FEDERAL COURT OF AUSTRALIA

Burke v Chesterfield Australia Pty Ltd [2012] FCA 663

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant is to pay the respondent’s costs of and incidental to the appeal, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

REASONS FOR JUDGMENT

1    On 21 July 2011, upon a creditors petition presented by the present respondent, Chesterfield Australia Pty Ltd (Chesterfield Australia), the Federal Magistrates Court, by a registrar, made a sequestration order against the estate of the present appellant, Mr Bruce Patrick Burke (Mr Burke). Mr Burke sought later an order under s 153B of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), an order that his bankruptcy be annulled. On 13 January 2012, the Federal Magistrates Court dismissed that application with costs: see Burke v Chesterfield Australia Pty Ltd (ACN 001 654 762) [2012] FMCA 10). Mr Burke has appealed to this court against that order of dismissal.

2    In substance, the basis for the challenge to the judgment of the Federal Magistrates Court is that that court erred in concluding that it had not been shown that the sequestration order ought not to have been made. To understand the basis of the challenge, and the judgment below, it is necessary to make some reference to what lies behind the challenge to the making of the sequestration order, and in turn to the bankruptcy notice concerned, and a covering letter. That is because the basis upon which Mr Burke contends that the sequestration order ought not to have been made is that he did not commit any act of bankruptcy, because the bankruptcy notice concerned was a nullity.

3    The bankruptcy notice, at least that which is entitled “bankruptcy notice”, is in the prescribed form. It is based upon a final judgment obtained against Mr Burke by Chesterfield Australia. The amount of that final judgment is specified at item 1 in the notice in the amount of $5330.65. To that, at item 3, is added interest since the date of judgment in the sum of $42.35. The total debt is stated at item 5 in the notice to be $5373. Significantly, in terms at least of the submissions made by Mr Burke, the amount of legal costs at item 2 is stated to be zero dollars, zero cents.

4    The notice was served by post under cover of a letter directed to Mr Burke by the solicitors for Chesterfield Australia, MSB Lawyers. The letter was in these terms:

Enclosed by way of service pursuant to regulation 16.01 of the Bankruptcy Regulations 1996 are a bankruptcy notice and judgment issued from Magistrates Court at Dowling Centre on 28 October 2010.

In addition to the sum of $5373.00 which is noted as the total debt owing in the bankruptcy notice, our client claims a further sum of $1385.00 which are their costs of issuing this bankruptcy notice.

Therefore the total amount outstanding to completely satisfy this debt is $6758.00.

5    Mr Burke did not apply to set aside the bankruptcy notice, nor at the time when the creditor’s petition was heard was any question relating to the validity of the bankruptcy notice, and hence proof of an act of bankruptcy, raised by or on his behalf. The learned federal magistrate concluded that there was nothing misleading about the bankruptcy notice. His Honour stated at [25]:

The bankruptcy notice is either capable of misleading the debtor or it is not. In this case there being no defects, substantive or otherwise, in the bankruptcy notice, it is not capable of misleading the debtor. The circumstances created by the accompanying letter do not serve to invalidate the otherwise valid bankruptcy notice. In my opinion those circumstances may be relevant to the exercise of the discretion vested in the Court by s.52(1) of the Bankruptcy Act 1966. Although a creditor is prima facie entitled to the making of a sequestration order upon the proof of an act of bankruptcy, the making of a sequestration order always remains discretionary. That the accompanying letter may have caused some confusion for the debtor is something which may have been taken into account by the Court when determining whether to exercise its discretion in favour of making the sequestration order.

6    His Honour continued at [26]:

Be that as it may the terms of the letter are not inconsistent with the bankruptcy notice. Although the letter asserts an entitlement to a sum greater than that in the bankruptcy notice, it does not assert that failure to pay the higher sum will result in an act of bankruptcy. There is no assertion, in my view, that failure to pay the higher amount claimed is a failure to comply with the bankruptcy notice. Indeed the terms of the letter make it clear that the amount owed for costs is in addition to the amount claimed in the bankruptcy notice.

