Herat v McLean Holdaway Pty Ltd

An implied stay - the argument abandoned 7 The first of the arguments advanced by Mr Herat - and as amended during the course of the hearing - focussed attention principally upon ss 40(1)(g) and 41 of the Bankruptcy Act. 8 Section 41(1) provides that a bankruptcy notice may be issued where (inter alia) there is a "final judgment or final order" of "the kind described in paragraph 40(1)(g)". Section 40(1)(g), in turn, refers to a "judgment or order the execution of which has not been stayed…". Section 41(3)(b), the provision of present importance, provides as follows: A bankruptcy notice shall not be issued in relation to a debtor: … (b) if, at the time of the application for the issue of the bankruptcy notice, execution of a judgment or order to which it relates has been stayed It was Mr Herat's initial contention that there was a "standard period" of 28 days within which the order made on 6 May 2014 was impliedly stayed. If this be correct, the Bankruptcy Notice was served one day before that 28 day period expired. 9 Common to both ss 40(1)(g) and 41(3)(b) is the limitation that the "execution" of a judgment or order not be "stayed". A judgment or order may be "stayed" by an order of the Court: Civil Procedure Act 2005 (NSW) s 135(1). An order may be stayed, for example, pending the hearing of an appeal. But, for the purposes of ss 40(1)(g) and 41(3)(b), a judgment or order may also be "stayed" otherwise than by an order of a court. What is required is that a judgment creditor is in a position to issue execution on his judgment at the time when the bankruptcy notice is issued. So much seems to follow from the following observations of Riley J in Re Pannowitz; Ex parte Wilson (1975) 38 FLR 184 at 188: In none of those cases had execution in fact been stayed. In each the defect in the creditor's case was simply that he had not put himself in the position of being able to issue execution. "For this purpose execution is considered to be stayed if, at the date of the issue of the notice, the judgment creditor is not entitled to issue immediate execution on the judgment": 3 Halsbury (4th ed) par. 262; for example where the judgment creditor must be taken to have agreed to suspend his right to execution: Re a Debtor [1908] 1 KB 344 at 349 per Fletcher Moulton LJ. The English Bankruptcy Act of 1914 consolidated the relevant provisions of the Acts of 1883, 1890 and 1913 into its s. 1(1)(g) and in the process cast them into the form in which, with minor differences, they appeared in s. 52(j) of the Commonwealth Act of 1924 and later in s. 40(1)(g) of the Commonwealth Act of 1966. Though the literal meaning of the words "execution thereon not having been stayed" had been considerably departed from, those words have remained in the English and Commonwealth legislation substantially unchanged from 1883 to the present day. These observations have subsequently been endorsed by Woodward, Fisher and Spender JJ in Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568. Their Honours concluded that "this Court should adopt and affirm the meaning of the words which have for so long been accepted and acted upon": (1988) 18 FCR at 577. Their Honours had there also previously observed: It appears to be settled law both in the United Kingdom and, at least at first instance, in this country, that the words in s 41(3) "execution of the judgment or order to which it relates had been stayed" are not restricted to an order expressly staying a judgment. They have been construed as having a much wider meaning. In certain circumstances execution is deemed to have been stayed if the execution creditor is for some reason not in a position to issue execution upon his judgment…: (1988) 18 FCR 568 at 575 to 576. See also: Reasonable Endeavours Pty Ltd v Dennehy [2001] FCA 188 at [14] to [20], (2001) 107 FCR 144 at 147 at 148 per Marshall J. 10 As initially advanced, Mr Herat contended that there was an "implied" stay of 28 days pending the expiration of the period of time within which an appeal could be filed: Uniform Civil Procedure Rules r 50.3(1)(a). That argument was rightly abandoned. Even the filing of an appeal does not, of itself, operate as a stay of the judgment or order the subject of the appeal.

