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GR Finance Limited v Francis Waldron [2009] FMCA 418 (7 May 2009)

Last Updated: 8 May 2009

FEDERAL MAGISTRATES COURT OF AUSTRALIA

GR FINANCE LIMITED v FRANCIS WALDRON

BANKRUPTCY – Creditor’s petition – misstatement in document attached to bankruptcy notice as to provision under which interest claimed, principal sum, interest rate and amount of interest – reference to mortgage and/or loan contract rather than to provision relating to interest on judgment – whether defect or irregularity curable under s.306 of the Bankruptcy Act – failure to disclose particulars of security in creditor’s petition – whether evidence to verify or support any estimate of value of security – creditor’s petition dismissed.


Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409
Bendigo Bank Ltd v Williams and Others [2000] FCA 482; (2000) 98 FCR 377
Biron Capital Limited v Anstee [2005] FMCA 1100
Capital Finance Aust Pty Ltd v Nathan [2008] FMCA 1363
Capital Finance Australia Ltd v Nathan (No.2) [2006] FMCA 1051
Chandramouli v Wallader [2001] FCA 808
Circle Credit Co-op Ltd v Lilikakis [2000] FCA 667; (2000) 99 FCR 592
Ex parte Fewings; In re Sneyd (1883) 25 Ch D 338
Gorczynski v Perera & Anor [2008] FMCA 55
In re Small; Westminster Bank v Trustee [1934] Ch 541
Irani v Hollyburton UK Ltd [2007] FCA 1447; (2007) 163 FCR 329
James v Federal Commissioner of Taxation [1955] HCA 75; (1995) 93 CLR 631
Jones v Verity [2007] FMCA 1108
Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71
MacDonald v Official Trustee in Bankruptcy [2001] FCA 140; (2001) 107 FCR 72
Malek v Macquarie Leasing Pty Ltd [2007] FCAFC 14; (2007) 156 FCR 552
Matthews v Collet [2000] FCA 224
National Australia Bank Ltd v Westbrook, in the matter of Westbrook [2000] FCA 246
Northam v Commonwealth Bank of Australia [1999] FCA 544
Olivieri v Stafford and Others [1989] FCA 486; (1989) 24 FCR 413
Pillai v Comptroller of Income Tax [1970] AC 1124
Project Blue Sky Inc and Others v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355
Re a Debtor (No 478 of 1908) [1908] 2 KB 684
Re a Judgment Debtor [1908] 2 KB 474
Re Collier; Ex parte Dan Rylands Limited (1891) 8 MOR 80
Re Florance; Ex parte Turimetta Properties Pty Ltd (No. 2) [1980] FCA 5; (1980) 39 FLR 400
Re Godfrey Charles Demarco; Ex Parte: Godfrey Charles Demarco v Australia & New Zealand Banking Group Ltd [1997] FCA 759
Re O’Leary and Another; Ex parte Bayne and Another (1985) 61 ALR 674
Re Vassis; Ex parte Leung (1986) 9 FCR 518
Re Wiggins; Ex parte Credit Assistance Pty Ltd [1979] FCA 61; (1979) 36 FLR 182
Seovic Civil Engineering Pty Ltd v Groeneveld [1999] FCA 255; (1989) 87 FCR 120
Skouloudis v St George Bank Ltd [2008] FMCA 114; (2008) 216 FLR 52
Skouloudis v St George Bank Limited [2008] FCA 1765; (2008) 173 FCR 236
Snelgrove v Roskell [2007] FCA 122; (2007) 157 FCR 313
St George Wholesale Finance Pty Ltd v Spalla [2000] FCA 1094; (2000) 181 ALR 682
Stec v Orfanos [1999] FCA 457
The Australian Steel Company (Operations) Pty Ltd v Lewis [2000] FCA 1915; (2000) 109 FCR 33
Walsh v The Deputy Federal Commissioner of Taxation of the Commonwealth of Australia [1984] HCA 33; (1984) 156 CLR 337
Wright Designed Pty Ltd (subject to deed of company arrangement) ACN 094 558 200 v McClymont and Another (2006) 232 ALR 683

Applicant:
GR FINANCE LIMITED
ACN 093 549 305

Respondent:
FRANCIS GERARD WALDRON

File Number:
SYG 1779 of 2008

Judgment of:
Barnes FM

Hearing date:
26 March 2009

Delivered at:
Sydney

Delivered on:
7 May 2009

REPRESENTATION

Counsel for the Applicant:
Mr FFF Salama

Solicitors for the Applicant:
Marsdens Law Group

Solicitors for the Respondent:
Kennedy & Cooke Lawyers

ORDERS

(1) That the creditor’s petition be dismissed.
(2) That the applicant pay the costs of the respondent as agreed and in the absence of agreement taxed in accordance with the Federal Court Rules.
FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 1779 of 2008

GR FINANCE LIMITED ACN 093 549 305

Applicant


And


FRANCIS GERARD WALDRON

Respondent


REASONS FOR JUDGMENT

  1. The applicant creditor, GR Finance Limited, filed and presented a creditor’s petition on 10 July 2008 seeking that a sequestration order be made against the estate of the respondent, Francis Gerard Waldron. The creditor’s petition relied on an alleged act of bankruptcy said to consist of a failure by the respondent debtor to comply with the requirements of Bankruptcy Notice NN1747 of 2008 issued on 20 May 2008.
  2. The respondent filed a notice of intention to oppose the petition on 26 September 2008 contending that the Bankruptcy Notice was defective and that the creditor had not complied with s.44 of the Bankruptcy Act 1966 (Cth). The parties sought that I deal with the notice of opposition as a preliminary question on the basis that if either ground succeeded the creditor’s petition must be dismissed. The same issues were raised in the matter of GR Finance Limited v Josephine Carmel Waldron (SYG 1778/2008) and both matters were heard at the same time (see GR Finance Limited v Josephine Waldron [2009] FMCA 398).

