FEDERAL COURT OF AUSTRALIA BANKRUPTCY - Review of decision of Deputy Registrar rejecting challenge to bankruptcy notice - whether notice required debtor to pay the judgment debt in accordance with the judgment - whether person reading notice would infer that it claimed something in addition to the total of the judgment sum and interest thereon. Bankruptcy Act 1966 (Cth) s 41(2)(a)(i) HB, In re [1904] 1 KB 94, refd Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71, appl Morris & Morris, Re; Ex parte Wardley Australia Property Management Ltd [1992] FCA 863, refd RE JANICE LYNETTE BAIN; EX PARTE OFFSET ALPINE PRINTING LTD NG 7812 of 1997 DAVIES J 6 MARCH 1998 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 7812 of 1997 re: JANICE LYNETTE BAIN CREDITOR ex parte: OFFSET ALPINE PRINTING LTD DEBTOR JUDGE: DAVIES J DATE OF ORDER: 6 march 1998 WHERE MADE: SYDNEY MINUTES OF ORDER THE COURT ORDERS THAT: 1. The appeal from the decision of the Deputy Registrar be allowed. 2. The order made by the Deputy Registrar be set aside and in substitution thereof it be ordered that the bankruptcy notice be set aside. 3. The judgment creditor pay the costs of this proceeding and the costs of the proceeding before the Deputy Registrar. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 7812 of 1997 re: JANICE LYNETTE BAIN debtor ex parte: OFFSET ALPINE PRINTING LTD creditor JUDGE: DAVIES J DATE: 6 march 1998 PLACE: SYDNEY REASONS FOR JUDGMENT This is a review of a decision of a Deputy Registrar rejecting a challenge to a bankruptcy notice. The challenge was brought upon the basis that the bankruptcy notice was capable of misleading the debtor as to what was necessary for compliance with the notice. The misleading elements of the notice were said to be first, a statement of the balance due of the judgment debt, $29,152.18, which was $25 more than the balance actually due, although less than the original judgment debt of $28,722.18, of which $595 had been paid. Secondly, there was a reference in the notice to enforcement costs but no sum was inserted. Thirdly, there was a claim for interest of $38.97, whereas the interest properly calculated would have amounted to $421.34 or thereabouts. Finally, there was a statement of a total of $31,708.33 which was not the total of the figures previously stated. However, the notice did state that total and it specifically required the debtor to pay the sum of $31,708.33 so claimed by the judgment creditor to the judgment creditor or to compound or secure a sum. The notice commenced: "WHEREAS: OFFSET ALPINE PRINTING LTD of (REGISTERED OFFICE) 42 BOOREA STREET LIDCOMBE 2141 (hereinafter referred to as `the Judgment Creditor') has claimed that the sum of $29152.18 being the balance of the Judgment Debt, together with attempted enforcement costs of $, together with interest thereon calculated on the Judgment Debt outstanding from time to time at the prescribed rate from the 27th day of August 1996 which at the 10/10/96 amounts to $38.97 making a total of $31,708.33 is due by you to the Judgment Creditor under a final Judgment obtained by it against you in the LOCAL COURT AT 64-72 HENRY STREET, PENRITH NSW 2750 in the State of New South Wales on the 27th day of August 1996, being a Judgment the execution of which has not been stayed". The sum of $31,708.33 overstated the total of the specified balance of the judgment debt and interest by $2,517.18, and the total of the balance actually due and the claimed interest by $2,492.18. Section 41 of the Bankruptcy Act 1966 (Cth) provided, inter alia: "(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 or she shall be deemed to have complied with the notice if, within the time allowed for payment, he or she takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it." Those provisions were not relied on by the debtor. No notice was given under s 41(5) and no payment was made in accordance with s 41(6). The bankruptcy notice was issued on 26 November 1996 before the coming into operation of the Bankruptcy Legislation Amendment Act 1996 (Cth) or the Bankruptcy Amendment Act 1997 (Cth). The notice was also issued before the commencement on 16 December 1996 of the present bankruptcy regulations which specify the current form for a bankruptcy notice. Accordingly, the present matter should be considered having regard to the legislation in its earlier form and to the form of the bankruptcy notice which was specified in Schedule 1 of the Bankruptcy Rules. Section 41 of the Bankruptcy Act provided, inter alia: "(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." (emphasis added) The earlier strict approach to bankruptcy notices was enunciated by Deane J in Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71, where his Honour said at 81: "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 [1908] 2 KB 474 , at pp 476-477; see also James v. Federal Commissionerof Taxation (1955) 93 CLR 631 , at p 644. 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 [1904] 2 KB 161, at p 163, see also In Re a Debtor, No. 21 of 1950; Ex parte The Debtor v. Bowmaker Ltd [1951] Ch 313, at p 317. 