FEDERAL COURT OF AUSTRALIA

McKean Park (A Firm), In the matter of Lawrence v Lawrence [2011] FCA 1291

IN THE MATTER OF TESS LAWRENCE

THE COURT ORDERS THAT:

1.    A sequestration order be made against the estate of Tess Lawrence.

2.    The applicant creditor’s costs be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules.

IN THE MATTER OF TESS LAWRENCE

REASONS FOR JUDGMENT

1        The question before the Court is whether a bankruptcy notice is invalidated by the failure to include in the interest calculation reference to the provision under which interest is being claimed.

2        On 4 March 2009, the creditor, McKean Park, obtained judgment in the sum of $10,793 in the Magistrates’ Court in Victoria against the debtor, Tess Lawrence.

3        On 6 November 2010, the creditor left the bankruptcy notice in a sealed envelope at the debtor’s address and, pursuant to an order for substituted service made by Registrar Hetyey, service was deemed to have been effected on 23 November 2010.

4        The bankruptcy notice claimed that the debtor owed $11,962.67 comprising the judgment debt of $10,793, and interest of $1,369.67.

5        The debtor failed to comply with the bankruptcy notice and the creditor filed a creditor’s petition alleging that the failure to comply was an act of bankruptcy. The creditor sought a sequestration order against the estate of the debtor.

6        Section 41(2) of the Bankruptcy Act 1966 (Cth) provides in respect of a bankruptcy notice that:

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

7         Regulation 4.02(1) of the Bankruptcy Regulations 1996 (Cth) provides:

For the purposes of subsection 41(2) of the Act, the form of bankruptcy notice set out in Form 1 is prescribed.

8        The prescribed form on the date the bankruptcy notice was issued, namely, 18 June 2010, stated in [1] that the creditor owes the debtor a debt of a specified amount “as shown in the Schedule”.

9        The schedule comprised a table and some notes for the information of the creditor. The table had two columns. Column one listed the items constituting the debt owing, and column two provided blank spaces for the amount of each item to be inserted. Item three, in column one stated:

If claimed in this Bankruptcy Notice, interest accrued since the date of judgments or orders (see Note 2, below)

10        Note 2 to the schedule referred to item three as follows:

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, [emphasis added]:

        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)

11        The provision relating to post judgment interest on judgments of the Magistrates’ Court in Victoria is set out in the Magistrates’ Court Act 1989 (Vic) as follows:

s 100(7)    Every judgment debt carries interest at the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 from the time the order was made.

12        Section 2(1) of the Penalty Interest Rates Act 1983 (Vic) provides:

The penalty interest rate is the interest rate expressed as a percentage fixed by the Attorney-General from time to time by notice published in the Government Gazette.

13        The bankruptcy notice in this case included the schedule with item three, column one in the terms of the prescribed form. The amount of interest claimed, namely, $1,369.67, was inserted in column two of item three of the schedule. The notes to the schedule included the terms of Note 2 exactly in the form found in the prescribed form. Then, at the end of the schedule, there was a section headed “Interest Calculation” which was in the following form:

INTEREST CALCULATION

(See Note 2: Interest accrued (Item 3 of the Schedule))

Details of calculation of interest claimed:

(a)    Interest is claimed pursuant to section 2(1) of the Penalty Interests Act 1983. [emphasis added] The current rate of interest as at the date of preparation of this notice is 10.50% p.a.

(b)    Judgment was entered against TESS LAWRENCE in the Magistrates Court of Victoria on 4 March 2009 for the sum of $10,793.00. A Certificate of Judgment issued by the Magistrates Court of Victoria is attached.

(c)    Interest is being claimed for the period from 5 March 2009 to 11 June 2010.

Summary of Interest Calculation

Total: 464 $1,369.67

14        Thus, para (a) of the interest calculation did not refer to s 100(7) of the Magistrates’ Court Act which was the provision under which the interest was being claimed.

