Duncan v Mortgage House of Australia Pty Ltd
[2010] FMCA 328
•12 May 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DUNCAN v MORTGAGE HOUSE OF AUSTRALIA PTY LTD & ORS | [2010] FMCA 328 |
| BANKRUPTCY – Set aside bankruptcy notice – grant of relief pursuant to s41(6A) – right to an extension of time for compliance with bankruptcy notice. |
| Bankruptcy Act 1966, ss.40(1)(g), 41(7), 41(6A) Federal Magistrates Court (Bankruptcy) Rules 2006 Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) |
| Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235 Warner v Frost [1999] FCA 830 |
| Applicant: | ROBERT DUNCAN |
| First Respondent: | MORTGAGE HOUSE OF AUSTRALIA PTY LTD |
| Second Respondent: | DIRECT MORTGAGE SOLUTIONS PTY LTD |
| Third Respondent: | MORTGAGE HOUSE BROKER SERVICES PTY LTD |
| Fourth Respondent: | MORTGAGE HOUSE REALTY PTY LTD |
| File Number: | BRG 751 of 2009 |
| Judgment of: | Burnett FM |
| Hearing dates: | 23 December 2009 & 17 March 2010 |
| Date of Last Submission: | 17 March 2010 |
| Delivered at: | Brisbane |
| Delivered on: | 12 May 2010 |
REPRESENTATION
| The applicant appeared on his own behalf |
| Counsel for the First Respondent: | Mr Zahra |
| Solicitors for the First Respondent: | Gokani & Associates |
| Counsel for the Second Respondent: | Mr Zahra |
| Solicitors for the Second Respondent: | Gokani & Associates |
| Counsel for the Third Respondent: | Mr Zahra |
| Solicitors for the Third Respondent: | Gokani & Associates |
| Counsel for the Fourth Respondent: | Mr Zahra |
| Solicitors for the Fourth Respondent: | Gokani & Associates |
ORDERS
That the application be dismissed.
Subject to application made within seven (7) days by either party for other orders, order that the applicant pay the respondent’s costs to be assessed and taxed pursuant to Order 62 of the Federal Court Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 751 of 2009
| ROBERT DUNCAN |
Applicant
And
| MORTGAGE HOUSE OF AUSTRALIA PTY LTD |
First Respondent
| DIRECT MORTGAGE SOLUTIONS PTY LTD |
Second Respondent
| MORTGAGE HOUSE BROKER SERVICES PTY LTD |
Third Respondent
| MORTGAGE HOUSE REALTY PTY LTD |
Fourth Respondent
REASONS FOR JUDGMENT
Introduction
On 21 September 2009 the Official Receiver for the bankruptcy district of New South Wales issued a bankruptcy notice to the applicant Robert Alan Duncan. At that time each of the judgment creditors, Mortgage House of Australia Pty Ltd, Direct Mortgage Solutions Pty Ltd, Mortgage House Broker Services Pty Ltd (formerly Array Home Loans Pty Ltd) and Mortgage House Realty Pty Ltd (the creditors) had a judgment against the applicant for the sum of $106,735.25 which represented the assessed costs the applicant was directed to pay in proceedings he and another had pursued against the creditors in the Supreme Court of New South Wales. A sum of $10,000 had been paid and accordingly the total owing at the time of the issue of the bankruptcy notice was $96,735.25.
By application filed 23 October 2009 the applicant seeks to set aside the bankruptcy notice.
The application was filed within the time permitted by section 41(6A) Bankruptcy Act (the Act). However because of the applicant’s health the hearing was adjourned until March 2010.
The application does not comply with the Federal Magistrates Court (Bankruptcy) Rules in that contrary to Rule 3.02 it did not identify the grounds upon which it is based. However from argument it is apparent that the applicant seeks to have the bankruptcy notice set aside because he contends the bankruptcy notice is supported by a judgment that is subject to a counter claim, set off or cross demand which could not have been brought in the proceedings in which the judgment was obtained: s.40(1)(g) and s.41(7); and/or, because proceedings have been commenced to set aside the judgment in respect of which the notice issued: s.41(6A).
