FEDERAL COURT OF AUSTRALIA

Burton v Belgravia Investments Pty Ltd [1999] FCA 1840

BANKRUPTCY – application to set aside a bankruptcy notice – to what extent notice must nominate the misstatement relied on by the debtor to comply with s 41(5)  – whether applicant complied with agreement with the creditor to use her “best endeavours” to collect debts – whether debtor can comply with bankruptcy notice if debt assigned to third party before time of compliance expires

Bankruptcy Act 1966 – s 41(5)

Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 161 ALR 543 followed

Re Wilhelmsen; ex parte Gould (1986) 11 FCR 107 distinguished

Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 followed

Walsh v Deputy Commissioner of Taxation (1984) 53 ALR 606 distinguished

Re Lynch; ex parte Depela Pty Ltd (in liq) (1998) 153 ALR 271 cited

Re Nugent; ex parte Nugent (1985) 5 FCR 161 cited

James v Federal Commissioner of Taxation (1995) 93 CLR 631 cited

MARIE LESLEY BURTON v

BELGRAVIA INVESTMENTS PTY LIMITED

(ACN 050 138 246)

N 7309 OF 1999

HILL J

24 DECEMBER 1999

SYDNEY

THE COURT ORDERS THAT:

1.                  The bankruptcy notice be set aside.

2.                  The respondent pay the applicant’s costs of the application.

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

REASONS FOR JUDGMENT

1                     The applicant, Mrs Burton applies to the Court for an order setting aside a bankruptcy notice issued against her on 12 November 1998 on the application of the respondent, Belgravia Investments Pty Limited (“Belgravia”).  Mrs Burton also seeks an order restraining Belgravia from issuing against her any further bankruptcy notice based upon the allegation that she is indebted to Belgravia under the judgments of the Supreme Court of New South Wales in proceedings 50284 of 1992.

2                     The facts are uncomplicated.  Affidavits were read in the proceedings from Mr and Mrs Burton and from Mr Syme, a solicitor in the firm of Corrs Chambers Westgarth of Melbourne who acted for Belgravia.  There was virtually no cross-examination that in any way detracted from the credit of Mr and Mrs Burton or, for that matter, the solicitors.  Cross-examination of Mrs Burton was directed to establishing that essentially she relied upon her husband in their business affairs.  Although a number of matters were put to Mr Burton he either denied saying what was put to him or alternatively claimed not to remember.  I have no doubt that he was doing his best to tell the truth.  There was no cross-examination of Mr Syme. 

3                     The bankruptcy notice is founded upon a judgment in the amount of $1,105,495.40 obtained against Mr and Mrs Burton.  It notes that some $17,015.23 had been paid since the date of the judgment order and, together with interest included in the bankruptcy notice, that $1,670,860.17 was still owing.  The matter however is somewhat more complicated than that. 

4                     On 16 July 1993 an agreement was reached between Belgravia and Mr and Mrs Burton.  It recited the judgment to which reference has been made and that Tri Star Pre Mix Concrete Pty Limited (“Tri Star”) was also indebted to Belgravia but had gone into liquidation before judgment was obtained and that on 6 September 1991 Tri Star had executed a debenture charge over all of its assets and undertakings including book debts, as security for its obligations to Belgravia.  A bill of sale had also been executed by Mr Burton over his assets including book debts.

5                     The Burtons through various companies had been involved in the construction industry.  One particular debt of $250,000 owed by White Constructions Limited was said in the agreement to be owed to Tri Star and so formed part of Belgravia’s security.  Another debt said to be owed to Tri Star was in the sum of $150,000 by a company called ICM.  For present purposes the remaining relevant recitals are that Belgravia proposed to accept as an accord and satisfaction of the judgment debt the sum of $850,000 on the terms of the agreement and it was proposed that Belgravia should recover the sum of at least $150,000 together with debts secured in its favour including the White debt and the ICM debt.  The operative parts of the deed are as follows:

“It is agreed:

1.                  Provided that:

(a)               Belgravia receives from NJW by bank cheque the sum of $150,000 forthwith, and

(b)               Each of Burton and Mrs Burton forthwith use their best endeavours (which they hereby covenant to do) and to the reasonable satisfaction of Belgravia to collect all of the debts of Burton and Tri Star over which Belgravia has security including the White Debt and the ICM Debt and to pay forthwith to Belgravia

(i)                 the full amount of the White Debt collected, and

(ii)               the net proceeds of the ICM Debt and all other debts collected after deduction of reasonable costs

and for so long as

(c)                Belgravia remains entitled to and does retain the whole of the Settlement Sum and any other monies received on account of the Judgment Debt or Interest, and

(d)               Mrs Burton and her estate does not become bankrupt or subject to a Deed of Composition, Deed of Assignment or Deed of Arrangement or any other administration pursuant to Part X of the Bankruptcy Act or like administration

Belgravia agrees

(i)                 Not to seek a sequestration order against the estate of Burton and/or Mrs Burton and/or to seek to otherwise commence any proceedings against Burton and/or Mrs Burton for the enforcement of any order for the recovery of the Judgment Debt;

(ii)               ...