7    Before turning to the question of whether there was any error on the part of the Federal Magistrates Court in reaching the conclusion that the bankruptcy notice was not misleading, and hence, inferentially, that there was no basis upon which it might be concluded that a sequestration order ought not to have been made, it is desirable, in my opinion, to refer to the nature of the jurisdiction which was being exercised by the Federal Magistrates Court when considering the annulment application. In Re Frank; Ex parte Piliszky (1987) 16 FCR 396, Fisher J, referring to the then provision for annulment in the Bankruptcy Act, the former s 154, the differences in respect of which are not presently material, observed:

In my opinion it is proper to contrast the position of a Full Court on hearing an appeal seeking the setting aside of a sequestration order and that of this Court when an annulment under s 154(1)(a) is sought. Particularly this is so when the judge making the order did so in the exercise of his discretion. It would be strange if in a matter such as this I was called upon to review the order of Foster J on the same grounds as the debtor requires it to be reviewed by the Full Court.

8    That observation was quoted with approval by O’Loughlin J in Re Papps; Ex Parte Tapp (1997) 78 FCR 524 at 533. Having so done, O’Loughlin J, at 533, referred to statements made in Cameron v Cole (1944) 68 CLR 571 by Latham CJ at 583, and by Starke J at 594, with respect to the power to annul in the then Bankruptcy Act 1924 (Cth). Latham CJ stated:

There is no power to annul a valid sequestration order without observance of what have been described as ‘the very careful provisions’ which are applicable in the case of an application to annul: Re A Debtor; Ex parte Official Receiver (1937) 106 AJC 225.

Starke J stated:

This power of reviewing or rehearing any order is one that must be exercised with great caution and should not be exercised unless in special circumstances: Ex parte May; Re May (1884) 12 QBD 497.

9    In Re Williams (1968) 13 FLR 10 at 23, Gibbs J, then a judge of the Federal Court of Bankruptcy, stated in respect of the power to annul:

If the court is satisfied that the order ought not to have been made, it is not bound as a matter of course to annul the order, but must consider in the light of all the circumstances of the case whether the order ought to be annulled: Delph Singh v Wood (1918) 25 CLR 497 at 498-499; Re Lawson (1939) 11 ABC 137 at 139.

10    Later in time, but to no different effect, French J, as he then was, in Rigg v Baker (2006) 155 FCR 531 at 543 at [59], stated:

The power of the Court to annul a bankruptcy derives from s 153B of the Act. In the case of a bankruptcy created by a sequestration order on a creditors petition, the power involves two elements:

1.    the court's satisfaction that the sequestration order ought not to have been made.

2.    the court's exercise of a discretion to make an order annulling the bankruptcy.

11    The result is that in the proceedings before the Federal Magistrates Court two considerations fell for determination; ie was it shown that the sequestration order ought not to have been made and, even if so, ought the bankruptcy, as a matter of discretion, be annulled? Mr Burke was not, in my opinion, precluded by his failure to apply for the setting aside of the bankruptcy notice, or by his failure to raise the issue on the hearing of the creditors petition, from contending that on an annulment application that the sequestration order ought not to have been made, because the bankruptcy notice was a nullity.

12    In Re Pollard; Ex parte Lensing Management Co Pty Limited (1991) 33 FCR 284 (Re Pollard), Gummow J, then a judge of this Court, dismissed a creditor’s petition on the basis of a defect in a bankruptcy notice, even though there had not been a final determination of an application to set aside a bankruptcy notice, (the application to set aside the notice in that case had not been pursued by the debtor). The point about the validity of the notice was raised by the debtor at the time of the hearing of the creditor’s petition. His Honour observed, referring to what remains the leading authority, Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 at 79 – 80 (Kleinwort Benson v Crowl), at 286:

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, and in such cases the notice is a nullity whether or not the debtor is in fact misled.

13    In St George Wholesale Finance Pty Ltd v Spalla (2000) 181 ALR 682 at 692 at [35], Heerey J stated:

In considering whether a bankruptcy notice could mislead the debtor the court may look at facts extraneous to the notice itself: Winborne at 499. This can be seen as an application of the modern rule that documents are to be construed in the light of the surrounding circumstances, that is to say the extrinsic facts viewed objectively, which are within the knowledge of the parties: Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 347 - 352, per Mason J.

