Apps & Anor v Campbell [2010] FMCA 1 (18 February 2010)

Last Updated: 1 March 2010

FEDERAL MAGISTRATES COURT OF AUSTRALIA

APPS & ANOR v CAMPBELL

[2010] FMCA 1

BANKRUPTCY – Creditors petition – whether the bankruptcy notice supporting the petition is invalid or confusing considered – overstatement of interest – claim for interest before judgment – mixing of interest on the judgment with interest on costs.

Bankruptcy Act 1966 (Cth), ss.41, 306 Bankruptcy Regulations Civil Procedure Act 2005 (NSW), ss.101, 133 Consumer, Trader and Tenancy Regulations Legal Profession Act 2004 (Cth), s.368 Uniform Civil Procedure Rules

Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409 GR Finance Limited v Josephine Waldron [2009] FMCA 398 Kleinwort Benson Australia Ltd v Crowl [1988] HCA 34; (1988) 165 CLR 71 Re A Judgment Debtor (1908) 2 KB 474 Re Spurr [1991] FCA 420; (1991) 31 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

First Applicant:

KEN APPS

Second Applicant:

RUTH APPS

Respondent:

LEIGH JOHN CAMPBELL

File Number:

SYG 2652 of 2009

Judgment of:

Driver FM

Hearing date:

15 December 2009

Date of Last Submission:

27 January 2010

Delivered at:

Sydney

Delivered on:

18 February 2010

REPRESENTATION

Counsel for the Applicant:

Ms Campbell

Solicitors for the Applicant:

Garden & Montgomerie

Counsel for the Respondent:

Mr J C Hewitt

Solicitors for the Respondent:

O’Halloran Deal Lawyers

Solicitors for the Supporting Creditor:

Ms J Park ATO Legal Services Branch

ORDERS

(1) Bankruptcy Notice NN2280/09 is set aside.
(2) The creditors petition filed on 2 November 2009 is dismissed with costs.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY

SYG 2652 of 2009

KEN APPS

First Applicant

RUTH APPS
Second Applicant

And

LEIGH JOHN CAMPBELL

Respondent

REASONS FOR JUDGMENT

Introduction and background

1. I have before me a creditors petition filed on 2 November 2009 seeking a sequestration order and other orders against the estate of Leigh John Campbell. The petition is supported by the affidavit within it of Ruth Apps made on 30 October 2009, as well as the affidavit verifying paragraph 4 of the petition by Geoffrey John Casey made on the same day. The petitioning creditors also rely upon the affidavit of service of the bankruptcy notice by Martin Kevin Connolly made on 14 June 2009, the affidavit of service of the creditors petition made on 10 November 2009 by Mr Connolly, affidavits of debt by Ruth Apps made on 1 December 2009 and by Geoffrey John Casey made on 14 December 2009 and affidavits of search by Mr Casey made on 14 December 2009.
2. The petition is opposed by the respondent debtor who relies upon a notice of grounds of opposition filed on 4 December 2009. The ground in the notice is that the bankruptcy notice is defective and cannot be relied upon to give rise to an act of bankruptcy because it claimed interest for a period for which the applicants are not entitled to interest, pursuant to s.101 of the Civil Procedure Act 2005 (NSW) (“the Civil Procedure Act”). The notice of grounds of opposition is supported by the affidavit of Sean Patrick Lee made on 3 December 2009, which I treated substantially as submissions.
3. The respondent debtor filed written submissions in court and also made oral submissions on that day. In short, counsel for the debtor submits that the bankruptcy notice is vitiated by several irregularities, namely that it includes a claim for pre-judgment interest erroneously based on s.101 of the Civil Procedure Act, that it includes a claim for interest on costs prior to the date of the filing of a certificate in the office or registry of a court having jurisdiction to order the payment of that amount of money or that the bankruptcy notice was misleading and therefore cannot be rectified, pursuant to s.306(1) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”).
4. The petitioning creditors contend that while the bankruptcy notice overstates the amount due, no notice was given for the purposes of s.41(5) of the Bankruptcy Act and, indeed, there was no challenge at all to the bankruptcy notice. While the petitioning creditors concede errors in the calculation of interest in the bankruptcy notice leading to an overstatement, they seek rectification as a formal defect pursuant to s.306 of the Bankruptcy Act.

