Burrell v Reavill Farm Pty Ltd & Ors
[2014] FCCA 1449
•8 July 2014
FEDERAL CIRCUIT COURT OF AUSTRALIA
| BURRELL v REAVILL FARM PTY LTD & ORS | [2014] FCCA 1449 |
| Catchwords: BANKRUPTCY – Application to set aside bankruptcy notice on the ground that debtor has counter-claim equal to or greater than the amount claimed in the bankruptcy notice – whether debtor has sufficiently substantial grounds that he has a counter-claim equal to or greater than the amount demanded in the bankruptcy notice. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.27(1), 30, 33(1), 41(6A), 41(7), 52(1), 153B, 306, 306(1) Federal Circuit Court of Australia Act 1999 (Cth), ss.57(1), 81(1)(a) |
| Adams v Lambert (2006) 228 CLR 409 Ballard v Multiplex Ltd [2008] NSWSC 1019 Burrell Solicitors Pty Ltd v Reavill Farm Pty Limited & Ors (No.2) [2011] NSWSC 1615 Colin Richard Hubner v ANZ Banking Group Ltd [1998] FCA 1779 Glew v Harrowell, in the matter of Glew [2003] FCA 373 Gould v Vagellas (1985) 157 CLR 215 Hussain and Another v King Investment Solutions Pty Ltd (2006) 234 ALR 195 O’Meara v Deputy Commissioner of Taxation [2009] FCA 1575 Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] 1 Ch. 204 Union Bank of Australia v Harrison, Jones and Devlin Ltd (1910) 11 CLR 492 |
| Applicant: | JOHN LLEWELLYN BURRELL |
| First Respondent: | REAVILL FARM PTY LTD (ACN 001 817 492) |
| Second Respondent: | CHAMPIONS QUARRY PTY LTD (ACN 127 774 949) |
| Third Respondent: | JEFFREY FRANCIS CHAMPION |
| Fourth Respondent: | DIANA CHRISTINE CHAMPION |
| Fifth Respondent: | MACABIL PTY LTD (ACN 078 825 863) |
| File Number: | SYG 43 of 2014 |
| Judgment of: | Judge Manousaridis |
| Hearing date: | 12 May 2014 |
| Delivered at: | Sydney |
| Delivered on: | 8 July 2014 |
REPRESENTATION
| Counsel for the Applicant: | Mr Livingston |
| Solicitors for the Applicant: | Burrell Solicitors Pty Ltd |
| Counsel for the Respondents: | Ms V. McWilliam |
| Solicitors for the Respondents: | Ronayne Lawyers |
ORDERS
The proceedings commenced on 8 January 2014 for an order to set aside bankruptcy notice BN 168177 issued on 13 December 2013 (bankruptcy notice) are not invalid because the applicant failed to comply with r.3.02 of the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth) (Bankruptcy Rules).
Pursuant to r.1.06(1) of the Federal Circuit Court Rules 2001 (Cth) (FCCR) the Court dispenses with the requirement that on 8 January 2014 the applicant comply with r.3.02 of the Bankruptcy Rules.
Pursuant to r.3.05(1) of the FCCR the time for complying with r.3.02 of the Bankruptcy Rules is extended to 18 March 2014.
The interim application filed in Court on 12 May 2014 is otherwise dismissed.
The application filed on 8 January 2014 is dismissed.
The applicant pay the respondents’ costs of the application including the costs of the interim application.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 43 of 2014
| JOHN LLEWELLYN BURRELL |
Applicant
And
| REAVILL FARM PTY LTD (ACN 001 817 492) |
First Respondent
| CHAMPIONS QUARRY PTY LTD (ACN 127 774 949) |
Second Respondent
| JEFFREY FRANCIS CHAMPION |
Third Respondent
| DIANA CHRISTINE CHAMPION |
Fourth Respondent
| MACABIL PTY LTD (ACN 078 825 863) |
Fifth Respondent
REASONS FOR JUDGMENT
Introduction
Before the Court are two applications. The first, which was filed on 8 January 2014, seeks an order that a bankruptcy notice issued against the applicant, Mr Burrell, be set aside or, in the alternative, that the time for compliance with its requirements be extended. The ground on which Mr Burrell seeks these orders is that he has a counter-claim against the respondent creditors equal to or exceeding the amount demanded in the bankruptcy notice.
The second application is an interim application Mr Burrell filed on 12 May 2014. The application was filed in response to contentions made by the respondents that the application Mr Burrell filed on 8 January 2014 did not comply with r.3.02 of the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth) (Bankruptcy Rules), and that such failure rendered Mr Burrell’s application incompetent. In his interim application Mr Burrell seeks an order that the proceedings commenced by the application filed on 8 January 2014 are not invalidated because of any formal defect.
When the matter came before me on 12 May 2014, counsel agreed I should deal with both the interim application and, if Mr Burrell were to succeed on that application, with Mr Burrell’s application filed on 8 January 2014. Counsel also agreed I should deal with Mr Burrell’s interim application on the assumption that Mr Burrell did not comply with r.3.02(3) of the Bankruptcy Rules, although it was agreed that Mr Burrell’s right to submit he did comply with that rule would be preserved to the extent it became relevant to any issue.
In these reasons, therefore, I do the following. First, I set out the facts and procedural history out of which the applications arise. As will be seen below, there are two sets of facts. One concerns Mr Burrell’s dealings with the respondents. That is relevant because Mr Burrell alleges that an essential element of his asserted counter-claim – the making of misrepresentations – occurred in the course of those dealings. The other set of facts concerns Mr Burrell’s involvement in two property developments. That set of facts is relevant for two reasons. First, the judgment debt referred to in the bankruptcy notice arose in connection with one of those property developments. Second, it is an essential element of Mr Burrell’s asserted counter-claim that the misrepresentations allegedly made by the respondents prevented Mr Burrell from completing the second property development; and it is the value of the foregone profit from that development that Mr Burrell claims is the amount of his asserted counter-claim.
