— 2LO CATCHWORDS BANKRUPTCY - Bankruptcy notice - Application that bankruptcy notice be set aside - Notice based on judgment against three individuals carrying on business in partnership under a business name - Notice addressed to all partners but served on one only - Whether bankruptcy notice defective in form. BANKRUPTCY - Bankruptcy notice - Application that bankruptcy notice be set aside or, alternatively, that the time for compliance with its requirements be extended - Appeal pending against judgment 1n respect of which bankruptcy notice issued - Whether appeal is a proceeding to set aside the judgment within $.41(6A)(a) of the Bankruptcy Act 1966 (Cth) - Discretion under s.41(6A)(b) exercised to extend time for compliance with the requirements of the notice pending determination of appeal. Bankruptcy Act 1966 (Cth), ss.40(1)(g), 41(1), (2) and (6A) Bankruptcy Rules, Rule 8 and Schedule 1, Form 4 Re: BARBARA MADDOX, SIMON MADDOX and VICTOR MADDOX (Judgment Debtors) Ex parte: SIMON MADDOX (Applicant) DEBORAH JENKINS and HENRY HUDSON (Respondents) No. ACT B 16 of' 1987 Neaves J. 12 May 1987 Canberra IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY ) ) ) ) No. ACT B 16 of 1987 ) ) ) Re: BARBARA MADDOX, SIMON MADDOX and VICTOR MADDOX Judgment Debtors Ex parte: SIMON MADDOX Applicant DEBORAH JENKINS and HENRY HUDSON Respondents MINUTE OF ORDER JUDGE MAKING ORDER : Neaves Jd. DATE OF ORDER >: 12 May 1987 WHERE MADE Canberra THE COURT - 1. Declares that the bankruptcy notice No. ACT B 16 of 1987 is not invalid as being defective in form. 2. Orders that the application to set aside bankruptcy notice No. ACT B 16 of 1987 be adjourned generally. 3. Orders that the time for compliance by the applicant with the requirements of bankruptcy notice No. ACT B 16 of 1987 be extended until further order conditionally upon the appeal to the Supreme Court of the Australian Capital Territory 'in matter No. SCA 1 of 1987 being prosecuted with all due diligence. 4. Orders that any party have liberty to restore the application filed herein on behalf of Simon Maddox on 10 April 1987 to the list for hearing on a day which will permit the giving of seven days' notice to the other parties. 5. Orders that the costs of all parties be reserved. Note: Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY ) ) ) ) No. ACT B16 of 1987 ) ) ) Re: BARBARA MADDOX, SIMON MADDOX and VICTOR MADDOX Judgment Debtors Ex parte: SIMON MADDOX Applicant DEBORAH JENKINS and HENRY HUDSON Respondents CORAM: Neaves Jd. DATE: 12 May 1987 REASONS FOR JUDGMENT This is an application by Simon Hulett Maddox ("the applicant") for an order that a bankruptcy notice served on him on 1 April 1987 be set aside or, alternatively, that the time for compliance with the notice be extended until 13 ¢ July 1987. The application was filed on 10 April 1987. As an interim .measure the time for compliance with the notice has been extended until further order. The bankruptcy notice was issued by a Deputy Registrar in Bankruptcy on 17 March 1987 on the application of Deborah Jenkins and Henry Hudson ("the respondents"). It 1s based ona judgment obtained by the respondents in the Magistrates Court of the Australian Capital Territory on 27 January 1987 in proceedings (No.CS 836 of 1986) commenced by a partnership, trading as Maddox Consultants, consisting of Barbara Maddox, the applicant and Victor Maddox ("the judgment debtors") as plaintiffs against the respondents as defendants. In those proceedings the plaintiffs claimed the sum of $2,810.00 for work done for and at the request of the defendants, the work comprising the construction of a driveway, carport floor, lawn edging anda side path upon the defendants' premises. The defendants alleged that the work had been defectively performed and cross-claimed for damages for the cost of having the concreting work demolished and replaced. Judgment was entered for the defendants in the sum of $6,481.00 and costs. On 17 February 1987 a notice of appeal to the Supreme Court of the Australian Capital Territory from the decision of the Magistrates Court was filed. Although the appeal was said to be from the whole of the order of the Magistrates Court made on 27 January 1987, what was sought from the Supreme Court was an order that judgment be entered for the defendants (respondents) in the amount of $5,272.00 in lieu of. the sum of $6,481.00. The single ground of appeal was that the Magistrate erred in assessing the quantum of damages payable by the plaintiffs (appellants) to the defendants (respondents) for breach of contract as at the date of the hearing rather than as at the date at which the defects giving rise to the defendants' claim were detected. 