FEDERAL COURT OF AUSTRALIA

Cosco v Tsatsoulis (in the matter of Tsatsoulis) [2002] FCA 358

BANKRUPTCY – bankruptcy notice – notice based on judgment in District Court of New South Wales – prescribed form of bankruptcy notice required statement of provision under which interest claimed – bankruptcy notice asserted that entitlement to interest was derived from s 83A District Court Act 1973 (NSW) – entitlement was in fact derived from s 85 District Court Act 1973 (NSW) – rate of interest correctly stated in bankruptcy notice – whether error was a failure to meet a requirement made essential by the Bankruptcy Act 1966 (Cth)

BANKRUPTCY – creditors petition – petition founded on non-compliance with bankruptcy notice – application to oppose creditors petition – debtors sought to dismiss petition under s 52(2)(b) of the Bankruptcy Act 1966 (Cth) alleging debtors had no assets of any value and oppression on the part of the creditors – whether debtors satisfied Court that for “other sufficient cause” a sequestration order ought not to be made

District Court Act 1973 (NSW) s 83A, 85

Bankruptcy Act 1966 (Cth) s 52(1), 52(2)(b)

Radich v Bank of New Zealand (1993) 45 FCR 101 referred to

Cain v Whyte (1933) 48 CLR 639 applied

Ling v Enrobook Pty Ltd (1997) 74 FCR 19 referred to

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

Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 considered

JOHN NICCOLO COSCO, KAY VIOLET COSCO AND TRIGAMIST HOLDINGS PTY LIMITED v GEORGE TSATSOULIS AND MARY TSATSOULIS

(IN THE MATTER OF GEORGE TSATSOULIS)

N 7536 OF 2001

HELY J

28 MARCH 2002

SYDNEY

THE COURT ORDERS THAT:

1.         The petition 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                     Bankruptcy proceedings No N 7560 of 2000 were instituted by the present applicants against the present respondents.  On 31 October 2000 the petition against the respondents in those proceedings  was dismissed.  Clause 4 of the orders entered on 1 November 2000 is as follows:

“4.       Note that the Applicant Creditors have received from the Respondent Debtors a bank cheque in the sum of $69,940.12.  The debtors acknowledge that a further sum of interest of $4,953.43 is due on the judgment debt as at 30 October 2000 and that the dismissal of this Petition is without prejudice to the Applicant Creditors rights to claim and receive payment of the further sum of $4,953.43.”

2                     On 10 August 2001 the applicants issued bankruptcy notice No 1864 of 2001 (“the bankruptcy notice”) against the respondents claiming a debt of $4,953.43 as shown in the schedule.  The schedule was as follows:

“Schedule

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

3                     Note 2 to the bankruptcy notice provides as follows:

“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 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)”

4                     An interest calculation was attached to the bankruptcy notice which took the following form:

“Interest Calculation

(See Note 2:    -  Interest accrued (Item 3 of the Schedule) on page 6)

Details of calculation of interest claimed:

(a)               Interest is claimed pursuant to s 83A of the District Court Act (NSW) 1973.  The current rate of interest as at the date of preparation of this Notice is 11% p.a.

(b)               Judgment was entered against George and Mary Tsatsoulis in the District Court on 19 November 1999 for the sum of $68,497.94.  A Certificate of Judgment issued by the District Court is attached.

(c)               Interest is being claimed for the period from 20 November 1999 to 31 October 2000.

Summary of Interest Calculation

5                     It is common ground that the bankruptcy notice contained the following errors:

-                     the amount of $6,395.61 stated as being claimed for accrued interest is wrong.  As appears from the interest calculation, the correct amount is $6,512.94.  If that amount were inserted into the schedule in place of the $6,395.61, no amendment would be required to the subtotal figure, or to the amount shown as total debt owing;

-                     interest was payable upon the judgment pursuant to s 85 of the District Court Act 1973 (NSW) rather than pursuant to s 83A of that Act as stated;

-                     section 39A of the Local Courts (Civil Claims) Act 1970 (NSW) had no relevant application to the interest calculation.

