Franks, R.S. v GIO Holdings Ltd

[1990] FCA 323

Re: RODNEY SEDDON FRANKS; MARGARET LAWRIE FRANKS
Ex parte: GIO HOLDINGS LIMITED
No. B4360 of 1989
FED No. 323
Bankruptcy
25 FCR 398

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
GENERAL DIVISION
Beaumont J.(1)

CATCHWORDS

Bankruptcy - bankruptcy notice issued in respect of judgment debt - claim by debtor that he has a counter-claim that he could not set up in the action in which judgment was obtained - Bankruptcy Act 1966, s.40(1)(g).

HEARING

SYDNEY

#DATE 29:6:1990

Counsel and Solicitors for debtors: J. Chippindale

Instructed by: Messrs Cowley Hearne

Counsel and Solicitors for creditors: B.M. Skinner

Instructed by: James Pope and Associates

ORDER

Declare that the Court is not satisfied that the debtors have a counter-claim, set-off or cross-demand as is referred to in s.40(1)(g) of the Bankruptcy Act 1966.

That the debtors pay the creditor's costs of the application.

Note: Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules.

JUDGE1

On 16 January 1990, a bankruptcy notice was issued at the request of GIO Holdings Limited ("GIO") as judgment creditor, addressed to Rodney Seddon Franks and Margaret Lawrie Franks, as judgment debtors. The bankruptcy notice recited that GIO claimed that the sum of $57,829.64, together with interest of $2,295.75, making a total of $60,125.39, was due by Mr and Mrs Franks to GIO under a final judgment ("the judgment debt") obtained in the District Court at Sydney on 1 September 1989. The notice required Mr and Mrs Franks, within 28 days after service of the bankruptcy notice, to pay the sum of $60,125.39 ("the said sum") or to secure or compound the said sum. The bankruptcy notice further stated that, if within the said period of 28 days, Mr and Mrs Franks failed either to comply with the requirements of the notice or to satisfy the Court that they had a counter-claim, set-off or cross-demand that they could not have set up in the action in which judgment was obtained, Mr and Mrs Franks would have committed an act of bankruptcy.

1. On 13 February 1990, there was filed an affidavit sworn by Mr Franks in this matter on 9 February 1990. In his affidavit, Mr Franks claimed that he had a right of counter-claim, set-off or cross-demand equal to or exceeding the said sum. Mr Franks' claim, which was described in only general terms, but was "estimated" to be for not less than $1,200,000, was said to be a claim for unliquidated damages for breach of contract and for misleading and unconscionable conduct said to be engaged in by GIO contrary to the provisions of s.52 and s.52A of the Trade Practices Act 1974.

2. A similar affidavit was sworn by Mrs Franks and filed on 13 February.
   The present application

3. By application dated 19 April 1990, GIO seeks a declaration that Mr and Mrs Franks "have failed to satisfy the Court that they have a counter-claim, set-off or cross-demand equal to or exceeding the amount of the judgment . . . (debt)." The application arises under s.40(1)(g) of the Bankruptcy Act 1966 ("the Act") which provides for the service of a bankruptcy notice requiring a debtor, within a fixed time, to-
   

". . . comply with the requirements of the notice or satisfy the Court that he has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt. . . , being a counter-claim, set-off or cross demand that he could not have set up in the action or proceeding in which the judgment or order was obtained." (Emphasis added)

By s.41(7) of the Act, it is provided as follows:

"Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has filed with the Registrar an affidavit to the effect that he has such a counter-claim, set-off or cross demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter-claim, set-off or cross-demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied."

1. In order to understand the contentions now made by the parties, it is necessary to refer to the history of the proceedings in the District Court, and subsequently, in the Supreme Court.
   The District Court proceedings

2. On 22 November 1988, GIO sued Mr and Mrs Franks in the District Court claiming a liquidated sum of $49,399.29, being the balance of principal and interest, alleged to be due in respect of moneys lent by GIO, together with costs. On 12 April 1989, Mr and Mrs Franks filed notice of grounds of defence and notice of cross-claim in terms similar, in essential respects, to the claims now made by Mr Franks in his affidavit sworn on 9 February 1990.

3. On 24 July 1989, GIO filed a notice of motion seeking orders that Mr and Mrs Franks give discovery and supply further particulars of their defence and cross-claim and consequential orders. The notice of motion was returnable on 15 August 1989. Before the notice of motion was dealt with, Mr and Mrs Franks applied to have the proceedings transferred to the Supreme Court.
   The application to the Supreme Court

4. On 14 August 1989, Mr and Mrs Franks filed a summons in the Supreme Court of New South Wales, returnable on 4 September 1989, seeking an order that the proceedings in the District Court be removed to the Supreme Court. The application was made pursuant to s.145 of the District Court Act, 1973 (N.S.W.) which provides:
   

"145. Proceedings may, upon the application of a party, be removed into the Supreme Court by order of the Supreme Court upon such terms as to payment of costs, giving security for the amount claimed or costs, or otherwise, as the Supreme Court thinks fit."

1. On 30 October 1989, the debtors applied to the Supreme Court for, and were granted, leave to discontinue their summons.
   Further proceedings in the District Court

2. As has been noted, the notice of motion filed on 24 July 1989 was returnable on 15 August 1989. On that day, Mr and Mrs Franks consented to orders that, within 14 days, they give discovery and supply further particulars. They also consented to an order that, if they failed to comply with these orders, their defence and cross-claim "be struck out".

