Derriman v National Australia Bank Limited

REASONS FOR JUDGMENT WILCOX J: 1 These reasons relate to two appeals challenging orders made on 5 October 2004 by Smith FM in the Federal Magistrates Court of Australia. 2 Smith FM dismissed a motion by the present appellant, Kym Derriman, seeking an extension of time to request a review of a decision of Registrar Hedge on 22 June 2004. The Registrar dismissed Mr Derriman's application to set aside a bankruptcy notice ('the bankruptcy notice') issued against him on the application of National Australia Bank Limited ('NAB'), the present respondent. 3 The second order made by Smith FM was a sequestration order against Mr Derriman's estate. This order was made on the petition of NAB, the relevant act of bankruptcy being Mr Derriman's alleged failure to comply with the requirements of the bankruptcy notice. 4 The Chief Justice has made orders, pursuant to s 25(1A) of the Federal Court of Australia Act 1976, that each appeal be heard and determined by a single judge. 5 Section 41(2) of the Bankruptcy Act 1966 (Cth) ('the Act') requires a bankruptcy notice to 'be in accordance with the form prescribed by the regulations'. The form currently required is that prescribed by reg. 4.02 of the Bankruptcy Regulations 1997 (Cth) ('the Regulations'). It is Form 1 in the Schedule to the Regulations. The issues 6 The bankruptcy notice served on Mr Derriman, on 6 April 2004, generally followed Form 1. It did not contain Note 3, relating to foreign currency amount conversion. Before Smith FM, Mr Derriman argued this omission constituted a defect in the bankruptcy notice, notwithstanding that the judgment upon which the bankruptcy notice was based was given in the Local Court of New South Wales and expressed in Australian currency. This argument did not succeed; although not for the fundamental reason that emerged during argument in this Court. The prescribed form contains an italicised instruction to delete Note 3 if it is not applicable. The note is obviously inapplicable in a case where there is no need to convert foreign currency into Australian currency. 7 The other matter arising out of the form of the bankruptcy notice is more substantial. The prescribed form contains the following words: ' For the Information of the Creditor Note about use of information It may be necessary to disclose some or all of the information provided by you on this Form to Government agencies and departments for any purpose under the Act. Also, the information may be included on a public record or given to other persons, bodies or agencies for purposes authorised by the Act.' I will return to the significance of this omission. 8 Before Registrar Hedge the appellant argued he had a cross-claim against NAB which he could not have set up in the proceeding in which NAB's judgment was obtained. The Registrar rejected that claim. The learned magistrate agreed with her. At paras 13-15 of his reasons, Smith FM said: 'Mr Derriman put most emphasis in his submissions to me upon these two omissions from the Bankruptcy Notice. However, he also maintained the challenge which failed before the Registrar: that he had a cross-claim which he could not have set up in the proceedings in the Local Court. As I understood his submissions on the material which he filed in support of this claim, he claimed that because the creditor bank had refused to honour two cheques drawn on a trust account for "Kids 4 Kids Inc", of which he was managing director, he had suffered "considerable damage, pain and suffering". He said "the amount claimed is fifty thousand dollars and is claimed holistically in nature and therefore also in calculation". It is sufficient to say that I agree with the Registrar that on the material presented there is no substance to the alleged "counter claim, set-off or cross demand".' 9 The appellant's Notice of Appeal to this Court does not squarely challenge the magistrate's decision on this point. The only ground of appeal that might conceivably cover the point is the fourth ground of appeal viz 'The magistrate erred in finding that the sequestration order could legitimately be made'. 10 In his written submissions in this Court, the appellant said: 'Smith F.M. ruled that he was satisfied that I was aware that both matters would be heard on the day of his hearing. While I was aware that both matters were to be heard, it was abundantly obvious that I was not aware, though undoubtedly should have been aware, that I would be required to represent my case, which had been heard months earlier. I thought that a ruling would be made on what had already been presented months earlier. I certainly was not prepared to represent my case again regarding the counterclaim.' 11 As was pointed out by Mr J White, counsel for NAB, this statement does not constitute a complaint that Smith FM fell into error in relation to the alleged counter-claim. At least at this stage of the litigation, no point arises in relation to that subject. 12 The only matter requiring consideration in this Court is the significance of the omission from the bankruptcy notice of the words 'For the Information of the Creditor' set out in para 7 above. Australian Steel 13 The form of bankruptcy notice prescribed in 1997 was considered by a Full Court of this Court in The Australian Steel Company (Operations) Pty Ltd v Lewis [2000] FCA 1915; 109 FCR 33. The Court was there concerned with three bankruptcy notices, all based on orders made in the Magistrates' Court of Victoria. Each bankruptcy notice set out a calculation of the interest claimed by the notice but none of them correctly identified the provision pursuant to which the interest was being claimed, as is required by Note 2 to the prescribed form of bankruptcy notice. 14 By majority (Black CJ, Heerey and Sundberg JJ; Lee and Gyles JJ dissenting) the Court held the notices to be invalid. 