Issuu on Google+

Is Failure to Identify a Creditor’s Address an “Irremediable Injustice”? by Amy Hall | June 2006

In BMW Finance Australia v Jackson (2006) FMCA 401, Federal Magistrate Lloyd-Jones examined whether the failure to identify the creditor in paragraph 4 of a Bankruptcy Notice was a formal defect which would result in its invalidity. Paragraph 4 of the Notice is the paragraph that deals with the manner in which payment of the debt can be made.

The Facts 3 SEPTEMBER 2004 A Bankruptcy Notice was issued against the debtor requiring compliance on or before 13 December 2004.

26 APRIL 2005 A Creditor’s Petition was filed.

11 JULY 2005 The debtor filed a Notice of Intention to Oppose Application.

The grounds of opposition were as follows: “1. The Bankruptcy Notice served…was defective in that it did not comply with the provisions of the Bankruptcy Act as to form and content and therefore does not support the Petition. 2. The defect is comprised by the failure to complete paragraph 4 of the Notice. Paragraph 4 of the Notice had been completed in the following manner: 4. Payment of the debt can be made to: of *C/- Cridlands Lawyers Level 23, 264 George Street SYDNEY NSW 2000 NOTE: the address must be within Australia.” The issue before the Court was whether the Bankruptcy Notice suffered from a formal defect which would result in its invalidity.

1

T U R KSLEGAL


The Legislation Section 41(2) of the Bankruptcy Act 1966 (Cth) (“the Act”) deals with Bankruptcy Notices. Section 306(1) deals with formal defect of that Notice and the concept “substantial injustice”:

“SECTION 41(2) BANKRUPTCY NOTICES The notice must be in accordance with the form prescribed by the regulations.

SECTION 306 FORMAL DEFECT NOT TO INVALIDATE PROCEEDINGS 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”

The Creditor’s Case The creditor submitted that there was a slight error in so much as “care of” was inserted in paragraph 4. The paragraph was in fact complete although slightly mis-positioned in the context of the surrounding text. The creditor relied on section 306(1) of the Act saying the error was merely a formal defect that was incapable of causing a substantial injustice to the debtor. The creditor relied on an established line of authority: that payment of a debt in a Bankruptcy Notice may be made to a creditor’s solicitors. In particular it relied on Worchild v Drink Nightclub (Qld) Pty Ltd (2005) FCA 863, which recently confirmed that payment can be made to a creditor’s lawyer. The solicitor for the creditor argued that an objective person reading the notice would not be confused as to whom payment of the debt was to be made, if considered in the following way:

2

“a.

Under Item 3(a) the notice states to the debtor: You are required within 21 days after service on you of this Bankruptcy Notice to pay the creditor the amountof the debt.

b.

The creditor is already identified under Item 1 as: BMW Australia Finance Limited (A.C.N. 007 101 715) (“the creditor”).

c.

Item 4 states: Payment of the debt can be made to: Of*C/-Cridlands Lawyers Level 23, 264 George Street SYDNEY NSW 2000 [NOTE: The address must be within Australia.]

d.

On page 7 of the notice, Cridlands Lawyers is clearly identified as the creditor’s authorised agent.”

T U R KSLEGAL


The Debtor’s Case The debtor submitted that in the notice, the identity of the person to whom money can be paid is a substantive rather than a formal matter. The argument is then that it is a substantive matter and section 306 of the Act is incapable of correcting it. The debtor further argued that the Bankruptcy Notice in this matter contained three different addresses for the creditor: 1.

In paragraph 1, an address in Mulgrave, Victoria;

2.

In paragraph 4, the address: C/- Cridlands Lawyers, Level 23, 264 George Street, Sydney NSW 2000; and

3.

In the Local Court’s Certificate of Judgment, the address: C/- Dickson Fisher Macansh Solicitors, Level 23, 264 George Street, Sydney.

The debtor continued with a line of argument that the differing addresses and absence of a name meant that the notice was objectively confusing and not the sort of defect that can be cured under section 306 of the Act. The debtor relied on Kyriackou v Shield Mercantile Pty Ltd (2004) FCA 490 per Justice Weinberg, where the omission of “the creditor” from paragraph 1 of a Bankruptcy Notice was a defect. In Kyriackou Justice Weinberg held that the omission was enough to invalidate the Bankruptcy Notice.

