Chen v TMS Global Services Pty Ltd
[2010] FMCA 524
•30 July 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| CHEN v TMS GLOBAL SERVICES PTY LTD & ORS | [2010] FMCA 524 |
| BANKRUPTCY – Challenge to bankruptcy notice – whether the debtor has a counterclaim that could not have been set up in the proceedings leading to the judgment debt considered – debtor filing counterclaim in the proceedings – interlocutory costs orders made against him – the counterclaim could have been raised in opposition to those orders. |
| Bankruptcy Act 1966 (Cth), s.41 |
| Re Errol Hugh Pollnow v Queensboro Pty Limited & Anor [1988] FCA 365 Smart v Esanda Finance Corp Ltd [2000] FCA 235 |
| Applicant: | ALEXANDER CHEN |
| First Respondent: | TMS GLOBAL SERVICES PTY LTD |
| Second Respondent: | JUMBO CORPORATION LTD |
| Third Respondent: | BENON TECHNOLOGIES PTY LTD |
| File Number: | SYG 1496 of 2010 |
| Judgment of: | Driver FM |
| Hearing date: | 20 July 2010 |
| Delivered at: | Sydney |
| Delivered on: | 30 July 2010 |
REPRESENTATION
| Solicitors for the Applicant: | Mr B Fudge Barrie Fudge & Company |
| Counsel for the Respondent: | Mr D Knoll |
ORDERS
The application filed on 6 July 2010 is dismissed with costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1496 of 2010
| ALEXANDER CHEN |
Applicant
And
| TMS GLOBAL SERVICES PTY LTD |
First Respondent
JUMBO CORPORATION LTD
Second Respondent
BENON TECHNOLOGIES PTY LTD
Third Respondent
REASONS FOR JUDGMENT
Introduction and background
The applicant, Mr Chen, is a debtor of the respondents. By his application filed on 6 July 2010, he challenges bankruptcy notice VN1109/2010 which claims a debt of $6,782 based upon two interlocutory costs orders of the Melbourne Magistrates Court.
Mr Chen claims that he has a counterclaim of equal or greater value than the sum claimed in the bankruptcy notice which could not have been raised in the Magistrates Court proceedings. The respondents assert that the challenge (based upon s.41(7) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”)) has no substance as the asserted counterclaim has in fact been raised in the Magistrates Court proceedings which are continuing.
Mr Chen’s application is supported by two affidavits made by him on 5 July 2010 and 19 July 2010. He was cross-examined on his affidavits.
Consideration
On 21 February 2007 the respondents issued a complaint against Mr Chen out of the Melbourne Magistrates Court seeking recovery of $42,876 as a result of an alleged embezzlement of funds by Mr Chen. He filed a Notice of Defence on or about 31 May 2007.
On or about 20 June 2007 Mr Chen filed a counterclaim seeking recovery of $80,000 for moneys allegedly owing to him arising out of his employment with the respondents. The respondents have filed a defence to that counterclaim.
On 2 November 2009 the magistrate made a costs order against Mr Chen in the sum of $512. The costs order arose out of an interlocutory application relating to discovery and required payment of the costs within 30 days.
The proceedings were set down for hearing in the Melbourne Magistrates Court on 9 November 2009. However, at that time Victorian Police officers attended court and sought to interview Mr Chen in relation to the alleged embezzlement. The magistrate stayed the proceedings until the determination of any criminal proceedings against Mr Chen and further ordered that upon such determination, the proceedings were to be relisted at the earliest practicable opportunity. The magistrate ordered Mr Chen to pay the respondents’ costs, fixed in the sum of $6,270 subject to a stay of 60 days. The stay expired 60 days after the order.
No criminal proceedings were taken against Mr Chen and the proceedings in the Melbourne Magistrates Court are now listed for hearing on 6 December 2010.
Mr Chen asserts that the relevant proceedings for the consideration of his application are the interlocutory proceedings leading to the two costs orders. He submits that his counterclaim could not have been set up at that interlocutory stage as it required a final hearing. He relies on the decision of the Federal Court in Re Errol Hugh Pollnow v Queensboro Pty Limited & Anor [1988] FCA 365 (“Pollnow”). In that case, Burchett J said at [2]-[3]:
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.
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] FCA 46; (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.
His Honour’s reasoning in the case before him is relevantly contained at [10] of his judgment:
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.
Mr Chen relies on that paragraph in support of the proposition that his counterclaim could not have been “set up” at the interlocutory stage of his proceedings. However, the respondents point out that in Pollnow there were two proceedings, equity proceedings which had only reached an interlocutory stage and common law proceedings[1]. The cross demand was raised in the common law proceedings, but not the equity proceedings. In other words, the important point was not that the proceedings were at an interlocutory stage but, rather, that the proceedings were a different suit arising out of different asserted rights and a counterclaim in one action could not be raised in the other. I agree. I distinguish Pollnow on the basis that in this case there was only one set of proceedings which was, at the relevant time, at an interlocutory stage. There is no record of what was put to the magistrate before the two costs orders were made. However, there is no legal reason why Mr Chen’s legal representative at those hearings could not have resisted the interlocutory costs orders on the basis that there was an undetermined counterclaim before the Court. It could also have been put to the magistrate that costs awarded at the interlocutory stage should not become payable until all issues between the parties had been resolved on a final basis. Whatever may or may not have been put to the magistrate, the two orders made established a debt for a sum certain payable at a fixed time.
