DUDGMENT No. =O... Sh CATCHWORDS BANKRUPTCY - Whether a bankruptcy notice is defective if it claims interest on the judgment debt to a date specified in the notice which is earlier than the date of issue of the notice but does not expressly abandon any claim for interest accruing after the date specified - requirements for validity of a bankruptcy notice. Bankruptcy Act 1966 (Cth): ss. 40, 41, 82 Federal Court of Australia Act 1976 (Cth): s. 25 ALFRED FARRUGIA EX PARTE: DEPUTY COMMISSIONER OF TAXATION P2472 of 1987 COURT: SWEENEY, LOCKHART and BURCHETT JJ. 4 JULY 1988 SYDNEY is Ho \S ote guurreg ~ ' \ \ . \ EN NL? IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) BANKRUPTCY DISTRICT IN THE STATE )} No. P2472 of 1987 OF NEW SOUTH WALES AND THE &""~#& ?) ) AUSTRALIAN CAPITAL TERRITORY RE: ALFRED FARRUGIA Debtor EX PARTE: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGES MAKING ORDER: Sweeney, Lockhart and Burchett JJ. DATE OF ORDER: 4 July 1988 WHERE ORDER MADE: Sydney MINUTES OF ORDER The question asked in the case stated pursuant to sub-s. 25(6) of the Federal Court of Australia Act 1976 is as follows: Is the bankruptcy notice defective by reason only of the fact that it claims interest to a date prior to the issue of the notice but does not waive or abandon any claim for interest accruing after the date specified in the notice? We answer the question asked in the case as follows: The bankruptcy notice is not defective by reason only of the fact that it claims interest to a date prior to the date of the issue of the notice and does not in terms abandon or waive any claim for interest accruing after the date specified in the notice. It is unnecessary for the Court to answer any of the other questions raised by the stated case. THE COURT ORDERS THAT: There be no order for costs with respect to the stated case. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA) GENERAL DIVISION ) BANKRUPTCY DISTRICT IN THE STATE ) No. P2472 of 1987 OF NEW SOUTH WALES AND THE ) AUSTRALIAN CAPITAL TERRITORY ) RE: ALFRED FARRUGIA Debtor EX PARTE: DEPUTY COMMISSIONER OF TAXATION Respondent COURT: Sweeney, Lockhart and Burchett JJ. DATE: 4 July 1988 PLACE: Sydney REASONS FOR JUDGMENT THE COURT A single Judge of this Court stated a case pursuant to sub-s. 25(6) of the Federal Court of Australia Act 1976 for the consideration of a Full Court of the Court concerning a matter of importance in bankruptcy law and practice. The question is whether a bankruptcy notice is defective if it claims interest on the judgment debt to a date specified in the notice which is earlier than the date of issue of the notice but does not in terms waive or abandon any claim for interest accruing after the date so specified. Judgment was signed by the creditor, the Deputy Commissioner of Taxation, against the debtor, Alfred Farrugia, in the District Court of New South Wales at Sydney on 21 July 1986. A draft bankruptcy notice was presented to a Deputy Registrar in Bankruptcy in Sydney together with an application for its issue on a day before the notice was issued. On 29 June 1987 the bankruptcy notice was issued by a Deputy Registrar. The date of issue was determined by the Deputy Registrar, not by the creditor. It was served on the debtor on 8 July 1987. The notice was not complied with and on 27 November 1987 a petition was presented by the creditor seeking sequestration of the debtor's estate. The hearing of the petition awaits the determination of this stated case. The bankruptcy notice recites that the creditor claimed the sum of $10,000 due by the debtor under the final judgment obtained in the District Court of New South Wales at Sydney on 21 July 1986, being $16,016.54 due under the judgment, since reduced by $6,016.54, and interest amounting to $2,018.94 calculated on the daily balance of the judgment debt at the rate of 19.50 dollars per centum per annum from 21 July 1986 to 26 June 1967, making a total of $12,018.94, the judgment being a judgment the execution of which has not been stayed. The notice then requires the debtor to pay the sum of $12,018.94 to the Registrar of the District Court of New South Wales at 225 Macquarie Street, Sydney or to secure the payment of that sum to the satisfaction of the Federal Court or the creditor or to compound it to the satisfaction of the creditor. The notice does not in terms waive or abandon any claim for interest after 26 June 1987. 