ELBERG v FRAVAL (No 2)
[2012] VSC 371
•29 AUGUST 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2008 05825
| ALEX ELBERG | Plaintiff |
| v | |
| SACHLAN FRAVAL | Defendant |
| And Between | |
| SACHLAN FRAVAL | Plaintiff by Counterclaim |
| v | |
| ALEX ELBERG | Defendant by Counterclaim |
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JUDGE: | HABERSBERGER J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 23 AUGUST 2012 | |
DATE OF JUDGMENT: | 29 AUGUST 2012 | |
CASE MAY BE CITED AS: | ELBERG v FRAVAL (No 2) | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 371 | 1st Revision: 30 August 2012 |
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Practice and Procedure – Discontinuing counterclaim after trial and prior to entry of judgment – Whether set-off affected – Costs – Calderbank offer – Bankruptcy Act 1966 (Cth), s 60 – Supreme Court (General Civil Procedure) Rules 2005, rr 13.14, 25.02(2)(b).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr GR McCormick | Goldsmiths |
| For the Defendant | No appearance |
HIS HONOUR:
On 14 August 2012, I published my reasons for judgment in this matter.[1] I adjourned the further hearing to 23 August 2012 to enable the parties to make submissions on the form of judgment and on the question of interest and costs. The background to this judgment on costs is to be found in my earlier judgment.
[1][2012] VSC 342.
The proposed form of judgment submitted by the plaintiff prior to the second hearing relevantly provided that judgment be entered for the plaintiff against the defendant in the sum of $14,334.[2] That amount was derived from a set-off between the amount of $211,462, being my assessment of the plaintiff’s damages for the non-transfer of the 20 million Computronics shares which were part of the consideration for the loan of $500,000,[3] and the amount of $197,128, being the amount which I found should have been repaid by the plaintiff to the defendant.[4] Interest in the sum of $6,570[5] was also sought, as were the plaintiff’s costs of the proceeding.
[2]First, there was a paragraph providing by agreement for rectification of the second loan agreement.
[3][2012] VSC 342, [190].
[4][2012] VSC 342, [137].
[5]My rounding of the precise calculation as at 23 August 2012.
What should have been a straightforward final hearing was complicated by the fact that, the defendant having become bankrupt between the trial and the publication of reasons for judgment, by a letter dated 22 August 2012 the defendant’s trustee in bankruptcy advised the plaintiff’s solicitors that pursuant to s 60 of the Bankruptcy Act 1966 (Cth) he elected “to discontinue the bankrupt’s claim(s)” in this proceeding.
Section 60 of the Bankruptcy Act relevantly provides:
(2)An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.
(3)If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.
…
(5)In this section, action means any civil proceeding, whether at law or in equity.
Insofar as it was necessary, the plaintiff consented to the discontinuance. A proceeding commenced by writ can be discontinued at any time prior to judgment by consent or with the leave of the Court. (See r 25.02(2)(b) of the Supreme Court (General Civil Procedure) Rules 2005 (“the Rules”) and Brown v Parker[6]).
[6][1961] WAR 194.
This election by the defendant’s trustee in bankruptcy caused the plaintiff to change his submission with respect to the amount of the judgment. It was submitted on behalf of the plaintiff that the judgment which should now be entered for the plaintiff against the defendant was one in the sum of $211,462 plus interest in the sum of $96,924[7] because, as a result of the trustee’s election, there no longer was any counterclaim for the amount of $197,128.
[7]My rounding of the precise calculation as at 23 August 2012.
There was no appearance at the second hearing by the defendant or his trustee in bankruptcy to advance a contrary argument.
In the prayer for relief contained in the statement of claim endorsed on the writ, the plaintiff claimed, amongst other relief, “$36,000”, being the alleged balance due under the second loan agreement, and “20 million Computronics shares”. In his particulars of loss and damage dated 26 October 2010 the plaintiff alleged that the balance due under the second loan agreement was “$29,783” and he claimed that amount and “the shares, further or alternatively their value as at the due date for their transfer …”
In his further amended defence and counterclaim, the defendant pleaded, in effect, that the plaintiff had:
sold a very substantially greater amount of the security than was necessary to cover the loan amount, and failed to return to the defendant the residual security in excess of the loan amount.[8]
I say “in effect” because although this was not quite how the defendant pleaded it, this was the way the defence was run at the trial. The defendant also pleaded, in effect, that the plaintiff received in total the sum of $1.11 million from selling the security, that the amount due under the second loan agreement ought properly to have been paid out in full from the proceeds of sale of $1.11 million and that the balance of those proceeds after repayment of the loan was due to him.[9] The defendant then pleaded that he would “seek to set up so much of his counterclaim hereunder as is necessary in extinction or diminution of Elberg’s claim, by way of set-off”.[10] In the second paragraph of his counterclaim, the defendant pleaded that he referred to and repeated “the non admissions, denials and positive allegations set out in his Defence above as if the same were set out hereunder seriatim”.[11]
[8]Paragraph 11F(a) and (b).
