JUDGMENT No. sree 22nd Lhe CATCHWORDS BANKRUPTCY - sufficiency of bankruptcy notice - overstatement in bankruptcy notice - failure by debtors to give notice under s.41(5) Bankruptcy Act - effect of failure - no substantial injustice to debtors. Bankruptcy Act 1966 s.41(5), s.41(6), 8.306(1) Bankruptcy Rules Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 Re Cirillo, Ex Parte Commissioner tion (1992) 36 FCR Re Walsh (1982) 65 FLR 87 HELEN PATRICIA H MURDOCH AND PATRICIA MARY MURDOCH Ex Parte: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED No. NP 1800 of 1994 Sackville J. 7 october 1994 RECEIVED Sydney 14 OCT 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY IN THE FEDERAL COURT OF AUSTRALIA ) BANKRUPTCY DISTRICT OF THE ) No. NP1800 of 1994 STATE OF NEW SOUTH WALES ) Res BARRY THOMAS MURDOCH, HELEN PATRICIA MURDOCH, JOHN DAVID MURDOCH AND PATRICIA MARY MURDOCH Debtors Ex Parte: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED Creditor F_ ORDER 1. Sequestration orderes be made against the estate of each of the debtors. 2. The creditor's costs (including any reserved costs) be taxed and paid in accordance with the Act. : Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) BANKRUPTCY DISTRICT OF THE ) No. NP1800 of 1994 STATE OF NEW SOUTH WALES ) Re: BARRY THOMAS MURDOCH, HELEN PATRICIA MURDOCH, JOHN DAVID MURDOCH AND PATRICIA MARY MURDOCH Debtors Ex Parte: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED Creditor CORAM: SACKVILLE J. PLACE s SYDNEY DATE: 7 OCTOBER 1994 REASONS FOR JUDGMENT es: ic This is a petition by the Australia and New Zealand Banking Group Limited (the "creditor") for a sequestration order against the estate of four debtors, namely, Barry Thomas Murdoch, Helen Patricia Murdoch, John David Murdoch, and Patricia Mary Murdoch. Subject to an issue relating to service of the creditor's petition upon one of the debtors, Helen Patricia Murdoch, the only substantial issue raised by the debtors was the sufficiency of the bankruptcy notice. However, there were, in addition, certain matters that were said to go to the discretion to issue a sequestration order, and I shall return to these in due course. fe} {e] t The creditor obtained judgment on a cross-claim against each of the debtors in proceedings No. 5556 of 1992 in the Equity Division of the Supreme Court of New South Wales. The orders were dated 20 November 1992 and entered on 27 November 1992. In each case judgment was obtained against the debtor in the sum of $535,440.13, with interest to be paid from 18 September 1992 to date of judgment at the daily rate of $173.93. The judgment provided for the plaintiff to have possession of certain land at Glenquarry (owned by another party to the proceedings) and Colo Vale (owned by two of the debtors). However, the writs of possession were to be stayed until 28 February 1993, on condition that the plaintiffs paid $15,654 to the creditor on or before 4 December 1992, and also paid the sum of $535,440.13, together with interest and bank charges, on or before 28 February 1993. Rather curiously, in view of the terms of the judgment, the orders noted the agreement of the parties that the creditor would supply details to the debtors and certain associated companies "as to how the amounts referred to in the letter from the plaintiffs' (that is, the debtors'] solicitors of 4 November 1992 are made up". It appears from later correspondence between the parties that the date of the letter referred to in the agreement should have been 9 November 1992. That letter requested details of certain deductions totalling about $47,000 from the account of a company (Murbay Pty Ltd) in which the debtors presumably had an interest. I also return to this matter later. On about 7 December 1992 the debtors paid the sum of $15,500 in respect of the judgment debt. Although not the precise amount referred to in the orders of the Supreme Court, the payment appears to be referable to those orders. No other Payment appears to have been made in respect of the judgment at that time, or indeed until late 1993. On 3 November 1993 a bankruptcy notice was issued, addressed to the debtors, claiming that a total sum of $617,591.44 was due under a final judgment of the Supreme Court, execution of which had not been stayed. The calculation of this amount was stated to be as follows: $535,440.13 - judgment debt 28,350.59 - interest from 18 September 1992 to date. of judgment at $173.93 per day (this calculation was erroneous, as the correct figure was $10,975.59). 53,800.72 - interest from 21 November 1992 to 15 October 1993 on the daily balance of $535,440.13 at Supreme Court rates. This bankruptcy notice overstated the amount due by the debtors, quite apart from the error relating to the calculation of interest. The notice did not take into account the payment of $15,500 in December 1992, nor did it deduct interest attributable to the repayment of this sum. On 1 December 1993 the solicitors for the debtors wrote to the solicitors for the creditors as follows: "Please note the purported document is invalid and of no effect inter alia in that it claims an amount in excess of what is in fact due. Please also note any subsequent proceedings based on the invalid notice will be strenuously defended." The letter did not specify the precise error that had led to the overstatement of the amount due. On 24 December 1993 the sum of $254,639.31 was paid off the debt, presumably as the result