FEDERAL COURT OF AUSTRALIA BANKRUPTCY - amendments to Bankruptcy Act and Regulations between 16 December 1996 and 14 April 1997 - construction and application of Reg 4.02 - bankruptcy notice based on a final judgment or final order - absence of order for taxed costs - no legal obligation of debtor/bankrupt to pay costs of issuing bankruptcy notice - fee is not a debt unless by Court order - leave granted to amend amount of judgment debt. Bankruptcy Act 1966 Bankruptcy Regulations SR No 263 of 1996 Federal Court of Australia Act 1976, s 35A(7) Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 Re Grujin; Ex parte Tesselaar Nominees Pty Ltd (Federal Court of Australia, Marshall J, 28 May 1997, unreported) THE DISTRIBUTION GROUP LIMITED (ACN 000 091 930) trading as LAWRENCE & HANSON v JEFFREY MICHAEL LYDAN and ROBERT ERNEST BIRRELL VG 7432 OF 1997 NORTHROP ACJ MELBOURNE 5 SEPTEMBER 1997 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 7432 of 1997 IN THE MATTER OF: JEFFREY MICHAEL LYDAN and ROBERT ERNEST BIRRELL debtors THE DISTRIBUTION GROUP LIMITED (ACN 000 091 930) trading as LAWRENCE & HANSON APPLICANT AND: JEFFREY MICHAEL LYDAN and ROBERT ERNEST BIRRELL RESPONDENTs COURT: NORTHROP ACJ PLACE: MELBOURNE DATE: 5 SEPTEMBER 1997 MINUTES OF ORDERS THE COURT ORDERS THAT: 1. A Sequestration order be made against the estate of Jeffrey Michael Lydan and Robert Ernest Birrell. 2. The Applicant's costs including reserved costs but excluding costs reserved by the order made on 19 August 1997, be taxed and paid according to the Bankruptcy Act. Note: The respondent Jeffrey Michael Lydan committed the act of bankruptcy on 31 March 1997 and Robert Ernest Birrell committed the act of bankruptcy on 19 March 1997. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 7432 of 1997 In the matter of: JEFFREY MICHAEL LYDAN and ROBERT ERNEST BIRRELL debtors THE DISTRIBUTION GROUP LIMITED (ACN 000 091 930) trading as LAWRENCE & HANSON APPLICANT AND: JEFFREY MICHAEL LYDAN and ROBERT ERNEST BIRRELL RESPONDENTS COURT: NORTHROP ACJ PLACE: MELBOURNE DATE: 5 SEPTEMBER 1997 REASONS FOR JUDGMENT This petition raises a narrow issue under the Bankruptcy Act 1966 as amended by Act No 44 of 1966 and a bankruptcy notice issued under the Bankruptcy Regulations in operation between 16 December 1996 and 14 April 1997. On 3 December 1996 The Distribution Group Limited trading as Lawrence & Hanson (the Creditor) obtained a final judgment against Jeffrey Michael Lydan and Robert Ernest Birrell trading as BAL Electrical (the Debtors) in default of defence for goods sold and delivered. The judgment was that the Debtors pay to the creditor "$13,957.06 debt; $166.57 interest and $576.00 costs". The amount of the judgment thus was $14,699.63. At all relevant times, and for present purposes, s 40(1)(g) of the Bankruptcy Act provided: "40(1) A debtor commits an act of bankruptcy in each of the following cases; ...... (g) if a creditor who has obtained against the debtor a final judgment ...... has served on the debtor in Australia ...... a bankruptcy notice under this Act and the debtor does not; (i) ....... within the time specified in the notice; ...... comply with the requirements of the notice ......". Before 16 December 1996, the provisions of s 41 presently relevant were:- "41(1) A bankruptcy notice ...... (a) shall be in accordance with the prescribed form; and (b) shall be issued by the Registrar. (2) The prescribed form of bankruptcy notice shall be such that the notice: (a) requires the debtor named in it, within a specified time (being the time referred to in subparagraph 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. ..... (3) A bankruptcy notice shall not be issued in relation to a debtor: (a) except on the application of a creditor who has obtained against the debtor a final judgment or final order within the meaning of paragraph 40(1)(g) or a person who, by virtue of paragraph 40(3)(d), is to be deemed to be such a creditor; (b) if, at the time of the application for its issue, execution of the judgment or order to which it relates has been stayed; or (c) in respect of a judgment or order for the payment of money made by the Court in the exercise of the jurisdiction conferred on it by this Act if: (i) a period of more than 6 years has elapsed since the judgment was given or the order was made; or (ii) the operation of the judgment or order is suspended under section 37. (4) Service of a bankruptcy notice shall be effected as prescribed. (5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he disputes the validity of the notice on the ground of the mis-statement. (6) 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 ......" As from 16 December 1996, s 41(1) and (2) were amended to read:- "41(1) An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor a final judgment or final order that: (a) is described in paragraph 40(1)(g); and ...... (2) The notice must be in accordance with the form prescribed by the regulations." As from the same date, s 41(4) was deleted while subss (5) and (6) remained the same. These amendments