Consideration

5. I accept generally the submissions made on behalf of the respondent debtor. The bankruptcy notice is based on a judgment obtained by the applicants from the NSW District Court which rendered enforceable a decision of the Consumer, Trader and Tenancy Tribunal (“CTTT”).
6. The orders made by the CTTT were that:
   1. Leigh Campbell pay Mr and Mrs Apps the sum of $44,785.15 on or before 15 September 2008;
   2. Leigh Campbell pay the costs of Mr and Mrs Apps “either as agreed or as assessed as set out in Division 11 of Part 3.2 of the Legal Profession Act 2004 (Cth)”.
7. The costs referred to in the order were assessed at $20,827.98 pursuant to a Certificate of Determination of Costs issued on 23 March 2009 and sent on 31 March 2009: annexure F to affidavit of Ken Apps dated 31 July 2009.
8. On 30 April 2009, judgment was entered with the District Court at Orange in the amount of $66,798.04. The order was made on 19 September 2008.
9. In the bankruptcy notice, the applicants claim the respondent owes the applicants “a debt of $71,997.31, as shown in the Schedule”. The Schedule refers to an amount of $66,798.04 in respect of the “[a]mount of judgment or orders” and $5,199.27 in respect of “interest accrued since the date of judgment or orders”.
10. Details of the calculation of the amount of interest claimed are set out in a document attached to the bankruptcy notice. That document states in relation to the claim of $5,199.27 for interest:
    • Interest is claimed pursuant to s.101 of the Civil Procedure Act 2005 from 14.08.08 to 02.06.09 as per schedule set out below and continuing at $16.47 per day.
11. The respondent contends that the bankruptcy notice is defective, that the defect cannot be cured pursuant to section 306(1) of the Bankruptcy Act and that the bankruptcy notice cannot be relied upon to give rise to the act of bankruptcy alleged by the applicants.

The defect in the bankruptcy notice

12. The first question is whether the bankruptcy notice is affected by a “defect or irregularity”.
13. An erroneous statement of the amount of interest owing on a judgment debt is “a defect or irregularity”: Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409 at [24].
14. The bankruptcy notice includes erroneous statements of the amount of interest owing because:
    1. it includes a claim for pre-judgment interest based on section 101 of the Civil Procedure Act;
    2. it includes a claim for interest on costs prior to the date of the filing of a certificate in the office or registry of a court having jurisdiction to order the payment of that amount of money.

The claim for pre-judgment interest

15. The applicants’ claim for an entitlement to interest is based on section 101 of the Civil Procedure Act which provides for post-judgment interest. Sections 101(1) and (2) provide:
    • (1) Unless the court orders otherwise, interest is payable on so much of the amount of a judgment (exclusive of any order for costs) as is from time to time unpaid.
    • (2) Interest under subsection (1) is to be calculated, at the prescribed rate or at such other rate as the court may order, as from:
      • (a) the date on which the judgment takes effect, or
      • (b) such later date as the court may order.
16. Rule 36.4(1) of the Uniform Civil Procedure Rules 2005 (“Uniform Civil Procedure Rules”) provides:
    • A judgment or order takes effect:
      • (a) as of the date on which it is given or made, or
      • (b) if the court orders that it not take effect until it is entered, as of the date on which it is entered.
17. The bankruptcy notice is based on the judgment of the District Court which was made or given on 19 September 2008 and entered on 30 April 2009. The earliest date on which interest pursuant to s.101 would start to accrue is 19 September 2008[1].
18. Interest in the bankruptcy notice has been incorrectly calculated from 14 August 2008. Section 101 of the Civil Procedure Act does not permit the calculation of post-judgment interest from that date.
19. The bankruptcy notice is affected by a “defect or irregularity” because it includes a claim for interest for a period for which the applicants are not entitled to interest pursuant to s.101 of the Civil Procedure Act resulting in both the amount of interest and the total debt being overstated.

