Baseline Constructions Pty Ltd v Chen

Case [2020] FCCA 2080

FEDERAL CIRCUIT COURT OF AUSTRALIA

BASELINE CONSTRUCTIONS PTY LTD v CHEN [2020] FCCA 2080

Catchwords:

BANKRUPTCY – Application for sequestration order based on act of bankruptcy arising out of failure of respondent to comply with the requirements of a bankruptcy notice – at time of issue of bankruptcy notice the District Court of New South Wales made two orders, one that there be judgment for the applicant for $150,000 (first judgment debt), and one that there be judgment for the applicant for $150,000, but subject to a temporary stay (second judgment debt) – applicant issued bankruptcy notice demanding payment of the first judgment debt – the respondent paid $100,000 of the first judgment debt after the day by which the bankruptcy notice required payment of the first judgment debt – creditor’s petition claimed the applicant relied on a judgment debt of $300,000 being the sum of the first and second judgment debts, noting that the respondent had paid $100,000 – the respondent later paid the outstanding $50,000 of the first judgment debt – whether in those circumstances the District Court had given only one judgment for $150,000 with the consequence that by paying the $150,000 the respondent discharged the judgment and the applicant was not a creditor of the respondent – held District Court made one order that created two judgment debts – whether the stay in relation to the second judgment debt had lifted – stay lifted – whether respondent has offsetting claim exceeding the amount of the second judgment debt – no arguable case of an offsetting claim that was equal to or in excess of the second judgment debt – matter to be listed for the making of a sequestration order to give respondent opportunity to come to terms with the applicant.

Legislation:

Bankruptcy Act 1966 (Cth), ss.43, 47(1), 47(1A), 52(1), 156A

Civil Procedure Act 2005 (NSW), ss.4(1), 73, 90(1), Schedule 1
District Court Act 1973 (NSW), s.81
Federal Circuit Court (Bankruptcy) Rules 2016 (Cth), rr.4.02(1), 4.02(2), 4.04(1)(a)(ii), 4.04(1)(b), 4.05, 4.06(3), 4.06(4)
Federal Circuit Court of Australia Act 1999 (Cth), s.5
Home Building Act 1989 (NSW), ss.18B, 94(1A)
Supreme Court Act 1970 (NSW), s.63
Uniform Civil Procedure Rules 2005 (NSW), r.13.3

Cases cited:

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Commonwealth Bank of Australia Trading as Bankwest v Mastronardo [2019] FCCA 2371

Corney v Brien (1951) 84 CLR 343

Darling Downs Investments Pty Ltd v Ellwood (1988) 18 FCR 510; 80 ALR 203

Dinch v Dinch [1987] 1 WLR 252

Gorczynski v Bendigo and Adelaide Bank Ltd [2016] NSWCA 170

Kinch v Walcott [1929] AC 484

Liang v LV Property Investments Pty Ltd [2015] FCA 1057

McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41

Opie v Opie (1951) 84 CLR 362

Re Joseph Francis Emerson and Wilma Lucy Emerson v Wreckair Pty Ltd [1992] FCA 16
Roberts v Gippsland Agricultural & Earth Moving Contracting Co Pty Ltd [1956] VLR 555

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AGLC
Baseline Constructions Pty Ltd v Chen [2020] FCCA 2080
Case
[2020] FCCA 2080
Decision Date

CaseChat Overview and Summary

Baseline Constructions Pty Ltd (Baseline) sought a sequestration order against Mr Chen based on an alleged act of bankruptcy arising from Mr Chen's failure to comply with a bankruptcy notice. The bankruptcy notice demanded payment of $150,000, which Baseline contended was part of a larger judgment debt of $300,000 entered by consent in the District Court of New South Wales. Mr Chen opposed the sequestration order, arguing that he had discharged the judgment debt and that Baseline was therefore not a creditor.

