CATCHWORDS, BANKRUPTCY - Service of bankruptcy notice on Sunday - Whether valid service - Amount claimed in bankruptcy notice - Interest calculated to date prior to issue of notice - Whether notice valid - Denial that debt owing - Circumstances in which Court will qo behind judgement. DANIEL JAMES PINKERTON EX PARTE B G TEXTILES PIY LIMITED (IN LIQUIDATION) P.432 OF 1984 WILCOX J 27 SEPTEMBER 1984, 4 OCTOBER 1984 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. P.432 of 1984 GENERAL DIVISION ee CORAM: DATE: PLACE: BETWEEN : DANIEL JAMES PINKERTON Bankrupt EX PARTE: B.G. TEXTILES PTY LIMITED (IN LIQUIDATION) Applicant ORDERS WILCOX J 27 SEPTEMBER 1984, 4 OCTOBER 1984 SYDNEY Sequestration Order made. Order that costs be taxed and paid according to the Act. Direct that draft order be delivered within 7 days. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. P.432 of 1984 ww evew GENERAL DIVISION RE: DANIEL JAMES PINKERTON Bankrupt EX PARTE: B.G. TEXTILES PTY LIMITED (IN LIQUIDATION) Applicant REASONS FOR JUDGMENT CORAM: WILCOX J DATE: 27 SEPTEMBER 1984. 4 OCTOBER 1984 PLACE: SYDNEY 27 SEPTEMBER 1984 A Petition for the makina of a Sequestration Order against the Estate of Daniel James Pinkerton came before me last Monday 24 September. Counsel for Mr Pinkerton appeared to oppose the making of a Sequestration Order and to submit that the petition should be dismissed. He relied upon certain grounds which had been foreshadowed 1n a Notice of Opposition dated 22 August 1984 and filed on behalf of the debtor. He also sought to rely upon various matters which had been raised by the Registrar 2. in his certificate under Rule 22. I will deal separately with each of the objections relied upon by counsel for the debtor although some of them. which are of little or no substance. may _ be disposed of quite shortly. The act of bankruptcy relied upon by the petitioning creditor is stated in the petition as being the failure of the debtor on or before 4 March 1984 either to comply with the requirements of a Bankruptcy Notice served on him on 19 Februarv 1984 or to satisfv the Court that he had a counter claim. set-off or cross-demand equal to or exceeding the sum specified in paraqraph (a) of the Bankruptcy Notice. It appears from an affidavit of R J Speed sworn on 28 February 1984 that the Bankruptcy Notice was served on the debtor at approximatelv 4.50 am on Sunday 19 February 1984. The Registrar has pointed out that, under those circumstances, the last day for compliance with the requirements of the Bankruptcv Notice was Monday 5 March 1984, and that the petition should have so stated. Rule 202(2) of the Bankruptcy Rules provides that where the last day of a period during which an act may be done falls on a Sunday then the act mav be done on the first day following that dav that is nota Sunday or holiday. It follows that the last day for compliance with the requirements of the Bankruptcy Notice was Monday. 5 'March 1984 and that the petition is erroneous in this reqard. Section 306(1) of the Bankruptcy Act 1966 provides: "306(1) Proceedings under this Act are not invalidated by a formal defect or an irreqularity, unless the Court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irreqularity and that the injustice cannot be remedied by an order of that Court". I reaard the misstatement of the last day for compliance with the requirements of the Bankruptcy Notice as being a formal defect or irreaqularity. There is nothing before me to indicate that anv injustice has been caused by that defect or irreqularity. I propose to apply s.306(1) in relation to this matter. In connection with service, an objection was taken by counsel for the debtor which was not the subject of comment bv the Reqistrar in his Rule 22 certificate and was not included in the qrounds stated in the filed Notice of Opposition. The complaint 1s that the Bankruptcy Notice was served on a Sundav which, 1t is said, is contrary to law. In this regard counsel referred -to the decision of Clvne J in Re Coplev: ex parte Sundell (1964) 20 ABC 229. However, counsel verv properlv also referred me to the decision of McGreqor J in Re Hopper: ex parte Esanda Limited (1980) 43 FLR 452. In that latter case his Honour distinaguished the decision in Copley as turning upon the provisionns of the then Bankruptcy Rules. McGreqor J held that the provisions of the current Bankruptcy Rules in relation to service of a Bankruptcy Notice. which are contained in r.15 of the Bankruptcy Rules are intended to be comprehensive and that 4. there is no warrant for engrafting upon them qualifications derived from other legislation. His Honour specifically held that the Rules do not forbid the service of a Bankruptcy Notice on a Sunday. I respectfully agree with the view taken by his Honour and I hold that there is no substance in the objection that this Bankruptcy Notice was served on a Sunday. The next matter relates to the statement of the amount due in the Bankruptcy Notice. The relevant portion of the Notice read as follows: "WHEREAS B.G. Textiles Pty Limited (in liquidation) of Suite 5505, M.L.C. Centre, Martin Place, Sydney (hereinafter referred to as "the judaement creditor") has claimed that the sum of $26,590.44 toqaether with interest thereon at the rate of $10 per centum per annum from 5th May, 1981 which at 13th December. 