Notwithstanding these errors, the interest rate applicable pursuant to s 85 of the District Court Act and the interest amount are as stated.

6                     On 16 October 2001 a registrar of the Court made an order for substituted service of the bankruptcy notice, one of the terms of which was that if service was effected in accordance with that order, the bankruptcy notice should be deemed to have been served on 6 November 2001.  In the current proceedings, there was no issue as to the service of the bankruptcy notice.

7                     On 21 December 2001 a creditors petition (“the petition”) was filed in these proceedings.  That petition was based upon an act of bankruptcy alleged to have been committed on or before 6 November 2001 by reason of the failure to comply with the requirements of the bankruptcy notice.  The debt alleged was $4,953.43, although that precise sum cannot be derived from the figures mentioned in par 1(a) of the petition.  However, 6 November 2001 was the deemed date of service of the bankruptcy notice, not the date on which an act of bankruptcy occurred.  The act of bankruptcy was committed on 27 November 2001 (being the date which was 21 days following the date of deemed service of the petition).

8                     On 4 February 2002 the respondents paid the sum of $4,953.43 to the applicants.

9                     On 12 February 2002 the applicants filed a Notice of Motion seeking leave to amend the creditors petition in the terms of an amended creditors petition which was attached to the Motion.  The amended creditors petition reflected the payment of $4,953.43 on 4 February 2002, but claimed a further sum of $47,255.03 due under four judgments, two of which were given in the Local Court of New South Wales and two of which were given in the Supreme Court of New South Wales.  The amended creditors petition identified the act of bankruptcy as the failure on or before 28 November 2001 to comply with the requirements of the bankruptcy notice.

10                  On 18 February 2002 a registrar of the Court ordered that the applicant should have leave to amend the petition in terms set out in the Notice of Motion filed on 12 February 2002.  So far as I can see, that leave was not taken up, in the sense that an amended creditors petition in terms of the document attached to the Notice of Motion does not appear to have been filed.  However, counsel for the respondents indicated that no point was taken on that account, and he accepted that the case should proceed upon the basis that the amended creditors petition is the document attached to the Notice of Motion.

11                  On 8 March 2002 a Notice of Intention to Oppose the amended petition was filed.  The grounds of opposition were:

1.                  the respondents offer to pay the sum referred to in the amended creditor’s petition (No 7536 of 2001) into Court;

2.                  the respondents dispute threatened attempts by Westpac Banking Corporation to join the amended creditors petition filed by the applicants.

Westpac was represented by Mr Dowdy of counsel who informed me that his client claimed to be a creditor on a judgment debt in the sum of about $185,000 and that Westpac would seek substitution in the event that the applicants, for some reason, did not proceed with the petition.  Apart from making the occasional, and if I may say so, helpful observation, Mr Dowdy did not seek to participate actively on the hearing of the amended petition.

12                  The matter came before a registrar of the Court on 12 March 2002.  Apparently, on that occasion, the registrar raised with those appearing the validity of the bankruptcy notice, as a result of which an Amended Notice of Intention to Oppose the amended petition was filed on 14 March 2002.  The grounds specified in the Amended Notice of Intention to Oppose the amended petition are as follows:

1.                  That the Bankruptcy Notice No 1864 of 2001 upon which the present Amended Creditors Petition (No 7536 of 2001) is founded is misleading in a substantial manner and cannot be cured by s 306(1) of the Bankruptcy Act.

2.                  Alternatively, the Respondents seek dismissal of the petition under s 52(2)(b) of the Bankruptcy Act on the basis that:

(a)                the Respondents have no assets of any value;

(b)               the Respondents have no prospects of acquiring any assets; and

(c)                the manner in which the Applicants have sought to enforce the bankruptcy notice and the repeated threatened attempts by Westpac Banking Corporation to join the Applicants’ Amended Petition constitute oppression and an unfair use of the Court’s processes.

