Re Joseph Francis Emerson and Wilma Lucy Emerson Ex Parte: Wreckair Pty Ltd; Joseph Francis Emerson and Wilma Lucy Emerson [1991] FCA 189; 255 Bankruptcy 101 ALR 315 (8 May 1991)

FEDERAL COURT OF AUSTRALIA

Re: JOSEPH FRANCIS EMERSON and WILMA LUCY EMERSON
Ex parte: WRECKAIR PTY. LTD.; JOSEPH FRANCIS EMERSON and WILMA LUCY EMERSON
No. Q N1499 of 1990
FED No. 255
Bankruptcy
101 ALR 315

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
Pincus J.(1)

CATCHWORDS

Bankruptcy - judgment for too large a sum - whether bankruptcy notice bad - whether discretion to go behind the judgment.

Bankruptcy - extension of time for compliance until determination of appeal to Supreme Court.

Bankruptcy Act 1966, s.41(5)

HEARING

BRISBANE
8:5:1991

Counsel for the creditor: Mr P.D. McMurdo

Solicitors for the creditor: Conwell Kirby Lilley

Barker Gosling

Counsel for the judgment debtors: Mr P.E. Hack

Solicitors for the judgment debtors: Lees Marshall and Warnick

ORDER

The application be dismissed.

In the event of a sequestration order being made, founded on the bankruptcy notice herein, the costs of the creditor of and incidental to this application be treated as petitioning creditor's costs.

If no such sequestration order is made, then the debtors pay the taxed costs of and incidental to this application.

The time for compliance with the bankruptcy notice be extended until 22 May 1991.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

DECISION

This is an application to set aside the orders made by a Deputy District Registrar in a bankruptcy matter.

2. The principal question it raises is whether a bankruptcy notice is invalidated if the judgment on which it is based was entered for too large a sum, a notice disputing validity having been given under s.41(5) of the Bankruptcy Act 1966.

3. The argument that the bankruptcy notice should be set aside was apparently not pressed before the Deputy District Registrar, but it was put forward here that the notice is bad.

4. On 27 November 1990, judgment was entered against the applicants as guarantors in a sum of $29,081.65, plus interest and costs, after a trial in the District Court. Subsequently, a bankruptcy notice was issued in conformity with the judgment, and against that judgment an appeal has been lodged to the Supreme Court of Queensland.

5. Mr Hack, for the judgment debtors, has argued that the time for compliance with the requirements of the bankruptcy notice should be extended until the appeal to the Supreme Court has been determined and that the bankruptcy notice, having been based upon a judgment entered for too great a sum, is invalid.

6. In the reasons for judgment of the learned District Court Judge who tried the case, it is explained that the central point of the defence related to use by the creditors of equipment owned by a company whose debt was the subject of the guarantee. That equipment consisted of two pumps. Under an agreement between the creditor and that company, the pumps were hired out by the creditor, the money obtained being divided, 40% to the creditor and 60% to the debtors. This was done at a time when the company was substantially indebted to the creditor and the hiring out of the pumps produced a substantial reduction in the amount of the indebtedness.

7. The principal point of the proposed attack upon the judgment of the District Court is that, according to the argument for the debtors, the company should have been given credit for amounts received for pump hire immediately before, as well as after, 7 July 1989, on which date the company was wound up. The learned District Court Judge held in effect that no credit was due after the winding up because the sums obtained from hire after that time "became the property of the liquidator". One of the pumps remained hired until 15 August 1989, the hire charges being $9,000 and the 60% share of it due to the company was $5,400.

8. The Judge, perhaps because the point was overlooked by counsel at the trial, has not given credit for the hire earned in respect of the sum due up to the date of the winding up. It can be seen from invoice No. 523838 that one of the pumps was hired from 1 July 1989 on a daily - rate basis for a period of six days. It was argued that at the date of the winding up, a sum of $1,500 was due for its hire - that is, the sum of $250 per day for a period of six days. The proper view, perhaps, is that only five days' hire should be taken into account, because the winding up should be taken to have begun at the first instant of 7 July, but nothing of present significance turns upon that.