The claim for interest on costs

20. The District Court judgment on which the bankruptcy notice is based (in the amount of $66,798.04) includes an amount in respect of an order to pay $44,785.15 and an amount of $20,827.98 in respect of costs.
21. The bankruptcy notice claims interest pursuant to s.101 of the Civil Procedure Act in respect of the total judgment amount of $66,798.04 including the amount for costs.
22. Section 101 expressly applies to judgments “exclusive of any order for costs”.
23. Section 368(5) of the Legal Profession Act 2004 (NSW) (“the Legal Profession Act”) provides:
    • (5) In the case of an amount of costs that has not been paid, the certificate is, on the filing of the certificate in the office or registry of a court having jurisdiction to order the payment of that amount of money, and with no further action, taken to be a judgment of that court for the amount of unpaid costs, and the rate of any interest payable in respect of that amount of costs is the rate of interest in the court in which the certificate is filed.
24. Section 133 of the Civil Procedure Act provides that “[a] judgment or order of the court may not be enforced until it has been entered in accordance with the uniform rules”. The section extends to any adjudication “that may be filed or registered in the court, or of which a certificate may be filed or registered in the court, under any other Act or law”. Uniform Civil Procedure Rule 36.10 provides for the filing of cost assessors’ certificates.
25. Section 368(5) is expressly referenced on the Certificate of Determination of Costs which was issued on 23 March 2009 and sent on 31 March 2009: annexure F to affidavit of Ken Apps dated 31 July 2009.
26. The earliest possible date upon which the Certificate of Determination of Costs could have been filed is 23 March 2009. That means 23 March 2009 was the earliest possible date upon which interest started to accrue on the costs.
27. Interest on the costs in the bankruptcy notice has been incorrectly calculated from 14 August 2008. Again both the amount of interest and the total debt have been overstated.

Section 306 of the Bankruptcy Act

28. Section 306(1) of the Act provides:
    • 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.
29. The High Court said in Adams v Lambert at [18] that if there is a defect or irregularity in a bankruptcy notice, the first question is whether the defect or irregularity is a formal one within the meaning of s.306 of the Act: see also Snelgrove v Roskell [2007] FCA 122; (2007) 157 FCR 313 at [29]- [31].
30. The question whether the defect or irregularity is formal, involves two levels of enquiry. The relevant enquiry is (i) does the bankruptcy notice fail to meet a requirement made essential by the Bankruptcy Act or the Bankruptcy Regulations (“the Bankruptcy Regulations”) or (ii) could it reasonably mislead a debtor as to what is necessary to comply with the notice: Kleinwort Benson Australia Ltd v Crowl [1988] HCA 34; (1988) 165 CLR 71 at 79; Adams at [25].

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

31. In Adams v Lambert the High Court stated at [28] that whether a requirement is made essential by the Act is to be decided by the process of statutory construction described as follows at [26]:
    • 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’”.
32. In determining the question of purpose regard must be had to the fundamental precept of the law of bankruptcy that "a bankruptcy notice, which is the foundation of a bankruptcy, attended as a bankruptcy is with penal consequences, is a matter in which great strictness is required": Kleinwort Benson Australia Ltd at 81 quoting Cozens-Hardy MR in Re A Judgment Debtor (1908) 2 KB 474 at 476-477; see also Re Spurr [1991] FCA 420; (1991) 31 FCR 236.
33. The form of bankruptcy notice prescribed by regulation 4.02 of the Bankruptcy Regulations makes it clear that the only interest that may be claimed in a bankruptcy notice is “interest accrued since the date of judgment or orders”. The form also requires identification of “the provision under which the interest is being claimed”, “the principal sum on which” and “the period for which” interest is claimed.
34. The debtor asserts that a notice fails to meet a requirement made essential by the Bankruptcy Act and the Bankruptcy Regulations if it:
    1. claims pre-judgment interest;
    2. misidentifies the provision under which the interest is being claimed;
    100. misstates the principal sum on which interest can lawfully be claimed; and/or
    4. misstates the period for which the interest can lawfully be claimed.