Ambiguity - a stay until there is a certain date for payment? 11 Although the principal focus of the attack upon the Bankruptcy Notice was initially the argument that the orders for the payment of monies had been impliedly stayed, that focus was replaced during the course of the hearing with an argument that the orders could not be enforced until a time for payment was specified - until then, the orders were "ambiguous" and could for that reason not found the Bankruptcy Notice. 12 Central to this submission was r 36.5 of the Uniform Civil Procedure Rules which provides as follows: Time for compliance with judgments and orders (1) If a judgment or order requires a person to do an act within a specified time, the court may, by order, require the person to do the act within another specified time. (2) If a judgment or order requires a person: (a) to do an act forthwith or forthwith on a specified event, or (b) to do an act but does not specify a time within which he or she is required to do the act the court may, by order, require the person to do the act within a specified time. The submission advanced by Mr Herat founded upon r 36.5 involved three steps, namely: any order of the Supreme Court, to be enforceable, requires the specification of a time for compliance; if no time for compliance is specified, the order is necessarily ambiguous; and even if the existing orders for the payment of $273,901 and $60,000 were to be construed as requiring compliance "forthwith", such an order is ambiguous. Rule 36.5, it was submitted, necessarily required an order to "specify a time" within which an act - such as the payment of monies - was to take place. Common to the argument that the orders were subject to an "implied stay" for 28 days is the present contention that the orders made on 6 May 2014 cannot found a bankruptcy notice until a time for payment is specified - and that period may well exceed 28 days. 13 The argument is rejected. It fails at the outset. 14 An order that monies be paid, including orders of the kind made on 6 May 2014, may not be enforced until entered (Civil Procedure Act s 133(1)) but thereafter can be enforced. In the past, a party had "a right to avail himself of any error or of the most technical objection" to the manner in which an order had been "entered": Tolson v Jervis (1845) 8 Beav 364 at 366 per Lord Langdale MR. As at present, the requirements as to the manner in which an order of the Supreme Court is to be entered are set forth in r 36.11 of the Uniform Civil Procedure Rules. But no question is raised in the present proceeding disputing the fact that the orders made on 6 May 2014 were properly entered. Once entered, it is not considered that r 36.5 is to be construed as requiring the orders as made to specify a time within which the amount of $333,901 was to be paid. Authorities relied upon by Mr Herat as to an order requiring an act to be done "forthwith" (e.g., Kayserian Nominees (No 1) Pty Ltd v J R Garner Pty Ltd [2008] NSWSC 1011) are, with respect, of no immediate relevance. 15 In the event that this argument was rejected, Mr Herat receded to a fall-back position. The fall-back position was that any ambiguity in the manner in which the orders made on 6 May 2014 was to be construed by reference to the subjective intention of the parties when consenting to the orders made on that date. His subjective intention, so it was submitted from the bar table, was that he never contemplated that the orders were enforceable immediately upon their being entered. But that fall-back position is without substance either because: there is no evidence as to what was the subjective intention of Mr Herat; or because, had that been his intention: it could readily have been accommodated by an order that the time for compliance with the orders for payment be not before a date specified. But no such order was sought by Mr Herat and no such order was made on 6 May 2014. Left to one side is any underlying consideration as to why evidence of any such intention would, in any event, have been relevant or admissible to any question as to the construction of what were otherwise unambiguous orders of a superior court of record.