I then consider whether Mr Burrell failed to comply with r.3.02 of the Bankruptcy Rules, and, if so, whether Mr Burrell’s not having complied with r.3.02 means the Court has no power to determine the claims made in the application. Finally, assuming the Court does have the power to determine Mr Burrell’s application, I consider whether I am satisfied Mr Burrell has a counter-claim, set-off or cross demand equal to or exceeding the amount demanded by the bankruptcy notice.
Facts
Mr Burrell’s dealings with the respondents
Mr Burrell is a solicitor who, since 2003, has conducted his practice through an incorporated law practice, Burrell Solicitors Pty Ltd.
In around February 2010 Mr Burrell commenced legal work on instructions from Mr Champion, the third respondent. Mr Champion and the fourth respondent, his wife, control the first, second, and fifth respondents, each of which is a company.
Mr Burrell’s legal work related to seeking development approval for a proposed expansion of an existing sandstone quarry at Tuckurimba, near Lismore. The quarry is on land of which the first respondent, Reavill Farm Pty Ltd (Reavill), and another company controlled by Mr Champion, Tucki Hills Pty Ltd, are the registered proprietors. The legal work consisted in representing the respondents in two proceedings before the Land and Environment Court of New South Wales (LEC).
From the outset Mr Champion and the other respondents had difficulty paying the legal fees associated with the second of the LEC proceedings. Mr Burrell has deposed to conversations he says he had with Mr Champion about the payment of fees. Mr Burrell alleges that in the course of those conversations Mr Champion made a number of representations about the capacity and willingness of the respondents to pay the relevant fees.
Throughout 2010 the legal fees being incurred in relation to the LEC proceedings were accumulating. On 5 January 2011 Mr Burrell issued a statement of account to Reavill that showed total costs and disbursements of $357,958.30 had been incurred, and towards which the respondents had made payments totalling $103,850.41. On 28 February 2011 Mr Burrell issued a further statement of account that showed that total costs and disbursements had increased to $725,723.94 towards which the respondents had made payments totalling $243,469.91.
After 27 February 2011 Mr Burrell and Mr Champion had a number of discussions about the payment of outstanding fees, particularly those owing to senior counsel. Counsel had indicated on 16 February 2011 he would not do any further work unless payment of his outstanding fees was secured.
Mr Burrell and Mr Champion reached an agreement by 4 April 2011, being the day on which submissions were due to be made to the LEC. That resulted in the respondents signing a number of documents, the details of which are described in the reasons for judgment in Burrell Solicitors Pty Ltd v Reavill Farm Pty Limited & Ors (No.2).[1]
[1] [2011] NSWSC 1615
The LEC proceedings were decided against the respondents in May 2011. Mr Burrell had further discussions with Mr Champion about the payment of his and counsel’s fees. These discussions ended on 27 September 2011 when Mr Champion sent a letter to Mr Burrell attaching a letter from Reavill in which a number of allegations were made against Mr Burrell. By letters dated 30 September 2011, Mr Burrell notified Reavill and the second, third, and fourth respondents that he had ceased to act for them.
In November and December 2011 Mr Burrell caused Burrell Solicitors Pty Ltd to apply for assessments of the costs that had been incurred in the LEC proceedings. On 22 August 2013, after the hearing of objections, two judgments were entered in the Supreme Court of New South Wales against the respondents, one for $188,005.11, and the other for $349,302.42.
Mr Burrell’s property developments
While acting for the respondents in the LEC proceedings, Mr Burrell was managing a property development venture that had begun in 2003 but which before 2011 had fallen into difficulties. The venture concerned the development of medical suites in Kogarah. Mr Burrell undertook the venture through JR & JB Pty Limited (JR) as trustee of the Sojara Trust.
JR borrowed money for the purposes of the venture from a number of entities. One was Tanilba Beach Pty Limited (Tanilba), a company controlled by Mr Bruce Webster. The repayment of the loan was secured by a mortgage over a property in Kurnell (lot 89) that Mr Burrell, through JR as trustee of a family trust, had acquired in 1997 together with an adjoining lot (lot 88). Lot 89 contained a residence in which Mr Burrell lived until October 2012. Mr Burrell became registered as proprietor of lot 88 in 2002 following a property settlement with his former wife. Both lots 89 and 88 were subject to first-ranking mortgages. Lot 89 was mortgaged to RHG Mortgage Corporation Limited (RHG), and lot 88 was mortgaged to the Laiki Bank (now known as the Beirut Hellenic Bank).
The Kogarah venture encountered difficulties from late 2007 to early 2008, after stage 1 of the venture had been completed, when the project financier withdrew funding for stage 2. According to Mr Burrell:[2]
Development of stage 2 then foundered and I put considerable time and effort into reviving the project over the next five years during 2008 to 2012 without success. On a few occasions it seemed that completing the project would be possible. Matters came to a head in April 2012, when after months of due diligence to establish a sale and joint venture, all was cancelled the day before contracts were set to be signed when the lead investor’s wife was diagnosed with terminal brain cancer.
[2] Affidavit of J L Burrell, 17.03.14, [399]
In the meantime, in or about the middle of 2010, Mr Burrell resolved to apply for the consolidation of lots 88 and 89 and to subdivide the consolidated lots into two new lots 888 and 889. Mr Burrell lodged a development application for consolidation in January 2011 and the approval was granted on 12 September 2011.
Mr Burrell failed to make mortgage payments to RHG in August-December 2011. In October 2011, Mr Burrell made a “Hardship Application” to RHG to capitalise the arrears. Mr Burrell renewed the application in March 2012. In May or June 2012 an employee of RHG informed Mr Burrell that RHG approved the hardship application “subject to the consent of the second mortgagee Tanilba Beach”. Tanilba, however, refused to consent. That led to RHG refusing the hardship application.