[1] That is not obvious from the reasons in the case but I have no reason to doubt the accuracy of the submission.
In my view, the present case is analogous to that in Smart v Esanda Finance Corp Ltd [2000] FCA 235. In that case, the Full Federal Court said at [2]-[22]:
The primary judge was satisfied that the appellant had committed the act of bankruptcy alleged in the petition, namely, a failure to comply with a bankruptcy notice which had been served upon him. The bankruptcy notice was based upon a judgment obtained by the respondent against the appellant in the County Court at Melbourne on 3 December 1998 in the sum of $12,779.45 which consisted of an amount of taxed costs and interest thereon. The primary judge was not satisfied that the appellant had a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt which could not have been set up in the proceeding in which the judgment in the County Court was obtained.
We are not satisfied that any of the grounds of appeal are made out and in order to understand how we have reached this conclusion it is necessary to understand the path by which the respondent came to file its creditor's petition against the appellant.
The respondent says that in 1990 the appellant entered into two hire purchase contracts with the respondent in relation to two items of equipment, a Caterpillar Scraper and a Vibrating Sheep Foot Roller ("the equipment"). In affidavits sworn this year in response to the petition the appellant has denied he entered into these contracts. On 10 July 1992 the respondent issued a proceeding in the County Court against the appellant claiming the sum of $72,029.20, being the money allegedly due under the two contracts. The respondent obtained a default judgment in that proceeding on 18 August 1992. After obtaining judgment the respondent "repossessed" the goods and sold them applying the proceeds of sale to reducing the judgment debt to a sum of approximately $20,000-$30,000.
The appellant made four applications in the County Court to set aside that judgment which either did not proceed or were dismissed. The first application was filed on 28 August 1992 and subsequently withdrawn. The second application was filed on 3 June 1993 and subsequently struck out. The third application was filed on 30 October 1995 and on 13 December 1995 a Judge of the County Court ordered that execution by the respondent on the judgment be stayed pending the prosecution of a claim to be made by the appellant against the respondent. Later, that application was struck out when the appellant failed to comply with another interlocutory order made in the proceeding. A further application was made in September 1998 and was dismissed on 19 November 1998. That order of dismissal is the subject of a notice of appeal to the Court of Appeal of the Supreme Court of Victoria.
In February 1996 the appellant had issued a proceeding in the County Court against the respondent claiming damages. In his statement of claim the appellant alleged that:
(1) two hire purchase contracts were entered into between him and the respondent dated 5 February 1990 and 15 March 1990 in relation to the equipment;
(2) the respondent had no right to terminate the contracts;
(3) the respondent entered judgment in default against the appellant in the County Court on 18 August 1992 for damages for failure to deliver up the equipment and that by reason of the judgment:
(a) the respondent had repudiated the hire purchase contracts;
(b) the respondent was estopped from denying that it had elected not to repossess the equipment and that the appellant had title to the equipment; and
(c) the hire purchase contracts had merged in the judgment;
(4) the respondent wrongfully seized the equipment or, alternatively, did not sell it for the best price reasonably obtainable; and
(5) the respondent had wrongfully converted the equipment or, alternatively, had not complied with the provisions of the Hire-Purchase Act 1959 (Vic) in repossessing the equipment.
The appellant claimed that as a result of the conduct of the respondent set out in the statement of claim he had suffered loss and damage being the value of the equipment and the loss of its use. Alternatively, he sought a declaration that he was not indebted to the respondent in respect of the equipment and an order that the judgment be set aside.
As a result of the appellant's failure to comply with an interlocutory order requiring him to answer interrogatories delivered to him in that proceeding, the County Court ordered on 1 May 1997 that the appellant's proceeding be struck out with costs. In due course the respondent's costs were taxed and the amount of the taxed costs and interest thereon became the sum in which judgment was entered.
The respondent served on the appellant a bankruptcy notice issued on 18 February 1999 demanding payment of the amount of the judgment debt and setting out how it was calculated. There was affixed to the bankruptcy notice a copy of the authenticated order of the Court pursuant to which the debt was payable. The appellant did not pay the amount claimed in the bankruptcy notice and thereby committed an act of bankruptcy.
On 16 March 1999 the appellant applied to set aside the bankruptcy notice and on 30 March 1999 that application was dismissed by a Registrar.
The issue before the primary judge was whether the appellant could satisfy him that the appellant had, relevantly, a cross demand equal to or exceeding the amount of the judgment debt which he could not have set up in the County Court proceeding. The appellant claimed that he had a good defence to the claim by the respondent in the original 1992 County Court proceeding. The primary judge noted that the appellant made certain serious allegations against the respondent in respect of the hire purchase contracts including allegations of fraud, forgery and non-payment of any purchase price for the equipment. His Honour accepted that if the allegations were made out and the appellant persuaded the Court of Appeal to set aside the default judgment obtained by the respondent in the County Court in 1992, the appellant would be entitled to assert that the respondent has no claim against the appellant for monies due to it by the appellant under hire purchase contracts.