(iii)             agrees to vote at any meeting of creditors of Burton as directed by Norman Arthur Burton.”

6                     On 16 July a bank cheque of $150,000 was handed over to Belgravia.  It is not taken into account in the bankruptcy notice.

7                     Thereafter the Burtons retained the legal services of a solicitor to assist them to comply with the terms of the deed.  Correspondence indicates that Mr Burton filed affidavits in respect of proceedings taken to recover the White debt.  On 10 March 1995 Messrs Corrs Chambers Westgarth wrote to Mr Burton saying that they were grateful for the assistance he had been able to give in respect of the ICM debt which apparently also went to court and was listed for hearing.

8                     It seems that Belgravia had appointed a debt collector whose task it was to recover debts that were the subject of the agreement.  There is no evidence of the amount of debt actually recovered and Mr Burton did not suggest in his evidence that he was called upon to assist the debt collector employed by Belgravia.

9                     An additional affidavit filed by Mr Burton referred to his bankruptcy and financial position.  Likewise an additional affidavit of Mrs Burton deposed to her poor financial position throughout the entire period.  She and her husband deposed to having been ready, willing and able to assist Belgravia but lacking the resources to retain solicitors to pursue legal proceedings.

10                  Curiously, until the bankruptcy notice issued, there appears to be no correspondence suggesting any real dissatisfaction by Belgravia at the cooperation they obtained from Mr and Mrs Burton.  So far as appears, the bankruptcy notice was issued out of the blue.

11                  Mr Syme in one of his affidavits discloses that Belgravia had made attempts to recover the debts but had recovered very little other than the debt from White Industries.

12                  His affidavit refers to the various discussions with a solicitor, Mr Kekatos, who ultimately was sacked by the Burtons and reported to the Law Society in circumstances which do not emerge from the evidence.  There is reference to a facsimile on 6 September complaining about Belgravia being concerned that Mr Burton at least had not used his best endeavours to collect outstanding debts.  His affidavit refers to the various affidavits that Mr Burton had sworn in respect of books debt and specifically the ICM debts.

13                  It is in these circumstances that Mrs Burton seeks to set aside the bankruptcy notice.  She relies upon three matters:

1.                  Prior to the time for compliance with the bankruptcy notice she had given notice to Belgravia under s 41(5) of the Act that the bankruptcy notice had failed to take into account the initial $150,000 payment.

2.                  That the agreement to which reference has been made foreclosed in any event Belgravia issuing a bankruptcy notice or, to put it another way, that the amount in question was not owing as at the date of the bankruptcy notice.

3.                  She submits that (and it is admitted) that because Belgravia a week or so before the hearing before me assigned the debt from Mrs Burton to a third party, the bankruptcy notice should be set aside because Mrs Burton could not give a valid discharge to the debt if she made payment to Belgravia with notice of the assignment.

I shall deal with each of the three matters separately.

The misstatement in the bankruptcy notice

14                  On 20 September 1999, as already noted, the solicitors for Mrs Burton gave notice purporting to be pursuant s 41(5) of the Bankruptcy Act in the following terms:

“We hereby give you Notice Pursuant to Section 41(5) of the Bankruptcy Act 1966 that Mrs Burton disputes the validity of the Bankruptcy Notice dated 12 November 1998 upon the ground that the amount specified in the Notice is the amount due to the creditor, Belgravia Investments Pty Limited, exceeds the amount in fact due.”

15                  Not surprisingly the letter elicited a reply saying that the amount set out in the bankruptcy notice was perfectly clear and they could see no basis for any claim under s 41(5).  The question is whether the notice given by Mrs Burton in fact complies with s 41(5).  That section reads 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 the misstatement.”

16                  It should be mentioned that the time under which the bankruptcy notice required amendment has been extended from time to time so that the notice, although given relatively late, was within the time stipulated under the section.