In 2010 Mr Burrell proposed to Mr Webster that Mr Webster discharge the mortgage Tanilba held over lot 89 in return for Mr Burrell paying Tanilba $600,000, being $300,000 principal, and $300,000 interest. Mr Webster did not accept this proposal. Before 13 September 2012, Tanilba commenced proceedings against Mr Burrell in the Supreme Court of New South Wales, and obtained judgment against Mr Burrell on 13 September 2012 in the amount of $780,264.32
On 30 October 2012, RHG went into possession of lot 89. In December 2012, Mr Burrell was advised that RHG had sold lot 89 to Tanilba for $750,000. Mr Burrell was subsequently informed by email from Mr Webster that the sale of lot 89 was settled on 1 February 2013. After 1 February 2013, but before 26 November 2013, Tanilba applied $277,066.42 towards the judgment debt, leaving a balance of $503,197.90. The evidence does not reveal how that sum was calculated.
By notice dated 26 November 2013 Tanilba informed Mr Burrell that it had assigned to the respondents “all its right title and interest in the debt of is [sic] $575,689.58 as at 26 November 2013” between Mr Burrell and the respondents.
Proceedings before this Court
On 13 December 2013, the respondents arranged for the issue of a bankruptcy notice against Mr Burrell demanding payment of $503,197.90. That represents the amount of the judgment of $780,264.32 Tanilba recovered from Mr Burrell on 13 September 2012 less the $277,264.32 Tanilba applied against that debt. The bankruptcy notice was served on Mr Burrell on 18 December 2013.
On 8 January 2014 Mr Burrell filed an application with this Court seeking an order to set aside the bankruptcy notice or, in the alternative, an order to extend the time for compliance with its requirements. The application was supported by an affidavit of Mr Burrell. In that affidavit, Mr Burrell deposed that on 24 December 2013 he commenced proceedings against the respondents in the Supreme Court of New South Wales. He deposed that he commenced what Mr Burrell describes as a “counter-claim” by summons “as a matter of convenience with limited assistance with counsel due to the timing of the summer vacation”. Mr Burrell further deposed that the summons was due to be before the Supreme Court on 7 February 2014 for directions, at which time he expected that directions would be made for the pleading of his counter-claim.
Mr Burrell, nevertheless, described in his affidavit of 8 January 2014 the counter-claim he asserted against the respondents as follows:
6.[T]he nub of the counterclaim is that by agreement between the respondents, Burrell Solicitors P/L and myself, I undertook significant legal work for the respondents through the corporate vehicle for my legal practice, Burrell Solicitors P/L, on promises made by the respondents to me for payment for my services which were not kept and which I believe on reasonable grounds were misleadingly and deceptively made.
7.Further, the respondents later entered into written agreements for the payment of these legal fees which they subsequently breached and from which they ultimately resiled, and are thereby in breach of contract.
8.As a consequence I have personally suffered loss and damages in excess of the debt claimed in the bankruptcy notice.
. . .
10.In the period from February 2010 to September 2011, I undertook complex legal work for [all but the fifth respondents] including conducting two cases in the Land & Environment Court and assisting with a Part 3A Application to the Minister for development consent for a sandstone quarry near Lismore. Burrell Solicitors P/L received part payment for this work. Later the legal costs were assessed, certificates were issued and judgments entered into against the respondents on 22 August 2013 for the outstanding balance in the total sum of $537,307.64.
11.There are presently legal proceedings in the Supreme Court of NSW matter #2011/365912 in respect of this legal work and judgment debt, being conducted by the respondents against Burrell Solicitors P/L and defended, alleging breach of retainer and other matters in which the respondents are claiming reimbursement of amounts paid or owing of $1,246,676.13.
Mr Burrell’s application came before a Registrar of this Court on 28 January 2014, and directions were made for the filing of further evidence.
On 14 February 2014, the solicitor for the respondents sent a letter to Mr Burrell by email in which he identified what he claimed were fatal problems with Mr Burrell’s application to set aside the bankruptcy notice. First, it was said Mr Burrell had failed to comply with the Bankruptcy Rules because neither the application nor Mr Burrell’s affidavit in support had attached to it a copy of the bankruptcy notice, Mr Burrell’s affidavit did not state when the bankruptcy notice was served, and his affidavit did not specify full details of the counter-claim. It was further said that the information Mr Burrell provided about his counter-claim did not establish a prima facie case because the claim Mr Burrell asserted, if it existed, was one that belonged to Burrell Solicitors Pty Ltd, not Mr Burrell.
On 18 March 2014, Mr Burrell filed two affidavits, both sworn on 17 March 2014. In those affidavits, Mr Burrell deposed:
a)as to the date on which he was served with the bankruptcy notice;
b)as to matters relating to whether or not the bankruptcy notice was attached to the application commencing these proceedings;
c)that he had filed a statement of claim and supporting affidavit in the Supreme Court proceedings; and
d)of facts on which he relies for his counter-claim.
Failure to comply with r.3.02 of the Bankruptcy Rules
I now turn to consider whether Mr Burrell complied with r.3.02 of the Bankruptcy Rules on 8 January 2014 when he filed his application to set aside the bankruptcy notice. That rules provides as follows:
(1)An application to set aside a bankruptcy notice must be accompanied by:
(a)a copy of the bankruptcy notice; and
(b) an affidavit stating:
(i) the grounds in support of the application; and
(ii) the date when the bankruptcy notice was served on the applicant; and
(c)a copy of any application to set aside the judgment or order in relation to which the bankruptcy notice was issued and any material in support of that application.
(2)If the application is based on the ground that the debtor has a counter-claim, set-off or cross demand mentioned in paragraph 40(1)(g) of the Bankruptcy Act, the affidavit must also state:
(a) the full details of the counter-claim, set-off or cross demand; and
(b) the amount of the counter-claim, set-off or cross demand and the amount by which it exceeds the amount claimed in the bankruptcy notice; and
(c)why the counter-claim, set-off or cross demand was not raised in the proceeding that resulted in the judgment or order in relation to which the bankruptcy notice was issued.
(3)The application and supporting documents must be served on the respondent creditor within 3 days after the application is filed.