[9]Paragraph 19A(b), (c) and (d).
[10]Paragraph 24.
[11]Paragraph 26.
The plaintiff submitted that as the set-off was linked to the counterclaim, once the counterclaim was discontinued the set-off also went away. It seems to me that this submission overlooked r 13.14 of the Rules. That rule provides as follows:
Money claim as defence
Where a defendant has a claim against a plaintiff for the recovery of a debt or damages, the claim may be relied on as a defence to the whole or part of a claim made by the plaintiff for the recovery of a debt or damages and may be included in the defence and set off against the plaintiff's claim, whether or not the defendant also counterclaims for that debt or damages.
Thus, pursuant to this rule, the discontinuance of the counterclaim does not affect the existence of the set-off as a defence.
In Clark v Loftus,[12] the plaintiff and his brother were registered as joint proprietors of a house, which they contracted to sell. When they failed to transfer the land, the purchasers sued for and obtained an order for specific performance. It was also ordered that the balance of the price remaining after payment of the purchasers’ costs be paid into court. The plaintiff claimed that his brother was responsible for the breach of the contract of sale and was liable to him in damages for the amount of the purchasers’ costs. The plaintiff also claimed that his brother was indebted to him in the sum of $90,135. He sought a declaration that he was entitled to be paid the funds in court, payment of the further sum and damages. The brother was subsequently declared bankrupt and the appellant was appointed trustee of his estate. The appellant filed and served a defence, set-off and counterclaim alleging that the brothers were in a property development partnership and that on the taking of accounts between them the plaintiff owed in excess of $200,000 to his brother.
[12][2005] VSCA 155.
In the course of a summary judgment application by the plaintiff, it was held by a County Court judge that, pursuant to s 60(3) of the Bankruptcy Act, the appellant’s counterclaim was deemed to have been abandoned, and therefore that there was no counterclaim or set-off.
On appeal, Buchanan JA, with whom Eames JA and Osborn AJA (as his Honour then was) agreed, held as follows:
In my opinion a set-off raised by a defendant is not a civil proceeding within the meaning of the Act. An action or civil proceeding is a court process by one person claiming relief from another or possibly in rem. A set-off raised by a defendant, on the other hand, is a defence to an action or civil proceeding commenced by another. It may be assumed for present purposes that a counterclaim is a civil proceeding. The same facts may found a set-off and a counterclaim. Nevertheless, set-offs and counterclaims have independent existence and may suffer different fates. A counterclaim constitutes a procedural device by which the court may entertain independent cross-actions in the same proceedings,[13] whereas a set-off is dependent upon the plaintiff's action in that it operates as a defence to the claim brought in the action.
The evident purpose of s 60 of the Bankruptcy Act is to bar independent actions by bankrupts unless the bankrupt's trustee elects to prosecute the action. No such bar applies to defences to actions brought against bankrupts. I do not see how the policy of the legislation is furthered by applying s 60(3) to a defence which is called a set-off.
Counsel for the respondent submitted that a set-off is based upon a claim for the recovery of a debt or damages. If that claim is pleaded as a counterclaim and the counterclaim has been deemed to have been abandoned pursuant to s 60(3), the claim is no longer held by or in the possession of the defendant and cannot be resurrected as a set-off.
In my view s 60(3) does not have such a far-reaching effect. It does not obliterate the cause of action founding both the counterclaim and set-off, but merely operates to bar prosecution of a civil proceeding constituted by the counterclaim. Counsel for the respondent conceded that, if the appellant had pleaded originally only a set-off, it would have survived even if the trustee had not elected to prosecute it. In my view it is illogical that the fate of a set-off should depend upon the fact that it was also pleaded as a counterclaim. The result fortifies me in the view that the deemed abandonment of the counterclaim does not affect the set-off.
Counsel for the respondent submitted that rule 13.14 did not permit a defendant to set-off a claim for debt or damages where the plaintiff has sought a declaration. … In the present case the respondent's claim embraces both recovery of a debt and damages as well as a declaration. I need not stay to consider whether the appellant could have set-off his claim against the claim for a declaration if that had stood alone.[14]
[13]Winterfield v Bradnum (1878) 3 QBD 324, 325 (Brett LJ).
[14][2005] VSCA 155, [6]-[10].
