Leap year, or bankruptcy loophole?

Yesterday's rare and unusual date – February 29 – has historically proven to be a secret weapon for cunning lawyers and their clients seeking to dodge bankruptcy proceedings.

Property Observer

February 29s are a relatively unusual occurrence given the rules that decide leap years: every year divisible by four is a leap year, but every year divisible by 100 is not a leap year, unless the year is also divisible by 400, then it is still a leap year.

As amusing as they are, much can rest on the incidence of the leap year.

Indeed, bankruptcy notices have been set aside because banks didn’t correctly calculate the 366th day in their claims.

The much-feted Sydney developer Andrew Clubb avoided Westpac’s bankruptcy application in a fascinating 1990 Supreme Court ruling – the story still resonates around lower north shore drinking holes.

And a look at the judgement is quite colourful too … for a Federal Court ruling.

"When Julius Caesar decreed that from the year now known as 45BC onwards there should be adopted the Julian calendar, with its provision for recurring bissextile or leap years, he not only set the scene for a well-known Gilbertian jest; he also set the scene for the problem posed by the present case,” his honour Justice James Burchett said in his 1990 judgement.

"For the basic question is whether, in calculating a proportionate amount of interest due at a yearly rate, the year in question being a leap year, is it permissible to convert the yearly sum to a daily rate by dividing by 365, or whether it is essential to include the intercalary day, thus making the divisor 366.”

Clubb’s bankruptcy notice claimed the sum of $427,938.29, together with $311,000 interest on the balance of the judgment with the obligation to pay interest at a rate, which is stated as a percentage "yearly". There were different daily rates of interest – ranging from 15 per cent to 19.5 per cent – relating to particular time periods within the period of indebtedness.

The period included a leap year 1988, which had the extra day.

After doing his sums, his honour ruled the total error was $213.

And so given the long precedent that bankruptcy notices are invalid if the sum specified exceeds the amount for which the creditor was entitled, Clubb’s lawyer secured victory.

The bank failed in its contention that the word "yearly" had reference to a common year of 365 days after counsel for the bank cited Halsbury fourth edition volume 45, para.1102, where the expression "common year" referred to a year that consists of 365 days.

His honour suggested it would be a curious anomaly, if applied to a portion of a leap year consisting of 365 days, that the interest for that portion of the leap year would be identical to the interest that could lawfully be exacted for the full year.

"For these reasons, I have concluded that the bankruptcy notice is invalid and must be set aside,” he ruled.

There was another judgement in 1991 where a debt exceeding $100,000 was overstated by $33.19 and the bankruptcy application against the The New York Deli, Double restaurateur Henry Saade was similarly invalid.

None since then that I am aware of, which suggests the banks are alert to the loophole. And there have been two cases – Shaddock and Hodgson – where it’s been ruled in the financier’s favour after the court calculator ran a check over the amounts claimed.

Oh, and that bit of Gilbertian jest was The Pirates of Penzance and its character Frederic, the pirate apprentice who was indentured to remain with the pirates until his 21st birthday, but technically going by birthdays was only five, and so must serve for another 63 years.

This article first appeared on Property Observer. Republished with permission.