1983 amounts to $6,935.36 making a total of $33,525.80 is due by you to it under a final judgement obtained by it against vou in the Supreme Court of New South Wales on the Sth day of Mav 1981. being a judgement the execution of which has not been staved: THEREFORE TAKE NOTICE that within fourteen (14) davs after service of this notice on vou, excluding the day on which this notice is served on you, vou are required - (A) to pay the sum of $33.525.80 so claimed by the judgement creditor to the Judgement Creditor OR (B) to secure the payment of the sum referred to in paraqraph (A) to the satisfaction of the Federal Court of Australia or the judgement creditor (or his agent whose name and address are Norman Saul Isenberg of Norman Isenberg & Associates Suite 107. 83 York Street. Sydnev) or compound the sum so specified to the satisfaction of the iudqaement creditor (or his agent):" The Registrar points out that the requirement of the Notice, in respect of payment. is "to pay the sum of $33,525.80" without differentiation between the judgement debt and interest. Counsel for the debtor did not press an argument that this constituted a defect. Whilst it was proper for the Reaistrar to draw attention to the fact that this portion of the Notice, unlike the recital above. did not break up the amount claimed it is my view that there is no defect in a notice which requires pavment of a specified sum, being the total of the judgement debt and the interest thereon which has been claimed. There can be no possibility of the debtor being perplexed or mislead in a case where the Notice itself shows how that amount has been calculated. If. contrary to my view. the form of the requirement for payment does constitute a defect or irreqularity then I would apply s.306(1); there is no possibilitv of injustice being caused and none has been alleaed. The third matter referred to by the Reqistrar is that the notice. in accordance with form 6 attached to the petition and intended to inform the debtor as to the hearing date and as to the procedural steps required of him if he intends to denv or dispute any statements in the petition or to oppose the petition was not, at its head, completed with his name. This was a careless oversiaht by the solicitors who filed the petition and constitutes an irreqularity. However. I do not think that there 6. is any doubt that the debtor would have understood the notice to be directed to him. No suaqgestion has been made of anv iniustice having. been caused and i apply s.306(1) to this irreqularity. The first of the matters raised in the filed notice of opposition is a denial by the debtor that he is indebted to the creditor. The only evidentiary material before me to support this denial is an affidavit by the debtor in which he denies his indebtedness, in broad terms and without giving anv detail as to the reason for denial. and in which he reveals that the iudaement upon which the petition relies was obtained by default in the Supreme Court of New South Wales. From the Bar table I was informed that the debtor. and his wife. Narelle Constance Pinkerton. who 1s a joint debtor under the judaement. recently made an application to the Supreme Court to set aside the default judgement which application was dismissed because of their delay. There is no question about the jurisdiction of this Court to go behind a judgement and to inquire for itself whether or not the debt claimed by the creditor is in fact owing: see the article "Going Behind a Judgement" in 47 Australian Law Journal 377 and the cases referred to therein. The authorities establish that in the case of a judgement entered after a trial on the merits, a court exercising jurisdiction in bankruptcy will ao behind a judgement only where there is evidence before it of circumstances tending to show fraud, collusion or miscarriage of justice. In the case of a default judgement the debtor need not qo so far. However, the judgement is prima facie evidence of the debt and there must be material put before the bankruptcy court to justify an investigation by it of the existence of the debt. the test has been stated in various wavs. In Corney v_ Brien (1951) 84 CLR 343 Dixon. Williams, Webb and Kitto JJ at pp 347-348 cited with approval various statements of principle. one of which was that "upon a prima face case being shown" the court mav qo behind a judgement for the purpose of satisfying itself that the debt enforceable thereunder was a real debt. In that same case Fullagar J at pp 357-358 said that the court will ao behind the judgement "if there is what it regards as a bona fide allegation that no real debt 'lay behind' the judgement". He went on to point out that the determination as to whether there is such an allegation may itself involve some preliminary investigation of the merits of the attack on the judgement but that. once it decides to qo behind the iudgement, the whole matter 1S open. In Wren v Mahony (1972) 126 CLR 212 Barwick CJ. with whom Windever and Owen JJ agreed, said at pp 224-225: "The Court's discretion in my opinion is a discretion to accept the judgement as satisfactory proof of that debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judqement there is in truth and reality a debt due to the petitioner". 