FEDERAL COURT OF AUSTRALIA

Boylan v Farthing [2000] FCA 575

BANKRUPTCY - whether bankruptcy notice a nullity because of non-compliance with prescribed form - omission of explanatory material - whether an essential requirement.

BANKRUPTCY - application to extend time in which to comply with bankruptcy notice - application based upon application to High Court for special leave to appeal against judgment founding bankruptcy notice.

Bankruptcy Act 1966 (Cth), s 40(1)(g), s 41, s 41(2), s 44(1)(c), s 306(1)

Bankruptcy Regulations, reg 4.02

Trustees of the Franciscan Missionaries of Mary v Weir [2000] FCA 574 followed

Sharples v Hanson, In the Matter of Sharples [2000] FCA 426 referred

Guss v Johnstone [2000] HCA 26 referred

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

Yu v Farrow Mortgage Services Pty Ltd (1995) 60 FCR 300 referred

Bendigo Bank Ltd v Williams [2000] FCA 482 disapproved

Kirk v Ashdown [1999] FCA 1664 followed

Northam v Commonwealth Bank of Australia [1999] FCA 544 referred

Toote v Mid-West Finance Ltd (1997) 78 FCR 306 referred

Boylan v Farthing (unreported, FCA, Mansfield J, 23 October 1998) referred

FRED BOYLAN v STEPHEN FARTHING & ANOR

No S 7013 of 2000

FINN J

9 JUNE 2000

CANBERRA (HEARD IN ADELAIDE)

THE COURT ORDERS THAT:

            1.         the application be dismissed with costs.

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

REASONS FOR JUDGMENT

1                     In their original form these reasons were given ex tempore on 3 May 2000.  Having suspended the orders I then made to provide Mr Boylan, a self-represented litigant, with the opportunity to commence the steps preliminary to lodging his foreshadowed appeal against my orders, I became aware of the decision of the Full Court of this Court in Trustees of the Franciscan Missionaries of Mary v Weir [2000] FCA 574.  In light of that decision and of the controversy that now obtains over the significance of defects in bankruptcy notices, I invited further submissions from the parties on the bearing of that controversy on the issues in the present case.

The Proceeding

2                     The application before me is in form to extend time within which to comply with a bankruptcy notice until (a) Mr Boylan's application for special leave to appeal to the High Court against the judgment founding the notice has been prosecuted and the matter finalised;  or (b) pending the outcome of the applicant's alleged counter-claim against the respondents, Stephen Farthing and Alegna Pty Ltd.

3                     The bankruptcy notice was served on 5 January 2000.  While the application was filed on 21 January 2000 - ie within the time fixed for compliance with the notice - no application was made within that time to set aside the bankruptcy notice.  I emphasise the latter for this reason.  I have no power simply to extend time for the purpose of prosecuting, or of satisfying this Court of, a counterclaim:  see generally the consideration of this matter in Sharples v Hanson, In the Matter of Sharples [2000] FCA 426.  Unless the time for compliance is extended on the first of the two bases relied on by Mr Boylan, he will already have committed an act of bankruptcy:  cf Guss v Johnstone [2000] HCA 26 at [58] - if the bankruptcy notice itself is valid.

4                     At the hearing of his application Mr Boylan raised for the first time the question whether the bankruptcy notice itself was a nullity.  The basis of this claim is that the notice itself does not strictly comply with the form prescribed by the Bankruptcy Act 1966 (Cth) ("the Act").  It is appropriate that this claim be considered first.  Before so doing I should mention another matter raised by Mr Boylan.  Notwithstanding that the bankruptcy notice clearly was served on Mr Boylan and that he has brought this proceeding in relation to it, he objects to the lack of proof of service.  Mr Fuller for the respondents indicated that an affidavit of service had been prepared.  I directed that it be filed in the proceeding.