Ground One: Whether bankruptcy notice is defective

  1. The respondent contended first that bankruptcy notice NN1747 of 2008 was defective, that the defect could not be cured pursuant to s.306(1) of the Bankruptcy Act 1966 (Cth) and hence that the notice could not be relied on to give rise to the act of bankruptcy alleged by the applicant.
  2. On 15 May 2008 GR Finance Limited obtained a default judgment against Mr and Mrs Waldron in the sum of $689,269.86 in the Supreme Court of New South Wales. The defendants were also ordered to pay the plaintiff’s costs of $2,751.00. Judgment was entered on 15 May 2008.
  3. The bankruptcy notice in question was issued on 20 May 2008. Paragraph 1 of the notice claims that the debtor owes the creditor a debt of $693,274.95 as shown in the Schedule. Paragraph 2 states that the creditor claims the debt is due and payable by the debtor, that a copy of the judgments or orders relied on by the creditor is attached and that execution of the judgments or orders has not been stayed. The Schedule to the bankruptcy notice states that the total debt owing is $693,274.95, consisting of $692,020.88 being the “[a]mount of judgments or orders” plus $1,254.07 described in item 3 of the Schedule, which refers to: “[i]f claimed in this Bankruptcy Notice, interest accrued since the date of judgments or orders (see Note 2. below).”
  4. The form of bankruptcy notice is prescribed under s.41(2) of the Bankruptcy Act, by reg.4.02 of the Bankruptcy Regulations (see Form 1). Note 2 to the Schedule is a note for the information of the creditor dealing with interest accrued (item 3 of the Schedule). It specifies that if interest is being claimed in the bankruptcy notice, details of the calculation of the amount of interest claimed are to be set out in a “document attached” to the notice which must state:
  5. A copy of the judgment / order relied on by the creditor must also be attached (see para 2 of Form 1). No issue was taken in these proceedings as to whether these documents were “attached” to the bankruptcy notice or with the incorrect reference in the affidavit of service of Roderick Bruce Duncombe of 27 June 2008 to bankruptcy notice NN1751/2008 which is the bankruptcy notice issued in relation to Mrs Waldron.
  6. The document headed “INTEREST ACCRUED SINCE DATE OF JUDGMENT/JUDGMENT ORDERS” is as follows:
  7. In essence, the respondent submitted that the source of the entitlement to claim interest as set out in the bankruptcy notice was completely incorrect and rendered the bankruptcy notice invalid.
  8. First, the provision under which interest was claimed was misdescribed as a particular registered mortgage and/or loan contract between the creditor and debtor dated 13 June 2006. The debtor contended that the covenant to pay the principal sum and interest under the mortgage had merged in the judgment obtained by the creditor in the Supreme Court (see Ex parte Fewings; In re Sneyd (1883) 25 Ch D 338). The mortgage and/or loan contract was not the source of the entitlement to claim interest on the judgment of the Supreme Court accrued since the date of the judgment. This is not contested by the creditor. It is conceded that the creditor’s entitlement to interest after such judgment depended on the operation of s.101 of the Civil Procedure Act 2005 (NSW) (see Re Godfrey Charles Demarco; Ex Parte: Godfrey Charles Demarco v Australia & New Zealand Banking Group Ltd [1997] FCA 759).
  9. Section 101 of the Civil Procedure Act is relevantly as follows:
  10. Secondly, the principal sum on which interest was claimed was described in the document as $532,250, notwithstanding that the default judgment was for the amount of $689,269.88 plus fixed costs of $2,751 (a total of $692,028.88). Reliance was also placed on the inconsistency between the “principal sum” and the amount of the judgment or order referred to in the Schedule. It appears from a copy of the mortgage of 13 June 2006 between the creditor and the Waldrons (which is before the Court as an annexure to the affidavit of Emma Macfarlane sworn on 25 March 2009) that the amount of $532,250 was the principal amount of the loan secured by that mortgage. Counsel for the creditor conceded that this was incorrect and suggested that the principal sum referred to in the document should have been $692,020.88.
  11. Thirdly, the interest rate was said to be incorrect. The document stated that the interest rate at which interest was being claimed under the bankruptcy notice was “21.5% Per Annum (being a daily interest amount of $313.52)”. This rate does not reflect the correct “prescribed rate” for post-judgment interest, which at that time was 10% per annum (see s.101(7) of the Civil Procedure Act, Rule 36.7 and Schedule 5 to the Uniform Civil Procedure Rules 2005 (NSW)). There is no suggestion the Supreme Court ordered that an interest rate other than the prescribed rate should apply (see s.101(2)) of the Civil Procedure Act). It is apparent from the copy of the mortgage between the creditor and the Waldrons annexed to the affidavit of Ms Macfarlane that the rate of 21.5% was the higher rate of interest provided for under the mortgage. In addition, the daily rate of interest was said to be wrongly calculated as $313.52. This was conceded by counsel for the applicant, who suggested that the correct daily rate of post-judgment interest on $692,020.88 would be $189.59 calculated at the prescribed rate of 10% per anum.
  12. It followed from this error that the amount of interest claimed in the bankruptcy notice and hence the total amount due was incorrect. An interest amount of $1,254.07 was specified in the document attached and the Schedule to the bankruptcy notice. This amount was taken into account in calculation of the total debt owing in the Schedule and para 1 of the notice. The applicant conceded that the amount of interest claimed in accordance with the Civil Procedure Act and Rules was incorrect and submitted that it should have been the sum of $758.38.
  13. The document annexed to the bankruptcy notice claimed interest from 16 May 2008 (the date of the judgment) to 19 May 2008. No issue was taken by the respondent with this aspect of the document. This is the only aspect of the bankruptcy notice, apart from the heading to the document, to connect the claim for interest to the Supreme Court judgment which formed the basis for the bankruptcy notice. The Schedule refers generally to “interest accrued since the date of the judgment or orders” but does not describe the source of entitlement to interest other than by reference to Note 2. Neither of these references does more than to state that interest that had accrued since the date of the attached judgment was claimed in the bankruptcy notice. These references do not explain that the interest claimed was interest on the judgment debt, as distinct from a liability for interest arising in some other way (such as under a mortgage or loan between the parties).
  14. The respondent submitted that this combination of defects was not a “formal defect or irregularity” that could be cured pursuant to s.306(1) of the Bankruptcy Act because the bankruptcy notice was capable of misleading the debtor as to what he had to do to comply with the notice and/or the creditor had failed to meet a requirement made essential by the Act and that the bankruptcy notice was invalid.
  15. The applicant creditor submitted first that the defect in the bankruptcy notice was simply an overstatement of the amount due to the creditor by $495.63, being the difference between the $1,254.07 interest claimed and what was said to be the correct amount of $758.38. Reliance was placed on the fact that the debtor had not given notice under s.41(5) of the Bankruptcy Act 1966 (Cth) that he disputed the validity of the notice on the grounds of misstatement of the amount due to the creditor. It was submitted that a bankruptcy notice could only be found to be invalidated by reason that the sum specified in the notice as the amount due to the creditor exceeded the amount due if the debtor, within 21 days of service of the bankruptcy notice, gave such a notice to the creditor. No such notice was given in this case.
  16. The creditor also contended that a misdescription of the instrument under which the claim for interest was made was a formal defect or irregularity only, which could be cured under s.306(1) of the Bankruptcy Act and that no substantial injustice was caused by the misdescription.
  17. In addition, the creditor submitted that the Court had power to “correct” the bankruptcy notice by allowing amendments to the document setting out the interest calculation and to the Schedule to the bankruptcy notice and also to make any consequential orders in relation to the amount claimed in the bankruptcy notice and creditor’s petition. The creditor sought an order to amend the document attached to the bankruptcy notice. The amendment sought was as follows:

3 (sic). Interest is being claimed for the period of 16 May 2008 to 19 May 2008 (being the date the Bankruptcy Notice was signed and sent for filing at the Insolvency & Trustee Service of Australia).

Schedule of Interest
Start Date
End Date
No of Days
Principal
Amount
Daily Interest

16/05/2008
19/05/2008
4
$692,020.88
$758.38
$189.59

Total Interest Claimed:
$758.38

  1. Under s.40(1)(g) of the Bankruptcy Act a debtor commits an act of bankruptcy if a creditor has obtained against the debtor a final judgment or a final order and has served on the debtor a bankruptcy notice and the debtor does not within the time specified comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand as provided for in that subsection.
  2. Under s.43 of the Bankruptcy Act, where a debtor has committed an act of bankruptcy and certain other requirements are satisfied, the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor. However an allegation that an act of bankruptcy was based on non-compliance with a bankruptcy notice that is a nullity cannot found a petition (National Australia Bank Ltd v Westbrook, in the matter of Westbrook [2000] FCA 246 at [15]).
  3. Section 41 makes provision in relation to bankruptcy notices. Relevantly, s.41(2) provides that “The notice must be in accordance with the form prescribed by the regulations.” Regulation 4.02 of the Bankruptcy Regulations is as follows:

(1) For the purposes of subsection 41 (2) of the Act, the form of bankruptcy notice set out in Form 1 is prescribed.

(2) A bankruptcy notice must follow Form 1 in respect of its format (for example, bold or italic typeface, underlining and notes).

(3) Subregulation (2) is not to be taken as expressing an intention contrary to section 25C of the Acts Interpretation Act 1901.

Note Under section 25C of the Acts Interpretation Act 1901, 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; see also paragraph 46 (1) (a) of that Act for the application of that Act to legislative instruments other than Acts.

  1. Form 1 is to be found in Schedule 1 to the Regulations.
  2. Section 306(1) of the Bankruptcy Act is as follows:

(1) 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.

  1. It is necessary to consider as a preliminary issue whether the bankruptcy notice failed to comply with the Bankruptcy Act and hence was defective or irregular, having regard to the operation of s.25C of the Acts Interpretation Act in relation to substantial compliance and all the circumstances of the case. If there is such a defect or irregularity it is then necessary to determine whether the defect or irregularity is “formal” within s.306(1) (see Irani v Hollyburton UK Ltd [2007] FCA 1447; (2007) 163 FCR 329 at [14] – [17]). That question involves two levels of enquiry (see Irani, Snelgrove v Roskell [2007] FCA 122; (2007) 157 FCR 313 per Jacobson J, Kleinwort Benson Australia Limited v Crowl [1988] HCA 34; (1988) 165 CLR 71 at [15] per Mason CJ, Wilson, Brennan and Gaudron JJ and Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409 at [25] ff). The relevant enquiry at that point is whether the bankruptcy notice fails to meet a requirement made essential by the Bankruptcy Act or whether it could reasonably mislead a debtor as to what is necessary to comply with the notice (in which case it is a nullity whether or not the debtor is in fact misled). In Irani at [17] Middleton J stressed that these two aspects need to be addressed separately. If s.306(1) applies, consideration must be given to the issue of substantial injustice.
  2. The document attached to the bankruptcy notice is part of the bankruptcy notice (Adams v Lambert at [22]). It does not state the provision (or indeed any legislative provision) under which, or the rate at which, post-judgment interest could be claimed. Instead it purports to assert an entitlement to interest under a mortgage and/or a loan contract between the parties. The principal sum and the interest rate at which the interest was claimed do not relate to the default judgment of the Supreme Court of 15 May 2008. In addition, the document and the Schedule to the bankruptcy notice overstate the post-judgment interest that would be due to the creditor calculated in accordance with the Civil Procedure Act on the amount of the default judgment. Thus the total amount due is overstated.
  3. In relation to the preliminary issue, there was no suggestion in this case that, notwithstanding the errors in the document attached to the bankruptcy notice, the notice nonetheless substantially complied with Form 1 (see s.25C of the Acts Interpretation Act 1901 (Cth), Adams v Lambert at [22] and Malek v Macquarie Leasing Pty Ltd [2007] FCAFC 14; (2007) 156 FCR 552 at [11]). It is clear that the bankruptcy notice suffers from a number of defects or irregularities. In particular, as pointed out in Adams v Lambert at [22], the bankruptcy notice must state the “provision” under which interest is being claimed and this requires reference to a section of the applicable legislation. The reference to a mortgage and/or loan contract is not a reference to such a “provision”. Similarly, the notice did not refer to the principal sum on which post-judgment interest was in fact claimed or to the prescribed interest rate under the Civil Procedure Act and Rules. The amount of interest and the total debt owing were overstated. The bankruptcy notice was affected by a defect or irregularity.
  4. Hence the critical issue is whether such defects or irregularities constitute a “formal defect or an irregularity” within s.306(1) of the Bankruptcy Act. As there is no suggestion that substantial injustice has been caused, that is the only issue under s.306.
  5. The High Court in Adams v Lambert addressed the issue of whether a particular misdescription in a bankruptcy notice of the statutory provision under which post-judgment interest on a judgment debt was claimed (the bankruptcy notice referred to s.83A of the District Court Act 1973 (NSW) when it should have referred to s.85) constituted a formal defect or an irregularity within s.306 of the Act. The Court outlined the approach to be taken to such an issue, stating at [24] – [26]:

The composite expression "a formal defect or an irregularity", in its application to a bankruptcy notice, conveys a meaning with elements of both inclusion and exclusion. A failure to comply with a requirement, to be found in the Act, imposed by reference to the regulations as to information to be furnished by the notice, is a defect or irregularity. So, in Kleinwort Benson Australia Ltd v Crowl, an erroneous statement of the amount of interest owing on a judgment debt was a defect or irregularity. What is excluded from the section is a defect or irregularity of such a nature that, reading s 306 in the context of the whole Act, it is not "a formal defect or an irregularity". What kind, or degree, of defect is to be regarded as having such a nature?

In some cases the answer to that question may be easy. In others, a difficult question of judgment may be involved. The matter for judgment was identified by this Court in Kleinwort Benson Australia Ltd v Crowl. In that case, the majority contrasted the concept of a formal defect or irregularity with a defect or irregularity that renders a bankruptcy notice a nullity that cannot be saved by s 306. To describe a defect as merely formal, or to describe a notice as a nullity, is, of course, to state a conclusion, rather than the reason for reaching that conclusion. Even so, it is necessary to identify the question that arises for judgment. The majority, referring to James v Federal Commissioner of Taxation, and Pillai v Comptroller of Income Tax, summarised the exclusionary aspect of the meaning of "a formal defect or an irregularity" by saying:

“The authorities show 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.”

The question of construction raised by the words "a formal defect or an irregularity" is one to be decided by reading s 306 in the context of the whole Act, informed by the general purpose of the legislation, and the particular purpose of the provisions relating to bankruptcy notices. It is similar to the question that, in former times, would be explained by asking whether a statutory requirement was mandatory or directory. In Project Blue Sky Inc v Australian Broadcasting Authority it was said: "A better test ... is to ask whether it was a purpose of the legislation that an act done in breach of [a] provision should be invalid ... In determining the question of purpose, regard must be had to `the language of the relevant provision and the scope and object of the whole statute.' (Footnotes omitted).

“Overstatement” issue

  1. It is convenient to deal first with the question of overstatement, which was the focus of the creditor’s submissions. Counsel for the creditor stressed the fact that the overstatement of interest (and hence of the total amount due) was minimal and also the fact that the debtor did not give notice to the creditor under s.41(5) of the Act, which is 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 or she disputes the validity of the notice on the ground of the misstatement.

  1. There is a considerable body of authority to the effect that if no notice is given under s.41(5) a bankruptcy notice is not liable to be set aside by reason only of the overstatement. As the High Court pointed out in Adams v Lambert at [31], s.41(5) makes it clear that an overstatement, even a large overstatement, would not necessarily invalidate a bankruptcy notice. (Also see Walsh v The Deputy Federal Commissioner of Taxation of the Commonwealth of Australia [1984] HCA 33; (1984) 156 CLR 337, Olivieri v Stafford and Others [1989] FCA 486; (1989) 24 FCR 413 at 428 per Gummow J and [1989] FCA 486; (1989) 24 FCR 413, and Seovic Civil Engineering Pty Ltd v Groeneveld [1999] FCA 255; (1989) 87 FCR 120 and Gorczynski v Perera & Anor [2008] FMCA 55 at [3]).
  2. If the calculation of the amount of interest (and hence the total debt owing) was the only matter in issue in this case, the overstatement would not invalidate the bankruptcy notice, given the absence of a s.41(5) notice. However the debtor did not seek to assert that the bankruptcy notice was a nullity based simply on the overstatement of the amount due (which came about because of the overstatement of the claim for interest). He did not rely on s.41(5).
  3. The defects in this case are not within s.41(5), because they are not “only” that the sum specified in the notice as the amount due to the creditor exceeded the amount in fact due (St George Wholesale Finance Pty Ltd v Spalla [2000] FCA 1094; (2000) 181 ALR 682 per Heerey J at [28]). In Spalla, in addition to overstatement of the amount due, there was another “separate albeit related” defect (the failure to record payments or credits received). In such a case s.41(5) was said not to have the effect contended for the creditor. Similarly in this case, in addition to the overstatement of interest (and hence the total debt owing), there are also separate but related defects consisting of the reference to a registered mortgage and/or loan contract between the creditor and debtor dated 13 June 2006 as the provision under which interest was being claimed, the description of the principal sum on which interest was being claimed by a reference not to the amount of the judgment but to the amount secured by a mortgage between the parties and the reference to an interest rate that was not the correct prescribed interest rate for interest on a judgment but was the higher interest rate provided for in the mortgage referred to in the bankruptcy notice as the provision under which interest was claimed. In these circumstances the absence of a s.41(5) notice does not mean that the bankruptcy notice could not be a nullity.

Whether the bankruptcy notice failed to meet a requirement made essential by the Act.