'So far as appears, no stay of the order of the Magistrates Court was sought or obtained. On 1 April 1987 the bankruptcy notice was served personally on the applicant at his home address, 37 Lowana Street, Braddon in the Australian Capital Territory. The time fixed by the notice for compliance with its requirements was fourteen days from the date of service. On 10 April 1987 the Supreme Court heard a motion on behalf of the judgment debtors (the appellants). At the conclusion of the hearing, the Court made orders in the following terms: "1. That the ground of appeal specified in the Notice of Appeal be deleted and in its place he substituted the grounds set out hereunder: (1) That the Magistrate erred in assessing the quantum of damages payable by the appellants to the respondents for breach of contract as at the date of the hearing rather than at the date at which time the defects giving rise to the respondents' claim were detected or ata reasonable time thereafter. (2) That the Magistrate erred in assessing the quantum of damages payable by the appellants to the respondents for breach of contract as being the cost of having wvepairs carried out to the appellants' defective work rather than the diminution in value of the work to the respondents in consequence of the appellants' defective workmanship. 2. That the order sought in the Notice of Appeal be deleted and in its place be substituted the order set out hereunder: (1) That the judgment entered against the appellants be set aside insofar as the said judgment exceeds the sum of $2,000.00. 4, (2) That the proceedings be remitted to the Magistrates Court for further hearing and determination subject to such directions as this Honourable Court thinks fit. 3. That the sum of $2,000.00 be paid into Court by the appellants at or prior to 4pm on 16 April 1987. 4, That the costs of and incidental to this application be reserved." The sum of $2,000.00 was paid into the Supreme Court on the morning of 13 April 1987, prior to the present application coming on to be heard. The primary ground upon which the applicant seeks to have the bankruptcy notice set aside concerns the form of the notice. With that ground I shall now deal. Section 40(1) of the Bankruptcy Act 1966 (Cth) ("the Act") provides that a debtor commits an act of bankruptcy in the following circumstances - "(g) aif 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, has served on the debtor in Australia . or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not - (i) where the notice was served in Australia ~ within the time fixed by the Registrar by whom the notice was issued; or (ii) where the notice was served elsewhere - within the time fixed for the purpose by the order giving leave to effect the service, comply with the requirements of the notice or satisfy the Court that he has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he could not have set up in the action or proceeding in which the judgment or order was obtained." By virtue of s.4l of the Act a bankruptcy notice is required to be in accordance with the prescribed form. The prescribed form 1s to be such that the notice - (a) requires the debtor named in it, within a specified time (being the time referred to in sub-paragraph 40(1)(g)(i) or (ii), whichever is appropriate) to - (i) pay the judgment debt or sum ordered to be paid in accordance with the judgment or order; or (ii) secure the payment of the debt or sum to the satisfaction of the Court or the creditor or his agent, if any, specified in the notice or compound the debt or sum to the satisfaction of the creditor or his agent, if any, specified in the notice; and (b) states the consequences of non-compliance with the requirements of the notice. The bankruptcy notice here in question closely follows the form prescribed in Schedule 1 to the Bankruptcy Rules (see Rule 8 and Form 4). The name, address and occupation of the judgment debtor are set out as follows: The 6. "To the Judgment Debtor: BARBARA MADDOX, SIMON MADDOX & VICTOR MADDOX of 34 Investigator Street, Red Hill in the Australian Capital Territory, Building Consultants." notice then proceeds: "WHEREAS DEBORAH JENKINS and HENRY HUDSON both of 3 Bromley Street, Wanniassa in the Australian Capital Territory (hereinafter referred to as 'the judgment creditor') has claimed that the sum of $6,481.00 together with interest thereon at the rate of 15 per centum per annum from 27 January 1987 to 11 March 1987 Which amounts to $114.52 making a total of $6,595.52 and no more 1s due by you to the judgment creditors under a final order obtained by them against you in the Magistrates Court of the Australian Capital Territory on the 27th day of January 1987; being a judgment the execution of which has not been stayed: THEREFORE