Background Facts
The bankruptcy notice is founded upon a judgment for costs made in the creditors favour early in the course of a trial between the applicant and another and the creditors. At that time the applicant, as co-plaintiff with Alpha Centura Enterprises Pty Ltd (ACE), required an adjournment due to witness difficulties. The adjournment was granted but the plaintiffs were ordered to pay costs of the adjournment to be assessed on an indemnity basis. The costs were assessed at $106,735.25.
Later the trial continued to conclusion. Judgment was ultimately delivered for the creditors, as defendants, with the plaintiffs’ claim being dismissed. In the proceeding the creditors also had a cross claim for which the result was that the creditors’ cross claim was dismissed.
In debate following judgment (the substantive decision) orders were foreshadowed with respect to costs by the trial judge. It was foreshadowed that the plaintiffs would be ordered to pay the creditors costs of the proceedings except for costs of the creditor’s cross claim. It was foreshadowed that the creditors would be ordered to pay the plaintiffs’ costs of defending the cross claim. It is apparent from transcript of the debate before His Honour Hammerschlag J that it was hoped the matter of costs could be agreed. That did not prove to be so.
Ultimately on 3 July 2007 His Honour ordered:
a)The plaintiffs pay the creditors’ costs of the proceedings other than the costs of the cross claim (on a party and party basis until 6 February 2007 and from that point forward on an indemnity basis);
b)The creditors pay the plaintiffs’ costs of defending the cross claim; and
c)The plaintiffs pay the creditors’ costs of the adjournment assessed in the sum of $106,735.25 (the adjournment costs decision).
Noteworthy matters arising from those orders are that :
a)His Honour rejected any submission that there be a stay of execution of the costs order in favour of the creditors for the sum of $106,735.25, that is a stay of the adjournment costs decision;
b)In the course of the general debate on costs His Honour made the observation that he considered the plaintiffs’ costs in defending the cross claim would not have exceeded about 10% of the plaintiffs’ overall costs in the proceeding;
c)Orders in the proceeding included the applicant as a plaintiff although there appeared to be no basis for him being a plaintiff in the proceeding. Accordingly the applicant, as a plaintiff, was joint and severally liable with ACE for the creditors’ costs.
A short time after judgment the plaintiffs lodged a notice of appeal against the judgment of Hammerschlag J. The appeal was directed to the substantive decision only. It did not seek to disturb the adjournment costs decision but only sought a reversal of costs orders made following the substantive decision including attendant costs orders.
The significance of the appeal to the applicant’s application is that the only benefit he can receive directly if the appeal succeeds is to have reversed the costs orders in respect of the substantive decision below. That is, the applicant as co-plaintiff could be relieved of the present order that he, together with ACE, pay the respondents’ costs of the proceeding and in lieu of that order receive a beneficial costs order. There is no cross appeal by the creditors so the applicant as co-plaintiff will retain the benefit of the favourable costs order already made.
Grounds for Application
As earlier noted the creditors’ submissions were premised on relief sought under sections 40(1)(g), 41(7) and 41(6A) of the Act.
Section 40(1)(g) and Section 41(7) of the Act
Section 40(1)(g) of the Act relevantly provides that where the debtor can:
“… satisfy the Court that he or she has a counterclaim 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 counterclaim, setoff or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.”
The creditors contend there can be no application premised upon section 40(1)(g) because the “counterclaim” which the applicant appears to rely upon is a claim made by ACE in the Supreme Court of New South Wales. A review of the pleadings contained in the fourth further amended summons and the judgment of Hammerschlag J of 12 June 2009 bear out that fact. While it is clear that ACE prosecuted a claim against the creditors which claim was subject to a cross claim by the creditors against ACE there appears to be no basis for any claim by applicant. As His Honour noted in paragraph 4 of the judgment:
“The second plaintiff, Mr Robert Duncan, who controls the first plaintiff, claims no relief in his own right.”
