Bankruptcy - bankruptcy notice - Whether stay of execution on judgment granted after service of bankruptcy notice, but before expiry of its period, invalidates bankruptcy notice.

Bankruptcy Act 1966, ss.40(1)(g), 41(2)(a)(i), 41(3)(b)

Counsel for the Respondent(B.1981/88): Mr M.R. Aldridge

Solicitors for the Respondent: Messrs Chapman & Chapman

Counsel for the Respondent(B.1065/88): Mr J.S. Drummond

The creditors bring in on a date to be fixed short minutes of orders in accordance with the court's reasons.

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

These are two motions to set aside bankruptcy notices issued by different creditors against the same debtor. The one point arises in each motion. It is that the bankruptcy notices were based on final judgments of the District Court, being judgments the execution of which had not been stayed as at the dates of issue, and also service, of the notices; but that the periods of the notices not having expired (each has been extended from time to time and is presently the subject of an extension until further order), orders have been made by the Registrar of the District Court during the currency of the notices, under the rules of the District Court, for payment of the amount of each judgment by instalments, and for a stay of proceedings. On this basis, counsel for the debtor contends, in each case, that before an act of bankruptcy could be committed by failure to comply with the bankruptcy notice, the judgment ceased to be, within the meaning of s.40(1)(g) of the Bankruptcy Act 1966, "a judgment or order the execution of which has not been stayed".

2. It is accepted abundant authority demonstrates that, if an act of bankruptcy occurs before the intervention of a stay of the judgment on which it is founded, a subsequent stay will not prevent the making, in the discretion of the court, of a sequestration order. It is also accepted that the express prohibition in s.41(3)(b) against the issue of a bankruptcy notice, if execution of the judgment or order to which it relates has been stayed, only strikes at the case where the stay exists "at the time of the application" for the issue of the bankruptcy notice. But the debtor relies on the requirement, imposed by s.41(2)(a)(i), that the bankruptcy notice call upon the debtor to "pay the judgment debt or sum ordered to be paid in accordance with the judgment or order". Where the judgment or order has been amended during the currency of the notice so as to provide for payment by instalments, the debtor claims that the notice, though accurate at the time of its issue, and also at the time of its service, ought now to be set aside by the court.

3. The starting point must be s.40(1)(g), by which it is provided:

of the following cases:-

...

(g) If a creditor who has obtained against

the debtor a final judgment or final

order, being a judgment or order the

execution of which has not been stayed,

has served on the debtor in Australia

or, by leave of the Court, elsewhere, a

bankruptcy notice under this Act and

the debtor does not -

(i) where the notice was served in

Australia - within the time

fixed by the Registrar by whom

the notice was issued; or

...

comply with the requirements of the

notice ... ."

The effect of this section, so far as the words "the execution of which has not been stayed" are concerned, has been held not to differ from the effect of s.1(1)(g) of the English Bankruptcy Act 1914: Re Moss; Ex parte Tour Finance Ltd (1968) 13 FLR 101 at 104. (Of course the position in England is changing, but no assistance for present purposes is to be obtained from a consideration of the changes being effected by the Insolvency Act 1986.)

4. Neither in England nor in Australia, except perhaps in one English appeal last century to which I shall refer, does the precise point raised here seem to have been directly in issue in any decision. Cases have concerned questions whether a stay could be relied upon where the stay existed prior to the issue or service of a bankruptcy notice, or where it came into existence at some time after expiry of the period of the notice, but before sequestration. However, both in England and in Australia, the rule has been stated in terms which make its application depend upon whether there is a stay at the date of issue of the notice, or at latest at the date of its service on the debtor.

5. In In Re a Debtor. Ex parte The Debtor (1908) 1 KB 344, the debtor relied on what was claimed to be the equivalent of a stay of execution prior to the issue of a bankruptcy notice. At 351, Fletcher Moulton L.J. said:

"The question is whether the non-payment was

an act of bankruptcy. That must be decided

by the state of things existing at the moment

of service."

Farwell L.J. also tested the validity of the notice "at the date at which it was served".