of the sale of a property or properties. On 29 March 1994 a fresh bankruptcy notice was issued to the debtors. This notice claimed a total of $362,080.29 under the Supreme Court judgment. The sum was calculated as follows: $280,800.52 - the judgment debt of $535,440.13 less the payment of $254,639.61 on 24 December 1993. $10,975.59 - interest from 28 September 1992 to date of judgment at $173.93 per day. $70,327.18 - interest from 21 November 1992 to 9 March 1994 on the daily balance due under the judgment at Supreme Court rates. The notice required payment of the sum of $362,080.29, and no more, within 21 days after service of the notice. Two features of the notice should be observed. First, the calculation of interest for the period 28 September 1992 to date of judgment was altered to correct the mistake in the first bankruptcy notice. This suggests that the creditor's officers thought that the error, to which the debtors had referred in their letter relating to the first notice, was the overstatement of interest. Secondly, the bankruptcy notice repeated the error of failing to take account of the payment ef $15,500 made in December 1992. Thus it again overstated the amount due by the debtors to the creditor. The bankruptcy notice was duly served on each of the debtors on 11 April 1994. On 26 April 1994 a further payment of $194,659.36 was made in respect of the judgment debt, presumably as the result of the sale of further property. However, neither the balance stated to be due under the bankruptcy notice, nor the amount actually due, was paid by the debtors as required by the terms of notice. The debtors at this stage made no complaint about' the overstatement of the amount due by them in the second bankruptcy notice. On 17 June 1994 a creditor's petition was presented to the Court and made returnable on 8 August 1994. On 3 August 1994-the solicitors for the debtors wrote to the creditor, informing it, for the first time, that the second notice overstated the amount due by reason of the failure to give credit for the sum of $15,500 paid in December 1992. erst. t The principal contention of the debtors was that the bankruptcy notice of 29 March 1994 was invalid because it overstated the amount due by the debtors. But for the provisions of the Bankruptcy Act 1966 ("the Act"), this proposition might have considerable force. On one view of the authorities, an overstatement in a bankruptcy notice, apart from statutory provisions, invalidates a notice regardless of whether or not the overstatement could reasonably mislead the debtor: Re Prossimo: Ex parte De Marco (1952) 16 ABC 86; Re Greenhill; te Myer (NSW) Ltd (1984) 5 FCR 84. On another view, an overstatement, like other defects in the notice; will only render the notice invalid if the overstatement is of a kind that could reasonably mislead the debtor upon whom it is served: Re Walsh (1982) 65 FLR 87 (affirmed on other grounds, sub nom Walsh v_ Deputy Commissioner of Taxation (1984) 156 CLR 337). Section 41(5) and (6) It is necessary, however, to take account of the provisions of the Act. Section 41(5) and (6) provides as follows: "41(5) [Defect in statement of sum _ due] 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 disputes the validity of the notice on the ground of the misstatement. 41(6) [Compliance where correct sum tendered] Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with subsection (5), he shall be deemed to have complied with the notice if, within the time allowed for payment he takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it." The debtors, in this case, did not give notice within the time specified in s.41(5). Nor was any application made by the debtors to extend the time for notifying the creditor that they disputed the validity of the bankruptcy notice on the ground of overstatement of the amount due: compare s.33(1)(c) of the Act and Re Wilhelmsen; Ex parte Gould (1986) 11 FCR 107. Had the debtors given notice within the period specified by 8.41(5) the bankruptcy notice may well have been invalid by reason of the overstatement: Re Greenhill: Ex parte Myer (NSW) Ltd. Questions might arise, however, as to whether the defect should be regarded as formal or substantive and, if formal, whether it was likely to mislead the debtor or was one which could be validated under s.306(1) of the Act: see Kleinwort 8 i td v wl (1988) 165 CLR 71, at 77; Re Cirillo, Ex parte Commissioner of Taxation (1992) 36 FCR 279, at 284. As I understood the argument before me, it proceeded on an assumption that if the debtors could establish that a substantial injustice had been caused by the overstatement in the bankruptcy notice, the notice would be invalid. This assumption appears to have been based on the view that 8.306(1) of the Act applied to the circumstances of the case. It is in the following terms: Section 306 - FORMAL DEFECT NOT TO INVALIDATE PROCEEDINGS *306(1) [In proceedings] Proceedings under this Act are not invalidated by a formal defect or an irregularity, 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 irregularity and that the injustice cannot be remedied by an order of that court." Both counsel appeared to make this assumption, notwithstanding that no notice had been given by the debtors within the time specified in s.41(5). As the matter was not argued before me I do not express a final view on the assumption to which I have referred. However, I am by no means satisfied that