The court was required to determine several legal issues. Firstly, it had to ascertain whether the District Court judgment constituted a single debt of $150,000 or two separate judgment debts totalling $300,000. Secondly, if there were two judgment debts, the court needed to decide whether a stay on the second judgment debt had lifted, rendering it payable. Thirdly, the court had to consider whether Mr Chen possessed an arguable offsetting claim that exceeded the amount of the second judgment debt, which would preclude him from being considered a creditor for the purposes of bankruptcy.

The court found that the District Court had made one order creating two judgment debts of $150,000 each. It determined that the stay on the second judgment debt had lifted, making it payable. Furthermore, the court concluded that Mr Chen had not established an arguable case for an offsetting claim that was equal to or in excess of the second judgment debt. Consequently, the court listed the matter for the making of a sequestration order, providing Mr Chen an opportunity to reach an agreement with Baseline.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

The act of bankruptcy on which Baseline relies is Mr Chen’s failure to comply with the requirements of a bankruptcy notice that was issued on 12 December 2019, and served on Mr Chen on 18 December 2019. The bankruptcy notice demanded payment of $150,000 within 21 days from the date of service. This represents what Baseline submits was part of a judgment for $300,000 that was made by the Judicial Registrar of the District Court of New South Wales (Judgment) on 9 December 2019 with the consent of Baseline and Mr Chen. Mr Chen opposes the application for a sequestration order on a number of grounds. a)First, Mr Chen submits he discharged the Judgment by payment, and, for that reason, Mr Chen does not owe Baseline any debt. This ground relies on a particular construction of the Judgment, namely, that it was for $150,000. Baseline, on the other hand, submits the Judgment was for $300,000; it consisted of two judgment debts, each in the amount of $150,000; Mr Chen paid the first judgment debt, but not the second judgment debt; and, for that reason, Baseline is a creditor of Mr Chen in the amount of $150,000.b)Second, assuming the Judgment consisted of two judgment debts, Mr Chen submits he was liable to pay the second judgment debt only in particular circumstances that have not eventuated. The second judgment debt, therefore, was not payable when the bankruptcy notice was issued, and remains not payable. c)Third, Mr Chen seeks leave to rely as a ground for opposing the making of a sequestration order a claim (Offsetting Claim) in the sum of $196,869 Mr Chen lodged against Baseline in the New South Wales Civil and Administrative Tribunal (NCAT). Mr Chen alleges that the $196,869 represents the cost of making good defective work Baseline performed at a property of which Mr Chen and his wife are the registered proprietors (Property). d)Fourth, Mr Chen relies on an affidavit that contains evidence that is potentially relevant to establishing his solvency. Baseline opposes Mr Chen being granted leave to rely on the Offsetting Claim as a ground for the Court not making a sequestration order because it submits the claim lacks merit. Counsel for Baseline, however, indicated that Baseline would be in a position to deal with the substance of the ground if I were to grant Mr Chen leave to rely on it. At my invitation, counsel for Baseline and Mr Chen made submissions on the merits of the proposed ground on the basis that I would consider the ground, first, for the purpose of determining whether it had sufficient merit to warrant my granting Mr Chen leave to rely on it and, second, assuming I were to conclude the ground has sufficient merits, whether the ground is made out and, if so, whether I should rely on that ground as a reason for not making a sequestration order, assuming Baseline otherwise establishes the matters that must be established before the Court can make a sequestration order under s.52(1) of the Act. I will proceed as follows. I will first set out the evidence in narrative form of the events leading to the filing of the creditor’s petition. All of the evidence is contained in documents and, for that reason, is not contentious. Second, I will briefly set out the matters s.52(1) of the Act requires a creditor prove before the Court can make a sequestration order. Third, I will consider the first and second grounds on which Mr Chen relies because, if successful, Baseline will not be able to prove the preconditions prescribed by s.52(1) of the Act for the making of a sequestration order. Fourth, assuming these two grounds are decided against Mr Chen, I will consider whether Baseline has proved all the preconditions for the making of a sequestration order. Fifth, I will consider the merits of the Offsetting Claim. Finally, I will consider the relevance of Mr Chen’s affidavit.

Ratio Decidendi

Legal Principle Established

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