The Alleged Nullity of the Bankruptcy Notice

5                     The claim is put in the following way.

(i)         Section 41(2) of the Act provides for bankruptcy notices that:

"[t]he notice must be in accordance with the form prescribed by the regulations."

            (ii)        Regulation 4.02 of the Bankruptcy Regulations in turn provides:

"REGULATION 4.02  FORM OF BANKRUPTCY NOTICES

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.

4.02(2)                        A bankruptcy notice must follow Form 1 in respect of its format (for example, bold or italic typeface, underlining and notes).

4.02(3)                        Subregulation (2) is not to be taken as expressing an intention contrary to section 25C of the Acts Interpretation Act 1901.

[NOTE:  Under section 25C of the Acts Interpretation Act 1901, 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;  see also paragraph 46(1)(a) of that Act for the application of that Act to legislative instruments other than Acts.]

            (iii)       Insofar as presently relevant the prescribed form (Form 1) states:

"5.       Bankruptcy proceedings may be taken against you if, within the time stated in paragraph 3, above:

            (a)        you do not comply with the requirements of either paragraph 3(a) or paragraph 3(b) above;  and

            (b)        the Federal Court does not extend, or is not deemed to have extended, the time for compliance with this Bankruptcy Notice (see paragraph 6, below).

6.         The Federal Court of Australia may extend the time for compliance with this Bankruptcy Notice if, within the time stated in paragraph 3 above, you apply to that Court on one or both of the following grounds:

            (a)        that you have instituted proceedings to set aside the judgment or order in respect of which this Bankruptcy Notice has been issued;

            (b)        that you have filed with the Federal Court of Australia an application (on one or more grounds, apart from the grounds mentioned in paragraph 7, below) to set aside this Bankruptcy Notice.

7.         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 counter-claim, set-off or cross demand equal to or exceeding the sum specified in this Bankruptcy Notice as owing to the 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 counter-claim, set-off or cross demand*.

            *          This means that, because of a legal obstacle, you could not have raised that counter-claim, 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: [emphasis added].

8.         You should note the following points carefully:

            (a)        If you file, at the Federal Court Registry, an application mentioned in paragraph 6(a) or (b), you must still comply with this Bankruptcy Notice within the time stated in paragraph 3 above unless the Court extends the time for you to comply.

            (b)        If you file, at the Federal Court Registry, an application mentioned in paragraph 7(a), you need not comply with this Bankruptcy Notice until the Court decides whether you have grounds for a counter-claim, set-off or cross demand.  Whether you will have to comply at that stage will depend on the Court's decision.

WARNING

9.         The information in paragraphs 6, 7 and 8 is based on provisions of section 41 of the Act.  The information is a summary only, and not a complete statement of the relevant law.  It might be unwise to rely solely on this summary.  If you need a more detailed explanation, you should seek legal advice"

6                     The asterisked part above that is underlined for emphasis in these reasons was omitted from the form served on Mr Boylan.

7                     Mr Boylan's claim is that strict compliance with the terms of the form is made essential by the Act, s 41(2) and in consequence the omission in question renders the notice a nullity.  In this he relies on the often quoted observations of the High Court in Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79-80 to the effect 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.

8                     Mr Boylan also relied originally upon the judgment of Lehane J in Yu v Farrow Mortgage Services Pty Ltd (1995) 60 FCR 300 where his Honour agreed (at 305-306) with an earlier observation of Lindgren J that "a statutory requirement that a bankruptcy notice be in accordance with the prescribed form is itself a requirement made essential by the Act [s 41(1)]".  He now relies as well on the majority decision of the Full Court in Bendigo Bank Ltd v Williams [2000] FCA 482 and invites me both to disregard the criticism of the Bendigo Bank case in Trustees of the Franciscan Missionaries v Weir and to not follow the decision of the Full Court in Kirk v Ashdown [1999] FCA 1664.