the assumption is correct. The predecessors of s.41(5) and (6) in the current Act were taken from English antecedents, going back to the Bankruptc eds__of Arrangement Act 1913. These provisions appear to have been intended to overcome the decision in Re a Debtor [1908] 2 KB 684, which had taken a strict view of an overstatement in a bankruptcy notice of the amount due by the debtor: see Qlivieri v Stafford (1989) 24 FCR 413, at 415-417 (per Sweeney ACJ, whose dissent does not affect the historical analysis). Section 41(5) suggests, in terms, that an overstatement of the amount due to the creditor, of itself, does not invalidate a bankruptcy notice, unless the debtor gives the notice within the time specified by the section. The language seems to me to be intended to prevent a debtor relying on an overstatement as a ground of invalidity if the debtor fails to give the requisite notice contemplated by s.41(5). A debtor who fails to give that notice is, however, deemed to comply with the bankruptcy notice if he or she takes such action as would have constituted compliance had the amount due been correctly specified: s.41(6). Section 41(6) itself appears to be framed on the assumption that the bankruptcy notice remains valid despite the overstatement of the amount due. Curiously enough, the Australian authorities do not seem to address directly the consequence of a debtor's failure to give the notice provided for in s.41(5), where the bankruptcy notice overstates the amount due. A number of dicta tend to support the view that, if the notice provided for in s.41(5) is not given, the bankruptcy notice is not invalid, at least on the ground that it overstates the amount due. In Re Walsh at 92 Lockhart J. said this: "Plainly enough, as long ago as 1913 the predecessors of s.41(5) and (6) were intended to ensure that, when courts would otherwise hold bankruptcy notices invalid on the ground of overstatement of the amount due, the consequence of invalidity was not to follow unless the debtor gave the requisite notice under s.41(5) or its then equivalent". (Emphasis added) This was part of a passage approved by Gummow J. in Qlivieri v Stafford, at 428, although his Honour was principally concerned with other issues. In Re Cirillo, Ex parte Commissioner of Taxation, at 284, von Doussa J. dealt with a small overstatement in the bankruptcy notice: "In the absence of notice by the debtor to the creditor [under s.41(5)], an overstatement of $83 of the amount claimed in the bankruptcy notice by the judgment creditor would not render the bankruptcy notice invalid". Compare Kleinwort Benson Australia Ltd v Crowl, at 76-77, 78. These statements, although not definitive, suggest that, unless the notice under s.41(5) is given within time, an overstatement of the amount due by the debtor will not render the notice invalid. If this is correct, it would seem to follow that the notice would not be invalid even if the overstatement is capable of misleading the debtor: compare James v Federal] Commissioner of Taxation (1955) 93 CLR 631, at 644. Section 306(1) On the assumption that the critical question relating to validity of the bankruptcy notice is whether the debtors can satisfy the terms of s.306(1) of the Act, I think on the evidence they have failed to establish that any substantial injustice was caused by the overstatement in the bankruptcy notice of March 1994. Although an affidavit of one debtor, Mr John David Murdoch, was read, no evidence was addressed to suggest that the debtors, or any of them, were misled by the overstatement in the bankruptcy notice. A fortiori there was no evidence that the debtors, or any of them, had done or failed to do anything in reliance on the overstatement. On the contrary, having regard to the history of the matter, I would infer that the debtors were aware that the bankruptcy notice of March 1994 had erroneously failed to take into account the payment of $15,500 made in December 1992. The error was the same as in the first bankruptcy notice and the debtors were presumably aware that they had paid the sum of $15,500 in respect of the debt. It was quite clear from the form of the bankruptcy notice that no credit had been given for that payment although, equally clearly, credit had been given for the payment of $254,639.61 in December 1993. The evidence was also quite clear that the debtors were unable to pay the debt due to the creditor, even if credit were given for the instalment of $15,500 paid in December 1992. The total amount due by the debtors, according to the affidavit of debt of the creditor's Manager, Asset Management (an affidavit which itself was affected by a mathematical error), was over $155,000. The debtors' solicitors, in a letter of 19 August 1994, stated that the debtors "are builders and cannot continue work unless they remain solvent. However, they have lost everything they own and they are in no position to pay the debt in full". Thus, the debtors are clearly not able to meet the debt that is due to the creditor. Nor, if it be relevant, was any explanation offered for the failure to give a notice under s.41(5) of the Act in relation to overstatement in the bankruptcy notice. In my opinion, therefore, the debtors have not demonstrated that substantial injustice has been caused by the defect in the bankruptcy notice by reason of the overstatement of the amounts due. Having regard to the way in which the case was conducted, it follows that