15 At paras 27 - 38 of their reasons for judgment, the majority judges considered the decision of the High Court of Australia in Kleinwort Benson Australia Ltd v Crowl (1998) 165 CLR 71. That case concerned an earlier form of bankruptcy notice. However, the majority judges used it to support the existence of a distinction between an essential requirement of a bankruptcy notice, non-compliance with which leads to invalidity, and a non-essential (or formal) defect that leads to invalidity only where it results in substantial injustice to the debtor: see s 306(1) of the Act. 16 In addressing the distinction between an essential and a non-essential requirement of a bankruptcy notice, at para 39 their Honours referred to a statement by McHugh, Gummow, Kirby and Hayne JJ in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355: 'A better test for determining the issue of validity is to ask whether it was a purpose of the legislation that an act done in breach of the 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 purpose of the whole statute".' The majority then said: 'In the light of this passage, it can be seen that a requirement is "made essential" within the Kleinwort Benson principle when the enquiry as to purpose discloses the intention that an act done in breach should be invalid.' 17 Their Honours went on (at para 40) to state a general principle: 'In 1996 Parliament chose to make a form to be prescribed by regulation the sole criterion of whether a bankruptcy notice complied with the Act, with the consequence that an act of bankruptcy would be committed in the case of non-compliance with such a notice. This being the will of Parliament, it is not for a court to treat the terms of the prescribed form as inherently less important than a requirement specified in the Act itself, so as to attract a more lenient view in the case of non-compliance. Valid delegated legislation (and there is no suggestion that the present regulations are otherwise) is binding law because that is what Parliament has willed. As Lindgren J said in Re St Leon; Ex parte National Australia Bank Ltd (1994) 54 FCR 371 at 378 (obviously in relation to a pre-1996 notice) "… the statutory requirement that a bankruptcy notice be in accordance with the prescribed form is itself a requirement made essential by the Act.' 18 Notwithstanding this statement of principle, the majority judges did not say that any departure from the prescribed form would lead to invalidity. Consistently with what they had earlier said, their Honours looked at the purpose behind the particular unfulfilled requirement. They concluded (at para 42): 'Having regard to the purpose behind the requirement that the provision under which interest is being claimed, and correctly claimed, be included in the notice, that requirement is made essential by the Act, and a notice issued in breach of the requirement will be invalid.' 19 For the purposes of the present case, it is unnecessary to discuss the reasons why Lee and Gyles JJ disagreed with that conclusion. However, it is relevant to note a comment by Lee J (with whom Gyles J expressed agreement) about the note 'For the Information of the Creditor' that is in issue in this case ('the note'). At para 61, Lee J described the note as being 'new material which informed the creditor of impairment of the creditor's privacy rights'. At para 66, his Honour said: 'In addition to paragraphs directed to the debtor, the prescribed form of the new notice contains instructions addressed to the person completing a "draft bankruptcy notice" or, perhaps, addressed to the Official Receiver ... For example, an introductory Note in the prescribed form instructs that words in italics "are for guidance in completion of this Notice, and are not to be reproduced in the Notice". Although the Note is not in italics, it would seem to follow that it is not intended that the Note be part of the bankruptcy notice served on the debtor. Similarly, a paragraph headed "For the Information of the Creditor Note about use of information" set out in the prescribed form would not appear to be relevant to the obligations of the person upon whom a bankruptcy notice is to be served and it suggests that it is intended that compliance with the requirements of the Act and Regulations would be satisfied if that paragraph were omitted from a "draft bankruptcy notice" presented to the Official Receiver, notwithstanding that neither the heading to, nor the paragraph, appears in italics.' The magistrate's decision 20 It is unnecessary to refer to the whole of Smith FM's reasons for judgment. It is sufficient to set out his conclusion about the note. After dealing with the foreign currency conversion point, he said (at para 12): 'Less confidently, I also think that the note about use of information is intended by the form to be there for its stated purpose, that is: "For the Information of the Creditor", and is not intended to be provided as a warning to a debtor or for any purposes of the debtor. On that reading, I also consider that the omission of the note about use of information is a formal defect or a regularity which may be excused under Section 306 of the Bankruptcy Act 1966 (Cth) as applied to bankruptcy notices by the cases I have cited above. In the circumstances of the present case, I do not consider that the omission has caused the debtor to be misled in any respect nor that any substantial injustice was caused.' Submissions of the parties 21 At the hearing of the appeals, Mr Derriman appeared on his own behalf. He argued the omission of the note was an injustice to him. He said a debtor is entitled to have the same information about the operation of the Act as is the creditor. In his written submissions, Mr Derriman said the words in the note 'are anything but "drafting notes"'. He went on: 'They are a clear advice to the Creditor. That there could be a necessity to disclose some or all of the information provided by the Creditor on the Form to Government agencies and departments, has a profound effect upon this debtor in particular and may well have upon any other debtor. Failure to make critical information available to both the Creditor and Debtor alike cannot be regarded as a formal defect or irregularity. It is a matter of substance.' 22 Mr White, on behalf of NAB, contended the omission of the note did not constitute a defect. He argued the terms of the note demonstrated it was not something addressed to the debtor; it was simply information for the creditor that was not required to be set out in the bankruptcy notice. He cited the comment by Lee J in Australian Steel. Mr White likened the note to the drafting notes considered by Weinberg J in Northam v Commonwealth Bank of Australia [2000] FCA 544 and Kyriakou v Shield Mercantile Pty Limited [2004] FCA 490; 207 ALR 393. 