Kond v National Development Bank Ltd [2015] PGSC 18; SC1432 (5 June 2015)

SC1432

PAPUA NEW GUINEA
[IN THE SUPREME COURT OF JUSTICE]

SCA No.89 0F 2010

BETWEEN:

JAMES KOND
Appellant

AND:

NATIONAL DEVELOPMENT BANK LIMITED
Respondent

Waigani: Lenalia J, David J & Yagi J
2012: 28 June
2015: 5 June

ADJUDICATION OF INSOLVENCY - creditor's petition for an adjudication of insolvency - creditor's petition initiating insolvency proceedings signed by petitioner's lawyer – allegation by debtor that summons endorsed on petition not signed and sealed by Registrar of the National Court - Appellant adjudged insolvent - Appellant sought to rescind or in the alternative set aside the adjudication order or dismiss the insolvency proceedings in their entirety for being non-compliant with Insolvency Act, Sections 27, 28 and 30(2) – appeal dismissed.

WORDS & PHRASES – whether the word "shall" in Insolvency Act, Section 27 is mandatory or directory?

Cases Cited

Papua New Guinea cases:

In re Moresby North East Election Petition, Patterson Lowa v Goasa Damena [1977] PNGLR 429
Safe Lavao v The State [1978] PNGLR 15
Madang Timbers Ltd v Valentine Kambori (2009) SC1000
Reference by the East Sepik Provincial Executive (2011) SC1154

Overseas cases cited:

Re Tomkins & Co. [1901] 1KB 476
Ex p Hinds re Penboss [1972] 2 NSWLR 542
Liverpool Borough Bank v Turner [1860] EngR 1276; (1861) 30 LJ Ch 379
Howard v Boddington [1877] UKLawRpPro 14; (1877) 2 PD 203

Treatise cited:

Halsbury's Laws of England, Vol.3 (2), Fourth Edition, Reissue

Counsel:

Charlie J. Wara, for the Appellant
Jack Nalawaku, for the Respondent

JUDGMENT

5 June, 2015

1. BY THE COURT: INTRODUCTION: The appellant, James Kond appeals against the whole of the judgment of Hartshorn J (the primary judge) given at Waigani on 22nd June 2010 in insolvency proceedings instituted in the National Court by MP No.842 of 2006 (the insolvency proceedings) by the respondent, National Development Bank Limited as the petitioning creditor (hereinafter called "the Respondent") and the appellant, James Kond as the debtor (hereinafter called "the Appellant"). The appeal is brought pursuant to Amended Notice of Appeal filed on 5th November 2010.

BACKGROUND

2. By way of background facts, the Respondent filed a creditor's petition dated 23rd October 2006 seeking to adjudge the Appellant insolvent. The creditor's petition initiating the insolvency proceedings was signed by the Respondent's lawyer, Mr. Robert Bradshaw. It was alleged by the Appellant that the summons endorsed on the petition was not signed by the Registrar of the National Court. On 7th December 2009, the primary judge adjudged the Appellant insolvent (the adjudication order). By a Notice of Motion filed on 4th June 2010, the Appellant sought to rescind or in the alternative set aside the adjudication order or the insolvency proceedings be dismissed in its entirety on the basis that the creditor's petition was not signed in accordance with Section 27 of the Insolvency Act (the application to set aside the adjudication order). The application to set aside the adjudication order was heard by the primary judge on 15th June 2010 and His Honour dismissed it on 22nd June 2010.

GROUNDS OF APPEAL

3. The grounds of appeal are set out at paragraph 3 of the Amended Notice of Appeal and these are:

"3.1 The learned Judge erred in law and fact or in mixed law and fact in holding that the word "shall" in section 27 of the Insolvency Act 1951 is directory and not mandatory in that:

3.1.1 Section 27 and Section 28 of the Insolvency Act 1951 exhaustively enlist persons or class of persons who are authorised to sign a petition under Section 27 of the Insolvency Act 1951 which would otherwise not be necessary if compliance with Section 27 was directory.

3.1.2 The requirement to comply with Section 27 and Section 28 of the Insolvency Act 1951 is mandatory in that a Creditor's Petition is an originating process which purpose is to invoke the jurisdiction of the court to declare a person insolvent, which represents a pronouncement of failure and humiliation attended by the fear of unknown consequences and the susceptibility to criminal punishment, as such any person or entity seeking to subject another to the law of bankruptcy should himself strictly observe the requirements of the of the Insolvency Act 1951.

3.1.3 The requirement for a person authorised under Section 27 of the Insolvency Act 1951 to sign a Creditor's Petition is a requirement essential to the validity of the Creditor's Petition and the invoking of the Court's jurisdiction in the first instance. This requirement is made essential by the use of the imperative "shall" and also the fact that Section 27 and Section 28 exhaustively identify persons or class of persons so authorised to sign a Creditor's Petition.

3.1.4 Section 27 and Section 28 of the Insolvency Act 1951 do not allow for Creditor's Petition by a company or a legal entity to be signed by a person other than a person authorised under Section 28 to verify a Creditor's Petition.

3.1.5 The purpose of Section 27 and Section 28 of the Insolvency Act 1951 is to ensure that proceedings commenced by Companies, Corporations or other corporate entities are duly authorised and as such the requirement of compliance with Section 27 and Section 28 of the Insolvency Act 1951 is essential to the fulfilment of this purpose, especially when effect of or consequence of an adjudication of insolvency represents a pronouncement of failure and humiliation attended by the fear of unknown consequences and the susceptibility to criminal punishment, and is accordingly a mandatory requirement.

3.2 The learned Judge erred in law and acted in excess of his powers in holding that the Creditor's Petition may be signed by lawyers of the Petitioning Creditor in that:

3.2.1 The said decision of His Honour Justice Hartshorn will amount to His Honour introducing a new class of persons authorised to sign creditor's petition when Parliament and or the Legislature has already exhaustively prescribed, under Section 27 and Section 28 of the Insolvency Act 1951, persons or class of persons authorised to sign Creditor's Petition.

3.2.2 The said decision of His Honour Justice Hartshorn amounting to His Honour introducing a new class of persons authorised to sign creditor's petition when Parliament and or the Legislature has already exhaustively prescribed, under Section 27 and Section 28 of the Insolvency Act 1951, persons or class of persons authorised to sign Creditor's Petition, is tantamount to His Honour assuming the role of the Parliament or the Legislature contrary to the principles or doctrine of Separation of Powers under Section 99 of the Constitution of the Independent State of Papua New Guinea.

3.3 Furthermore, the learned Judge erred in law and fact or in mixed law and fact in failing to consider the Appellant's submission that:

3.3.1 The summons endorsed on Creditor's Petition was not duly signed by the Registrar of the National Court and is therefore defective pursuant to Section 30(2) of the Insolvency Act 1951.

3.3.2 The lack of the Registrar's signature on the Summons endorsed on the Creditor's Petition is essential to the validity of the said summons and consequently the validity and or competency of the Creditor's Petition and therefore renders the said summons void and a nullity and consequently the whole proceedings incompetent and a nullity.

3.4 The learned Judge erred in law and fact or in mixed law and fact in not dismissing the proceeding MP No.842 of 2006 between National Development Bank Ltd and James Kond in that:

3.4.1 The whole proceedings was commenced on a defective Creditor's Petition which lack the proper signature mandatorily required under Section 27 of the Insolvency Act 1951 and is therefore defective and incompetent; and

3.4.2 The Creditor's Petition is endorsed with a Summons that lack National Court Registrar's signature mandatorily required under Section 30(2) of the Insolvency Act 1951 and is therefore defective and incompetent." (sic)

RELIEF SOUGHT

4. The Appellant seeks the following relief in this appeal:

"4.1 The order of Justice Hartshorn ordered on the 22nd June 2010 dismissing the Appellant's Notice of Motion dated and filed on the 4th June 2010 be quashed.

4.2 That the Insolvency Orders ordered by the Court be rescinded or in the alternative set aside.

4.3 The proceeding MP No.842 of 2006 between National Development Bank Ltd and James Kond be dismissed.

4.4 Costs against the Respondent on a solicitor/client basis.

4.5 Any other or further orders this Court deems fit to so order."

LEGAL ISSUES

5. In our view, the grounds of appeal give rise to the following principal issues:

1. Whether or not the primary judge erred in law and fact or in mixed fact and law when he held that the word "shall" in Section 27 of the Insolvency Act was directory and not mandatory?

2. Whether or not the primary judge erred in not rescinding or setting aside the adjudication order or not dismissing the insolvency proceedings for the petition being non-compliant with Section 27 of the Insolvency Act?

3. Whether or not the primary judge erred in law and fact when he failed to dismiss the insolvency proceedings for the petition being non-compliant with Section 30(2) of the Insolvency Act?

DISCUSSION OF LEGAL ISSUES

Issue 3

Whether or not the primary judge erred in law and fact when he failed to dismiss the insolvency proceedings for the petition being non-compliant with Section 30(2) of the Insolvency Act?

6. We will deal with the third issue first as we consider that it can be determined without much discussion. This issue is raised in appeal grounds 3.3 and 3.4.2.

7. It was submitted by the Appellant that the primary judge erred in failing to consider his submission and to dismiss the insolvency proceedings on the basis that:

1. the requirement for the Registrar to sign and seal the summons endorsed on the creditor's petition was mandatory pursuant to Section 30(2) of the Insolvency Act and non-compliance of which rendered:

(a) the summons void and a nullity; and

(b) the creditor's petition incompetent and a nullity.

2. the summons endorsed on the creditor's petition was not signed and sealed by the Registrar of the National Court in accordance with Section 30(2) of the Insolvency Act and is therefore defective.

3. the insolvency proceedings having been commenced by a defective creditor's petition is therefore defective and incompetent.

8. It was submitted by the Respondent that the issue about the Registrar of the National Court not signing the summons endorsed on the petition according to Section 30(2) of the Insolvency Act was misconceived because the summons was actually signed and sealed by the Registrar as shown on page 12 of the Appeal Book. It was further submitted that this was not a ground relied upon by the Appellant in the application to set aside the adjudication order.

9. Order 4 Rule 40(1)(c) of the National Court Rules provides that a notice of motion must state concisely the nature of the order which is sought. Order 4 Rule 49(8) of the National Court Rules goes further to state that a motion must also state the law relied on, i.e., the concise reference to the court's jurisdiction to grant the order sought. The Notice of Motion filed on 4th June 2010 meets none of these requirements in so far as the Appellant's claim for relief for dismissal of proceedings for non-compliance with Section 30(2) of the Insolvency Act is concerned. That issue was not before or properly before the primary judge to warrant any consideration by the primary judge. We accept the Respondent's submission in that regard. We find that no error was committed by the primary judge. Grounds 3.3 and 3.4.2 therefore are unmeritorious and are dismissed.

Issues 1 and 2

Whether or not the primary judge erred in law and fact or in mixed fact and law when he held that the word "shall" in Section 27 of the Insolvency Act was directory and not mandatory?

Whether or not the primary judge erred in not rescinding or setting aside the adjudication order or not dismissing the insolvency proceedings for the petition being non-compliant with Section 27 of the Insolvency Act?

10. These two issues are inter-related and therefore we will address them together. These issues are raised in appeal grounds 3.1, 3.2 and 3.4.1.

11. It was submitted by the Appellant that the primary judge erred in finding that the word "shall" in Section 27 of the Insolvency Act was directory and not mandatory because:

1. Sections 27 and 28 of the Insolvency Act provide an exhaustive list of persons or class of persons who are authorized to sign a creditor's petition.

2. Compliance with Sections 27 and 28 of the Insolvency Act is mandatory as it is essential to the validity of the creditor's petition.

3. Sections 27 and 28 of the Insolvency Act do not allow for a creditor's petition by a company or a legal corporate entity to be signed by a person including a petitioning creditor's lawyers other than a person authorized under Section 28 to verify a creditor's petition.

12. The Respondent submitted that the word "shall" in Section 27 of the Insolvency Act when read together with Section 28(2) (5) and (6) of the Insolvency Act in so far as it applies to signing of creditor's petitions by companies or corporations was "directory" and not "mandatory" so the primary judge did not commit an error.

13. Section 27 of the Insolvency Act states:

"Signature of petition

A creditor's petition shall be signed by the petitioner or a person authorized by Section 28 to verify the petition."

14. Section 28 of the Insolvency Act states:

"Verification of petition

(1) Subject to this Act, a creditor's petition shall be verified by the oath of the petitioner.

(2) Where the petitioning creditor is a corporation, joint-stock company or company authorized to sue in the name of a public officer, the petition may be verified by the manager, secretary or other authorized officer of the corporation or company.

(3) Where the petitioning creditors are two or more persons in partnership, the petition may be verified by one only of the partners.

(4) Where the petitioning creditor is out of the country, the petition may be verified by his duly authorized attorney or agent in the country.

(5) The verification shall be—

(a) by affidavit in Form 3; and

(b) annexed or subscribed to the petition.

(6) Where a petition is verified by a person other than a petitioner, he shall also show in the affidavit verifying the petition that he is authorized under this Act to verify the petition."

15. Section 27 of the Insolvency Act is in two parts separated by the conjunction "or".

16. The first part applies to a creditor's petition filed by an individual who is a natural person. It states that the petition must be signed by the petitioner himself or herself.

17. The second part applies to a creditor's petition which is required to be signed by a person authorised by Section 28 of the Insolvency Act to verify the petition.

18. Section 28(2) and (5) of the Insolvency Act when read together provide that a creditor's petition must be verified on oath by affidavit of a person authorised by Section 28 of the Insolvency Act to verify the petition.

19. Section 28(2) of the Insolvency Act applies to legal persons other than natural persons such as a corporation, joint-stock company or company authorised to sue in the name of a public officer. It is common ground that the Respondent falls within this category of legal persons. Section 28(2) provides that the petition may be verified by the manager, secretary or other authorized officer of the corporation or company.

20. Section 28(3) of the Insolvency Act applies to petitioning creditors who are in partnerships of two or more persons. It provides that one of the partners may verify the petition.

21. Section 28(4) of the Insolvency Act applies to a petitioning creditor who is out of the country. This would appear to apply to both natural and legal persons. It allows for a petition to be verified by the petitioning creditor's authorized attorney or agent in the country.

22. Section 28(6) of the Insolvency Act provides that where a petition is verified by a person other than a petitioner, that person shall show in the affidavit verifying the petition that he is authorized under Insolvency Act to verify the petition.

23. It goes without saying that a corporate entity, being an unnatural person, cannot sign documents and do things a natural person would do. A corporate entity conducts its business and signs documents through its officers and authorized attorneys and agents. That is clearly demonstrated by Section 28(2), (4) and (6).

24. In Halsbury's Laws of England, Vol.3 (2), Fourth Edition, Reissue at paragraph 128 the learned authors state:

"A company may be a petitioning creditor. It may act by any of its officers duly authorised under its seal, and may give a general authority to an officer to present bankruptcy petitions in the future in respect of debts which may not have arisen at the date when the authority is given. It is sufficient if the company's seal is affixed to the copy which constitutes the officer's authority, the sufficiency of which may be inquired into by the court, although the debtor has not taken objection to it. Any person chosen bona fide by the company as its agent to present a bankruptcy petition becomes thereby an officer of the company for the purpose. The petition must be in the company's name; if the company is in liquidation, the petition must be in the name of the company, and not of the liquidator." (Our emphasis)

25. In Re Tomkins & Co. [1901] 1KB 476, although the person nominated was only a clerk, the petition was found to be good.

26. In the present case, the petition was signed by the Respondent's lawyer namely, Robert Bradshaw, but verified by the Senior Legal Officer for the Respondent namely, Andrew Bemau: see Creditor's Petition at 7-8 Appeal Book and Affidavit of Jeffrey Kennedy sworn on 4th June 2010 at 10-17 Appeal Book. Was this sufficient compliance with Sections 27 and 28(2) of the Insolvency Act?

27. Was Andrew Bemau an authorised officer for purposes of Section 28(2)? In our considered opinion, the answer is yes. In his Affidavit Verifying Petition sworn on 23rd October 2006 (at p.17, Appeal Book), he deposes that he was authorised to verify the petition. By virtue of Section 29 of the Insolvency Act, it is manifestly clear that Mr. Bemau's affidavit verifying the petition was sufficient prima facie evidence to support the petition.

28. The question arises whether the Respondent complied with Sections 27 and 28(2) of the Insolvency Act when its petition was signed by its lawyer, Mr. Bradshaw?

29. Should the word "shall" in Section 27 of the Insolvency Act be construed as mandatory or imperative as opposed to directory? This provision does not expressly declare the consequence for non-compliance therefore a proper construction of the word "shall" will necessarily determine its intended consequences. A mandatory enactment is one that must be obeyed or fulfilled exactly, but if it is a directory enactment, it is sufficient that it be obeyed or fulfilled substantially and in some occasions, it has been disregarded entirely without invalidity: Ex p Hinds re Penboss [1972] 2 NSWLR 542 at 552.

30. In Howard v Boddington [1877] UKLawRpPro 14; (1877) 2 PD 203, Lord Penzance gave a distinction between matters which were mandatory and directory in the following terms:

"Now the distinction between matters that are directory and matters that are imperative is well known to us all in the common language of the courts at Westminster. I am not sure that it is the most fortunate language that could have been adopted to express the idea that it is intended to convey, but still that is the recognized language and I propose to adhere to it. The real question in all these cases is this: A thing has been ordered by the legislature to be done. What is the consequence if it is not done? In the case of statutes that are said to be imperative, the courts have decided that if it is not done the whole thing fails, and the proceedings that follow upon it are all void. On the other hand, when the courts hold a provision to be directory, they say that, although such provisions may not have been complied with, the subsequent proceedings do not fail, still whatever the language, the idea is a perfectly distinct one. There may be many provisions in Acts of Parliament which, although they are not strictly obeyed, yet do not appear to the court to be of that material importance to the subject matter to which they refer as that the legislature could have intended that the non-observance of them should be followed by a total failure of the whole proceedings. On the other hand, there are some provisions in respect of which the court would take an opposite view, and would feel that they are matters which must be strictly obeyed, otherwise the whole proceedings that substantially follow must come to an end."

31. His Lordship at 211 discussed the criteria that must be used to determine what was mandatory and directory in these terms:

"I believe, as far as any rule is concerned, you cannot safely go farther than that in each case you must look to the subject-matter,' consider the importance of the provision that has been disregarded, and the relation of that provision to the general object intended to be secured by the Act,' and upon a review of the case in that aspect decide whether the matter is what is called Imperative or only directory."

32. In ordinary usage, the word "shall" is taken as imperative. However, it is generally accepted that it is impossible to lay down a universally applicable general rule that the word "shall" used in a statute is mandatory or directory: In re Moresby North East Election Petition, Patterson Lowa v Goasa Damena [1977] PNGLR 429, Safe Lavao v The State [1978] PNGLR 15, Madang Timbers Ltd v Valentine Kambori (2009) SC1000, Liverpool Borough Bank v Turner [1860] EngR 1276; (1861) 30 LJ Ch 379 and Howard v Boddington.

