FEDERAL COURT OF AUSTRALIA Farrugia v Farrugia [2000] FCA 129 BANKRUPTCY – whether bankruptcy notice contained an overstatement – whether relevant date for calculating "amount in fact due" for notice is date of application for bankruptcy notice or date of its issue – whether the Bankruptcy Act requires inclusion in the notice of the correct provision under which interest is claimed – whether failure to indicate provision under which interest is claimed is misleading – whether stating that interest is continuing to accrue is misleading. WORDS & PHRASES – "amount in fact due" Acts Interpretation Act 1901 (Cth), ss 25C, 46(1)(a) Bankruptcy Act 1966 (Cth), ss 41(2), 41(5), 41(6), 306 Bankruptcy Regulations (Cth), r 4.02, Form 1 Local Courts (Civil Claims) Act 1970 (NSW), s 39 Bendigo Bank v Scerri [1999] FCA 1215, applied Glass v Demarco [1999] FCA 481, applied Kirk v Ashdown [1999] FCA 1664, applied Kleinwort Benson v Crowl (1988) 165 CLR 71, applied Meekin v Commonwealth Bank of Australia [1999] FCA 682, applied Re Cooper [1911] 2 KB 550, applied Re Davis (1963) 19 ABC 100, applied Re Wimborne (1979) 24 ALR 494, applied Thorpe v Bristile [1997] FCA 1369, applied Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337, applied ALFRED FARRUGIA v JOSEPH FARRUGIA N 7443 of 1999 MADGWICK J 2 MARCH 1999 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7443 OF 1999 BETWEEN: ALFRED FARRUGIA Applicant AND: JOSEPH FARRUGIA Respondent JUDGE: MADGWICK J DATE OF ORDER: 2 MARCH 1999 WHERE MADE: SYDNEY THE COURT ORDERS THAT: The bankruptcy notice is set aside. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7443 OF 1999 BETWEEN: ALFRED FARRUGIA Applicant AND: JOSEPH FARRUGIA Respondent JUDGE: MADGWICK J DATE: 2 MARCH 1999 PLACE: SYDNEY REASONS FOR JUDGMENT HIS HONOUR: 1 In this case the debtor applies to set aside a bankruptcy notice as invalid principally on three grounds: firstly, it contains an overstatement of the amount in fact due; secondly, for being misleading as to the amount due, and; thirdly, for non-compliance with the requirement in prescribed form (and for being misleading) in relation to the statement of the provision under which interest on the judgment debt was claimed. Overstatement of amount in fact due 2 The source of the dispute is two-fold. In the first place, the interest claimed was over-calculated, on one view, by 90 cents, and on another view (and in my opinion the better) by 7 cents. The interest due was admittedly well over $15,000. The total amount shown as due was $45,861.17. In the second place, however, the calculations were made to 1 March 1999, as the bankruptcy notice advised the debtor, but the bankruptcy notice was issued by the Official Receiver on 3 March 1999. If the creditor can rely on the latter date for calculation of the amount in fact due, then there is a mere underestimate of the amount due and the miscalculation would be of no significance. The notice would neither fail to meet "a requirement made essential by the Act" nor be reasonably "objectively capable of misleading the debtor as to what is necessary for compliance with the notice": Kleinwort Benson v Crowl (1988) 165 CLR 71 at 79 - 80. What is "the amount in fact due"? 3 The potential act of bankruptcy, of which non-compliance with a bankruptcy notice is part, is predicated upon a debtor's failure to meet "a final judgment or final order": s 40(1)(g). It is long settled that interest on a judgment debt may be included in a bankruptcy notice: Re Cooper [1911] 2 KB 550. The prescribed form of bankruptcy notice recognises this. The certificate of judgment attached to the notice in this case indicates that interest is payable. 4 Section 41(5) provides: "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 or she disputes the validity of the notice on the ground of the mis-statement." Section 41(6) continues: "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." 5 These provisions clearly imply that a bankruptcy notice may be "invalidated" (the phrase is not "invalid") by an overstatement of the amount which is due and that, absent the debtor's taking the steps contemplated by s 41(6), the notice might continue, despite the overstatement, to have effect in founding an act of bankruptcy. The key concepts, for present purposes, are the sum or amount "specified in the notice" and "the amount in fact due". The latter phrase clearly means "objectively due". It must also mean due under (or, in many cases of interest, by statutory reference to) the judgment. Where interest is involved, it can only be presently "due" at a given date. No date but that of the notice is suggested by the Act as being relevant. 6 Further, the bankruptcy notice "speaks as at the date it bears": see Glass v Demarco [1999] FCA 481 at para [23], per Emmett J, and Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 at 340, per Gibbs CJ. It is that date which every debtor reads upon receiving the bankruptcy notice. 