The Amended Notice of Intention to Oppose the amended petition no longer contains an offer to pay the sum referred to in the amended creditors petition into Court, nor does it contain any offer to pay that sum to the applicants.

13                  An affidavit of Mary Tsatsoulis dated 8 March 2002 filed in support of the notice of opposition reveals that her assets consist of a joint interest with her husband in the following property:

-                     family home at Croydon Park valued at about $380,000 but fully encumbered;

-                     block of land at West Marsden Park valued at about $7,000, but fully encumbered;

-                     household furniture valued at about $2,000;

-                     1978 Mercedes Benz valued at about $2,000.

14                  Those assets total $391,000.  In addition, the respondents conduct a cleaning business “through” GM Operations Pty Ltd, but I have no information as to the value of the shares which I infer that the respondents hold in the capital of that company.  It does not appear to be a large-scale operation.

15                  Joint liabilities total $453,000 apart from legal costs owing to the applicants which are the subject of these proceedings.  The affidavit therefore discloses a deficiency of at least $62,000.  It is clear from the affidavit that the respondents are insolvent.  One of the liabilities is a sum of $400,000 secured upon the home at Croydon Park by a mortgage granted in favour of Thomas Alexopoulos.  The date in the mortgage has been left blank but the mortgage was stamped at $400,000 on 24 May 2001.

16                  The affidavit also includes the following:

“12.     My husband and I have access to the sum of $48,000 which is immediately available to satisfy the applicants’ debt which is the subject of these proceedings.”

Counsel for the respondents informed me, as is in any event apparent on the face of the affidavit, that the $48,000 does not form any part of the assets of the respondents.

17                  On 29 January 2002, in response to an enquiry on the part of the respondents, the solicitor for the applicants stated that the total amount owing to his clients is $98,147.46, and he provided a schedule of the outstanding debts, interest and costs which go to make up that sum.  I have not been able to reconcile the amounts shown on that schedule with the amounts referred to in the amended petition.  The affidavit of Mr Cosco of 11 March 2002 as to the indebtedness of the respondents is consistent with the petition as the debts there disclosed, including interest, total $47,255.03.

18                  Paragraph 19 of the affidavit of Mary Tsatsoulis dated 8 March 2002 is as follows:

“My Husband and I have not paid the amount of $47,255.03.  We are uncertain as to the correct amount owing to the Applicants having regard to the letter from the Applicants’ Solicitor comprising the annexure marked “H” to this Affidavit, in which the amount claimed is $98,147.46.”

19                  I am satisfied with the proof of the matters referred to in s 52(1) of the Bankruptcy Act 1966 (Cth) (“the Act”).  Subject to the question of the validity of the bankruptcy notice, the respondents have not shown that for “other sufficient cause” a sequestration order ought not to be made.  The matters relied upon by counsel for the respondents in that respect were that it would be a waste of public funds for a sequestration order to be made as the debtors have no assets to speak of.  The law on this topic was reviewed by the Full Federal Court in Radich v Bank of New Zealand (1993) 45 FCR 101, in particular at 111 and following.  In the present case, the respondents have assets albeit overall there is a deficiency.  One of the purposes of the bankruptcy law is to secure the distribution of those assets to the creditors of the bankrupt’s estate.  It cannot be said here that the making of a sequestration order will be an exercise in futility.  There is also the possibility (and on the evidence, it is no more than a mere possibility) that a trustee might wish to investigate the circumstances of the mortgage granted in May 2001 over the matrimonial home, which is the principal asset of the respondents.

