JUDGMENT No. wslLQurnenl cont Ae, CATCHWORDS Bankruptcy - Bankruptcy notice - sum specified in bank- ruptcy notice comprising balance of a judgment debt and an additional debt together with interest on both debts - Whether defects formal defects or irregularities - Whether notice invalid. Bankruptcy Act 1966; sections 40(1)(g), 41(5), 306(1) No. P1697 of 1983 Re ROY BUICHER and CLIFFORD McPHARLIN Ex parte HUGHES PETROLEUM PTY. LIMITED Neaves J. Sydney 29 May 1984. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) ) ; BANKRUPTCY DISTRICT OF THE STATE ) No. P1697 of 1983 ) OF NEW SOUTH WALES AND THE ) ) ) AUSTRALIAN CAPITAL TERRITORY RE: ROY BUTCHER and CLIFFORD McPHARLIN EX PARTE: HUGHES PETROLEUM PTY. LIMITED ORDER JUDGE MAKING ORDER: Neaves fT. DATE OF ORDER: 29 May 1984 WHERE MADE: Sydney THE COURT ORDERS THAT the petition herein be dismissed. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION OF NEW SOUTH WALES AND THE ) ) BANKRUPTCY DISTRICT OF THE STATE ) No. P1697 of 1983 ) ) ) ) AUSTRALIAN CAPITAL TERRITORY RE: ROY BUTCHER and CLIFFORD McPHARLIN EX PARTE: HUGHES PETROLEUM PTY. LIMITED CORAM: Neaves J. DATE: 29 May 1984 REASONS FOR JUDGMENT On 6 December 1983 a creditor's petition was presented by Hughes Petroleum Pty. Limited ("the judgment ereditor") against Roy Butcher and Clifford McPharlin ("the judgment debtors"). The petition was based on the failure of each of the judgment debtors to comply with the requirements of a bankruptcy notice issued on 18 July 1983. The time for compliance specified in the bankruptcy notice was 21 days after the date of service. The evidence establishes that the bankruptcy notice was served on Mr. McPharlin on Tuesday, 19 July 1983. Assum- ing the notice to be valid (a matter to which it will be necessary to turn), he failed to comply with its require- ments on or before 9 August 1983 and thus committed an act of bankruptcy. On the application of the judgment ereditor I granted leave to amend the petition by amending that. part of paragraph 4 relating to the act of bankruptcy committed by Mr. McPharlin to read as follows - "The debtor Clifford McPharlin within 6 months before the presentation of this petition committed the following act of bankruptcy namely that the debtor failed on or before the 9th day of August 1983 either to comply with the requirements of a Bankruptcy Notice served on him on the 19th day of July 1983 or to satisfy the Court that he had a counter-claim, set-off or cross demand equal te cr exceeding the sum specified in paragraph (a) of the Bankruptcy Notice." The notice was served on Mr. Butcher on Saturday, 23 July 1983. On 17 August 1983 a Deputy Registrar in Bankruptcy, upon an application made in that behalf on 16 August 1983, purported to make an order pursuant to sub-section 41(6B) of the Bankruptcy Act 1966 ("the Act") extending the time for compliance by Mr. Butcher with the requirements of the notice up to and including 29 August 1983. This order was, however, expressed to be upon condition that the bankruptcy notice was served on Mr. Butcher on 30 July 1983. As that was not the fact, the notice having been served on 23 July 1983, and as the application to extend the time for compliance had not been made within the time allowed by sub-section 41(6B) of the Act, the Deputy Registrar's order was not effective to extend the time for compliance with the requirements of the notice. An act of bankruptcy was, therefore, committed by Mr. Butcher on 15 August 1983 assuming, again, that the notice was valid. The application filed on behalf of Mr. Butcher on 16 August 1983 also sought an order setting aside the bankruptcy notice. That application was by consent with- drawn and dismissed on 29 August 1983, Mr. Butcher being ordered to pay the judgment creditor's costs of the appli- cation. The bankruptcy notice was based on a judgment obtained by the judgment creditor against the judgment debtors in the Supreme Court of New South Wales on 8 July 1983 in the sum of $32,430 inclusive of costs. It appears that proceedings (No. 13921 of 1982) were commenced in that Court by the judgment creditor against the judgment debtors on 29 June 1982, the judgment creditor claiming the sum of $29,929.61 being the balance alleged to be due for goods sold and delivered by the judgment creditor to Preston Development and Investment Company Pty. Limited. It was alleged that on 25 November 1981 the judgment debtors had agreed, in writing, that, in consideration of the judgment creditor supplying Preston Development and Investment Company Pty. Limited at its request with certain goods on credit, the judgment debtors would guarantee and promise the judgment creditor to be responsible to it for the due payment of the price of the goods. It was further alleged that the goods, namely petroleum