FEDERAL COURT OF AUSTRALIA

Vereker & Ors, in the matter of Timbs v Timbs [2001] FCA 1776

BANKRUPTCY – bankruptcy notice – whether bankruptcy notice was in form prescribed by the Bankruptcy Regulations 1966 (Cth)

Bankruptcy Act 1966 (Cth) s 41(2)

Bankruptcy Regulations 1966 (Cth) reg 4.02

The Australian Steel Company (Operations) Pty Ltd v Lewis (2000) 109 FCR 33 cited

Farrugia v Farrugia [2000] FCA 129 referred to

Re O’Keefe; Ex parte Australian Factors Ltd (1963) 19 ABC 101 applied

Re The Bankruptcy Act 1966; Ex parte Commercial Banking Co of Sydney Ltd (1979) 23 ALR 522 referred to

IN THE MATTER OF ALLAN TIMBS

ANTHONY VEREKER & ORS v ALLAN TIMBS

N 7268 OF 2001

BRANSON J

SYDNEY

14 DECEMBER 2001

THE COURT ORDERS THAT the creditor’s petition be dismissed

REASONS FOR JUDGMENT

BRANSON J

INTRODUCTION

1                     On 7 November 2001 I ordered that the creditor’s petition in this matter be dismissed on the ground that the bankruptcy notice upon which it relied for the purpose of establishing an act of bankruptcy was a nullity.  I indicated that I would in due course publish written reasons for the dismissal of the petition.  These are those reasons.

FORM OF bankruptcy notice

2                     Subsection 41(2) of the Bankruptcy Act 1966 (Cth) (“the Act”) provides that a bankruptcy notice must be in the form prescribed by the regulations.  Regulation 4.02 of the Bankruptcy Regulations 1966 (Cth) (“the Regulations”) prescribes for the purposes of subs 41(2) of the Act, the form of bankruptcy notice set out in Form 1.  It is not convenient here to reproduce the whole of Form 1.  However, it includes the following paragraphs:

“…

1.         _______________________________________________________ (“the creditor”)

of:       _______________________________________________________ _______________________________________________________

            _______________________________________________________

            _______________________________________________________

claims you owe the creditor a debt of $               , as shown in the Schedule.

2.                 The creditor claims that the debt is due and payable by you. A copy of the judgment or order relied upon by the creditor is attached.  At the time of applying for this Notice, execution of the judgment or order had not been stayed.

3.                 You are required, within 21 days after service on you of this Bankruptcy Notice:

(a)      to pay the creditor the amount of the debt; or

(b)      to make an arrangement to the creditor’s satisfaction for settlement of the debt.

…”

3                     The equivalent paragraphs of the bankruptcy notice upon which the creditor’s petition relied (“the Bankruptcy Notice”) are:

“1.      ANTHONY VEREKER, STEPHEN TITUS, MARK GREEN, PETER WILLIAMSON t/as VEREKERS SOLICITORS AND ATTORNEYS

(“the creditor”)

            of 324 Crown Street, Wollongong

claims you owe the creditor a debt of $23,282.79 at 9 January 2001 and accruing at a rate thereafter of $6.84 per day.

2.                 The creditor claims that the debt is due and payable by you.  A copy of the judgment or order relied upon by the creditor is attached.  At the time of applying for this Notice, execution of the judgment or order had not been stayed.

3.                 You are required, within twenty-one (21) days after service on you of this Bankruptcy Notice:

(a)      to pay the creditor the amount of the debt; or

(b)      to make an arrangement to the creditor’s satisfaction for settlement of the debt.”

4                     The Schedule to the Bankruptcy Notice is in the following form:

SCHEDULE

validity of bankruptcy notice

5                     In The Australian Steel Company (Operations) Pty Ltd v Lewis [2000] FCA 1915, 109 FCR 33, a case in which the Chief Justice directed that a court comprised of five judges should exercise the original jurisdiction of the Court, Black CJ, Heerey and Sundberg JJ at [22] said:

“Non-compliance with a bankruptcy notice is, by far, the act of bankruptcy most commonly relied on by creditors.  Non-compliance does not merely provide means of proof of insolvency (cf the statutory demand in company winding up proceedings).  It is an act of bankruptcy in itself.  Non-compliance with a bankruptcy notice not only has profound consequences for the debtor but also affects the rights and obligations of others.  These are some of the reasons why courts have required strict compliance with the legislative requirements for a bankruptcy notice.”