6. But the views of those learned judges were, as I have indicated, expressed in a case calling only for a decision concerning the effect of a stay already in existence before the bankruptcy notice was issued. There is, indeed, one decision of the Court of Appeal in which the court was content to assume that the facts raised the present point, and, on that assumption, the point was decided in favour of the creditor. This case is Re Dennis; Ex parte Dennis (1888) 60 LT 348. A bankruptcy notice, founded on a judgment which had not been stayed, was served on Dennis, limiting seven days for payment. Before the expiration of the seven days, a garnishee order nisi, attaching all debts owing by Dennis to his creditor, was served on Dennis. (Subsequently, the garnishee order was made absolute, though that was after the expiry of the bankruptcy notice.) A bankruptcy petition issued, and a receiving order was made, which was the subject of the appeal. Lord Esher M.R. (with whom Fry and Lopes L.JJ. agreed) said at 349:

"(T)he only question under that sub-section

(he was referring to sub-section (1)(g) of

s.4 of the Bankruptcy Act 1883 which was

relevantly in the same terms as s.1(1)(g) of

the Bankruptcy Act 1914) is, whether there

was, at the time of the service of the

bankruptcy notice upon the person against

whom the receiving order has been made, a

final judgment against him upon which

execution had not been stayed. At the time

of the service of the bankruptcy notice upon

this judgment debtor execution on the

judgment had not been stayed, nor had

anything happened which could be suggested to

be equivalent to a stay of execution. At

that time no garnishee order at all had been

served on the judgment debtor. It is

unnecessary to consider in this case whether

the service of a garnishee order nisi upon

the judgment debtor amounts to a stay of

execution on the judgment, because not even a

garnishee order nisi had been served upon him

at the time of the service of the bankruptcy

notice. But before the expiration of the

seven days during which the notice was

pending, a garnishee order nisi was served

upon him. ... Supposing that it might

prevent him from paying, even supposing that

it did prevent him from paying, before we

give any effect to that, we ought first to

see what is the rule laid down in the Act of

Parliament. As I have said, looking at the

words only of sect.4, sub-sect.(1)(g), there

is nothing in the service of the garnishee

order at that time which would prevent the

receiving order being made. The words are:

'If a creditor has obtained a final judgment

against' the debtor 'for any amount, and

execution thereon not having been stayed, has

served on him ... a bankruptcy notice under

this Act.' That is, execution thereon not

having been stayed before the service on him

of the bankruptcy notice. In this case there

was nothing to prevent the service of the

bankruptcy notice, because, at the time of

the service, execution on the judgment had

not been stayed. The service of the notice

being, therefore, regular within the words of

the sub-section, what is to happen after the

service? ... The requirements of the notice

are that the debtor shall pay the judgment

debt, or pay or compound for it to the

satisfaction of the creditor, or satisfy the

court that he has a counter-claim. None of

those conditions have been complied with in

this case, and there is, therefore, nothing

to prevent the receiving order being made.

Looking at the words of the Act alone,

therefore, this would be a clear case."

At 350, he concluded his judgment with the statement:

"Therefore, the bankruptcy notice, which was

properly served, has not been complied with,

and there is nothing to prevent the

consequence mentioned in the Act of a

receiving order being made from following."

7. In order to understand the way in which the point arose in Re Dennis, it is necessary to appreciate that, earlier in the same year, the Court of Appeal had held, in In Re Connan. Ex parte Hyde (1888) 20 QBD 690 at 692, that a garnishee order absolute, attaching in favour of a creditor's creditor a judgment debt later made the subject of a bankruptcy notice, "operated as a stay of execution on the judgment so far as (the creditor) was concerned." Fry L.J. concluded:

"At the time, therefore, when the bankruptcy

notice was served, execution upon the

judgment was stayed so far as (the creditor)

was concerned, and he was not such a creditor

as by sub-s.(1)(g) is entitled to serve a

bankruptcy notice."

8. Much more recently, in Re A Debtor (No 26 of 1983) (1984) 2 All ER 257 at 265-6, Peter Gibson J. (with whom Megarry V-C agreed) stated the test in terms which referred to the time of issue of the bankruptcy notice. He said:

"Under the statutory predecessor of s.1(1)(g)

of the 1914 Act it was a condition for the

validity of a bankruptcy notice founded on a

final judgment or a final order that

execution had not been stayed thereon. The

Court of Appeal held that, on the true

construction of the subsection, in order to

entitle a creditor to issue a bankruptcy

notice he must be in a position to issue

execution on his judgment at the time when he

issued the bankruptcy notice."