23 Alternatively, Mr White argued that, if the bankruptcy notice was defective, the defect was in relation to a non-essential requirement; it was a merely formal defect; there was no evidence of injustice to the debtor and consequently s 306(1) of the Act should be applied. 24 During the course of his oral submissions, I put to Mr White the contention of Mr Derriman that a debtor was entitled to have the same information as a creditor. Mr White responded that it might be important for a creditor to know that information contained in a bankruptcy notice might be made available to others; the creditor might decide, under those circumstances, not to proceed with an application for issue of the bankruptcy notice. However, he argued, it was not useful for a debtor to be told of the possibility of information in the bankruptcy notice reaching a wider audience; there would be nothing he could do in response to that information. Conclusion 25 The necessity for creditors to adhere to the currently prescribed form of bankruptcy notice has been a fundamental tenet of bankruptcy law for many years. Departure from that form may have significant consequences affecting substantive rights, not only of the immediate parties. For example, a decision upon the question whether or not a particular non-compliance has resulted in the invalidity of a bankruptcy notice may affect the date of commencement of a bankruptcy, the operation of the doctrine of relation back and, consequently, the property interests of other creditors. 26 In that situation, it might have been expected that the drafters of the 1997 prescribed form of bankruptcy notice would have taken care unambiguously to indicate what material needed to be included in the notice to be issued to a debtor. They made a good start by stating that words in italics were for guidance only, and not intended to be reproduced in the notice itself. However, they then apparently departed from their own rule by setting out, in non-italicised form, a number of drafting notes that were surely not intended to be reproduced in the notice itself. After the Schedule detailing the total debt owing, the drafters inserted an item called 'For the Information of the Creditor - Notes to the Schedule', two of which took the form of an instruction to the creditor and the third of which was the foreign currency amount conversion. Were these notes intended to be reproduced in the notice itself? Presumably note 3 was so intended, where it was applicable, but the intention in relation to notes 1 and 2 is unclear. On the one hand, the notes are in the form of an instruction to the creditor; on the other hand, their inclusion may serve a purpose useful to the debtor in drawing attention to annexures to the notice. 27 No doubt it is correct to say, with Lee J, that the note under current consideration was intended to be a warning to the creditor about possible impairment of that party's privacy rights. As warnings go, it is not very effective. It conveys no clear information to the creditor. To what Government agencies and departments might information contained in the bankruptcy notice be disclosed? What information? Under what circumstances? What information might be included on a public record or given to other persons? Moreover, and more relevantly to this case, it is uncertain whether or not the drafters intended that this note should be reproduced in the bankruptcy notice itself. An affirmative answer is suggested by the fact that the note is not printed in italics, but the force of that consideration is reduced by the fact that the same comment may be made about the drafting notes. A negative answer is suggested by the circumstance that the note is described as being for the information of the creditor. As Mr White submitted, the possibility of publication of the information in the bankruptcy notice may be a matter relevant to a creditor's decision as to his or her future conduct; it cannot affect any decision as to conduct required or able to be made by the debtor. 28 Mr Derriman argued that a debtor may be damaged by publication to others of the fact that a bankruptcy notice has been issued against him or her. That is true, but any such damage stems from the issue of the notice, in an environment where such publication is possible, rather than the debtor being left unaware of the information (such as it is) set out in the note. 29 In Australian Steel, Lee and Gyles JJ expressed the opinion that the omission of the note did not constitute a defect in a bankruptcy notice. As this opinion was expressed obiter and in dissent, the opinion is not binding on me. However, as a matter of comity, I should adopt their opinion unless I perceived it to be in conflict with the majority opinion in Australian Steel, or other binding authority, or I concluded it was clearly wrong. 30 I do not think the opinion of Lee and Gyles JJ on this matter conflicts with the majority opinion. The majority judges did not deal with the question whether it was necessary for the note to be reproduced in the bankruptcy notice itself. If they had concluded this was intended, they might have had to consider whether it was an essential requirement. The majority did not adopt the view that any departure from the prescribed form leads to invalidity. The majority judges would have applied a purposive approach and it is difficult to see any purpose in this information, so far as the debtor is concerned. 31 I am not aware of any other relevant authority and I am not persuaded that the opinion of Lee and Gyles JJ is incorrect. Therefore, I believe I should adopt that opinion and hold that the drafters of the form intended that compliance with the Act and the Regulations would be achieved by a bankruptcy notice that omitted the note. Alternatively, I would take the view that, if the omission was a defect, it was a defect in relation to a non-essential matter; it was a formal defect. As no injustice is shown to have occurred, s 306 of the Act ought to be applied. Disposition 32 In the result I hold that Smith FM was correct in rejecting all the points put to him by Mr Derriman. Both appeals will be dismissed with costs.