14    In this case the submissions for the parties came down to whether the conclusion of the federal magistrate was correct, a proposition advanced on behalf of Chesterfield Australia, or whether, as Mr Burke contended, read together the covering letter, the bankruptcy notice was misleading.

15    Section 41(2) of the Bankruptcy Act provides that a bankruptcy notice, “must be in the form prescribed by the regulations”.

16    Chesterfield Australia has used the form “prescribed by the regulations”. It has also, though, not been satisfied just to leave Mr Burke with the impression that what he must do is to pay to it the amount of the debt claimed in the notice, or make arrangements to its satisfaction for the settlement of the debt within the 21 days after service on him of the bankruptcy notice. That is the requirement that is specified at item 1 on page 2 of the prescribed form of notice. Chesterfield Australia has, by the covering letter, stated to Mr Burke that the total amount he must pay to completely satisfy this debt is $6758, which is inclusive of its costs of issuing the notice.

17    The prescribed form of bankruptcy notice does not explicitly make any provision at all for the debtor to be called upon to pay any amount whatsoever in respect of the costs to a creditor of the issuing of a bankruptcy notice. The reference in the prescribed form to legal costs seems to me to be a reference to legal costs claimed in respect of the judgment, but which were not included in the judgment itself; see note B on page 1 of the prescribed form of bankruptcy notice. Further, and in any event, legal costs in the notice are said to be nil. Looking at the bankruptcy notice alone, it is an unremarkable document. Read in conjunction with the covering letter that is not so. The covering letter, in my opinion, is not just a document which conveys the notice; rather, it seeks to embellish that which is sought by the notice and the demand which is made of Mr Burke by the notice.

18    I respectfully differ from the learned federal magistrate as to the conclusion to be drawn from considering the bankruptcy notice in conjunction with the covering letter. There are two ways, in my opinion, of viewing what Chesterfield Australia has here done. The conclusion to which I am more inclined is that Chesterfield Australia has added an extra obligation to the prescribed form of bankruptcy notice, such that what it has done is not to serve a notice in the prescribed form, but rather to use the prescribed form in conjunction with a covering letter, such that the “bankruptcy notice” is in fact the two read together.

Another way of reading the two documents is that it is permissible nonetheless to look to the covering letter as part of the circumstances surrounding the service of the bankruptcy notice.

19    The former conclusion would mean that the prescribed form has not in fact been used, but rather an embellished version of the same. The latter conclusion would mean that the notice is misleading. That indeed is another feature of treating the two documents as together constituting the bankruptcy notice in this instance.

20    In either event the result, at the very least, is that, when Mr Burke was served with the bankruptcy notice and its covering letter, the position which obtained as a matter of objective scrutiny was a misleading one as to what he had to pay to “completely satisfy this debt”.

21    I have already referred to Gummow J’s judgment in Re Pollard and to Kleinwort Benson v Crowl in relation to the quality of nullity which attends a bankruptcy notice if it could reasonably mislead a debtor. It is, though, no new subject that bankruptcy notices which could reasonably mislead a debtor are to be regarded as nullities. More than 100 years ago, in Re A Debtor (478 of 1908) [1908] 2 K.B. 684, cited in Hunter M and Graham D, Williams and Muir Hunter on Bankruptcy (19th ed, Stevens & Sons, 1979) at p 493, fn 1, Farwell LJ observed of an earlier English case, Re Bates (1887) 4 Mor. 192:

I also feel great difficulty in following that case. I do not myself see on the wording of the Act that we are entitled to treat as a formal defect a demand in excess of the judgment, when the legislature says that the bankruptcy notice must be a notice requiring payment in accordance with the terms of the judgment.

22    The case with which His Lordship expressed disagreement concerned a notice which called upon a debtor to pay the whole debt of £446, and circumstances that a registrar had set aside the notice on the ground that there had been a stay of execution and an interpleader order. The court had held there had been no stay except perhaps as to £20 and that the fact of the notice claiming the whole debt without considering the £20 which might have been stayed only amounted to a formal error.

