Ground 15
The Court made errors in applying the law in deciding:
(a) that ineffective service of the notice was not relevant to the determination of the application to set aside the notice or a ground to set aside the notice;
(b) that an order of the Taxing Master subject to a review is a final order;
(c) that the Registrar was not obliged to extend time until the court had determined the issue of the applicant's counterclaim;
(d) that the overstatement / misstatement of the amount on the notice, as notified by the applicant to the respondent would be argued as a ground to have the notice set aside, was not a ground to have the notice set aside;
(e) that the overstatement/misstatement of the amount of interest on the notice, as notified by the applicant to the respondent would be argued as a ground to have the notice set aside, was not a ground to have the notice set aside;
(f) that it was not appropriate to go behind the judgment.
41 I have not been persuaded that any of the errors imputed to the learned Federal Magistrate under this ground has been committed. I shall set out seriatim my reasons for that conclusion.
(a) Her Honour did not decide that ineffective service of a bankruptcy notice was irrelevant on an application to set aside the notice. What was decided, applying the observations of Hely J in Sunderland v G & J Drivas Pty Ltd [2000] FCA 1029 and Jacobson J in Laza v Seccombe [2005] FCA 1652 was that, unless the Court were satisfied that the alleged service had been clearly defective, the preferable course would be to allow the issue of service to be resolved on the hearing of the creditor's petition. In the present case, her Honour considered, correctly in my view, that it had not been shown, particularly in light of the Registrar's order for substituted service, that service of the bankruptcy notice had been clearly defective.
(b) The learned Federal Magistrate fully understood this contention because she referred at [29] of her reasons to r 63.56 of the Supreme Court (General Civil Procedure) Rules 2005 which has been invoked by the appellant in support of this sub-ground. However, her Honour went on to note that the appellant's application for review of the order of the Taxing Master had been struck out. In the absence of a pending application for review, her Honour concluded, I think correctly, that the order of the Taxing Master was a final order, notwithstanding that it might become subject to review or appeal or have been set aside or otherwise made inoperative; see Clyne v Deputy Commissioner of Taxation (NSW) (1983) 48 ALR 545, at 548.
(c) In support of this sub-ground, the appellant claimed that "the Bankruptcy Regulations" require an extension of time for the purpose of enabling the Court to determine whether the debtor has a counter-claim, set-off or cross demand. It seems that by this reference to "the Regulations" the appellant intended to invoke s 41(7) of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act") which provides;
Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counter claim, set off or cross demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter claim, set off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied.
In her reasons dealing with this point, the learned Federal Magistrate noted that in her application to set aside the bankruptcy notice the appellant had not referred to the existence of a counterclaim. However, her supporting affidavit did assert a counterclaim. Nevertheless, as noted by her Honour, that counterclaim had been based on an enforcement proceeding instituted by the appellant on 21 July 2004 which had been dismissed by Bongiorno J in the Supreme Court of Victoria on 27 March 2006. That asserted counterclaim, it follows, was not available on or after 9 November 2007 to enliven the operation of s 41(7).
(d) and (e) It seems from her written submissions in support of the appeal that the appellant bases these sub-grounds on s 41(5) of the Bankruptcy Act, which provides;
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.
These sub-grounds of appeal are based on a misunderstanding of the effect of s 41(5). That sub-section does not stipulate that an alleged overstatement or misstatement in a bankruptcy notice which has been notified by the debtor to the creditor necessarily constitutes the grounds for setting aside the bankruptcy notice. All the sub-section does is to provide that notification within the time allowed for payment of the debt is a condition precedent for the debtor's seeking to invalidate the notice by reason of the alleged overstatement.
(f) In support of this sub-ground of appeal, the appellant referred to Wren v Mahony (1972) 126 CLR 212, at 224 where Barwick CJ observed;
Lord Esher in emphasizing that the Bankruptcy Court did not go behind a judgment as a matter of course but only if appropriate circumstances were shown to exist, said in Re Flatau; Ex parte Scotch Whisky Distillers Ltd.[(1888) 22 QBD, at pp 85-86]:
"There is no statute which imposes any such obligation on the Court of Bankruptcy. Section 7 [of which s. 52 (1) is a counterpart] does no more than give a discretion."
His Lordship, in using this expression, was not intending, in my opinion, to weaken the emphasis he had always placed on the need for the Court of Bankruptcy to be satisfied of the existence of the petitioning creditor's debt. Rather, if one reads all his expressions in the several cases I have cited, he was pointing out that the Bankruptcy Court could in general accept a judgment debt as sufficient proof of that debt particularly where it resulted from a fully heard contest between parties but that it always had the power to go behind the judgment and if the case was a proper one, should do so. The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration. It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor's debt is a mere matter of its own discretion. Nothing in Corney v. Brien [(1951) 84 CLR 343] lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor's debt. The Court's discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner.
It needs to be remembered, first, that his Honour was referring in that passage to the discretion to go behind a judgment which arises when a court is considering whether or not to make a sequestration order on a creditor's petition. The passage is not to be regarded as applying with equal force when the decision under contemplation is whether or not to set aside a bankruptcy notice. In the second place, I have discerned nothing in the reasons of the learned Federal Magistrate to suggest that she was unaware of the eventual "paramount need to have satisfactory proof of the petitioning creditor's debt." On the contrary, the reasons are replete with consideration of the circumstances in which the Taxing Master's order and the costs orders which underlay it have come to be made and the principles to be distilled from the relevant law of costs.