the bankruptcy notice was not invalidated by reason of that defect. As I have explained, it may well be that, even if the debtors could show substantial injustice, the bankruptcy notice was not rendered invalid by reason of the overstatement. Di ti Ms McCullum for the debtors argued that there were discretionary considerations that should cause me to decline to make a sequestration order, even if the bankruptcy notice were held to be valid. However, the matters relied on seem to me simply to reflect the inevitable, albeit unpleasant consequences of a sequestration order. Thus it was said that the debtors would be unable to trade as builders and that if they could not retain their licences they would be unable to generate income sufficient to discharge their debts. No doubt these matters would affect the debtors deeply, but they do not constitute a basis for declining to make sequestration orders if the statutory conditions are satisfied. It was also said that the successive bankruptcy notices and the affidavit of debt contained errors. However, if these did not have the effect of invalidating the notices, I do not think that they justify withholding a sequéstration order, where the statutory conditions are otherwise satisfied. Finally, it was said that the creditor had not provided the breakdown of amounts referred to in the orders made in the Supreme Court. The correspondence shows that the relevant letter was that of 9 November 1992. It sought particulars of debts to the account of Murbay Pty Ltd totalling some $47,000. Certain information was provided by letter of 13 November 1992 concerning each of these amounts. However, there does not seem to have been compliance with the terms of the agreement recorded in the orders made in the Supreme Court, although it must be said that the agreement is far from clear as to what was required. It has not been suggested that non-compliance with the agreement rendered the judgment one that was liable to be stayed or that gave rise, for example, to a set-off or cross demand. There has been no evidence led or suggestion made that the initial judgment debt of $535,440.13 was calculated incorrectly. In these circumstances, I do not think that the creditor's apparent failure to provide further details of the deductions from Murbay's account provides any basis for declining to make a sequestration order. Service There was evidence that the bankruptcy notice had been personally served on all debtors and that the petition had been served on all debtors, other than Helen Patricia Murdoch. There was evidence that repeated attempts were made to serve Ms Murdoch at her home address and elsewhere, but without success. Her husband, Mr Barry Murdoch, was served with the petition on 12 July 1994. On 27 September 1994 the creditor's solicitors forwarded a copy of the petition "by way of service" to the solicitors acting for the other debtors. However, the solicitors replied by letter advising that they had no instructions to accept service. On the hearing of the application Ms McCullum announced her appearance on behalf of all debtors. She also said that she was instructed to take no point about service on Ms Helen Murdoch. However, this is not enough of itself to ensure compliance with the terms of the Act and the Bankruptcy Rules. Rule 15 of the Bankruptcy Rules requires personal service of the petition unless the Court orders a different manner of service under s.309(2) of the Act. Furthermore, s.52(1)(b) of the Act requires proof, in a creditor's petition, of service of the petitioner. Ms McCullum stated in Court on behalf of the debtor, Ms Helen Murdoch, that Ms Murdoch had received a copy of the petition and was aware of its contents. In these circumstances, I think that r.195(1) can be invoked to relieve the creditor from the consequences of non-compliance with the rules. Alternatively, reliance can be placed on s.306(1) to prevent any invalidity of the proceedings flowing from the irregularity of service. As in Re Florance;: Ex parte Turimetta Properties Pty Ltd (1979) 36 FLR 256, at 264, the debtor knew of the petition and was represented by counsel. Far from there being any suggestion of prejudice to her, she has, through her counsel, expressly disclaimed any reliance on the failure to serve her personally. onclus It follows from what I have said that I am satisfied that the debtors have committed the act of bankruptcy alleged in the petition. Pursuant to r.195(1) or alternatively s.306(1) of the Act, I relieve the creditor from the consequence of not complying with the requirement of personal service of the petition on the debtor Ms Helen Murdoch. I am satisfied with the proof of the other matters of which s.52(1) of the Act requires proof. I make sequestration orders against the estate of each of the debtors. I order the creditor's costs (including any reserved costs) be taxed and paid in accordance with the Act. I direct that a draft of this order be delivered to the Registrar within seven days in accordance with r.124(2). I certify that this and the preceding 14 pages are a true copy of the Reasons for Judgment of the Honourable Justice Sackville. . Associate: / Dt fe.h [™. Heard: Place: Decision: Appearances: Dated: 7 October, 1994 4 October 1994 Sydney 7 October 1994 Ms McCullum instructed by Carters, The Law Firm, Solicitors, appeared for the debtors. Ms K Otteson instructed by Norton Smith & Co, Solicitors, appeared for the creditor.