Re Alexander Berthold Held Ex Parte: Pegasus Leasing Limited [1993] FCA 7 (29 January 1993)

FEDERAL COURT OF AUSTRALIA

Re: ALEXANDER BERTHOLD HELD
Ex Parte: PEGASUS LEASING LIMITED
No. S N693 of 1992 FED No. 18
Number of pages - 9
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
GENERAL DIVISION
O'Loughlin J.(1)

CATCHWORDS

Bankruptcy - Defect in bankruptcy notice - incorrect calculation of interest due - whether notice was capable of misleading debtor - leap year - use of 366 (and not 365) days as a divisor in calculating interest.

HEARING

ADELAIDE
29:1:1993

Counsel for the Applicant: Mr M.J. Roder

Solicitors for the Applicant: Messrs Norman Waterhouse

Counsel for the Respondent: Ms B. Grant

Solicitors for the Respondent: Messrs Kelly and Co.

ORDER

THE COURT ORDERS THAT:
1. The application be dismissed.

2. The applicant pay the respondent's costs.
Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

DECISION

O'LOUGHLIN J. Application to set aside a bankruptcy notice.

2. On 14 February 1992, Pegasus Leasing Ltd. ("the judgment creditor") obtained a judgment in the District Court of Adelaide against Alexander Berthold Held ("the judgment debtor") in the sum of $49,564.54. The amount claimed had been $43,241.93 and the balance comprised interest and costs.

3. Upon the application of the judgment creditor, a bankruptcy notice, dated 12 August 1992, was issued out of this Court in the sum of $51,735.39. The notice, which was served on the judgment debtor on 19 October 1992, disclosed that this last-mentioned sum was calculated by adding to the judgment debt additional costs of $145 and interest that had accrued since the date of entry of judgment. According to the terms of the bankruptcy notice, the amount of this further interest, $2,025.85, was "calculated on the sum of $43,241.93 at a rate of 10% from 14 February 1992 to 3 August 1992".

4. The judgment debtor has challenged the validity of the bankruptcy notice, claiming that the figure of $2,025.85 is excessive. His application for an order that the bankruptcy notice be set aside was filed in Court on 2 November 1992; it was supported by the affidavit of Michael James Roder sworn on the same date. Mr Roder, who is and was the solicitor for the judgment debtor, exhibited a copy of his letter of 2 November to the solicitor for the judgment creditor. It said:

"We hereby give notice pursuant to Section 41(5) of the
Bankruptcy Act that the abovenamed Alexander Berthold Held
disputes the validity of the Bankruptcy Notice on the
grounds that the sum specified in the said Bankruptcy Notice
exceeds the amount in fact due."

5. Sub-section 41(5) of the Bankruptcy Act 1966 (Cth) ("the Act") deals with a defect in a bankruptcy notice occasioned by claiming an amount in excess of the amount actually due to the judgment creditor. It provides:

"41(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. As the bankruptcy notice called upon the judgment debtor to pay, secure or compound the sum claimed within a period of fourteen days after service of the notice, the solicitor's letter of 2 November constituted due compliance with the time constraint of subs41(5) of the Act.

7. Two arguments were advanced on behalf of the judgment debtor in support of the claim that an excessive amount of interest had been claimed. It was claimed first that, 1992 being a leap year, the daily rate of interest should have been calculated on the basis of using 366 days (and not 365 days) as the dividing figure in the interest calculations. This issue was considered at length by Burchett J. in Re Clubb; Ex parte Clubb and Westpac Banking Corporation (1990) 93 ALR 123 who resolved it in a manner that supports the judgment debtor in these proceedings. Whilst I respectfully adopt the reasoning of his Honour in Clubb's case, there is, in the present case, an additional complication. It is this: the judgment creditor could have claimed interest up to 12 August 1992. For some unexplained reason it only claimed interest to 3 August - a shortfall of nine days. It is common ground that the interest that could have been charged for those additional nine days far exceeds the excess that occurred as a result of the judgment creditor using the wrong divisor.

8. The second ground of attack related to the rate or rates of interest that the judgment creditor was entitled to charge on the amount of the debt that was the subject of the judgment. The District Court Act 1991 (S.A.) received the royal assent on 12 December 1991 but did not come into operation until 6 July 1992. Section 40 of that Act states that a judgment debt bears interest at a rate prescribed by the rules and s5 defines "rules" as meaning "the rules of the Court in force under this Act". These rules, which also came into operation on 6 July 1992, are based on the Supreme Court Rules 1987 (as amended) with appropriate variations; they provide:

"Except to such extent as these Rules otherwise provide,
Part 1 of the Supreme Court Rules and the first, second,
third and fourth schedules to the Supreme Court Rules in
force from time to time shall apply mutatis mutandis to all
actions commenced or continued in the civil jurisdiction of
the Court as if such Rules had been made pursuant to the
power contained in section 51 of the Act." (DCR II.1)

9. Although the subject judgment had been obtained in the District Court of Adelaide pursuant to the provisions of the Local and District Criminal Courts Act 1926 (S.A.), the ultimate repeal of that Act did not affect the enforceability of the judgment. Section 21 of the Statutes Repeal and Amendment (Courts) Act 1991 (S.A.), which repealed the Local and District Criminal Courts Act 1926 (S.A.), expressly provided that such a judgment was to be regarded as a judgment of the newly constituted District Court of South Australia.