6                     Their Honours observed at [40]:

“In 1996 Parliament chose to make a form to be prescribed by regulation the sole criterion of whether a bankruptcy notice complied with the Act, with the consequence that an act of bankruptcy would be committed in the case of non-compliance with such a notice.  This being the will of Parliament, it is not for a court to treat the terms of the prescribed form as inherently less important than a requirement specified in the Act itself, so as to attract a more lenient view in the case of non-compliance.”

7                     At [31] their Honours indicated that the following passage from the joint judgment of Mason CJ, Wilson, Brennan and Gaudron JJ in Kleinwort Benson Australia Limited v Crowl (1998) 165 CLR 71 at 79-80 is applicable to the Act in its present form:

“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…” (authorities and citations omitted).

8                     Their Honours concluded at [32]:

“Thus essentiality of the requirement which the notice fails to meet and capacity of the notice to reasonably mislead a debtor are alternative ways in which a defect or irregularity may be found to be ‘substantive’.  It must logically follow that a notice which fails to meet a requirement made essential by the Act will contain a substantive defect even if the notice could not reasonably mislead a debtor as to what was necessary for compliance.”

9                     Form 1 is to be understood, in my view, as requiring that the debt owed by the debtor to the creditor be specified in paragraph 1 in a dollar and cents amount and that the amount specified be an amount arrived at “as shown in the Schedule”.  It is the debt in the amount so specified which the debtor claims in paragraph 2 is “due and payable”, and which paragraph 3 requires the debtor to pay within the specified number of days (ordinarily twenty-one days) after the service of the bankruptcy notice.  As the debt is the amount “as shown in the Schedule” it is plain that the debt can include interest accrued on a judgment or order (see item 3 of the Schedule to Form 1).

10                  The Bankruptcy Notice in this case, which was issued on 30 January 2001, did not specify the debt said to be owed by the debtor to the creditor in a dollar and cents amount.  Rather it specified an amount said to be owing as at 9 January 2001 and claimed that that amount was “accruing at a rate thereafter of $6.84 per day”.  Further the debt so specified in paragraph 1 of the Bankruptcy Notice was not the debt shown in the Schedule as being the “Total debt owing”.  The Schedule showed by item 6 that the total debt owing was $23,282.79.  Item 3 of the Schedule showed that interest was claimed in the amount of $574.85 to 9 January 2001 plus “$6.84  per day thereafter” but both the item 4 “Subtotal” and item 6 “Total debt owing” show the fixed amount of $23282.79.

11                  In my view, the terms of paragraph 1 of Form 1 make it plain that it is an essential requirement of a bankruptcy notice that it specify in a fixed amount the debt said to be “due and payable” to the creditor.  Although it is not necessary here to decide, I incline to the view that this amount, where interest is accruing on the debt, may not exceed the amount of the principal debt, plus interest accrued thereon, which is due and payable as at the date of the issue of the bankruptcy notice.  As Madgwick J pointed out in Farrugia v Farrugia [2000] FCA 129 at [5]-[6]:

“Where interest is involved, it can only be presently “due” at a given date.  No date but that of the notice is suggested by the Act as being relevant.

Further, the bankruptcy notice ‘speaks as at the date it bears’…  It is that date which every debtor reads upon receiving the bankruptcy notice.”  (authorities and citations omitted).

However, whatever view is taken on this issue, the Bankruptcy Notice in this case was a nullity.  It did not comply with the essential requirement that it specify a fixed amount as the debt said to be due and payable to the creditor.

