COUTTS-SMITH v Titley Scientific Pty Ltd
[2012] FMCA 622
•20 July 2012
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| COUTTS-SMITH v TITLEY SCIENTIFIC PTY LTD | [2012] FMCA 622 |
| BANKRUPTCY – Application to set aside bankruptcy notice – consideration of proceedings in the District Court of Queensland – dispute regarding cross claim – whether the cross claim was a sham – whether the claim was proper and reasonable to litigate – application adjourned. |
| Bankruptcy Act 1966 (Cth), ss.40(1)(g), 41(7) |
| Glew v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331 Guss v Johnstone (2000) 171 ALR 598 James, Re; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 123 ALR 342 Massih v Esber (2008) 250 ALR 648 Vogwell v Vogwell (1939) 11 ABC 83 |
| Applicant: | GEOFFREY COUTTS-SMITH |
| Respondent: | TITLEY SCIENTIFIC PTY LTD |
| File Number: | BRG 170 of 2012 |
| Judgment of: | Burnett FM |
| Hearing date: | 11 April 2012 |
| Date of Last Submission: | 11 April 2012 |
| Delivered at: | Brisbane |
| Delivered on: | 20 July 2012 |
REPRESENTATION
| Counsel for the Applicant: | Dr A.J. Greinke |
| Solicitors for the Applicant: | Morgan Conley Solicitors |
| Counsel for the Respondent: | Mr D. McCafferty |
| Solicitors for the Respondent: | McCullough Robertson |
ORDERS
Application adjourned for mention to 9.30am on 1 August 2012.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 170 of 2012
| GEOFFREY COUTTS-SMITH |
Applicant
And
| TITLEY SCIENTIFIC PTY LTD |
Respondent
REASONS FOR JUDGMENT
Introduction
On 31 January 2012 the respondent, Titley Scientific Pty Ltd (Titley), caused Bankruptcy Notice no. BN9403 issued 16 December 2011 (the Notice) to be served upon the applicant. The Notice claimed a sum of $148,706.03, that being a debt founded upon a judgment of the Supreme Court of Queensland entered 25 November 2011 on account of costs. The applicant seeks to have the notice set aside.
The applicant contends that the Notice ought be set aside because he has an arguable cross demand against Titley for an amount exceeding the amount claimed in the Notice, and that the cross demand was one he could not have set up in the proceeding in which the judgment was obtained: s.40(1)(g) Bankruptcy Act 1966 (Cth).
Background Facts
The judgment secured by Titley against the applicant was a judgment in respect of costs following the applicant’s unsuccessful defence to proceedings commenced by Titley against him in respect of an action by Titley for declarations of ownership concerning a share then being held in trust by the applicant. Ultimately, the applicant gave up his defence and delivered a duly executed share transfer and other ancillary documents to Titley, leaving costs as the only matter in issue between the parties. In July 2011, Titley and the applicant appeared before Mullins J on the return of an application concerning costs that had then been assessed at $152,519.84. Ultimately, by judgment of 25 November 2011, Mullins J ordered in favour of Titley that the costs assessed in the sum of $152,519.84 be set aside and in lieu thereof the applicant pay Titley’s costs fixed in the sum of $147,976.27. Following orders for substituted service, the application was subject to procedural directions before listing for hearing in April.
Cross Claim
The applicant claims that by deed executed on 20 August 2010 a company known as Tribute Capital Partners Pty Ltd (TCP) assigned to him its right title and interest to debts owing to it by Titley in a sum totalling $162,036.67. On 21 April 2011, the applicant commenced proceedings in the District Court of Queensland against Titley to recover those assigned debts. Titley filed an Amended Defence in the District Court proceedings on 28 October 2011. Titley disputes that the invoices remain outstanding alleging that each was paid on 28 May 2010 except for two which were paid in part and in respect of which the liability for the balance remains in issue because either the services were not provided or they were otherwise covered by a management consultancy agreement.
It was submitted by the applicant that he could not have set up the cross demand in the judgment proceeding since that proceeding was for the assessment of a costs order: Massih v Esber (2008) 250 ALR 648. Notwithstanding the applicant’s submission on that point, the proceeding was a proceeding for declarations concerning ownership of a share and given the issues between the parties it appears on that basis alone that the cross claim could not have been pursued in the proceeding in its broader sense.
Titley’s Response
Titley contends that the alleged cross claim is a sham. It further contends that no assignment of any invoices in respect of monies due by Titley to TCP was ever assigned to the applicant and, accordingly, there is no substantive basis for the alleged cross claim.
In support of its contention, Titley submits that a lengthy history of dealings between the applicant, Titley and other related entities requires consideration.
In broad terms, Genesis BDI Ltd (a pool development) is the majority shareholder of Titley. Until April 2010, Genesis BDI was administered and coordinated by TCP.[1] The applicant was formerly a director of both TCP and Genesis BDI.