The applicant was the subject of a cross claim in respect of his indemnity as guarantor for ACE’s obligations. But in this case the cross claim against him was abandoned in any event.
In Pollnow v Queensbro Pty Ltd (1988) 217 ALR 49 a similar question to the one in this case came before the Federal Court. There, debts founding the bankruptcy notice arose following orders for costs made against the debtor in interlocutory proceedings in a suit commenced by the debtor against the creditor. In that instance the cross demand relied upon consisted of the substantive claims made in the principal suit. They were subject to appeal. In addressing the issue of the relevant “proceeding” for the purposes of s40(1)(g) Burchett J observed that it was:
“…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.”
Here, as with Pollnow v Queensbro Pty Ltd, the relevant “proceeding” for the purposes of s.40(1)(g) is either the application for the interlocutory orders in the suit (the adjournment application) or the order for costs made (the adjournment costs decision). However unlike in Pollnow v Queensbro Pty Ltd the applicant here had no claim in the suit in either case for a remedy that might have provided an offsetting claim, that is as either a counterclaim in the original proceeding or cross claim following the defence. Nor was he subject to orders following a cross claim prosecuted against him for, as I have earlier noted, the cross claim was abandoned. The best the applicant can hope for is success on appeal which will only neutralise the effect of the presently adverse costs orders. Other benefits from a successful appeal will be indirect.
The appeal currently pending in the New South Wales Court of Appeal does not provide a basis for the relief sought by the applicant in respect of substantive orders in these proceedings. It is not the applicant who sought relief in the Supreme Court proceedings. Rather the relief was sought by ACE and the applicant was simply joined as a party. It follows that even if ACE’s appeal could succeed that would not translate to a judgment in favour of the applicant except in respect of costs.
The appeal is, at its essence, to challenge a finding that no franchise arrangement existed between ACE and the creditors and to obtain damages it is contended ought to have been ordered at trial.
The applicant seeks to set up the appeal made against the substantive decision as “a counter-claim, set off or cross demand” as being the “counter-claim, set off or cross demand” which he could not have set up in the action in which the judgment was obtained.
An appeal against a judgment or final order on which the bankruptcy notice is based does not constitute a “counterclaim, set-off or cross demand” for the purposes of s.40(1)(g): Stack v Elster Motoring Pty Ltd [2005] FCA 231 at [79] – [85]; Re Thompson; Ex parte Thompson v Grimely Pty Ltd & Ors (1995) 61 FCR 554 at 552. Although with an appeal the court does retain a general power to go behind a judgment sought to be relied upon by the debtor on a set-off: Cameron v Cole (1944) 68 CLR 571.
The relevant judgment sum for the bankruptcy notice was premised upon the adjournment costs decision made against the applicant and ACE for which they are jointly and severally liable. That decision is not subject to appeal so even if ACE succeeds on its appeal only the costs orders following the substantive decision may be varied. The adjournment costs decision will stand.
Despite the authority concerning whether an “appeal” generally constitutes “a counter-claim, set off or cross demand” the applicant relied upon the observations by Burchett J in Pollnow v Queensbro Pty Ltd & Anor in support of his contention that the circumstances did give rise to a ‘counter claim, set off or cross demand’ not available in the original proceedings.
Concerning the term “cross demand” at his Honour stated at [9]:
“…
de Brink: Ex P. Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 also contains a valuable indication of what is meant by a “cross demand” in the relevant sense. It accepted earlier authority to the effect that the term is not a technical one, and that it has a wider meaning than the words which accompany it, “counter-claim” and “set off”. At 139, Lockhart J adopted the view that the object of the legislature “is obviously to prevent a judgment creditor from pursuing bankruptcy proceedings when, as between himself and judgment debtor, the balance of account is in favour of the judgment debtor.”
From His Honour’s analysis it seems arguable that an appeal may constitute a cross demand, particularly if its prospects were such that it might swing the balance of account in favour of the judgment debtor.