TAKE NOTICE that within fourteen days after service of this notice on you, excluding the day on which this notice 1s served on you, you are required - {a) to pay the sum of $6,595.52 and no more so claimed by the judgment creditor to the judgment creditor; or (b) to secure payment of the sum referred to in the last preceding paragraph and no more to the satisfaction of the Federal Court of Australia or the judgment creditor or compound the sum so specified to the satisfaction of the judgment creditor. AND TAKE FURTHER NOTICE that if, within the period set out above, you fail either to comply with either of the abovementioned requirements of this notice or to satisfy the Federal Court of Australia that you have a counter-claim, set-off or cross demand egual to or exceeding the sum specified in paragraph (a) of this notice, being a counter-claim, set-off or cross demand that you could not have set up in the action in which the judgment was obtained, you will have committed an act of bankruptcy on which bankruptcy proceedings may be taken against you." The bankruptcy notice is said to be misleading because it does not appear on its face whether the applicant is "being proceeded against 1n his own right as a member of the partnership or whether the proceedings are against the partnership itself". Counsel for the applicant directed attention to the circumstance that the bankruptcy notice is addressed to three individuals without those individuals being described as constituting a partnership. He also referred to the address given in the bankruptcy notice as that of the three debtors, namely 34 Investigator Street, Red H111 and submitted that the significance of that address did not appear. It certainly was not the home address of the applicant. In my opinion, there is no substance in the submission that the bankruptcy notice is defective in form. The judgment obtained by the respondents in the Magistrates Court is a judgment against the three individuals named who are described in the judgment as "trading as Maddox Consultants". The three individuals are jointly and severally liable for the judgment debt. The bankruptcy notice follows the judgment in every respect except that it does not refer to the business name under which the individuals carried on the partnership business. That, in my opinion, us of no significance. The notice effectively and accurately describes the judgment and the applicant could be in no doubt to which judgment the notice refers. I was not referred to any authority directly in point. However, the general discussion in In _re Wenham C1900] 2 Q.B. 701, In re a Debtor £19361 Ch.292 and Re John 8. T. Martin & Co.; Ex parte Australian Continental Resources Ltd. (1971) 18 F.L.R. 450 tends to support the validity of the bankruptcy notice. It may well be that a bankruptcy notice could have been issued directed to the applicant alone without adding the names of the other partners against whom the judgment was obtained (see In re Low; Ex parte Gibson £18953 1 Q.B. 734). But, the circumstance that that might have been done does not provide any support for the argument against the validity of the bankruptcy notice which was, in fact, issued. A question may, in due course, arise as to the effectiveness of any creditors' petition which the respondents may present based on the service of the bankruptcy notice on the applicant. But that is a question for another day. The fact that such a question may arise can have no bearing on the validity of the bankruptcy notice itself. In my opinion, the applicant has failed to establish that the bankruptcy notice should be set aside as being defective in form. A further ground upon which the applicant seeks to have the bankruptcy notice set aside has its foundation in the appeal pending in the Supreme Court against the judgment upon which "the bankruptcy notice is based. I shall defer 9. dealing with that ground for the moment and turn to the alternative claim that the time for compliance with the requirements of the bankruptcy notice should be extended until 13 July 1987, that apparently being the date by which it 1s expected that the appeal to the Supreme Court will be heard and determined. In Lipov v. Alexander Fraser & Son Ltd. (1978) 24 A.L.R. 616 C.A. Sweeney J. granted an extension of the time for compliance with the requirements of a bankruptcy notice until further order so that the judgment debtor would avoid the commission of an act of bankruptcy pending the hearing and determination of an appeal against the judgment upon which the bankruptcy notice was founded. As the source of the Court's power to enlarge the time for compliance with the requirements of the bankruptcy notice, his Honour relied upon s.33(1)(c) of