Re Stec, Tadeusz Ex Parte Scragg, Peter [1997] FCA 462

IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA No. SG 7009 of 1997 DISTRICT REGISTRY BANKRUPTCY DIVISION RE: TADEUSZ STEC Judgment Debtor EX PARTE: PETER SCRAGG Judgment Creditor AND: No. SG 7059 of 1997 RE: TADEUSZ STEC EX PARTE: PETER SCRAGG Petitioning Creditor MINUTES OF ORDER JUDGE MAKING ORDER : VON DOUSSA J WHERE MADE : ADELAIDE DATE ORDER MADE : 30 MAY 1997 THE COURT ORDERS THAT:

1. There be a declaration that the bankruptcy notice issued on 13 November 1996 was not served upon the judgment debtor Tadeusz Stec on 1 January 1997.
2. The creditor's petition be dismissed.
3. The judgment creditor Peter Scragg pay the costs of Tadeusz Stec of and incidental to the bankruptcy notice and the creditor's petition. Note: Settlement and orders are dealt with by Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA No. SG 7009 of 1997 DISTRICT REGISTRY BANKRUPTCY DIVISION RE: TADEUSZ STEC Judgment Debtor EX PARTE: PETER SCRAGG Judgment Creditor AND: No. SG 7059 of 1997 RE: TADEUSZ STEC EX PARTE: PETER SCRAGG Petitioning Creditor REASONS FOR JUDGMENT Coram : von Doussa J Place : Adelaide Date : 30 May 1997 There are two applications for hearing. The first is an application for review of a decision of a Deputy Registrar who refused an order to set aside a bankruptcy notice addressed to Tadeusz Stec ("Mr Stec"). The bankruptcy notice had been issued by a judgment creditor, Peter Scragg ("Mr Scragg"). The second application is a creditor's petition issued by Mr Scragg against Mr Stec. The act of bankruptcy relied upon is the failure to comply with the bankruptcy notice which the Deputy Registrar refused to set aside. The two matters are therefore interrelated. Mr Scragg is a solicitor. In 1995 Mr Scragg acted in relation to Supreme Court proceedings in which Mr Stec had an interest. Subsequently Mr Scragg sued Mr Stec for legal fees. Mr Stec has at all times disputed liability for these fees on the ground that he was not the contracting party, or in the alternative on the ground that he has a substantial counter-claim against Mr Scragg for negligent advice and professional defaults which substantially exceeds the amount which Mr Scragg claims. It is not necessary for present purposes to go into all the matters raised by Mr Stec. The papers on the Court file suggest that these grounds, or at least some of them, were raised in proceedings in the Adelaide Magistrates Court which resulted in the judgment against Mr Stec on which the bankruptcy notice is based. That judgment was the subject of a review by a District Court judge who dismissed the application for review. On 13 November 1996 Mr Scragg issued the bankruptcy notice the subject of the present proceedings. On 1 December 1996 the bankruptcy notice was served by a process server, Mr Bowering, on Mr Stec's wife. On 2 December 1996 Mr Bowering swore an affidavit of service to which was annexed a sealed copy of the bankruptcy notice in accordance with rules 7(2)(b) and 16(a) of the Bankruptcy Rules. The affidavit was forwarded to the Federal Court by Mr Scragg by letter dated 4 December 1996 and was marked as filed and placed on the Court file in the Registry on 6 December 1996. The process server pointed out to Mr Scragg when the affidavit of service was forwarded to him that service might not be adequate. The bankruptcy notice had been given to Mr Stec's wife as he was on 1 December 1996 in ill health, confined to bed. Mr Scragg, correctly, considered that the purported service was invalid and took steps to have the bankruptcy notice re-served. On 1 January 1997 another process server, Ms Hatibovich, purported to effect service of the bankruptcy notice. On 10 January 1997 she swore an affidavit which was later filed at Court which deposed that: "1. On Wednesday the 1st day of January, 1997 at approximately 3.15 o'clock in the afternoon I served TADEUSZ STEC at 9 Darwendale Street, Hackham West in the said State with the following document: (a) An official copy of the Bankruptcy Notice issued on the 13th day of November, 1996 and signed by the Deputy Registrar. 2. At the time of service I identified the person whom I served by the following conversation: I said, 'What is your full name?' He said, 'Tadeusz Stec.' I then said, 'I have a Bankruptcy Notice to serve on you in which Peter Scragg is the Creditor. Have you had any business dealings with Peter Scragg?' He said, 'Yes.' I then handed him the document referred to in paragraph one hereof and he appeared to read same. Finally I said, 'Are you the Debtor referred to in this Bankruptcy Notice?' He said, 'Yes.' 3. Annexed to this Affidavit and marked with the letter 'A' is a true copy of the said Bankruptcy Notice, a true copy of which was served on TADEUSZ STEC. 4. I have attained the age of 16 years. 