St George Wholesale Finance Pty Ltd v Spalla

Column 1 Column 2

1 Amount of judgment or order $2,781,173.53 Plus 2 Legal costs if ordered to be paid and a specific amount was not included in the judgment or order (see Note 1 below) To be taxed Plus 3 If claimed in this Bankruptcy Notice, interest accrued since the date of judgment or order (see Note 2 below) Nil 4 4 Subtotal $2,781,173.53 Less 5 Payments made and/or credits allowed since date of judgment or order Nil 6 Total debt owing $2,781,173.53

8 The notice was served pursuant to an order for substituted service made by Registrar Fary on 10 September 1999, the deemed date of service being 24 September 1999. 9 The petition was filed on 24 December 1999. On the same date Mr Wayne Phillips, State Manager Victoria, Commercial and Automotive Finance for St George, swore an affidavit deposing that he had access to the books and records of St George and was authorised by it to make the affidavit on its behalf. He deposed amongst other things the statement in par 1 of the petition was, within his own knowledge, true. Paragraph 1 stated: "The Respondent Debtor owes the Applicant Creditor the amount of $2,781.173.53 for moneys owed pursuant to a judgment sum for this amount entered by the Federal Court against the Respondent Debtor in favour of the Applicant Creditor on 30 April 1999." 10 The petition was served personally on Mr Spalla on 5 January 2000. It was returnable on 9 March. On that day solicitors on Mr Spalla's behalf filed a notice of intention to oppose dated the previous day. The notice stated inter alia: "1. That payments have been made to, or monies have been received by, the judgment creditor sufficient to extinguish the judgment debt. 2. That there is no debt owed by the respondent debtor to the judgment creditor in truth or reality." 11 On 9 March Mr Peter Beed, St George's Senior Manager, Commercial and Automotive Finance, swore in an affidavit that he had searched the accounting records kept by St George relating to Mr Spalla and that such search disclosed that the amount of $2,781,173.53 owing by Mr Spalla to St George "pursuant to a judgment obtained in the Federal Court at Melbourne on 30 April 1999 remains due and unpaid". On the same day the further hearing of the petition was adjourned to 17 April. Directions were given for the filing of affidavits. 12 On 24 March Mr Spalla swore an affidavit. He deposed that the books and records of the Spalla companies were in the possession of the receiver and that his affidavit was sworn "on the basis of limited documentation currently available" to him and that neither the receiver nor St George had ever accounted to him for the realisation of assets of the Spalla companies. In around March or April 1999 he had received an estimated statement of the position of the Spalla companies as at 12 February 1999 prepared on behalf of the receivers. He then deposed to the following matters: (i) Money was owed by Delta Car Rentals to Irlmond for vehicles sold. Mr Spalla believed that as at 12 February 1999 the amount was between $583,582 and $606,000. An internal email within St George of 22 February 1999 referred to $783,583 being owed by Delta. On 29 April 1999 Mr Cahill of St George gave evidence before Registrar Seccombe as to a total indebtedness of Delta of $806,419.99. A few days before the appointment of the receivers on 12 February 1999 Delta paid Irlmond $200,000. Mr Spalla believed that as at the date of appointment Delta owed Irlmond between $583,582 and $606,000. (ii) An amount of $452,316 was owed to Irlmond by other vehicle debtors. Those debtors included long-standing customers such as Kodak, Scotch College, the University of Melbourne, various government departments and agencies and religious orders. Mr Spalla's experience of those customers was that he would expect the amounts due by them would have now been paid in full either by cash payments or by the delivery of a trade-in. Mr Spalla was informed by Mr Woody Wunsch, an officer of Delta, that Delta's indebtedness to Irlmond had now been paid in full. (iii) On about 28 June 1999 the receiver received $1.3 million from PBJ Gorell Pty Ltd for the sale of the business of APS. (iv) The statement of position referred to a number of used vehicles owned by Irlmond as at the date of appointment. A number of those vehicles were unencumbered. The amount paid for those vehicles by Irlmond totalled at least $806,363. All of those vehicles have been sold. The amount received for them should have been credited against the amount claimed by St George as well as the value of the unsold vehicles, if any. (v) The statement of position showed seven unencumbered vehicles which from their stock numbers Mr Spalla could say were Mitsubishi vehicles. The value of each he estimated to be in excess of $15,000, a total of $105,000. (vi) Mr Spalla's recollection was that there was approximately $660,000 in the bank accounts of the Spalla companies as at 12 February 1999. (vii) The statement of position referred to parts and service debtors, factory receivables, sales tax claims and other amounts owing to the Spalla companies. In his experience 70% of such amounts should be recoverable. The amounts listed in the statement of position as to factory receivables