FEDERAL COURT OF AUSTRALIA James v Deputy Commissioner of Taxation (No 2) [2010] FCA 677 Citation: James v Deputy Commissioner of Taxation (No 2) [2010] FCA 677 Parties: TREVOR ARNOLD JAMES v DEPUTY COMMISSIONER OF TAXATION File number(s): QUD 75 of 2010 Judges: DOWSETT J Date of judgment: 23 April 2010 Date of hearing: 23 April 2010 Place: Brisbane Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 13 Counsel for the Applicant: Mr D Hassall Solicitor for the Applicant: Mamdouh Elmaraazey Counsel for the Respondent: Mr P Bickford Counsel for the Respondent: Australian Taxation Office Legal Services Branch IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 75 of 2010 BETWEEN: TREVOR ARNOLD JAMES Appellant AND: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGE: DOWSETT J DATE OF ORDER: 23 APRIL 2010 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appellant give security for costs of the appeal in the amount of $20,000.00 to the satisfaction of the registrar, such security to be provided within 28 days. 2. In default of such security being provided, the appeal be stayed until further order. 3. The appellant pay the respondent's costs of the motion. 4. The trustee be joined as a party to the appeal. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 75 of 2010 BETWEEN: TREVOR ARNOLD JAMES Appellant AND: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGE: DOWSETT J DATE: 23 APRIL 2010 PLACE: BRISBANE REASONS FOR JUDGMENT 1 This is an application for security for costs in connection with an appeal against a sequestration order made against the appellant. The order was made by a Federal Magistrate following a hearing. The Federal Magistrate gave considered reasons for the decision. Two issues are apparently to be ventilated on the appeal. They arise out of the bankruptcy notice upon which the petition and the sequestration order were founded. On the front page of the notice the debt is stated as being $69,339.35, "as shown in the schedule". In the schedule amounts totalling $69,339.33 are shown. There is then a further item, "Payments made and/or credits allowed since date of judgments or orders". Opposite those words is the figure $0.02, suggesting an intention to give a credit for two cents. 2 The total debt owing is then shown as $69,339.35. For my part, I would immediately infer that what had happened was that whoever compiled the schedule added in the two cents instead of subtracting them, so that the amount ought to have been $69,339.31. The error appears in a slightly different form later in the bankruptcy notice on a page which is entitled "Judgment Obtained in the Supreme Court of New South Wales at Sydney on 11 October 2005, calculation of interest pursuant to section 101 of the Civil Procedure Act 2005 (NSW)". Below that heading are details of the way in which interest has been calculated. The principal sum is initially shown as $61,145.63, but in the third period for which interest is calculated it is shown as $61,145.61. I would immediately infer that at that point the credit of two cents had properly been deducted and interest calculated accordingly. 3 Out of these circumstances the appellant alleges that either the bankruptcy notice is invalid by virtue of the overstatement or is misleading. The misleading aspect of the argument also depends heavily upon the allegation that the amount is misstated, thus causing confusion. I pass over any comments about the likelihood of four cents being of any significance in litigation of this kind, and assume for present purposes that absent the operation of s 41(5) of the Bankruptcy Act 1966 (Cth) (the "Act"), the bankruptcy notice would be invalid by virtue of the misstatement of the amount. 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 misstatement. 4 The steps to be taken in the event of such notice are not identified. In particular, it is not immediately clear to me whether the bankrupt may simply ignore the notice or must apply to have it set aside. It is true that Gibbs CJ, in Walsh v The Deputy Commissioner of Taxation (1984) 156 CLR 337 at 339 suggests that the notice is invalid. The other members of the Court agreed with the Chief Justice's views. It is for that reason that I proceed upon the basis that the notice will be invalid in the event that s 41(5) has been complied with. 5 A primary question at the hearing was whether or not there had been compliance with s 41(5). The appellant's case was that he had spoken to an officer of the ATO saying, after certain introductory matters: When, firstly, there is an accountant that the ATO has been in constant contact with and I dispute the amount the ATO is claiming in the bankruptcy notice because it is incorrect and totally wrong. 6 The officer responded, "Well. You have to tell the Commissioner that". The appellant said, "I need to do the amendments for the 96-97 years for the business. They have never been done and the ATO has not taken that into account along with the necessary amendments that need to be done for the year that [they] were lodged". He then says that he "went on with words to the effect that I bitterly complained of the action the ATO has taken when negotiation could have taken place between the accountant, myself, and the ATO by way of coming to the negotiating table". The officer then said, "perhaps you should seek some legal advice". The Federal Magistrate held that even if such conversation occurred, it did not constitute notice of the kind contemplated by s 41(5). In fact, the relevant officer denied that any such conversation had taken place. There seems to have been no finding of fact on that question. The Federal Magistrate proceeded upon the basis that even if the conversation had taken place, it did not constitute a notice for the purposes of s 41(5). The Federal Magistrate's decision was based largely upon a decision of the Full Court in Seovic Civil Engineering Proprietary Limited v Groeneveld (1999) 87 FCR 120 at 129-130. At [37], the Court said: The object of a debtor's notice under section 41(5) is to inform the creditor that the debtor disputes the bankruptcy notice and does so on the ground of a mis-statement contained in that notice. The point of the notice is to draw to the creditor's attention the mis-statement, thereby giving the creditor the opportunity to consider, for example, whether the bankruptcy notice should be withdrawn and a fresh notice correcting the misstatement, issued. If the creditor is given no hint in the notice as to the nature of the misstatement, there is a considerable risk that the debtor will be able to take unmeritorious advantage of minor errors (such as the small mistake in the present case) and that unnecessary and wasteful litigation will eventuate. It is no answer to say that the creditor can ask for particulars, since the debtor would not be obliged to give any until after litigation had been instituted. Indeed, a debtor wishing to take advantage of the technicalities of the law of bankruptcy might be well advised to say as little as possible for as long as possible about the true nature of the alleged misstatement in the bankruptcy notice. 