Clear Hall v Moloney
[2012] FMCA 216
•11 May 2012
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| CLEAR HALL & ORS v MOLONEY | [2012] FMCA 216 |
| BANKRUPTCY – Challenge to bankruptcy notice on the basis that the applicants have a set-off of greater value than the respondent’s judgment debt, which could not have been set up in the proceedings leading to that debt – respondent’s debt taken by assignment from a person who was engaged in proceedings against the applicants which gave rise to the debt – whether mutuality which formerly existed removed by the assignment of the debt – whether equitable set-off available following the assignment. |
| Bankruptcy Act 1966, ss.40, 41 Consumer Credit (NSW) Act 1995 (NSW) Contracts Review Act 1980 (NSW) Conveyancing Act 1919 (NSW), s.12 Legal Profession Act 1984 (NSW) Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules 2005 (NSW) |
| Australian Beverage Distributors v Evans & Tate Premium Wines Pty Limited [2006] NSWSC 560 Stec v Orfanos [1999] FCA 457 |
| First Applicant: | SIMON CLEAR HALL |
| Second Applicant: | JON STORM |
| Third Applicant: | GEORGE ROMIZ |
| Respondent: | PATRICK JOHN MOLONEY |
| File Number: | SYG 2726 of 2011 |
| Judgment of: | Driver FM |
| Hearing date: | 15 March 2012 |
| Date of Last Submission: | 16 March 2012 |
| Delivered at: | Sydney |
| Delivered on: | 11 May 2012 |
REPRESENTATION
| Counsel for the Applicants: | Mr V Bedrossian |
| Solicitors for the Applicants: | D'Arcy Sloman Peacock Solicitors |
| Counsel for the Respondent: | Mr J Ireland |
| Solicitors for the Respondent: | Moloney Lawyers |
ORDERS
Bankruptcy Notice BN7922 issued on 21 October 2011 is set aside.
The respondent shall pay the applicants’ costs and disbursements of and incidental to the application which, if not agreed, shall be assessed and, if necessary, taxed in accordance with the Federal Court Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 2726 of 2011
| SIMON CLEAR HALL |
First Applicant
JON STORM
Second Applicant
GEORGE ROMIZ
Third Applicant
And
| PATRICK JOHN MOLONEY |
Respondent
REASONS FOR JUDGMENT
Introduction and background
By application filed on 29 November 2011, the applicants seek an order setting aside bankruptcy notice BN7922 issued on 21 October 2011 and served on the applicants on 11 November 2011. The applicants claim that they have a set-off, which exceeds the amount of the debt claimed by the respondent under the bankruptcy notice. There is no issue between the parties as to whether the amount claimed as a set-off could have been raised in any proceedings leading to the debt.
In support of the application, the applicants rely upon the affidavit of Vincent Eugene D’Arcy made on 28 November 2011. The applicants also tendered and rely upon a copy of the Supreme Court of NSW judgment in Fast Funds Pty Limited v Coppola; Coppola v Hall [2010] NSWSC 470 (including the record of the proceedings contained in that judgment of the final orders made in those proceedings on 27 May 2010).
The application raises for determination the issue of whether an assignee of a debt (but which debt was subject to a set-off claimable by the debtor as against the assignor), is subject to that same set-off by the debtor, notwithstanding that he has taken an assignment of the debt and has pursued payment of it in his own name and for his own benefit.
The respondent (Mr Moloney) opposes the application and relies upon his own affidavit made on 25 January 2012. Exhibited to that affidavit are the following documents:
·NSW LPI Title Search, 06/12/2011;
·Statement of Claim – Supreme Court of NSW proceedings 4615 of 2009;
·Statement of Claim – Supreme Court of NSW proceedings 3309 of 2009;
·Judgment – Fast Funds Pty Limited v Coppola & Ors; Coppola v Hall & Ors, Slattery J, 14 May 2010;
·Judgment/Order – Case numbers 2009/290634; 2009/289358, 27 May 2010;
·Judgment – Fast Funds Pty Limited v Coppola 2009/289358; Coppola v Hall 2009/290634, Slattery J, 24 June 2010;
·Judgment – Fast Funds Pty Limited v Coppola & Ors, 2009/289358; Coppola v Hall & Ors, 2009/290634, Slattery J, 24 August 2010;
·Order – case number 2009/290634, 24 August 2010;
·Consent orders – case number 289697 of 2010, 8 September 2010;
·Certificate of Determination of Costs, 25 January 2011;
·Judgment/Order – case number 2010/00289697, 31 January 2011;
·Certificate of Determination of Costs, 18 April 2011;
·Letter from Moloney Lawyers to Bransgroves Lawyers, 16 May 2010;
·Letter from Moloney Lawyers to D’arcy Sloman Peacock Lawyers, 18 May 2011;
·Affidavit of Patrick John Moloney in case number 2011/182096, filed 2 June 2011; and
·Judgment/Order – case number 2011/00182096, 2 June 2011.
