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Re Godfrey Charles Demarco; Ex Parte: Godfrey Charles Demarco v Australia & new Zealand Banking Group Ltd [1997] FCA 759 (29 July 1997)

BANKRUPTCY - application to set aside bankruptcy notice on the ground of misstatement - whether a creditor is entitled to claim in a bankruptcy notice interest expressed to be calculated by reference to the rate specified pursuant to s 95(1) of the Supreme Court Act 1970 but on a compound basis - whether in these circumstances the bankruptcy notice could state that the interest claimed was calculated in accordance with s 95(1) - whether defects in the bankruptcy notice were found - meaning of "rate".

Bank of New South Wales v Brown [1983] HCA 1; (1983) 151 CLR 514 - considered

ss 41(5), 306(1) Bankruptcy Act 1966

s 95 Supreme Court Act 1970 (NSW)

GODFREY CHARLES DEMARCO; EX PARTE GODFREY CHARLES DEMARCO

AUSTRALIA & NEW ZEALAND BANKING GROUP LTD (Respondent)

BEAUMONT J.

SYDNEY

29 JULY 1997

IN THE FEDERAL COURT OF AUSTRALIA )

)

GENERAL DIVISION ) No NG 7477 of 1997

)

BANKRUPTCY DISTRICT OF THE STATE )

)

OF NEW SOUTH WALES )

RE: GODFREY CHARLES DEMARCO

Debtor

EX PARTE: GODFREY CHARLES DEMARCO

Applicant

AUSTRALIA & NEW ZEALAND

BANKING GROUP LTD

Respondent

JUDGE : BEAUMONT J

PLACE : SYDNEY

DATE : 29 JULY 1997

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The bankruptcy notice be set aside, with costs.

2. The costs of the application in respect of the alleged counterclaim etc. are reserved.

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

IN THE FEDERAL COURT OF AUSTRALIA )

)

GENERAL DIVISION ) No NG 7477 of 1997

)

BANKRUPTCY DISTRICT OF THE STATE )

)

OF NEW SOUTH WALES )

RE: GODFREY CHARLES DEMARCO

Debtor

EX PARTE: GODFREY CHARLES DEMARCO

Applicant

AUSTRALIA & NEW ZEALAND

BANKING GROUP LTD

Respondent

JUDGE : BEAUMONT J

PLACE : SYDNEY

DATE : 29 JULY 1997

REASONS FOR JUDGMENT

INTRODUCTION

Before the Court is an application for orders, inter alia, setting aside a bankruptcy notice. The debtor has given notice pursuant to s 41(5) of the Bankruptcy Act 1966 ("the Act"), within the time allowed for payment, that he disputes the validity of the notice on the ground of a misstatement, namely, he claims, the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due in respect of the amount claimed for interest.

In the bankruptcy notice, the creditor claims that the debtor owed it:

"a debt of $44,597.68 as shown in the Schedule."

The Schedule was as follows:

"Column 1		Column 2
1.	Amount of judgment or order	$374,878.83
plus 2.	Legal costs if ordered to be paid and a specific amount was not included in the judgment or order (see Note 1, below)
plus 3.	If claimed in this Bankruptcy Notice, interest accrued since the day of judgment or order (see Note 2, below)	$48,962.40
4.	Subtotal	$423,841.23
less 5.	Payments made since date of judgment or order	$379,543.55
6.	Subtotal	$44,297.68
plus 7.	Cost of this Bankruptcy Notice	300.00
8.	Total debt owing	$44,597.68"

The Notes to the Schedule included the following:

"Note 2: Interest accrued (item 3 of the Schedule)

If interest is being claimed in this Bankruptcy Notice, details of the calculation of the amount of interest claimed are to be set out in a document attached to this Bankruptcy Notice. The document must state:

(a) the provision under which the interest is being claimed; and

(b) the principal sum on which, the period for which, and the interest rate or rates at which, the interest is being claimed.

(If different rates are claimed for different periods, full details must be shown)"

The attached document there mentioned was as follows:

"INTEREST ACCRUED SINCE JUDGMENT

Date	Deposit	Principal	Days	Interest	Total
8/11/95-21/11/96		$374,878.83	379	$46,710.93	$421,589.76
22/11/96	$256,189.71				$165,400.05
22/11/96-1/12/96		$165,400.05	10	$543.78	$165,943.83
2/12/96	$23,400.22				$142,543.61
2/12/96-12/12/96		$142,543.61	11	$515.50	$143,059.11
13/12/96	$99,953.62				$43,105.49
13/12/96-28/2/97		$43.105.49	78	$1,105.39	$44,210.88
1/3/97-7/3/97		$43105,49	7	$86.80	$44,297,68
TOTAL				$48,962.40	"

The judgment referred to in the bankruptcy notice is a judgment of the Supreme Court of New South Wales in its Commercial Division whereby it was ordered on 4 August 1995 that the debtor pay to the creditor the sum of $374,878.83. Under the terms of the judgment, that order was to take effect on 7 November 1995. Importantly for present purposes, it was there further ordered as follows:

"5. the first, second and third defendants pay interest to the plaintiff at the rate charged to customers of the plaintiff on like accounts or pursuant to Section 95 of the Supreme Court Act, 1970, whichever is the higher, on the balance of the judgment which from time to time remains unpaid."