First, the respondents submit Mr Burrell did not comply with r.3.02(1)(b)(ii). That is correct. Mr Burrell’s affidavit sworn on 8 January 2014 does not refer to the day on which the bankruptcy notice was served on him. This omission, however, is trivial; the application Mr Burrell filed stated that the bankruptcy notice had been served on him on 18 December 2013.
Second, the respondents submit Mr Burrell did not attach to his application a copy of the bankruptcy notice, and thus he did not comply with r.3.02(1)(a). Mr Burrell disputes this. He has sworn an affidavit on 17 March 2014 in which he deposes that he instructed his clerk to file the application together with the bankruptcy notice. Mr Burrell also deposes that on the day the application was filed he had a conversation with a Registrar about the application seeking an interim order under s.41(7) when there was no need to claim such an order, and the Registrar saying that he would make a note on the file, yet the Registrar did not mention that the application was not accompanied by a copy of the bankruptcy notice.
I am not satisfied the application was accompanied by a copy of the bankruptcy notice. There is no record on the Court file of a bankruptcy notice having been filed on 8 January 2014 other than the application that was filed stating that “a copy of that Bankruptcy Notice accompanies this application”. There is no record on the Court file of the sort Mr Burrell deposed the Registrar said he would make in relation to the application seeking an order under s.41(7) of the Bankruptcy Act 1966 (Cth) (Act). And the copy of the bankruptcy notice Mr Burrell annexed to his affidavit of 17 March 2014 is incomplete. Accordingly, I am not satisfied Mr Burrell complied with r.3.02(1)(a) of the Bankruptcy Rules.
Third, the respondents submit Mr Burrell’s affidavit of 8 January 2014 also does not comply with r.3.02(2). I agree. First, although Mr Burrell in his affidavit of 8 January 2014 describes the nature of the asserted counter-claim, he does not state “the amount of the counter-claim” or “the amount by which it exceeds the amount claimed in the bankruptcy notice”. Second, although Mr Burrell purports to describe the “nub of his counterclaim”, his description does not rise above an assertion that he has a counter-claim against the respondents. As I will show later in these reasons, the mere assertion that a debtor has a counter-claim cannot satisfy the Court that the debtor has a counter-claim. Third, the affidavit does not state why Mr Burrell did not raise the asserted counter-claim in the proceeding in which the judgment referred to in the bankruptcy notice was entered.
Is compliance with r.3.02 mandatory?
Counsel for the respondents submits that the requirements of r.3.02 of the Bankruptcy Rules are mandatory so that if an application to set aside a bankruptcy notice is made without the rule being complied with, the application is a nullity. Counsel especially relies on the decision of Edmonds J in O’Meara v Deputy Commissioner of Taxation.[3]
[3] [2009] FCA 1575
Counsel for Mr Burrell, on the other hand, submits that r.3.02 is not mandatory in the sense contended for by counsel for the respondents. It is a rule whose breach can be forgiven by the Court either under the general dispensing power of r.1.06 of the Federal Circuit Court Rules 2001 (Cth) (FCCR) or under s.306 of the Act or s.57(1) of the Federal Circuit Court of Australia Act 1999 (Cth) (FCCA Act). Counsel for Mr Burrell further submits that O’Meara v Deputy Commissioner of Taxation is not authority for the proposition that an application to set aside a bankruptcy notice is a nullity if r.3.02 is not complied with.
Power to relieve compliance under r.1.06(1) FCCR
The jurisdiction of this Court in matters relating to the Act is conferred by a number of provisions of the Act. At the most general level is s.27(1) of the Act which confers on the Federal Court and this Court “concurrent jurisdiction in bankruptcy”. At a slightly less general level is s.30, and in particular sub-section (1), which confers on the Court, among other things, “full power to decide all questions, whether of law or of fact, in any case of bankruptcy”, and empowers the Court to make “such orders . . . as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter”. Then, there are provisions that grant or, perhaps more accurately, particularise, discrete heads of power. These include the power to extend the time for compliance with the requirements of a bankruptcy notice (s.41(6A)), the power to make a sequestration order (s.52(1)), the power to annul a bankruptcy (s.153B), and so on.
The Act also contains provisions that may be described as procedural. One is s.33(1) of the Act which empowers the Court to adjourn proceedings before it, or to allow the amendment of any written process, proceeding or notice, or extend any time limited by the Act, either before its expiration or, if the Act does not expressly provide to the contrary, after its expiration. Another provision is s.306(1) which provides that “[p]roceedings under this Act are not invalidated by a formal defect or an irregularity unless the court . . . is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court”.
The Act does not, however, exhaust the provisions that regulate the exercise of the Court’s jurisdiction under the Act. Also relevant – indeed, pervasive – are the Bankruptcy Rules. Those rules have been made by the Judges of this Court in exercise of the power conferred by s.81(1)(a) of the FCCA Act. And that fact bears some reflection. Paragraph (a) of s.81(1) of the FCCA Act authorises the Judges of the Court to make rules of court “for or in relation to the practice and procedure to be followed in the” Court. The Bankruptcy Rules, therefore, are simply rules that are intended to govern the practice and procedure of the Court in relation to its bankruptcy jurisdiction.
One implication that may be drawn from this is that, as with all rules and forms of procedure, the Bankruptcy Rules are “not ends in themselves, but means to an end, which is the attainment of justice”.[4] Although this observation was made just over one hundred years ago in relation to rules of court in general, it has modern relevance, particularly to the practice and procedure of this Court, given that the objects of the FCCA Act include enabling this Court to operate as informally as possible in the exercise of judicial power, and to enable the Court to use streamlined procedures.[5] This, by itself, suggests that the Court has power to apply the Bankruptcy Rules, as with all other rules of court, with a degree of flexibility.
[4] Union Bank of Australia v Harrison, Jones and Devlin Ltd (1910) 11 CLR 492 at page 504 (Griffith CJ)
[5] Subsection 3(2) of the FCCA Act.