Mr Moloney contends that the proceedings raise the following issues:
a)What is the nature of the rights which have been acquired by the respondent under the assignment from the Coppolas?
b)What is the effect of s.12 of the Conveyancing Act 1919 (NSW) (“the Conveyancing Act”) which subjects an assignment of a legal chose in action to “equities” which would have been entitled to priority over the right of the assignor?
c)Whether the judgment recovered by the applicants against Maria Coppola is a sufficient answer to Mr Moloney’s claim against the applicants, to the extent that Mr Moloney’s claim is based upon assigned rights acquired from Elio Coppola?
There is no dispute between the parties as to the facts and circumstances which gave rise to the issues requiring resolution. Those facts and circumstances are set out in the affidavits of Mr D’Arcy and Mr Moloney. In summary:
a)in September 2009 Mr Moloney, who is a solicitor, was retained to act on behalf of Mrs Maria Coppola in connection with a purported mortgagee sale of a property owned by Mrs Coppola at Colo Vale (“the Colo Vale property”). Mrs Coppola was, and remains, the sole registered proprietor of the Colo Vale property;
b)each of the applicants in these proceedings were, in September 2009, and remain, mortgagees of the Colo Vale property. At the time Mr Moloney was instructed by Mrs Coppola the applicants had exchanged contracts for the sale of the Colo Vale property, purportedly pursuant to a mortgagee’s power of sale as mortgagees in possession;
c)Mr Moloney, on instructions from Mrs Coppola, sought and obtained an injunction from the Supreme Court of NSW to restrain the sale of the Colo Vale property by the applicants. Those proceedings became proceedings number 2009/290634 in the Supreme Court of NSW (“the Mrs Coppola proceedings”). Mrs Coppola also sought relief in the Mrs Coppola proceedings pursuant to the Consumer Credit (NSW) Act 1995 (NSW), the Contracts Review Act 1980 (NSW), the Consumer Credit Code and the Trade Practice Act 1974 (Cth);
d)later in September 2009, Mr Moloney became aware of another set of proceedings in the Supreme Court of NSW involving Mrs Coppola and her husband Elio Coppola. He was instructed to act on behalf of both of them in connection with those proceedings, which had been instituted by a company called Fast Funds Pty Limited (“the Fast Funds proceedings”), managed by Mr Hall;
e)in the Fast Funds proceedings, Fast Funds sought judicial sales orders in respect of a number of properties, either owned jointly by Mr and Mrs Coppola or by Mr Elio Coppola alone. Those proceedings became Supreme Court proceedings 2009/289358;
f)on instructions from Mr and Mrs Coppola, Mr Moloney prepared and filed a defence and cross claim in the Fast Funds proceedings. That defence and cross claim sought similar relief to the relief sought in the Mrs Coppola proceedings, in relation to the various properties owned by Mr and Mrs Coppola;
g)the Mrs Coppola proceedings and the Fast Funds proceedings were heard together in the Supreme Court of NSW by his Honour, Slattery J. On 14 May 2010, Slattery J delivered judgment in both proceedings;
h)the judgment is a lengthy one but, in essence, Slattery J made orders which altered the contractual relationship of the parties and prevented the present applicants and Fast Funds from dealing with the properties;
i)Slattery J determined, on 14 May 2010[1] in both sets of proceedings that, as at 27 May 2010, Mrs Coppola owed the applicants the amount of $144,007.94 (plus interest accruing thereafter at the rate prescribed from time to time in Schedule 5 to the Uniform Civil Procedure Rules 2005 (NSW)). Nothing has been paid in reduction of that debt;
[1] Although the final orders were not made until 27 May 2010
j)on 24 June 2010, Slattery J delivered separate reasons for judgment dismissing the Fast Funds proceedings and making costs orders in both sets of proceedings;
k)following the judgment of Slattery J on 24 June 2010 the parties were unable to reach agreement as to the final orders to be made by the Supreme Court of NSW. In consequence, Slattery J delivered further reasons in respect of the issue of costs on 24 August 2010. His Honour ordered that the applicants and Fast Funds pay 40 per cent of the legal costs incurred by Mr and Mrs Coppola in relation to both the Mrs Coppola proceedings and the Fast Funds proceedings;
l)shortly after obtaining the order for costs, Mr Moloney’s retainer was terminated by Mr and Mrs Coppola. They engaged other legal representation to act for them thereafter. At the time his retainer was terminated, Mr Moloney was owed significant amounts in respect of his professional costs and disbursements;
m)pursuant to the terms of the retainer agreement between Mr Moloney and Mr and Mrs Coppola, he lodged various caveats against properties owned by them, either jointly or individually, to secure moneys owing to him for his professional services. Mr and Mrs Coppola caused lapsing notices to be issued by the Registrar-General in respect of those caveats;
n)in August 2010 Mr Moloney commenced proceedings number 2010/00289697 against Mr and Mrs Coppola in the Supreme Court of NSW seeking to extend the operation of the caveats and seeking judgments against them in respect of unpaid invoices (“the Moloney proceedings”);
o)the Supreme Court made certain orders (which are not presently material) on 8 September 2010 and Mr and Mrs Coppola gave various undertakings (which are also not material). What is material is that an agreement was reached and documented to assign and transfer to Mr Moloney the costs orders obtained in favour of Mr and Mrs Coppola against the applicants;
p)on 21 September 2010 Mr and Mrs Coppola commenced assessment proceedings against Mr Moloney seeking to have his professional invoices assessed in relation to the Mrs Coppola proceedings and the Fast Funds proceedings. A certificate of determination was made on 25 January 2011;
q)the certificate of determination was registered as a judgment of the Supreme Court of NSW on 31 January 2011. The amount due was $268,836.03. Nothing has been paid by Mr and Mrs Coppola in reduction of that judgment debt;
r)on 18 April 2011 the costs orders made by Slattery J in the Mrs Coppola proceedings and the Fast Funds proceedings were assessed by a costs assessor;
s)on 16 May 2010 Mr Moloney caused notice to be served on the solicitors acting for the applicants in the costs assessment proceedings that the costs ordered had been transferred and assigned to him;
t)having received no response, Mr Moloney wrote to other solicitors known to have acted on behalf of the applicants concerning the assessment of the costs orders and the transfer and assignment;
u)on 2 June 2011, Mr Moloney caused judgment to be entered in his favour against the applicants in the sum of $131,861.87.
Consideration
The outcome of the Mrs Coppola proceedings and the Fast Funds proceedings was that Mrs Coppola owed the applicants the amount of $144,007.94 (as at 27 May 2010). No part of that judgment debt has been paid. The costs order in favour of Mr and Mrs Coppola was subsequently assessed in the amount of $131,861.87. That amount also remains outstanding.
There is no doubt that the applicants therefore had, as against any claim Mrs Coppola may have had in respect of the costs order, a set-off at law in an amount exceeding the value of the costs order.
The Coppolas assigned the benefit of the costs order to their former solicitor, Mr Moloney. Mr Moloney obtained a judgment from the Supreme Court of NSW against the applicants based upon the certificate of assessment of that assigned costs order. Mr Moloney then caused a bankruptcy notice to be issued and served upon the applicants in reliance upon that assigned costs order and judgment. The applicants seek to have that bankruptcy notice set aside.
Given that, as at the date of the making of the Supreme Court costs order in favour of the Coppolas, the applicants had available to them a set-off in an amount exceeding the value of the costs order, the applicants say that the assignment of that costs order to Mr Moloney does not change that position. The applicants continue to claim the benefit of the set-off and say they are entitled to have the bankruptcy notice set aside. They assert that Mr Moloney cannot be in a better position, by reason of the assignment, than the Coppolas were visa-á-vis their claim against the applicants.
The debt claimed by Mr Moloney against the applicants, which debt has formed the purported basis for causing the bankruptcy notice to be issued, came to be held by Mr Moloney by reason of an assignment by the Coppolas. This was an assignment pursuant to and governed by s.12 of the Conveyancing Act.[2]
[2] See Moloney Lawyers letter dated 16 May 2010 – part of annexure “D” to affidavit of Vince D’Arcy
Section 12 of the Conveyancing Act relevantly provides:
Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee, or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action, shall be, and be deemed to have been effectual in law (subject to all equities which would have been entitled to priority over the right of the assignee if this Act had not passed) to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same without the concurrence of the assignor: … (emphasis added)
The emphasised portion of s.12 of the Conveyancing Act, as set out above, confirms an equitable principle of long-standing.
The applicants rely upon Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (Receiver & Manager Appointed) (1997) 42 NSWLR 462 at 481-483 (especially at 482B-E), in which Gleeson CJ (as his Honour then was), Handley JA and Brownie A-JA confirmed that a legal assignee of a debt was subject to the same “equities” (including cross-claims or set-offs) to which the assignor had been subject. At 482D-E, their Honours identified that “the merits [of the principle] are clear” and quoted with approval from the judgment in Government of Newfoundland v Newfoundland Railway Co (1888) 13 App Cas 199 at 212, where Lord Hobhouse stated:
… It would be a lamentable thing if it were found to be the law that a party to a contract may assign a portion of it, perhaps a beneficial portion, so that the assignee shall take the benefit, wholly discharged of any counter-claim by the other party in respect of the rest of the contract, which may be burdensome.
More recently, his Honour Brereton J gave detailed consideration to the principle and the application of s.12 of the Conveyancing Act in Franks v Equitiloan Securities Pty Limited [2007] NSWSC 812, especially at [23]-[33].
Making reference to the express terms of s.12 of the Conveyancing Act, Brereton J stated at [25]:
I accept that the reference to “equities” in this context is not to be narrowly interpreted, and not only includes defences which may be raised by way of set-off, but also extending to cross-claims and counter-claims that the person subject to the assigned obligation is entitled to set up in opposition to the claim of the person entitled to its benefit…
At [33], Brereton J concluded the analysis in the following terms:
The preserving of the “equities”, by s.12, means that the obligor can raise against an assignee all matters that he could have raised against the assignor in extinguishment or reduction of the liability. This ensures that the obligor does not become liable to pay the assignee a sum which, because of an available set-off or counter-claim, it would never have had to pay to the assignor. But that is not to say that the obligor should be better off. The obligor retains the rights against the assignor, who remains primarily liable on any counter-obligation. This leaves the obligor in no worse position than would have been the case in the absence of an assignment. As against the assignee, the obligor retains the benefit of the defences it would have had against the assignor. That extends to defences by way of cross-claim, which can be set off in extinguishing or reduction of the obligor’s liability, but it does not extend to improving the obligor’s position by creating new rights to sue the assignee, in circumstances where those rights lie against the assignor. Liabilities, unlike assets, are not capable of assignment.
Mr Moloney’s opposition to the application is based upon the asserted need for mutuality to establish a set-off.
The Court’s jurisdiction to set aside the bankruptcy notice arises pursuant to s.47(7) of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”). That section requires a debtor to satisfy the Court that the debtor has a counter-claim, set-off or cross-demand as referred to in s.40(1)(g). In this case the applicants assert a set-off. A right of set-off must be an effective set-off existing at the time the application to set aside the bankruptcy notice is heard.[3] Where a debtor seeks to set aside a bankruptcy notice on the grounds that the debtor has a cross-demand that equals or exceeds the amount on which the bankruptcy notice is founded, the judgment on the one hand and the cross-demand on the other must be mutual and in the same right.[4]
[3] Guss v Johnstone (2000) 74 ALJR 884.
[4] Stec v Orfanos [1999] FCA 457 at [24]; James v Abraham (1981) 51 FLR 16
The word “mutual” in this context means that the claims must be of the same kind or nature. Joint debts cannot be set off against several debts. In a case where a bankruptcy notice is issued by several joint creditors, the debtor may not raise a debt owed by one or some of them individually.[5]
[5] Stec v Orfanos (supra) at [24]-[25]
Here the assigned debt acquired by the respondent involves joint and several entitlements to recover costs on the part of both Maria and Elio Coppola. Insofar as Mr Moloney is an assignee, he asserts the rights of Elio Coppola. They are said to be not diminished or affected by the separate judgment debt owed to the applicants by Maria Coppola.
In the exercise of a form of equitable jurisdiction[6] a common law court would permit a set-off of judgments in appropriate cases.
[6] Edwards v Hope (1885) 14 QBD 922 at 926
Mr Moloney accepts that, in the case of an assignment of a debt, here by virtue of s.12 of the Conveyancing Act, there is a general principle than an assignment take subject to “equities”. Those equities will include rights of set-off available to the debtor against the assignor. However, the requirement of mutuality still applies. In the present case, Mr Moloney asserts that there was no “equity” which affected or debilitated the right of Elio Coppola to recover the costs of the Supreme Court proceedings against each of the applicants. Hence, s.12 of the Conveyancing Act provides no bar or inhibition in the present case to the enforcement by Mr Moloney of the Supreme Court costs judgment against each of the applicants.
The applicants contend that the opposition based on the asserted lack of mutuality is not a basis for resistance to their application to have the bankruptcy notice set aside.
The applicants contend that, prior to the assignment of the costs order by the Coppolas to Mr Moloney, the Coppolas enjoyed a joint entitlement to recover costs.[7]
[7] Dennis v Miller [2012] FMCA 25 at [22]-[27]
The applicants contend that the precise characterisation of that costs entitlement is, however, irrelevant. It is not in dispute that the Coppolas each assigned the entirety of their rights and entitlements under the Supreme Court costs order to Mr Moloney. As a consequence, with those rights and entitlements entirely owned by Mr Moloney, there is no longer any distinction between those rights, entitlements or obligations, which might have been held by Maria Coppola, as opposed to those rights, entitlements or obligations, which might have been held by Elio Coppola.
The applicants contend that the entirety of the entitlement under the costs order is held by Mr Moloney. Likewise, the entirety of the burden of the “equities” that travel with that costs order (by reason of s.12 of the Conveyancing Act and pre-existing equitable principles) is borne by Mr Moloney. There is, in their submission, “perfect mutuality”.
The applicants contend that it was Mr Moloney who caused judgment for the relevant costs entitlement against the applicants to be entered in his name on 2 June 2011.[8] They submit that all rights and entitlements to costs arising from the costs order of Slattery J made on 24 August 2010 are now merged in that judgment of 2 June 2011.
[8] Affidavit of Patrick Moloney, 25 January 2012 at [29]
The applicants contend that, in any event, set-off is available even in the absence of strict mutuality Given that the costs judgment now pursued by Mr Moloney arose out of the very same Supreme Court proceedings, which resulted in a judgment in favour of the applicants against the Coppolas, there is a very close connection and relationship between those competing claims. They are inseparable.
As a consequence, the applicants claim to have available to them an equitable set-off. There is no strict requirement for mutuality in the case of equitable set-off.
Further or alternatively, the availability of a different type of set-off in such circumstances was summarised by White J in Australian Beverage Distributors v Evans & Tate Premium Wines Pty Limited [2006] NSWSC 560 at [67]-[70], but especially at [68] where his Honour stated:
Notwithstanding ABD's submissions to the contrary, set-off of judgments for costs in different actions and in different courts has long been allowed, as has the set-off of judgments for costs against judgments for debt or damages. Such set-offs do not depend upon the statutes of set-off, or the general equitable jurisdiction, but on the control a court exercises over its own proceedings. The jurisdiction is explained in many cases dealing with claims by solicitors to assert a lien over a judgment for costs in favour of their client where the opposite party has obtained judgment against their client in the same or in other proceedings (Edwards v Hope (1885) 14 QBD 922 at 926-927; Reid v Cupper [1915] 2 KB 147; Puddephatt v Leith (No 2) [1916] 2 Ch 168 especially at 173-174; Re a Debtor No 21 of 1950 [1951] 1 Ch 612 at 617-618).
Consequently, there are, in the applicants’ submission, two sources for the set-off claimed by them in these proceedings – the equitable set-off and the set-off permitted by courts in their supervision of their own proceedings.
Equitable set-off
The principles applicable to equitable set-off are conveniently and authoritatively discussed by Young, Croft and Smith in On Equity.[9] At [15.390], the learned authors identify the existence of four kinds of equitable set-off. The applicants here claim the benefit of the fourth kind – the true equitable set-off – which is the set-off recognised by equity wherever “the party seeking the benefit of it can show some equitable ground for being protected against his adversary’s demand”[10].
[9] Lawbook Co, 2009 at [15.360]ff
[10] citing Rawson v Samuel (1841) 41 ER 451 at 458
Further discussion of this fourth class of equitable set-off is set out by Young, Croft and Smith at [15.430]ff. Importantly, at [15.430], the learned authors state:
Substantive equitable set-off does not require the drawing of any analogies with set-off at law and there is no requirement of mutuality, beneficial or otherwise [citing Re Whitehouse and Co (1878) 9 Ch D 595], nor is there any requirement that the claim be liquidated: see D Galambos and Son Pty Ltd v McIntyre [(1974) 5 ACTR 10 at 25-26].
As further identified by the learned authors at [15.440], the critical element of an equitable set-off is “impeachment”, which is identified by Woodward J in Galambos[11] as involving cross-claims which “were so closely related as to subject matter that the claim sought to be set-off impeached the other in the sense that it made it positively unjust that there should be recovery without deduction”.
[11] at 5 ACTR 18
The applicants contend that it would be manifestly unjust and inequitable, if Mr Moloney was not bound to recognise the set-off here claimed by them, particularly given that the two competing claims arose out of the very same Supreme Court proceedings. They assert that their claim clearly impeaches Mr Moloney’s claim against them.
Mr Moloney chose to take an assignment of the Coppolas’ costs order and have it registered as a judgment in his name. Presumably he thought that that process would confer upon him advantages in the pursuit of the applicants, which advantages were not available to the Coppolas. The applicants contest that assessment
Set-off as to costs
Young, Croft and Smith also identify the separate type of set-off arising from competing costs orders and/or judgments for debt or damages.[12]
[12] at [15.470]
More detailed discussion of this type of set-off is contained in Derham Derham on the Law of Set-Off.[13]
[13] Oxford University Press, 4th ed, 2010 at [2.90]ff and especially at [2.98]-[2.110] (pp46-59)
The consequence of set-off for the bankruptcy notice
Given the broad reach of the expression “counter-claim, set-off or cross demand” in s.40(1)(g) of the Bankruptcy Act,[14] the set-off here asserted by the applicants arises for this Court’s consideration on the application to set aside the bankruptcy notice.
[14] See Re Brink; ex parte Commercial Banking Co of Sydney Limited (1980) 30 AKR 433 at 436-437 per Lockhart J
If the applicants are entitled to a set-off, whether equitable or not, then such a set-off is a proper basis for the present application.
To the extent that Mr Moloney contends that mutuality is a necessary element of an application under s.40(1)(g) of the Bankruptcy Act, the applicants say that this is not correct.
The applicants acknowledge that this Court is bound to follow the decision of the Full Federal Court in Stec v Orfanos. Nevertheless, for the purpose of preserving arguments, the applicants formally contend that it was wrongly decided insofar as it stands as authority for the proposition that a “cross-demand” must, for the purposes of s.40(1)(g) of the Bankruptcy Act, strictly satisfy a requirement of “mutuality”.
The expression “counter-claim, set-off or cross demand” is one of wide scope, quite apparently designed to catch all such claims by a debtor as would render it inappropriate, unfair or inequitable that the bankruptcy notice procedures under the Bankruptcy Act be utilised by a creditor. The breadth of that expression is confirmed by various authorities, including Re Judd; ex parte Pike.[15]
[15] (1924) 24 SR (NSW) 537 at 539-540 per Maughan AJ, which passage was quoted with approval by Lockhart J in Re Brink; Ex parte Commercial Banking Co of Sydney Limited (1980) 30 ALR 433 at 436-437.
In Re Brink[16], the passage quoted by Lockhart J in Re Judd confirms that the expression “cross demand” ought to be given “an unrestricted meaning” and that:
[t]he object of the Legislature in providing machinery for the setting aside of a bankruptcy notice where a judgment debtor has a cross demand is obviously to prevent a judgment creditor from pursuing bankruptcy proceedings when as between himself and the judgment debtor, the balance of account is in favour of the judgment debtor…
[16] supra at ALR 437
The applicants submit that the apparent breadth and intended flexibility of s.40(1)(g) is undermined by the construction attributed to the expression “cross demand” in Stec v Orfanos and that such construction is wrong. If courts recognise, through the application of the equitable principles of set-off or through their own regulation of their judgments and orders, that mutually need not be present for a relevant set-off to be available to a debtor, then it is not apparent that s.40(1)(g) of the Bankruptcy Act excludes those same rights of set-off. In accordance with the earlier cited authorities, there appears, in the applicants’ submission, to be no legislative intent to adopt a restrictive definition of “cross demand”.
After the hearing of this matter on 15 March 2012, I invited further submissions from the parties in respect of the implications, if any, to be drawn from the decision of Raphael FM in McClymont v Wright Designed Pty Limited [2006] FMCA 4. The parties agree that that decision has no direct bearing on this case as it was concerned with s.86 of the Bankruptcy Act which refers specifically to mutuality. The applicants point out, however, that Raphael FM does, at [11] in McClymont, expressly recognise that there may be circumstances where a right to an equitable set-off exists “where complete mutuality is absent”.
During the course of argument on 15 March 2012 the applicants raised a further issue concerning the status of the costs order and whether that involved a joint or several entitlement to recover costs.
The applicants have submitted that the costs order obtained by the Coppolas from Slattery J was a “joint entitlement to recover costs”. Mr Moloney submits that the costs order made by Slattery J which is now quantified in Mr Moloney’s judgment against the applicants did not merely entail a joint liability owed by the judgment debtors to the Coppolas.
In Dennis v Miller [2012] FMCA 25, Smith FM had to consider various challenges by a solicitor, Mr Dennis, to a bankruptcy notice served upon him. The bankruptcy notice was based on two judgments obtained against Mr Dennis totalling $14,374.13. Those were Local Court judgments obtained as a consequence of an assessment of two costs orders against Mr Dennis in earlier proceedings. The costs orders were in favour of four parties and only three of them had participated in the costs assessment process. The fourth party (Fodare Pty Limited) was in liquidation. His Honour held that Fodare Pty Limited was a necessary party to the costs assessment in that case and that the two judgments which founded the bankruptcy notice were entered in the Local Court “without authority”.[17]
[17] see [28]
However, Mr Moloney points out that Dennis should not be taken as deciding (as the applicants here appear to argue) that all costs orders in favour of more than on party must be characterised as joint rights rather than joint and several. The reference in Dennis to AWU v Bowen [1] (1946) 72 CLR 575 depended on Clyne J’s view at first instance (upheld by the High Court) that the costs order in the particular case was “on its proper construction” a joint right and not a joint and several right. The case is not authority for the general proposition that all costs orders must have that character.
The costs order in the present case was somewhat special. Slattery J heard two proceedings involving the Coppolas. This is clear from the judgment at PJM-1 (tab 4). In one of the proceedings (2009/289358) Mr and Mrs Coppola were named as defendants and in the other proceeding (2009/290634) Mrs Coppola was the plaintiff and Mr Coppola was not a party. Slattery J’s order was entered in both proceedings.
The costs assessment procedure was commenced in the name of Mr and Mrs Coppola under the Legal Profession Act 1984 (NSW). Two certificates of assessment issued.[18] One was for $121,489.49 which was the quantum of the costs recovered. The other was for $10,372.41 which was the costs of the assessment.
[18] PJM-1 [tab 12]
The judgment which is the foundation of the bankruptcy notice is for the total of those two certificates and it was entered in new proceedings No 2011/182096 in the name of the Mr Moloney in a sum of $131,861.87.
Costs are ordered and recovered as an indemnity.[19] The indemnity rule requires that the party recovering the costs from the opposite party has a liability to his or her solicitor. In the present case, because Mr Coppola was not a party to one of the proceedings, he had no liability for costs in those proceedings. As it happened, because of the terms of Slattery J’s order, the costs assessment process covered 40 per cent of the costs incurred by Mrs Coppola in one set of proceedings and 40 per cent of the costs incurred by both Mr and Mrs Coppola in the other. Those costs were assessed under one certificate. However, Mr Moloney maintains that they are different (although not ascertainable) elements because Mr Coppola had no entitlement to the whole of the costs recovered.
[19] Harold v Smith (1860) 5 H&N 381 at 385
The applicants here have the onus to show the set-off. They have the onus to demonstrate that Mr Moloney’s judgment is within the words of s.12 of the Conveyancing Act, subject to an “equity”. The equity that the applicants must show in the present case is a set-off. The crucial issue is whether mutuality is required and if so, whether it is present.
The authority of Stec v Orfanos
The judgment of the Full Federal Court in Stec v Orfanos is of course binding upon me. The critical passage of that judgment is at [24] where their Honours stated:
The primary judge then said that there was a more general answer to all the alleged cross demands. This was that in answer to a bankruptcy notice issued by several joint creditors, the debtor may not raise a debt owed by one or some of them individually. Mr Stec's claims were not against all those described in the notice as "the creditor". His Honour relied on James at 643 and on an earlier decision of his own, Emanuele v Grey (unreported 17 December 1997), which also relied on the passage in James. Where a debtor seeks to set aside a bankruptcy notice on the ground that the debtor has a cross demand which equals or exceeds the amount of the judgment or order on which the bankruptcy notice is founded, the judgment on the one hand and the cross demand on the other must be mutual and due in the same right: Re Anderson; Ex parte Alexander (1927) 27 SR (NSW) 296; James v Abrahams [1981] FCA 46; (1981) 51 FLR 16 at 27. The requirement that the two claims be "in the same right" is directed to the capacities in which the claimants claim. Thus a claim by a judgment creditor personally cannot be answered by a claim against the creditor as a member of a partnership or as an executor or trustee. See Re Wedd; Ex parte Wedd (1961) 19 ABC 36; Re Molesworth (1907) 51 Sol J 653; Vogwell v Vogwell (1939) 11 ABC 83 at 89. But the requirement relevant to the present case is that the claims be mutual; that is that they be of the same kind or nature. Thus joint debts cannot be set off against several debts: Middleton v Pollock (1875) LR 20 Eq 515 at 518. Here three of Mr Stec's claims were against ERI alone. There is thus no mutuality in relation to these claims. His other claim was against Messrs Conroy, Rybak and Georgopolos. Again there is no mutuality because one of the joint creditors, ERI, is not the subject of the cross claim.
The decision of the Full Court in Stec v Orfanos is one of a number of authorities cited in support of the general proposition that, where a debtor seeks to set aside a bankruptcy notice on the ground that the debtor has a counterclaim, set-off or cross-demand which exceeds or equals the amount of the judgment or order on which the bankruptcy notice is founded, the judgment on the one hand and the cross-demand on the other must be mutual and due in the same right. The requirement that the two claims be “in the same right” is directed to the capacities in which the claimants claim. Accordingly, a claim by a judgment creditor personally cannot be answered by a claim against the creditor as a member of a partnership or as an executor or trustee.[20] In particular, Stec v Orfanos is cited in support of the proposition that joint debts cannot be set-off against several debts.[21]
[20] Re Wedd; ex parte Parker [1962] WAR 42; (1962) ALR 60
[21] See Butterworth’s Bankruptcy Law and Practice at page 10,246
Nevertheless, as is noted by the learned authors of Australian Bankruptcy Law and Practice[22] where the debt relied on to found the bankruptcy notice is a joint debt, it can be extinguished by payment, accord or satisfaction by any one of the joint debtors, and may in appropriate circumstances be set-off against a debt owed by the creditor to another of the joint and several debtors.[23]
[22] at 8/194
[23] see Sandberg v Smarter Way (Aust) Pty Ltd (2002) 190 ALR 130 at [33]-[34], [40] and [57]-[59] per Kenny J
Further, I do not understand the general requirement for mutuality in respect of a set-off raised in challenging a bankruptcy notice pursuant to ss.40(1)(g) and 41(7) of the Bankruptcy Act, to extinguish or modify the operation of s.12 of Conveyancing Act in relation to the assignment of debts. Those bankruptcy authorities, including Stec v Orfanos, do not stand for the proposition that mutuality supporting a set-off at law between A and B can be destroyed by the simple expedient of assignment of one of the debts by either A or B to C. At the very least, such an assignment operates subject to equities and a court of equity (including this Court in exercise of its bankruptcy jurisdiction) can still intervene to recognise an equitable set-off in circumstances where it would be inequitable to permit a set-off which formerly existed at law to be so easily circumvented. In short, I do not regard the authority of Stec v Orfanos to present an obstacle to the core proposition put by the applicants at [14]-[17] above.
The present case is an example of a circumstance in which the principles discussed in Roadshow Entertainment and Franks should apply. It falls squarely within the principle of equitable set-off discussed above at [33]-[36]. Provided, therefore, that mutuality existed before the assignment, the applicants should succeed in their claim of set-off now.
In my view, the necessary mutuality did exist prior to the assignment. While it is true that there were several sets of proceedings and the configuration of the parties varied between those proceedings, and while it is also true that there would have been no set-off as between the applicants and Mr Copppola (to the extent that he had the benefit of a costs debt against the applicants) the reality is that the costs order made by Slattery J did not establish any separate costs benefit to Mr Coppola. There was a single costs order and the benefit to be derived by Mr and Mrs Coppola severally was unascertainable. It was, in substance, a joint costs order. It was dealt with by Mr Moloney as a joint costs order and he should not now be permitted to proceed on any other basis.
It follows, and I find, that the applicants have succeeded in establishing their claim of set-off against Mr Moloney and the consequence is that the bankruptcy notice should be set aside and the applicants should recover the costs of these proceedings. I will so order.
I certify that the preceding sixty-three (63) paragraphs are a true copy of the reasons for judgment of Driver FM
Date: 11 May 2012
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