3. The notice was thus issued three days after the date up to which interest was claimed in it. This means that $16.02 interest was not claimed and not in terms waived or abandoned. It is common ground that all calculations of amounts by way of judgment debt and interest in the bankruptcy notice were correctly stated in the bankruptcy notice. It is well established that a claim for interest on a judgment debt which bears interest may be included in a bankruptcy notice: Re Lehmann; Ex parte Basluck (1890) 7 Morrell 181; 62 L.T. 941 per Cave J. at 942; Re Cooper (1911) 2 K.B. 550 per Buckley L.J. at 555; Re O'Keefe (1963) 19 A.B.C. 101; (1964) A.L.R. 561; Re Mullavey; Ex parte A.N.Z. Banking Group Limited (1977) 20 A.L.R. 276; Re Munson; Ex parte Deputy Commissioner of Taxation (1977) 29 F.L.R. 479; Re Manion; Ex parte Deputy Commissioner of Taxation (1979) 23 A.L.R. 270; Ex parte Commercial Banking Co. Limited (1979) 23 A.L.R. 522. Judgment debts usually bear interest these days and creditors seeking the issue of bankruptcy notices generally include claims for interest. Though this practice is permissible, it has given rise to questions, sometimes of difficulty, concerning the validity of bankruptcy notices. These questions have come before the courts from time to time. If a judgment creditor chooses to claim interest on a judgment debt it is necessary for the calculation of the claim to be accurately stated in the notice and for the period during which the claim is made to be specified: Re Mullavey (supra) per C.A. Sweeney 4. J. at 284; Re Davis; Ex parte Deputy Commissioner of Taxation (1963) 19 A.B.C. 100; (1963) A.L.R. 764; Re McDonald; Ex parte Elder Smith Goldsbrough Mort Ltd. (1978) 18 A.L.R. 505 per Riley 3. at 507. It has not to our knowledge been said in any reported case that a bankruptcy notice is defective if the period for which interest on the judgment debt is claimed is specified as terminating on a date earlier than the date on which the bankruptcy notice is issued. In Re Sly; Ex parte Broadlands International Finance Limited, a judgment of Davies 3. delivered on 21 March 1988, unreported, his Honour considered the validity of a bankruptcy notice which specified a rate of interest and the amount of that interest calculated up to a named date which was three weeks before the date of the issue of the bankruptcy notice. His Honour, whilst recognising that a claim for interest may be made in the notice to a date prior to the issue of the notice, said at p. 5: "It was not permissible for the judgment creditor so to claim part only of the debt, leaving another part of the debt subsequently to be claimed. If interest was demanded, the amount due up to the date of the bankruptcy notice had to be specified or the claim for interest after the date named in the bankruptcy notice, 14 May 1979, had to be abandoned. In ay opinion, the notice on its terms claimed part only of the interest due under the judgment, a course which was not open unless any claim to the remainder of the interest was clearly abandoned. Not only was the interest after 14 May 1979 not abandoned, the recitals indicated that the judgment creditor regarded interest up to the date of payment as due under the judgment." Davies J. restated that opinion a few weeks later in Re Moeller; Ex parte Dairy Farmers Employees' Credit Union Limited, unreported, 15 April 1988; and again some weeks later in Re 5. Stavrakakis; Ex parte Noronu Pty. Limited, unreported, 10 May 1988. In the latter case his Honour observed at p. 3, with respect to abandonment of interest after the date to which interest is claimed in the notice: "Technical words of abandonment are not required but the notice should specify the totality of the judgment debt that is claimed, to the end that, if the debtor pays the whole of the sum claimed, no further sum can be claimed under the judgment, for the balance has been abandoned." The judgments of Davies J. in these three cases gave rise to this stated case. If his Honour's opinion is correct many extant bankruptcy notices will be invalid because notices issued these days usually calculate interest on judgment debts to dates prior to the issue of the notices by the bankruptcy registry and do not in terms abandon claims for interest accruing thereafter. The point is therefore important to creditors, debtors, solicitors and bankruptcy registries throughout Australia. Riley J. said in Re Munson (supra) at pp. 480-481: "Obviously it is not contemplated that the bankruptcy notice will necessarily be issued immediately the application is filed, or even on the day on which it is filed: and an examination of twenty-five current files chosen at random shows that in practice it was so issued in only twelve of those cases and that in the other thirteen cases the dates of application and of issue differed by from one to as many as fourteen days." Riley J. was speaking of the position as it was in 1977. In recent times there has been a considerable increase in the numbers of bankruptcy notices issued by the Registrars and 6. Deputy Registrars in Bankruptcy throughout Australia, and the lapse of time between the dates of application and of issue is not infrequently of several weeks duration. Section 41 of the Bankruptcy Act 1966 ("the Act") is central to this matter. Sub-section 41(1) requires that a bankruptcy notice shall be in accordance with the prescribed form and shall be issued by the Registrar. Sub-section 41(2) provides that the prescribed form of bankruptcy notice shall be such that the notice: *(a) requires the debtor named in it within a specified time ... 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 ..." The Act thua demands that a bankruptcy notice require the debtor to pay the judgment debt in accordance with the judgment. The question before us is whether the bankruptcy notice in this case fulfils that statutory requirement. It must be kept in mind that a bankruptcy notice is the document of the Registrar (or a Deputy Registrar) in Bankruptcy, not of the creditor who seeks its issue. It is dated by the Registrar, not by the creditor. It is the Registrar who issues it (para. (41(1)(b)); it is the Registrar who fixes time for compliance with it where it is to be served in Australia (para. 7. 