AXARLIS v Pets Paradise Franchising Pty Ltd
[2009] FMCA 1216
•15 December 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| AXARLIS & ANOR v PETS PARADISE FRANCHISING PTY LTD | [2009] FMCA 1216 |
| BANKRUPTCY – Bankruptcy notice – application to set aside or extend time for compliance – whether counterclaim under s.47 of the Trade Practices Act 1974 could have been set up in the proceedings in which judgment obtained – whether counterclaim under s.47 equals or exceeds the amount of the judgment – whether issue estoppel. |
| Bankruptcy Act 1966, ss.40(1)(g), 41 Courts (Case Transfer) Act 1991 (Vic), ss.16(1), 17 |
| Blair v Curran (1939) 62 CLR 464 Johnson Tiles Pty Ltd v Esso Australia Ltd (2000) 104 FCR 564 Johnson Tiles Pty Ltd v Esso Australia Ltd (2001) FCA 421 Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129 Re Wakim; ex parte McNally (1999) 198 CLR 511 Whiley Investments (Qld) Pty Ltd v Pet’s Paradise Franchising (Qld) Pty Ltd [2009] VSC 144 |
| First Applicant: | SUSAN AXARLIS |
| Second Applicant: | FIONA MILLER |
| Respondent: | PETS PARADISE FRANCHISING PTY LTD |
| File Number: | MLG 759 of 2009 |
| Judgment of: | Riley FM |
| Hearing date: | 24 November 2009 |
| Date of Last Submission: | 24 November 2009 |
| Delivered at: | Melbourne |
| Delivered on: | 15 December 2009 |
REPRESENTATION
| Counsel for the applicants: | Michael Gronow, pro bono |
| Counsel for the respondent: | Philip Crennan |
| Solicitors for the respondent: | Robert James Lawyers |
ORDERS
The application to set aside or extend the time for compliance with bankruptcy notice VN987/2009 is dismissed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 759 of 2009
| SUSAN AXARLIS |
First Applicant
| FIONA MILLER |
Second Applicant
And
| PETS PARADISE FRANCHISING PTY LTD |
Respondent
REASONS FOR JUDGMENT
Introduction
This is an application to have bankruptcy notice VN987/2009 set aside, or, alternatively, for the time for compliance with that bankruptcy notice to be extended pending the hearing and determination of Federal Court of Australia proceeding VID418/2009.
The application is brought under s.40(1)(g) and s.41of the Bankruptcy Act 1966. Those provisions are to the effect that a bankruptcy notice may be stayed or set aside if the judgment debtor has a counterclaim, set off or cross demand equal to or exceeding the amount of the judgment debt on which the bankruptcy notice is based, provided that the counterclaim, set off or cross demand could not have been set up in the proceeding in which the judgment was obtained. The counterclaim in the present matter is said to arise under s.47 (exclusive dealing), s.51AD (contravention of industry codes) and s.52 (misleading and deceptive conduct) of the Trade Practices Act 1974 (“TPA”).
In the present application there are three issues. The first is whether the debtors’ counterclaim under s.47 of the TPA could have been set up in the proceeding in which the judgment was obtained. Clearly, the counterclaims under s.51AD and s.52 of the TPA could have been brought in the County Court proceeding: s.86(2) of the TPA. The second issue is whether the debtors’ counterclaim under s.47 of the TPA equals or exceeds the amount of the judgment debt. The third issue is whether the applicant debtors are now estopped from raising the s.47 point in the Federal Court proceedings.
Companies called Krescendo Pty Ltd and Fimill Pty Ltd entered into franchise agreements with the respondent. Both of the applicant debtors guaranteed Krescendo's obligations under the franchise agreement and the second applicant debtor guaranteed Fimill’s obligations under the franchise agreement. Krescendo and Fimill defaulted. Krescendo went into liquidation and has now been deregistered.
The respondent brought claims in contract against the applicant debtors in the County Court of Victoria in what are described as the Krescendo proceedings and the Fimill proceedings. On 18 March 2009, the respondent obtained a judgment in the sum of $151,110.92 in the County Court against the applicant debtors in the Krescendo proceedings. The bankruptcy notice is based on that judgment.
The applicant debtors sought to argue in the County Court that they had a counterclaim against the respondent under s.47 of the TPA. The County Court struck out that claim on the grounds that the County Court had no jurisdiction to hear it. The applicant debtors accept that that determination was correct.
Could the TPA and contract claims have been set up in the same proceedings?
The respondent says that the applicant debtors could have brought the s.47 claim in the proceeding in which the judgment was obtained if that proceeding had been transferred to the Federal Court of Australia. The respondent relied on the decision of Hill J in Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129. In that case, Hill J reviewed the authorities and concluded that:
31. These cases, it seems to me, establish that a cross claim will be one which could be set up in the action, notwithstanding that to do so the debtor may need to transfer the proceedings first to another court, or may need to obtain in his or her favour the exercise of a discretion before doing so. The onus of showing that the claim is not one that could have been set up in the creditor's proceedings lies upon the debtor. That onus will not be satisfied merely by showing that some indirect course may need be followed (that course being in the discretion of the debtor) nor by showing that there existed a discretion which could have been exercised against the setting up of the claim as a cross claim. To satisfy that onus the debtor must show that, as a matter of law and in the circumstances prevailing, he or she could not have set up the cross claim. That the debtor has not done in the present case.
32. I do not find the result strange having regard to the evident policy underlying s40(1)(g) to which I have earlier referred. A debtor having a claim against his or her creditor can not just stand by while judgment is obtained and later seek to use that claim to set aside a bankruptcy notice founded upon that judgment. If machinery is available for that claim to be agitated as a cross claim in the proceedings, even if application must be made in a timely way to another court or leave must be obtained, that application should be made or that leave sought. Otherwise the debtor will be bound by his or her conduct.
In that case, Mr Ling had entered into contracts with numerous Chinese students to provide them with educational services. The students paid certain fees to Mr Ling. However, the students were then unable to obtain visas. The Commonwealth refunded the fees to the students in exchange for an assignment of their rights against Mr Ling. The Commonwealth then sued Mr Ling for recovery of the fees. The Federal Court made orders against him for more than $9 million. Subsequently, the Commonwealth served a bankruptcy notice on
Mr Ling. He sought to have it set aside on the grounds that he had a counterclaim against the Commonwealth that could not have been brought in the original proceedings for defamation and negligent misstatement.
Hill J proceeded on the basis, without deciding, that Mr Ling could not have brought the tort proceedings in the Federal Court and could not have brought the tort proceedings in the Supreme Court and then had them cross-vested to the Federal Court. However, his Honour considered that Mr Ling could definitely have commenced the tort proceedings in the High Court, and the High Court would almost undoubtedly have remitted the proceedings to the Federal Court. His Honour considered that it was very likely that the Federal Court would have consolidated the Commonwealth’s claim in debt and Mr Ling’s claim in tort: [16] to [19].
Hill J then said:
20. In short, it may be said that by a somewhat tortuous path and with the aid of discretions exercised in his favour, the debtor was legally capable of bringing about the situation where the claims in tort could have become cross claims in the Commonwealth proceedings. In case it may be thought that the effect of consolidation would have resulted in the consolidated proceedings being a new and different proceeding from that commenced by the Commonwealth against the debtor, that is of no consequence for the Commonwealth would then have obtained judgment in the new proceeding against the debtor; that is to say, the cross claims would have been set up in the same proceeding as that in which the judgment was obtained.
21. The question is whether the possibility of this tortuous route and the existence of the discretions which would be encountered on the way (both of the High Court to remit and of this Court to order consolidation) permit the debtor to argue that the claims in tort were such that they could not have been set up in the Commonwealth proceedings.
Hill J concluded that the tortuous path and the existence of the discretions did not mean that Mr Ling’s claims in tort could not have been brought in the same proceedings as the Commonwealth’s claim against Mr Ling.
In the present case, the respondent argued that the applicant debtors could have obtained the transfer of the County Court proceeding to the Federal Court by having the matter transferred to the Supreme Court of Victoria under s.17 of the Courts (Case Transfer) Act 1991 (Vic.) and then cross-vested to the Federal Court under the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Vic.). In that way, the respondent argued, the claim and the counterclaim could have been brought in the same proceeding.
The applicant debtors argued that the decision in Ling was wrong, because the proceeding which resulted in the judgment relied upon for the bankruptcy, and any proceeding which resulted in a judgment on the counterclaim, would have been separate proceedings. I do not accept that argument. Hill J considered that issue and determined that it was very likely that the two proceedings would have been consolidated. That meant that, in Ling, there would have been one proceeding that dealt with both the determination of the original claim and the determination of the counterclaim. The same would presumably have happened in this matter if the applicant debtors had filed a proceeding under the TPA in the Federal Court and the contract claim was then transferred to the Federal Court. Alternatively, if the whole County Court proceeding, with the contract claims and the s.47 claims, had been transferred to the Federal Court, there would have been only one proceeding.
The applicant debtors argued that Ling is distinguishable. They argued that the County Court proceeding could not have been transferred to the Federal Court because the Federal Court could not have dealt with the primary claims in the proceeding, which were contract claims. The applicant debtors argued that the effect of Re Wakim; ex parte McNally (1999) 198 CLR 511 was that the Commonwealth Parliament cannot give the Federal Court jurisdiction in any matter that does not fall within s.75 and s.76 of the Commonwealth Constitution.
The Full Federal Court considered the effect of Wakim on the accrued jurisdiction of the Federal Court in Johnson Tiles Pty Ltd v Esso Australia Ltd (2000) 104 FCR 564 at [83] and [84] as follows:
83.Non-federal claims that cannot be severed from a federal claim are treated as part of the matter for the purposes of federal jurisdiction. That condition is satisfied if both sets of claims arise from a common substratum of facts - Abebe v Commonwealth[1999] HCA 14; (1999) 197 CLR 510 at 530 (Gleeson CJ and McHugh J). Most recently in Re Wakim; Ex parte McNally[1999] HCA 27; (1999) 198 CLR 511, Gummow and Hayne JJ in their joint judgment (Gleeson CJ, Gaudron and McHugh JJ agreeing with them on this point) said:
"What is a single controversy "depends on what the parties have done, the relationships between or among them and the laws which attach rights or liabilities to their conduct and relationships". There is but a single matter if different claims arise out of "common transactions and facts" or "a common substratum of facts", notwithstanding that the facts upon which the claims depend "do not wholly coincide". So, too, there is but one matter where different claims are so related that the determination of one is essential to the determination of the other, as, for example, in the case of third party proceedings or where there are alternative claims for the same damage and the determination of one will either render the other otiose or necessitate its determination. Conversely, claims which are "completely disparate", "completely separate and distinct" or "distinct and unrelated" are not part of the same matter." (at 586)
84 The judgment to be made in assessing the scope of the accrued jurisdiction extends to the relationship between the federal and non-federal claims said to fall within it. Further, the federal claim must be a substantial aspect of the controversy if that controversy is to attract federal judicial power. As the majority said in Fencott v Muller [(1983) 152 CLR 570] at 609:
"A federal claim which is a trivial or insubstantial aspect of the controversy must, of course, itself be resolved in federal jurisdiction, but it would be neither appropriate nor convenient in such a case to translate to federal jurisdiction the determination of the substantial aspects of the controversy from the jurisdiction to which they are subject in order to determine the trivial or insubstantial federal aspect. Again, impression and practical judgment must determine whether it is appropriate and convenient that the whole controversy be determined by the exercise of federal judicial power."
It is to be noted that the characterisation "trivial or insubstantial" is not an absolute attribute of the federal claim or a description of its strength or weakness but rather a description of its relationship to the controversy in respect of which jurisdiction is invoked.
In Johnson Tiles, the Full Federal Court considered that a common law negligence claim was within the accrued jurisdiction of the Federal Court in a matter allegedly involving misleading and deceptive conduct in breach of the TPA. At [93], the Full Federal Court considered that the negligence claim should continue in the Federal Court, even though the TPA claim was struck out on the grounds that it was not tenable. The High Court granted special leave to appeal against that decision. However, on 12 April 2001, the Federal Court transferred the matter to the Supreme Court: Johnson Tiles Pty Ltd v Esso Australia Ltd (2001) FCA 421. The High Court appeal was subsequently abandoned.
In Wakim, the High Court held that a common law negligence claim was within the accrued jurisdiction of the Federal Court because it was part of one justiciable controversy involving an action against the official trustee in bankruptcy under s.176 of the Bankruptcy Act1966.
It is clear, from these cases, that, even since the High Court’s decision in Wakim, the Federal Court is able to exercise jurisdiction in common law claims, such as contractual disputes, if they are part of one justiciable controversy involving a matter that falls within the Federal Court’s usual jurisdiction.
In the present case, it was not argued by the applicant debtors that the TPA claims were not part of the same justiciable controversy as the contract claims. Nor did they argue that the TPA claims were an insubstantial or trivial aspect of the controversy. From the material before me, I consider that the TPA and contract claims were part of the one justiciable controversy. I also consider that the TPA claims were not an insubstantial or trivial part of that controversy. Accordingly, I consider that the proceedings in the Count Court could have been transferred to the Federal Court, subject to the issues discussed below.
The next question is whether there was a mechanism that would have enabled the contract claims in the County Court to be transferred to the Federal Court. The respondent relied on the decision of Davies J in Whiley Investments (Qld) Pty Ltd v Pet’s Paradise Franchising (Qld) Pty Ltd [2009] VSC 144. In that case, her Honour reviewed a decision of a Magistrate who had refused to refer four debt recovery proceedings for consideration of whether they should be transferred to the Supreme Court under s.17 of the Courts (Case Transfer) Act 1991 (Vic.). The defendants in the debt recovery proceedings had raised defences and counterclaims in those proceedings under s.47 of the TPA and some of the defendants were also parties to a group action in the Federal Court under s.47 of the TPA.
The Courts (Case Transfer) Act 1991 (Vic.) permits the transfer of cases between State courts. Subsection 16(1) of that Act provides that:
(1) A proceeding may only be transferred under this Part if in the opinion of the designated judicial officers—
(a) the transferor court does not have exclusive jurisdiction to hear and determine it; and
(b) the transferee court has the appropriate skill, experience and authority to hear and determine it having regard to its gravity, difficulty and importance; and
(c)it is just and convenient that it be transferred.
Davies J considered the meaning of paragraph 16(1)(b) of that Act in paragraphs [17] to [24] of the reasons for decision which are as follows:
17Secondly, the criterion in paragraph (1)(b) is that the transferee court has authority to hear and determine “it”, being the proceeding that is sought to be transferred. This raises for consideration the meaning of the expression “proceeding” as used in the context of the Case Transfer Act.
18The expression “proceeding” is not defined in the Case Transfer Act. As Smart J observed in Blake v Norris “[t]he word “proceeding is capable of... a variety of meaning[s]” and “[a]ny assistance as to its meaning has to be derived from the statutory context and the objects of the legislation in question”. The expression ordinarily refers to the “method permitted by law for moving a Court or judicial officer to some authorised act”; “the means or vehicle by which the subject matter of a dispute [is] brought before [a] court for adjudication”.
19In Braeside Bearings Pty Ltd v HG Brignell & Associates the Court of Appeal was concerned with the meaning of “proceeding” as used in s 60(1) of the Supreme Court Act 1986. “Proceeding” is a defined word in the Supreme Court Act and means “any matter in the Court other than a criminal proceeding”. The Court concluded that word, in the context of that Act, was used in the sense of legal proceeding – “as a generic expression to embrace what was formerly comprehended individually and respectively by the expression “action, “cause” and “matter””.
20The word is similarly defined in the County Court and Magistrates’ Court Acts.
21It is plain, in my view, that “proceeding” is used in the same sense in the context of the Case Transfer Act, that is, as the action or cause initiated by the appropriate process. The scheme of the Act, which provides for the transfer of civil proceedings, bears out that the Act is concerned with transferring, as between courts, the action or cause.
22The criterion that the transferee court have the authority to hear and determine the proceeding is thus a requirement that the action be within the jurisdiction of the court. To construe the subsection as requiring that the transferee court have the authority to determine all matters involved in the proceeding, as Counsel for the defendants submitted, involves inferring words into the subsection that the context does not, in my view, warrant.
23Plainly the debt recovery actions are within the jurisdiction of the Supreme Court. In my view, it is an irrelevant consideration, under s 16(1)(b), that the defences and counterclaims in those actions involve matters under s 47 of the TPA that are outside the jurisdiction of the Supreme Court.
24It follows that the Magistrate was wrong in law to conclude that the criteria for transfer could not be satisfied and wrong in law to refuse the stay on the basis of that conclusion.
The applicant debtors argued that Whiley was wrongly decided, in that, for a transfer to be permitted, the transferee court (in that case, the Supreme Court) must have jurisdiction to hear the whole controversy, being both the contract claim and the s.47 claim. There is some force in that submission. However, I consider that I should defer to an interpretation of a Victorian statute made by a judge of the Supreme Court of Victoria. Moreover, in addition to the matters mentioned by her Honour, it may be thought that, in context, authority to determine a proceeding includes authority to deal with it by transferring it to a more suitable court.
However, there was an alternative mechanism that the applicant debtors could have used to enable their TPA claims to be dealt with in the same proceeding as the contract claims. That mechanism would have avoided the alleged defects in Whiley. Under s.8 of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Vic.), if it appeared to the Supreme Court that a proceeding was pending in another court, such as the County Court, and the proceeding was related to a proceeding in the Federal Court, the Supreme Court could remove the County Court proceeding to the Supreme Court. The proceeding would then be pending in the Supreme Court. To have availed themselves of this mechanism, the applicant debtors would have needed to file their s.47 claim in the Federal Court and made application to the Supreme Court.
Under s.6 of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Vic.), if a matter for determination in a proceeding that is pending in the Supreme Court is a special federal matter, the Supreme Court must transfer it to, relevantly, the Federal Court, unless the Supreme Court makes an order under s.6(3). I consider it to be unlikely that the Supreme Court would have made such an order in the circumstances of this case. A special federal matter is defined in the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Vic.) to have the same meaning as in the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth.). That Act defines a special federal matter to include a matter under s.47 of the TPA.
The applicant debtors argued that the s.47 matter could not actually have been pending in the Supreme Court because the State courts had no power to hear it. It was argued that, although the s.47 claim had been brought in the County Court, the claim was void ab initio, as it were, because it could not be heard in the state courts. I do not accept that argument. The cross-vesting legislation contemplates that matters beyond the jurisdiction of a court are pleaded in that court and the matter is then transferred. See, for example, s.5(1) of the Victorian Act.
For these reasons, I consider that the applicant debtors’ s.47 claim could have been set up in the proceeding in which judgment was obtained against them. As previously stated, the applicant debtors’ other TPA claims, being the claims under s.51AD and s.52, could certainly have been set up in the proceeding in which judgment was obtained against them, even if that proceeding had remained in the County Court.
Does the s.47 claim equal or exceed the amount of the judgment?
Even if the counterclaim under s.47 of the TPA could not have been set up in the same proceedings as the proceedings in which the judgment was obtained, the applicant debtors would need to show that their counterclaim under s.47 is equal to or exceeds the amount of the judgment. The judgment is in the sum of $151,110.92. The applicant debtors also need to show that their counterclaim is genuine and has a fair chance of success: Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135.