On behalf of the debtor, it is now submitted that the bankruptcy notice overstated the amount claimed for interest, ie $48,962.40, by the amount of $3200.44. It is said that the error arises by virtue of the allowance of compound, rather than simple, interest, in circumstances where only simple interest could be claimed. On behalf of the creditor, it is accepted that the interest claimed was in fact compounded, but it is submitted that as a banker, and under the terms of its lending documents, the creditor was entitled to do so. Reliance is placed by the creditor upon the reasoning in the Bank of New South Wales v Brown [1983] HCA 1; (1983) 151 CLR 514 at 519 and at 526-7. Alternatively, the creditor says that any defect is merely formal and seeks to invoke s 306(1) of the Act in this connection.

CONCLUSION

The starting point in the consideration of the present question is the meaning and operation of para 5 of the Supreme Court judgment and in particular, its relationship with s 95 of the Supreme Court Act 1970 (NSW). It will be recalled that under the terms of para 5, the debtor was liable for interest:

"at the rate charged to customers of the [creditor] on like accounts or pursuant to section 95 ...., whichever is the higher ..."

Section 95(1) of the Supreme Court Act is in these terms:

"95. Interest on debt under judgment or order

(1) Where judgment is given or an order is made for the payment of money, interest shall, unless the Court otherwise orders, be payable at the prescribed rate from the date when the judgment or order takes effect on so much of the money as is from time to time unpaid."

It follows from the language of s 95(1) that the Supreme Court is empowered in the exercise of its discretion to "otherwise order", so that the Court may order interest at a rate, or in an amount, different from that prescribed for the purposes of s 95(1). To some extent only, para 5 of the Supreme Court judgment proceeds on this basis. That is to say, para 5 calls for an inquiry, one of fact, as to which is the higher rate of interest, when a comparison is made between, on the one hand, the rate "charged to customers of the [creditor] on like accounts" and on the other, the rate prescribed under s 95(1). Only if it is the higher rate, will s 95(1) apply.

In the present application, there was no evidence as to the former rate, but as has been noted, it is now accepted by both parties that although the amount of interest claimed in the bankruptcy notice was calculated by reference to the rate prescribed under s95(1), it was in fact compounded.

In my opinion, unless the Supreme Court otherwise orders, the interest payable under s 95(1) is simple interest only. See s 94(2)(a). Further, the authorities establish that under the doctrine of merger, any contractual entitlement to interest merges in the judgment so that the creditor's entitlement to interest thereafter depends upon the operation of s 95(1) (see, for example, Ex parte Fewings [1883] 25 Ch.D 338). It follows, in my view, that unless the Supreme Court ordered otherwise in para 5, simple and not compound, interest was payable.

Did the Supreme Court "otherwise order"? In a limited sense only, it did so by directing the inquiry of fact previously mentioned. But what follows from this? The first limb of para 5 is directed to:

"the rate charged to customers of the [creditor] on like accounts."

What is meant here by "rate" (that is, of interest)? The ordinary meaning of "rate" in the present context is, according to the Macquarie Dictionary:

"The amount of a charge or payment with reference to some basis of calculation."

It appears from banking practice, and from the creditor's present documentation, that the creditor had a contractual entitlement to charge interest upon outstanding interest, that is compound interest. (See the discussion in Bank of New South Wales v Brown, above). On the other hand, as has been said, only simple interest is prima facie payable under s 95(1).

No attempt was made by the creditor to establish by evidence what rate of compound interest was charged by it upon "like accounts". Indeed, it was acknowledged on behalf of the creditor that the interest claimed in the bankruptcy notice was calculated by reference to the rate specified pursuant to s 95(1) but on a compound basis, although, as has been said, s 95 allows for simple interest only.

It follows, in my view, that there are two major difficulties with the bankruptcy notice. First, there was no entitlement to charge interest under s 95(1) on a compound basis. Secondly, it was incorrect to state in the attachment to the bankruptcy notice forming part of the notice, that the interest claimed was calculated in accordance with the provisions of s 95.

It must follow that these defects are not "formal" within the meaning of s 306(1) of the Act. To the contrary, they are matters of substance, which in the terms of the settled course of authority in this area, could reasonably have misled the debtor. In my opinion s 306(1) can have no application here.

ORDERS

I order that the bankruptcy notice be set aside, with the costs of that application. Since I have not needed to deal with it, the costs of the application in respect of the alleged counterclaim etc. are reserved.

I hereby certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment of the Honourable Justice Beaumont

Associate

Date 29 July 1997

Counsel and Solicitors for Mr. M. Rollinson instructed

the applicant: Mulally Mylott

Counsel and Solicitors for Mr. P. Dowdy instructed by

the respondent: Minter Ellison

Date Judgment delivered: 29 July 1997