  1. The debtor contended that the bankruptcy notice in this case failed to meet a requirement made essential by the Bankruptcy Act in that it was not in accordance with the prescribed Form and failed to specify the provision under which interest was claimed as provided for in Note 2 to the Schedule in the prescribed Form.
  2. In Kleinwort Benson Mason CJ, Wilson, Brennan and Gaudron JJ expressed the view (at 80) that if the amount specified in a bankruptcy notice was in fact due and payment was claimed in accordance with the judgment, the “essential requirements” of former s.41(2)(a)(i) of the Bankruptcy Act would be met. At that time s.41(2)(a)(i) provided that the prescribed Form of the notice had to be such that it “requires the debtor named in it, within [the] specified time ... to ... pay the judgment debt or sum ordered to be paid in accordance with the judgment or order...”. Their Honours suggested that it was “clear enough from the terms of s 41(2)(a)(i) of the Act that a notice must require payment "in accordance with the judgment". A notice specifying payment in accordance with some other arrangement does not satisfy this requirement”(Kleinwort Benson at 79).
  3. In this case the amount specified in the bankruptcy notice was not in fact due (because of the overstatement of interest) and payment was not claimed in accordance with the judgment, in that the interest claimed was expressed to be based on a mortgage and/or loan contract between the parties.
  4. As indicated above, the solicitor for the debtor made it clear in both written and oral submissions that it was not sought to rely on s.41(5). Nor was it simply contended that an overstatement of the amount due necessarily invalidated the bankruptcy notice (see Adams v Lambert at [31]) in the absence of a s.41(5) notice. Rather, it was contended that in all the circumstances including the overstatement of the amount due, the bankruptcy notice served on Mr Waldron did not comply with an essential requirement of the Act because the document containing details of the calculation of the amount of interest misstated the provision under which interest was claimed, the principal sum and the interest rate as well as the amount.
  5. Notwithstanding the fact that s.41(2) no longer refers to a notice requiring payment “in accordance with the judgment”, it was submitted that s.41(2) required the bankruptcy notice to be in accordance with the Form prescribed by the regulations and that the nature of the defects in this case was such that the notice did not meet the essential requirements of the Act in the sense considered in Adams v Lambert in relation to a claimed payment of interest because the source of entitlement relied on was totally invalid.
  6. In Adams v Lambert the High Court concluded that misdescription of the relevant section of the District Court Act as the provision under which interest was claimed in a document attached to a bankruptcy notice was a mistake that fell within the terms of, and could be cured under, s.306 and that the bankruptcy notice in that case did not fail to meet “a requirement made essential by the Act” as discussed by the High Court in Kleinwort Benson Australia Ltd v Crowl at 79. The Court relevantly stated at [13] – [14]:

The evident purpose of the requirement to state the provision under which interest is being claimed is to assist the debtor to check the claim. Nevertheless, as Kiefel J pointed out in her dissenting judgment in Bendigo Bank Ltd v Williams, such information is normally incomplete. It would tell a debtor who is represented by a lawyer something the lawyer would, or should, already know. It would set an unrepresented debtor upon a train of inquiry that, in most cases, would require further information in order to find the relevant rate of interest.

The requirement in question is established by three levels of prescription. Section 41(2) of the Act states that a bankruptcy notice must be in the form prescribed by the regulations. Regulation 4.02 states that, for the purposes of s 41(2), the form set out in Form 1 is prescribed. Note 2 to the Schedule in Form 1 states that a document attached to the notice must state the provisions under which interest is being claimed. The use of the word “must” is significant, but it should be kept in perspective. A prescription as to a form to be followed will normally be expressed in language of obligation rather than of permission. That is the idea of a form. Such a prescription raises the question to be considered in the present case; it does not answer it. (Footnotes omitted).