9. In Australia, a large number of dicta point away from the proposition maintained by the debtor. Here, I take as the starting point the general proposition laid down by the High Court in Walsh v. The Deputy Commissioner of Taxation of the Commonwealth of Australia [1984] HCA 33; (1984) 156 CLR 337 at 340:

"Normally, ... it would be expected that the

validity of the notice should be tested as at

the date of its issue. ... In form the

notice speaks as at the date which it bears,

that is the date of its issue, and although

service is essential to make non-compliance

an act of bankruptcy, and although the time

fixed for compliance runs from the date of

service, the notice must be understood as

speaking as at the date of its issue and the

requirements of the notice, for the purposes

of s.40(1)(g) of the Bankruptcy Act, must be

ascertained in that context."

10. Nevertheless, in Re Moss; Ex parte Tour Finance Ltd (1968) 13 FLR 101 at 103-104, Gibbs J. stated the precise proposition with which I am concerned in terms relating the matter to the time of service of the notice. He did so in the context of an argument, which he rejected, that the words of s.40(1)(g) "the execution of which has not been stayed", caught the case of a stay which had once existed in respect of the relevant judgment, even though that stay had been removed prior to the issue of the bankruptcy notice. (Without reference to Re Moss, a similar conclusion has been reached by the Divisional Court in England in James v. Amsterdam-Rotterdam Bank N.V. (1986) 1 WLR 1278 at 1281.) Gibbs J. said:

"However, the words of the notice and of the

section speak as at the time when the notice

is served (this may have to be qualified, so

far as the notice is concerned, in the light

of the later High Court decision in Walsh's

case, but the statement, with respect,

remains persuasive in respect of the

section)and refer to a stay of execution

which has continued in force up to the time

of the service of the notice. Similarly,

s.41(3)(b), which provides that a bankruptcy

notice shall not be issued if at the time of

the application for its issue execution of

the judgment or order to which it relates has

been stayed, refers to a stay in force at the

time of the application. The effect of these

provisions is that if at the time of the

issue or the service of the notice the

execution of the judgment on which the notice

is founded has been stayed, and the stay is

still in force, so that at that time the

creditor is not entitled immediately to issue

execution on the judgment, the notice will be

bad."

Referring to the English bankruptcy legislation on the same subject, he continued:

"These provisions were usually regarded as

having the effect that the critical time for

consideration of the question whether the

execution of a judgment had been stayed was

the time at which the notice was issued."

11. Re Moss was accepted as stating the law by Riley J. in Re Padagas; Ex parte Carrier Air Conditioning Pty Ltd [1977] FCA 12; (1977) 16 ALR 475 at 476. That was a case where a stay, granted by an order for the payment of a District Court judgment by instalments, came into effect only after the expiry of the period named in a bankruptcy notice. Riley J. said:

"Had this order so operated before the time of

the issue or the service of the bankruptcy

notice, the notice would have been bad ... ."

He made a sequestration order. Both decisions were referred to by Evatt J. in Re Vittoria Di Giacomo; Ex parte Boral Steel Limited [1983] FCA 43; (1983) 68 FLR 106, where a bankruptcy notice was issued before, but served after, the making of a stay order in the District Court in respect of the judgment on which it was founded. Evatt J. followed the view expressed by Gibbs J. in the passage which I have cited above.

12. Re Moss has also been accepted as correctly stating the law by Lockhart J. in Re Francis; Ex parte Gartrell [1983] FCA 129; (1983) 77 FLR 80 at 82, and by Fisher J. in Re Williams; Ex parte General Credits Ltd [1983] FCA 40; (1983) 68 FLR 202 at 206. See too Re Bennett (1932) 5 ABC 111, and Re Seers (1955) 17 ABC 11 at 13.

13. Not only has Re Dennis stood unchallenged now for one hundred years, but in numbers of other cases, in which admittedly the precise point did not arise, courts have stated the law in terms that are consistent with Re Dennis. In my view, this court should follow those statements of the law. Therefore, I hold that the bankruptcy notices in the present case are not liable to be set aside by reason of the orders for payment by instalments, and staying execution, which were not made until after service of the notices. If the notices are not liable to be set aside, it is conceded that there is no power to grant any further extension of the time fixed by them: James v. Abrahams [1981] FCA 46; (1981) 51 FLR 16 at 22.

14. For these reasons, I shall dismiss the debtor's applications, and make orders terminating the periods of the extensions granted in respect of the bankruptcy notices pending judgment herein. I direct the creditors to bring in appropriate short minutes, in order to give effect to these reasons, on a date to be fixed. When that is done, I shall also hear any submissions the parties may wish to put in respect of costs.