17                  The question ultimately is whether it is necessary to comply with s 41(5) to actually nominate at least in some way the “misstatement” which is relied upon.  That is a question which was the subject of consideration by a Full Court in Seovic Civil Engineering Pty Ltd v Groeneveld (1999) 161 ALR 543.

18                  In that case a notice had been given purporting to rely upon s 41(5) of the Act indicating that the amount claimed in the bankruptcy notice was overstated but indicating that payments had been made totalling $3,500.  In fact there was an overstatement but the relevant overstatement was $71,500 not $80,500.  What was sought to be relied upon in fact at the hearing was that there had been an overstatement of interest.  The argument sought to be advanced was that the letter indicating a dispute as to the validity of the notice on the grounds of a misstatement was sufficient to encompass any misstatement which was in fact to be incorporated in the bankruptcy notice.

19                  The Full Court (Hill, Sackville and North JJ) held that a creditor faced with the notice was not merely left uninformed as to alleged misstatement but would have been positively misled.  In these circumstances the Court held that a debtors notice which wrongly identified the misstatement in the bankruptcy notice failed to comply with s 41(5) of the Bankruptcy Act.

20                  In the course of the discussion of the issue before it, the Court considered the question (it has been raised in Re Wilhelmsen;  ex parte Gould (1986) 11 FCR 107 by Pincus J) whether the notice required under s 41(5) must identify the overstatement or whether it is sufficient that it advise that there is some unidentified overstatement.  The Court undertook a consideration of the issue, ie. the history and policy matters involved, and said at 551:

“While it is not strictly necessary for us to decide, we think that the better view is that a notice by the debtor which simply asserts, without more, that the amount specified in the bankruptcy notice exceeds the amount actually due, does not comply with the requirements of s 41(5) of the Bankruptcy Act.  The expression ‘the misstatement’ strongly suggests that the debtor must do more than merely assert that there is a misstatement in the bankruptcy notice.  The subsection requires the debtor to provide sufficient information in the notice to enable the creditor to identify what is said to be the alleged misstatement.  Only then does the debtor’s notice displace the general rule established by s 41(5), that the bankruptcy notice is not invalidated only by reason that the sum specified therein as the amount due to the creditor exceeds the amount in fact due.”

21                  It was submitted that the comments made by the Full Court in the passage cited above were dicta and, in any event, should not be followed in preference to the contrary view taken by Pincus J in Re Wilhelmsen.  It is true that the comments are dicta.  It does not follow however that they should not be followed.  In my view the arguments in Seovic which underline the conclusion which the Full Court expressed as the “better view” are correct.  I propose not to follow the decision of Pincus J but rather the dicta of the Full Court in Seovic.  It follows that the notice of overstatement being not in compliance with s 41(5), the bankruptcy notice is not invalidated by reason that the amount of $150,000 handed over to Belgravia on 16 July was not taken into account in the calculation of the amount due.

Was the amount in question due and owing at the date of the bankruptcy notice?

22                  The second submission if successful requires Mrs Burton to satisfy the Court that each of her husband and herself used their best endeavours to the reasonable satisfaction of Belgravia to collect all of the debts of Burton and Tri Star over which Belgravia had security.  If Mrs Burton succeeds in that then it is clear that no money could be due and owing at the date of the bankruptcy notice and that it should be set aside.

23                  The question whether a person has used his or her best endeavours to do something is always a question of judgment.  In the present agreement it is conditioned by the words “and to the reasonable satisfaction of Belgravia”.  The correspondence leaves one uncertain as to whether Belgravia was or was not satisfied.  At one point it was not.  At another the solicitors seemed to be very satisfied.  But it is not just the mental state of Belgravia which is relevant because the satisfaction or dissatisfaction must be “reasonable”.  This introduces a more objective test into what otherwise would have been a subjective determination.

24                  The case for Mrs Burton has really been put on the basis that the Burtons did cooperate with the recovery of the White debt and the ICM debt in the Court proceedings that were initiated but essentially did nothing in respect of the other debts both because of the appointment by Belgravia of a debt collector and because of their own strained financial resources.  Counsel for Mrs Burton asks rhetorically what more might the Burtons have done in the circumstances.  They do not appear to have been required to do anything by anybody other than in respect of the legal proceedings where they swore affidavits; no one suggested that they should.  In all the circumstances I am of the view that Mr and Mrs Burton did, on the balance of probability, use their best endeavours to the reasonable satisfaction of Belgravia to collect the relevant debts with the consequence that no money was due and owing to Belgravia and the bankruptcy notice should be set aside.

