FEDERAL COURT OF AUSTRALIA McWilliam v Jackson [2000] FCA 175 BANKRUPTCY – Bankruptcy notice – Application to set aside bankruptcy notice - Validity of notice – Creditor identified in notice as "Anthony Jackson & Ors" – Whether sufficient identification of creditor – Notice signed on behalf of agent of creditor by her employee – Whether this constituted substantial compliance with requirements of regulations – Whether "formal defect" or "irregularity" not giving rise to possible prejudice – Alternative application for declaration that debtor had established the existence of a counter-claim, set-off or cross demand that could not be set up in proceeding in which judgment obtained – Whether pending appeal may constitute a counter-claim, set-off or cross demand. Bankruptcy Act 1966, ss 40, 41 and 306 Bankruptcy Regulations, reg 4.02 Federal Court Rules, Order 45 rule 9 Acts Interpretation Act 1901, s25C Legal Profession Act 1987 (NSW), ss 202, 206 and 208J BRUCE SCOTT McWILLIAM v ANTHONY JACKSON & ORS N8290 of 1999 WILCOX J SYDNEY 25 FEBRUARY 2000 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N8290 of 1999 IN THE MATTER OF BRUCE SCOTT McWILLIAM BETWEEN: BRUCE SCOTT McWILLIAM Applicant AND: ANTHONY JACKSON & ORS Respondent JUDGE: WILCOX J DATE OF ORDER: 25 FEBRUARY 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. It be declared that bankruptcy notice 2084/99, issued against the applicant, Bruce Scott McWilliam, on 25 October 1999, is a nullity. 2. Anthony Jackson pay the costs of the said applicant of this proceeding. 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 N8290 of 1999 IN THE MATTER OF BRUCE SCOTT McWILLIAM BETWEEN: BRUCE SCOTT McWILLIAM Applicant AND: ANTHONY JACKSON & ORS Respondent JUDGE: WILCOX J DATE: 25 FEBRUARY 2000 PLACE: SYDNEY REASONS FOR JUDGMENT 1 WILCOX J: This is the hearing of an application to set aside a bankruptcy notice served on the applicant, Bruce Scott McWilliam, on 1 November 1999. The Application was filed on 22 November 1999, within the period of 21 days specified in the bankruptcy notice for compliance with its requirements. That being so, time for compliance with the notice was able to be extended: see s41(6A) of the Bankruptcy Act 1966. Time was in fact extended, on two occasions, by a Deputy Registrar of the Court. By the second order, time was extended until the resolution of the current proceeding. The facts 2 The evidence establishes that in 1988 Mr McWilliam, his father, Bruce McWilliam Snr, and his brother, Peter Bruce McWilliam, instituted in the Supreme Court of New South Wales an action claiming damages in respect of various causes of action that were claimed to arise out of the termination in 1982 of a publishing relationship between a company, ADM Franchise Pty Limited, in which the plaintiffs claimed to have had interests, and Penthouse Publications Ltd. Penthouse Publications was the first defendant. The second defendant was Anthony Charles Badham Jackson, a solicitor allegedly associated with the legal firm, Norton Smith & Co. The third defendants were six named people, all said to be partners in Norton Smith & Co. The fourth, fifth and sixth defendants were three individuals who were said, respectively, to have been at material times an enquiry agent, a process server and an employee of ADM Franchise. A Further Amended Statement of Claim filed in 1997 set out particulars of the claim made by Mr McWilliam, the present applicant, totalling $10,147,522. In addition the plaintiffs jointly sought exemplary damages totalling $15,000,000 and $7,450,000, representing their loss of shareholder equity in another company, Australia Direct Mail Advertising and Addressing Co Pty Limited. 3 The Supreme Court action was heard by Maconachie AJ over 15 days in May and June 1998. On 17 June 1998 his Honour delivered lengthy reasons for judgment. He ordered there be judgment for each of the defendants in the action and the plaintiffs pay the defendants' costs. 4 On 14 July 1998 the three unsuccessful plaintiffs filed a Notice of Appeal in the Court of Appeal of the Supreme Court. The Notice of Appeal sought orders that the judgment in favour of the defendants be set aside and the matter remitted to the trial judge for redetermination, or such further or other orders as the Court deemed fit. 5 On 14 August 1998 Mr Jackson and the members of Norton Smith & Co filed a motion seeking to strike out the appeal by Mr Bruce McWilliam Snr, who had recently died, and for an order that the appellants provide security for costs of the appeal. That motion came before Registrar Jupp. During the hearing of the motion, the Registrar made an order striking out the appeal of Mr Bruce McWilliam Snr. He reserved his decision on the application for security for costs. On 21 January 1999 the Registrar delivered a judgment dealing with that matter in which he commented upon the appeal's prospect of success. He said he had read the judgment of Maconachie AJ and considered the grounds of appeal. He expressed agreement with a submission made by Mr P R Graham QC, counsel for the two remaining appellants, "that despite the apparent difficulty of the appeal, this was a bona fide arguable appeal". Later in his reasons, the Registrar said: "While I would agree with the claimant that this will be an appeal that will be difficult to win, I do not classify this as an appeal that is manifestly misconceived and hopeless … There has been no delay in bringing the appeal and the grounds of appeal are properly drawn and arguable. As I have noted above the standing of the appellants to sue is a ground of appeal, and in light of the brief consideration of this issue in the judgment, it appears to be an open issue." The Registrar refused the application for security for costs. 