  1. The respondent submitted that the defects in issue in this case could be distinguished from the misdescription of the relevant section of the District Court Act 1973 (NSW) considered in Adams v Lambert and were not a mere “mistaken citation of the source of entitlement to claim interest” (Lee J in Lewis at [68] referred to in Adams v Lambert at [33]).
  2. In Adams v Lambert the High Court stated at [28] that whether a requirement is made essential by the Bankruptcy Act is to be decided by the process of statutory construction described in [26]. The Court continued at [29] – [30]:
  3. While their Honours stated that s.306 made it “plain” that some instances of non-compliance with the form of a bankruptcy notice would not invalidate the notice (at [31]), it was also acknowledged that “[t]he practical significance of an error or deficiency could vary according to the circumstances of each particular case” and that “[e]rrors or deficiencies in compliance with requirements as to form may involve questions of degree as well as of kind” (at [31]).
  4. The respondent placed reliance on the decision in Jones v Verity [2007] FMCA 1108 in which McInnis FM found that the failure in a bankruptcy notice to refer to any Act of Parliament giving rise to an entitlement to interest involved “a failure to comply with the requirement made essential by the Act; namely, to specify ‘the provision under which the interest is being claimed’” (at [83]). His Honour was of the view that Form 1 in Schedule 1 to the Regulations clearly provided for a requirement made essential by the Act in “the terms which appear in ‘Note 2’” (interest accrued (item 3 of the Schedule)) and that Adams v Lambert was distinguishable as the Act cited in the bankruptcy notice in issue in Jones was not an Act that provided any entitlement at all to interest. Hence there was said to be not simply a misdescription of a provision under which interest was claimed or a reference to an Act which provided for an entitlement to interest but applied to a court other than the court in which the creditor had obtained judgment (as had been the case in Lewis).
  5. On this approach, the debtor submitted that the reference to the mortgage and/or loan as the provision under which the interest was claimed was a failure to comply with a requirement made essential by the Act that could not be cured by s.306.
  6. In this case an evaluation of the significance or importance of the particular error or deficiency in the circumstances of the case in light of the legislative purpose of the Act and of the provisions relating to bankruptcy notices leads me to the view that there has been a failure to meet a requirement made essential by the Act.
  7. As the High Court accepted in Adams v Lambert (at [13]), the “evident purpose” of the requirement in Note 2 to the Schedule to the bankruptcy notice to state a provision under which interest was being claimed was “to assist the debtor to check the claim”, albeit such information is normally incomplete. Consistent with the approach taken by Kiefel J (dissenting) in Bendigo Bank Ltd v Williams and Others [2000] FCA 482; (2000) 98 FCR 377 (at 404) referred to with apparent approval in Adams v Lambert and in light of the legislative purpose of the Act, where a bankruptcy notice is based on a judgment (see s.40(1)(g)) it is essential that any identification of the source of the entitlement to interest on that judgment should make it clear that the debt relied on was based on that judgment. That is so notwithstanding that correct completion of the form prescribed “in every respect” is not a requirement made essential by the Act (Adams v Lambert at [32] and Lewis at 70 per Gyles J).
  8. In this case having regard to the kind of mistake, the degree of error and the notice as a whole I am satisfied that the combination of incorrect statements goes beyond a mistaken citation as to the source of entitlement to claim interest and constitutes a “substantive defect or irregularity such as to exclude the operation of s 306 of the Act” (Lee J in Lewis at 68).
  9. In Adams v Lambert the defect under consideration was limited to a misstatement of a section of the correct legislation (the District Court Act 1973 (NSW)) under which interest was claimed on a judgment. The information as to the rate and amount of interest was correctly stated. It was clear that it was claimed in addition to the amount of the judgment which was expressed to include pre-judgment interest. The calculation of interest was correct and, importantly, the notice made it clear that the interest claimed was in relation to a judgment and was post-judgment interest (see Adams v Lambert at [19]).
  10. In contrast, the mistakes in the bankruptcy notice in this case suggest a source of entitlement to interest completely separate from the judgment. The notice is in that sense akin to a notice that requires a debtor to pay a debt in accordance with terms not of the judgment relied on but on some other basis. While former s.41(2)(a)(i) of the Bankruptcy Act (which required payment “in accordance with the judgment”) has been repealed, it is consistent with the purpose of the Act that the Form of bankruptcy notice (see s.41(2)) based on a judgment debt (see s.40(1)(g)) should, whether in the attached document or elsewhere (see Irani v Hollyburton), make the fact that interest is claimed on the judgment that forms the basis for the notice clear as a matter of substance.
  11. Middleton J suggested in Irani that “the calculation of interest in itself is not necessarily an essential requirement of the Act, irrespective of the circumstances of this case” (at [32]) but, as his Honour also stated: “[t]he whole purpose of the essential requirements of the Act is to inform the debtor clearly and simply of the basis of the debt said to be owed” (at [31]). In Irani, that purpose had been achieved. Interest did not have to be calculated in a document attached to the bankruptcy notice given the reference in the notice to an order of the Supreme Court of Victoria which had determined and calculated the amount of interest. There was (and could be) no dispute about the amount of interest claimed in Irani.
  12. It is otherwise in this case. There was not simply a reference to the wrong “provision” in legislation under which post-judgment interest was claimed or could be claimed or a complete omission of the source of the legislative entitlement to interest on a judgment. This was not a mere “careless omission” (see Bendigo Bank v Williams at [46]) or a clerical error (see Re a Debtor (No 478 of 1908) [1908] 2 KB 684 at 691). The document attached to the bankruptcy notice clearly (and wrongly) stated that the entitlement to interest relied on by the creditor under the bankruptcy notice was an entitlement that arose under a 2006 mortgage and/or a loan rather than an entitlement to interest on the judgment that was the basis for the bankruptcy notice.
  13. Reading the bankruptcy notice as a whole, the significance and importance of the mistake (and the confusion to a debtor) is added to by the fact that in the Schedule the creditor claimed a total debt owing which combined the amount of the judgment (including costs) with the interest that was said to be calculated by reference to a mortgage and/or loan contract between the creditor and debtor and that it calculated interest on a basis that was not consistent with the creditor’s actual entitlement under the judgment. The debtor could not even begin to verify that the amount claimed was in fact due on the information provided. The notice did not accurately set out the basis of the claim for interest. While an overstatement of interest (and hence of the total amount due) does not of itself invalidate a notice in the absence of s.41(5) notice, in this case the information provided did not enable the debtor to correctly identify or verify that there was an overstatement, let alone the extent of the overstatement.
  14. The error in this case is not the kind of error considered in either Adams v Lambert or Gorczynski v Perera & Anor [2008] FMCA 55. In Gorczynski a reference to Schedule 5 of the Uniform Civil Procedure Rules (NSW) (the provision under which interest is calculated) rather than to s.101 of the Civil Procedure Act 2005 as the provision under which interest was claimed was found to be a formal defect to which s.306 applied (although the notice was set aside for other reasons). The defect in this case was not simply a matter of citation of the wrong Act or section of an Act in relation to entitlement to interest on a judgment. Not only was there a failure to refer to any Act of Parliament giving rise to an entitlement to interest on a judgment, but also the mortgage/loan contract referred to did not provide the entitlement to interest relied on in the bankruptcy notice (see Ex parte Fewings). This error was compounded by the reference to the principal sum secured by the mortgage instead of to the amount of the judgment and by the reference to the interest rate under the mortgage.
  15. Errors of this nature and magnitude not only had an impact on the amount claimed to be payable, they did not require payment in accordance with the judgment and meant that the document in relation to the interest claimed in no way met its purpose of providing information about interest claimed under the bankruptcy notice to “assist the debtor to check the claim” (Adams v Lambert at [13]). The information was not missing or incomplete, it was wrong. It would not set an unrepresented debtor on the correct train of inquiry to find the relevant rate of interest on the judgment. In terms of what was required by Note 2 to the Schedule, the bankruptcy notice failed to correctly calculate any of the specified components, except for the period for which interest was claimed. It cannot be said that the notice met the legislative purpose of the requirement as to information in relation to interest claimed in a bankruptcy notice. Hence the bankruptcy notice failed to meet a requirement made essential by the Act. The defect is not a formal defect or irregularity capable of being cured within s.306 of the Act.

Whether bankruptcy notice misleading

  1. Moreover, even if I am wrong in relation to the issue of an essential requirement, I am satisfied that given the circumstances discussed above, the notice could reasonably mislead a debtor as to what was necessary to comply with the notice. I consider that the combination of mistakes in this bankruptcy notice is of such nature and importance (see Adams v Lambert at [31]), that the errors invalidate the notice. In that respect I have borne in mind that the bankruptcy notice must be read as a whole and can be read in light of facts extraneous to the notice itself and that it should be read sensibly and not perversely (see Weinberg J in Northam v Commonwealth Bank of Australia [1999] FCA 544 at [22]). The issue is not whether the particular debtor in question has in fact been misled (Re a Judgment Debtor [1908] 2 KB 474 at 481 and Kleinwort Benson at [15]).
  2. In this case the mistakes were capable of misleading the debtor by producing uncertainty as to the source or sources of the debtor’s liability to the creditor under the bankruptcy notice and the amount in fact due to the creditor (in particular whether that was based on a judgment alone or purported to assert a liability based both on the judgment and the mortgage and/or loan contract between the creditor and the debtor). Hence it was capable of misleading the debtor as to what was necessary to comply with the notice (see Kleinwort Benson at [16]) and Stec v Orfanos [1999] FCA 457). Such a defect is not merely formal and cannot be cured under s.306(1). The bankruptcy notice is invalid.