15        The question arises whether the omission of the reference to s 100(7) of the Magistrates’ Court Act invalidates the bankruptcy notice, or whether s 306 of the Bankruptcy Act avoids that consequence. Section 306(1) provides:

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 the 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.

16        In the usual way, the application for a sequestration order was listed before a registrar of the Court. There was no appearance by the debtor. The registrar was satisfied that the application complied with all the statutory requirements save for the omission of reference to s 100(7) of the Magistrates Court Act in the interest calculation section of the bankruptcy notice. Such an omission was held by the Federal Magistrates Court in Jones v Verity [2007] FMCA 1108 (Jones) to invalidate the bankruptcy notice. Consequently, the registrar referred the application for determination by this Court.

17        The debtor did not appear to oppose the making of a sequestration order. Mr Fary appeared as counsel on behalf of the creditor. He argued that the bankruptcy notice was valid by operation of s 306 of the Bankruptcy Act as interpreted by the High Court in Adams v Lambert (2006) 228 CLR 409; 225 ALR 396; [2006] HCA 10 (Adams). He argued that Jones was wrongly decided.

18        In Adams the terms of s 41(2) of the Bankruptcy Act, reg 4.02(1) of the Bankruptcy Regulations and the prescribed form of bankruptcy notice were the same as applicable in the present case. Paragraph (a) of the interest calculation in Adams stated that interest was claimed pursuant to s 83A of the District Court Act 1973 (NSW). This section related to prejudgment interest. The section which should have been referred to was s 85 which dealt with post judgment interest. The High Court held that s 306(1) applied so that the reference to the wrong section of the District Court Act did not invalidate the bankruptcy notice.

19        A defect or irregularity in a bankruptcy notice will invalidate the notice if the defect or irregularity could reasonably mislead the debtor as to what is necessary to comply with the bankruptcy notice or if the defect or irregularity fails to meet a requirement made essential by the Bankruptcy Act. Otherwise the defect or irregularity will be a formal defect or irregularity and attract the protection of s 306(1): Kleinwort Benson Aust Ltd v Crowl (1988) 165 CLR 71; 79 ALR 161; [1988] HCA 34.

20        In Adams, although the interest calculation referred to the prejudgment entitlement provision, the bankruptcy notice as a whole made it clear that the interest claimed included post judgment interest, and the calculation of the interest amount was correct. The Court held that the reference to the wrong section in the entitling Act could not reasonably have misled the debtor as to what was necessary to comply with the bankruptcy notice. It required payment of interest in the amount which was correctly calculated, and which included post judgment interest.

21        The Court then considered whether it was an essential requirement of the Bankruptcy Act that the correct entitling provision be stated. The Court said:

30    … Is it the purpose of the legislation that any slip, such as giving a reference to the statutory provision governing pre-judgment interest when what is intended is a reference to the provision governing post-judgment interest, should invalidate the notice? Is this so no matter how clear it might be from other parts of the notice that the claim is for post-judgment interest?

31    Section 306, in its application to bankruptcy notices, makes it plain that some instances of non-compliance with the requirements as to the form of a notice will not invalidate the notice. The practical significance of an error or deficiency could vary according to the circumstances of each particular case. Errors or deficiencies in compliance with requirements as to form may involve questions of degree as well as of kind. At the same time, the decision in Kleinwort Benson shows that an error may be covered by s 306 even though it involves a substantial misstatement of an amount of money. It was essential that the bankruptcy notice state the amount claimed. Was it essential that the amount be correct? Section 41(5) made it clear that an overstatement, even a large overstatement, would not necessarily invalidate the notice. This Court concluded that it was not the legislative purpose that a substantial understatement should necessarily invalidate the notice. That is to say, accurately stating the amount of interest owing was not a matter of such importance that error necessarily resulted in invalidity. In the present case, overstatement or understatement of the amount of post-judgment interest owing would not necessarily have invalidated the notice. That is part of the context in which legislative purpose is to be considered in deciding whether the reference to s 83A rather than s 85 was fatal.