and sales tax claims were: Factory Receivables $377,000 Sales tax claims $79,000 $456,000 Recoverable $309,200 (viii) The statement of position showed Irlmond owned plant and equipment recorded at a written down value of $500,000. Mr Spalla then estimated the amount of credits against the amounts claimed in the creditor's petition as follows: Debtors of Irlmond (a) Debtors of Irlmond $606,000 (b) Other vehicle debtors $452,316 (c) Factory receivables and sales tax $319,900 PBJ Gorell Pty Ltd $1,300,000 Unencumbered used vehicles $806,363 Unencumbered new vehicles $105,000 Bank accounts $660,000 Plant and equipment $500,000 $4,749,579 13 On 10 April St George filed an affidavit by Mr Daniel Gerard Patrick Cahill its Dealer Manager Automotive Finance. He deposed that since the appointment of the receivers a total of $2,122,762.65 had been applied in reduction of the judgment debt. The details were APS 27 June 1999 $1,300,000.00 31 August 1999 $283,582.65 10 September 1999 $300,000.00 27 September 1999 $100,000.00 Irlmond 17 May 1999 $125,180.00 24 May 1999 $14,000.00 14 Mr Cahill also deposed that there were receivers and managers' costs totalling $560,000, legal costs $696,804.95 and interest for APS $163,082.62 and Irlmond $135,402.19 calculated at the St George dealer rate. Mr Cahill disputed a number of the items in Mr Spalla's affidavit. For present purposes it is not necessary to go into this detail because Mr Cahill's summary of what he believed the "current indebtedness" of Mr Spalla was as follows: Judgment debt $2,781,173.53 Plus legal costs to date (less $30,000 already applied) $666,804.95 Plus receivers and managers' costs $560,000.00 Plus interest $298,484.81 Sub total $4,306,463.29 Less money applied in reduction of judgment debt $2,122,762.65 $2,183,700.64 ____________ 15 A number of points need to be made at this stage. Of the amounts admittedly received in reduction of the Spalla companies' judgment debt, a total of $1,439,180 was received by St George prior to the issue of the bankruptcy notice, which as already noted, stated that nil payments have been made or credits allowed since the date of the judgment. Secondly, no legal costs were claimed in the notice. In the schedule it was simply stated that costs were "to be taxed". Thirdly, receivers and managers' costs did not form part of the judgment. Fourthly, no interest was claimed in the notice. Thus at the time of the issue of the notice the amount owing under Finkelstein J's order was, on St George's case, not $2,781,173.53 but $1,341,993.53. Further payments and credits had reduced the judgment debt as at the date of the petition to $658,410.88, less than a quarter of the amount which Mr Phillips swore was owing as at that date under the order. Notwithstanding the matters disclosed in Mr Cahill's affidavit, St George was pressing (as it continues to do) for a sequestration order on the ground of non-compliance with a bankruptcy notice which, on its own case, overstated the amount due under the judgment by $1.44 million. 16 On 5 May the petition came on for hearing before Finkelstein J. Shortly before that, on 27 April, St George's solicitors had sent a copy of the receivers' accounts filed at the Australian Securities and Investment Commission to Mr Spalla's then solicitors. There was a change of solicitors. At the hearing on 5 May counsel for St George conceded that there was an overstatement of "about half" in the notice but asserted that Mr Spalla was not entitled to attack the notice on the ground of overstatement because he had not relied on it in his grounds of opposition and had not complied with s 41(5). Counsel for Mr Spalla sought an order for discovery. After some debate his Honour suggested to counsel for St George (transcript p 9): "… isn't it sensible in any event to see if you can work out precisely how much is being [sic] repaid. There are really two questions, aren't there. What was the precise amount of the indebtedness as at the date of issue of the bankruptcy notice itself. That's the key question from your point of view. And from Mr Spalla's point of view, he has got another question as well which is 'What's the current state of the indebtedness as at this minute?' Because, I don't know, maybe he wants to do something about it, maybe he doesn't, I don't know, but he has got two critical questions and you have got one critical question. Counsel for St George agreed. 17 In the event, his Honour adjourned the case sine die indicating that because of his commitments another judge might be required for any further hearing. Another factor was that Mr Spalla had lodged an application for special leave to appeal against the Full Court's judgment and the High Court was due to hear his application on 26 May. In the event that application was abandoned on the day of the hearing. 18 On 25 May Mr Spalla's solicitors sent a fax to the solicitors for St George as follows: "We refer to previous correspondence in this matter and to the hearing of this matter before Finkelstein J on 5 May 2000. At the hearing, His Honour indicated that in his view our client is entitled to know the amount currently claimed to be owed to your client by Mr Spalla. Accordingly, we request that you provide by return the following information:

1. The debt owed to your client as that of these dates: a) the date of appointment of the Receiver & Manager b) the date of the issue of the Bankruptcy Notice c) the current debt
2. details of payments that have been made to your client and applied in reduction of the indebtedness of APS Pty Ltd. Irlmond Pty Ltd and Mr Spalla; a) between the date of appointment of the Receiver & manager and the date of issue of the Bankruptcy notice; b) since the issue of the Bankruptcy notice;
3. the indebtedness claimed by [sic] in addition to the judgment debt. We request that you identify: a) the source of that indebtedness, b) how it is calculated. We enclose for your attention a copy of our facsimile to Mr Beck." 19 On the same day the solicitors sent a fax to the receivers as follows: "We are instructed to act on behalf of Mr Spalla in his defence of bankruptcy proceedings brought by St George Wholesale Finance Pty Ltd in the Federal Court. We advise that there was a Directions Hearing before Finkelstein J on 5 May 2000. At the hearing, His Honour indicated that in his view our client is entitled to know the amount currently claimed to be owed to St George Wholesale Finance Pty Ltd by Mr Spalla. Accordingly, we request that you provide by return the following information:
4. details of payments made to St George Wholesale Finance Pty Ltd in your capacity as Receiver & Manager;
5. details of payments that have been made specifically in reduction of the debt of St George Wholesale Finance Pty Ltd since the date of the commencement of the Receivership;
6. details of payments that relate to new debts incurred by the Receiver after his appointment.
7. The amount owed by APS Pty Ltd and Irlmond Pty Ltd as at the date of the Bankruptcy Notice and the current amount owed.
8. The amount owed by APS Pty Ltd and Irlmond Pty Ltd as at the date of your appointment as Receiver & Manager. Furthermore, we request that you provide this information by reference to the account of receipts and payments filed with ASIC." 20 St George's solicitors replied by fax dated 29 May stating: "All of the information you have requested is contained in the affidavit of Daniel Patrick Gerard Cahill or the report of the receivers and managers filed at the ASIC, a copy of which has been provided to you." 21 The same solicitors by fax of the same date sent another fax stating that they acted for the receivers. The fax continued: "We are instructed to respond to your letter of 25 May 2000. The information has been provided to you. We suggest that you work through the ASIC records yourself." 22 On 11 July, on a motion by St George, Registrar Efthim gave leave to amend par 1 of the petition to substitute $658,410.88 for the amount of $2,781,173.50. Reverification and reservice of the petition was dispensed with. St George's motion had been supported by an affidavit sworn by Mr Cahill on 7 July deposing that the amount which was "actually owed" to St George at the date of the bankruptcy notice was $1,341,993.53 and at the date of the petition $658,410.88. 23 On 13 July Mr Spalla filed a notice of motion seeking an extension of time to 8 March 2000 for the giving of a notice under s 41(5) disputing the validity of the bankruptcy notice on the ground of mis-statement of the sum specified therein as being due to St George. 24 In support of this motion Mr Spalla swore an affidavit on 13 July. He deposed amongst other things that having been a director of the Spalla companies he was aware that the companies had substantial assets the realisation of which must, over time, have reduced his debt. However the receivers had never supplied him with any accounting from which he might satisfy himself as to the true level of indebtedness. He deposed that on 14 April 1999 the value of the floor plan was increased by approximately $2.5 million. There was no record of that amount being paid to the receiver. Further he said that in the statement of position as at 24 May 1999 it was stated that some funds transferred to St George did not relate to converted sales and that a reconciliation may be