The Court’s ability to apply the Bankruptcy Rules with a degree of flexibility is not, however, left to implication. Rule 1.03(2) of the Bankruptcy Rules provides that the “other rules of the Court apply, so far as they are not inconsistent with these Rules, to a proceeding to which the Bankruptcy Act applies”. The “other rules of the Court” include the FCCR. Those rules include r.1.06(1) of the FCCR which provides that the Court “may in the interests of justice dispense with compliance, or full compliance, with any of these Rules at any time”. They also include r.3.05 of the FCCR which empowers the Court to “extend or shorten a time fixed by these Rules” even if “the time fixed has passed”.
Rule 1.06(1) and r.3.05 of the FCCR apply to “these Rules”, namely, the FCCR. On a literal reading, they do not apply to the Bankruptcy Rules. In my opinion, however, to read r.1.06(1) and r.3.05 of the FCCR literally would not be warranted, given the existence of s.33(1) of the Act. As I note above, that subsection empowers the Court to extend time limited by the Act. The Act, however, “does not purport to apply to the Rules of Court”.[6] It would be odd if the Court had power to extend times limited by the Act, but no power to extend time limited by the rules of procedure contained in the Bankruptcy Rules. In my opinion, therefore, both r.1.06(1) and r.3.05 of the FCCR apply to the Bankruptcy Rules.
[6] Colin Richard Hubner v ANZ Banking Group Ltd [1998] FCA 1779
And it is at this point that I turn to the authorities on which counsel for Mr Burrell relies; because those authorities have held that rules equivalent to r.1.03(2) of the FCCR authorise a court to dispense with compliance with a court’s bankruptcy rules. First, there is the decision of Gyles J in Hussain and Another v King Investment Solutions Pty Ltd.[7]
[7] (2007) 234 ALR 195
In Hussain, a person who applied to set aside a bankruptcy notice failed to serve the application within the three days required by r.30.02(4) of the Federal Magistrates Court Rules 2001 (which in substance is the same as r.3.02(3) of the Bankruptcy Rules). Gyles J rejected the submission that this rendered the application a nullity. His Honour did so because of r.1.06 of the FCCR. His Honour said:[8]
“There is a critical difference between rules of court, on one hand, and statutory obligations on the other. As shown by the decision in Crimmins there is always an overriding power in the court to dispense with the effect of rules of court. The applicable provision here was r 1.06 of the Federal Magistrates Court Rules 2001. . . . In my opinion, the proceeding was not a nullity, as the failure to abide by the rules as to service could have been excused.”
[8] At [25] and [26]
Second, there is the decision of Dowsett J in Colin Richard Hubner v ANZ Banking Group Ltd.[9] In that case, the creditor contended that the application for setting aside the bankruptcy notice was a nullity because no affidavit was filed with the application, as was required by a similar rule to r.3.02 of the Bankruptcy Rules. His Honour held that Order 1 rule 8 of the Federal Court Rules, being similar to r.1.06(1) of the FCCR, was available to dispense with the requirement that the applicant file an affidavit with the application to set aside the bankruptcy notice.
[9] [1998] FCA 1779
And third, there is the decision of Branson J in Crimmins v Glenview Home Units,[10] a decision to which Gyles J referred in Hussain. In Crimmins, the applicant applied to set aside a bankruptcy notice on the ground that the applicant had a counter-claim against the creditor. Her Honour held that “[a]lthough no application was made to the Court for the Court to dispense with strict compliance [with] the requirements of O77 r 13(3)(c), it seems to me that this is an appropriate case, so far as the applicant’s personal injuries claim is concerned, for the Court to give such a dispensation”.[11]
[10] [1999] FCA 515
[11] [1999] FCA 515 at [21]
It is against the background of these authorities that I consider the decision of Edmonds J in O’Meara v Deputy Commissioner of Taxation.[12] In that case, an application to set aside a bankruptcy notice[13] and to extend time for complying with the bankruptcy notice was filed without an accompanying affidavit as required by r.3.02 of the Federal Court (Bankruptcy) Rules 2005 (which is the same as r.3.02 of the Bankruptcy Rules). His Honour held that r.3.02 “mandates what is required for an application to set aside a bankruptcy notice”[14] so that where, as was the case before his Honour, an application to set aside a bankruptcy notice did not comply with the requirements of r.3.02, such application “is as if no application to set aside the Bankruptcy Notice was ever filed”.[15]
[12] [2009] FCA 1575
[13] At least, that is how the Court interpreted the application that was before it; the application in that case sought an order that the bankruptcy notice “be dismissed”.
[14] [2009] FCA 1575 at [8]
[15] [2009] FCA 1575 at [10]
In my opinion, O’Meara cannot be regarded as authority for the proposition that the Court has no power under r.1.06(1) of the FCCR to dispense with compliance with r.3.02 or any other rule of the Bankruptcy Rules. No application was made in O’Meara for an order dispensing the applicant’s non-compliance with r.3.02. Nor was Edmonds J referred to in the three cases to which I have referred above.
Accordingly, I conclude that this Court has power under r.1.06(1) of the FCCR to dispense with the requirement that Mr Burrell comply with r.3.02 if it is in the interests of justice that I do so. I am also of the opinion that the Court has power under r.3.05 of the FCCR to extend the time for Mr Burrell complying with r.3.02 of the Bankruptcy Rules.
Section 306 of the Act and s.57(1) of the FCCA Act
Counsel for Mr Burrell also relies on s.306(1) of the Act which provides:
Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.
The relief Mr Burrell seeks in his interim application assumes that Mr Burrell’s failure to comply with r.3.02 of the Bankruptcy Rules is capable of constituting a “defect or irregularity” within the meaning of s.306(1) of the Act. Counsel relied on Adams v Lambert[16] where the High Court considered the notion of “a formal defect or an irregularity” in relation to a bankruptcy notice.