40(1)(g)); and the Registrar who signs it and issues it only when he is satisfied that the application has been "duly" made and that the bankruptcy notice is in order for signature (rule 7(5) of the Bankruptcy Rules): Re Munson (supra) per Riley J. at p. 480. A bankruptcy notice is a statutory document which must be complied with by the debtor if he is to avoid committing an act of bankruptcy. It must be unequivocal in its terms and clear to the debtor. Strict compliance with the requisites of a bankruptcy notice is essential to its validity: James v. Commissioner of Taxation (1955) 93 C.L.R. 631 at 644. If a bankruptcy notice claims interest on a judgment debt it must be so expressed that it is clear that all that is claimed by the creditor from the debtor in the notice is the amount or are the amounts specified, so that the debtor is informed that if he wishes to comply with the requirements of the notice he may do so and that, if he does not, he shall commit an act of bankruptcy. It is a question of interpretation of the bankruptcy notice in each case whether this requirement is complied with. But it is not necessary that the notice state in terms that any right to future accruals of interest on the judgment is abandoned or waived. There is no reason in principle why this should be so. All that is necessary is that the bankruptcy notice should clearly and unequivocally state what the debtor is required to do to avoid the commission of an act of bankruptcy. Such clear and 8. unequivocal statement in turn requires an accurate statement of the amount which the debtor is required to pay, secure or compound. A bankruptcy notice is an essential element in the scheme of bankruptcy legislation. It is not a creature of the general law, nor does compliance or non-compliance with its requirements by the debtor have direct legal consequences outside bankruptcy law. Of course, if a debtor complies with the notice the judgment debt which underlies the issue of the notice will be discharged; but this is because the payment operates as a discharge of the debt to the extent of the payment, not because the bankruptcy notice has been complied with. The commission of an act of bankruptcy may be an event which parties to agreements specify as having an effect upon their legal relationship: for example, under a deed of charge the commission of an act of bankruptcy may result in the crystallisation of the charge. But that occurs because of the terms of the agreement, not as a consequence of the operation of bankruptcy law. If the debtor fails to comply with the requirements of a bankruptcy notice and thereby commits an act of bankruptcy, the creditor may include in his petition the full amount of the judgment debt and interest accrued thereon to the date of presentation of the petition. Also, the creditor may prove in the bankruptcy for the full amount due to him for the judgment debt and interest accrued to the date of bankruptcy (sub-s. 82(1)). There is no rule of bankruptcy law that requires a creditor to abandon or waive, in the bankruptcy notice, his 9. entitlement to interest on the judgment debt accruing after the date to which the claim is made in the notice. Davies J. appears to have been persuaded by the judgment of the English Court of Appeal in Re H.B. (1904) 1 K.B. 94 to adopt the view that, unless a claim for interest after a date named in the bankruptcy notice is abandoned, the notice is invalid if there is a delay between the date named in the notice and the date of issue of the notice. In particular, it appears that his Honour relied upon the following passage from the reasons for judgment of Romer L.J. at p. 103: "Clearly, in a bankruptcy notice the debtor is entitled to see from the notice exactly what is claimed to be due on the judgment debt. No doubt a sum might be claimed which is less than the real amount due, and that would not of course be fatal to the notice so long as the notice made it clear that nothing more was claimed to be due on the judgment beyond the amount specified in the notice. But a notice to pay part of a judgment debt, leaving any balance that may be due to be subsequently claimed, is, to my mind, clearly ad. In Re H.B. the debtor and the creditor had reached an agreement that the debtor owed a particular sum, that the debt was to be repaid by certain instalments, and that the debtor should consent to judgment being signed against him. Judgment was then signed against him by consent, but without any reference to payment by instalments. Default was made by the debtor in the payment of some of the monthly instalments which had become due. Following an unsuccessful attempt to issue an earlier bankruptcy notice in relation to the whole amount of the judgment debt, a 10. second bankruptcy notice was issued for the amount of the overdue instalments, credit being given to the debtor in