Chesson v Smith

[1992] FCA 429

Re: MURRAY ADDAIR CHESSON
And: IRIS ENSLEY SMITH
No. N G127 of 1992
FED No. 429
Bankruptcy - Costs

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Beaumont(1), Gummow(1) and Cooper(1) JJ.

CATCHWORDS

Bankruptcy - s.40(1)(g) of Bankruptcy Act 1966 - creditor's petition based on costs order made in previous proceedings - whether debtor had counter claim which could not have been set up in previous proceedings.

Costs - general rule - costs follow the event.

HEARING

SYDNEY

#DATE 27:5:1992

Counsel and Solicitors Mr L.J. Ellison instructed
for Appellant: by Patterson, Byfield and Bryen

Counsel and Solicitors Mr J.R. Dupree instructed by
for Respondent: H.D. Kelly

ORDER

Appeal dismissed, with costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This appeal arises in the following circumstances. In January 1990 the respondent filed in the Supreme Court of New South Wales a summons seeking leave to commence proceedings under the De Facto Relationship Act 1984 (N.S.W.) out of time. The application for extension of time was heard by Master Windeyer. In July 1990 Master Windeyer dismissed the application with costs.

1. Subsequently, a certificate of taxation was issued by the Supreme Court certifying the amount of the appellant's costs. A bankruptcy notice was then issued at the request of the appellant requiring the respondent to pay or secure the sum referred to in the certificate of taxation. On 21 August 1991 the respondent was served with the bankruptcy notice.

2. On 28 August 1991 and subsequently the respondent filed affidavits pursuant to section 41(7) of the Bankruptcy Act 1966, ("the Act") to the effect that she had a counter-claim against the appellant which she claims she could not have set-up in the Supreme Court. The Judge at first instance made a declaration that the respondent had a cross-demand of the type referred to in section 40(1)(g) of the Act and this appeal is brought from that declaration. By section 40(1)(g) of the Act it is provided that:
   

A debtor commits an act of bankruptcy in each of the following cases -

...

(g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not -

(i) where the notice was served in Australia - within the time fixed by the Registrar by whom the notice was issued; or

(ii) where the notice was served elsewhere - within the time fixed for the purpose by the order giving leave to effect the service, 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;

..."

1. In his reasons his Honour said:
   

"It is not disputed by the judgment creditor that, if the claim in question is appropriately to be classified as a counter-claim, set off or cross-demand within s.40(1)(g), that I should be satisfied on the evidence that the Debtor has demonstrated a prima facie case that she has a counter-claim, set off or cross-demand, which is genuine and substantial, equal to or greater in value than the amount of the Judgment Debt. It is accordingly unnecessary for me to detail the circumstances in which it is asserted that the claim by the Debtor against the Judgment Creditor arose."

1. His Honour went on to say:
   

"The real issue between the parties in the present case was whether the Debtor's acknowledged claim against the Judgment Creditor can properly be described as a counter-claim, set off or cross-demand and, if that be right, whether it was capable of being set up in the relevant action or proceeding to which s.40(1)(g) of the Act refers."

1. His Honour was of the view that the respondent's claim against the appellant was a cross-demand for present purposes. This is not now challenged. His Honour went on to deal with the next question, that is whether the cross-demand was one that the respondent could have set-up in the action or proceeding in which the order for costs was obtained. His Honour expressed his conclusion on this point, after referring to the decision of Fitzgerald J in Re Gould, ex parte Skinner (1983) 72 FLR 393, as follows:
   

"In Re Gould, the order upon which the relevant Bankruptcy Notice was based was an order for costs against the Debtor in an unsuccessful interlocutory application for an injunction. The alleged cross-demand was for damages for breach of an obligation as encumbrancee to exercise reasonable care with respect to a sale of the property. In these circumstances, the deemed proceeding was not the proceedings for final relief, in which proceedings the interlocutory steps were taken, but the application for the interlocutory injunction. It may be noted that the proceedings were not defined by Fitzgerald J as being the taxation of costs, although this would not have changed the result, which his Honour thought to be self-evident. In the interlocutory proceeding, no other claim would have been possible. Applying the same reasoning, the relevant deemed proceedings here would be the proceedings in which the cost order against the Debtor was made, namely the unsuccessful application for leave proceedings. It is clear that the cross-demand could not have been brought in these deemed proceedings."

We agree. A similar conclusion was reached by Fitzgerald J in Gould's case where his Honour said (at 408):

"In my opinion, the test in such circumstances called for by section 40(1)(g) of the act is to ascertain not whether the cross-demand could have been set-up in the Supreme Court action, No 1473 of 1982, but whether it could have been set-up in the deemed action, the proceeding in which the order for costs was made, that is the application for an interlocutory injunction in that action. The answer is clearly negative. It is of course obvious that there has been no final judgment in action No 1473 of 1982 which is still on foot."

1. To similar effect are the observations of Burchett J in Pollnow v Queensboro Pty Limited, unreported, 19 October 1988, as follows:
   

"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."

1. In our view the reasoning in both these cases is in point here. In the present case, although the order for costs is by virtue of section 40(3)(b) of the Act deemed to be a final order obtained in the action in which it was obtained, the order of Master Windeyer dismissing the application for leave was itself interlocutory - see Hall v Nominal Defendant, (1966) 117 CLR 423. It follows, in our view, that the claim for final relief, the subject of the respondent's cross-demand, could not have been set-up in answer to the appellant's application for a costs order made in the interlocutory application.

2. In other words, to adopt the language of Burchett J in Pollnow's case, the position is as follows. The relevant, "proceeding", for the purposes of section 40(1)(g), is either the application for the interlocutory order for leave or the application for a costs order in that interlocutory application. In either case the common law claim could not have been set up in answer to the creditor's application for a costs order in the interlocutory matter. That follows from the nature of the proceeding. On behalf of the appellant, reliance was placed before us upon the recent decision of O'Loughlin J in Re Willats; Ex parte Nissan Finance Corporation Limited, (1991) 31 FCR 206, but in our opinion that decision may be distinguished for present purposes. The question there was whether a debtor who failed to apply for leave to raise a cross-claim may still contend that he could not set up the cross-claim. That is a different question. In our view his Honour was correct in making the declaration he made.

3. The learned Judge also ordered that the appellant pay the respondent's costs. The appellant has also appealed against this discretionary order. In our view, for the reasons expressed in the course of argument, this challenge is without substance. In the result the order of the court is that the appeal is dismissed with costs.