However as his Honour noted at [13] he was not referred to any authority on the effect of a pending appeal upon a ‘final order’. In both Stack v Elster Motoring Pty Ltd [2005] FCA 231 at [79] – [85] and Re Thompson; Ex parte Thompson v Grimely Pty Ltd & Ors (1995) 61 FCR 554 at 552 that matter was the subject of express consideration and I am guided by those decisions on this point. They are clear authority for the principal that an appeal does not constitute a cross demand for the purposes of s.40(1)(g). That authority has more force in those circumstances where the appeal relied upon is not against the final order.
In the circumstances there is no need for me to undertake any review of the prospects of the appeal.
Otherwise, except as to costs, as earlier noted, the counter claim the applicant appears to rely upon is the claim made by ACE in the proceedings. On that basis section 40(1)(g) has no application. Those claims failed at trial and subject to appeal a res judicata has arisen in respect of them. See Barclays Australia (Finance) Ltd v Mike Gaffikin Marine Pty Ltd (1996) 21 ACSR 235 at 238 per McClellan CJ in Eq; Glew v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331 per Lindgren J.
The final order costs were assessed and ordered by the trail judge at $106,735.25 as detailed above. A sum of $10,000 was paid by the applicant so $96,735.25 remained payable. The respondents’ solicitor’s affidavit deposed to their costs totalling $2,120,207.65[1]. There was evidence that the trail judge believed about 10% of those costs related to the defence of the counter claim which was subsequently abandoned and in respect they received a favourable costs order. The applicant contends that that sum was in fact closer to 40%. The applicant also contends its costs on the counter claim were $350,000. At best it follows that the applicant could claim to setoff $1,198,083 against the respondents’ costs. Even allowing for the most generous assessment of the applicants’ costs on the balance on account due by it to the respondents there would be no sum available to be set off against the final order sum.
[1] Standard costs to 31/1/07 @ 75% of $686479.54 plus Indemnity costs from 1/2/07 @ 90% of $1,783,719.99
It follows there is no basis for the bankruptcy notice to be set aside or for the time to comply to be extended pursuant to section 40(1)(g) or section 41(7) of the Act.
Section 41(6)(A) of the Act
Section 41(6A) of the Act provides:
“Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:
(a) the proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or
(b) an application has been made to the Court to set aside the bankruptcy notice;
the court may, subject to subsection 6(C), extend the time for compliance with the bankruptcy notice.”
Section 41(6C) provides:
“Where:
(a) a debtor applies to the court for an extension of the time for compliance of the bankruptcy notice on the ground the proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and
(b) the court is of the opinion that the proceedings to set aside the judgment or order:
(i) have not been instituted bona fide; or
(ii) are not being prosecuted with due diligence;
the court shall not extend the time for compliance with the bankruptcy notice.”
The creditors contend that the appeal proceedings commenced by the debtor and ACE relate to the substantive proceedings which were heard and determined by Hammerschlag J on 12 June 2009 and do not concern the judgment that is the subject of the bankruptcy notice. In those circumstances it was submitted that where no appeal has been lodged in respect of the adjournment costs decision occasioning the debt the subject of the bankruptcy notice and where a stay of that costs decision has been refused there is no basis for any relief to be granted to the debtor pursuant to section 41(6A) of the Act.
That submission is plainly correct and I accept it.
Other factors
Notwithstanding the matters identified above the creditors claim that in any event there is no basis for an order setting aside the bankruptcy notice or granting an extension of time to comply with it. They contend the following factors support that conclusion:
a)The debtor by his own admission is already insolvent. In his affidavit filed 23 October 2009 he swore:
“NOTICE OF MOTION hearing which included the production of the financial state of both ACE and me personally the respondents/defendants have at all material times been aware that in the event they won the case neither ACE nor I would be in a position to bear any costs order regardless of the size.”