respect of a sum that had been attached under a garnishee order. The balance due was described in the bankruptcy notice as "the amount due on the final judgment". Vaughan Williams L.J. said at pp. 101 and 102: "The question which we have to decide is whether, at the time when that second bankruptcy notice was issued, it was a notice served on the debtor, within s. 4, sub-s. 1l(g), of the Bankruptcy Act, 1883, 'requiring him to pay the judgmen @ nm accordance with the terms of the judgment'." His Lordship said at p. 102 that he regarded the bankruptcy notice as requiring the debtor to pay the debt in accordance with the terms, not of the judgment, but of the agreement, which led him to hold the notice to be invalid. Romer L.J. reached a similar conclusion, holding that the notice was founded, not simply on the judgment according to its terms, but on the judgment as modified by the agreement. His Lordship construed the notice as if it required the debtor to pay only part of the judgment debt, namely, that part which was due according to the terms of the agreement. Stirling L.J. expressed views substantially the same as those expressed by Romer L.J. Re H.B. turned on its own special facts, central to which was the existence of the agreement made between the debtor 11. and the creditor before judgment was entered relating to the manner of payment of the judgment debt. The bankruptcy notice was treated by each member of the Court as requiring the debtor to pay in accordance with the terms of the agreement, not the judgment (Vaughan Williams L.J.) or the terms of the judgment as modified or varied by the agreement (Romer and Stirling L.JJ.). We make one final observation about Re H.B. and it is with reference to the last sentence of the passage from Romer L.J.'s reasons, already cited: "... But a notice to pay part of a judgment debt, leaving any balance that may be due to be subsequently claimed, is, to my mind, clearly bad." This observation must be read in the context of the sentences which precede it, also previously recited. In speaking of the second notice issued by the creditor in Re: 4H.B., Vaughan Williams L.J. said at pp.101-2 "That notice is issued for the amount of the overdue instalments, credit being given to the debtor in respect of a sum that had been attached under a garnishee order; and the balance is described as 'the amount due on the _ final judgment.' The question which we have to decide is whether, at the time when that second bankruptcy notice was issued, it was a notice served on the debtor, within 9.4, sub-s. 1(g), of the Bankruptcy Act, 1883, 'requiring him to pay the judgment debt in accordance with the terms of the judgment.' I do not think it was. I think it was a notice requiring the debtor to pay a debt in accordance with the terms, not of the judgment, but of an agreement; and I think that in dealing with a section of this nature in an Act of Parliament creating a new legislative act of bankruptcy, the actual language of the section ought to be considered." 12. It is in that sense, in our opinion, that the observation of Romer L.J. must be read. Had the judgment in that case provided for payment by instalments, it would have been open to the creditor to issue a bankruptcy notice in respect of overdue instalments, because such a notice would have been in accordance with the terms of the judgment. Indeed, Romer L.J. himself said at pp.103-4 "That form of notice clearly could only be justified by the special agreement alleged to exist between the parties. That being so, this notice is not one founded simply on the judgment according to its terms; it is founded on the judgment as modified by the agreement, and it seems to me that the notice is no better than if it had, on the face of it, set forth the facts and required the debtor to pay only part of the judgment debt, according to the terms of the agreement, outside the judgment. To my mind that is not a notice which, within the provisions of the Act, s.4, sub-s.1(g), requires the debtor to pay the judgment debt 'in accordance with the terms of the judgment,' and therefore it is, in my opinion, bad. The Act should I think, where it specifies acts of bankruptcy, receive a very careful and strict interpretation. On this short ground I think the appeal fails.". But if his Lordship meant that a bankruptcy notice must not only make clear what sum is to be paid in compliance with the notice, and that no further payment is required to secure compliance, but must also expressly abandon any future claim (as, for example, by proof of debt in a subsequent bankruptcy) which the terms of the original judgment might enable the creditor to make, we must respectfully disagree. Vaughan Williams and Stirling L.JJ. laid down no such proposition, and we can see no basis for it in principle. 