The consequences of the assignment

25                  It is common ground that Belgravia assigned the debt, the subject of the bankruptcy notice, to a third party.  Details of the assignment were not adduced in evidence.  The assignment could of course be either legal or equitable depending upon the circumstances.  If legal with notice, it would be clear beyond all doubt that Mrs Burton could not safely comply with the bankruptcy notice.  Her obligation was to pay the assignee;  s 12 of the Conveyancing Act (NSW) 1919.  The assignment could, of course be equitable.  The circumstances of the assignment were to a totally third party which suggests at least that the assignment was for consideration.  Notice of assignment was given.  While no doubt a trustee for the assignee could commence proceedings (perhaps joining an absolute beneficiary as a party) that does not mean in the present context that a trustee on his or her own could give a good receipt.  As the majority of the Full Court in Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 at 447 observed:

“Ordinarily the effect of an equitable assignment of an equitable interest is to entitle the assignee to all equitable remedies applicable to the subject matter of the assignment and to give a good discharge (Meagher, Gummow & Lehane ...).  By virtue of the assignment the assignee stands in shoes of the assignor so there is no necessity to regard the assignor as a trustee for the assignee.”

26                  The same is obviously true where the equitable assignment is of a legal interest as would be the present case.  In the result Mrs Burton with notice of the assignment could not actually pay to Belgravia the money claimed under the bankruptcy notice and obtain a good discharge.  That amount could be paid only to the assignee.  What then is the consequence for the bankruptcy notice in a case where at the time the bankruptcy notice is issued the amount in question is due and payable but subsequently the person to whom payment is required under the bankruptcy notice assigns the debt?

27                  Counsel for Belgravia submitted that the question of validity of the bankruptcy notice was to be determined only at the time the bankruptcy notice issued.  For this proposition the decision of the High Court in Walsh v Deputy Commissioner of Taxation (1984) 53 ALR 606 which held that a bankruptcy notice was valid if it stated that the amount actually due at the date of issue was relied on.  That is however a different question and in my view the case is not determinative of the issue before me.  Perhaps more useful are cases such as Re Lynch; ex parte Depela Pty Ltd (in liq) (1998) 153 ALR 271 and perhaps also by way of analogy Re Nugent; ex parte Nugent (1985) 5 FCR 161.  These cases depend upon the statutory requirements as to form and content of the bankruptcy notice itself.  That notice requires, inter alia, where payment is to be made to a creditor that the notice set out the place where the creditor is to be found.  It seems well enough established that, if a creditor abandoned the address after service so that the address ceased to be a place where at reasonable times the creditor could be found (or some authorised agent) to receive payment, then the bankruptcy notice ceased to be valid;  James v Federal Commissioner of Taxation (1955) 93 CLR 631 and Re Lynch.

28                  Although it is generally true that the time for complying with the relevant requirements of the bankruptcy notice will be the time the notice is issued, the notice must be one that is capable of compliance during the time in which compliance is required.  If, before the time for compliance required to be given, the bankruptcy notice itself cannot safely be complied with, in my view, it is appropriate that the bankruptcy notice be set aside.

29                  There may be another ground upon which this can be put.  Failure to comply with a bankruptcy notice is an act of bankruptcy upon which a sequestration order can be founded.  Even where the person issuing the bankruptcy notice withdraws, other creditors may seek to substitute once the act of bankruptcy has been found.  But there could never be a petition issued following the circumstance of a bankruptcy notice where, when the time for compliance expired, compliance with the bankruptcy notice itself was impossible.  One could not, to use statutory language, “.... within the time specified in the notice ... comply with the requirements of the notice” and so commit an act of bankruptcy where, before the time for compliance expired, the notice was such that it could not be complied with.  Given the place which non-compliance with a bankruptcy notice has in the scheme of bankruptcy (see particularly s 40(1)(g) of the Act) it would fly in the face of reason to permit a bankruptcy notice to continue on foot with potential consequences to the creditor if a petition is initiated, perhaps by a different creditor, in circumstances such as the present.

30                  For this reason too the notice should be set aside.

Conclusion

31                  I am of the view that the bankruptcy notice should be set aside and that Belgravia Pty Limited pay the costs of the application.

32                  Having regard to the reasons I have given, which would operate in any event to create an issue estoppel between the parties on the effects of the deed, I see no reason to grant injunctive relief as sought by Mrs Burton.

Associate:

Dated:              24 December 1999