5. I know the facts deposed to herein to be of my own knowledge and belief except where otherwise appears." On 15 January 1997 the debtor made application to Court to set aside the bankruptcy notice on several grounds. That application was heard by Deputy Registrar Fisher who dismissed it on 6 March 1997. On 27 March 1997 Mr Stec made application to have the decision of Deputy Registrar Fisher reviewed. In the meantime the creditor's petition had been issued on 11 March 1997. Both matters were referred to me for hearing. Mr Stec filed a lengthy and detailed affidavit raising many grounds challenging the validity of the bankruptcy notice. However he added to these grounds in a notice of opposition to the petition filed on 20 May 1997. He sought to have the additional grounds considered on both applications. One new ground raised in the notice of opposition, which had not been canvassed before the Deputy Registrar, was that the document served upon Mr Stec on 1 January 1997 was not a document which complied with the Bankruptcy Rules. In particular it failed to comply with rule 15(a) which requires, unless otherwise ordered under s.309(2) of the Bankruptcy Act 1966, that service of a bankruptcy notice shall be effected on the debtor by delivering to the debtor personally a copy of the bankruptcy notice signed and stamped by the Registrar. There is no order under s.309(2). As this ground raised a fundamental threshold point I requested the parties to address it at the outset of the hearing. Mr Stec gave evidence that he had been served with a photocopy of the bankruptcy notice, and he produced a document which he said was the one that he had received. It was indeed a photocopy, the original of which appears to have borne the seal of the Registrar in Bankruptcy, and the signature of a Deputy Registrar. The photocopy document however also had typed at the top "A", and at the foot of the first page appeared a discolouration suggesting that something had been covered by another piece of paper at the time when the photocopying occurred. Mr Stec was vigorously cross-examined. It was suggested that the allegation that he had been served only with a photocopy was a late and dishonest invention by Mr Stec. It was put to him that the document that he had produced had been photocopied from the Court file. Mr Stec, who is unrepresented, explained that the question of service had been raised by him belatedly because he was not aware of rule 15 until he recently read the Bankruptcy Act and Rules. He denied the allegations of dishonesty. Mr Scragg called a number of witnesses with the intention of establishing that a bankruptcy notice, bearing the blue seal of the Registrar in Bankruptcy, and the signature of a Registrar, was served validly on 1 January 1997, namely Ms Hatibovich, Ms McQuade (Mr Scragg's secretary), Ms Brock (the office secretary of the process serving firm who had instructed Ms Hatibovich) and Mr Hegarty (a recently admitted legal practitioner who was fulfilling the requirements of the Law Society Practical Legal Training program in Mr Scragg's office). Ms Hatibovich said that she received instructions to serve the bankruptcy notice from Ms Brock. She received only one copy of the bankruptcy notice, namely that which she gave to Mr Stec. To the best of her recollection she said she served a document bearing a blue seal. She thought she would have noted that it was only a photocopy that she was being asked to serve if that were the case. The notes that she kept about the service were, to say the least, uninformative. She made no note which would indicate whether the document served was an original or a photocopy. Although the identity of the person served is not an issue in this case, I also note that she made no note of the conversation or other events which occurred at Mr Stec's home at the time of service. Ms McQuade was responsible for making arrangements within Mr Scragg's office to have the bankruptcy notice re-served. Although she had no note to this effect, nor was anything said in Mr Scragg's correspondence to the process server on the topic, she thought that she had forwarded to the process server two sealed copies of the bankruptcy notice. She said that she thought Mr Hegarty had uplifted the necessary copies from the Federal Court for this purpose. Ms Brock said that the firm for which she worked had received instructions both in respect of the invalid service on 1 December 1996 and in respect of the further service on 1 January 1997. On the second occasion she said she had received from Mr Scragg's office a letter which said: "I refer to the above matter and return your affidavit of service dated the 2nd December 1996. Unfortunately the court will not accept anything but personal service in relation to Bankruptcy Notices. I should be pleased if you would have the notice served personally at your earliest possible convenience." From the file maintained by Ms Brock was produced the original affidavit of Mr Bowering together with Mr Scragg's letter of 4 December 1996 addressed to the Federal Court. These documents bear the Federal Court stamp and, in circumstances still unexplained, these documents must have been "uplifted" from the Court file. The affidavit of Mr Bowering no longer had attached to it the original exhibit