products, had been supplied on credit between December 1981 and April 1982 but that neither Preston Development and Investment Company Pty. Limited nor the judgment debtors had paid for them. A defence was filed admitting the essential facts on which the judgment creditor relied but contend- ing that the guarantee was not enforceable for the reason that the debt of the principal contracting parties hed not then been ascertained. It was also alleged that the judgment creditor had takoan possession of certaiu fuel and had not credited the value thereof to the alleged debt. Notice of motion was filed in the Supreme Court returnable on 9 February 1983 seeking an order that the defence be struck out and that the judgment creditor have summary judgment. So far as appears the Court was not moved for those orders. Terms of settlement were, however, agreed between the parties and these were embodied in a deed dated 18 February 1983. The judgment debtors (in the deed referred to as "the defendants") acknowledged that they owed the judgment creditor (in the deed called 4. "the plaintiff") the sum claimed namely $29,929.61 and agreed to pay the sum of $32,430 (which included the amount owing together with costs) by an instalment of $1,000 forthwith, two further instalments of $1,000 each on 18 March 1983 and 18 April 1983 and the balance, together with interest at 18% per annum on daily rests ealculated from 18 February 1983, on 18 May 1983. The judgment creditor agreed not to file the terms of settle- ment or proceed to judgment and execution provided the judgment debtors paid each of the instalments and the balance by the due dates. Clause 5 of the deed was in the following terms - "It is further expressly agreed and declared that in the event of the defendants failing to pay any instalment or the balance by 5pm on its due date, the plaintiff may immediately proceed to file the said Terms of Settlement and obtain judgment for the full amount of $32,430 provided that in recovering the said judgment due credit shall be given for any amount that the defendants shall have paid to the plaintiff prior to the enforcement." It is not in dispute that the judgment debtors failed to pay the balance due on 18 May 1983. The judgment ereditor attempted to enter judgment in accordance with the terms of settlement but was precluded from doing so as the solicitor for the judgment debtors had not signed the appropriate form of consent. A notice of motion returnable on 20 May 1983 was filed in the Supreme Court on behalf of the judgment creditor and that motion was adjourned when the appropriate consent was signed ana delivered to the solicitor for the judgment creditor. Mr. C.J. Kearney, the solicitor for the judgment creditor, who gave evi- dence before me and whose evidence I accept, said that on or about 20 May 1983 the judgment debtors through their solicitor agreed to pay the costs of the motion which were assessed at $350. On 8 July 1983 the judgment upon which the bankruptcy notice is based was entered. In accordance with the terms of settlement it was entered in the sum of $32,430 notwithstanding that some payments had been made in reduction of the amount due. Giving credit for payments totalling $3,266 made on 15 February, 6 April, 16 May and 22 June 1983, the balance of the amount of $32,430 that was in fact due as at 8 July 1983 was $29,164. The bankruptcy notice recites that the judgment creditor "has claimed that the balance sum of $29,514.00 together with interest calculated on the balance of the judgment debt outstanding fromtime to time at the rate of 15.5 per centum per annum from the 8th July 1983 which at the date of this Notice amounts to $125.33 making a total of $29,639.33 is due by you to it under a final judgment obtained by it against you in the Supreme Court of New South Wales, Queen's Square, Sydney on the 8th day of July 1983, being a judgment the execution of which has not been stayed". The notice then required that the judgment debtors within 21 days after service of the notice upon them to pay to the judgment creditor the sum of $29,639.33 so claimed by the judgment creditor. The remainder of the notice followed the usual form. The bankruptcy notice is, therefore, incorrect in stating, as it does, that the balance due under the judgment obtained in the Supreme Court of New South Wales on 8 July 1983 was $29,514. The difference between that sum and the amount in fact due, $29, 164, is represented by the sum of $350 agreed to be paid by the judgment debtors as the assessed costs of the notice of motion returnable on 20 May 1983 to which reference has already ~ been made. It is also clear from Mr. Kearney's evidence that not only was the sum of $350 included in the amount claimed in the bankruptcy notice but that amount also included inzcrest