Barsby, M. Re: Ex Parte: The Bankrupt

[1988] FCA 600

Re: ERROL HUGH POLLNOW
And: QUEENSBORO PTY LIMITED and GARDEN MEWS-ST. LEONARDS PTY LIMITED
No. B2391 and B378 of 1988
Bankruptcy Notice

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
AND THE AUSTRALIAN CAPITAL TERRITORY
GENERAL DIVISION
Burchett J.(1)

CATCHWORDS

Bankruptcy Notice - Cross demand under s.40(1)(g) - Effect of s.41(7) and sufficiency of relevant affidavit - Value of cross demand not quantified in affidavit - "Benevolent construction" applied - Sufficiency of evidence to establish cross demand - Cross demand being subject of dismissed proceedings now under appeal, issue was not whether prima facie case shown but whether real possibility debtor's appeal will succeed.

Bankruptcy Act 1966, ss.40(1)(g), 41(7)

HEARING

SYDNEY

#DATE 19:10:1988

Counsel for the Debtor: Mr S.D. Epstein

Solicitors for the Debtor: Beston & Riordan

Counsel for the Petitioning Creditor: Mr J.E. Sexton

Solicitors for the Petitioning Creditor: McKiMM & Associates

ORDER

The Court is satisfied that the debtor has a cross demand of the type referred to in s.40(1)(g).

The creditor pay the debtor's costs.

NOTE: Settlement and entry of orders is dealt with in rule 124

of the Bankruptcy Rules.

JUDGE1

These are applications, which were heard together by consent, in respect of two bankruptcy notices.

1. By s.40(1)(g) of the Bankruptcy Act 1966 provision is made for the service of a bankruptcy notice requiring a debtor, within a fixed time, to "comply with the requirements of the notice or satisfy the Court that he has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he could not have set up in the action or proceeding in which the judgment or order was obtained." Section 41(7) provides:
   

"Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has filed with the Registrar an affidavit to the effect that he 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."

1. In Re Laybutt; Ex parte Robinson (unreported, 17 July 1985), I referred to the operation of s.41 in the following terms:
   

"The structure of s.41 distinguishes between such a claim (i.e. a claim to have a counter-claim set-off or cross demand within s.40(1)(g)) and the claim to set aside a bankruptcy notice. Where a debtor seeks to set up a counter-claim, set off, or cross demand, the provisions of s.41(7), provided they are complied with, produce an extension by force of the statute. They do not provide for an extension by the Court."

That this was in fact the position had already been held in James v. Abrahams (1981) 34 ALR 657 at 661 where Deane and Lockhart JJ. said of the filing of an affidavit under s.41(7):

"It operates as an automatic extension of time for compliance with the bankruptcy notice until the court can determine whether it is satisfied by the debtor that the debtor has a counter-claim, set-off or cross demand of the type referred to in s.40(1)(g). If the court is so satisfied, it is neither required nor empowered to make an order setting aside the bankruptcy notice. The result of the court's being so satisfied, within either the time originally fixed by the bankruptcy notice for compliance or the extended time resulting from the operation of s.41(7), is that failure to comply with the requirements of the bankruptcy notice does not constitute an act of bankruptcy. After the court has been so satisfied, the bankruptcy notice is spent."

1. If, as was pointed out in both the cases cited, an affidavit filed in purported compliance with s.41(7) does not in fact meet the requirements of that provision, the result is simply that the time has not been extended by its filing and, if nothing further occurs, an act of bankruptcy will result from the expiration of the time limited in the notice. It will then be too late to take any other step which may have been open to the debtor if it had been taken in time.

2. Accordingly, the first question in cases under s.41(7) is the sufficiency of the affidavit filed within the period allowed and upon the basis of which, pursuant to rule 10, the matter has been brought before the Court. Upon that question hangs the issue whether or not an act of bankruptcy has been committed.

3. It was pointed out by Lockhart J. in Re Brink; Ex parte Commercial Banking Company of Sydney Limited (1980) 30 ALR 433 at 439, in a judgment which received the approval of the Full Court in Eastick v. Australia and New Zealand Banking Group Limited (1981) 53 FLR 91 and was applied in Re Racheha; Ex parte Antonios (1980) 49 FLR 423, that the affidavit must contain more than a mere assertion of the existence of the requisite counter-claim, set-off or cross demand which could not have been set up in the action in which the judgment or order was obtained. The affidavit must "show" such a counter-claim, set-off or cross demand.

4. But in Eastick's case (supra) at 95 the joint judgment of Deane, Fisher and Sheppard JJ. accepted as sufficient in the particular circumstances an affidavit which did not verify an essential ingredient of the cause of action sought to be set up except by asserting the debtor's belief as to the matter in question. Their Honours said:
   

"The question whether an affidavit is an affidavit 'to the effect' required by s.41(7) must, as we have indicated, depend in every case on the particular facts and circumstances and should be determined on a benevolent construction of the relevant affidavit."

They went on to hold that it also appeared from the affidavit that the claim was not one which could have been set up in the proceedings in which the judgment founding the bankruptcy notice was obtained.

1. In accepting that the affidavit must be given a benevolent construction, the joint judgment at 93-94 quoted at length from the judgment in Re Brink, where Lockhart J. pointed out that the exigencies of time might render it "difficult, if not impossible, for the debtor to present more than a mere outline of his case in the time available."