23    The result then is a situation whereby the act of bankruptcy relied upon was based upon an alleged non-compliance with a bankruptcy notice which was truly a nullity. It would follow from that that there was in fact at the time when the sequestration order was made no act of bankruptcy. On that basis, a sequestration order ought not to have been made.

24    That, though, is not the end of matters, as will be apparent from the nature of the jurisdiction which the Federal Magistrates Court was called upon to exercise, as the authorities which I have cited reveal. It was necessary, but not sufficient, in order to secure annulment of the bankruptcy, for Mr Burke to show that the sequestration order ought not to have been made.

25    In Alfio Peter Bulic v Commonwealth Bank of Australia Limited [2007] FCA 307, at [12], Tracey J offers a helpful summary of a number of propositions relevant to the hearing and determination of an annulment application. Amongst the propositions his Honour there states is this:

(8)    Considerations which may have a bearing on the exercise of discretion include unexplained delay in the making of the application, whether or not the applicant is solvent, whether or not the applicant has made full disclosure of his or her financial affairs and a failure by the bankrupt to oppose the creditor’s petition and attend the hearing at which the sequestration order was made: Re Williams (1968) 13 FLR 10 at 24-5; Boles at 247; Re Papps; ex parte Tapp (1997) 78 FCR 524 at 531; Rigg v Baker [2006] FCAFC 179 at [79]; Cottrell v Wilcox [2002] FCA 1115 at [7]. Additional considerations are collected in D. A. Hassall, “Annulment of Bankruptcy and Review of Sequestration Orders” (1993) 67 ALJ 761 at 766.

26    In this instance, Mr Burke led no evidence at all before the Federal Magistrates Court with respect to his solvency, nor was there any application before me to lead evidence on the hearing of the appeal on that subject. There is no evidence that Mr Burke has ever challenged the judgment entered against him. He has been content to sit by, both when the bankruptcy notice came to be served, when the creditor’s petition came to be served and when the creditor’s petition came to be heard. The position which obtains is that I cannot, because there is no evidence at all, be satisfied that Mr Burke is solvent.

27    The debt itself, in a relative sense, is modest, but there is no means of testing that against Mr Burke's own means. He has, as a matter of deliberate choice, placed no evidence before the Federal Magistrates Court or on the hearing of the appeal. In the ordinary course of events, such evidence ought to have been led as part of the evidence supporting an annulment application; this Mr Burke did not do.

28    I note that in Cottrell v Wilcox [2002] FCA 1115, Branson J, before whom an application for annulment under s 153B was made, found it unnecessary to determine whether a sequestration order ought not to have been made because of an absence of evidence on the part of the applicant as to solvency. Here, I have adopted the different course, as for that matter did the Federal Magistrates Court, of considering first whether a sequestration order ought not to have been made. The result, though, is no different. Her Honour dismissed the annulment applicant on the basis of an absence of proof of solvency. In so doing, her Honour noted at [13]:

Another important matter in the exercise of the Court’s discretion is the failure of the applicant to make any proposal for the payment of the fees and disbursements of the Trustee.

Here, too, there is an absence of evidence before the Federal Magistrates Court on that subject. The learned federal magistrate did not find it necessary to consider the question of solvency in light of the conclusion which his Honour reached that it had not been shown that the bankruptcy notice was a nullity. In my opinion, to succeed upon the appeal, Mr Burke had to do more than show that the conclusion on that subject reached by the Federal Magistrates Court was in error. He ought also to have been able to point to evidence before that court of solvency or, if no such evidence had been led, he ought, in my opinion, to have shown by evidence today that he was solvent.

29    The result therefore is that the bankruptcy is not one which ought to be annulled. That is because there was no evidentiary basis, in my opinion, upon which an annulment order, as a matter of discretion, could reasonably have been made. No different result would follow in the event that my conclusion as to the invalidity of the notice were incorrect. However viewed, the appeal is one which ought, for these reasons, to be dismissed.

Associate:

Dated:    22 June 2012