The costs order - an amount exceeding the amount due? 16 The next submission advanced by Mr Herat was that the Bankruptcy Notice specified as the amount due, an amount in excess of that which was payable. Separate from any argument as to whether the order for costs in the agreed sum of $60,000 was an order which was enforceable, Mr Herat contended that that amount was - in any event - an amount which was in excess of the amount of costs which was otherwise payable. In advance of taxation or assessment, Mr Herat could not quantify the extent to which the $60,000 was in excess of the amount payable. Such an overstatement, it may be accepted, is not confined to the specification of the "total debt owing" and may extend to an overstatement of the components part of that total debt: Hudson v Donald, Unreported, 12 August 1997 per Lindgren J. In Mr Herat's case, the overstatement relied upon is in the specification of the order in respect to the order for "costs in the agreed sum of $60,000". The importance of correctly specifying the amount due cannot be underestimated; the very purpose of a bankruptcy notice is "to convey to the debtor the amount claimed by the creditor and to give the debtor the opportunity to pay or secure that amount": Kyriackou v Shield Mercantile Pty Ltd [2004] FCA 490 at [36], (2004) 138 FCR 324 at 335 per Weinberg J. 17 The effect on the validity of a bankruptcy notice which overstates the amount due has a long history. That history seems to have focussed upon at least two related questions, namely: whether any overstatement of the amount owing will necessarily invalidate a bankruptcy notice and whether any such overstatement is a substantial defect in the notice (e.g., Re a Debtor [1908] 2 KB 692) or a "formal defect" and hence susceptible of falling within s 306 of the Bankruptcy Act; and whether it is necessary to show that an overstatement of the amount is likely to mislead a debtor (Re Walsh (1982) 65 FLR 87 per Lockhart J) or whether an overstatement invalidates a bankruptcy notice irrespective of whether the overstatement could reasonably mislead the debtor (e.g., Re Greenhill; Ex parte Myer (NSW) Ltd (1984) 5 FCR 84 per Morling J; Re Emerson; Ex parte Wreckair Pty Ltd (1991) 101 ALR 315 at 318 to 319 per Pincus J). It is within this context that s 41(5) of the Bankruptcy Act assumes relevance. 18 Section 41(5) provides as follows: (5) 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. This subsection is premised upon the assumption that a bankruptcy notice may be "invalidated" where there has been an overstatement of the amount due - "unless" the debtor gives a notice of the kind described. 19 The legislative history behind s 41(5) has been previously explored in Seovic Civil Engineering Pty Ltd v Groeneveld [1999] FCA 255 at [41] to [48], (1999) 87 FCR 120 at 130 to 132 per Hill, Sackville and North JJ. Their Honours there referred to the divergence of views between Re Walsh and Re Greenhill and Re Emerson and proceeded to act "on the assumption not challenged by either party, that Re Greenhill and Re Emerson correctly state the law". It was there concluded that "a debtor's notice which wrongly identifies a misstatement in the bankruptcy notice, and does not provide sufficient information to enable the true misstatement (if any) to be identified by the creditor, does not comply with s 41(5) of the Bankruptcy Act": [1999] FCA 255 at [40], (1999) 87 FCR 120 at 130. Subsequently, in Skouloudis v St George Bank Ltd [2008] FCA 1765, (2008) 173 FCR 236 Edmonds J again reviewed the authorities and proceeded on the same assumption "that an overstatement in a bankruptcy notice of the amount in fact due renders the notice invalid, whether or not the overstatement could reasonably mislead the debtor, if a notice complying with the requirements of s 41(5) has been duly given": [2008] FCA 1765 at [23], (2008) 173 FCR 236 at 244. See also: Walsh v Deputy Federal Commissioner of Taxation (1984) 156 CLR 337 at 339 per Gibbs CJ. 20 In the present proceeding, Mr Herat has maintained from the outset that there has been an overstatement of the amount due and maintains that he has given "notice" as required by s 41(5). That "notice" he maintains was provided by a letter in the following terms sent to the solicitors for McLean Holdaway: I refer to the Bankruptcy Notice served on myself on 2 June 2014. Pursuant to Section 41(5) of the Bankruptcy Act 1966 I hereby give you notice that I dispute validity of the Bankruptcy Notice on the grounds of