The Decision Federal Magistrate Lloyd-Jones noted that the leading decision on defective Bankruptcy Notices is the decision of the High Court in Kleinwort Benson a decision made on 1 July 1988. Although the Act has been amended, the principles established in Klienwort Benson remain applicable to notices issued after the amendments, critically, in respect of the correct test to determine validity of a Bankruptcy Notice. Subsequent to the 1996 amendments, a specially constituted Full Federal Court in Australian Steel, by majority, took a slightly less rigid approach than that in Kleinworth Benson as to what would cause a defect and invalidity of a Bankruptcy Notice. Federal Magistrate Lloyd-Jones stated that he was bound by Australian Steel and guided by the detailed analysis of the leading cases on this subject and also Shannon & Anor v King (2005) FMCA 1264 per Federal Magistrate Walters. Federal Magistrate Walters in Shannon & Anor v King discussed the consequences of non-compliance with Form A. His Honour also identified the relevant test established in Kleinwort Benson (then followed in Australian Steel), which sets out three questions to ask in order to establish validity of a notice. These tests are: 1.

Is the Bankruptcy Notice defective or irregular?

2

If so, is the defect or irregularity substantive or formal?

3.

If it is formal only, has it occasioned substantial or irremediable injustice?

This particular Bankruptcy Notice did not conform to the layout of paragraph 4 as contained in Form 1 of Schedule 1 of the Regulations. Federal Magistrate Lloyd-Jones accepted that there was a defect or irregularity in the Bankruptcy Notice and that it did not wholly conform with the requirement in paragraph 4 to list a separate name and address.

3

T U R KSLEGAL


Next, he had to determine: was the defect or irregularity substantive, or alternatively, was it purely formal? In his reasons for judgment Federal Magistrate Lloyd-Jones stated: “ If the Bankruptcy Notice is considered as a whole an objective reader would not be confused as to who payment of the debt was to be made. If the debtor attended the address set out in paragraph 4 he could successfully make the payment irrespective of whether he had addressed his cheque to BMW Australia Finance Limited, or alternatively, Cridlands Lawyers. The Bankruptcy Notice requires the debtor to seek out his creditor and pay him. Paragraph 4 allows the payment to be made to a person at a place nominated” For these reasons Federal Magistrate Lloyd-Jones held that the defect or irregularity was formal in nature. Finally, Federal Magistrate Lloyd-Jones had to decide given that the defect or irregularity was formal only: has it occasioned substantial and irremediable injustice to the debtor? In finding that it did not, his Honour said: “The fundamental objective of the Bankruptcy Notice is to have the debtor pay the creditor the debt nominated in the notice within a nominated time limit. If the Bankruptcy Notice prevents the debtor from satisfying this requirement because the debtor could not locate where the debt could be satisfied, then he would suffer substantial irremediable injustice. This would not occur if the debtor attends Cridlands Lawyers at Level 23, 264 George Street, Sydney. He could make payment. The information contained in the Bankruptcy Notice would not prevent the debtor from satisfying this requirement.” Consequently, section 306(1) of the Act would apply to validate the notice.

Implications The decision reinforces that the courts exercising jurisdiction under the Bankruptcy Act are clearly moving away from the strict formal approach that has, until quite recently, been applied to determining the validity of Bankruptcy Notices. This is not to say that the creditors and their solicitors should relax from a rigorous inspection of a Bankruptcy Notice before it is issued; rather, the courts are applying a much more practical interpretation of what is and what is not a defect and what is and what is not capable of causing a debtor irremediable injustice.

For More Information Please Contact: Amy Hall Lawyer T: 02 8257 5716 amy.hall@turkslegal.com.au

Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 11 | 350 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099

Business & Property | Commercial Disputes & Insolvency | Insurance & Financial Services Workers Compensation | Workplace Relations www.turkslegal.com.au �������� ������ �������� �������������������������� ���������������� � � �� � �� �� � � �� � � � �� � � � � �� � �� � � �� �� � � ��� � � � �� � �� � � � ��� � � ��� � � � �� � �� � � � �� � � ��� � � � � � � �� �� � � � � � ������� ���� ������� ���� � �� ������� �� ��� ���� ����� ��� � ����� �� �� � � � � � � � � � � � � �� � �� � � � � � � � � � � � � � � � �� � � � � � � � � � � � � � � � � �� �� � ��� �� � � � �� � � � � � � � � � � � � � � � �� � � � ���� ��������� ������������ ���������������������������������� ���� � � ���� � � ��� � � �� � � � �� � ��� �� � � � �� �� � � �� � �� � � � �� �� �� � ��� � �� � � �� � �� � �� �� ��� � � �� � � � � � � �� � � � � �� �������������� ����������������������� ������������������ ��� � � � � � � � � � � � � � � � � � ��� � � �� � � � �


Is Failure to Identify a Creditor’s Address an “Irremediable Injustice”?