6 On 10 May 1999 the Registrar wrote to the appellants and the solicitors for the respondents concerning preparation of the appeal. Directions were subsequently made. They appear to have been complied with and the appeal is apparently ready for hearing. However, no hearing date has yet been set. 7 The evidence includes a document entitled: "Certificate as to Determination of Costs Assessment of Party/Party Costs" It is intituled in the Supreme Court of New South Wales Common Law Division No. 92388/98. This proceeding number is presumably that which was assigned to an application for an assessment of the quantum of the costs awarded by Maconachie AJ. The document identifies the applicant for the assessment as "Anthony Jackson & Ors" and the respondent as "Bruce McWilliam Senior & Ors", although the formal notice at the end of the document shows "the respondent" as "B McWilliam Snr, BS McWilliam & P B McWilliam". The document was issued on 22 March 1999 by Stephen John Lancken, a costs assessor. 8 Section 202 of the Legal Profession Act 1987 (NSW) enables a person who is entitled to receive costs as a result of an order for the payment of an unspecified amount of costs made by a court to apply to the proper officer of the Supreme Court for an assessment of those costs. Section 206 empowers the proper officer of the Supreme Court to refer the application to a costs assessor appointed under s208S of the Act. Section 208J(1) of the Act requires a costs assessor to issue to each party a certificate that sets out the determination of costs. Section 208J(3) provides: "(3) In the case of an amount of costs that has not been paid, the certificate is, on the filing of the certificate in the office or registry of a court having jurisdiction to order the payment of that amount of money, and with no further action, taken to be a judgment of that court for the amount of unpaid costs." 9 The document issued in this case by Mr Lancken states that "the application is determined by assessing a fair and reasonable amount of costs to be paid to the applicant in the sum of $220,067.67". 10 Three days after the issue of Mr Lancken's certificate, a judgment was entered in the District Court of New South Wales for the value of the certificate ($220,067.67) plus $357.00 costs, a total of $220,424.67. The judgment identified the plaintiff in the District Court as "Anthony Jackson & Ors" and the defendant as Bruce Scott McWilliam, the present applicant. 11 It appears this judgment constitutes the foundation for the claim made in the bankruptcy notice. The bankruptcy notice claims that Mr McWilliam owes "the creditor" a debt of $232,462.53. The composition of that sum is revealed by a schedule to the notice: $220,424.67 being the amount of a judgment entered against Mr McWilliam in the District Court of New South Wales on 25 March 1999 and $12,037.86 being accrued interest on that sum. 12 The bankruptcy notice follows Form 1, the form of bankruptcy notice prescribed by reg 4.02(1) of the Bankruptcy Regulations. Regulation 4.02(2) requires that a bankruptcy note "follow Form 1 in respect of its format". However, reg 4.02(3) provides that subreg (2) is not to be taken as expressing an intention contrary to s25C of the Acts Interpretation Act 1901 (which permits substantial compliance rather than strict compliance with a form). 13 Section 41(1) of the Bankruptcy Act authorises the Official Receiver to issue a bankruptcy notice "on the application of a creditor who has obtained against a debtor a final judgment or final order", the execution of which has not been stayed and is for an amount of at least $2,000. Although the subsection makes no provision for the issue of a bankruptcy notice at the behest of an agent of a creditor, Form 1 envisages this. It contains the following wording: "The person who applied for this notice to be issued is: ---------------- (name) who confirms by the following signature that he or she is the creditor/the creditor's authorised agent*: ---------------- (*delete as appropriate)" 14 The bankruptcy notice issued in the present case identified the person who applied for the notice as "Sally Susan Nash", a solicitor. However, the person who signed the confirmation note prescribed by the Form was not Ms Nash. The signature on the bankruptcy notice is indecipherable, but I was told from the bar table that it is of a solicitor employed by her firm, Sally Nash & Co. That fact would not be apparent to a recipient of the notice. The applicant's points 15 Against this background, Mr Graham advances two separate grounds for his submission