Commonwealth Bank of Australia v Horvath

REASONS FOR JUDGMENT 1 The Commonwealth Bank of Australia petitions for a sequestration order against the estate of Gabor Horvath (junior). The act of bankruptcy on which the petition is founded is that the debtor had failed to comply with the bankruptcy notice issued on 11 June 1997: see s 40(1)(g) of the Bankruptcy Act 1966 (Cth) which permits a notice to be issued in respect of a "final judgment or final order, being a judgment or order the execution of which has not been stayed." 2 The notice was issued in respect of costs that had been ordered to be paid by the debtor in an action in the Supreme Court of Victoria in which the bank was plaintiff. The costs were taxed and allowed in the sum of $55,864.10 and it was in respect of this sum that the bankruptcy notice was issued. The only issue that requires determination is whether the notice is valid. 3 The Bankruptcy Act provides that a bankruptcy notice must be in accordance with the form prescribed by the Bankruptcy Regulations: see s 41(2). According to those regulations the notice must be in accordance with Form 1: see reg 4.02(1). That form requires the petitioning creditor to specify the amount of the judgment debt that is due to the petitioner by the debtor and attach to the notice a copy of the final judgment or order relied upon: see clauses 1 and 2. The notice must require the debtor to pay the amount of the debt or to make an arrangement to the petitioner's satisfaction for settlement of the debt: see clause 3. If the debt is in respect of legal costs which have been ordered to be paid the notice must specify the amount of those costs and (if applicable) a certificate of the taxed or assessed costs must be attached to the notice: see item 2 of the schedule to the form and note 1. 4 The bankruptcy notice specified as the debt due to the bank the sum of $55,864.10. In the schedule this debt was described as "legal costs". Attached to the notice was a copy of the order of the taxing master. The order reads: "The costs of the plaintiff [the bank] are taxed and allowed in the sum of $55,864.10." The order records that it was made on a summons for taxation and notes that the "taxation [was] pursuant to the orders of the Honourable Mr Justice Beach made 23 May 1995, the Honourable Mr Justice O'Bryan made 2 April 1996, and the Honourable Mr Justice Beach made 10 May 1996." Copies of those orders were not attached to the notice. The taxing master's order does not record the fact that the costs orders had been made against the debtor. 5 The bankruptcy notice might be invalid for two reasons. The first is that the noticedid not have attached to it a copy of the three costs orders. The second is that, on one view, the notice relies upon more than one order. 6 As regards the failure to attach a copy of the three costs orders, the bank makes two submissions. First, it says that this does not constitute a deficiency in the notice. Secondly, it is submitted that if the failure to attach the orders is a deficiency, it is a formal defect or irregularity that is cured by s 306(1) of the Bankruptcy Act. That subsection 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." 7 It is clear enough that an allocatur by a taxing master is not a judgment or order for the payment of money: In re Crump, Ex parte Crump (1891) 64 LT 799. The obligation to pay costs is founded in the judgment or order of the court requiring a party to pay costs to be taxed. Under the Rules of the Supreme Court of Victoria it is provided that where a taxing master assesses costs the result shall be stated in the form of an order: see O 63.56(1). However, by O 63 r 11 such an order can only be enforced as a judgment for the payment of money where the costs are taxed otherwise than under a judgment or order for costs. So, where the Rules make provision for the payment of costs in the absence of an order, for example when an action is discontinued (see O 63 r 15), the order of the taxing master will be an order that is capable of being enforced and one that may be described as a final order: see Pepper v McNiece (1941) 64 CLR 642 at 657. Where, as here, a taxing master undertakes a taxation in consequence of an order made by a judge of the court, the taxing master's order is not capable of enforcement. It is not, therefore, a final judgment or order of the Supreme Court and cannot be relied upon to found a petition. Accordingly, the bankruptcy notice is defective in that there was not attached to it copies of the final orders which were the foundation for the debt described in the notice. 8 The bank points out that, unlike the form of bankruptcy notice prescribed prior to the commencement of the regulations, there is now no requirement to identify or describe in the body of the bankruptcy notice the final order which is relied upon. The present requirement is that the final order must be attached to the notice. This is not a significant distinction. The object of both the old form of bankruptcy notice and the current form is to identify for the debtor the judgment upon which the bankruptcy proceeding is based. If that identification has not taken place in the requisite manner the notice is deficient. The true question is: What is the consequence of that deficiency? 9 A bankruptcy notice, being a document which sets in motion the whole process leading to bankruptcy (which is in the nature of a criminal matter), must be very strictly and narrowly construed: In re A Debtor [1951] 1 Ch 313 at 318 per Harman J. This view has been a feature of bankruptcy law for a long time. Nevertheless, as s 306(1) makes plain, certain defects or irregularities in a bankruptcy notice can be validated by the subsection provided no substantial injustice will result. 10 The test for determining whether there is a "formal defect or irregularity" within the meaning of the subsection is well known. It is whether the defect or irregularity is one that could reasonably mislead the debtor. If it could not reasonably mislead the debtor it is a formal defect and will be validated by the subsection: Pillai v Comptroller of Income Tax [1970] AC 1124 at 1135; James v Commissioner of Taxation (1955) 93 CLR 631 at 644. In determining whether a debtor could be mislead the court takes into account factors extraneous to the notice itself: Re Wimborne; Ex parte The Debtor (1979) 24 ALR 494 at 499. 