7 To my mind, the view of the Full Court is unarguably correct. It is difficult to see what purpose s 41(5) serves other than to require the debtor to raise, in a timely way, any misstatement as to the relevant amount claimed by the creditor. It seems equally clear to me that the so-called notice in this case does not satisfy that purpose. However it is a point which a person in the position of the appellant may ventilate in the Full Court and, indeed, in the High Court, subject to leave being given, should he or she so wish. That there may be a right of appeal does not, in my view, lead to the conclusion that he or she should be permitted to exercise it in a way which exposes the creditor to the incurrence of costs with no apparent prospect of recovering them in the event that the sequestration order is upheld. 8 On the other hand, the courts have traditionally been concerned to avoid shutting out litigants from ventilating legitimate claims. It is in that context that the application for security for costs must be considered. The relevant considerations appear from the decision of Hill J in Equity Access Limited v Westpac Banking Group (1989) ATPR 40-972. They include the prospects of success, the quantum of the risk that a costs order will not be satisfied, whether the making of an order would be oppressive in that it would stifle a reasonably arguable claim, whether any impecuniosity of the appellant arises out of the conduct complained of, whether there are aspects of public interest which weigh in the balance against such an order and whether there are particular discretionary matters peculiar to the circumstances of the case. 9 In the present case, the primary considerations are the quantum of the risk that any costs order will not be satisfied and the extent to which the appeal can be said to be reasonably arguable. One might assume that the prospects of recovering the costs from a bankrupt would be minimal. However that is not necessarily the case. Nonetheless it must be accepted that on the information as it appears in the evidence, there is little prospect of the respondent recovering costs in the event that the appeal is unsuccessful. That, by itself, may not lead to an order for security being made, but one must also take into account the fact that there has been a trial, the appellant's case has been considered by a judicial officer, and he has lost. 10 He has lost because of the way in which the Federal Magistrate has assessed the bankruptcy notice and the alleged conversation between the Commissioner's officer and the appellant. Although those matters are susceptible of consideration by an appellate court, they are matters about which opinions may differ. Nonetheless, the appellant has had, as I have said, the opportunity of a fair consideration of them by a judicial officer. I do not share the appellant's enthusiasm concerning his prospects of success. To my mind, the purported notice is defective in that it does not identify the misstatement and so does not satisfy the clear purpose of s 41(5) or the formal requirements of that section. However it is a matter for the appeal court. All I can say is that I do not think the prospects of success on that ground are substantial. It is also said that the notice is itself misleading. However, the basis for that allegation really seems to me to be the reason why the proposition is misguided. 11 Anybody reading the notice would see what had happened, namely that the two cents has been added in, rather than subtracted. This is a matter that could easily have been drawn to the attention of the creditor at the time of the conversation alleged by the appellant, and it was not. It is very difficult to believe that a debtor receiving such a notice would be concerned by a difference of four cents. In any event, I consider that the argument on the basis of confusion is also lacking in any real substance. Again, it is a matter for the appeal court, but I cannot conclude that there are substantial or even reasonable prospects of success in arguing the appeal. 12 There is the further difficulty that no finding of fact has been made with respect to the alleged notice. It is not immediately clear to me how that problem is going to be rectified in the event that the question of whether or not notice was given becomes the basis for disposition of the appeal. To my mind, once the appellant decided to appeal, he should have asked for further findings of fact. Mr Bickford, for the Commissioner, suggests that there may be some difficulty in following that course. That may or may not be so, but if it is, then it would cause serious inconvenience in the administration of justice. Unfortunately, the practice of counsel asking for further findings after judgment appears to have fallen into disuse. It is time that it was resurrected, whether it would have helped in the present case or not. In any event, the absence of any factual finding concerning the conversation poses further difficulties in connection with the appeal. That is not directly relevant for present purposes. 13 In the circumstances, I order that the appellant give security for costs of the appeal in the amount of $20,000 to the satisfaction of the Registrar, such security to be provided within 28 days. I order that appellant pay the respondent's costs of the motion today. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett. Associate: Dated: 13 July 2010