10. The relevant rule, common to both the Supreme Court and the District Court, dealing with interest on judgments is now r84.19. It states that:

"A judgment debt shall carry interest at such rate as is
prescribed by any Statute or Rule or by the judgment of the
Court. If no rate is prescribed the rate shall be that set
out in the third schedule."

11. The third schedule, being in its origin the third schedule to the Rules of the Supreme Court 1987, covers interest rates from and including 1 January 1987. The rates that are relevant for present purposes are the current rate and that preceding it; they are 10% from (and including) 1 December 1991 to (and including) 29 February 1992, and 9% from (and including) 1 March 1992. However, as the current District Court Rules only commenced on 6 July 1992 they can only pick up and utilize the rates in the third schedule as from that date. The relevant rate of interest for the period from and including the date of entry of judgment, 14 February 1992 to 5 July 1992 would be that laid down under the former Rules of the District Court. Counsel proceeded upon the premise that this rate was 10% and I will accept that rate as being the applicable rate to 5 July for the purpose of these reasons.

12. With this exposition the position may be summarised as follows:
1. The judgment creditor claimed interest in the sum of $2,025.85 on

the principal sum of $43,241.93 at the rate of 10% for the period
14 February to 3 August 1992 (that information is to be found in
the bankruptcy notice). My independent calculations suggest that
a period of 171 days was used; those calculations also support the
unrefuted allegation that a divisor of 365 was erroneously used.

2. The judgment creditor, on my calculations, would have claimed

$1,986.05 interest - an amount of $39.80 less than the sum
actually claimed - if it had used the figure of 366 as a divisor
and if it had used the rate of 10% for the period 14 February to 5
July and the rate of 9% for the period from and including 6 July
to 3 August 1992.

3. The judgment creditor, on my calculations, could have claimed

$2,081.75 interest - an amount of $55.90 more than the sum
actually claimed - if it had used the figure of 366 as a divisor
and if it had used the rate of 10% for the period 14 February to 5
July and the rate of 9% for the period from and including 6 July
to 12 August 1992.

13. In my opinion, these calculations prove that the judgment creditor did not claim an excessive amount from the judgment debtor but claimed an amount that was less than the sum that it could lawfully have claimed. In my view, the provisions of subs41(5) of the Act and the decision in Clubb's case do not apply to the facts of this case.

14. The question then is whether the mistakes that were made by the judgment creditor in its calculations of interest constitute "a formal defect or an irregularity" within the meaning of s306(1) of the Act. That sub-section provides as follows:

"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."

15. The high-water mark in the authorities that deal with understatements of amounts due in bankruptcy notices is the decision of the High Court in Kleinwort Benson Australia Ltd. v Crowl [1988] HCA 34; (1988) 165 CLR 71. In that case there had been an understatement of interest in excess of $23,000. In the Full Court of the Federal Court, Beaumont and Burchett JJ., in their separate judgments, concluded that such an understatement amounted to a defect in the notice that could not be classed as "formal"; it was, however, so they held, capable of misleading the debtor as to the manner in which he may comply with the requirements of the notice.

16. The High Court disagreed. In the majority joint judgment, Mason C.J., Wilson, Brennan and Gaudron JJ. emphasised the fact that the bankruptcy notice made it clear that a nominated sum had to be paid or secured or compounded to avoid the commission of an act of bankruptcy. Even though that nominated sum happened to be $23,000 less than was actually owing to the judgment creditor, their Honours said at pp 80-81:

"... the body of the notice makes it clear that it was the
sum of $1,442,438.30 that was required to be paid, secured
or compounded. More importantly, the notice specified that
it was failure to comply with the requirement to pay the sum
of $1,442,438.30, or to secure or compound that sum, or to
satisfy the Federal Court of the existence of a relevant
counter-claim, set-off or cross-demand equal to or exceeding
the sum specified in paragraph (a) i.e. $1,442,438.30, that
would constitute an act of bankruptcy. There could thus be
no uncertainty as to what would constitute compliance with
the notice. The notice cannot be regarded as capable of
misleading and accordingly cannot be said to be a nullity.
The understatement thus constituted a formal defect or
irregularity which attracts the operation of s306(1) of the
Act.
Section 306(1) operates automatically unless 'the court...
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'. In the present case no
evidence was presented and no claim was made of actual
injustice. There was thus no basis upon which an opinion
could be formed to deny the operation of s306(1)."

17. A more recent authority that dealt with the same subject is to be found in the decision of the Full Court in Gardiner v Gardiner (unreported: judgment delivered 15 December 1992). Although the debtor succeeded on the ground that there was no final judgment or final order to provide a foundation for the issue of a bankruptcy notice, Northrop and Foster JJ., in their joint judgment, had this to say about mistakes in the calculations of the amount due:

"Although close scrutiny of the calculations in the notice
would reveal the errors and discrepancies referred to, there
would, in our opinion, still be no significant doubt in the
minds of the respondents that the notice could be complied
with by the payment of the amount of $7,574.10, being the
amount clearly claimed in the notice. That being so, the
miscalculations and discrepancies can properly be treated as
formal defects or irregularities within the meaning of s306
of the Bankruptcy Act 1966 (Cth). As there is no indication
that 'substantial injustice has been caused by the defect or
irregularity' (s306(1)), these defects or irregularities do
not operate to invalidate the notice."

18. The same conclusion can be reached in this case. No evidence was led that suggested any injustice to the judgment debtor. The notice made it quite clear that the sum that was to be paid, secured or compounded was $51,735.39. If that was attended to no act of bankruptcy would occur. The application of the judgment debtor is therefore dismissed; the applicant is to pay the respondent's costs.