mark "A" which had been endorsed as the annexure to Mr Bowering's affidavit. The affidavit of service sworn by Ms Hatibovich had attached to it a bankruptcy notice bearing the blue seal of the Registrar in Bankruptcy and an original signature of a Deputy Registrar. This document was marked "A" at the top, and at the foot of the first page bore an endorsement indicating that it had been the exhibit "A" to the affidavit of Mr Bowering. It bore another endorsement indicating that it was also the exhibit to Ms Hatibovich's affidavit. Plainly, the document had been taken from Mr Bowering's affidavit and used to enable Ms Hatibovich to complete an affidavit which in form complied with rule 16 of the Bankruptcy Rules. Ms Brock was unable to say positively that the document which she gave Ms Hatibovich for service was an original copy of a bankruptcy notice bearing a blue seal and a Registrar's signature. However as it was her normal practice to check that documents were in order before instructing a process server, she assumed that a document that was duly sealed had been given to Ms Hatibovich. Ms Brock also outlined the office procedures which led to the preparation of the affidavit of service later sworn by Ms Hatibovich. Further reference is made to these procedures at the end of this judgment. Mr Hegarty's testimony fell far short of establishing that he was instructed to attend the Federal Court to acquire additional copies of a bankruptcy notice duly signed and stamped for service. He had only a vague recollection of attending the registry. His recollection was that he was instructed to check the records of the Court, but could not say what documents, if any, he obtained from the Court. Unfortunately none of the witnesses called by Mr Scragg had maintained notes which enabled them to have given evidence with confidence that the documents which they handled were duly signed and stamped copies of the bankruptcy notice, and that the document served on Mr Stec was not a photocopy. The disputed question of fact can however be decided with confidence, not just by accepting the evidence of Mr Stec in preference to that of the other witnesses, but by considering how he could have come by the document which he produced as that served on him if it were not the document that had been given to him by Ms Hatibovich. The suggestion that Mr Stec obtained the document by photocopying another document on the Court file can be rejected as impossible as there is no document on the Court file the same as that produced by Mr Stec. The presence of the endorsement "A" at the top of the document produced by Mr Stec, and an irregularity in the way the action number has been written in by hand in the heading to the document identifies it as a photocopy of the bankruptcy notice which was attached to Mr Bowering's affidavit as "Exhibit A", and which is now exhibited to Ms Hatibovich's affidavit. As already indicated, there is a discolouration at the foot of the first page of the document produced by Mr Stec which has all the appearances of being the result of the exhibit endorsement made at the time when Mr Bowering swore his affidavit being covered up for the purpose of the photocopying. I therefore find that Mr Stec was served on 1 January 1997 with a photocopy of the bankruptcy notice. I accept his evidence in this respect. I find that the evidence of the witnesses called by Mr Scragg, insofar as it suggested to the contrary, was mistaken. The bankruptcy notice was issued before the Bankruptcy Legislation Amendment Act 1996 (Act No. 44 of 1996) came into force on 16 December 1996. The Bankruptcy Rules then in force were the rules made under the Bankruptcy Act. Since 16 December 1996 the Bankruptcy Rules have operated by force of Order 77 of the Federal Court rules. It is not suggested in the present case that anything turns on the change in status of the Bankruptcy Rules. Rule 7(2)(b) of the Bankruptcy Rules requires a party seeking to have a bankruptcy notice issued to furnish to the Registrar, for signature and stamping by the Registrar, so many copies of a form of bankruptcy notice as are required for service and for annexure to any affidavits of service, and one additional copy of that form for filing. Thus, where the bankruptcy notice is to be issued against one debtor only, the requirement of the rules is for the party making the application to furnish the Registrar with three copies. It is the practice of the registry in such a case to have the Registrar, or a Deputy Registrar, seal and sign three copies. One original copy is kept on the Court file (the Court file indicates that this occurred in the present case) and two sealed and signed copies are returned to the applicant for service. In the present case there is no reason to doubt (and Mr Stec's evidence tends to confirm) that a duly signed and stamped copy of the bankruptcy notice was given to Mr Stec's wife on 1 December 1996. Another copy then became an exhibit to Mr Bowering's affidavit. On the evidence I am in no doubt that when the irregularity in the