the omission in a bankruptcy notice of the provision under which interest is claimed vitiates the notice or is a formal defect or irregularity for the purposes of s 306(1) of the Act.

4                     The bankruptcy notice is in the form prescribed by reg 4.02 of the Bankruptcy Regulations.  It states that the Petitioner claims the debtor owes a debt of $5,474.23 “as shown in the Schedule”.  The notice requires the debtor within twenty-one days after service of the bankruptcy notice 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.

5                     The Schedule to the notice is in the following form:

                                           “Schedule

(NB:  Amounts, where applicable, are to be inserted in column 2)

For the Information of the Creditor

Notes to the Schedule

            Note 1:  Legal costs (item 2 of the Schedule)

            If legal costs are being claimed in this Bankruptcy Notice, a certificate of taxed or assessed costs in support of the amount claimed must be attached to this Bankruptcy Notice.

            Note 2:  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 the 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.

ANNEXURE ‘INTEREST’

BENDIGO BANK LIMITED

REFERENCE

GARY JOHN WILLIAMS

It can be seen immediately that the details of the calculation of the amount of interest claimed, and the principal sum on which, the period for which and the interest rate at which, the interest is being claimed are set out in the document attached to the bankruptcy notice.  But that document does not set out or state “the provision under which the interest is being claimed” as is contemplated by sub-paragraph (a) of Note 2 in the Schedule.  The applicant contends that this omission is a “formal defect or an irregularity” for the purposes of s 306(1) of the Act so that the notice is not vitiated or invalidated.

6                     In Bendigo Bank Limited v Scerri (supra) Finkelstein J, by way of obiter, opined that the failure to specify the source of the obligation to pay interest claimed in a bankruptcy notice was a failure to meet a mandatory requirement of the Act.

7                     In Ashdown v Kirk (supra) Dowsett J held that the failure to refer to s 48 of the Supreme Court Act 1995 (Qld) as the relevant provision justifying the claim for interest in a bankruptcy notice upon which the Creditor’s Petition before him was founded, constituted non-compliance with the Act and therefore a defect or irregularity, but his Honour concluded that it was not a defect which nullified the notice but was rather an irregularity to be dealt with pursuant to s 306(1) of the Act.

8                     Before turning to Dowsett J’s reasoning it is necessary to set out relevant parts of the bankruptcy notice which his Honour was considering.  In the notice the creditor claimed that the debtor owed a debt of $343,868.43 “as shown in the Schedule”.  The Schedule was in the following form:

The notice before Dowsett J did not contain the two notes which are set out in the Schedule to the notice under consideration in this case and, in particular, did not refer to the fact that the document attached to the notice must state the provision under which the interest was being claimed.  The notice before Dowsett J had a schedule attached to it (not set out in his Honour’s reasons) which stated the principal sum on which interest was claimed and the period for which, and the interest rate at which, the interest was being claimed.  Neither the notice nor the schedule to the notice set out or stated the provision under which interest was being claimed.

9                     Dowsett J referred to the judgment of the majority of the High Court in Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 77 and 79-80 and reasoned that the defect did not nullify the notice in the following terms at [25] – [30]:

“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. 

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.

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.

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.

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.

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.”

10                  In Bendigo Bank Limited v Scerri (supra) Finkelstein J considered a bankruptcy notice in which there was a difference between the amount of the debt alleged to be due to the Petitioner in the body of the notice and the total debt that was due to the Petitioner as set out in the Schedule to the notice.  His Honour concluded that the bankruptcy notice was misleading because it failed to clarify the nature of the proceeding that the debtor had to take in order to have the notice set aside.  His Honour reached this conclusion because, although the notice notified the debtor that to avoid bankruptcy proceedings he might apply to the Federal Court for an Order to set aside the bankruptcy notice on the ground that he had a counter-claim etc. “equal to or exceeding the sum specified in a bankruptcy notice as owing to the Judgment Creditor”, it was not clear to what sum that notification was referring.  It was for that reason that his Honour dismissed the Petition.  The notice did not state or set out the provision under which interest was claimed in the notice and because his Honour concluded that the bankruptcy notice was misleading he found it unnecessary to determine whether that failure was a failure to meet a mandatory requirement of the Act.  Nevertheless, his Honour stated his conclusion on this issue in the following terms at [20] – [21]:

“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.

It must be remembered that it has long been a fundament 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.”