12                  To understand Form 1 as requiring that a bankruptcy notice specify a fixed sum as the debt due and payable is not to suggest that the 1996 amendments to the Act effected any relevant change to the law.  In Re O’Keefe; Ex parte Australian Factors Ltd  (1963) 19 ABC 101 (“Re O’Keefe”) Clyne J gave consideration to a bankruptcy notice which required the debtor to pay to the creditor a judgment debt of ₤117 9s. 9d., together with interest at the rate of five pounds per centum per annum from the date of the judgment.  At 103 his Honour said:

“…when a judgment creditor seeks the issue of a bankruptcy notice, he must state specifically therein the amount which the debtor is required to pay to the creditor.  If he claims the payment of interest upon his judgment he must specify the amount of such interest.  It is not the obligation of the debtor to calculate the interest which the judgment creditor calls upon him to pay: to make specific something unspecified.

It is, I think, a fundamental principle of the law relating to bankruptcy notices that a creditor who issues a notice must be in a position to issue execution for the whole sum mentioned in the notice.”

13                  In Re the Bankruptcy Act 1966; Ex parte Commercial Banking Co of Sydney Ltd (1979) 23 ALR 522 at 526-527 Lockhart J observed:

“It is well established that it is permissible, though not obligatory, to include in a bankruptcy notice, a claim for interest on a judgment debt which bears interest….

If a judgment creditor chooses to claim interest on a judgment debt, it is necessary for the calculation of the claim to be accurate, and for the period during which the claim is made to be specified….

…

I see no reason in principle why a bankruptcy notice, claiming the amount of a judgment debt and statutory interest thereon, cannot in terms limit the date to which interest is calculated and claimed provided it is made clear that nothing more is claimed.  The judgment debtor knows where he stands.  He may comply with the notice and pay the total amount claimed or secure payment thereof and, if he does not do so, he will have committed an act of bankruptcy.”  (authorities and citations omitted).

14                  Further, in my view, the terms of paragraph 1 of Form 1 make it plain that the debt specified must be, and must be described as, the debt “as shown in the Schedule”.  Paragraph 1 of the Bankruptcy Notice does not include the words “as shown in the Schedule”.  Moreover, the debt as specified in paragraph 1 of the Bankruptcy Notice (ie “a debt of $23,282.79 at 9 January 2001 and accruing at a rate thereafter of $6.84 per day”) is not the amount shown by item 6 of the Schedule to the Bankruptcy Notice as being the “Total debt owing”.  Item 6 of the Schedule shows the “Total debt owing” as $23,282.79.  For these reasons also I find that the Bankruptcy Notice did not comply with essential requirements of a bankruptcy notice.

15                  I have concluded that the Bankruptcy Notice failed to meet essential requirements of the Act.  On that basis alone the Bankruptcy Notice was a nullity.  Additionally, in my view, the Bankruptcy Notice was a nullity as it could reasonably mislead the debtor as to what was necessary to be done to comply with the notice.  First, the claim made by paragraph 1 of the Bankruptcy Notice that the debtor owed the creditor “a debt of $23,282.79 at 9 January 2001 and accruing at a rate thereafter of $6.84 per day” is inconsistent with item 6 of the Schedule to the Bankruptcy Notice which asserts that the “Total debt owing” is $23,282.79.  As a consequence of this inconsistency alone the debtor could reasonably be misled as to what was necessary to be done to comply with the Bankruptcy Notice. 

16                  Even if item 6 of the Schedule is reasonably open to be read as being subject to item 3 of the same schedule, which identifies interest in the amount of “$574.85 to 9/1/01 + $6.84 per day thereafter”, the Bankruptcy Notice was, in my view, capable of misleading the debtor.  The amount of interest which the Bankruptcy Notice required to be paid was not specified but was left to be calculated by the debtor.  Presumably the creditor expected the debtor first to identify and adopt a means of payment which would render certain the date of payment and then to calculate the interest accrued or to be accrued on the judgment or order from 9 January 2001 to the date of payment.  The creditor was not entitled to impose these obligations on the debtor (see Re O’Keefe).  Having done so, the creditor created a risk that the debtor might make a not unreasonable mistake at one or other or both stages, and consequently be reasonably mistaken as to what was required to comply with the notice.

17                  It was for the above reasons that on 7 November 2001 I concluded that the Bankruptcy Notice was a nullity and ordered that the creditor’s petition be dismissed.

Associate:

Dated:              14 December 2001