11 In the present case it could not be said that the debtor could have been misled in any way by the bankruptcy notice. He was present when the taxation took place and the procedures that were involved and the result of the taxation were explained to him. 12 However, it does not follow that the deficiency in the bankruptcy notice is capable of being cured by the application of s 306(1). A bankruptcy notice will also be a nullity if it fails to meet an essential requirement of the Bankruptcy Act: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79-80. Thus, the question here is whether the failure to attach a copy of the three costs orders is a failure to meet an essential requirement of the Act? 13 On this question there are several decisions that are directly in point. The most important is that of the Divisional Court in Chancery, in In re Cartwright; Ex parte Cartwright v Barker [1975] 1 WLR 573. There, the court considered the effect of a failure to refer in a bankruptcy notice to the judgment giving rise to the debt for costs. The prescribed form of the bankruptcy notice was similar to that which was in force prior to the commencement of the regulations. As to the failure, Goulding J said [at 576-7]: "[T]he bankruptcy notice is not in my view in accordance with the prescribed form because it does not show under what judgment or order the sum is due, and it is not in accordance with section 2 of the Bankruptcy Act 1914 because it does not require the sum to be paid in accordance with the terms of the judgment or order. … Then comes the question whether we should regard the shortcomings of the notice as a formal defect or irregularity which should be cured by the court in its discretion under section 147 of the Bankruptcy Act 1914 [the counterpart of s 306 of the Australian legislation] … The case is rather different from anything that subsequently occurs in bankruptcy proceedings because the failure to comply with the notice is the very act of bankruptcy on which all the rest is founded. Unless, therefore, you have a notice that fulfils the statutory requirements, you cannot fairly say that a debtor has committed an act of bankruptcy by not complying with it. … On the whole, it appears to me, although the debtors do not seem to have been misled in any way in the particular circumstances, that we should be departing from the course mapped out by reported authority if we were to overlook or attempt to cure the shortcomings of the notice in the present case." Walton J expressed his agreement with the judgment of Goulding J. He also said [at 578]: "It seems to me that the petitioning creditor got it wrong; he got the whole foundation of his judgment wrong. Notwithstanding the fact that anybody of reasonable intelligence - and that certainly includes the debtors because they were not in fact misled - could see what he really meant to have said, seems to me to be nihil ad rem. You have not, in fact, got a proper bankruptcy notice giving the requisite particulars of the foundation of the debt." See also Wilmot v Buckley (1984) 2 FCR 540; Re Haros v National Australia Bank Ltd (unreported, Ryan J, 24 November 1997). It is true that each of those cases concerned the old form of bankruptcy notice but, as I say, I regard the differences in the form of the requirement to identify the final judgment as immaterial. 14 It follows, in my opinion, that the bankruptcy notice is a nullity and cannot be validated by s 306(1). 15 Strictly this makes unnecessary any discussion concerning the second possible deficiency in the notice. However, because the matter was argued at some length, I will set out my views on the matter. 16 I can begin by stating a proposition to which no objection could be taken. It is that two or more judgment debts cannot be included in the same bankruptcy notice: see In re Low; Ex parte Argentine Gold Fields Ltd [1891] 1 QB 147; In re Bassett (1895) 2 Mans 177; In re A Bankruptcy Notice (1906) 96 LT 133. 17 Here the bankruptcy notice is based on three orders for costs made in one proceeding and in respect of which there was one taxation producing a single assessment of the costs to be paid. The bank says that, in these circumstances, the notice is valid. It relies upon In re Wheeler [1982] 1 WLR 175, a decision of the Court of Appeal, in support of its contention. 18 Briefly stated the facts of In re Wheeler are as follows. The judgment creditors had instituted an action against the debtor seeking damages for misrepresentation. At the conclusion of the trial Foster J gave judgment, with costs to be taxed, in favour of the judgment creditors. On the same day as giving judgment his Honour also made orders on three procedure summonses that were before him; the orders were that the costs of those summonses be taxed and paid by the debtor to the judgment creditors. The judgment creditors arranged for a composite bill of costs in respect of the four orders. The taxing master taxed parts of the bill and issued one interim certificate for the costs taxed. Those costs were not paid and a bankruptcy notice was served on the debtor which required him to pay "the sum of Ł20,000 claimed by [the judgment creditors] as being the amount due in respect of part of the costs ordered to be paid by [the debtor] on four final orders of Foster J." The debtor did not comply with the bankruptcy notice and the judgment creditors presented a petition for the debtor's bankruptcy. The court made a receiving order from which the debtor appealed. The Divisional Court allowed the appeal, rescinded the receiving order and dismissed the bankruptcy petition on the ground that the bankruptcy notice referred to more than one final order. From that decision an appeal was taken to the Court of Appeal. 19 On the question whether the bankruptcy notice was defective Lawton LJ, with whom Brightman and Fox LJJ agreed, said ([1982] 1 WLR at 182): "Mr. Primost [counsel for the petitioner] submitted that what had happened in this case was that the four orders made by Foster J arising out of one action had been channelled into one order requiring the payment by the debtor and Mr. Argent of the sum of Ł20,000; that, as a result of that channelling into the interim certificate, there was in the end only one final order, which was for the payment of the sum of Ł20,000; and that as the bankruptcy notice made it clear what was the origin of the debt upon which the bankruptcy notice was based, there was compliance with the provisions of both section 1(1)(g) and section 2. The debtor, on the other hand, submitted that, on the face of the bankruptcy notice, there were four orders and that it followed, having regard to the decision of this court in In re Low, Ex parte Argentine Gold Fields Ltd [1891] 1 QB 147, the bankruptcy notice was bad. For the reasons I have stated, in my judgment, those four orders were channelled into the interim certificate so as to constitute one order."