service was recognised, Mr Bowering's affidavit was retrieved from the Court file, in circumstances which remain obscure. A photocopy of the bankruptcy notice was then created using the exhibit to that affidavit as the master copy. Whilst the annexure endorsement prepared when Mr Bowering swore the affidavit was covered up, the endorsement "A" was not. The photocopy was then served on Mr Stec, and the one signed and stamped copy then in possession of Mr Scragg and his agents, was used for the purposes of the annexure to Ms Hatibovich's affidavit. In Re DeIeso (1978) 24 ALR 701 Judge Rogerson sitting in the Court of Insolvency of the State of South Australia held that there had been no valid service of a bankruptcy notice where the process server showed the debtor a duly signed and sealed bankruptcy notice, and left him with a photocopy of that document. After consideration of the requirements of the Bankruptcy Rules, his Honour held that the photocopy document served on the debtor was not a bankruptcy notice and that the debtor had not been served with a bankruptcy notice. This decision is relied on in the commentary to rule 15 in McDonald, Henry and Meek, Australian Bankruptcy Law and Practice, 5th Edition (see R.15.0.10), as indicating that the rules require that the document served on the debtor must itself bear the Registrar's own stamp and signature and not a reproduction of it. See also Re Leppard; Ex parte Fortune (Aust.) Pty Ltd (1974) 25 FLR 158; Re Hatchett; Ex parte Shell Co. of Australia Ltd (1985) 11 FCR 118; and Re O'Sullivan; Ex parte Bank of New Zealand (1991) 30 FCR 112. I hold that in the present case the document which was served on Mr Stec on 1 January 1997 was not a bankruptcy notice. As the bankruptcy notice has not been served on Mr Stec, there has been no act of bankruptcy and the creditor's petition must fail on this ground. Rule 9 of the Bankruptcy Rules, continued in force by Federal Court Rule O.77, requires that service of a bankruptcy notice be effected within six months after the day on which it is issued or within such extended period as the Court or a Registrar allows by an order made before the expiration of that period or of any extended period previously allowed. In the present case there has been no order extending the time for service of the bankruptcy notice and it became stale on 13 May 1997. The issue of bankruptcy notices is now governed by the Bankruptcy Regulations which came into force on 16 December 1996. A new form of bankruptcy notice is now prescribed by regulation 4.02 and Form 1. The form is significantly different to the former requirements of the Bankruptcy Rules. Even if the Court has power, notwithstanding that the time for service has expired, to extend time to serve a bankruptcy notice, I do not think that an extension should be granted. I consider that a bankruptcy notice in accordance with the present requirements of the Regulations should now be issued by Mr Scragg if he wishes to pursue proceedings for bankruptcy against Mr Stec. As the bankruptcy notice has become stale, and as the creditor's petition must be dismissed, I think it is inappropriate to embark upon a consideration of the other grounds upon which the bankruptcy notice was challenged. There are two further matters that require comment. The first matter concerns a submission by Mr Scragg that the bankruptcy notice was validly served, notwithstanding the events already discussed, because Mr Stec admitted that his wife in about early May 1997 had shown, or given, him the document which was served on her by Mr Bowering on 1 December 1996. In my opinion even if Mrs Stec had delivered the bankruptcy notice served on her on 1 December 1996 to Mr Stec before it became stale on 13 May 1997, that delivery would not constitute service of the bankruptcy notice for the purpose of the Bankruptcy Act: see Re Florance; Ex parte Turimetta Properties Pty Ltd (1979) 28 ALR 403 at 411. The Bankruptcy Act and Rules, and in particular rules 15(a), 16(a), and 122, contemplate that there will be a formal act of service by the petitioning creditor or by someone acting on behalf of the petitioning creditor. The formality of the act of service is important as the date when service occurs is critical in determining if and when an act of bankruptcy has occurred. It is for this reason that it is essential that due service in accordance with the statutory rules is insisted upon: Re Long; Ex parte Fraser Confirming Pty Ltd (1975) 24 FLR 392 at 395, and Re Ditfort; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347 at 359. It is essential to the proper working of the procedure initiated by the service of a bankruptcy notice that the date and manner of service be capable of reliable proof by the petitioning creditor. In my opinion the scheme of the legislation does not contemplate that a bankruptcy notice would be sufficiently served if, for example, the debtor by chance took a copy of the notice into his hands whilst searching the Court file, or if the debtor happened to find it after it had been