Amendment

  1. The creditor contended that notwithstanding such a conclusion the Court had power to amend an invalid bankruptcy notice based on the decision of Raphael FM in Skouloudis v St George Bank Ltd [2008] FMCA 114; (2008) 216 FLR 52 which dealt with a bankruptcy notice rendered invalid by reason of a notice pursuant to s.41(5) of the Act. However, on appeal in Skouloudis v St George Bank Limited [2008] FCA 1765; (2008) 173 FCR 236, Edmonds J found that an invalid bankruptcy notice was a nullity and of no effect and could not be amended pursuant to s.33(1)(b) of the Act as it was not a notice under the Act (ibid at [35] and see Circle Credit Co-op Ltd v Lilikakis [2000] FCA 667; (2000) 99 FCR 592 at [10] per Heerey J and Chandramouli v Wallader [2001] FCA 808 at [4])).
  2. As the bankruptcy notice is invalid and cannot be amended to overcome the defects it cannot be relied on to found the act of bankruptcy relied on by the creditor. Hence the creditor’s petition should be dismissed. This finding is sufficient to dispose of this case, but I have also considered the second ground in the notice of opposition.

Ground Two: Whether the creditor complied with section 44 of the Bankruptcy Act

  1. The second ground in the notice of opposition is that the creditor did not comply with s.44 of the Bankruptcy Act, in particular s.44(4) which provides that where a petitioning creditor is a secured creditor, he or she shall set out in the petition particulars of his or her security.
  2. The inadvertent leaving out of a security altogether can be cured by amendment of the petition to include particulars of the security (Re Wiggins; Ex parte Credit Assistance Pty Ltd [1979] FCA 61; (1979) 36 FLR 182) but in this case, as discussed below, insofar as leave is sought to amend the petition I would decline to grant such leave.
  3. Paragraph two of the creditor’s petition is as follows:

The Applicant Creditor does hold security over the property of the Respondent Debtor.

  1. There is no suggestion that this paragraph was intended to state does “not” hold security. There is no statement in the creditor’s petition that the creditor is willing to surrender its security for the benefit of creditors generally in the event of a sequestration order being made against the debtor. The petition does not contain any particulars at all of the security in the petition.
  2. In written submissions the creditor seemed to assume that this ground took issue with the fact that the creditor had presented separate creditor’s petitions against joint debtors, notwithstanding the provisions of s.46(1) of the Act. It appears that this contention was based on a matter that was raised orally in a directions hearing before the Registrar. However the notice of opposition is clear. It refers to s.44 of the Bankruptcy Act and not to s.46. Moreover the debtor’s submissions filed on 17 March 2009 made the basis for this ground of opposition clear.
  3. The debtor contended that the omission of particulars of the security meant that the creditor’s petition was defective and in breach of the Act. Subsections (2), (3) and (4) of s.44 are relevant to this contention. They are as follows:

(2) Subject to subsection (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security.

(3) A secured creditor may present, or join in presenting, a creditor’s petition as if he or she were an unsecured creditor if he or she includes in the petition a statement that he or she is willing to surrender his or her security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.

(4) Where a petitioning creditor is a secured creditor, he or she shall set out in the petition particulars of his or her security.