That matter is confirmed in an affidavit filed by the debtor in the Supreme Court proceedings where he swore that as at 22 October 2008 he had total assets of $95,000 but owed his solicitor $200,000. He also swore that he expected to incur a further $200,000 in costs from the balance of the Supreme Court hearing.[2]
b)There is no real prejudice to the debtor to be occasioned by an act of bankruptcy as opposed to a sequestration order. See Porter v OAMPS Ltd [2004] FMCA 272 at [22]. It is plain that the failure to set aside the bankruptcy notice would not impact on Mr Duncan’s business activities in the manner he alleges.[3]
c)Any extension of time for the setting of the bankruptcy notice will delay the date of the act of bankruptcy which will in turn effect the timing of the relation back period; see Conway v Jackson (2001) 107 FCR 201 at [ 30] per Moore, Matthews and Mansfield JJ. Given the financial position of the debtor as deposed to in his affidavit of 23 October 2009 any variation of the relation back periods may have a real prejudicial impact on the creditors including the respondent creditor to this application.
d)The debtor has not given any relevant undertakings.
[2] Affidavit Robert Duncan filed 23 October 2009 [12], [17] and [27]
[3] See affidavit Gagini filed 6 November 2009 at [22] – [24[
In McPhee v Glentham Pty Ltd [2006] FMCA 1508 Lucev FM said at [28]:
“In the absence of other relevant factors it requires an exceptional case or, at least, quite special circumstances, for time to be extended where no stay has been obtained.”
See also Sidhom v Euphoric Pty Ltd [2006] FMCA 827 at [16] and Warner v Frost [1999] FCA 830 at [8] per Healy J.
In this case there are no special circumstances supporting the debtor’s application. In my view this case is not an exceptional case.
The applicant in response particularly asserts that should the appeal succeed his solvency will be restored. He particularly relies upon his position as the sole direction/shareholder of ACE and therefore his capacity to control the affairs of the company. He contended that not only would the company enjoy a reversal of the adverse costs orders in the substantive proceeding but that the proceeds of any successful judgment would immediately enable the company to repay a debt due by him in the sum of $138,804.
However, even if the debt due by ACE could be realised other matters have now intervened which may neutralise the effect of realisation of such debt upon the applicant’s solvency. First, ACE was the subject of a winding up order made on 20 February 2010. Serious concern must now exist as to the prospect of the appeal being prosecuted for the benefit of the company and in turn the applicant. Second, ACE entered into a deed of assignment on 19 February 2010. By the deed of assignment ACE purported to assign all its rights title and interest in respect of the appeal proceedings to the applicant’s wife, Heather Duncan. No evidence exits to suggest that in the event Heather Duncan successfully prosecutes the appeal the applicant himself will be the beneficiary of that successful appeal. In fact this matter further distances the applicant from the prospect of proceeds of a successful appeal being applied to the discharge of the applicant’s indebtedness.
It follows there is no basis for the exercise of discretionary powers in this case.
Conclusion
The debtor applies to set aside the bankruptcy notice. The debtor has not demonstrated that he has a counterclaim set-off or cross demand equal to or exceeding the amount of the judgment debt founding the bankruptcy notice because the judgment supporting the bankruptcy notice is not itself the subject of appeal and insofar as any successful appeal is concerned it would only give rise to rights for ACE to claim a counterclaim, setoff or cross demand but no such rights to the debtor.
Furthermore the debtor has not sought to set aside the judgment or order in respect of which the bankruptcy notice was issued and it follows he has no rights to apply for an extension for time for compliance with the bankruptcy notice on the grounds that proceedings to set aside the judgment or order have been instituted.
No discretionary grounds have been advanced in support of the application.
Orders
Application dismissed.
Subject to application made within seven (7) days by either party for other orders, order that the applicant pay the respondent’s costs to be assessed and taxed pursuant to Order 62 of the Federal Court Rules.
I certify that the preceding forty-five (45) paragraphs are a true copy of the reasons for judgment of Burnett FM
Associate: B Schmidt
Date: 12 May 2010
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