7 In this case, probably by reason of the continuance of the administrative practice of formally issuing bankruptcy notices some little time after they are lodged with the Official Receiver for issuance, the creditor fixed a date to close off his claim for interest which preceded the date of issue of the notice. Nevertheless, by reason of the slight delay in issuing the notice, it remained true that, as at the time the bankruptcy notice, in Emmett J's phrase, "spoke", in an objective sense the amount indicated as due was due. 8 There was no question, on this score alone, of the debtor's being misled as to what was necessary. He was told, among other things, that he would need to pay a particular sum, or make an application to the Court to set aside the bankruptcy notice. If he had checked the interest calculation, he would have found that it was wrong by a few cents in relation to the period for which interest was claimed. But the same check would have indicated that he was liable, as at the date of the issue of the notice, actually to pay more than was claimed. There was not, as will shortly be seen, any indication, either positive or under cover of silence that his entire liability to the creditor would be extinguished by the payment of the sum asserted to be due. 9 In my view, therefore, there was no excess of the amount specified in the notice over the amount in fact due. The erroneous calculation did not in my view invalidate the notice. Misleading as to amount due? 10 Two matters were mainly urged for the debtor as making the bankruptcy notice misleading. Again it is to be noticed that the test is whether a supposedly misleading matter "could reasonably mislead a debtor as to what is necessary to comply with the notice": Kleinwort Benson and Kirk v Ashdown [1999] FCA 1664. 11 The first matter is that the notice gives three indications of "the provisions under which the interest is being claimed". The requirement to indicate such provision stems from the prescribed form of bankruptcy notice which states: "Note 2 Interest Accrued If interest is being claimed in this Bankruptcy Notice, details of the calculation of the amount of interest claimed are to be set out in a document attached to this Bankruptcy Notice. The document must state: (a) the provision under which the interest is being claimed; and (b) the principal sum on which, the period for which, and the interest rate or rates at which, the interest is being claimed." (emphasis added) 12 The document attached to the bankruptcy notice setting out the interest calculations says firstly: "(c) [Curiously, the paragraph numbering so begins] Interest is claimed pursuant to Section 39A of the Local Court Act". Then, in a "Summary of Interest Calculation" various rates (for different periods are set out in a column under the heading "Interest rate pursuant to s 85 DCA 1973". Finally, the attached copy certificate of judgment of the Local Court contains a paragraph as follows: "3. Interest is payable on the judgment debt at the rate PRESCRIBED FOR THE PURPOSES OF SECTION 95(1) OF THE SUPREME COURT ACT, 1970." The fact is that interest may be claimed on a judgment debt under s 39 of the Local Courts (Civil Claims) Act 1970 (NSW) (the "Civil Claims Act"). Section 39A of that Act provides for the Court's power to make orders as to the interest to be paid. There is a Local Courts Act 1982 (NSW) which contains no provision as to interest and which does not have 39 sections. The said s 39 provides: "39. Interest on judgment debt (1) Unless a court orders in any particular case that interest be not payable, interest shall, subject to subsection (3), be payable on so much of the amount of a judgment debt as is from time to time unpaid. (2) Interest payable under subsection (1) in respect of a judgment debt shall: (a) subject to subsection (3), be calculated as from the date when the judgment debt came into being or from such later date as a court in any particular case fixes; (b) be calculated at such rate as may be prescribed by the rules; and (c) form part of the judgment debt, but not so as to require the payment of interest upon interest." 13 Rule 3 of Part 13 of the Local Courts (Civil Claims) Rules 1988 (NSW) provides: "(3) For the purposes of section 39 (2) (b) of the Act, the prescribed rate per cent yearly, in respect of any period mentioned in Column 1 of the Table below, is the rate specified in Column 2 of that Table in respect of that period. TABLE Column 1 Column 2 … After 27 May 1993 the rate prescribed for the purposes of s 95(1) of the Supreme Court Act 1970." 