were necessary because of the substantial amendments made by other provisions of Act No. 44 of 1996. The provisions deleted the office of Registrar in Bankruptcy. The powers of a Registrar to issue a bankruptcy notice were transferred to the Official Receiver. The form of a bankruptcy notice was changed dramatically. Before 16 December 1996, Rules 7, 8, 9 and 10 of the Bankruptcy Rules contained provisions for the application for the issue of a bankruptcy notice and the prescribed form of a bankruptcy notice. Rule 8 provided that a bankruptcy notice be in accordance with Form 4. Form 4 was a lengthy document but for present purposes, it is sufficient to say that a bankruptcy notice had to show that the judgment creditor claimed an identified amount as being due "under a final judgment" and a notice that the debtor pay that amount within a specified time. Between 16 December 1996 and 14 April 1997 the form of a bankruptcy notice was that contained in Form 1 in Sch 1 of the Bankruptcy Regulations contained in S R No.263 of 1996. Reg 4.02 is set out in full:- "4.02(1) For the purposes of subsection 41 (2) of the Act, the form of bankruptcy notice set out in paragraph Form 1 is prescribed. (2) A bankruptcy notice must follow Form 1 in respect of its format (for example, bold or italic typeface, underlining and notes). (3) Subregulation (2) is not to be taken as expressing an intention contrary to section 25C of the Acts Interpretation Act 1901. [NOTE: Under section 25C of the Acts Interpretation Act 1901, where an Act prescribes a form, then, unless the contrary intention appears, strict compliance with the form is not required and substantial compliance is sufficient; see also paragraph 46(1)(a) of that Act for the application of that Act to legislative instruments other than Acts.]" This Reg has some unusual features and in particular the apparent conflict between Reg 4.02(2) and (3). In addition to the reference to ss 25C and 46(1)(a) of the Acts Interpretation Act 1901 contained in the note to Reg 4.02, reference should be made to s 15AD of the Acts Interpretation Act. Form 1 of the Bankruptcy Regulations is even longer and more complex than that contained in Form 4 of the Bankruptcy Rules. For present relevant purposes it provides that the bankruptcy notice sets out the name and address of the creditor and the fact that the creditor "claims you (the debtor) owe the creditor a debt of $[amount], as shown in the Schedule" to being a Schedule contained in Form 1. Clause 2 of the notice is as follows: "2. The creditor claims that the debt is due and payable by you. A copy of the judgment or order relied upon by the creditor is attached. At the time of applying for this Notice, execution of the judgment or order had not been stayed." Clause 3(a) of the notice, by one alternative, requires the debtor "to pay to the creditor the amount of the debt". Clause 4 requires particulars of where the debt may be paid. Clause 5 warns that bankruptcy proceedings may be taken against the debtor if the debtor does not comply with one or other of the alternatives specified in cl 3. In the present case,the alternative in sub-clause 3(a) only is relevant, namely the non payment of the debt. The Schedule contained in Form 1 is as follows:- " Column 1 Column 2 1. Amount of judgment or order plus 2. Legal costs if ordered to be paid and a specific amount was not included in the judgment or order (see Note 1, below) plus 3. If claimed in this Bankruptcy Notice, interest accrued since the date of judgment or order (See Note 2, below) 4. Subtotal less 5. Payments made since date of judgment or order 6. Subtotal plus 7. Cost of this Bankruptcy Notice 8. Total debt owing. (Amounts, where applicable, are to be inserted in column 2)." The novel feature in this form comprises item 7 namely "plus 7. Cost of this Bankruptcy Notice". In the present case, the Creditor had set out in the schedule in the bankruptcy notice served on the Debtors the following amounts:- Item 1, $14,699.63. In fact this was the amount of the final judgment obtained by the Creditor. Item 4, $14,699.63 which amount is correct. Item 5, Nil. Item 6, $14,699.63, which amount is correct. Item 7, $680. Item 8, $15,379.63 being the sum of Item 6 and Item 7. As a result, under the bankruptcy notice the Creditor claimed that the Debtors owe it a debt of $15,379.63 as shown in the Schedule and claimed that "the debt is due and payable" by the Debtors. A copy of the judgment was attached to the notice and showed that the judgment was in the amount of $14,699.63 only. There has been no order of any court that the Debtors pay the Creditor the amount of $680 specified in Item 7. There is no evidence to suggest the Debtors are under any liability to pay that amount. At the hearing of the petition on 25 August 1997, the Creditor relied upon an affidavit sworn on 22 August 1997 by its solicitor which showed that the costs of the Creditor in relation to the bankruptcy notice amounted to $310 legal costs and $419.75 disbursements, a total of $729.75 but that a claim was made for $680 only. When the petition came on for hearing before a Deputy District Registrar, the Debtors were not present nor were they represented. The hearing of the petition was adjourned to 25 August 1997. On that day, pursuant to s 35A(7) of the Federal Court of Australia Act 1976, the Deputy District Registrar referred the hearing of the petition to the Court because of doubts arising with respect to the claim for $680. Problems of this kind can not arise after 14 April 1997 since by SR 1997 No. 76 the Schedule in Form 1 (Bankruptcy Notice) was amended to exclude items 7 and 8 and to re-describe item 6 to read "Total debt owing". Thus, since 14 April 1997, a bankruptcy notice is limited by the amount of the judgment debt, costs (amount of which must have been determined according to law, and interest, if claimed from the judgment to date of issue of bankruptcy notice). All these amounts have a direct connection with the judgment debt. The problems arising with respect to the claim for costs of the bankruptcy notice are illustrated by the facts of the case before the Court. The Petition is in conformity with Form 5 to the Bankruptcy Rules then in operation. The petition states that the creditor petitions the Court for a sequestration order against the estates of each of the debtors and alleges, among other things, that the debtors are indebted to the creditor "in the sum of $15,379.63 for the Final Order obtained by the Creditor against the Debtors .... and the cost of Bankruptcy Notice No. VN 40 of 1997 dated the 22 day of January 1997". The petition does not identify the amount of the costs. The petition is misleading in that it suggests the judgment debt was $15,379.63, not $14,699.63. The affidavit verifying the debt merely states that the statements contained in, among others, paragraph 2 of the petition, which is the relevant paragraph for present purposes "are within my own personal knowledge true". It is difficult to see how this verification could apply with respect to the claim for costs of the bankruptcy notice. There is no formal order certifying this amount or any order directing the Debtors to pay it. Before turning to consider the submissions made on behalf of the creditor, reference should be made to what is required to be proved to support the making of a sequestration order. Under s 43 of the Bankruptcy Act, the Federal Court has jurisdiction, where among other matters, a debtor has committed an act of bankruptcy, on a petition presented by a creditor, to make a sequestration order against the estate of the debtor. Where such an order is made, the debtor becomes a bankrupt with all the consequences resulting therefrom. Section 52 specifies the matters to be proved on the hearing petition which include the matters stated in the petition. The Court has power to accept an affidavit verifying the petition as sufficient for this purpose. Section 51 provides that subject to s 109, the prosecution of a creditor's petition to and including the making of a sequestration order on the petition of the shall be at the expense of the creditor. Under s 109 the taxed costs (emphasis added) of the petitioning creditor have priority of payment. One would expect the costs of a petitioner in obtaining the issue of a bankruptcy notice upon which a petition is successfully based would form part of the taxed costs of the petitioner if the Court making the sequestration order makes an order for costs. Under s 32, the Court has power, in any proceeding before it, to make such orders as to costs as it thinks fit. In that section "proceeding" means any proceeding under the Bankruptcy Act, see definition of "proceeding" in s 5(1). But in the absence of any order for taxed costs, there is no legal obligation on the debtor, or the bankrupt, to pay the costs of a creditor in obtaining the issue of a bankruptcy notice. Very helpful discussions relating to bankruptcy notices appear in Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71. The issue there was whether an understatement of interest in a bankruptcy notice constituted a formal defect or irregularity within s 306(1) of the Bankruptcy Act. If so, the notice was valid but if not the notice was invalid and could not support the making of a sequestration order. A majority of the Court, Mason CJ, Wilson, Brennan and Gaudron JJ held the notice was valid. Deane J held it was invalid. Crowl was based on the provisions of the Bankruptcy Act in operation before 16 December 1996, but the opinions expressed have general application. The relevant provisions of the Bankruptcy Act then applicable and those presently applicable are set out earlier in these reasons. In the joint judgment of the majority the following passage appears (footnotes not being included) 77-8 "It may be accepted that a bankruptcy notice which mis-states the amount due to the creditor is defective or irregular. Within this context the inclusion in the notice of an amount for interest due on a judgment debt poses particular problems. The bankruptcy notice is issued by the Registrar: s. 41(1)(b). As the