9                     As has been noted on a number of occasions, s 41 of the Act in its pre-1996 form identified matters that had to be dealt with in a bankruptcy notice.  Since the 1996 amendment the section now contains no explicit directions concerning the contents of a notice.  Rather it contemplates the prescription of a form in the regulations and directs that the notice be in accordance with that form:  see generally the discussion in the Bendigo Bank case at [10] ff.

10                  In Kirk v Ashdown the Full Court in dealing with a failure to comply with the prescribed form for a bankruptcy notice, clearly proceeded upon the assumption that where a matter is omitted, the effect of the omission on the validity of the notice depended upon whether the omitted matter itself was in respect of a requirement made essential by the Act.  It was not the case that adherence to the requirements of the form in their totality was made essential by the Act:  see Kirk at [18].

11                  The later decision of a majority of the Full Court in the Bendigo Bank case, in refusing to follow Kirk v Ashdown, suggested (at [16]) that reg 4.02 was drafted to ensure that strict compliance with Form 1 was necessary other than as to format, although I would add that the majority judgment would nonetheless admit that the omission from a notice of some text or information required by the form could be such as to constitute a formal defect or irregularity that could be saved from invalidity by s 306(1).  It is clear, though, that that Court would give s 306(1) a far more circumscribed scope for operation in relation to omissions from bankruptcy notices than Kirk v Ashdown was prepared to countenance.

12                  Finally, and subsequent to the Bendigo Bank case, the Full Court in Trustees of the Franciscan Missionaries of Mary v Weir in considered dicta rejected the strict compliance suggestion of the majority in Bendigo Bank.  Referring to the 1996 amendment the Court observed (at [15] - [16]):

"[I]t would work a far reaching reversal of the operation of the Act if the amendment of s 41(2) were to be regarded as doing away with the emphasis of bankruptcy administration on matters of substance, in favour of the elevation of form as the criterion of validity.  That would be the consequence if every part of the prescribed form were treated as something made essential by the Act, and it would use the expression coined by the majority in Kleinwort Benson Australia Limited v Crowl in a sense that would turn their actual decision (which excused, as Deane J emphasised, a quite serious defect) on its head.  Such an approach would be completely at odds with the formulation in James confining the consequence of invalidation to important breaches of the relevant provisions of the Act and matters that could mislead, that is to say, to defects of substance.

In our opinion, as a matter of construction, the very fact that the new s 41(2) is expressed in terms of form aligns it directly and naturally with s 306.  The new s 41(2) does not amend s 306;  it is inserted into an Act that already contains that provision, and it is intended to operate accordingly in the statutory setting into which it is received.  The form must be complied with, but in the context of an Act containing s 306, a "formal defect" by the express terms of the statute does not attract the invalidating consequences once associated with a mandatory provision:  Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355.  It is in fact recognised in regulation 4.02 that the prescription of a form of bankruptcy notice does not involve a requirement of strict compliance, substantial compliance being sufficient.  That the draftsman attributed this consequence to the operation of s 25C of the Acts Interpretation Act 1901, rather than to s 306 of the Act, and that express attention was drawn to the matter only because of a drafting problem related to the issue of format, in no way detracts from the conclusion that the regulation was not intended to prescribe a form in precise terms, but one to be complied with in substance."

13                  In this state of authority and having particular regard to the observations in the Franciscan Missionaries case, the proper course to be taken by a judge at first instance is to follow Kirk v Ashdown in relation to the principles to be applied in determining whether an omission from the prescribed form for a bankruptcy notice results in its being a nullity.  I should add that that was the course I took when the original orders were made in this matter.  As with the Court in the Franciscan Missionaries case I do not consider, with respect, that the 1996 amendment to s 41 had the effect ascribed to it by the majority in the Bendigo Bank case.

14                  The approach to be taken, then, is to have regard to the character and significance of the particular non-compliance with Form 1 that is in question and not with the mere fact of non-compliance as such.