In accordance with the reasoning of Buchanan JA in Clark v Loftus, I reject the plaintiff’s submission. In my opinion, the correct analysis of the situation after the defendant’s trustee in bankruptcy had discontinued the bankrupt’s counterclaim was that, as a result of my findings there should be judgment for the plaintiff only in the sum of $14,334, because there still had to be set off against the $211,462 damages for the non-transfer of the 20 million Computronics shares, the amount of $197,128 which should have been repaid by the plaintiff to the defendant.
The second issue for determination is the appropriate order for costs. Exhibited to an affidavit of the plaintiff’s solicitor, Gary David Goldsmith, sworn on 22 August 2012, was a letter from the plaintiff’s solicitors to the defendant’s then solicitors dated 21 October 2009. This letter contained a Calderbank offer of settlement that each party “withdraw” and “bear their own costs in respect to this proceeding”. The offer was said to be open for 14 days. Reference was made to Calderbank v Calderbank[15] and subsequent authorities and to the possible costs consequence should the plaintiff obtain a result better than the offer. The following was also stated in the letter:
This offer does not refer to our client’s view as to the prospect of their [sic] success in the matter, however it does reflect the fact that our client is concerned about recovering against your client in respect to their [sic] claim.
Notwithstanding that, our client is ready, willing and able to proceed with the matter and our client believes that your client’s proposed counterclaim is not likely to be successful.
[15][1976] Fam 93.
In considering the impact of a Calderbank offer, the critical question is whether the rejection of the offer by the defendant was unreasonable in the circumstances.[16] In terms of the relevant matters to be taken into account when considering whether the refusal of the Calderbank offer was unreasonable, I find that:
[16]Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435, [23].
(a)the stage at which the offer was received was appropriate given that it followed on after a mediation, interlocutory steps were advanced and, importantly, as pointed out by the plaintiff, it was made at a time when solicitors were acting for the defendant;
(b) the period of 14 days for acceptance of the offer was reasonable;
(c)the offer to walk away represented a genuine compromise brought about not by the plaintiff doubting the strength of his claim but by the well-founded concern about the defendant’s ability to meet a substantial judgment;
(d)the defendant’s prospects of achieving a better result, assessed as at the date of the offer, were not good, particularly as at that time no-one on his side had appreciated that there was a penalty argument to be made about the $5,000 a day extra interest, which improved his position in the final outcome by $225,000;
(e) the terms of the offer were clear; and
(f) the costs consequences of not accepting the offer were foreshadowed.
My conclusion that the defendant should pay costs on an indemnity basis from 5 November 2009, being the date after the expiry of the Calderbank offer, means that it is unnecessary to make specific orders dealing with two matters of costs where I had indicated during the trial that the defendant would have to pay the costs regardless of the outcome. They were that:
(a)the defendant should pay half of the costs of the first day of the trial on an indemnity basis, because of the time lost dealing with the application to amend the defence to include the penalty argument; and
(b)the defendant should pay the party and party costs of the two days devoted to hearing the expert evidence about the belated issue as to what was the valuation of the 20 million Computronics shares.
The conclusion that this proceeding should have been concluded on or before 4 November 2009 by the defendant’s acceptance of the plaintiff’s Calderbank offer also means, in my opinion, that it is not appropriate to take an issue by issue approach on the question of costs.[17] Even though the defendant won the penalty issue, the fact is that there would never have been a trial if the defendant had acted reasonably and accepted the plaintiff’s Calderbank offer.
[17]Chen v Chan [2009] VSCA 233, [10] (Maxwell P, Redlich JA and Forrest AJA); GT Corporation Pty Ltd v Amare Safety Pty Ltd (No 3) [2008] VSC 296, [38] (Robson J); Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (No 2) [2008] FCAFC 107, [3]-[5].
I will, therefore, order that:
1.Recital G of the Computronics Agreement (being the agreement more particularly described in paragraph 11 of the Amended Statement of Claim dated 1 August 2011) is rectified to state:
The lender be at liberty to liquidate stock upon the loan amount reaching $700,000.00 Australian dollars or the loan amount at a specified time exceeding 70% of the value of the ESI shares and options provided as collateral;
2.There is judgment for the plaintiff against the defendant for the sum of $14,334 plus interest in the sum of $6,595[18] plus costs (including reserved costs) such costs, in default of agreement, to be taxed on a party and party basis up to and including 4 November 2009 and thereafter on an indemnity basis; and
[18]My rounding of the precise calculation as at 29 August 2012.
3.The defendant pay the plaintiff’s costs of the counterclaim, such costs, in default of agreement, to be taxed on a party and party basis up to and including 4 November 2009 and thereafter on an indemnity basis.
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