11                  The applicant submitted that I should follow Dowsett J and not Finkelstein J whose observations were obiter.  The applicant submitted that the reasoning of the majority of the High Court in Kleinwort Benson Australia Limited v Crowl (supra) led to the conclusion that the omission in the bankruptcy notice of the provision under which the interest was being claimed was a formal defect or irregularity.  At 77, Mason CJ, Wilson, Brennan & Gaudron JJ said:

“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 mis-states the amount due to the creditor is defective or irregular.

At 79-81 their Honours said:

“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:  James v Federal Commissioner of Taxation (1955) 93 CLR 631 at 644; Pillai v Comptroller of Income Tax [1970] AC 1124 at 1135.  In such cases the notice is a nullity whether or not the debtor in fact is misled:  In re A Judgment Debtor, 530 of 1908 [1908] 2 K.B. 474 at 481;

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.

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

Their Honours then analysed the bankruptcy notices under consideration, concluded that there could be no uncertainty as to what would constitute compliance with the notice and continued at 81:

“The notice cannot be regarded as capable of misleading and accordingly cannot be said to be a nullity.  The understatement thus constituted a formal defect or irregularity which attracts the operation of s. 306(1) of the Act.”

12                  The applicant submitted that the respondent could not be misled by the omission in the annexure to the Schedule as it was clear from the notice and the Schedule what the respondent was required to do in order to comply with the bankruptcy notice.  It was said there was nothing incorrect about the numbers specified and that there was no ambiguity discrepancy or disconformity within the notice such as was contained in the bankruptcy notice before Finkelstein J.  It was submitted that the respondent would not be better informed if the notice had informed him that interest was claimed under the relevant provision of the Supreme Court Act 1986 (Vic) as he still knows how much money he has to pay and how the calculation of interest is arrived at.

13                  The form of the bankruptcy notice is derived from s 41(2) of the Act which provides:

“The notice must be in accordance with the form prescribed by the regulations.”

Regulation 4.02 provides:

“(1)     For the purposes of sub-section 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 type face underlining and notes).

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

Section 25C of the Acts Interpretation Act 1901 (Cth) provides where an Act prescribes a form, then unless the contrary intention appears strict compliance with the form is not required and substantial compliance is sufficient.

14                  Form 1 is contained in Schedule 1 to the Regulations and paragraph 1 of the Form provides for the creditor to claim that the debtor owes the creditor a debt of a specified amount “as shown in the Schedule”.  The Schedule in Form 1 is in the following form:

“Schedule

For the Information of the Creditor –

Notes to the Schedule

Note 1:  Legal costs (item 2 of the Schedule)

If legal costs are being claimed in this Bankruptcy Notice, a certificate of taxed or assessed costs in support of the amount claimed must be attached to this Bankruptcy Notice.

Note 2:  Interest accrued (item 3 of the Schedule)

If interest is being claimed in this Bankruptcy Notice, details of the calculations 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).”

15                  I have reached the conclusion that the omission of the provision under which interest is being claimed in the document annexed to the bankruptcy notice results in a failure to meet a substantive and mandatory requirement of the Act.  Section 41(2) of the Act requires a bankruptcy notice to be “in accordance with the form prescribed by the Regulations”.  That form is set out in Form 1 in the Schedule to the Regulations via reg 4.02.  I accept that because reg 4.02(2) is not to be taken as expressing an intention contrary to s 25C of the Acts Interpretation Act:  reg 4.02(3), strict compliance with the form is not required and substantial compliance is sufficient.  But reg 4.02(2) is expressed in terms that a bankruptcy notice must follow Form 1 “in respect of its format …”.  It seems to me that the combination of s 41(2), reg 4.02(1) and Form 1 in the Schedule results in the mandatory requirement that the provisions referred to in note 1 and note 2 in the Schedule of Form 1 must be complied with.  The reference in reg 4.02(3) to s 25C of the Acts Interpretation Act does not require me to reach a contrary conclusion, as that subregulation is only directed to the provisions of reg 4.02(2) which require the bankruptcy notice to follow Form 1 “in respect of its format (for example, bold or italic type face or underlining or notes)”.  Regulation 4.02(3) is not directed to the content of Form 1 otherwise than in relation to its format.