[16] (2006) 228 CLR 409
The Court said that a “defect or irregularity”, at least in relation to a bankruptcy notice, is “[a] failure to comply with a requirement to be found in the Act, imposed by reference to the regulations as to information to be furnished by the notice”.[17] Whether or not a defect or irregularity is not a formal defect or irregularity, and hence outside the scope of s.306, depends on the kind or degree of defect or irregularity that is before the Court. And the kind or degree of defect that will take it outside s.306 is to be determined by asking whether it is a purpose of the Act that the act done in breach of it should be invalid; and in determining the question of purpose, regard must be had to the language of the relevant provision and the scope and objects of the whole Act.[18]
[17] (2006) 228 CLR 409 at page 418 ([24])
[18] (2006) 228 CLR 409 at page 419 ([26])
In my opinion, it is doubtful whether s.306 of the Act applies to defects or irregularities that may arise because of non-compliance with the Bankruptcy Rules. My doubt arises from the meaning the High Court assigned to the expression “defect or irregularity”, namely, a failure to comply with a requirement “to be found in the Act”. The matters prescribed by r.3.02 of the Bankruptcy Rules obviously are not requirements of the Act or of any regulations made under the Act, given that the Bankruptcy Rules are made under s.81 of the FCCA Act.
If s.306 does not apply to the Bankruptcy Rules, I am of the opinion that s.57(1) of the FCCA applies. That subsection provides:
Proceedings in the Federal Circuit Court of Australia are not invalidated by a formal defect or an irregularity, unless the Federal Circuit Court of Australia is of opinion that:
(a)substantial injustice has been caused by the defect or irregularity; and
(b)the injustice cannot be remedied by an order of the Federal Circuit Court of Australia.
If s.57(1) applies, Mr Burrell’s not complying with r.3.02 of the Bankruptcy Rules are defects or irregularities. I am of the opinion, however, that the defects or irregularities are formal in nature. As I have noted above, the Bankruptcy Rules are subject to r.1.06(1) of the FCCR.
Should the Court relieve Mr Burrell of non-compliance?
Having concluded the Court has power under r.1.06 and 3.05 of the FCCR to relieve Mr Burrell’s non-compliance with r.3.02, it is necessary to consider whether it is in the interests of justice that I should do so.
Counsel for the respondents have not identified any prejudice or injustice that would flow to the respondents if I were to relieve Mr Burrell of his non-compliance with the rule, and permit him to rely on the affidavits he made on 17 March 2014. On the other hand, not to relieve Mr Burrell will mean his substantive application will not be determined and will with time commit an act of bankruptcy that will lay the foundation for bankruptcy proceedings against him.
I am also of the opinion that Mr Burrell’s non-compliance with the Bankruptcy Rules, although a formal defect or irregularity, has occasioned no substantial injustice to the respondents.
Is the Court satisfied Mr Burrell has a counter-claim?
The matters of which a Court must be satisfied before it can be satisfied that a debtor has a counter-claim, set-off or cross demand against the creditor have been stated in different ways, and in ways that sometimes overlap. The various statements were helpfully summarised by Lindgren J in Glew v Harrowell, in the matter of Glew as follows:[19]
a)The debtor must have a “prima facie case”, even if he or she does not adduce evidence which would be admissible on a final hearing making out that case.[20]
b)The debtor has “a fair chance of success” or is “fairly entitled to litigate” the claim.[21]
c)The debtor is advancing a “genuine” or “bona fide” claim.[22]
[19] [2003] FCA 373 at [9]
[20] His Honour referred to Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 (Ebert) at 350; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd [1980] FCA 78; (1980) 44 FLR 135 (Brink) at 141; Gomez v State Bank of NSW Ltd [2002] FCAFC 101 at [17], [18]
[21] His Honour referred to Brink at 141; Re Gould; Gould v Day [1999] FCA 1650 at [27], [28]; Re Capsanis; Capsanis v The Owners - Strata Plan 11727 [2000] FCA 1262 at [11]
[22] His Honour referred to Re Capsanis; Capsanis v The Owners - Strata Plan 11727 [2000] FCA 1262 at [11]
After referring to other authorities, Lindgren J said:[23]
Plainly, in order to “satisfy” the Court for the purposes of par 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor's claim was being finally determined, but by reference to the question whether the Court should be satisfied that the debtor has a claim deserving to be finally determined.
Perhaps little more can usefully be said than that a debtor must satisfy the Court that there is sufficient substance to the counter-claim, set-off or cross demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.
[23] [2003] FCA 373 at [11] and [12]
Accordingly, the question I will consider is whether there is sufficient substance to the counter-claim asserted by Mr Burrell. That will require me to describe the counter-claim.
Mr Burrell’s asserted counter-claim
Mr Burrell’s asserted counter-claim is contained in a statement of claim that has been filed with the Supreme Court of New South Wales. The essential elements of the causes of action pleaded by Mr Burrell may be summarised as follows.
First, in February and March 2010 the first, second, third, and fourth respondents retained Burrell Solicitors Pty Ltd to commence and conduct proceedings in the LEC.
Second, in the course of Mr Burrell performing the retainer, Mr Champion, on behalf of himself and all other respondents, made two sets of representations to Mr Burrell. The first, which is identified as the “Capacity to Pay Representations”, are as follows:[24]
a)The respondents knew that the costs and disbursements they would be required to pay in connection with the LEC proceedings would be substantial and, by the middle of 2010, would be at least several hundreds of thousands of dollars.
b)The respondents did not require updated costs estimates in writing.
c)The respondents would be liable to pay, were willing and able to pay, and would pay the legal costs and disbursements associated with the LEC proceedings.
d)The respondents wished Burrell Solicitors Pty Ltd and Mr Burrell to continue to provide legal services to them on the basis of hourly costs and charges.