13. We therefore respectfully disagree with the conclusion of Davies J. in the cases to which we have referred that it is essential for the creditor to abandon his claim for interest after the date named in the notice. In our opinion the bankruptcy notice before us complies with the statutory requirement of sub-s. 41(2), namely, that it require the debtor to pay the judgment debt in accordance with the judgment. It is true that it does not in terms state that the creditor abandons or waives any claim for interest accruing beyond 26 June 1987, but we see no basis in law for such a requirement. By reciting that interest is claimed from 21 July 1986, being the date of the judgment, to 26 June 1987, in the sum of $2,018.94, making a total of $12,018.94 which must be paid in order to avoid the commission of an act of bankruptcy, the bankruptcy notice complies with sub-s. 41(2). There is no doubt, on a perusal of this notice, as to what the creditor is claiming from the debtor, namely, the sum of $12,108.94 having two components: first, the balance due under the judgment being the amount for which judgment was signed against the debtor less moneys subsequently paid by the debtor; and, second, interest thereon to a nominated date. We have not seen the bankruptcy petition in this matter as it does not form part of the case stated. It may assert that the petitioning creditor claims from the debtor a sum which contains a component of interest due after 26 June 1987. If a sequestration order is made against the debtor's estate the creditor's proof of debt 14. may likewise include such a claim for interest due to the date of bankruptcy when claims of creditors are converted into rights of proof. We see no inconsistency between these rights of the creditor and his right to specify by reference to a particular date stated in the bankruptcy notice, being a date preceding its issue, the period for which by that notice, he claims interest on the judgment debt. Since we wrote these reasons for judgment the High Court has given judgment (on Friday, 1 July 1988) in Kleinwort Benson Australia Ltd. v Crowl. We have read the reasons for judgment in that matter where the question was whether the understatement in the bankruptcy notice of the amount of interest due on the judgment debt to the date to which interest was expressed to be calculated in the notice (an understatement of some $23,000) invalidated the particular notice. That question is plainly different from the question with which this appeal is concerned. All members of the Court, Mason C.J., Wilson, Brennan and Gaudron JJ., in their joint judgment at 3 and 4 and Deane J. at 13 noted that a bankruptcy notice is not necessarily issued on the date on which the application for its issue is lodged and that the judgment creditor is not therefore always able to calculate precisely the amount due as at the date of issue of that notice. Deane J., although in dissent, but not on matters relevant to the present appeal, said at 13 and 14: "There is one further matter which should be mentioned. Senior counsel for the appellant creditor drew attention to the procedural difficulty in calculating the precise amount of 15. interest up to the date of the bankruptcy notice in circumstances where a petitioning creditor will ordinarily be unaware, in advance, of the precise date upon which a bankruptcy notice will issue. There are, however, a number of accepted ways of avoiding that difficulty without waiving or abandoning the entitlement to interest. One way is to refrain from including interest in the debt upon which the bankruptcy notice is based (see, e.g., Re McDonald; Re Mullavey; Ex parte Australia and New Zealand Bankin Grou Ltd. (1977) 20 A.L.R. 276, at pp. 282-284). Another is to follow the course adopted in the present case, namely, to include in the debt upon which the bankruptcy notice is based interest only up to a specified date (see, e.g., Re Munson, and see generally, Ss. Cavanagh, 'The Requisites of Bankruptcy Notices - A Survey of Recent Cases' Australian Law Journal, vol. 54 (1980), 278, at pp. 280-282)." The majority of the High Court referred (at 6) to Re H.B. (supra) and expressly rejected the view that it was authority for the proposition that any understatement of the judgment debt invalidates a bankruptcy notice unless it is clear that the excess is waived by the judgment creditor. Had we found the bankruptcy notice in the present appeal to be in fact defective it would have been necessary for us to give consideration to the possible effect of sub-s. 306(1) of the Act having regard to what is said about that provision in the majority judgment in Crowl's Case at 6. We answer the question asked in the case as follows: The bankruptcy notice is not defective by reason only of the fact that it claims interest to a date prior to the date of the issue of the notice and does not in terms abandon or waive any claim for interest accruing after the date specified in the notice. 16. It is unnecessary for us to answer any of the other questions raised by the stated case. No order for costs with respect to the stated case is sought by the respondent, so we make no order for costs. I certify that this and the preceding fifteen (15) pages are a true copy of the reasons for judgment herein of the Court. Associate AS Bok — Date: 4 July 1988 Counsel for Petitioning Creditor: Mr. M.R. Aldridge Solicitor for Petitioning Creditor: Australian Government Solicitor Solicitor for Debtor: Mr. L. Davis Date of Hearing: 25 May 1988 Datee of Judgment: 4 July 1988