His Honour found, however, that there was a fundamental misconception in the appellant's opposition to the petition because the cross demand upon which he apparently relied was in fact set up in the proceeding in which the judgment was obtained, namely the proceeding brought by the appellant on 15 February 1996 in which he had filed a statement of claim which set out his complaints against the respondent concerning the hire purchase contracts and the repossession and sale of the equipment. His Honour found:
All of the events upon which he relied occurred back in the early part of the 1990s. There is no doubt in my mind that the matters, the subject of the cross-demand that he says that he wishes to raise under section 40(1)(g), were in fact raised in that proceeding. But if I am wrong and there were some additional matters that he could have raised but failed to, then he nevertheless is caught by the requirement in s 40(1)(g) that the cross-demand could not have been set up in that proceedings.
His Honour referred to the substantial body of authority that the expression "could not have been set up" as used in s 40(1)(g) meant "could not by law have been set up in the action": Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129. His Honour also referred to other cases set out in the notes to s 40(1)(g) in the annotated Bankruptcy Act at para 80, 910.15.
His Honour therefore found that notwithstanding the body of material relied upon by the appellant, the ground upon which the appellant wished to oppose the petition had not been made out. It followed that a sequestration order should be made.
Counsel for the appellant referred to a number of affidavits filed by the appellant in which he set out his claims that the hire purchase contracts had not been entered into by him and that various documents had been forged. It is not necessary to refer to these affidavits in any detail other than to note that they were before the primary judge. Counsel submitted that the primary judge erred when he found that the appellant's cross demand, identified in his affidavits, was in fact raised in his County Court proceeding could have been raised in that proceeding. He submitted that the appellant could not have raised his proposed cross-claim in his County Court proceeding because of the existence of the respondent's proceeding in respect of which judgment had been entered on 10 August 1992. He submitted that the proceeding which the appellant had commenced on 15 February 1996 was misconceived because it sought to attack the validity of the judgment in the first proceeding. In short, he submitted that the appellant's proceeding was not competent because he could not set up a claim of fraud or make the allegation that he had not entered into the two hire purchase contracts in relation to the subject-matter of the first proceeding. Rather, he submitted, that could only be done in the first proceeding itself in respect of which there was presently outstanding the notice of appeal in relation to the order refusing to set aside that judgment. Counsel further submitted that the primary judge's reliance on Re Ling; Ex parte Ling v Commonwealth of Australia (supra) was misplaced because there was no choice available to the appellant notwithstanding the existence of the proceeding he had commenced on 15 February 1996 because although that proceeding had been instituted it was not competent to raise the issues therein relied upon.
We have some doubt about the primary judge's observation that the matters which are the subject of the cross demand and which the appellant now wishes to raise were in fact raised in the proceeding commenced on 15 February 1996. If his Honour was referring to the prayer for relief in that proceeding that the appellant was not indebted to the respondent in respect of the two hire purchase contracts, his Honour's observation was correctly made. However, if his Honour was referring to the allegations of forgery and that the appellant had not entered into the hire purchase contracts, then it was not correct to say that these matters were in fact raised in that proceeding. In the event, it does not matter whether this is what his Honour found because we are satisfied that those claims of forgery and non-execution of the hire purchase contracts could have been set up in the appellant's County Court proceeding.
The question whether the cross demand "could not have been set up" in the proceeding in which the judgment was obtained for the purposes of s 40(1)(g) of the Act is a question "to be answered by reference to legal considerations": Re Ling; Ex parte Ling v Commonwealth of Australia (supra) at 599. Counsel submitted that the allegations of forgery and not signing the hire purchase contracts could not have been set up in the appellant's County Court proceeding because he would have been met with a plea or defence of res judicata or issue estoppel. Whether or not a cross-claim could be set up does not depend upon whether it could be set up successfully but whether it could be set up as a matter of law: Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 at 138-139; Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183 at 189.
…
The appeal will be dismissed with costs.
It is an established fact that Mr Chen’s counterclaim has been raised in the proceedings in the Melbourne Magistrates Court and has not yet been determined. I do not know whether that counterclaim was raised in opposition to the interlocutory costs orders made by the magistrate in those proceedings, but it could have been. On the non payment of the costs as ordered, the respondents were entitled to issue the bankruptcy notice. Mr Chen’s challenge to the bankruptcy notice under s.41(7) of the Bankruptcy Act is misconceived.
It follows that the application before me should be dismissed with costs, and I will so order.
It does not follow that the Court would necessarily make a sequestration order against Mr Chen in consequence of him having committed an act of bankruptcy. The fact that there are continuing proceedings in the Melbourne Magistrates Court between the parties involving a claim against Mr Chen and a more substantial counterclaim by him against the respondents might be a reason for the Court to refrain from making a sequestration order. That is a matter to which the Court would need to give consideration in the event that a creditor’s petition is presented.
I certify that the preceding fifteen (15) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 30 July 2010
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