32    In Lewis, Gyles J accurately identified the question as whether correct completion of the form prescribed by the regulations in every respect is a requirement made essential by the Act. Bearing in mind that, in the present case, the error could not have misled the respondent as to what it was necessary to do in order to comply with the requirements of the notice, it is difficult to understand how, consistently with Kleinwort Benson, the respondent could succeed without an affirmative answer to that question.

22        The first question in the present case is whether the failure to refer to s 100(7) of the Magistrates’ Court Act could reasonably mislead the debtor as to what was necessary to comply with the bankruptcy notice. As in Adams, the amount of the interest calculation is correct. The debtor is thus aware of the amount necessary to pay in order to comply with the bankruptcy notice. The debtor is correctly informed of the rate of interest and the statutory source of that rate. The only misstatement is in para (a) of the interest calculation which states that interest is claimed pursuant to the Penalty Interests Act 1983 (sic) as though this was the entitling Act. The misstatement could not reasonably mislead the debtor as to what is necessary to comply with the bankruptcy notice. Indeed it is arguable that there is no misstatement at all. Had s 100(7) of the Magistrates’ Court Act been referred to it would have led the debtor to s 2 of the Penalty Interest Rates Act which is incorporated by reference. The two together might properly be seen to be the provisions pursuant to which interest is claimed and which the form requires to be included. If so, the failure to refer to the Magistrates’ Court Act was an omission rather than a misstatement. And it was an omission which could not have misled the debtor as to what was necessary to comply with the bankruptcy notice. In passing it should be noted that the misnaming of the Penalty Interest Rates Act as the Penalty Interests Act could not alone amount to anything more than a formal defect.

23        The second question is whether the reference to s 100(7) of the Magistrates’ Court Act in para (a) of the bankruptcy notice was a requirement made essential by the Bankruptcy Act. As in Adams, it is difficult to imagine that the failure to include that reference was intended to invalidate the bankruptcy notice when the failure could not have reasonably misled the debtor as to what was necessary to comply with the bankruptcy notice. For the reasons explained in Adams at [30] – [32] referred to above, the Bankruptcy Act did not make it an essential requirement that para (a) of the interest calculation in the form of bankruptcy notice be completed correctly when the bankruptcy notice was otherwise accurate and where para (a) made reference to the rates Act which was part of the provision of the entitling Act to which reference should have been made.

24        The circumstances in Jones are indistinguishable from the present case. The Federal Magistrate in that case considered that a failure to refer to the Magistrates’ Court Act was a failure to meet a requirement made essential by the Bankruptcy Act. He said that the situation was distinguishable from Adams because in Adams the bankruptcy notice referred to the entitling Act and this was the requirement stipulated in the prescribed form. The Federal Magistrate reasoned that because the prescribed form of bankruptcy notice required reference to the entitling provision, that requirement was thereby made essential by the Act. However, the mere fact that the Act stipulates certain requirements does not automatically lead to the result that those requirements are essential to the validity of the proceeding in question. As the High Court said in Adams at [29]:

    To describe an error or a deficiency in a bankruptcy notice as involving a failure to meet a requirement made essential by the Act is to state a conclusion reached after a consideration of the legislative purpose and an evaluation of the significance or importance of the error or deficiency in the circumstances of the case. That question is not answered by observing that there has been a failure to meet a requirement.

25        It follows that Jones was wrongly decided on this issue.

26        Consequently, the failure to refer to s 100(7) of the Magistrates’ Court Act in para (a) of the calculation of interest was a formal defect or irregularity. In the absence of the debtor there was no case made that substantial injustice was caused by the defect or irregularity. Hence, s 300(6) applies and the bankruptcy notice is not invalidated by the defect or irregularity.

Associate:

Dated:    11 November 2011