the Act in the form in which that provision then stood. In exercising the Court's discretion whether to enlarge the time, his Honour said, at p.620: "The courts have had regard to the grave consequences which flow from the effluxion of the time fixed for compliance with a bankruptcy notice. Judgment has been obtained against the applicant who has regularly instituted an appeal against it. He has sworn that he believes that he has proper grounds of appeal against it. He has not been cross-examined. The creditors have not offered any evidence in opposition. In these circumstances, the grant of an extension of time for compliance will enable the applicant, should his appeal succeed, to avoid the commission of an act of bankruptcy, based upon a judgment which should not, on this assumption, have been given against him in the first place." 10. Since the amendments made by ss.20 and 24 of the Bankruptcy Amendment Act 1980 (Cth), s.33(1)(c) no longer provides a source of power in the Court to extend the time for compliance with the requirements of a bankruptcy notice. That power, a more limited power, is now to be found in s.41(6A) of the Act: James v. Abrahams (1981) 51 F.L.R. 16. That sub-section 1s the sole source of the relevant power. As Deane and Lockhart JJ. said in James v. Abrahams (supra) at p.22: "In our view, the express exclusion of a power to extend time for compliance with the requirements of a bankruptcy notice from the general powers to extend time conferred by s.33(1)(c) and the express grant of the power to extend the time for compliance in the specific cases mentioned in s.41(6A) preclude the implication of a general inherent power in the court to extend the time fixed by the Registrar for compliance with the requirements of a bankruptcy notice." Sub-sections 41(6A) and 41(6C) provide: "(6A) Where, before the expiration of the time fixed by the Court or the Registrar for compliance with the requirements of a bankruptcy notice - (a) proceedings to set aside the judgment or order in respect of which the bankruptcy . notice was issued have been instituted by the debtor; or (b) an application to set aside the bankruptcy notice has been filed with the Registrar, the Court may, subject to sub-section (6C), extend the time for compliance with the bankruptcy notice. ll. (6C) Where - (a) a debtor applies to the Court or the Registrar for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and (Bb) the Court or the Registrar, as the case may be, 1s of the opinion that the proceedings to set aside the judgment or order - (i) have not been instituted bona fide; or (ii) are not being prosecuted with due diligence, the Court or the Registrar, as the case may be, shall not extend the time for compliance with the bankruptcy notice." The applicant relies on both limbs of s.41(6A). In reliance upon s.41(6A)(a), it is submitted that the institution of the proceedings in the Supreme Court by way of appeal against the judgment of the Magistrates Court is properly to be considered as the institution of proceedings to set aside the judgiient in respect of which the bankruptcy notice was issued. It 1s further submitted that, as the appeal was instituted before the expiration of the time fixed for compliance with the requirements of the bankruptcy notice, the condition precedent to the exercise of the Court's discretion under that provision is established. I am unable to accept this submission. The language of s.41(6A)(a) 1s clearly apt to refer to proceedings by a judgment debtor in the court where judgment 12. was entered against him to have the judgment set aside. What the provision contemplates is an application to have the court by which the judgment was pronounced revoke the expression of its coercive power where there has been a failure to follow the rules of procedure or where there is shown to be some defect or irregularity or some other circumstance which renders it desirable that the debtor should be given an opportunity to have the issue further litigated. It may be that, in some circumstances, such proceedings may be taken in a court superior to that in which the judgment was entered but, be that as it may, the language of the provision is not, in my opinion, apt to refer to proceedings which are properly characterised as an appeal from the judgment in respect of which the bankruptcy notice was issued. There is, of course, the further complication in the present case that the appeal is not against the whole of the judgment of the Magistrates Court but only from so much of it as awarded damages in excess of $2,000.00. What 1t seeks, in truth, is not a setting aside of the judgment but a variation of it, reducing the amount of damages awarded. IT turn now to a