8. i. The evidence so far put before me does not meet any of the tests referred to in these authorities. It is not enough t that there simply be a statement by the debtor denying his ' liability. There must be some evidentiary material placed before the Court to show that there is a qenuine issue on liabilitv, a substantial question as to the correctness of the default qudgement. However. during argument on this question I indicated to counsel for the debtor that I would afford to his client a short period of time in which to file an affidavit. if he so wished. to bring the evidence within the principles indicated by these cases. I defer dealing further with this ground of opposition until counsel has had an opportunity of placing before me any such evidence. ' The second aground of opposition taken in the filed Notice of Opposition is that the Bankruptcy Notice is ambiquous in as much as it does not contain an uneauivocal demand of the amount due under the judgement and the debtor is entitled to have the notice set aside as it has a tendency to perplex and confuse him with respect to the precise amount which he is required to pay in full and final satisfaction of the judgement. Counsel for the debtor elaborated this complaint in argument. pointing out that the calculation of interest is made as at 13 December 1983 whereas the Bankruptcy Notice was issued on 27 January 1984. He 9. says that the form of the Bankruptcy Notice leaves uncertain whether the debtor is required by the creditor to pay to him interest on the judgement falling due between 13 December and 27 Januarv. There is a long standing principle that a bankruptcv notice is invalid if it misstates the terms of the judgement upon which it purports to be founded: see Re H.B. (1904) 1 KB 94 at p 103, Re McDonald; ex parte Elder Smith Goldsborough Mart Limited (1978) 32 FLR 11; Re Schierholter;: ex parte Geis (1978) 19 ALR 113. This principle extends to taxed costs. which are part of the judgement: see Re Jack: ex parte CV Holiand (Holdings) Limited (1959) 19 ABC 268. However, although interest ona judaement may be claimed in a bankruptcy notice (see Re Mullevey; ex parte Australian and New Zealand Bank Limited (1977) 32 FLR 1. Re Munson; ex parte Deputy Commissioner of Taxation (1977) 29 FLR 479) the authorities indicate that a bankruptcy notice will not be invalid simply because the amount of interest claimed in the Notice is less than that which is properly payable by the debtor. In Munson the amount claimed for interest in the bankruptcy notice was understated. partly because of an erroneous assumption as to the date upon which the notice would be issued by the Registrar and partlv because of a miscalculation. Riley J held that the debtor would not have been perplexed or embarrassed and applied s.306(1) of the Act. 10. Re Manion; ex parte Deputy Commissioner of Taxation (1979) 23 ALR 270 was a similar case where the understatement on the bankruptcy notice occurred because of the same combination of circumstances. Lockhart J at p 273 distinquished the position of an understatement of interest with the position which occurs where there is an understatement of the judgement debt saying: "Although interest is necessarily and inextricably attached to the judgement debt, in my opinion it does not itself answer the description of the sum due by the debtor to the petitioning creditor under the final yudgement". ~ Lockhart J pointed out. as Rilev J had before him, that there was necessarily extreme difficulty in accurately calculating the amount of the interest as at the date of issue of the Bankruptcy Notice. The Bankruptcy Notice is the document of the Registrar. not of the creditor. and the period of time which will elapsed between the application for issue and actual issue is difficult accurately to predict. His Honour went on to follow the approach of Rilev J and to applv s.306(1). In my opinion, the present case is a stronger one, in favour of the creditor. than was either Munson or Manion. In each of those cases the Bankruptcy Notice incorrectly stated that a given sum was due for interest at the date of the issue of the Bankruptcy Notice. In the present case there is no inaccuracy in the Bankruptcy Notice. The Notice specifies the interest which had accrued to 13 December 1983. No complaint is made of ll. inaccuracy in that statement. Neither is there any ambiquity in relation to the amount of money which must be paid by the debtor in order to avoid the commission of an act of bankruptcy. This sum is clearly stated as being $33,525.80. Had the debtor paid that amount then it is clear beyond arqument to the contrary that he would have avoided committing an act of bankruptcy, notwithstanding the fact that further monevs may be payable by him for interest on the judgement. There is no misstatement made to the debtor: the only complaint that can be made is that the creditor might properly have included in his demand a qreater sum by way of interest. Because there is no inaccuracy, it seems to me that it is not correct to say that there is a formal defect or 1rreaqularity in the bankruptcy notice. There could only be such a defect or irreqularity if, as a matter of law. the creditor was required, in issuing a bankruptcy notice, to claim the whole of the interest which was in fact due to him as of the date of issue of the Bankruptcy Notice or alternativelv expressly to waive any later claim for the balance of such interest. No authoritv has been cited to me for that proposition and I see nothing in principle to commend it. Accordingly I am of the view that there is no necessity to resort to s.306 in relation to this matter. I add, however, that if I be in error in that reaqard then this is certainly a case in which there 1s no injustice to the debtor and I would applv s.306 so as to overcome the irregularity or defect. 