16                  In my opinion the combination of s 41(2), reg 4.02 and Form 1 demonstrates that, otherwise than in relation to format, strict compliance with Form 1 is required.  Thus it is an essential requirement of the Act if interest is being claimed in the bankruptcy notice that the provision under which interest is being claimed must be set out in the document attached to the bankruptcy notice.  The specification of the provision under which the interest is being claimed is important for the debtor, as it enables the debtor to determine whether the claim for interest is a valid claim as a matter of law.  The judgment debt speaks for itself in the sense that the debtor is given a copy of the order of the court with the bankruptcy notice as an attachment as required by Form 1.  If a copy of the judgment or order relied upon is not attached to the notice, there is a failure to comply with an essential requirement of the Act:  American Express International Inc v Held [1999] FCA 321 at [14] and the cases there cited.  The only way in which the debtor can satisfy himself or herself as to the validity or lawfulness of the claim for interest is if he or she is told the provision under which the interest is claimed.  As Finkelstein J said in Scerri (supra) it “is not an idle piece of information”.

17                  If I am wrong in my conclusion that the requirement to state the provision under which interest is being claimed is made essential by the Act it is necessary to consider whether that omission could mislead the debtor as to what was necessary for compliance with the notice. 

18                  As noted in the passage from Kleinwort Benson Australia Limited v Crowl to which I have referred in paragraph 11 above, if the requirement to state the provision under which the interest has been claimed in the bankruptcy notice is not made essential by the Act the bankruptcy notice is only a nullity if the omission is objectively capable of misleading the debtor as to what is necessary for compliance with the notice. 

19                  In my opinion the notice is objectively capable of misleading the debtor as to what is necessary for compliance with the notice and is also capable of producing uncertainty as to what the debtor is required to do in order to comply with the notice.  Although the notes to the Schedule, set out in Form 1 in the Schedule to the Regulations, are said to be “for the information of the creditor”, those notes have been set out in full in the notice served on the respondent.  The respondent was therefore specifically told in the notice that if interest was being claimed in the notice the annexure or attachment to the notice was to state the provision under which the interest was being claimed.  When the respondent turns to the notice he cannot find any provision under which the interest is being claimed.  In my opinion confusion and uncertainty can arise because having been told that if interest is being claimed the provision under which the interest is being claimed must be stated, the respondent then finds such a provision is not stated.  Does this then mean that in such circumstances he does not have to pay the interest?

20                  I would therefore venture to differ from the reasoning of Dowsett J in Ashdown v Kirk (supra).  I consider that I should follow earlier decisions of single Judges of this Court, as a matter of judicial comity, unless I am satisfied that the decision is clearly wrong:  La Macchia v Minister for Primary Industries and Energy (1992) 110 ALR 201 at 204;  Bank of Western Australia Ltd v Commissioner of Taxation (1994) 55 FCR 233 at 255;  Towney v Minister for Land and Water Conservation for New South Wales (1997) 76 FCR 401 at 412.  I have given the matter earnest consideration but I have reached a conclusion that I should not follow the reasoning of Dowsett J.  In particular I am unable to agree with his Honour’s observation that 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” if those provisions relate to the content of the bankruptcy notice and the document to be attached to it rather than the format and style of the bankruptcy notice.  Although, as Dowsett J observed at [26], it may be said:

“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”,

I do not consider that it is appropriate to characterise the failure to state the provision under which the interest is being claimed as a “less serious defect”.  The relative seriousness of a defect is not relevant to the determination of whether a relevant omission is of a mandatory requirement unless that conclusion is reached in the course of determining the proper construction of the relevant statutory provision.

21                  Dowsett J observed at [26]:

“If the claim for interest were unjustified or excessive, the matter would have fallen for resolution pursuant to subs 41(5).  It seems must unlikely that the Act places the debtor in a better position where the amount claimed is correct, but not justified in detail”.

The point is not so much that the amount of interest is not justified in detail;  rather the point is that the Act and the Regulations require specific information to be given to the debtor and that information has not been provided.

22                  Dowsett J concluded there was no room for misunderstanding or confusion in relation to the bankruptcy notice before him.  That notice did not set out, as does the notice in the present case, the notes to the Schedule in Form 1.  His Honour therefore did not have to consider the nature of the capability of the present notice to mislead or whether confusion would arise as a result of it.

23                  I would, with respect, agree with the observations, albeit obiter, made by Finkelstein J in Bendigo Bank Limited v Scerri (supra) to which I have referred in paragraph 10 above.  North J reached a similar conclusion in Bendigo Bank Limited v Gard [1999] FCA 1179 where he dismissed a petition because the bankruptcy notice on which it was founded did not have attached the interest document required to be attached by Note 2.  His Honour concluded that the omission to attach the document was not a formal but rather a substantive defect.

24                  The petition will therefore be dismissed.

Associate:

Dated: