Clapham v Commonwealth Bank of Australia - [2012] FMCA 498

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CLAPHAM & ANOR v COMMONWEALTH BANK OF AUSTRALIA

[2012] FMCA 498

BANKRUPTCY – Application to set aside bankruptcy notice – whether cross-claim within s.40(1)(g) of the Bankruptcy Act.

Bankruptcy Act 1966 (Cth), ss.40, 41, 52

Legal Aid Commission Act 1979 (NSW), s.57

Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), r.3.02

Axarlis and Another v Pets Paradise Franchising (SA) Pty Ltd (2010) 183 FCR 521; [2010] FCA 319
Commonwealth Bank of Australia v Clapham [2012] NSWSC 41
Jensen v Queensland Law Society Incorporated [2004] FCA 1630
Nath v Clipway Pty Ltd [1999] FCA 149
Nath v Clipway Pty Ltd [1999] FCA 625
Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 30 ALR 433; [1980] FCA 78
Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers; Re Tresidder; Tresidder v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331; [2003] FCA 373
Re Ling; Ex Parte Ling v Commonwealth of Australia (1995) 58 FCR 129; [1995] FCA 1410
Re Stovkis (1934) 7 ABC 53
Slack v Bottoms English Solicitors [2002] FCA 1445

First Applicant:

IAN ROBERT CLAPHAM

Second Applicant:

ELLEN PATRICIA CLAPHAM

Respondent:

COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)

File Number:

SYG 551 of 2012

Judgment of:

Barnes FM

Hearing date:

23 April 2012

Delivered at:

Sydney

Delivered on:

23 April 2012

REPRESENTATION

First Applicant:

In person

Solicitors for the Respondent:

HWL Ebsworth Lawyers

ORDERS

The application of 12 March 2012 is dismissed.
The applicants pay the costs of the respondent as agreed and in the absence of agreement taxed in accordance with the Federal Court Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 551 of 2012

IAN ROBERT CLAPHAM & ELLEN PATRICIA CLAPHAM

Applicants

And

COMMONWEALTH BANK OF AUSTRALIA

(ACN 123 123 124)

Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

This is an application filed on 12 March 2012 by Mr and Mrs Clapham seeking that Bankruptcy Notice BN729 issued on 7 February 2012 at the request of the first respondent, the Commonwealth Bank of Australia (the Bank) and served on them on 21 February 2012 be set aside. The application is said to be brought under s.41(7) of the Bankruptcy Act 1966 (Cth). Mr and Mrs Clapham rely on the affidavit of Mr Clapham sworn on 10 March 2012. The application to set aside the bankruptcy notice is brought on the basis that Mr and Mrs Clapham have a cross-claim in relation to the Bank.
The bankruptcy notice claims a debt in the amount of $1,396,115.16 being the amount of a judgment of the Supreme Court of New South Wales of 31 January 2012. There is no claim for interest included in the bankruptcy notice.
The Claphams brought this application before the expiration of the time fixed for compliance with the bankruptcy notice and no issue was raised in relation to the timing of the application.
Insofar as they seek that the bankruptcy notice be set aside, the applicants must satisfy the court that they have a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt that forms the basis for the bankruptcy notice, being a counter-claim, set-off or cross demand that they could not have set up in the action or proceeding in which the judgment or order was obtained as provided in s.40(1)(g) of the Act.
The principles in relation to an application for setting aside a bankruptcy notice on the ground of a cross-claim have been summarised in various Federal Court cases. I bear in mind generally the useful summary of principles by Lindgren J in Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers; Re Tresidder; Tresidder v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331; [2003] FCA 373.
I was referred to Nath v Clipway Pty Ltd [1999] FCA 149 at first instance. An appeal was dismissed in Nath v Clipway Pty Ltd [1999] FCA 625. Drummond J referred to the principles in Re Ling; Ex Parte Ling v Commonwealth of Australia (1995) 58 FCR 129 at 132; [1995] FCA 1410. It is of particular relevance in this instance, as Drummond J stated at first instance in Nath at [6], that:
…in the context of s40(1)(g) [of the Act] considerations personal to a debtor which prevent him, as a matter of practical reality, from pursuing a cross-claim in proceedings in which judgment is given on which the bankruptcy notice is founded, do not constitute circumstances which entitle the debtor to characterise such a cross-claim as one which he could not have set up in the action or proceeding in which the judgment was obtained.
As Hill J stated on appeal in Re Ling at [10] whether a claim is one which the debtor could not have set up in the proceedings “is not a question to be determined by reference to practicalities; it is a question to be answered by reference to legal considerations” (and see Nath on appeal at [6] per Spender J).
In this case, some issues were raised by the respondent in relation to the chance of success of the Clapham’s cross-claim and as to whether the asserted counter-claim, set-off or cross demand was equal to or exceeded the amount of the judgment debt, but the primary focus was on whether it could have been set up in the proceedings that led to the judgment debt.
It is relevant to have regard to the circumstances which led to the judgment on which the bankruptcy notice is based. In his affidavit Mr Clapham has set out in detail the background to these proceedings. Proceedings were instituted by the Bank against him and his wife in 2010 in the Supreme Court of New South Wales which led to the judgment on which the bankruptcy notice was based. He and his wife filed a cross-claim in those proceedings on 8 February 2011. In other words, these are not circumstances in which a debtor claims that he was not able to institute a cross-claim in the proceedings that led to the judgment debt. However on 31 January 2012 McDougall J refused the Claphams’ application for an adjournment of the entire proceedings and gave judgment for the Bank in the amount of $1,396,115.16. The cross-claim was stood over for directions. As is apparent from the judgment of McDougall J in Commonwealth Bank of Australia v Clapham [2012] NSWSC 41 (a copy of which is annexed to Mr Clapham’s affidavit) and the affidavit evidence of Mr Clapham the cross-claim did not get resolved at the same time. The reason for this is explained by McDougall J. In essence, the Bank had lent a sum of money to Yarralumla Holdings Pty Limited, a company in relation to which Mr and Mrs Clapham gave a guarantee. In addition, after Yarralumla defaulted, Mr and Mrs Clapham and Yarralumla executed an agreement after it was explained to them by a solicitor. Pursuant to that agreement the Claphams acknowledged the validity of various securities given to the Bank and agreed on a process for refinancing or liquidating the debt owed by the Yarramlumla to the Bank. Time was of the essence. In the event of non-compliance the Bank was to be at liberty to enforce the securities, including the guarantees. Moreover the Claphams agreed that they would consent to entry of appropriate monetary judgments in those circumstances and that they would not defend or resist any legal action taken by the Bank (“the agreement”).
In the Supreme Court proceedings the Bank sought judgment based, in effect, on the Claphams’ liability under the guarantee of over $4.5 million. However, in the alternative, the Bank sought a lesser amount calculated in accordance with the provisions of the agreement to which the Claphams were parties in the sum of approximately $1.396 million. This was the amount for which judgment was ultimately given. In pleadings the Claphams admitted all relevant contentions in relation to this amount.
When the matter came before McDougall J on 31 January 2012 there was no defence to the Bank’s claim for the lower amount pursuant to the agreement.