necessary. There had been no reconciliation provided to Mr Spalla. Further he deposed that on the return of the petition on 9 March after obtaining directions from Registrar Wood for the exchange of affidavits his counsel handed to counsel for St George a schedule of documents to be discovered. A few days before the further hearing of the petition on 5 May St George made available to him a bundle of documents which he understood to be a copy of the receivers' accounts of receipts and payments. The receivers' accounts of receipts and payments did not make clear to him the extent of the reduction of his indebtedness. He noted that in the hearing before Finkelstein J on 5 May counsel for St George for the first time conceded that the amount stated as being due on the bankruptcy notice exceeded the amount in fact due by as much as half. He deposed that he had attempted to reconcile the amounts referred to in Mr Cahill's affidavit with the receivers' receipts and payments but had been unable to do so. 25 The only response on behalf of St George was an affidavit sworn by Mr Phillips on 18 July stating that on 4 May 2000 St George Motor Finance Ltd had commenced proceedings in the Supreme Court of Victoria against Mr Spalla claiming $218,105.40 plus interest at the rate of 9 per cent from 16 November 1999. The relevance of this fact for the purposes of the present proceeding is not apparent to me. 26 At the hearing before me on 24 July counsel for Mr Spalla stated (transcript p 4): "Your Honour, Mr Spalla is in an unenviable situation in that since the date of judgment, indeed since the date of the appointment of receivers, apart from the receivers' accounts, receipts and payments, he has not had access to information which would enable him to ascertain the extent to which his liability under the guarantee has been reduced by the realisation of assets of the principal debtors, Irlmond and APS. After the expiry of the bankruptcy notice very early this year Mr Spalla became aware that it was likely that the assets - he believed that the assets were sufficient to reduce the debt absolutely, fully. He filed his notice of opposition to the petition on the grounds that the debt had in fact been satisfied. He was unable to confirm that because he has never had an accounting from the receivers. To this day he hasn't had it. He has the receiver's accounts, receipts and payments but he, as your Honour will see from his affidavit material, cannot reconcile, indeed I can't reconcile, what is in the receivers' accounts with what Mr Cahill says in his affidavits about what St George has received. When one looks at the accounts, receipts and payments, it seems that a great deal more money has been paid to St George than is suggested by Mr Cahill and that appears from Mr Spalla's material which I will take you to." Later counsel said (transcript p 8): "Essentially what I was submitting to (Finkelstein J) was that it now appeared that Mr Spalla's suspicions about the reduction of the judgment debt had some basis and I sought directions for discovery of material so that we could ascertain exactly what St George had been paid. What his Honour suggested on that occasion was that Mr Spalla go to the receivers' account of receipts and payments and ascertain from that what has been paid to St George. I have those accounts with me in court. They are very complicated They are two arch lever folders worth of documents and they demonstrate all sorts of payments being made to St George which on my examination and my client's examination cannot be reconciled with what Mr Cahill says in his affidavit. And again (transcript p 13): "The point here is and this is important from your Honour's discretionary point of view, Mr Spalla was not in a position to and even today is not in a position to quantify the extent of the overstatement exactly. St George has attempted to quantify the overstatement for us, but we don't think it's gone far enough, because of the receivers' accounts." 27 These submissions were not contested by counsel for St George. Mr Spalla was not cross-examined.

Is s 41(5) applicable? 28 It could not be disputed that the notice of 28 July 1999 was defective in that it stated that no payments had been made and/or credits allowed since the date of the judgment or order whereas in fact credits or payments amounting at least to $1,439,180 had been received. Therefore the notice was not in accordance with the form prescribed because it did not provide information required by the schedule. In my opinion this particular defect is not within s 41(5) because the defect is not "only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due" (emphasis added). It is true that the amount specified in the notice as due ($2,781,173.50) exceeded the amount in fact due. However there was another and separate, albeit related, defect in the non-recording of payments or credits received. Since s 41(5) does not apply, no question of extending the time for giving of a notice arises.

Was the defect merely "formal"? 29 Counsel for St George submitted that, even if s 41(5) did not apply to the omission of the amounts paid or credited, such a defect was not in respect of a "requirement made essential by the Act" (Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79-80) but a "formal" defect which could be cured under s 306(1), which 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." 30 Non-compliance with a form must be "formal", so the argument goes. But, since the 1996 amendments, the Act's only provision as to what a bankruptcy notice must contain is that it "must be in accordance with the form prescribed by the regulations": s 41(2). So on the logical extension of St George's argument any defect in a bankruptcy notice, however gross, must be merely "formal", because it relates to a form. This cannot be right. Such a construction would conflict with a basic tenet of bankruptcy law. As Lockhart J said in Re Wimborne (1979) 24 ALR 494 at 498: "The courts have said time and time again that bankruptcy notices must conform strictly to the requirements of the bankruptcy legislation and rules of court; see James v FC of T (1955) 93 CLR 631, especially per Williams, Kitto and Taylor JJ at 644; Re Howes; Ex parte Hughes 161; Re O'Keefe; Ex parte Australian Factors Ltd (1963) 19 ABC 101, and Re Mellick (1971) 19 FLR 1." 31 There is nothing in the 1996 amendments to suggest a legislative intention to reverse this approach. The answer to St George's argument is, as Kleinwort Benson at 77 makes plain, that "formal" means not substantive. It is not necessary to enter into the current controversy arising out of the Full Court decisions in Kirk v Ashdown [1999] FCA 166 and Trustees of the Franciscan Missionaries of Mary v Weir [2000] FCA 574 on the one hand and Bendigo Bank Ltd v Williams [2000] FCA 482 on the other. These cases dealt (although in Franciscans only by way of obiter) with a failure to state the provision under which interest is claimed. Unlike the present case, the defects did not affect the correctness in fact of the dollar amounts claimed to be owing by the debtors. 32 If the Act requires a bankruptcy notice to be in the form prescribed by the regulations, and that form requires the creditor to state the payments made or credits allowed since the date of the judgment which founds the notice, and such payments or credits amounting to at least $1,439,180 have in fact been made, and a notice entirely omits that amount and claims the gross amount of the judgment, I do not see how it can be seriously argued that there has not been a failure to meet a requirement made essential by the Act or that such failure is not in respect of a substantive matter.