33. In Liverpool Borough Bank v Turner at 380, Lord Campbell LC said:

"No universal rule can be laid down as to whether mandatory enactments shall be considered directory only or obligatory with an implied nullification for disobedience. It is the duty of the courts of justice to try to get at the real intention of the legislature by carefully attending to the whole scope of the statute to be construed."

34. This distinction was also considered by Salika, DCJ in his dissenting ruling in Reference by the East Sepik Provincial Executive (2011) SC1154.

35. How the word "shall" in Section 27 of the Insolvency Act is regarded or construed depends on the reading of the statute as a whole to ascertain its real purpose and intention and that of the Legislature and the context in which the provision is used.

36. A statement regarding the principle was made in Howard v Boddington at 210-211 in the following terms:

"There may be many provisions in Acts of Parliament which, although they are not strictly obeyed, yet do not appear to the court to be of that material importance to the subject matter to which they refer, as that the legislature could have intended that the non-observance of them should be followed by a total failure of the whole proceedings. On the other hand, there are some provisions in respect of which the court would take an opposite view, and would feel that they are matters which must be strictly obeyed, otherwise the whole proceedings that subsequently follow come to an end. Now the question is, to which category does the provision in question in this case belong?"

37. The primary judge in his judgment sufficiently discusses the law on "mandatory" and "directory" legislative provisions in the light of the objective and scope of the statute and he was guided by the judgments he cited in reaching the conclusion he reached that the word "shall" in Section 27 of the Insolvency Act was directory and not mandatory.

38. The main principles that emerge from these case authorities therefore are:

1. in statutory provisions that are considered imperative, the courts have decided that where there is non-compliance, the whole proceedings become a nullity and that everything that follows upon them are all void;

2. where a statutory provision is found to be directory, the courts have decided that non-compliance does not render subsequent proceedings a nullity or void.

39. From paragraphs 5 to 20, the primary judge discusses in detail as to whether the word "shall" in Section 27 of the Insolvency Act and read in conjunction with Section 28 of the Insolvency Act was mandatory or directory. He also considered Section 158 of the Insolvency Act. He addressed his mind to the relevant principles and case law; the subject matter of the statute, the importance of what was disregarded and the general object of the statute in deciding. It is helpful that we set out verbatim paragraphs 17 to 20 of the primary judge's judgment where His Honour said:

"17. One of the objects of the Insolvency Act to my mind, is to provide for a safe, fair and appropriate procedure for an adjudication upon the petition of a petitioner who is aware of the consequences of his actions. For this to occur, a procedure is required that ensures that the petitioner is aware and is in control of his petition. Hence, the requirement for verification of a creditor's petition.

18. The procedure in the Insolvency Act also recognizes that in some circumstances someone other than a petitioner should be permitted to sign on its behalf and that this is in accordance with the general objects of the Insolvency Act. This is reflected in ss.27 and 28 of the Insolvency Act. I note also that s. 158 Insolvency Act provides that:

"A corporation may prove a debt, vote and otherwise act in any insolvency by a duly authorized agent"

19. In the circumstances therefore, I am of the view that "shall" in s.27 Insolvency Act is directory and not mandatory.

20. Consequently, the signing of a creditor's petition of a company petitioner by a lawyer so authorized to sign but who is not an officer of the company, does not render the creditor's petition a nullity. Further, when such a petition is properly verified as in this instance, the omission of the person signing the creditor's petition not being and officer of the company petitioner is not such that the creditor's petition should be rescinded or set aside or that the proceedings in which it was issued should be dismissed."

40. We subscribe to and endorse those observations.

41. We therefore find that the primary judge did not commit any error when he concluded that the word "shall" in Section 27 was not mandatory, but directory. We dismiss appeal grounds 3.1, 3.2 and 3.4.1 as a result.

FORMAL ORDERS

42. The formal orders of the Court are:

1. The appeal is dismissed.

2. The Appellant shall pay the Respondent's costs of the appeal to be taxed if not agreed.
________________________________________________________________
Makap Lawyers: Lawyers for the Appellant
Namani & Associates: Lawyers for the Respondent