notice is not necessarily issued on the day of filing, the creditor is not always able to calculate precisely the amount due as at the date of issue. These problems are adverted to in some detail in Re Munson; Ex parte Deputy Commissioner of Taxation; and Re Bankruptcy Act 1966; Ex parte Commercial Banking Co. of Sydney Ltd.. Interest due on a judgment debt may, but need not, be included in a bankruptcy notice: In re Lehmann; Ex parte Hasluck; Re O'Keefe; Ex parte Australian Factors Ltd.; Re Mullavey; Ex parte Australia and New Zealand Banking Group Ltd. It would seem that the reason for this is historical, rather than referable to the terms of s. 41(2)(a)(i) of the Act which speaks of a requirement that the debtor pay "the judgment debt ... in accordance with the judgment" (emphasis added). In Re Manion; Ex parte Deputy Commissioner of Taxation, Lockhart J expressed the view that "[a]lthough interest is necessarily and inextricably attached to the judgment debt ... it does not itself answer the description of the sum due by the debtor to the petitioning creditor under the final judgment". Whether that be so or not, the regularity of including interest in the amount claimed by a bankruptcy notice has long been accepted." At the beginning of his judgment, Deane J at 81 to 83 expresses a precept that is well settled and accepted. The whole passage should be read. Its application varies from judge to judge but the essential nature of the precept appears at 81, again not including footnotes; "It has long been a fundamental precept of the law of bankruptcy that "a bankruptcy notice, which is the foundation of a bankruptcy, attended as a bankruptcy is with penal consequences, is a matter in which great strictness is required": per Cozens-Hardy M.R., In re A Judgment Debtor, 530 of 1908; see also James v. Federal Commissioner of Taxation. A defect in a bankruptcy notice will invalidate it "except in the case of a merely formal defect": per Vaughan Williams L.J., In re O.C.S. (A Debtor); Ex parte The Debtor, see also In Re a Debtor, No 21 of 1950; Ex parte The Debtor v. Bowmaker Ltd. If a defect in a bankruptcy notice is other than a formal one, the notice itself is defective and failure to comply with it does not constitute an act of bankruptcy." The submissions made on behalf of the Creditor were simple. They can be considered in two stages. The first stage relates to the amount of $300 which, by reason of Reg 16.04 of the Bankruptcy Regulation and Schedule 9 is the amount of the fee payable on an application for the issue of a bankruptcy notice. The second stage relates to the legal fees claimed by the solicitor for obtaining the bankruptcy notice. It was submitted that the amendments coming into effect on 16 December 1996 changed completely the nature of a bankruptcy notice. Before that amendment, the bankruptcy notice had to require the debtor to pay the amount of the judgment debt; (s 41(2)). During the interregnum (16 December 1996 to 14 April 1997) the notice had to be in accordance with Form 1 prescribed in the Regulations and the Schedule. Form 1 included a claim for the item 7, "cost of this Bankruptcy Notice". Here, the notice did conform to the schedule and thus there was a compliance with the amended s 41(2). In support of this submission, counsel relied upon Re Grujin; Ex parte Tesselaar Nominees Pty Ltd (Federal Court of Australia, Marshall J 28 May 1997, unreported). In that case the issuing fee of $300 only was claimed as a cost under item 7 of the bankruptcy notice. In his reason his Honour said:- "I agree with the submissions put by Mr Ellis on those issues and am of the view that from 16 December 1996 until 14 April 1997 when the Bankruptcy Regulations were amended by Statutory Rule number 76 of 1997 deleting item 7 of the relevant table to Form 1, it was appropriate for bankruptcy notices to include a claim for the costs of the notice. In my view the bankruptcy notice in this proceeding is valid bankruptcy notice." In Grujin, the hearing of the petition was unopposed. Mr Ellis appeared for the creditor. He appeared for the Creditor in the present case. There was no discussion on the nature of a bankruptcy notice and the precept referred to by Deane J in Crowl. There was no discussion of the need for the cost referred to item 7 to be a debt. In the Bankruptcy Act, and in the Bankruptcy Regulations, the word "debt" is defined to include a liability, see s 5(1) of the Bankruptcy Act. On no view can it be said that the fee of $300 is a debt payable by the debtor to the creditor. There is no liability on the debtor to pay that amount to the creditor. The fee can become a debt (or a liability) if and only if an order of the Court is made directing the debtor to pay the taxed costs of the creditor. Until then, no debt or liability can arise. The bankruptcy notice may not be served. The judgment debt may be paid before the bankruptcy notice is served. The bankruptcy notice may be invalid. The Court might refuse to order costs in favour of a creditor. In all these circumstances no debt arises. In my