[24] Affidavit of J L Burrell, 17.03.14, Annexure “B”, Statement of Claim, [41]
The second set of representations, which is described as the “State of Preparation Representations”, relates to representations the respondents made about the extent to which the sandstone quarry at Tuckurimba was in a position to be awarded development consent for the expansion of the quarry.[25]
[25] Affidavit of J L Burrell, 17.03.14, Annexure “B”, Statement of Claim, [43]
Third, the representations were false, misleading, or deceptive in a manner that I do not need to set out here.[26]
[26] Affidavit of J L Burrell, 17.03.14, Annexure “B”, Statement of Claim, [44]-[46]
Fourth, Mr Burrell relied on the representations in the following ways:[27]
a)Mr Burrell and Burrell Solicitors Pty Ltd commenced and continued to provide legal services to the respondents without obtaining security for their fees and disbursements and without providing updated costs disclosures in writing.
b)Mr Burrell and Burrell Solicitors Pty Ltd did not seek or accept any substantial work from other paying clients, but instead devoted themselves full time to the affairs of the respondents.
c)Mr Burrell and Burrell Solicitors Pty Ltd did not insist on a binding agreement involving the payment of more than $10,000 a month.
[27] Affidavit of J L Burrell, 17.03.14, Annexure “B”, Statement of Claim, [47]
Fifth, as a consequence of his reliance on the misleading or deceptive representations, Mr Burrell suffered loss and damage.[28] That loss, relevant to the asserted counter-claim, is as follows:[29]
a)Mr Burrell and Burrell Solicitors Pty Ltd lost the opportunity to obtain paying work from other clients during April 2010 to March 2011.
b)Mr Burrell and Burrell Solicitors Pty Ltd lost the opportunity to obtain a binding agreement with the respondents involving payment of more than $10,000 per month.
c)The failure by the respondents to pay the substantial outstanding fees resulted in Mr Burrell committing a $25,000 default on his mortgage and losing his home, which was sold by Tanilba as mortgagee. As “a consequence, Mr Burrell was indebted to Tanilba Beach in the amount of $575,689.58”.
d)Mr Burrell “lost the opportunity to undertake the subdivision and sale of his property at 280 and 282 Prince Charles Parade, Kurnell”, the estimated loss of net profit being $1,000,000.
[28] Affidavit of J L Burrell, 17.03.14, Annexure “B”, Statement of Claim, [49]
[29] Affidavit of J L Burrell, 17.03.14, Annexure “B”, Statement of Claim, [49]
Is there sufficient substance to the asserted counter-claim?
In paragraph 11 of one of his two affidavits sworn on 17 March 2014, Mr Burrell says:
The amount of the Counter Claim is the difference in value on a before and after basis of existing Lots 88 & 89 I DP 7632 at 280-282 Prince Charles Parade Kurnell and proposed Lots 888 & 889 (as approved By Council for subdivision) and ranges between $750,000 and $1,350,000 to be further quantified by expert valuation evidence.
The statement of claim does not specify how it is alleged Mr Burrell’s reliance on the misleading or deceptive representations led to his losing the opportunity to undertake the subdivision, and thus lose between $750,000 and $1,350,000. The statement of claim, however, suggests three theories. The first is that, had Mr Burrell not relied on the misleading conduct, there was a probability he or Burrell Solicitors Pty Ltd would have obtained paying clients during April 2010 to March 2011. Implicit in this proposition are the contentions that Mr Burrell or Burrell Solicitors Pty Ltd would have consequently obtained more fees than they had in fact obtained during that period, and that the fees would have been sufficient to permit Mr Burrell to continue to pay the RHG mortgage, and hence proceed and complete to sale the subdivision of lots 88 and 89.
The second theory is that, but for Mr Burrell’s reliance on the misleading conduct, there was a chance Mr Burrell or Burrell Solicitors Pty Ltd would have succeeded in obtaining the respondents’ agreement to pay more than the $10,000 a month they agreed to pay. Again, implicit in this are the contentions that the additional amount Mr Burrell or Burrell Solicitors Pty Ltd would have secured from the respondents would have been greater than the amounts they had in fact received and, moreover, the amounts would have been sufficient to permit Mr Burrell to continue to pay the RHG mortgage, and hence enable him to proceed and complete to sale the subdivision of lots 88 and 89.
The third theory is that had the respondents paid the fees charged to them, Mr Burrell would have been in a position to continue to pay the RHG mortgage, and thus proceed and complete to sale the subdivision of lots 88 and 89.
All three theories suffer from serious difficulties. First, the statement of claim alleges that both Mr Burrell and Burrell Solicitors Pty Ltd relied on the representations by not seeking other work or by seeking to secure higher rates of pay from the respondents. There is no basis for alleging, however, that Mr Burrell relied on the representation not to seek paying customers, or an increased amount of fees from the respondents. Since 2003 Mr Burrell conducted his law practice through Burrell Solicitors Pty Ltd. The only person who could have relied on the representations not to seek clients or an additional rate of remuneration was Burrell Solicitors Pty Ltd acting through Mr Burrell, not Mr Burrell in his personal capacity. The only basis on which Mr Burrell can conceivably claim a loss from Burrell Solicitors Pty Ltd’s reliance on the representations is that, because Burrell Solicitors Pty Ltd was induced not to seek additional paying clients or higher payments from the respondents, Mr Burrell lost the opportunity to obtain the benefit, as shareholder of Burrell Solicitors Pty Ltd, of the higher fees Burrell Solicitors Pty Ltd would have obtained. In other words, the only loss that Mr Burrell can claim to have suffered is a reflection of the loss that Burrell Solicitors Pty Ltd suffered.
This leads to a second difficulty. Although Mr Burrell claims he suffered a personal loss, namely, the loss of an opportunity to subdivide and sell his own property, that loss is predicated on his not obtaining the benefit, as shareholder of Burrell Solicitors Pty Ltd, of the fees Burrell Solicitors Pty Ltd would have gained had it secured paying customers or a greater amount of fees from the respondents. That is, it is only if Mr Burrell would have personally received all or part of the additional fees Burrell Solicitors Pty Limited would have received that Mr Burrell would have been in a position to maintain his payments to RHG. But there is a principle of law (proper plaintiff principle) that prevents Mr Burrell from making such a claim; and that principle is that a shareholder:[30]
cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss.