12. The final matter raised by the debtor is that both the Bankruptcy Notice and the petition are said to have been issued irreqularly because they were issued at the instance of the _ petitioning creditor's solicitor rather than at the instance of the petitioning creditor itself. In relation to the Bankruptcy Notice counsel refers to s.41(3)(a) of the Act which provides that a Bankruptcy Notice shall not be issued in relation to a debtor, "except on the application of a creditor who has obtained against the debtor a final judgement" etc. Counsel arques that this means that the creditor must personally seek the issue of a Bankrupty Notice. I reject this argument. The provision is Clearly directed to the qualification of a creditor to seek the issue of a Bankruptcy Notice. It does not require the creditor to make the application personally. Such a result would lead to absurdity in the case of a corporate creditor. which necessarily must act by an agent. In the case of the petition. the point is differently expressed. The petition is executed under the common seal of the petitioning creditor, B G Textiles Pty Limitd (in liquidation). However, the footnote to the petition reads: "This petition is filed by Norman Saul Isenberg on behalf of Norman Isenberg & Associates". . The typist should, of course, have shown the petition as having been filed on behalf of B G Textiles Pty Limited (in liquidation). I do not accept the submission of counsel that 13. this means that the petition is not filed on behalf of BG Textiles Pty Limited (in liquidation). In every other respect, the petition is the document of that company. The reference is an obvious error and could not possibly cause any confusion. If it constitutes an irreqularity, which I doubt, 5.306 should be applied. In the result, I refect all of the submissions qoing to the validity of the documents upon which the petitioning creditor relies. I now return to the question whether there is material to justify the court going behind the judgement debt. 4 OCTOBER 1984 This matter was last before me on Thursday, 27 September. On that occasion I delivered a iudqement which dealt with various matters of law which had been arqued by counsel on behalf of the debtor on Mondav. 24 September. One of the grounds of opposition to the making of a sequestration order which was taken by the debtor was that no moneys were owing by him to the creditor. I dealt shortly with the principles established by the authorities as to the circumstances in which the Court will go behind a judgement debt for the purpose of inquiry as to whether there is, in fact. a debt owed to the petitioning creditor in an amount exceeding $1,000. 14. After dealing with the other submissions put on behalf of the debtor, all of which I determined adversely to him, I considered certain affidavit evidence which was placed before me on each side in relation to the circumstances in which the debt was said to have arisen. Part of that material is an affidavit from the debtor in which he deposed to a conversation which he claimed to have had with Mr Noel Betty, a director of the judgement creditor, in June 1979. According to Mr Pinkerton in that affidavit. there was discussion about the fact that a company, Bankstown Clothings Limited, was to take over the business which had previously been carried on by a partnership, Dentex Industries, of which Mr and Mrs Pinkerton were members along with Mr and Mrs Gallagher. The conversation as set out in Mr Pinkerton's affidavit is susceptible of an interpretation that in the future B G Textiles Pty Limited would look to the company Bankstown Clothings Limited for payment not only of goods to be supplied in the future but also in respect of the then outstanding account. The amount owing at that time. according to the ledger card of the petitioning creditor, was $28.552.2¢. After 1 July 1979 there was some small reduction in that outstanding account reducing the balance by the end of 1979 to $26,390.44, Subseauently, B G Textiles Ptv Limited sued, inter alia, Mr Pinkerton to recover that sum and siqned a default judgement in the sum of $26,590.44. The difference of $200 I understand is scale costs. 