2. Re Brink also contains a valuable indication of what is meant by a "cross demand" in the relevant sense. It accepted earlier authority to the effect that the term is not a technical one, and that it has a wider meaning than the expressions which accompany it, "counter-claim" and "set-off". At 139, Lockhart J. adopted the view that the object of the legislature "is obviously to prevent a judgment creditor from pursuing bankruptcy proceedings when, as between himself and the judgment debtor, the balance of account is in favour of the judgment debtor."

3. I turn to the affidavits in the present cases, which are in substantially identical terms. What they disclose is that the debts founding the bankruptcy notices arose upon orders for costs made against the debtor in interlocutory proceedings in an equity suit commenced by him against the creditors and others. The cross demand relied upon consists of the claims made in the principal suit. The relevant "proceeding" for the purposes of s.40(1)(g) is either the application for interlocutory orders in the suit or the application for a costs order in that interlocutory application - in either case the substantial claim in the principal proceeding could not have been set up in answer to the creditor's application for a costs order in the interlocutory matter. That followed from the nature of the proceeding. But is the affidavit "to the effect that" the debtor has a cross demand equal to or exceeding the amount of the debt? It does not seek to quantify in figures the value of the claim set out in it. But if the affidavit is given a "benevolent construction", it seems to me appropriate to note that each of the debts here in question is relatively small, arising upon a partial costs order in an interlocutory proceeding, whereas the claim itself has been litigated upon a separate question as far as the High Court of Australia, where the prospect of special leave being granted, once all issues have been determined, is said (without objection) to have been held out. A further separate question has also been determined and is about to be dealt with in a further appeal. In these circumstances, it can scarcely be doubted that, if the debtor ultimately succeeds in his suit, the costs orders alone are likely far to exceed the debts the subject of the bankruptcy notices. The amended Statement of Claim in the Supreme Court, filed pursuant to leave given by McLelland J., has been verified by the debtor, and a verified copy is annexed to the affidavit. It does far more than assert the existence of a claim; it pleads that claim in detail, and alleges damages resulting both from the incurring of liabilities as a guarantor, and from the loss of the benefit of employment as a consultant and executive director upon which the debtor is alleged to have been financially dependent. It also claims an order for costs against each of the creditors.

4. It would not, I think, be in keeping with the requirement of the relevant bankruptcy law, that I should construe the affidavit benevolently, to fail to accept it as sufficient to comply with the requirements of s.41(7). I think it is "to the effect" that the debtor has the requisite cross demand.

5. The remaining question is the sufficiency of the evidence to establish the case propounded. For this purpose, more is required than merely compliance with s.41(7) by the filing of an affidavit to the relevant effect. The Court must be satisfied, within the meaning of s.40(1)(g), that the debtor has the appropriate cross demand. I have found this the most difficult question in the present cases. The information furnished in the affidavits is sparse in the extreme. It is not satisfactory that a court should be asked to infer matters which could easily have been the subject of evidence. Further affidavits can be filed on behalf of a debtor, provided any affidavits filed within the time limited by s.41(7) raise a sufficient case to comply with the requirements of that section. (See Laybutt's case (supra).) However, the parties agreed on certain further facts which were stated from the bar table, and any inferences which do arise from the material before me can more confidently be drawn since the respondents have not chosen to call any evidence. What has emerged is that the principal proceeding, raising the alleged cross demand, challenges the appointment of certain receivers and managers over the assets of a company of which the debtor was executive director. In those proceedings, two separate issues have been tried. The first, which related to the legal validity of the appointment, was determined in the debtor's favour at first instance by Kearney J., whose decision, however, was reversed by a majority of the Court of Appeal of New South Wales, with Priestley J. dissenting. It was this decision which was the subject of an application for special leave to the High Court, which was rejected, not on the basis that the case was in itself inappropriate for special leave, but on the ground the application was premature since the question would remain open until the final determination of the suit. A second separate question was determined adversely to the debtor by Hodgson J., and an appeal from that decision is due to be heard by the Court of Appeal in December.

6. It seems to me that a case where the debtor's claim is the subject of current litigation, which is incomplete in the sense that appeals remain to be determined, raises somewhat different questions from those which are raised in the normal case of a claim yet to come before a court. In the normal case, it is appropriate to ask whether the debtor has shown "that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross demand". (See Re Brink (supra at 141), citing the decision of the High Court in Ebert v. The Union Trustee Company of Australia Limited (1960) 104 CLR 346 at 350.) But in a case such as the present, a court has already pronounced upon the prima facie case the debtor would seek to propound. The pronouncement, however, has not been finally affirmed, and has been put in question by appellate proceedings. I have not been referred to any authority which discusses this problem. It would clearly be invidious for this Court to attempt to assess the prospect that the Court of Appeal may overrule the decision of Hodgson J., or that the High Court may ultimately grant special leave and allow an appeal on the question on which a majority of the Court of Appeal, with Priestley J. dissenting, has overruled the decision of Kearney J.The issue should rather be whether there is a real possibility that the debtor's claim will ultimately be established. The stage of considering whether there is a prima facie case has already been passed. It is necessary to bear in mind that s.40(1)(g) does not require the debtor to satisfy the Court that he will succeed in his claim; the ordinary test of whether he has merely shown a prima facie case makes that plain.

7. In the present cases, the dissenting judgment of Priestley J. seems to me, taken in conjunction with the other circumstances, to show that the debtor has a cross demand within the meaning of s.40(1)(g). Accordingly I declare that I am satisfied, in each case, that the debtor has a cross demand of the type referred to in s.40(1)(g).