[1] TCP is allegedly the company from whom the applicant accepted an assignment of outstanding invoices due to it from Titley.
In April 2010 the board of Genesis (including the applicant) ratified a decision to set up a new entity to provide corporate services to Genesis BDI and resolved that the arrangement with TCP would be terminated. Subsequently, on 7 September 2010, the applicant was removed as a director of Genesis BDI.
Titley commenced proceedings against the applicant on 14 September 2010, after it discovered that an English company which was set up by Titley to run its operations in Europe was in fact wholly owned by the applicant. The proceedings were necessary because the applicant refused to acknowledge Titley’s entitlement to the shares in the English company and declarations were sought. These were the proceedings in which judgment was ultimately conceded and gave rise to the costs orders which now support the bankruptcy notice.
Costs were awarded against the applicant in those proceedings but despite that the applicant disputed the quantum of costs which were initially assessed at $152,519.84. That matter was ultimately resolved by judgment on 25 November 2011 whereby the costs were assessed at $147,976.27 and judgment was entered for that sum.
In the meantime, on 16 December 2010, a liquidator was appointed to TCP. However, on 4 February 2011 a Notice of Assignment was purportedly executed by the applicant’s solicitors and provided to Titley. The Notice of Assignment itself purported to assign TCP’s rights title and interest in a series of invoices. It was undated but by its terms was stated to be “absolutely irrevocable and takes effect on 20 August 2010.” In an affidavit sworn by the applicant in an earlier application to set aside an earlier bankruptcy notice which had issued (BRG390/2011), he deposed to that deed being executed on 20 August 2010.
On 21 April 2010, the applicant commenced his proceedings in the District Court against Titley claiming the sums under the invoices particularised in the Notice of Assignment.
Principles
The principles relevant to the application are not in issue. To succeed the applicant must demonstrate that he has a “counter claim, set off or cross demand equal to or exceeding the amount of the judgment” within the meaning of ss.40(1)(g) and 41(7) of the Bankruptcy Act.
In resolving the issue of whether such a state exists, the Court must determine whether the claim is one “which it is proper and reasonable to litigate.”[2] In Guss v Johnstone (2000) 171 ALR 598 at [39] to [41], the High Court (Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ) observed:
[2] Vogwell v Vogwell (1939) 11 ABC 83
“In the passage quoted above, the Full Court correctly observed that the decision made by Sundberg J under s.40(1)(g) and s.41(7) was not in any sense a determination of the rights of the parties in relation to the supposed counter claims, set-offs, or cross-demands which the appellant sought to raise. Those rights could be determined in separate proceedings, unaffected by any view of Sundberg J, or they could be examined at the time of application for a sequestration order.
The nature of the exercise upon which Sundberg J was engaged is well established by a long line of authority.
In Vogwell v Vogwell [(1939) 11 ABC 83], Latham CJ said, in relation to a corresponding provision:
[T]he authorities show that the matter to which the court looks is this, — whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue; in other words, whether it is a claim which it is proper and reasonable to litigate.
The state of satisfaction referred to in s.40(1)(g), and s.41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.”
It is accepted that the applicant must satisfy the Court of the following interrelated and sometimes overlapping matters:
“* that they have a “prima facie case,” even if they do not adduce evidence which would be admissible on a final hearing making out that case (Ebert v The Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 (“Ebert”) at 350; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 (“Brink”) at 141; Gomez v State Bank of New South Wales Ltd [2002] FCAFC 101 at [17], [18];
* that they have “a fair chance of success” or are “fairly entitled to litigate” the claim: Brink at 141; Re Gould; Gould v Day [1999] FCA 1650 at [27], [28]; Re Capsanis; Capsanis v The Owners – Strata Plan 11727 [2000] FCA 1262 at [11]; and
* that they are advancing a “genuine” or “bona fide” claim (Re Capsanis; Capsanis v The Owners – Strata Plan 11727 [2000] FCA 1262 at [11]).
It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at 141) the reference to a “prima facie case” in Ebert as a reference to “a fair chance of success.” [3]
In support of his application, the applicant must provide effective evidence that the cross claim is real; James, Re; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 123 ALR 342 at 347. It is insufficient to merely assert the existence of a cross claim, cross demand or set off.
[3] Glew v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331 at [9].
Evidence of Cross Claim
Titley substantially contends that the applicant is not advancing a genuine or bona fide claim and certainly not one that has a fair chance of success, and that it is arguable that he is fairly entitled to litigate. It submits that this result follows a close analysis of the applicant’s material.