14 Whether a debtor could reasonably be relevantly misled needs to be judged, it seems to me, from the vantage point of a reasonable person in all the circumstances of the debtor (see Thorpe v Bristile [1997] FCA 1369 per Carr J at p 19, Burchett J agreeing, adopting the approach taken in Re Wimborne (1979) 24 ALR 494 at 500, per Lockhart J). It ought not be assumed that such a person would be proficient at electronic searching of legal materials. Such a person might however be assumed to make his or her way to a library. On finding that there was no provision such as that firstly specified, the inquirer might reasonably turn to the "DCA" reference and would be likely, not being a lawyer, to remain mystified. The reasonable and concerned person would then check the interest rates prescribed for the purposes of s 95(1) of the Supreme Court Act 1970 (NSW) and find that at least they had been correctly followed in the interest calculation. However, a reasonable person reading the Certificate of Judgment would see the reference to the Civil Claims Act and would, in my opinion, consult it. The introductory table of sections would turn up s 39. That would refer him or her to the Local Court Rules and thus to s 95(1) of the Supreme Court Act. What would be exposed would be no more than an unfortunate case of a solicitor's sloppiness. It is true that such hypothetical process, which I consider reasonable, would be rather more time-consuming than if the correct provisions had been set out in the notice. However, the debtor would know, in this case, that he owed over $28,000 plus some interest accrued over a period in excess of three years. A reasonable person in such a position would not be inclined to foreshorten enquiries. 15 In any case, so far as the interest calculation is concerned, with the possible exception of the trivial over-calculation dealt with above, there was no misleading of the debtor as to what was necessary to comply with the notice. It was not necessary, in order to comply with the notice, to check the statutory provisions. The confusion about the correct specification of the relevant statutory provision did not detract from the fact that it was necessary to do the things that the notice indicated. 16 The second aspect of the debtor's case that the notice was misleading stems from the creditor's solicitor having taken a paragraph from the NSW Law Society's precedent and inserted it in the notice: "The amount due is continuing to accrue at the daily rate of $… which is calculated by applying the interest rate claimed to the Judgment Debt." The argument is that, although the amount of the debt, including interest, was set out in the Schedule, this paragraph could reasonably confuse a debtor as to what was necessary to comply with the notice. The Schedule calculated the interest to "01.3.99"; the notice was dated 3 March 1999. The bankruptcy notice was served on 24 March. How would the debtor know whether, in order to escape the institution of proceedings to have him made bankrupt, he needed to pay: (a) the sum of $45,861.17 as actually shown in the Schedule, (b) that sum together with interest for another two days, to bring the interest up to 3 March, the date of the Notice, (c) that sum plus interest for another 23 days, to bring it up to the date of service of the Notice, or; (d) that sum plus further interest until the date of payment of the sum demanded? 17 I assume that the intended purpose of the paragraph is to eliminate the chance of a debtor's assuming that his or her ultimate legal liability for continuing interest might be extinguished either by payment of the debt claimed in the notice or by institution of bankruptcy proceedings as a consequence of non-payment of that amount. 18 However, although the first few paragraphs of the bankruptcy notice make it clear that it is the debt "as shown in the Schedule" which is to be paid, the Schedule itself advises the reader, as to interest: "see Notes 2". Note 2 in turn refers the reader to the document attached to the Notice which sets out details of the calculation of the amount of interest claimed. It is in that same document that the paragraph in question occurs. The evidence discloses nothing about the debtor's actual educational attainments or linguistic abilities. One may assume no more than that he is a reasonable Australian adult. Some such persons in the position of the debtor would, in my opinion, not draw the distinction between a debt "as shown in the Schedule" (to quote para 1 of the Notice), and a debt explained in the Schedule by the Note referred to in it and the document referred to in the Note. In short I think that there was a reasonable chance that the debtor might be misled and consider that the earlier operative provisions in the Notice are qualified by the gratuitous words in the interest calculations. In consequence, the debtor may be "perplexed" as to the amount necessary to be paid to the creditor: cf Re Davis (1963) 19 ABC 100. 