15                  It is of course the case that not all of the matters contained in the Form are required to be contained in an actual bankruptcy notice.  The Form itself acknowledges as much in the following note it contains:  "[NOTE:  Words appearing below in italics are for guidance in the completion of this Notice, and are not to be reproduced in the Notice.]".  Additionally, as Weinberg J held in Northam v Commonwealth Bank of Australia [1999] FCA 544, there are other matters (essentially taking the form of notes by way of reminder to the party filling in the notice) that properly can and should be omitted without giving rise even to a formal defect or irregularity for the purposes of s 306(1) of the Act, let alone to a failure to comply with an essential requirement resulting in the notice being a nullity.

16                  In the present matter the sentences omitted are explanatory of an aspect of s 40(1)(g) of the Act and are part of the information provided to a debtor explaining (inter alia) avenues available to him or her to avoid the need for compliance.  That information in its totality serves a definite informative purpose in the Form:  see the observations of Foster J in Toote v Mid-West Finance Ltd (1997) 78 FCR 306 at 307.  For this reason the omission of a part of it - even where that part, as here, is by way of further elaboration of the main body of the text - cannot be said to be of such character as can simply be ignored as in the Northam case.

17                  But is the matter properly to be described as part of a requirement made essential by the Act?  In my view it is not.  It doubtless is desirable that the type of information contained in paras 6 to 8 of the Form be provided to a debtor.  That information alerts the debtor, as I have noted, to courses that he or she might take.  But the notice itself explicitly warns the debtor of the possible limitations of the explanation given.  That warning in para 9 warrants reiteration:

"                                              WARNING

9.         The information in paragraphs 6, 7 and 8 is based on provisions of section 41 of the Act.  The information is a summary only, and not a complete statement of the relevant law.  It might be unwise to rely solely on this summary.  If you need a more detailed explanation, you should seek legal advice."

18                  When one turns to the omitted information itself, its function purports to be to elaborate and to exemplify what is contained in para 7(b) of the notice.  It is, in this sense, of a subsidiary or secondary character to para 7(b) itself and as such is not essential in its own right.  Its de-emphasised level of type is illustrative of this.

19                  When one then turns to the warning, having regard to the particular character of the omitted information I have noted, it can properly be said that the warning is of itself indicative that the sentences omitted do not have the alleged essential character Mr Boylan seeks to attribute to them.  It alerts the reader to both the purpose of, and limitations of the contents of, the paragraphs in question, even if it could be said - and I express no view on this - that the information in paras 6 to 8 of Form 1 alerting a debtor to the provisions of s 41 of the Act and to which the omitted information is subsidiary or secondary, should now be said to be an essential requirement of the Act.  The omitted information, furthermore, is not itself of such character that its omission could reasonably mislead a debtor as to what was necessary to be done to comply with, to extend, or to contest, the notice. 

20                  I am not then satisfied that these sentences fall within the nullity principle of Kleinwort Benson.  Nonetheless the omission itself does constitute a "formal defect" in the notice.  For this reason it is necessary to have regard to the effect of the omission as a defect for the purposes of s 306(1).  That section provides:

"306(1)  [In proceedings]      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."

21                  There is simply no basis upon which it can be said that substantial injustice has been caused by the defect in question.  Mr Boylan was well aware of the provisions of the Act in question.  There is no suggestion he has in any way been prejudiced or affected by the defect.

22                  Accordingly I conclude that the bankruptcy notice is a valid and effectual one and reject the challenge made to it.

The Extension of Time

23                  It is accepted by both parties for present purposes that the application Mr Boylan has made for special leave is sufficient to bring him within the provisions of s 41(6A)(a) of the Act:  on which see Boylan v Farthing (unreported, FCA, Mansfield J, 23 October 1998).