accidentally dropped, for example, by a process server that had earlier waited in vain for the debtor to return home. In the present case I do not consider that the casual handing of a signed and stamped copy of the bankruptcy notice by Mrs Stec to her husband constitutes valid service of the bankruptcy notice. The judgment creditor had attempted service. The notice was invalidly served on Mrs Stec on 1 December 1996. On that occasion it was given by someone acting for the judgment creditor to someone who was not so acting. That, in my opinion, is where the inquiry regarding service of that copy of the bankruptcy notice should stop. In Re Goldberger [1958] QWN 41 Philp J expressed the view that good service on a husband would occur where a bankruptcy notice was served on the wife who later handed it to her husband on the same day. That observation was not a necessary step in the reasons for judgment, and it has not been followed in later cases: see Re Fairlie; Ex parte Armco Australia Pty Ltd (1969) 14 FLR 61 at 67; Re Long at 397-398, and Re Ditfort at 359. The second matter concerns the affidavit of service sworn by Ms Hatibovich. I earlier set out the text of the affidavit, and in particular paragraph 2 which purported to depose to a conversation which occurred with Mr Stec at the time of service. When Ms Brock described the office procedure which led to the preparation of this affidavit it transpired that paragraph 2 was produced automatically from a computer program. When Ms Hatibovich returned the report on service to her employer, she had done no more than place a tick against "Personal Service" in a section of her instruction sheet which read: TYPE OF SERVICE: PERSONAL ( ) NON-PERSONAL ( ). Ms Brock said that when such a report was received it was treated as a normal service, and the computerised form of conversation was automatically produced in the affidavit of service. Only if the process server recorded something unusual about the service would any specific instructions be taken about the terms of the conversation. This trivialisation of the importance of an affidavit of service is a matter for serious concern. There is in force in this State legislation regulating the conduct of process servers: see Security and Investigation Agents Act 1995 (S.A.). Regulation is imposed in the public interest to ensure that competent and responsible people undertake the task of serving process. One of the reasons for this is to minimise the risk that the Court will be wrongly informed that service has occurred in a proper manner on the party named, when this has not in fact happened. Disputes as to the identity of the party served may not be common, but the occasions when a dispute will arise cannot be foreseen. In consequence every case should be treated as if it may give rise to dispute. Conversations which occur are an important means of identification, and it is therefore of importance that they be accurately recorded. To allow purported conversations to be electronically produced in the manner which occurred in the present case would be to encourage the swearing of false affidavits of service, and to sanction a procedure which would be likely from time to time to seriously mislead the Court, and to cause parties involved in litigation substantial waste of time and money. Process servers, if they are to perform their functions in an acceptable way, should make meaningful and accurate notes as soon after the event as possible of conversation which has occurred, and of any other events which may be relevant to the question of identification of the party served. This is not an arduous task, and it is one regularly performed by police officers and many agents who are involved in investigative and procedural steps which may later need to be proved. As this case indicates, process servers and employees in legal offices who routinely perform many similar tasks will have no particular reason to remember one case from another. As the witnesses who gave evidence in the present case did not keep notes which would enable them to refresh their memory with confidence should a dispute arise, it is hardly surprising that their best recollections turned out to be wrong. This case is perhaps unusual in that it was possible by reference to the various documents in the Court files to exclude the possibility that they were right and Mr Stec's evidence was wrong. The orders of the Court are as follows:

1. That there be a declaration that the bankruptcy notice issued on 13 November 1996 was not served upon the judgment debtor Tadeusz Stec on 1 January 1997.
2. That the creditor's petition be dismissed.
3. That the judgment creditor Peter Scragg pay the costs of the judgment debtor of and incidental to the bankruptcy notice and the creditor's petition. I certify that this and the preceding pages are a true copy of the Reasons for Judgment of Justice von Doussa Associate: Dated: Mr Stec appeared for himself Counsel for the respondent : Mr P A Scragg Solicitor for the respondent : Peter Scragg Date of hearing : 23 May 1997