9. There was no detailed argument before me as to the basis on which the rest of the hire, earned after the winding up, was left out of account, and it is unnecessary to discuss that. The matter must, however, be approached on the foundation that a sum which cannot be disregarded as trivial is included in the judgment and it should not have been so included - that sum being either $750 or $900.

10. Section 41(5) of the Bankruptcy Act reads as follows:

"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 misstatement".

11. Here, notice under s.41(5) was given within due time; the bankruptcy notice was served on 2 January 1991, allowing 21 days for compliance; the s.41(5) notice was given on 25 January 1991.

12. It is convenient firstly to deal with the more general point taken by Mr Hack, namely that the Registrar should have extended the time for compliance with the bankruptcy notice until the determination of the appeal to the Supreme Court. What the Registrar did was to so extend the time in respect of the sum of $5,400 only, being part of the sum claimed by the notice. (He also gave a further extension pending determination of this application.) It is not clear to me that the Registrar had any power partially to extend the time - that is, to extend it in respect of only part of the sum claimed - but it is unnecessary to discuss that matter, for no application was made to set aside that order for extension. The argument advanced by Mr Hack was that the appeal to the Supreme Court should be regarded as bona fide and that therefore, by analogy with the law as to applications to adjourn bankruptcy petitions, the extension of time for compliance sought should now be granted; as to adjournment of petitions, reference was made to the decision of the Full Court in Ahern v Deputy Commissioner of Taxation (Qld) [1987] FCA 312; (1987) 76 ALR 137.

13. Assuming that the law on this subject is as Mr. Hack contended, still I am by no means satisfied that the time for compliance should be extended until determination of the appeal to the Supreme Court. There seems to me to be little substance in the appeal, except for the point as to the $5,400 just discussed. Further, there is evidence of a conversation between the party's legal advisers which tends to show that the debtors regarded themselves as owing a substantial sum to the creditor.

14. In my opinion, the real point, and it is one of some difficulty, is whether, since judgment was entered for too large a sum, the bankruptcy notice is bad. As I have mentioned, it appears to me beyond dispute that the debtors should have had credit for a sum of $750 or $900.

15. There are authorities at the single Judge level which tend in favour of the debtors. In Re Prossimo; Ex parte De Marco (1952) 16 ABC 86, Clyne J., in circumstances which seem to me indistinguishable from the present, held a bankruptcy notice to be bad. That case was decided under the Bankruptcy Act 1924, but the relevant provisions are to the same effect as those of the present Act.

16. In Re Walsh (1982) 47 ALR 751, Lockhart J. took a different view, holding that an overstatement in a bankruptcy notice invalidates it only if "the overstatement could reasonably mislead the debtor on whom it is served, but not otherwise" (755). But Morling J. in Re Greenhill; Ex parte Myer (N.S.W.) Ltd. (1984) 5 FCR 84 followed Re Prossimo and declined to follow Re Walsh. Re Greenhill was a case like the present and like Re Prossimo, in which the error was made in the judgment and not subsequently; it appears to follow from the decision of the Full Court in Olivieri v Stafford (1989) 91 ALR 91 that the stage at which the mistake occurs is material.

17. In Olivieri v Stafford, as here, an amount was included in error in a judgment on which a bankruptcy notice was based. A s.41(5) notice was given, but the majority (Beaumont and Gummow JJ.) treated the outcome as dependent upon the question whether the Court could go behind the judgment.

18. A point of difference between that case and the present is that in Olivieri v Stafford, the creditors asserted that if the whole judgment were gone behind and the merits re-examined, it would be found that the judgment was entered for too low a sum, not too high a sum: see p 98.9. Here, there is no such suggestion and it appears that the judgment is simply too high.

19. In Olivieri v Stafford, an application had been made to the District Court (in which the judgment was entered) to set the judgment aside; that was dismissed. Beaumont J. said that if the Court were to go behind the judgment, the investigation would not reveal a fictitious debt, but would reveal "a real, antecedent debt ..." (101). Beaumont J. emphasised that the cause of action had merged in the judgment. His Honour went on:

"From the judgment there arose a new obligation in the form of a
judgment debt. The bankruptcy notice required payment of that debt. In
so requiring, the notice must be taken to have accurately stated the
amount due by the appellant to the respondents. In this sense, the
notice did not overstate the amount due" (102).