  1. Under s.44(4) a secured creditor must set out particulars of the security in the petition, including not only identification of the security, but also an estimate of its value. While an omission in estimating value or other particulars of the security can be cured by an amendment to the petition, the precise nature of any amendment sought should be apparent and supported by evidence before the Court for the discretion to amend the petition to be exercised.
  2. There is no suggestion that the affidavit verifying the petition provided any evidence as to particulars of the security. The creditor sought leave to file in Court an affidavit of Emma Macfarlane sworn on 25 March 2009 which was said to address the “inadvertent omission to mention or value the security” the creditor held over the respondent’s property. In the absence of any objection from the debtor the creditor was given leave to file this affidavit in Court.
  3. This affidavit is to the effect that when Ms Macfarlane learned of the omission she reviewed the applicant’s file and found a copy of the 2006 mortgage over a property of Mr and Mrs Waldron at 53 Junction Road, Wahroonga NSW 2073. A copy of the mortgage (which had an expiry date of 30 June 2007) and a copy of a loan agreement dated 13 June 2006 are annexed to the affidavit. It appears that this is the property over which security is said to be held, as Ms Macfarlane’s evidence is that the mortgage is a second mortgage over the property. There is said to be a registered first mortgage over this property in favour of Angus Securities Limited said to be for an amount of “no more than $2,310,662.” The creditor’s petition relies on a debt to GR Finance Limited of $693,274.95 based on the judgment of 15 May 2008 “plus” interest accrued since the date of judgment up until 19 May 2008.
  4. Ms McFarlane’s evidence is that Mr Waldron had deposed in these proceedings that as at 22 September 2008 he owed a total of $3,100,000 on the two mortgages, although there is no affidavit evidence from Mr Waldron before the Court. In any event, Ms Macfarlane also annexed to her affidavit a copy of a valuation of the Wahroonga property dated 14 June 2006 valuing the property at $3,550,000. If this is intended to be evidence of current value, it would suggest that the realization of the security would yield sufficient to enable both mortgagees to be paid in full.
  5. However, based on annexed correspondence from the respondent’s solicitor to the applicant’s solicitor dated 24 October 2008, Ms Macfarlane attested that she believed that the first mortgagee had “taken action” to foreclose on the property and that this would extinguish the applicant’s security over the property and that if the first mortgagee sold the property and retained the sale proceeds in satisfaction of the first mortgage it “appears” that the applicant would receive no sale proceeds in reduction of the mortgage.
  6. The letter of 24 October 2008 enclosed copies of letters dated to each of Mr and Mrs Waldron from the solicitors for Angas (sic) Securities Ltd giving notice of the intention of Angas (sic) Securities to apply to the Registrar-General of the NSW Department of Lands for an order for foreclosure of the property pursuant to its rights under s.61 of the Real Property Act 1900 (NSW).
  7. There is, however, no evidence before the Court as to whether or not such an application has been made and there is no evidence of any foreclosure order (see ss.61 and 62 of the Real Property Act 1900 (NSW)). The evidence before the Court is not such as to establish that the applicant’s security over the property has been extinguished pursuant to s.62 of the Real Property Act 1900. It is not such as to establish that the security is worthless (if this is what is intended).
  8. It is open to the Court to have regard to evidence verifying all the elements in a petition (MacDonald v Official Trustee in Bankruptcy [2001] FCA 140; (2001) 107 FCR 72 at [32]). Ms Macfarlane’s affidavit does identify the security as a mortgage between the applicant and the Waldrons on the property at Wahroonga. It annexes a 2006 valuation certificate. It is not clear whether this is intended to be relied upon to provide a basis for some current estimated value for the property. Counsel for the applicant suggested that the creditor’s petition did not contain information relating to the intended action by the first mortgagee because that was not known at the time the creditor’s petition was presented. However it was conceded that the applicant did not know whether there had been an order for foreclosure.
  9. Counsel for the applicant did not clarify precisely the nature of any possible amendment to the petition and in particular did not explain how it was proposed by amendment to address the issue of valuation of the security. The evidence before the Court is not such as to provide an evidentiary basis for an estimate of value of the security (see Capital Finance Australia Ltd v Nathan (No.2) [2006] FMCA 1051 at [31] and MacDonald at [32]).
  10. The creditor must either surrender its security for the benefit of all creditors or petition only for the amount by which the debt exceeds the creditor’s estimated value of the security (see Re Wiggins; Ex parte Credit Assistance Pty Ltd (1979) 36 FLR 138). If a secured creditor is not prepared to surrender the security he or she may present a petition only to the extent that the debt exceeds the value of the security. In Wright Designed Pty Ltd (subject to deed of company arrangement)ACN 094 558 200 v McClymont and Another (2006) 232 ALR 683 at [23] Rares J stated that a secured creditor can only present a creditor’s petition as if he or she was an unsecured creditor if the secured creditor includes in the petition the statements required by ss.44(3) and 44(4) of the Act.
  11. In the course of the hearing, after seeking instructions counsel for the applicant submitted that because the applicant relied on the judgment it did not need to identify and state the security with clarity. This contention did not address the fact that if the creditor was not seeking to rely on the security, the creditor’s petition would be defective in that it failed to comply with s.44(3) by including a statement that the creditor was willing to surrender his or her security for the benefit of creditors generally in the event of a sequestration order being made against the debtor (if the creditor was seeking to present the petition as if it were an unsecured creditor). There is no evidence of such willingness in the material before the Court.
  12. As the solicitor for the respondent contended, the failure to comply with s.44(3) or s.44(4) could not be excused by arguing that the fact that there was a judgment meant that the creditor did not have to comply with the Act.
  13. Insofar as s.44(4) is applicable, the creditor has not set out particulars of its security in the petition. While the security is identifiable on the evidence now before the Court, there is no clear indication from the creditor as to any proposed estimate of value of the security. An estimate of the value of security “must bear a close relationship to the realities of the matter. It must certainly not be arbitrary or capricious” (Re O’Leary and Another; Ex parte Bayne and Another (1985) 61 ALR 674 at 682 and see Capital Finance Australia Ltd v Nathan (No.2) [2006] FMCA 1051).
  14. In the alternative, counsel for the creditor submitted that the failure to “name and clarify appropriately the security” was only a formal defect or irregularity in a creditor’s petition and was curable under s.306(1) of the Bankruptcy Act (see Re Collier; Ex parte Dan Rylands Limited (1891) 8 MOR 80) and that the petition could be amended. However on the arguments and evidence before me I am not persuaded that a fundamental defect such as the complete absence of particulars of the security is a mere formal defect. In the absence of particulars of the security the basis on which the creditor presents the petition is unclear and is likely to mislead a debtor.
  15. A defect of substance requires leave of the Court under s.33(1)(b) to amend the petition (see Matthews v Collet [2000] FCA 224 at [17]) and MacDonald v Official Trustee in Bankruptcy [2001] FCA 140; (2001) 107 FCR 72 at [23]). The Court can give a petitioning creditor leave at a hearing to amend a petition to state that the creditor is prepared to surrender securities listed (Re Vassis; Ex parte Leung (1986) 9 FCR 518 at 530 and Re Florance; Ex parte Turimetta Properties Pty Ltd (No. 2) [1980] FCA 5; (1980) 39 FLR 400 at 404 – 405) but it is not clear that this is what is sought by the creditor or whether the creditor seeks an amendment to value the security as worthless or nil, such that it would not be obliged to include a statement to the effect that it was prepared to surrender it for the creditor’s petition to be in appropriate form. (Re O’Leary at 682 – 683). It was not suggested that the value of the security was currently not ascertainable, but no estimate of current value has been made in the evidence relied on by the creditor (cf Biron Capital Limited v Anstee [2005] FMCA 1100 and Capital Finance Aust Pty Ltd v Nathan [2008] FMCA 1363).
  16. Even though I accept the omission was due to inadvertence, as attested to by Ms Macfarlane (see In re Small; Westminster Bank v Trustee [1934] Ch 541) and that the absence of particulars need not necessarily be a fatal defect in that a creditor’s petition could be amended, the applicant’s attempt to address the shortcomings in the creditor’s petition by the affidavit of Emma Macfarlane sworn on 25 March 2009 does not clarify the precise basis on which the petition could be amended to address this issue.
  17. In all the circumstances I would decline leave to amend the creditor’s petition. Hence the creditor’s petition should be dismissed with costs.

I certify that the preceding eighty-one (81) paragraphs are a true copy of the reasons for judgment of Barnes FM


Associate:


Date: 7 May 2009

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