However Mr and Mrs Clapham had filed the cross-summons in which they asserted that they were entitled to relief by reason of alleged misleading or deceptive conduct of the Bank in relation to the guarantee. A copy of the cross-claim is in evidence before the court. His Honour noted that the cross-claim did not assert any entitlement to relief in respect of the agreement and indeed expressed some difficulty in seeing how that could have been the case (at [6]).
McDougall J found that these matters suggested that the Bank was entitled to judgment against Mr and Mrs Clapham for the lower amount on the basis of the agreement (at [7]). However, his Honour considered the fact that Mr Clapham had applied for legal aid, presumably on behalf of both Mr and Mrs Clapham to prosecute the cross-claim. Legal aid had been refused and Mr Clapham had lodged an appeal. That brought into play s.57 of the Legal Aid Commission Act 1979 (NSW) which, as his Honour pointed out, relevantly required an adjournment unless there were “special circumstances that tell against the adjournment” (at [7]).
Mr and Mrs Clapham did not appear before the Supreme Court on 31 January 2012 but had indicated that they sought an adjournment pursuant to s.57.
McDougall J had regard to the fact that Mr Clapham was aware of the proceedings but had sought an adjournment, and also considered the meaning of “special circumstances” in the context of s.57, having regard to authorities on that point, other provisions in that legislation and the Civil Procedure Act 2005 (NSW). His Honour pointed out (at [17]), that the “essential right” that Mr and Mrs Clapham wished to preserve could only be the right that they sought to advance pursuant to their cross-claim as they did not by the cross-claim seek to impeach or claim relief in relation to the agreement and the Bank had not sought to proceed with its claim under the guarantee for the higher amount to which the question of the cross-claim might have been directly relevant. As the Bank had limited its right to the settlement agreement, the relevance of the cross-claim in relation to the Bank’s claim under the guarantee was said to fall away in the context of determining whether there were special circumstances for the purposes of s.57 (at [18]).
For these reasons McDougall J was satisfied that there were special circumstances which dictated that there should not be an adjournment (at [19]). His Honour was satisfied, as stated at [20], that the lack of relationship between the claim in respect of which Legal Aid was sought and the limited claim in respect of which the Bank sought judgment provided a sufficient special circumstance to deny the adjournment of the Bank’s claim. Thus the Bank was permitted to proceed on its limited claim.
In reaching that view, his Honour had regard to the extensive admissions on the pleadings in relation to liability under the agreement and the terms of the agreement and the fact that he saw no prospect of defence to a claim limited to the agreement. His Honour found that to prevent the Bank from obtaining judgment on that agreement simply because there was a separate cross-claim seeking to set aside the guarantee or damages would not appear to “be in accordance with the dictates of justice” (at [20]). McDougall J had regard to the fact that counsel for the bank had indicated that the Bank undertook that if the cross-claim was subsequently pressed, it would not seek to defend it on the basis of any estoppel that might flow from judgment in its favour for the lower amount pursuant to the agreement.
His Honour found that the agreement had been proved. Indeed, it was admitted. The amount calculated in accordance with its terms was also admitted and his Honour found that the Bank was entitled to judgment for the amount claimed. His Honour then stated at [22]:
It follows, further, that there should be an adjournment of proceedings on the cross-claim until some time after the application for legal aid has been considered.
Thus the Bank obtained judgment for over $1.396 million. This was followed thereafter by the issue of the bankruptcy notice.
In these circumstances the Claphams seek to set aside the bankruptcy notice on the basis that they have a counter-claim, set-off or cross demand of the nature that is referred to in s.40(1)(g) of the Act. Mr Clapham also raised broader fairness issues in relation to the choice of the Bank to proceed with a bankruptcy notice. I have considered whether such matters, including such broader issues, go to show an abuse of process or other ground on which the bankruptcy notice can be set aside, as well as whether the debtors have satisfied the Court that they have a counter-claim, set-off or cross demand of the nature specified in s.40(1)(g) of the Act.
I note as a preliminary point that Spender J observed in Nath v Clipway that this is a very different context to the context that would arise were there a creditor’s petition on foot and were the Court considering whether it should exercise its discretion under s.52 of the Bankruptcy Act. Whether any creditor’s petition were to succeed would depend on a consideration of the circumstances and requirements of s.52 as at the time of any such petition. Indeed, much of what Mr Clapham said seemed to be relevant more to the issue of whether for other sufficient cause a sequestration order ought not to be made, rather than to the issue before the Court in these proceedings.
As to the asserted counter-claim, there is no suggestion that the claim is not bona fide or genuinely arguable in the sense considered in Glew v Harrowell. However, as McDougall J pointed out, and in light of the admissions in those proceedings it appears that there is no nexus between the cross-claim and the agreement which formed the basis for the bankruptcy notice. Rather it is a cross-claim that relates only to the claim based on the guarantee that was not pursued by the Bank. Beyond this there is insufficient evidence before the court to assess the probability of success of the cross-claim (see Re Brink and Glew v Harrowell).
The evidence in relation to the amount of the claim is also somewhat less than satisfactory. The requirements of r.3.02(2)(b) of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) were not strictly complied with in that Mr Clapham’s affidavit does not state the amount of the cross-claim and the amount by which this exceeds the amount claimed in the bankruptcy notice. However when one considers all the material annexed to the affidavit (in particular the copy of the cross-claim itself) it is apparent that it is intended to claim in the cross-claim an amount that is equal to the amount claimed by the Bank against the cross-claimants under the guarantee (which exceeded the amount of the judgment obtained and the amount in the bankruptcy notice).
As Mr Bartrop for the Bank pointed out, Mr and Mrs Clapham may well face difficulties in succeeding in a claim for damages in such an amount. There is insufficient evidence before the Court to assess whether I can be satisfied as to the likelihood of success in that amount. Where a claim is unliquidated, the court assessing an application to set aside a bankruptcy notice on this ground must quantify the value of the claim so it can determine whether it equals or exceeds the amount of the judgment debt demanded in the bankruptcy notice at the time of the application to set aside the bankruptcy notice. In this case, there is simply insufficient evidence to determine the likelihood of success of the claim in the amount that the Bank was seeking.
In any event, the applicants must fail in these proceedings because it has not been established that this is a counter-claim, set-off or cross demand that they could not have set up in the action or proceeding which led to the judgment. The concept “could not have set up” has been said to refer to a claim which could not have been set up in the action that led to the judgment due to its nature, the relative timing of the claim and the action, the absence of empowering provisions or from positive inhibition to do so (see Re Stovkis (1934) 7 ABC 53, Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 30 ALR 433; [1980] FCA 78 and Jensen v Queensland Law Society Incorporated [2004] FCA 1630).
In this case there is no suggestion that the asserted counter-claim came into existence after the proceedings in question. Rather, the claim was in fact set up in the proceedings. However it was not determined in those proceedings. Mr Clapham relies on practical considerations at the time of the judgment. Mr Clapham claimed in his affidavit evidence that he was not ready to run the cross-claim as at 31 January 2012. He gave a number of practical reasons why he was not ready to run the cross-claim, in addition to the appeal to the Legal Aid Review Committee, which he understood meant that he was entitled to an adjournment.
He said he was still developing his cross-claim, waiting for documents requested from the Bank and a notice to produce. He did not have legal representation. He had an application for pro bono assistance. In submissions today he also addressed his financial difficulties in being in Court and proceeding at that time. As stated in Nath v Clipway the question of whether a counter-claim or cross demand could not have been set up is a question “to be answered by reference to legal considerations”, not practicalities.
In Re Ling, Hill J pointed out that the onus of showing that the claim could not have been set up in the creditor’s proceedings lay on the debtor and found that such onus would not be satisfied merely by showing that some indirect course may need to be followed that was within the discretion of the debtor or by showing that there was some excuse on the debtor’s part or some discretion against the setting up of the claim as a cross-claim. Rather, the debtor must show as a matter of law and in the circumstances prevailing he or she could not have set up the cross-claim. There is also a useful discussion of the principles in relation to whether or not a cross-claim could have been set up in proceedings in the recent decision of Dodds-Streeton J Axarlis and Another v Pets Paradise Franchising (SA) Pty Ltd (2010) 183 FCR 521; [2010] FCA 319. Her Honour followed Re Ling, notwithstanding the breadth of the principle in Re Ling.
In this instance the cross-claim was raised and in that sense set up in the proceedings. Mr Clapham quite rightly pointed out that what is in issue is the scope of the expression “set up”. I was not, however, taken to any authority other than Nath v Clipway to which the respondent referred. In Nath v Clipway the court both at first instance and on appeal expressed the view that where a cross-claim had been raised but then not pursued (in that case because a debtor was impecunious) that was not a claim that could not have been set up in the proceedings that gave rise to the judgment that formed the basis for the bankruptcy notice.
While the circumstances in which the cross-claim was not pursued before judgment was obtained by the Bank in the Supreme Court are not on all fours with the circumstances in Nath v Clipway, that authority indicates that where a cross-claim has been raised in proceedings it is not one that could not have been set up in the proceedings.
It has not been established that the fact that the Claphams unsuccessfully sought an adjournment of the whole of the proceedings (which was refused) is such as to establish that the cross-claim could not have been set up in the proceedings in which the bankruptcy notice was based within s.40(1)(g) of the Act. The debtors cannot be said to have had no opportunity to set up the cross-claim. It was raised but was adjourned in circumstances where the Claphams were not present and the Bank’s lesser alternative claim was determined.
In some senses the Claphams may be seen as falling between two stools and to be quite understandably concerned at the fact that they have not yet had the opportunity to pursue the claim that they did raise at the time of the original proceedings. However, what is in issue in these proceedings is only whether the strict requirements of s.40(1)(g) of the Act are met. The debtors have not established that the cross-claim was a claim they could not have set up in the proceeding in which the judgment was obtained within s.40(1)(g) of the Act, notwithstanding that the counter-claim was not ultimately determined prior to the Bank being successful on the lesser basis of its claim.