15. An affidavit was filed on behalf of the petitioning creditor sworn by Mr G M Spedding in which certain hearsay information was set out being statements attributed to Mr Petty the effect of which was inconsistent with the evidence of Mr Pinkerton as to the content of that conversation. I took the view that on this matter I should not. proceed on the basis of hearsay evidence and I have rejected that material. However, I did indicate that I would be prepared to afford to the petitioning creditor an opportunity of obtaining an affidavit in reply from Mr Betty. Mr Spedding's affidavit also set out documentary material including a copy of a letter written by solicitors previously acting for Mr and Mrs Pinkerton to solicitors acting for the petitioning creditor, in which the solicitors for Mr and Mrs Pinkerton claim that the amount owing by their client is some $13,000 to $14,000 less than the amount claimed. On this basis the true debt would be about $12,000 to $13,000. The material which was provided also indicated that the claim made by Mr Pinkerton as to an agreement for a transfer of the liability was not made during a recent application on behalf of the four partners in Dantex Industries to set aside the default judgement, an application which was heard and refused by a Master in the Supreme Court of New South Wales. 16. Under those circumstances, I was pressed with the submission on 27 September that I should take the view that the material did not satisfy the tests laid down in the authorities, and that I should not go behind the judgement debt but simply proceed to consider the making of a sequestration order. It seemed to me that the material which had been put before the Court did little to raise any real question as to the existence of a debt exceeding $1,000; the conversation deposed to by Mr Pinkerton seemed to me highly unlikely to have occurred. I could not imagine that a business creditor would be prepared to agree to look to a newly formed company for payment of a substantial account when it had existing rights against four persons who in partnership had purchased the goods. Furthermore. the claim of an agreement was inconsistent with the letter from the previous solicitors of the debtor. and it is remarkable that, if such an agreement had occurred, 1t had not been raised in the application to the Master. Notwithstanding all that. I felt that I should afford to the debtor the opportunity of establishing. if he could. that there was no debt exceeding $1,000 despite the existence of the judgement against him. I therefore adjourned the matter to 17. today, qiving directions as to the filing of any further affidavits in order that the matter could be finallv resolved, if necessary with cross-examination of deponents in order to resolve any disputed question of fact. I have, however, today been informed by counsel for the debtor that on instructions qiven to him by his client he concedes that his client is indebted to the petitioning creditor in an amount exceeding $1,000. He informs me that there is nothing further he wishes to say in opposition to the making of a sequestration order. He has asked that I stay the operation of any sequestration order for a period of 21 days in accordance with section 52(3) of the Bankruptcy Act, but no reason has been furnished to me as to whv that course should be taken. I understand from what 15 said by counsel that his client may wish to appeal to arque the correctness of one or more of the rulinas of law which I have previously made aqainst him, but I do not see that the question whether or not a stay is granted would affect Mr Pinkerton''s rights on any appeal. In relation to the question whether the whole amount of the moneys the subject of the default judgement in the Supreme ' Court is in fact owing - this is a matter which can be examined by the trustee and he can act accordingly in response to any proof of debt which the petitioning creditor may seek to lodae. 18. In short, I see no reason at all for granting the application for a stay of a sequestration order and I do not propose to impose such a stay. The petitioning creditor has filed a consent of a trustee, a registered trustee, namely Max Christopher Donnelly, and it appears to me that all the necessary requisites to making the sequestration order have been satisfied. On the previous occasion I pointed out that there was an error in the petition as to the date upon which the act of bankruptcy was committed. I think that it is appropriate for the petition to be formally amended to rectify that error; I order that the petition be amended so as to substitute in paragraph 4 of the petition the date 5 March 1984 for 4 March 1984, I am satisfied that the debtor committed the act of bankruptcy alleged in the petition as so amended namely that he failed, on or before 5 March 1984, either to comply with the requirements of the bankruptcy notice served on him on the 19th day of February 1984, or to satisfy the court that he had a counter claim set off a cross demand equal to or exceeding the sum specified in paragraph A of the bankruptcy notice. I am satisfied with the proof of the other matters required by section 52(1) of the Bankruptcy Act. I note that Max Christopher Donnelly, a reaistered trustee, has consented to act as a trustee of the estate of the debtor: I make a sequestration order against the estate of the debtor: I order that costs including costs 19. which have been expressly reserved and the costs occasioned by the various adjournments of the hearing of the matter, be taxed and paid according to the Act; I direct that a draft of this order be delivered to the Reaqistrar within seven days in accordance with rule 124(2). I refuse the application for a stay of the sequestration order. I certify that this and the eghteen (1s) preceding pages are a true copy of the Reasons for Judgement herein of his Honour Mr Justice Wilcox. Associate xX CULL Prbiere Date {¢.1G Sey