20                  Counsel for the respondents submitted that the refusal on the part of the solicitors for the applicants to confirm that payment of the amount stated in the petition would be “the end of the matter” itself amounted to other sufficient cause.  Alternatively, it demonstrated lack of good faith on the part of the applicants who were “not transparent” and who used the processes of the Court unfairly.  There is no dispute but that the respondents are indebted to the applicants in the sum claimed in the petition on account of the judgments particularised in the petition.  That being so, an assertion on the part of the solicitor for the applicants that the respondents are also liable to the applicants on judgments other than those referred to in the petition cannot amount to “other sufficient cause”.  As the High Court said in Cain v Whyte (1933) 48 CLR 639 at 645-646 (quoted by the Full Federal Court in Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 24), it is for the debtors to show:

“some cause overriding the interest of the public in the stopping of the unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due.  Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause is shown against the making of the sequestration order.”

21                  Similarly, the complaint about Westpac cannot amount to “other sufficient cause”.  Westpac is entitled to appear as a supporting creditor, and to seek substitution if circumstances arise which make that an appropriate course for Westpac to adopt.

22                  Accordingly, if I were satisfied, as the amended petition asserts, that the respondents committed an act of bankruptcy by failing on or before 28 November 2001 to comply with the requirements of the bankruptcy notice, then I would have made a sequestration order.  Whether I can be so satisfied depends upon whether that bankruptcy notice was invalid by reason of the defects referred to above.

23                  The Australian Steel Company (Operations) Pty Ltd v Lewis (2000) 109 FCR 33 is a decision of the Full Federal Court consisting of five judges of the Court which considered the validity of bankruptcy notices which were defective inasmuch as they stated that interest was claimed “pursuant to s 101 of the Supreme Court Act 1986 (Vic)” whereas the applicable provision was s 100(7) of the Magistrates’ Court Act 1989 (Vic).  The Court was divided on that question.  Three of the judges were of the opinion that the bankruptcy notice was invalid, whereas two members of the Court were of a contrary opinion.

24                  Counsel for the applicants submitted that I should not follow the majority decision in Australian Steel Company (supra) as it is inconsistent with the decision of the High Court in Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71, and my duty is to follow the decision of the High Court.  In Kleinwort Benson (supra), the defect was an understatement in the bankruptcy notice of the amount of interest accrued.  The defect in Australian Steel Company and in the present case lies in an incorrect statement of the legislative provision pursuant to which interest was claimed.  Apart altogether from that point of distinction, the majority in Australian Steel Company purported to apply Kleinwort Benson.  It is not open to me, as a single judge, to conclude that their Honours failed to do so.

25                  After considering Kleinwort Benson, the majority in Australian Steel Company said at 43:

“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.”

26                  At 45 the majority said that the purpose of the requirement that the source of the creditor’s entitlement to interest be stated is to enable the debtor to verify that the amount claimed is in fact due:

“Having a regard to the purpose behind the requirement that the provision under which interest is being claimed, and correctly claimed, be included in the notice, that requirement is made essential by the Act, and a notice issued in breach of the requirement will be invalid.”

In the present case, it did not matter that the rate of interest payable under the applicable Act was correctly stated.  Nor did it matter whether or not the debtor might be misled as to the amount that he or she needed to pay.  The erroneous statement of the provision under which interest is being claimed is sufficient of itself to invalidate the bankruptcy notice, as the requirement that the source of the interest entitlement be correctly stated is made essential by the Act.

27                  Counsel for the applicants sought to distinguish the decision in Australian Steel Company on two grounds.  First, prior to the issue of the bankruptcy notice, the respondents had acknowledged that a further sum of interest of $4,953.43 is due on the judgment debt, and that the dismissal of the petition was without prejudice to the applicant creditor’s right to claim and receive payment of the further sum of $4,953.43.  Second, the respondents paid the amount of the bankruptcy notice, albeit after the date of the commission of the act of bankruptcy.  However, these two matters only go to the question as to whether in the particular circumstances of the present case, the defects or irregularities in the notice were likely to mislead the debtors.  On the reasoning of the majority in Australian Steel Company, this is irrelevant and the bankruptcy notice is invalid for non-compliance with a requirement made essential by the Act.

28                  The petition should be dismissed with costs.

Associate:

Dated:              28 March 2002