that the bankruptcy notice is a nullity: first, its failure to identify the creditor to whom the addressee of the notice is to pay the money claimed in the notice, or alternatively with whom the addressee is to make an arrangement for settlement of the debt; and, second, its omission of the confirmation of authorisation required by the regulations. Mr Graham also contends that his client has demonstrated he has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt. Mr Graham seeks a declaration to that effect. I will deal separately with each of these points. Failure to identify the creditor 16 Section 40(1)(g) of the Bankruptcy Act provides: "(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 or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not: (i) where the notice was served in Australia – within the time specified in the notice; or (ii) where the notice was served elsewhere – within the time fixed for the purpose by the order giving leave to effect the service; comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;" 17 The prescribed form requires the insertion at the commencement of a bankruptcy notice of the name and address of the addressee of the notice (therein identified as "the debtor"). Paragraph 1 provides for the name and address of a person called "the creditor" who, the notice says "claims you owe the creditor a debt of $[amount] as shown in the Schedule". In other words, the claim is that the debt is owed to the person whose name and address is stated and who is called "the creditor". 18 The prescribed form of paras 2 and 3 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. 3. You are required, within [insert number in accordance with the note to this paragraph] days after service on you of this Bankruptcy Notice: (a) to pay to the creditor the amount of the debt; or (b) to make an arrangement to the creditor's satisfaction for settlement of the debt." 19 It will be apparent that identification of the relevant creditor is of central importance to a proper understanding of a bankruptcy notice and the obligations of the addressee in respect of the notice. 20 In the present case the creditor was identified as "Anthony Jackson & Ors". Presumably, "Anthony Jackson" is identical to "Anthony Charles Badham Jackson", the second defendant in the Supreme Court proceeding. But who are the others? The bankruptcy notice does not say. 21 Ms J Oakley of counsel appeared to resist Mr McWilliam's application. She did so on the instructions of Sally Nash & Co. I gather from Ms Oakley that this firm currently acts for Mr Jackson and those members of Norton Smith & Co who were named as third defendants in the Supreme Court action. Ms Oakley asserted Mr McWilliam would have realised these were the people referred to in the bankruptcy notice as "others". But there is no evidence of this; Mr McWilliam was not cross-examined. In any event, the test is not whether the addressee of the bankruptcy notice was in fact misled, but whether he or she could have been misled: see James v Commissioner of Taxation (1955) 93 CLR 631 at 644. 22 In Re Hansen (4 March 1985, unreported) Beaumont J dealt with a case where a bankruptcy notice was issued in the name of "Mortgage Guaranty Insurance Corporation of Australia Limited", although that company had by then changed its name to "MGICA Limited". Following the issue of the bankruptcy notice, the debtor's solicitor had sought out the judgment creditor. However, he failed to make contact because only the name "MGICA Limited" was displayed at the address stated in the bankruptcy notice; the solicitor did not connect the two names. Beaumont J said: "In my opinion, it is essential to the validity of a bankruptcy notice that the judgment debtor be in no reasonable doubt as to the identity of the judgment creditor. In the present case, the judgment creditor was identified by a name which it had abandoned some considerable time previously. That name was quite different from the name of the judgment creditor at the time of issue of the bankruptcy notice and the judgment debtor could hardly be expected to connect the two corporate names. The judgment debtor could thus have been misled as to the identity of the party with whom he had to deal in order to comply with the requirements of the bankruptcy notice. The notice was accordingly defective." 23 Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 was a case of understatement of the interest calculation in three bankruptcy notices. The High Court (Mason CJ, Wilson J, Brennan J and Gaudron J; Deane J dissenting) held the mis-statement of amount was not fatal to the validity of the notices. In a joint judgment at 77, the majority referred to s306(1) of the Bankruptcy Act which provided (as it still does): "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." At 79 their Honours affirmed "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". However, they held it would have been clear to each of the debtors in the case before them that he or she could comply with the notice by paying the sum demanded, notwithstanding it was less than the full amount of the debt, when interest was taken into account. 