Misleading the debtor 33 In Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79-80 Mason CJ, Wilson, Brennan and Gaudron JJ said at 79-80 (citations omitted, emphasis added) "The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice … In such cases the notice is a nullity whether or not the debtor is in fact misled." 34 Especially since the 1996 amendments, a bankruptcy notice must spell out clearly what the debtor must do to avoid committing an act of bankruptcy. The amount claimed must not only be stated, but verified by a copy of the judgment and (if costs are claimed) a certificate of taxation and (if interest is claimed) details of the calculations and the provision under which the claim is made. All this is directed to the debtor being given a precise, verified, dollar figure which must be paid or compromised within the stated time if an act of bankruptcy is to be avoided. 35 In considering whether a bankruptcy notice could mislead the debtor the court may look at facts extraneous to the notice itself: Wimbourne at 499. This can be seen as an application of the modern rule that documents are to be construed in the light of the surrounding circumstances, that is to say the extrinsic facts, viewed objectively, which are within the knowledge of the parties: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347-352 per Mason J. In Kleinwort Benson the High Court was concerned with an understatement of the amount of interest due. The majority said (at 80): "It may be that, in a given case, understatement is capable of misleading the judgment debtor particularly if the notice is capable of producing uncertainty as to whether the debtor is required to pay the amount in fact due or the amount specified in the notice. In such a case uncertainty arises, not merely from the understatement, but from the understatement in the context of the particular bankruptcy notice. No such uncertainty arises if it is clear that payment of the amount specified in the notice will constitute compliance with the notice." (Emphasis added) 36 The surrounding circumstances known to both St George and Mr Spalla included the facts that the Spalla companies had assets and continued to trade as motor vehicle retailers. It was inherently likely that the receivers would recover substantial amounts towards the reduction of the judgment against the companies and thus also (as Finkelstein J's order expressly provided) in reduction of the liability of Mr Spalla. 37 In the present case the notice claimed that $2,781,173.50 was owing under the judgment. But the judgment itself (a copy of which, as required since the 1996 amendments, was attached to the notice) ordered that St George recover against Mr Spalla that amount less any sum received in satisfaction of the orders against the Spalla companies. So what is a debtor in the position of Mr Spalla to do? Does he pay the $2,781,173.53 even though he knows (and St George would know he knew) that nothing like that amount is truly owing? If he pays only the amount truly owing, might he still be made bankrupt, as the notice seems to say? In any case, how does he find out the amount truly owing given (again to the knowledge of St George) he has no access to the records of St George or the receivers? And even if he did have such access and worked out an amount which seemed to be truly owing, what would happen if St George disagreed? The notice was thus thoroughly misleading, confusing, oppressive and invalid for those reasons also.

Discretion 38 St George caused the issue of a bankruptcy notice on 28 July 1999 claiming $2,781,173.53. Several of its responsible officers subsequently swore, quite wrongly, that this amount was owing under the judgment of Finkelstein J. It was not until almost a year later, on 7 July 2000, that Mr Cahill's affidavit stated that the amount "actually owed" under the judgment at the date of the notice was $1,341,993.53. 39 St George agreed at the hearing before Finkelstein J on 5 May 2000 that there was a need for the parties to work out precisely what was owing as at the date of the notice and currently. When Mr Spalla's solicitors sought to put that sensible solution into effect, St George's response was "Work it out for yourself". 40 The unchallenged evidence of Mr Spalla and submissions of his counsel is that it is not possible to reconcile the receivers' accounts with the reduced amount that St George now, belatedly, says is owing. If some demonstrable reconciliation and explanation is available, one would expect it to come from St George. In the absence of such an explanation the principle in Jones v Dunkel (1959) 101 CLR 298 enables the inference to be drawn that St George is not sure itself what is really owing under the judgment. 41 In total, this proceeding amounts to an abuse of the procedures provided by the Act which are not intended to be used for the determination of complex accounting issues as between petitioning creditor and debtor. There is, in addition to the grounds already mentioned, sufficient cause why a sequestration order should not be made: s 52(2)(b).

Orders 42 The petition will be dismissed. There will be an order that St George pay Mr Spalla's costs, including reserved costs.

I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.

Solicitor for the Applicant: Corrs Chambers Westgarth

Date of Hearing: 24 July and 10 August 2000