calculated on the suuw vf 3550 at the rate of 15.5 per centum per annum from 8 July to 18 July 1983. The creditor's petition, in paragraph 2, alleges that - "The debtors are justly and, truly indebted to the said company [the judgment creditor] in the sum of $26,824.11 being the amount due under the final judgment recovered in the Supreme Court of New South Wales on the 8th day of July 1983 the consideration for such debt being guarantee as directors of Preston Developments Investment Company Pty. Limited for supplies of petroleum products to the said company." Mr. Kearney also gave evidence that the amount of $26,824.11 had been arrived at by the follow- ing calculation - Balance due as shown in the bankruptcy notice $29,514.00 Add costs of the application to set aside bankruptcy notice 600.00 Less payments made on - 6. 9.83 $3,000 10.10.83 $1,500 4,500.00 $25,614.00 Add interest on the sum of $25,614.00 at the rate of 15.5 per centum per annum from 8 July 1983 to 28 October 1983 1,210.11 $26,824.11 Upon this evidence being elicited and it appearing that, whatever way nave been the position concerning Mr. Butcher's liability to pay the sum of $600 described as costs of the application to set aside the bankruptcy notice, there was no basis for the judgment ereditor's allegation that that sum was owing by Mr. McPharlin, the judgment creditor consented to an order that the petition as against Mr. McPharlin be dismissed. That order was made. It remains to consider the validity of the bankruptcy notice in relation to the proceedings against Mr. Butcher. A bankruptcy notice may only be issued at the instance of a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed (see paragraph 40(1)(g) of the Act). It may not be issued in respect of a debt other than a debt due under such a final judgment or final order. The notice is to be in accordance with the prescribed form (sub-section 41(1)) which must be such as to require the debtor named in it to pay the judgment debt or sum ordered to be paid in accordance with the judgment or order (paragraph 41(2)(a)(i)). <A bankruptcy notice must conform strictly to the requirements of the Act and of the rules. In general, whether a defect in a bankruptcy notice is fatal or a formal defect or irregu- larity under section 306 of the Act depends on whether the ucfect is of such 2 kind a» couid reasonably mislead or perplex or embarrass the debtor upon whom it is served. The test is not whether the debtor was in fact misled - it is whether there is good ground for saying that the debtor might be misled or confused. Sub-section 41(5) of the Act provides - "(5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he dis- putes the validity of the notice on the ground of the mis-statement." That sub-section operates where and only where. the sole reason for holding the bankruptcy notice invalid is that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due. The sub- section has no operation where the ground of invalidity is other than that stated. Read in its context the refer- ence in sub-section 41(5) to "the sum specified in the notice" must be a reference to the sum which is said to be due under and in accordance with the final judgment or final order on which the bankruptcy notice is based. The vice which is reflected in the bankruptcy notice issued in this case is not that the judgment creditor or those acting on its behalf, by inadvertence or otherwise, miscalculated the amount due under the final judgment on which the notice was based and, in consequence, overstateu the amount eo due, sne vice is that the notice was drafted on the basis that it was proper to include in the amount claimed to be due to the judgment creditor a debt which was quite separate from and was not part of the judgment providing the foundation for the notice. Further, the notice included without, so far as appears, any authority for doing so, interest on that additional debt. In these circumstances I am of opinion that sub-section 41(5) of the Act has no application. The defect in the notice is not a formal defect or irregularity which may be cured by the operation of section 306. I have no doubt that a bankruptcy notice which is defective 10. in the respects I have indicated would be likely to mislead or confuse the debtor upon whom it is served. I, therefore, hold that the bankruptcy notice is invalid. The consequence is that the petition is dismissed. As the point was not raised by the debtor or by those appearing for him and having regard to the cir- cumstance that the debtor's application to set aside the bankruptcy notice was withdrawn, it is, I think, appro- priate to make no order as to costs. I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment of the Honourable Mr. Justice Neaves. Date: 29 May 1984 OW Associate. ll.