24 In the present case the problem is compounded by the fact that, apart from Ms Nash's clients, there were four other defendants to the Supreme Court action, all of whom were beneficiaries of the costs order made against Mr McWilliam and his fellow-plaintiffs. It is by no means fanciful to suggest Mr McWilliam might have been misled into thinking these other persons were amongst the "others" referred to in the bankruptcy notice. Putting the matter at its lowest, the identification of the persons who constituted the creditor was left a matter of doubt. 25 Ms Oakley defended the identification of the creditor on the bankruptcy notice by pointing out it followed the identification of the plaintiff in the District Court judgment. So it did. It is a matter of surprise to me that the District Court was prepared to enter judgment in favour of unidentified parties. But that cannot be a justification for the form of the bankruptcy notice; any more than it could be a justification for the judgment that Mr Lancken had also used the short form in his costs certificate. The certificate could and should have been amended in such a way as precisely to identify the parties. Whatever the form of earlier documents, it was essential the bankruptcy notice properly identify the person or persons who constituted "the creditor". This notice did not do that. For that reason, alone, it is a nullity. Omission of certification 26 Ms Oakley put two submissions in relation to the failure of Ms Nash to sign the bankruptcy notice by way of confirmation of her authorisation. First, she pointed out that the Federal Court Rules now apply to proceedings under the Bankruptcy Act (see Order 77 Rule 4(2)) and referred to Order 45 Rule 9. That rule provides that "(w)here any signature by a solicitor is required or permitted for the purpose of any proceeding", the signature for the solicitor by (amongst others) a solicitor employed by that solicitor shall be sufficient. However, a bankruptcy notice is not a "proceeding", within the meaning of that rule. A "proceeding" is an action commenced by filing process in the Court (see Order 77 Rule 6), not an extra-curial notice; even an extra-curial notice that might later give rise to a proceeding in the Court. Furthermore, Order 45 Rule 9 is concerned with a signature required or permitted by a solicitor, acting as such. Form 1 does not envisage that the authorised person will necessarily be a solicitor. The authorized person often will not be a solicitor; typically, perhaps, the person will be a company officer who signs on behalf of a creditor company. Order 45 Rule 9 has no application to this case. 27 Ms Oakley's other contention is that the case is covered by s25C of the Acts Interpretation Act. That section reads: "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." 28 I do not think it can properly be said that certification other than by the authorized person constitutes a substantial compliance with the requirement of Form 1 for execution of the notice by the creditor or a person who, by his or her signature, "confirms … that he or she is the creditor's authorized agent". Nor do I think the omission of proper certification is a "formal defect" or "irregularity" within the meaning of s306 of the Act. The receipt by a debtor of a bankruptcy notice is a serious matter; non-compliance with the requirements of the notice constitutes an act of bankruptcy and exposes the person to the possibility of being made a bankrupt. Certification is required in order to give an assurance to the addressee of the notice that it comes with the authority of the creditor and its demand is the demand of the creditor himself or herself. For that reason, the notice is required to be signed personally by either the creditor or the person who is disclosed as the creditor's agent. To use the words of the Crowl majority, this is a "requirement made essential by the Act". 29 In this case, it may be surmised that the person who signed the notice did so with the knowledge and approval of Ms Nash. But surmise is not sufficient; the addressee of the notice is entitled to be assured of the position. Execution of the notice by someone other than the authorized agent is not a substantial compliance with the requirements of the form. 30 I think the bankruptcy notice should be regarded as a nullity on this ground, also. Counter-claim, set-off or cross demand 31 Having regard to my conclusion that the bankruptcy notice is a nullity, it is strictly unnecessary for me to deal with Mr Graham's alternative argument that, in any event, his client has demonstrated a counter-claim, set-off or cross demand within the meaning of s40(1)(g). However, as the argument has been fully ventilated before me, I think I should deal with it. The issue would immediately arise if the creditor issued a fresh bankruptcy notice free of the identified defects. 32 Mr Graham points out it was not possible for his client to set up the claim made in his appeal in answer to the proceeding in which the District Court judgment was obtained. That judgment was obtained by filing in the District Court the costs certificate made by Mr Lancken. 