19 It is true that, at worst, under 1% of the apparently undisputed debt would be at issue. But the creditor cannot be relieved of his obligations on that account. Questions of actual injustice to the debtor are not germane if the notice is misleading; a misleading notice is a nullity: Kleinwort Benson at 79. Failure to nominate correct provision under which interest was due 20 As to the failure to nominate the correct provision(s) under which the interest was being claimed, "Note 2" in the prescribed form requires that the document to be attached to the Notice "must state: … the provision under which interest is being claimed". While the present was not a case of a total failure to state a provision or provisions, what the document stated was (i) an incompetent misdescription of the correct provision, and (ii) something that only a person familiar with legal abbreviations and the NSW court system would realise was intended to refer to a statutory provision (in any case, that the provision is entirely irrelevant. 21 Although the attached certificate of judgment did refer to the Supreme Court Act provision, incorporated by reference in the Local Court Rules, the Supreme Court Act provision is not the provision under which the creditor's entitlement (and the debtor's liability) to interest arises. It is that concept, in my opinion, at which the phrase "under which the interest is claimed" is aimed. 22 But for authority, I should think the foregoing to constitute an irremediable fault in the Notice, such as to render it a nullity. The matter is one of statutory construction, and may be approached both textually and in terms of the policy to be imputed to the legislature. Section 41(2) provides: "The notice must be in accordance with the form prescribed by the regulations." Not only is this language in unambiguous terms, as Moore J put it in Meekin v Commonwealth Bank of Australia [1999] FCA 682 at para [20], it clearly implies that there will be a form prescribed. As to matters of substance therein, it seems inconsistent with the tone of s 41(2) that delegated legislation should permit something other than strict compliance with the form. 23 Such seems to have been recognised by the author of the Regulations. Regulation 4.02 draws a distinction, noticed by Moore J in Meekin, between the requisite form of a bankruptcy notice, which is prescribed by subreg 4.02(1) and its requisite format, of which subreg 4.02(2) gives the examples of "bold or italic typeface, underlining and notes". Subregulation 4.02(3) provides that subreg (2) is not to be taken as expressing an intention contrary to s 25C of the Acts Interpretation Act 1901 (Cth). That section, together with s 46(1)(a) of that Act, permits substantial rather than strict compliance with prescribed forms "unless the contrary intention appears". Neither in subreg (3) nor elsewhere is a similar saving made as to subreg (1). It seems likely, having regard to the long history of the strict approach taken in bankruptcy law, as to the requirements of a bankruptcy notice, that this omission was deliberate. Thus, on textual analysis, the impression I receive is that the notion which pre-existed the 1996 legislative changes to s 41, that the prescribed form of a bankruptcy notice must be strictly complied with, was preserved. Further, except as to trivial matters like format, it would not seem to me that the Act authorised the Regulations to relax the degree of compliance with a prescribed form that the Act seems unequivocally to mandate. 24 If there be doubt about the matter, there is in my opinion much to be said, as to imputed legislative policy, for the analysis offered by Finklestein J in Bendigo Bank Ltd v Scerri [1999] FCA 215. His Honour said: "Section 41(2) requires a bankruptcy notice to be in accordance with the prescribed form and that form requires specification of the provision pursuant to which interest is claimed. This is not an idle piece of information to provide to a debtor. It enables him to decide whether the interest claimed is in fact due. It also permits him to determine whether the amount of interest claimed is the correct amount." 25 However, binding authority in the form of the Full Court decision in Kirk speaks otherwise. The Court held that "the omission to specify the source of the obligation to pay interest should … be regarded as a formal defect or irregularity", and is therefore curable by s 306 where no substantial injustice is involved. On the strength of that decision, it seems to me that the attack must fail, unless there is some substantial injustice: a creditor who entirely omits to specify the source of the obligation to pay interest can hardly be in a better position than one who makes several incompetent stabs at it but does manage to mention one of the appropriate sources. There is no substantial injustice involved here and, accordingly, this attack on the Notice fails. Conclusion 26 Accordingly, the bankruptcy notice is set aside. I will hear the parties on whether I should not make an order for costs to the effect that the creditor should pay half the debtor's costs and the creditor's solicitor should pay the balance. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick Associate: Dated: 2 March 2000 Counsel for the Applicant: D Ash Solicitor for the Applicant: LS Davis & Associates Counsel for the Respondent: G Colman Solicitor for the Respondent: McGirr James Hall & Associates Date of Hearing: 2 July 1999 Date of Judgment: 2 March 2000