The applicant debtors’ statement of claim in Federal Court proceeding VID418/2009 is contained in exhibit SA-2 to the affidavit sworn by the first applicant debtor on 7 October 2009. The statement of claim alleges breaches of s.47, s.51AD and s.52 of the TPA by the respondent in relation to Krescendo, in the case of both applicants, and in relation to Fimill, in the case of the second applicant. The statement of claim claims damages, but does not quantify them, and does not indicate how the damages claim relates to each of the alleged breaches.
However, counsel for the applicant debtors said that each breach individually and jointly led to the whole of the damages claim. The applicant debtors each swore an affidavit on 20 November 2009 saying that they had suffered substantial losses from the failure of their businesses. Those losses far exceeded the amount of the judgment. Their counsel argued that the various breaches of the TPA caused the applicant debtors’ businesses to fail and that caused them to incur the substantial losses.
The first applicant debtor said that she had lost:
a)$170,000 for a business loan;
b)$89,000 for a stock fitting and business loan;
c)$410,000 for Krescendo’s purchase of a residential property; and
d)the amounts claimed in the County Court proceedings.
The second applicant debtor said that she had lost:
a)$300,00 for a business loan;
b)$110,00 for a shop fitting and business loan;
c)the amounts claimed in the County Court proceeding.
Counsel for the respondent argued that the losses identified by the applicant debtors did not arise from the s.47 claim. That claim concerned exclusive dealing, that is, a requirement that the applicant debtors acquire certain goods from certain suppliers. The respondent argued that, even if s.47 had been breached, the measure of damages would be the difference between the price paid for those goods and the price for which they could have been obtained from another supplier. The respondent argued that there was nothing in the statement of claim or in the affidavits to enable the court to form a view that any damages flowing from the alleged breach of s.47 equalled or exceeded the amount of the judgment.
I accept that argument. To obtain damages for a breach of s.47, the applicant debtors need to show that their losses were caused, or at least contributed to, by the breach of s.47, as opposed to the breaches of s.51AD (contravention of industry codes) and s.52 (misleading and deceptive conduct). As the matter stands, there is nothing to indicate that there was any price differential at all between the amount at which the applicant debtors were required to purchase certain goods and the amount at which they could have been purchased on the open market. Moreover, there is nothing to indicate that the goods that the applicants were required to purchase could not be sold at a profit.
In all the circumstances, I am not persuaded that the applicant debtors have a counterclaim against the respondent under s.47 of the TPA that equals or exceeds the amount of the judgment on which the bankruptcy notice is based.
Does issue estoppel prevent the s.47 claim now being run?
The respondent argued that the applicant debtors could not argue in the Federal Court that the franchise agreements and guarantees were unenforceable because the County Court had decided that they were enforceable. The respondent referred to the classic statement of issue estoppel in Blair v Curran (1939) 62 CLR 464 at 531:
The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion ….
Applying that dictum to the present case, the County Court judgment proceeded on the basis that the franchise agreements and guarantees were valid and enforceable but did not declare them to be so in any absolute sense. The County Court did not consider whether the franchise agreements and guarantees were invalid and unenforceable by reason of s.47 of the TPA.
Accordingly, I do not accept that the County Court judgment necessarily established that the franchise agreements were valid and enforceable regardless of s.47 of the TPA. However, the point does highlight the desirability of all of the issues concerning the franchise agreements and guarantees being dealt with in the one proceeding.
Conclusion
For the reasons set out above, I do not accept that the applicant debtors have a counterclaim that could not have been set up in the same proceeding as the proceeding in which the judgment founding the bankruptcy notice was obtained. I do not accept that the applicant debtors’ counterclaim under s.47 of the TPA equals or exceeds the amount of the judgment debt. Accordingly, the application to set aside or extend the time for compliance with the bankruptcy notice must be dismissed.
I certify that the preceding thirty-nine (39) paragraphs are a true copy of the reasons for judgment of Riley FM
Associate: Ashika Kanhai
Date: 15 December 2009
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