consideration of the alternative submission that the Court has power in the circumstances of this case to grant an extension of time for compliance with the requirements of the bankruptcy notice by reason of the circumstance that an application to set aside the bankruptcy notice was filed within the time stipulated (s.41(6A)(b)). Tt is convenient to consider this submission in conjunction 13. with the consideration of the alternative ground on which the applicant seeks to have the bankruptcy notice set aside. In Re Sterling; Ex parte Esanda Ltd. (1980) 30 A.L.R.77 Lockhart J. adverted to the absence from the Act of any provision expressly conferring power on the Court to set aside a bankruptcy notice. His Honour concluded, however, that the Court clearly possessed that power. In reaching this conclusion his Honour referred to the power to extend time conferred by s.41(6A) as being plainly in aid of the power to set aside the notice itself. Unless, his Honour said, there were a power to hear an application to set aside the notice, there would be no purpose to be served in having power to extend the time for compliance with its requirements. Having decided the question as to the Court's power in the affirmative, his Honour considered the circumstances in which the power conferred by s.41(6A) would be exercised when application has been made by a judgment debtor within the stipulated time to set aside the bankruptcy notice . His Honour said, at p.84: w "It 1s neither necessary nor desirable for me to state exhaustively, the matters which an applicant for extension of time must show to obtain an order for extension. This will depend on the facts of each case. Orders for extension of time will not be made as of course. Grounds must be established. It is as well to remember that the power to set aside the notice and the power to extend time for compliance are necessarily related. For instance, if the application to set aside is made on the basis that no debt lies behind the judgment, the court May conduct a preliminary enquiry as to whether it should go behind the judgment. This approach is taken sometimes on the hearing of petitions for sequestration where the debtor alleges that 14, he is not indebted to the petitioning creditor notwithstanding the judgment: see Corney v. Brien (1951) 84 C.L.R. 343; Wren v. Mahoney (1972) 126 C.L.R. 212; £19723 A.L.R. 307, and Re Wong; Ex parte Kitson (1979) 27 A.L.R. 405. There are sound reasons why substantially the same considerations should apply in dealing with applications to set aside bankruptcy notices. There may be cases where the application to set aside should be adjourned pending the outcome of an application by the debtor toa court of competent jurisdiction to set aside the judgment on which the bankruptcy notice is founded. In other cases, the debtor may seek an adjournment of the application to set aside pending the outcome of an appeal from the judgment. I respectfully agree with the observations of C.A. Sweeney J. in Lipov''s case (24 A.L.R. at 620) on this matter. Although what was said by his Honour was referrable to the Act before the 1980 amendments, it is equally applicable to the power conferred by s.41(6A)." His Honour also expressed the opinion that pars (a) and (b) of s.41(6A) are not mutually exclusive. Following his Honour's approach, with which f respectfully agree, it is material to the question whether the bankruptcy notice should be set aside and to the exercise of the Court's discretion under s.41(6A)(b) to consider whether there has been shown to bea dispute, genuinely based on substantial grounds, as to the correctness of the judgment in respect of which the bankruptcy notice was issued. The mere pendency of an appeal from that judgment does not, of itself and in the absence of other compelling circumstances, require the exercise of the discretion to set the notice aside or to grant an extension of the time for compliance: see Clyne v. Deputy Commissioner of Taxation (1982) 69 F.L.R. 1 at p.7. 15. And, as Lockhart J. said in that matter at first instance, reported (1982) A.T.C. 4484 at p.4487: "There is no general rule that the Court must set aside bankruptcy notices or extend time for their compliance where there is a dispute genuinely based on substantial grounds. Indeed, although there are many 'disputed' debt cases, they generally arise on the hearing of bankruptcy or winding-up petitions or on applications to restrain presentation of petitions. Little guidance 1s to be found in the reported cases when considering a case such as the present one, although orders are not infrequently made setting aside bankruptcy notices where the Court is satisfied that there is a dispute genuinely based on substantial