The issues that the debtors raise in these proceedings may well be issues that are of some relevance if there is a creditor’s petition and an issue arises as to whether the court should exercise its discretion not to make a sequestration order or to adjourn, particularly if there was, at that time, an ongoing claim which had not been resolved. That is, however, a matter for another day, as Mr Bartrop for the Bank quite rightly pointed out. It is relevant to note however that the fact that the debtors have not satisfied me that the grounds for setting aside a bankruptcy notice have been made out does not determine how a court would exercise its discretion, were it confronted by a creditor’s petition while there was an ongoing counter-claim.
I should, for the sake of completeness, address the issue of abuse of process. In oral submissions Mr Clapham expressed the view that there was some issue about whether the Bank was motivated by retaliation, a view that he had hidden assets or to extinguish his legal capacity to pursue the cross-claim on the basis that if he were to become bankrupt a bankruptcy trustee might not continue to pursue the cross-claim. A bankruptcy notice can be set aside as an abuse of process if it is established that it was issued for a collateral purpose. The law in relation to abuse of process, however, is not as broad as Mr Clapham seemed to suggest (see Slack v Bottoms English Solicitors [2002] FCA 1445). The onus of proving the existence of the relevant purpose lies on the debtor. Proof of such a collateral purpose must be by evidence before the Court in the application to set aside the bankruptcy notice. Mr Clapham’s submissions to that effect do not establish that there has been an abuse of process. I note generally it is not an abuse of process to issue a bankruptcy notice where a creditor genuinely intends to pursue the matter if there is default in complying with the notice and wishes to resort to the jurisdiction of the Court for appropriate orders. In this case it has not been established that there was an abuse of process.
The debtors have not established that the cross-claim could not have been set up in the action or proceeding in which the judgment of the Bank was obtained. I am not satisfied either that they have a counter-claim, set-off or cross demand within s.40(1)(g) of the Act or that there is any other basis on which the Court should set aside the bankruptcy notice. Accordingly it is appropriate to order that the application be dismissed.
The Bank seeks costs, in accordance with the general principle that the unsuccessful party should meet the costs of the successful party. Mr Clapham indicates that he is not in a position to meet the costs. A lack of funds is not of itself a reason for departing from the general principle that an unsuccessful applicant should meet the costs of the respondent. I consider that, as is usual in these circumstances, costs should follow the event.

I certify that the preceding thirty-six (36) paragraphs are a true copy of the reasons for judgment of Barnes FM

Date: 12 June 2012