24                  Mr Boylan equally does not seek to challenge in any way the substantive matters considered and the conclusion arrived at by Mansfield J in the earlier Boylan proceedings when refusing to extend time in respect of the first - but now expired:  see the Act, s 44(1)(c) - bankruptcy notice issued by Mr Farthing.  That extension I would note relied upon the same special leave application as is presently relied upon by Mr Boylan.

25                  The essence of his claim to extend time is, essentially, that it would be fair in the circumstances to do so, or alternatively it would be unfair not so to do.

26                  The fairness argument can be put shortly.  It relates to the passage of time in this matter and the apparent inaction of Mr Farthing in prosecuting his rights.  The first (but now expired) bankruptcy notice was served on 26 November 1996.  By the time fixed for compliance with that notice, Mr Boylan had acted so as to attract the extension of time conferred by s 41(7) of the Act.  He had previously appealed against the judgment founding the bankruptcy notice.  On 23 December 1997 the Full Court of the Supreme Court of South Australia rejected that appeal.  He then applied for special leave to appeal to the High Court.  It is that special leave application that is presently in issue.  On 23 September 1998 his application (inter alia) for an extension of time to comply because of the special leave application was heard and rejected by Mansfield J.  A subsequent appeal to the Full Court of this Court was dismissed on 23 March 1999.  Thereafter no steps were taken by Mr Farthing to rely on the bankruptcy notice.  It can no longer be relied upon to found a creditor's petition:  the Act, s 44(1)(c).  On 5 January 2000 the present bankruptcy notice was issued.  The special leave application has not as yet been heard, though the index for the Appeal Book has been settled.

27                  Mr Boylan's case is essentially that two very lengthy periods were allowed to pass by the respondents without prosecuting their rights - the first, a period of about 9 months from when the Full Court of the Supreme Court of South Australia gave its decision until Mansfield J heard Mr Boylan's application in September 1998;  the second a period of about 8 months from the judgment of the Full Court of this Court in March 1999.

28                  Mr Boylan's claim is that he should now be permitted to pursue his appeal without having to comply with the notice.  And that, in the circumstances given the passage of time, it would be unfair not to allow him so to do.

29                  It is clear that notwithstanding the expiry of the first bankruptcy notice, Mr Farthing had the statutory right to issue a new notice in respect of the same judgment debt as founded the expired notice.  I would note that Mr Boylan has submitted to the contrary.

30                  I required Mr Farthing to file and serve an affidavit explaining the reasons for the delay since the Full Court's decision in 1999.  I wished to be satisfied that the Act's processes were not being abused or used oppressively.

31                  The explanation given by Mr Farthing for his failure to act on the first notice related essentially to his financial misfortune and resultant impecuniosity throughout 1999 in consequence of proceedings (and a related property seizure) against him and Alegna Pty Ltd.

32                  Though Mr Boylan, somewhat faintly, contests the accuracy of the explanation - there is clear ill-will between the parties - it is an explanation I am prepared to accept given the material before me.  It satisfies me that there is no question of the procedures of the Act being used oppressively or abusively.  Mr Farthing's inability to act earlier in the matter may have provided a beneficial respite to Mr Boylan.  His failure to act cannot, though (given its explanation), be said properly to occasion such prejudice or unfairness as would justify the extension sought.  There is no presumption in the Act that the making of a special leave application gives a prima-facie right to an extension of time.  In relation to the earlier notice, Mansfield J considered the effect of the special leave application in these circumstances and refused an extension.  I should indicate I am persuaded by his Honour's reasons there and would arrive at a similar conclusion in the present matter (subject to the fairness issue).  And on that issue I do not consider that the passage of time since the 1999 decision of the Full Court provides reason, in the circumstances, for now exercising my discretion in Mr Boylan's favour.

33                  Accordingly I refuse to extend time.  There is in the circumstances no reason to vary the orders I made on 3 May 2000, the operation of which I then suspended.  I lift that suspension as of the date of these reasons and confirm the orders that the application be dismissed with costs.

Associate:

Dated:  8 June 2000