grounds. Untimately it is a matter for the Court''s discretion." How, then, should the Court exercise its discretion in this case? The application is supported by an affidavit of the applicant sworn on 9 April 1987 and two several affidavits sworn by his solicitor, Mr Paul Anthony Fury, on 10 and 13 April 1987. A copy of the reasons for judgment in the Magistrates Court is not in evidence but the applicant deposes that the Magistrate, in reaching his decision, found that the appropriate measure of damages was the cost of having the'concreting work demolished and replaced rather than the diminution in value of the work to the defendants in consequence of the defective workmanship. The applicant further deposes that the Magistrate found that the cost of having the demolition and replacement of the concrete carried out should be assessed as at the date of the hearing rather than as at the date when the defendants first 16. detected the defective work. After referring to the amended grounds of appeal (the text of which is set out above), pars Ill and 12 of the affidavit state: "ll. As regards the amended grounds of appeal, I am informed and verily believe that at the hearing of this matter no evidence of any substance was advanced on behalf of the defendants as to why the defendants have thus far been unable to have the demolition and replacement of the said concrete work carried out. Consequentiy, I am informed that there are reasonable prospects of overturning the Magistrate's decision to assess damages as at the date of the hearing rather than at the date when the defects were first detected by the defendants or within a reasonable time thereafter. 12. As regards the other ground of appeal contained in the Amended Notice of Appeal, Tam informed by my solicitor and verily believe that there is an arguable case that the appropriate measure of damages in regard to the defective concreting work is the diminution in value of the said work to the defendants rather than the cost to the defendants of having the said work demolished and replaced, having regard to the cost of having the said work demolished and replaced as compared to the extent and nature of the damage present in the said work." It may be noted that par.ll is based on information and belief but the person from whom the applicant obtained the information 1s not identified (cf. par.12). However, in all the circumstances I think it safe to assume that the informant was Mr Fury. What I have set out is the totality of the material upon which the Court is to consider whether it is satisfied 17. that there is a dispute, genuinely based on substantial grounds, as to the correctness of the judgment in respect of which the bankruptcy notice was issued. It is impossible on that material to form a view as to the prospects of success on the appeal. Nevertheless, I think the material 1s sufficient to show that there is a bona fide dispute at least as to the question whether the date as at which the cost of remedying the work is to be determined is the date as at which it was reasonable to have the remedial work carried out or as at the date on which the matter was heard. Iam fortified in reaching the conclusion that there is a bona fide dispute genuinely based on substantial grounds by the fact that the respondents did not seek to place any evidence before the Court or to cross-examine the deponents of the affidavits relied on by the applicant. I have also taken into account that security has been given in respect of the judgment debt to the extent of $2,000.00. Having considered the matters put to the Court on behalf of the applicant and the respondents, I am of opinion that it is not an appropriate case in which to set aside the bankruptcy notice. However, in all the circumstances, it seems appropriate that the application to set aside the bankruptcy notice be adjourned generally and the time wihin which the applicant 1s to comply with the requirements of the notice be extended unti1 further order. The order is conditional upon the appeal to the Supreme Court being ame rom als uU rea iss) Q c cr ec aque gu any oar t ct '<q oO FS) ia} ool Oo S which will cerrrt the giving of wkhor mich 3 The costs ot ili wi Counsel for the applicant 2 Solicitors for the applicant Counsel for the respondents : Solicitor for the respondents Date of hearing diligence. zor relisting of tr WAKTLES Ate Liberty 15 reservea to @ appiication ona day seven days' mmarfice to tne wu reserve fi Ioocertify tnat this anc the preceding 17 pages are & teue copy of the Reasons For Judgment herein of the Honourable Me Justice Neaves. Viekr Reo Associate Dated: 12 May 1987 Mr S.L. Walmsley Reed & Co. Mr R.C. Refshauge Macphillamy Cummins & Gibson 13 April 1987