20. Gummow J. decided the case, as I read his Honour's reasons, on the basis that the Court should not go behind the judgment because even if, after having done so, the judgment was held to have been entered for too great a sum, still there would be a substantial sum due, quite enough to support the bankruptcy notice.

21. I should add that Re Prossimo was distinguished in Olivieri v Stafford, on the basis that there the judgment was given by default. I feel obliged to say that I do not find that a particularly satisfactory distinction. It seems to me that Re Prossimo must be taken to have been, in substance, overruled by Olivieri v Stafford.

22. The only other decisions to which I propose to refer are two in the High Court. The first is Walsh v Deputy Commissioner of Taxation [1984] HCA 33; (1984) 156 CLR 337. That case concerned payments made after issue of a bankruptcy notice, but before service - a matter not in question here. In the reasons of the Chief Justice, however, there occurs the following:

"There is no doubt that a bankruptcy notice will be invalid if the sum
specified in the notice as the amount due to the creditor exceeds the
amount for which the creditor is entitled to issue execution, provided
that the debtor gives timely notice under s.41(5) of the Bankruptcy Act
1966 (Cth), as amended, that he disputes the validity of the notice on
that ground" (339).

23. It is true that the sentence just quoted was no part of the ratio of Walsh's case. Nevertheless, since all the other Judges agreed with the Chief Justice's reasons, it is a dictum of considerable importance. It would be decisive of the present issue but for the important fact that it refers, not to the amount which is in truth and reality due to the creditor, but to the amount for which the creditor is entitled to issue execution; that is capable of meaning simply the amount of the judgment (whether or not an error was made in calculating that amount).

24. The second High Court case is Kleinwort Benson Australia Limited v Crowl [1988] HCA 34; (1988) 165 CLR 71, a case of understatement, not overstatement, of the debt. The question was thus significantly different from the one before me and the case requires mention here only because of a short passage at p 78:

"A notice claiming more by way of interest than that in fact due was
held to be invalid in In Re A Debtor (1908) 2 KB 684, where the
mistake was held not to be merely a formal defect or irregularity. That
position is now covered by s.41(5) and (6) of the Act, to which
reference has already been made".

The English case was one in which there was no mistake in the judgment, but an error in calculation of interest due under it.

25. Rather surprisingly, after such a long period of time during which s.41(5) or its predecessor has been part of our law, it is still not clear whether a bankruptcy notice is valid where the judgment has been entered for too great a sum. The decision of the Full Court in Olivieri v Stafford shows that there is a discretion whether or not to go behind the judgment to determine whether it is excessive. It will be recalled that there it was common ground that an amount had been included in the judgment which should not have been included, but it was not common ground that if re-examined as a whole the judgment would prove to be excessive.

26. Here, as it appears to me, that problem does not arise and it must be found that the judgment is too high. The question therefore is whether or not one should distinguish Olivieri on that ground. Although the question is an arguable one, and at one stage I was inclined to accept the powerful submissions made by Mr. Hack, I propose to follow what seems to me to be the central point in Olivieri and hold that there is a discretion to go behind the judgment. In this case, it seems to me that the discretion should be exercised against the debtors. The amount of the excess is not a particularly large one in relation to the sum for which the judgment is given, and more importantly, it seems clear that if one did go behind the judgment and re-examine the matter, still it would be necessary to hold there is a substantial debt due, sufficient to support a bankruptcy notice.

27. The result is that the application made by the debtors fails.

28. It will be ordered that in the event of a sequestration order being made, founded on the bankruptcy notice mentioned herein, the costs of the creditor of and incidental to this application be treated as petitioning creditor's costs. If, however, no such sequestration order is made, then the debtors must pay the taxed costs of and incidental to this application. I will extend the time for compliance with the bankruptcy notice until 22 May 1991, to allow time to consider an appeal from this judgment.