Whether the bankruptcy notice is misleading

35. 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 80. Rather, the question is whether the notice could reasonably mislead a debtor as to what was necessary to comply with the notice. The debtor asserts that a debtor in his position could reasonably have been misled because there was a:
    1. misstatement of the amount of interest owing and the total debt;
    2. false assertion that “the interest accrued since the date of judgments or orders” was an amount of $5,199.27 when that amount included pre-judgment interest;
    100. false assertion that interest is payable pursuant to s.101 of the Civil Procedure Act in respect of the period prior to the date on which the judgment takes effect;
    4. false assertion that interest is payable pursuant to s.101 of the Civil Procedure Act in respect of costs when interest on costs is payable, if at all, pursuant to s.368(5) of the Legal Profession Act.
    5. misstatement of the period for which interest could lawfully be claimed in that a claim for interest was made prior to the date the judgment was made or given; and
    6. misstatement of the period for which interest could lawfully be claimed in that a claim for interest was made prior to the date of the filing of the costs certificate.
36. The debtor further asserts that the mistakes in the bankruptcy notice are of such nature and importance that the errors invalidate the bankruptcy notice.

Section 41(5) of the Bankruptcy Act

37. Section 41(5) of the Bankruptcy Act provides that 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”.
38. The debtor asserts that 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: see St George Wholesale Finance Pty Ltd v Spalla [2000] FCA 1094; (2000) 181 ALR 682 per Heerey J at [28]. In addition to the overstatement of interest and the total debt owing the debtor identifies separate but related defects referred to at [34] and [35] above.
39. This Court dealt with arguably analogous circumstances in GR Finance Ltd v Waldron [2009] FMCA 398. At [20]- [54] her Honour Barnes FM dealt comprehensively with the relevant legal issues relating to the asserted invalidity of the bankruptcy notice in that case and said:
    • 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.
    • 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]).
    • 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.

Form 1 is to be found in Schedule 1 to the Regulations.
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.

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.
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.
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.
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.
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
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.

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]).
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). She did not rely on s.41(5).
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.
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.
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).
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.
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 Mrs 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.
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.
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).

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]).
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]:

• To describe an error or a deficiency in a bankruptcy notice as involving a failure to meet a requirement made essential by the Act is to state a conclusion reached after a consideration of the legislative purpose and an evaluation of the significance or importance of the error or deficiency in the circumstances of the case. That question is not answered by observing that there has been a failure to meet a requirement. In this respect, the majority in Lewis placed undue emphasis on the imperative terms of the Act and Regulations. If there were no failure to meet a requirement, there would be no defect or irregularity. Furthermore, as noted earlier, the fact that the requirement is expressed by the use of the term “must” is not conclusive. How otherwise might a requirement as to form be expressed?
• The misdescription of the relevant section of the District Court Act was not capable of misleading the respondent as to what he had to do to comply with the notice. This is not a matter of dispute. The question is whether the misdescription involved a failure to meet a requirement made essential by the Act. On the true construction of the Act, is it essential that there be no misdescription of the relevant section? Is it the purpose of the legislation that any slip, such as giving a reference to the statutory provision governing pre-judgment interest when what is intended is a reference to the provision governing post-judgment interest, should invalidate the notice? Is this so no matter how clear it might be from other parts of the notice that the claim is for post-judgment interest? (Footnotes omitted).