misstatement. The misstatement is evident for the following reasons; 1. The amount claimed in the Bankruptcy Notice is an overstatement of the amount due and payable in that it fails to account for costs orders made by the Supreme Court of New South Wales against the Judgement Creditor in respect of an application to amend pleadings prior to the date judgement. Such costs order is yet to be agreed or assessed; 2. The amount claimed by the Judgement Creditor in the sum of $60,000 in respect of the Plaintiff's costs is invalid and as such is an overstatement of that judgement debt. Pursuant to Section 331 of the Legal Profession Act 2004, proceedings for the recovery of legal fees cannot be commenced prior to the issuance of a bill. 3. An order for costs in the sum of $60,000 forming part of the total claimed was made by the Court without the Court having considered the operation of Rule 42.34 of the Uniform Civil Procedure Rules and is therefore an overstatement of the judgement debt in its present context and form. For the purposes of point 2 above, I call upon you to supply me with an itemised bill pursuant to 332A of the Legal Profession Act 2004. For the purposes of point 3 above, an application will be filed in the Supreme Court seeking a review of the order for costs. An application to set aside the Bankruptcy Notice will also be filed and served upon your client care of your office shortly. The solicitors for McLean Holdaway responded on 17 June 2014 referring to an earlier order for costs made by a registrar of the Supreme Court on 14 May 2014, being an order said to relate to costs thrown away by reason of an application to amend a statement of claim. It was also said that Mr Herat had failed to make out "a ground on which the bankruptcy notice should be invalidated or set aside". With specific reference to paragraphs (2) and (3) of Mr Herat's letter, attention was drawn to the power of the Supreme Court to make an order for costs in a "gross sum instead of assessed costs" pursuant to "section 95(4)(c) of the Civil Procedure Act…". The reference to that section was an error; the power to which reference was presumably sought to be made was s 98(4)(c). 21 It is concluded that there has been no "overstatement" of the amount of $60,000 and the amount which is due to be paid does not depend upon any future taxation or assessment. The order for costs was made pursuant to s 98(4)(c) of the Civil Procedure Act. That provision is as follows: In particular, at any time before costs are referred for assessment, the court may make an order to the effect that the party to whom costs are to be paid is to be entitled to: (a) …, or (b) …, or (c) a specified gross sum instead of assessed costs, or (d) … Section 98(4)(c) is comparable to the power conferred upon this Court by s 43(3)(d) of the Federal Court of Australia Act 1976 (Cth) to "award a party costs in a specified sum". The power is one which can conveniently be exercised in order to avoid (for example) the length and complexity of an assessment process (Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 at 120 per von Doussa J; Bitek Pty Ltd v IConnect Pty Ltd [2012] FCA 506 at [4], (2012) 290 ALR 288 at 289 per Kenny J) or further prejudice to a successful party where there is a potential inability on the part of the unsuccessful party to pay costs in any event (Harrison v Schipp [2002] NSWCA 213 at [21], (2002) 54 NSWLR 738 at 742 to 743 per Giles JA). It is a power which may be exercised to make an order for the payment of costs in advance of taxation: Mizzi Family Holdings Pty Ltd v Morellini (No 2) [2014] FCA 807 at [6] per Dowsett J. The making of such an order may be to the benefit of all parties to litigation and may be an order which is jointly urged upon the Court. 22 The Supreme Court has power to make an order for the payment of costs in a "gross sum" and may do so "at any time before costs are referred for assessment…". One purpose sought to be achieved by the making of such an order is to avoid the costs, expense and delay incurred in the assessment process. And that is what the Supreme Court did on 6 May 2014. And Mr Herat consented to that order being made. There is no room for any argument that the amount claimed in the Bankruptcy Notice in respect to costs "exceeds the amount in fact due…". It specifies the very amount which was the subject of consent by Mr Herat. 23 Any contention that the Bankruptcy Notice served on 2 June 2014 is vitiated by reason of an overstatement of costs payable is rejected.