[30] Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] 1 Ch. 204 at pages 222-223. Prudential was referred to with approval in Gould v Vagellas (1985) 157 CLR 215 by Gibbs CJ (at page 219) and Wilson J (at page 245).
The proper plaintiff principle was applied by McDougall J in Ballard v Multiplex Ltd[31] where his Honour struck out part of a statement of claim which claimed damages for a loss arising from the plaintiff’s being deprived of benefits he would have obtained as a shareholder of a company to whom a wrong was alleged to have been done.
[31] [2008] NSWSC 1019
Third, even if I accept that the proper plaintiff principle does not prevent Mr Burrell from claiming as a loss the amounts he would have received from Burrell Solicitors Pty Ltd, there are significant gaps in the evidence. There is no evidence of Mr Burrell or Burrell Solicitors Pty Ltd turning away work during April 2010 to March 2011; there is no evidence on the basis of which the Court could rationally assess the probability of Mr Burrell or Burrell Solicitors Pty Ltd obtaining paying clients who would have contributed fees in an amount greater than the fees Burrell Solicitors Pty Ltd in fact earned from the respondents; and there is no evidence which shows the amount of money Mr Burrell needed to earn through the period to enable him to continue to meet his commitments to RHG, together with his other commitments.
Fourth, not only are there gaps in the evidence; the evidence suggests that Mr Burrell would have defaulted under the RHG mortgage, even if he and Burrell Solicitors Pty Ltd did not agree to act for the respondents. In paragraph 400 of his affidavit sworn on 17 March 2014, for example, Mr Burrell deposes that throughout 2008 to 2012 he drew approximately $10,000 a month from his “legal business” to service two mortgages, one to Eclipse Prudential Corporation on “part of the stage 2 site at Kogarah, lot 201 an airspace parcel at 13 Derby Street [of approximately $6,000 per month] and the two first mortgages on my home at Kurnell [of approximately $5,000 per month]”. These amounts exceeded the $10,000 Mr Burrell says he drew from Burrell Solicitors Pty Ltd.
Fifth, even if I accept that Mr Burrell defaulted in meeting his obligations to RHG because of his reliance on the representations he alleges the respondents made, it is difficult to accept that it was that default that prevented Mr Burrell from subdividing lots 88 and 89 and selling the new lots. The default related to payments due in August to December 2011. RHG did not immediately take action to exercise its rights over lot 89. RHG considered and, in May or June 2012, it apparently agreed to Mr Burrell’s hardship application to capitalise the arrears. The difficulty Mr Burrell met, however, was that Tanilba, as second mortgagee, was not prepared to consent to the proposal. Further, according to Mr Burrell, in November or December 2012 RHG consented to Mr Burrell selling both lots 88 and 89 together for $1.2 million on the basis that the price would be apportioned $450,000 to lot 88 and $750,000 to lot 89. Tanilba, however, objected to Mr Burrell selling the lots. Thus, what appears to have prevented Mr Burrell from subdividing and selling lots 88 and 89 was not RHG’s exercising its rights as mortgagee following Mr Burrell’s default, but Tanilba’s opposition to such course.
Finally, the statement of claim assumes that both lots 88 and 89 were available to Mr Burrell to develop and sell. That assumption is incorrect. Mr Burrell was the registered proprietor of lot 88. The registered proprietor of lot 89 was JR.[32] As I note earlier in these reasons, JR was a trustee of a family trust. There is no evidence of the terms of that trust; and in the absence of any such evidence, it is impossible to assume or infer that Mr Burrell would have had any or the sole interest in the property held by JR as trustee. The trust, for example, may be a wholly discretionary trust. Or there may be two or more beneficiaries.
[32] Burrell affidavit 17.03.14 at [396] where Mr Burrell says that after his divorce “Lot 88 – the vacant lot – was transferred and registered into my name with a first mortgage to Laiki Bank (later known as Beirut Hellenic) and Lot 89 – the house on it – remained with JR & JB P/L as trustee for me with a split first mortgage to RAMS (later known as RHG). Later a 1/1,000th share in Lot 89 was transferred to me.”
The third theory also suffers from difficulties. First, the entity to whom the respondents owed the fees was Burrell Solicitors Pty Ltd, not Mr Burrell. Second, there is no relationship between the conduct it is alleged Mr Burrell took or refrained from taking under the inducement of the representations, and the respondents not paying outstanding fees charged to them by Burrell Solicitors Pty Ltd. The statement of claim alleges that Mr Burrell relied on the misleading representations by failing to attempt to act for other clients or by failing to attempt to secure higher levels of pay from the respondents
For these reasons, I am of the opinion there is insufficient substance to Mr Burrell’s claim that he has a counter-claim against the respondents or, if he does, he has a counter-claim that equals or exceeds the amount demanded in the bankruptcy notice.
Conclusion and disposition
My conclusions may be summarised as follows:
a)Mr Burrell did not comply with r.3.03 of the Bankruptcy Rules.
b)The Court, however, has power under r.1.06(1) of the FCCR to relieve an applicant from complying with r.3.02 if it is in the interests of justice.
c)It is in the interests of justice that Mr Burrell be relieved from complying with r.3.02 as at 8 January 2014.
d)Mr Burrell’s failure to comply with r.3.02 was a formal defect or irregularity that occasioned no substantial injustice
e)Mr Burrell’s asserted cross-claim does not have sufficient substance to warrant the Court setting aside the bankruptcy notice.
I propose, therefore, to make orders that will have the effect of confirming the Court has the power to hear and determine the application Mr Burrell filed on 8 January 2014, and an order otherwise dismissing the interim application and the application filed on 8 January 2014. I also propose to order that Mr Burrell pay the respondents’ costs of both applications.
I certify that the preceding eighty-two (82) paragraphs are a true copy of the reasons for judgment of Judge Manousaridis
Associate:
Date: 8 July 2014
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