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." and at 82: "To comply with the above rules, a bankruptcy notice must correctly state the amount of the debt upon which it is based." This approach accorded with that taken in the United Kingdom where, for example, in In Re HB [1904] 1 KB 94, Romer LJ said at 103: "... a bankruptcy notice under the Act must require payment of a sum alleged to be due according to the terms of the judgment - that is to say, it must state the amount that is claimed as remaining unpaid on the judgment debt." However, a different approach was enunciated by the majority Justices in Crowl. At 77, Mason CJ, Wilson, Brennan and Gaudron JJ said: "Three questions arise as to the validity of the bankruptcy notices in this case: are they defective or irregular; if so, is the defect or irregularity substantive or formal; and if it is formal only, has it occasioned substantial and irremediable injustice? It may be accepted that a bankruptcy notice which mis-states the amount due to the creditor is defective or irregular." At 79-80, their Honours said: The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice: James v. FederalCommissioner of Taxation (1955) 93 CLR 631 , at p 644; Pillai [1970] AC at 1135. In such cases the notice is a nullity whether or not the debtor in fact is misled: In re A Judgment Debtor, 530 of 1908 [1908] 2 KB 474 , at p 481. ... If the amount specified in a bankruptcy notice is in fact due and payment is claimed in accordance with the judgment, the essential requirements of s.41(2)(a)(i) - the only requirements presently relevant - are met. Understatement of the amount due, whether it be an understatement of the judgment debt or of interest payable thereon, will thus constitute a defect which is substantive rather than formal only if the understatement is objectively capable of misleading the debtor as to what is necessary for compliance with the notice." Their Honours concluded that an understatement of the interest due constituted a formal defect or irregularity which attracted the operation of s 306(1) of the Act which provides, inter alia: "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." Their Honours held that, in that case, no claim having been made of actual injustice and no evidence having been presented to show injustice, s 306 operated so as to preclude the bankruptcy notice being invalidated by the formal defect or irregularity. Subsequently, in Re Morris & Morris; Ex parte Wardley Australia Property Management Ltd [1992] FCA 863, Foster J held, in a case where the total amount claimed exceeded the claimed judgment debt but was less than the total of the judgment debt plus the calculated interest, that this difference did not create uncertainty as to the amount required to be paid to satisfy the notice. His Honour said that: "... this notice, when viewed as a total document, is not properly to be seen as objectively capable of misleading the debtors as to what was necessary for compliance." The case as put to the Deputy Registrar was that the bankruptcy notice could reasonably mislead the debtor as to what was necessary to comply with the notice. In the light of the above authorities, the Deputy Registrar understandably rejected that contention. Had the present been a case where there was a mere understatement of the amount due, so that payment was claimed in accordance with the judgment, or had there been a mere overstatement of the amount due so that the notice appeared to claim an amount due in accordance with the judgment, I would necessarily follow the approach enunciated by the majority Justices in Crowl. However, in Crowl, Mason CJ, Wilson, Brennan & Gaudron JJ emphasised that a notice to be valid must require payment "in accordance with the judgment". At 79 , their Honours said: "It is clear enough from the terms of s.41(2)(a)(i) of the Act that a notice must require payment "in accordance with the judgment". A notice specifying payment in accordance with some other arrangement does not satisfy this requirement. On one view In re H.B. merely gives expression to this requirement, making it clear that a judgment debt will not found the issue of a bankruptcy notice whilst ever the obligation to pay in accordance with the judgment is suspended or qualified by operation of an agreement. With that proposition we agree. ... The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act ..." One essential is that the notice should require the debtor to "pay the judgment debt or sum ordered to be paid in accordance with the judgment or order; ...". In my opinion, the subject bankruptcy notice failed to claim payment of the judgment debt in accordance with the judgment. That is because the sum of $31,708.33 was not only not the sum due under the judgment but it did not on its face purport to be that sum. It was so different from the total of the judgment debt balance, $29,152.18 and interest thereon, $38.97, a total of $29,191.15, that the implication a reader would draw is that it was calculated otherwise than by adding the balance of the judgment debt and interest together. Probably, it was calculated by taking some entirely different figure into account, perhaps the enforcement costs which were not part of the judgment debt. I think that a person reading the document would infer that the bankruptcy notice claimed something in addition to the total of the judgment sum and interest thereon. I read the bankruptcy notice as requiring the debtor to pay not only the amount due in accordance with the judgment but also an additional sum for which the debtor was alleged to be liable. In this circumstance, it seems to me that the notice was a nullity. Accordingly, the appeal from the Deputy Registrar's decision should be allowed. The order made by the Deputy Registrar should be set aside and it should be ordered that the bankruptcy notice be set aside. The judgment creditor should pay the costs of this review and the costs of the proceedings before the Deputy Registrar. I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies Associate: Date: 6 March 1998 Counsel for the Creditor: PR James, solicitor Solicitor for the Creditor: James Solicitors Counsel for the Debtor: KM Harkness, solicitor Solicitor for the Debtor: KM Harkness & Co Date of Hearing: 17 February 1998 Date of Judgment: 6 March 1998