The Legal Profession Act 24 The final argument pressed by Mr Herat focussed attention on s 331 of the Legal Profession Act. That section provides as follows: Legal costs cannot be recovered unless bill has been served (1) Subject to section 332A (Person may request itemised bill), a law practice must not commence legal proceedings to recover legal costs from a person until at least 30 days after the law practice has given a bill to the person in accordance with sections 332 (Bills) and 333 (Notification of client's rights). (2) The Supreme Court may make an order authorising a law practice to commence legal proceedings against a person sooner if satisfied that: (a) the law practice has given a bill to the person in accordance with sections 332 and 333, and (b) the person is about to leave this jurisdiction. (3) A court or tribunal before which any proceedings are brought in contravention of subsection (1) must stay those proceedings on the application of a party, or on its own initiative. (4) This section applies whether or not the legal costs are the subject of a costs agreement. Section 332A provides as follows: Request for itemised bill (1) If a bill is given by a law practice in the form of a lump sum bill, any person who is entitled to apply for an assessment of the legal costs to which the bill relates may request the law practice to give the person an itemised bill. (2) The law practice must comply with the request within 21 days after the date on which the request is made. (3) If the person making the request is liable to pay only a part of the legal costs to which the bill relates, the request for an itemised bill may only be made in relation to those costs that the person is liable to pay. (4) Subject to subsection (5), a law practice must not commence legal proceedings to recover legal costs from a person who has been given a lump sum bill until at least 30 days after the date on which the person is given the bill. (5) If the person makes a request for an itemised bill in accordance with this section, the law practice must not commence legal proceedings to recover the legal costs from the person until at least 30 days after complying with the request. (6) A law practice is not entitled to charge a person for the preparation of an itemised bill requested under this section. (7) Section 332 (2), (5) and (6) apply to the giving of an itemised bill under this section. 25 Difficulty was experienced by Mr Herat in identifying for the purposes of s 331(1) the "legal proceedings to recover legal costs". These proceedings were ultimately identified by him as being either: the proceedings in the Equity Division of the Supreme Court, that apparently being a proceeding to enforce an agreement; or the issue of the Bankruptcy Notice, the issue of that Notice being itself a "legal proceeding". Alternatively, it was contended that: the proceeding in the Equity Division, in "combination" with the subsequent issue of the Bankruptcy Notice, constituted "legal proceedings" for the purposes of s 331. However the argument was advanced, it is without substance. 26 Although little is known as to the substance of that proceeding in the Equity Division, that proceeding was properly characterised as a proceeding to enforce an agreement. The order for costs was made consequential upon the resolution of that proceeding. If Mr Herat's proposition was to be accepted, without qualification, any proceeding in the Supreme Court in which an order for costs was made would necessarily be a proceeding falling within s 331(1). But that section only applies where the proceeding is one "to recover legal costs from a person": e.g., Atanaskovic v Robey [2014] NSWSC 150 at [9] and [10] per Kunc J. The proceeding in which McLean Holdaway was a plaintiff and Mr Herat was a defendant and in which the order for costs was made was not such a proceeding. It is further considered that s 331 would not stand in the way of a person consenting to an order for the payment of legal costs, even in a proceeding "to recover legal costs from a person", where non-compliance with s 331 may otherwise afford a defence. 27 No authority was cited to support the proposition that the application for an issue of a bankruptcy notice to enforce - in whole or in part an order for the payment of costs - was itself a "legal proceeding to recover legal costs…" for the purposes of s 331(1). Indeed, it is difficult to construe the administrative act involved in the issue of a bankruptcy notice under the Bankruptcy Act as itself a legal proceeding: Re Moss; Ex parte Tour Finance Ltd (1969) 13 FLR 101 at 105 to 106. Gibbs J (as his Honour then was) there observed: It was strongly urged on behalf of the applicant that the Registrar, in fixing the time for compliance with a bankruptcy notice, makes a decision which is part of the proceedings leading to the making of a sequestration order; reliance was then placed on the statement in R. v. Davison [(1954) 90 CLR 353 at 365] that "in the now long history of the English law of bankruptcy the process by which a compulsory sequestration has been brought about has always been of a description