33 The Legal Profession Act contains no requirement for the giving of notice to an affected person of an application to file a certificate under s208J(3) and, thereby, obtain a judgment. Nor does it provide any opportunity for the affected person to oppose these steps or make a counter-claim, set off or cross demand. That being so, Ms Oakley does not dispute that Mr McWilliam was unable to set up the claim advanced by him in the appeal in answer to the District Court proceeding. Her response to this aspect of the applicant's argument is to deny that an appeal against a decision rejecting a claim can be regarded as a counter-claim, set-off or cross demand within the meaning of s40(1)(g) of the Act. 34 Mr Graham says the case is akin to that considered by Burchett J in Re Pollnow; Ex parte Queensboro Pty Limited (19 October 1988, not reported). The judgment debt upon which the bankruptcy notice was there founded arose out of an order for costs in respect of an unsuccessful interlocutory application. The case later went to final hearing, but with separate trials of the two issues that it involved. Pollnow succeeded on the first issue before Kearney J but Queensboro appealed to the Court of Appeal of the Supreme Court of New South Wales which, by majority, reversed the trial judge. Pollnow applied for special leave to appeal to the High Court. The High Court indicated special leave might be granted, but the second issue should first be tried. When that issue went to trial before Hodgson J, Pollnow failed. He filed an appeal against that decision in the Court of Appeal. While the appeal was still pending, he was served with a bankruptcy notice. Burchett J said: "It seems to me that a case where the debtor's claim is the subject of current litigation, which is incomplete in the sense that appeals remain to be determined, raises somewhat different questions from those which are raised in the normal case of a claim yet to come before a court. In the normal case, it is appropriate to ask whether the debtor has shown 'that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross demand'. … But in a case such as the present, a court has already pronounced upon the prima facie case the debtor would seek to propound. The pronouncement, however, has not been finally affirmed, and has been put in question by appellate proceedings. It would clearly be invidious for this Court to attempt to assess the prospect that the Court of Appeal may overrule the decision of Hodgson J., or that the High Court may ultimately grant special leave and allow an appeal on the question on which a majority of the Court of Appeal, with Priestley J. dissenting, has overruled the decision of Kearney J. The issue should rather be whether there is a real possibility that the debtor's claim will ultimately be established. The stage of considering whether there is a prima facie case has already been passed. It is necessary to bear in mind that s.40(1)(g) does not require the debtor to satisfy the Court that he will succeed in his claim; the ordinary-test of whether he has merely shown a prima facie case makes that plain." 35 I agree with Mr Graham that Burchett J's approach applies to the present case. I have not attempted any evaluation of the merit of the pending appeal to the Court of Appeal. I was not invited to undertake that onerous and invidious task, both parties being content to argue the matter upon the basis of Registrar Jupp's assessment of the appeal prospects. Upon the basis of that assessment, it seems to me Mr McWilliam has demonstrated the existence of a counter-claim, set-off or cross demand that he could not set up in the District Court proceeding in which the judgment for costs was obtained against him. Whether the counter-claim, set-off or cross demand is likely to prove successful, I do not know. But, as Burchett J pointed out, a debtor does not have the burden of going that far. 36 Ms Oakley pointed out that the value of the claim made by Mr McWilliam and his fellow plaintiffs is undetermined. She said it is not established that a successful appeal would generate a judgment against the petitioners equalling or exceeding the judgment for costs. It is true that the value of the claim is undetermined. Because of the view he took about liability, Maconachie AJ did not assess damages. However, I think it is apparent from the nature of the claim made by Mr McWilliam and his co-plaintiffs that, if it is successful, it is likely to result in a judgment in their favour in an amount exceeding $220,067.67. 37 In my opinion Mr McWilliam has discharged the onus placed upon him by s40(1)(g) of the Act. Disposition 38 Having regard to my conclusion about the first two points raised by Mr Graham, it is appropriate for me to dispose of the matter by declaring that the bankruptcy notice is a nullity. I will do that. The identified creditor, Anthony Jackson, must pay the applicant's costs. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox. Associate: Dated: 25 February 2000 Counsel for the Applicant: P Graham QC Solicitor for the Applicant: B M Salmon Layton & Co Counsel for the Respondent: J Oakley Solicitor for the Respondent: Sally Nash & Co Date of Hearing: 18 February 2000