opinion neither the Bankruptcy Regulations nor Form 1 of the Schedule can create a debt or a liability on a debtor to pay costs to the creditor. Section 41(2) of the Bankruptcy Act provides that the bankruptcy notice must be in accordance with the form prescribed by the Regulations. Section 315(1) of the Bankruptcy Act provides:- "315(1) The Governor-General may make regulations prescribing matters: (a) required or permitted by this Act to be prescribed; or (b) necessary or convenient to be prescribed for carrying out or giving effect to this Act." None of the particular matters specified in s 315(2) have application to the present case. On their true construction, there is nothing in s 41(2) and s 315(1) empowering the Governor-General to make a regulation imposing a debt or liability on a person against whom a creditor seeks to obtain the issue of a bankruptcy notice of the kind described in s 40(1)(g) of the Bankruptcy Act. Of necessity, a bankruptcy notice is based on a final judgment or final order, including where appropriate, costs and interest for a period after judgment as described in Crowl. Any additional debt cannot be created under the guise of a prescribed form of a bankruptcy notice. In my opinion, any attempt to do so would be beyond the power conferred upon the Governor-General in s 315(1) of the Bankruptcy Act. For these reasons, the Court declines to follow Grujin and rejects the submissions made by counsel for the Creditor with respect to the first stage. For the same reasons the submissions of counsel with respect to the second stage are rejected. In addition, there is no debt or liability imposed on the Debtors with respect to professional costs. Those costs have not been taxed. They have not been determined by any person having legal authority to determine them. This conclusion, however, does not mean that, of necessity, the petition must be refused. Paragraph 2 of the petition states that the sum of $15,379.63 is due when the correct amount is $14,699.63. Paragraph 2 is set out:- "2. The Debtors are justly and truly indebted to The Distribution Group Limited trading as, LAWRENCE & HANSON in the sum of $15,379.63 for the Final Order obtained by the Creditor against the Debtors in the Magistrates' Court of Victoria at Melbourne on the 3rd day of December, 1996, in proceeding No. J 02704887, the cause of action of which was for goods sold and delivered to the Debtors at the Debtors' request in the months of June, 1996 to August, 1996 inclusive and the cost of Bankruptcy Notice No. VN 40 of 1997 dated the 22nd day of January 1997." This constitutes an overstatement of the amount of the debt owed by the Debtors to the Creditors. Earlier in these reasons reference was made to s 41(5) and (6). In Crowl the majority said at 76-7:- "Mis-statement of the amount due to a creditor is not necessarily fatal to the validity of a bankruptcy notice. Sub-sections (5) and (6) of s 41 of the Act make specific provision for overstatement, providing that a bankruptcy notice will not be invalidated by reason only that the sum specified in the notice as due 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 mis-statement". sub-s. (5)." In the present case, neither of the Debtors has given any notice under s 41(5) nor has either appeared to oppose the granting of the petition. Further, Form 1 is misleading and was relied upon by the Creditor. In all the circumstances, the Court grants leave to the Creditor to amend paragraph 2 of the petition by substituting the sum of $14,699.63 for the sum of $15,379.63 and by deleting the words "and the cost of Bankruptcy Notice No VN 40 of 1997 dated the 22nd day of January, 1997". The Court will make an order dispensing with re-verification and re-service of the amended petition. On the material before the Court, I am satisfied that the debtor Jeffrey Michael Lydan on 31 March 1997 and that the debtor Robert Ernest Birrell on 19 March 1997 committed the acts of bankruptcy alleged in the petition as amended. I am satisfied with the proof of the other matters of which s 52(1) of the Bankruptcy Act requires proof. I note that Norman Jones, a registered trustee has consented to act as the trustee of the joint and separate estates of the joint debtors. Accordingly, the Court will make a sequestration order against the estates of the Debtors. Normally, the Creditor would be entitled to its costs to be taxed. Because of the form of the bankruptcy notice, there was an additional hearing on 19 August 1997 before a Registrar. The costs of that hearing were reserved. The Creditor should not get its costs for that hearing. Accordingly the Court will order that the creditor's costs including reserved costs, but excluding costs reserved by the order made on 19 August 1997, be taxed and paid according to the Bankruptcy Act. I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice R M Northrop. Associate: Dated: 5 September 1997 Counsel for the Applicant: Mr A Ellis Solicitor for the Applicant: Messrs Ward Taylor Date of Hearing: 25 August 1997 Date of Judgment: 5 September 1997