which may properly be called judicial", and it was said that the act of the Registrar is a step in a judicial process and is itself an exercise of judicial power. It is true that speaking in the broadest sense, and for some purposes, it may be said that bankruptcy proceedings are commenced by the making of an application for the issue of a bankruptcy notice… It is, however, begging the question to say that judicial proceedings are commenced by such an application. An application for the issue of a bankruptcy notice is made for the purpose of forcing the debtor either to comply with the notice or to commit an act of bankruptcy. If a debtor has failed to comply with a bankruptcy notice and has thereby committed an act of bankruptcy, a creditor may, if certain other conditions are satisfied, present a petition for the making of a sequestration order (s 43 of the Bankruptcy Act 1966). On the hearing of the petition it is the duty of the court to decide whether an act of bankruptcy has been committed, and if it finds that none was committed the proceedings will fail (see s 52). In other words, the commission of an act of bankruptcy is something that must have occurred before proceedings for a sequestration order are commenced. It cannot be said that the fact that a sequestration order may follow the commission of an act of bankruptcy makes everything which led to the commission of the act of bankruptcy part of the judicial process by which a sequestration is brought about. In the case of most of the other acts of bankruptcy described in s 40 of the Bankruptcy Act 1966 the commission of the act of bankruptcy does not involve the taking of proceedings at all. In one case, that mentioned in s 40 (1) (d), where execution has been issued under process of a court and the debtor's property has in consequence either been sold or held by the sheriff for twenty-one days or such execution has been returned unsatisfied, the act of bankruptcy results from the taking of a proceeding, which, however, is not a bankruptcy proceeding. In the case of the act of bankruptcy now in question, the application to the Registrar to issue a bankruptcy notice is a proceeding, but it is a proceeding different from and preliminary to that which leads to the making of a sequestration order. In my opinion, the judicial process by which a sequestration is brought about is commenced when the petition is presented, and the act of the Registrar in fixing the time for compliance with a bankruptcy notice can neither be regarded as a step in that judicial process nor treated as an exercise of judicial power simply because it may be followed by an exercise of judicial power. 28 This argument advanced by Mr Herat is, accordingly, also rejected.

The Uniform Civil Procedure Rules - the argument abandoned 29 Rule 42.34 of the Uniform Civil Procedure Rules provides as follows: Costs order not to be made in proceedings in Supreme Court unless Court satisfied proceedings in appropriate court (1) This rule applies if: (a) in proceedings in the Supreme Court, other than defamation proceedings, a plaintiff has obtained a judgment against the defendant or, if more than one defendant, against all the defendants, in an amount of less than $500,000, and (b) the plaintiff would, apart from this rule, be entitled to an order for costs against the defendant or defendants. (2) An order for costs may be made, but will not ordinarily be made, unless the Supreme Court is satisfied the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted. 30 The submission initially advanced by Mr Herat was that the Orders as made on 6 May 2014 and, in particular, the order as to the payment of costs in the agreed sum of $60,000 did "not refer to any consideration of rule 42.34 and such should be the subject of a review to determine whether in fact an oversight or error has been made…". 31 This argument was correctly abandoned. Although it is unnecessary to express to any more certain view, especially bearing in mind that the same argument is apparently an argument to be advanced before the Supreme Court, it appeared to be an argument without any self-evident substance. The Supreme Court unquestionably had power to entertain the proceeding which was before it and to make an order for costs in that proceeding, whether the order in respect to costs is made by consent or otherwise. An order for costs, especially one made by consent, does not require an express reference to r 42.34.

Conclusions 32 Notwithstanding the considerable ingenuity with which Mr Herat sought to impugn the validity of the Bankruptcy Notice - and the flexibility with which he abandoned some arguments and re-grouped to conceive a different line of challenge - each of his arguments have missed their mark. 33 The Application is dismissed. There is no reason to question the validity of the Bankruptcy Notice served on 2 June 2014. 34 Mr Herat should pay the costs of the Respondent.

THE ORDERS OF THE COURT ARE:

1. The Application filed on 20 June 2014 is dismissed.
2. The Applicant is to pay the costs of the Respondent. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Flick.