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]).
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).
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.
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.
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).
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).
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]).
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.
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.
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.
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.
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.
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.

40. Her Honour also found at [56] that 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. It was of particular significance in her Honour’s mind that the bankruptcy notice would create doubt in the mind of the debtor as to whether the liability was based on a judgment alone or purported to assert a liability based both on a judgment and a mortgage and/or loan contract between the creditor and the debtor. Her Honour therefore found that the bankruptcy notice was not capable of rectification pursuant to s.306 of the Bankruptcy Act. At [81] she declined leave to amend the creditor’s petition and dismissed it with costs.
41. In the present case the creditor’s petition asserts that the debtors owe the amount of $66,798.04 in respect of a judgment debt issued from the District Court of NSW at Orange on 30 April 2009. That is the same amount as is set out in the certificate of the judgment annexed to the bankruptcy notice. The affidavit of debt of Geoffrey John Casey filed in court on 15 December 2009 asserts a debt as at 14 December 2009 of $73,080.65, based upon a calculation of interest from 16 September 2008 to 30 April 2009 pursuant to regulation 45 of the Consumer, Trader and Tenancy Regulations and s.101 of the Civil Procedure Act. The petitioning creditors also claim interest on the judgment pursuant to s.101 of the Civil Procedure Act as from 1 May 2009 to 15 December 2009. It is now common ground that the creditors are not entitled to claim interest prior to the date of the judgment of the District Court on 19 September 2008. Neither are they entitled to claim interest in respect of their costs prior to the registration of the costs certificate on 23 March 2009. They concede that the amount claimed in the bankruptcy notice was an overstatement. The interest schedule annexed to the bankruptcy notice incorrectly claimed interest from 14 August 2008 and rolled together interest on the judgment and interest on the award of costs.
42. In my view, and consistently with the decision of this Court in GR Finance, these errors amounted to substantive defects in the bankruptcy notice that were not simply an overstatement of the amount due under the bankruptcy notice but were a misrepresentation of the sources of liability for the payment of interest. Further, not only was the source of the liability to pay interest unclear (and incorrect) from the bankruptcy notice but the claim of interest was for the wrong period of time and rolled together two sources of liability arising at different times. As in GR Finance, 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 (of the District Court) because the notice claimed interest between the date of the CTTT decision and the District Court judgment and rolled together the claim for interest on the judgment and costs. Further, as in GR Finance, the mistakes in the bankruptcy notice suggest a source of entitlement to interest separate from the judgment (and in the case of costs, separate from the Certificate of Determination of Costs). I am unable to distinguish this case from GR Finance. It follows that the bankruptcy notice in this case failed to meet a requirement made essential by the Bankruptcy Act. The defect is not a formal defect or irregularity capable of being cured by s.306 of the Bankruptcy Act. Section 41(5) of the Bankruptcy Act does not protect the creditors from those consequences because the defects in the bankruptcy notice were not only an overstatement of the amount due. There were separate but related defects concerning the period in respect of which interest was due and the sources of the liability to pay interest both in respect of the judgment debt and costs.
43. Like Barnes FM, I conclude that the substantive defects in the bankruptcy notice invalidate it, with the consequence that the debtor did not commit an act of bankruptcy in failing to comply with it. In the alternative, the errors in the bankruptcy notice would have created confusion in the mind of a debtor in the position of Mr Campbell as to how and for what periods, the two interest liabilities arose. I conclude that the defects in the bankruptcy notice are irremediable.
44. I will, in consequence of that finding, order that bankruptcy notice NN2280/09 be set aside and that the creditors petition filed on 2 November 2009 be dismissed with costs.

I certify that the preceding forty-four (44) paragraphs are a true copy of the reasons for judgment of Driver FM

Associate:

Date: 18 February 2010

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[1] or 20 September 2008 as submitted by the applicants