I shall deal first with Titley’s complaint as to form concerning evidence in support of the cross claim. In an affidavit deposed to by the applicant on 20 May 2011 in application BRG390/2011, which is an attachment to his affidavit in support of this application, the applicant deposed as follows:
“5. Further or alternatively, for the reasons that follow I have a set-off against the respondent that exceeds the amount of the judgment debt.
6. By deed executed on 20 August 2010 Tribune Capital Partners Pty Ltd (“TCP”) assigned to me all its right title and interest to debts owing by the respondent to TCP in relation to unpaid invoices to services provided by TCP to the respondent, in total $162,036.63.
7. A copy of the deed assigning these debts is Doc 4 to Annexure GCS1.
8. Copies of invoices assigned by the deed are Doc 5 to Annexure GCS1.”
He subsequently deposed having commenced proceedings in the District Court of Queensland in relation to the assigned debts. Those proceedings remain on foot and are unresolved.
I am satisfied that the applicant has placed material before the Court deposing to his cross claim.
A genuine and bona fide claim
The matter of evidence does not address the more substantive point made by the applicant which concerns whether or not the cross claim is genuine or bona fide and has a fair chance of success or is at least one that he ought be fairly entitled to litigate. That matter requires closer consideration of the source material.
In Glew v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331, commencing at [10], the Court continued:
“[10] In Brink Lockhart J said (at 141) that the Court is not required to “undertake a preliminary trial of the counter claim, set-off or cross demand.” But, clearly, the application of the criteria above requires the Court to make some kind of preliminary assessment, though obviously not to determine the counter-claim, set-off or cross demand finally. And in Guss v Johnstone (2000) 171 ALR 598, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ stated (at 606):
[40] The state of satisfaction referred to in s.40(1)(g), and s.41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.
[11] Plainly, in order to “satisfy” the Court for the purposes of par 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was being finally determined, but by reference to the question whether the Court should be satisfied that the debtor has a claim deserving to be finally determined.
[12] Perhaps little more can usefully be said than that a debtor must satisfy the Court that there is sufficient substance to the counter-claim, set-off or cross demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.”
In his submissions, Counsel for the respondent pointed to a number of factors which he contended led to an overwhelming inference that the assignment was a fiction and that the proceedings issued by the applicant were merely an attempt to delay the enforcement of the costs order. Those matters included observations that in other related proceedings and in other dealings the applicant failed to mention the Deed of Assignment in circumstances where it ought reasonably have done so. Additionally, there were observations of a forensic accountant concerning the absence of expected entries and accounts and a lack of primary documents, and the date on which various transactions were reported, which is said to support the contention that no true indebtedness existed. There was further evidence following the report of the liquidator. Finally, the respondent also points to inferences that ought be drawn from the dates when the applicant took action. For example, TCP’s assignment was recorded in its accounts seven days after a liquidator was appointed to it; seven days after the applicant had submitted his report as to his affairs; and, most significantly, one month after the order of the Supreme Court. All of this occurred despite it allegedly being entered into in August 2010.
I accept that these matters give rise to a legitimate basis for concern about the efficacy of the applicant’s proceedings. However, those are matters that must be considered against the applicant’s positive deposition that he executed a Deed of Assignment in respect of the purported debts on 20 August 2010. Although I note that the deed was signed by both the applicant in his own capacity and also as director and secretary of TCP, the fact remains that, given the applicant’s deposition, the matter can ultimately only be resolved following an assessment of the applicant’s credit. The matters raised by Titley undoubtedly call for explanation by the applicant, but of themselves do not answer the applicant’s claim that he has a prima facie case, based upon an acceptance of his deposition, and that there is a fair chance of success or that he is, at least, fairly entitled to litigate the point; that is, to have the circumstantial case against him tested in the face of his assertion to the contrary. Additionally, given that the applicant has sworn to the signing of the deed and that the deed is also signed under seal, the inference is raised that the deed was duly authorised and signed in accordance with the company’s constitution and that there was a basis for the subject matter of the agreement.
Further steps
It is troubling that the issue of whether or not the applicant is truly indebted has not been resolved. From the material it is not apparent whether this delay has been occasioned by the parties or is because of a resourcing issue with the District Court. I am particularly mindful that, if the applicant is ultimately subject to a sequestration order, calculation of the relation back period commences from the date of bankruptcy, which on the Notice would be in about February 2012. There is already a suggestion on the material concerning the prospect of a preference claim in the liquidation of TCP. That claim relates in part to the fund which is the subject of the District Court proceeding. Plainly, it is in the interests of all parties that the issue concerning debt be resolved expeditiously.
In the circumstances I propose to adjourn this application to permit the respondent time to report on the applicant’s prosecution of the District Court proceedings or alternatively other relief.
Order
Application adjourned for mention to 9.30am on 1 August 2012.
I certify that the preceding twenty-seven (27) paragraphs are a true copy of the reasons for judgment of Burnett FM
Date: 19 July 2012
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