3. On 1 September 1989, upon the failure of Mr and Mrs Franks to comply with the orders made on 15 August 1989, GIO applied for judgment in accordance with its notice of motion. On 1 September 1989, the District Court adjudged that GIO recover the sum of $57,829.64, including costs.

4. On 12 September 1989, Mr and Mrs Franks filed a notice of motion seeking to set aside the judgment and an order "restoring" their defence and cross-claim. On 13 October 1989, the District Court ordered that the defence and cross-claim be "struck out nunc pro tunc" and dismissed the notice of motion.
   Further evidence in this Court

5. On 18 June 1990, Mr Franks filed an affidavit sworn by him on 14 June 1990 giving evidence, in primary form, of the circumstances surrounding his entry into the loan transaction the subject of the District Court judgment and of loss he alleges he suffered in that connection.
   The contentions of the parties in the present application

6. As has been said, GIO now seeks a declaration that Mr and Mrs Franks "have failed to satisfy the Court that they have a counter-claim, set-off or cross-demand equal to or exceeding the amount of the judgment. . . (debt)". However, as the argument progressed, it emerged that the real issue between the parties was whether the cross-claim alleged by Mr and Mrs Franks was a counter-claim "that (they) could not have set up in the action or proceeding in which the judgment. . . was obtained." GIO contends that the cross-claim could have been so set up, but Mr and Mrs Franks argue that, because their cross-claim exceeded the jurisdiction limits of the District Court, it was not open to them to set up their cross-claim in the District Court action.
   Authorities dealing with the construction of s.40(1)(g)

7. The meaning of the condition precedent stated in s.40(1)(g) that the counter-claim, set-off or cross-demand could not have been set up in the action or proceeding in which the judgment was obtained, has been considered in several decided cases. (On the general operation of the provision, see Ebert v. The Union Trustee Company of Australia Limited (1960) 104 CLR 346 at p 350.) It is convenient to refer first to some of the English cases.

8. In In Re a Debtor (1914) 3 KB 726, the judgment debtor, after service of a bankruptcy notice, obtained an assignment to himself of a debt due from the judgment creditor. It was held that, even assuming that the debtor could have, had he so chosen, obtained the assignment in time to set up the counter-claim in the action, the bankruptcy notice must be set aside inasmuch as the debtor could not, as matters stood at the time the action was proceeding, have set up the counter-claim.

9. In Re a Debtor (1947) LJR 1413, judgment was signed against the debtor in King's Bench on the date on which his alleged counter-claim became enforceable. It appears that it was open to the debtor, before judgment was signed, to apply to the master in the King's Bench action for leave to defend. Lord Greene, M.R., said (at pp 1415-6):
   

"It seems to me what he has to do - and the burden of proof is on the debtor under the paragraph - is to satisfy the court that he could not set up the counterclaim in the action, and that really means that he was unable to set it up. It is perfectly true he could only set it up if the master exercised in his favour his discretionary power. But he fails to satisfy the court in my judgment that the counter-claim could not be set up, that he was unable to set it up, because not only does he fail to show that he could not have obtained leave from the master to set it up, but he even fails to show that he ever tried to ask the master to exercise his discretion.

He therefore fails, in my judgment, on the true construction of this paragraph to satisfy the court that he could not set up that counterclaim. His power to set it up depended on the exercise of a discretionary power which the master undoubtedly had; but he cannot satisfy the language of the section to my mind - and it seems to me clear - either that in fact or in law was it impossible to set this up in the action. In my judgment he fails to do that, because there was a means by which he could make an application which the master not only could have entertained but, in my judgment in all probability, indeed almost certainly, would have entertained in order to do justice if he was satisfied that there was substance in the counterclaim."

1. In Re A Debtor (1981) 1 WLR 1205, the Court of Appeal left open the question whether a set-off, counterclaim or cross-demand which the debtor had contractually agreed not to raise, could be relied on (at p 1211; p 1212).

2. In Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd. (1980) 44 FLR 135, Lockhart J. said (at p 139):
   

"The words 'that he could not have set up in the action or proceeding in which the judgment or order was obtained' mean 'which he could not by law set up in the action': see Re Jocumsen; Re A Debtor per Avory J. and Re Stockvis especially per Lukin J. where his Honour said: 'I take a counter claim, set off, or cross demand which could not be set up as one which, from the point of time, or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained. . . Mere failure to take advantage of the opportunity can hardly be said to be inability'."

1. In Re Racheha; Ex parte Antonios (1980) 49 FLR 423, a decision to which attention was properly drawn by counsel for Mr and Mrs Franks, the creditor commenced proceedings against the debtor in the Court of Petty Sessions. The debtor purported to file a notice of set-off and counterclaim in an amount in excess of the jurisdiction of the Court of Petty Sessions. It was held that, since the debtor could have applied to have "the action" in the Court of Petty Sessions transferred to the District Court and he could then have contested his counterclaim, set-off or cross-demand in "the action", the debtor failed to satisfy the requirements of s.40(1)(g). Lockhart J. said (at pp 428-9):
   

"It was submitted on behalf of the judgment debtor that, if he invoked the procedure afforded by s.12(2), the action in the District Court would have been a different action from the action in the Court of Petty Sessions and that, in the result, his counterclaim, set-off or cross demand propounded in the District Court would have been one that he could not have set up in the action in which the judgment was obtained, namely the action in the Court of Petty Sessions.

Upon a defendant invoking the procedures afforded by s.12(2), the Registrar of the Court of Petty Sessions is required to order that 'the action' be transferred to the District Court; and when that order is made the Registrar of the Court of Petty Sessions is required to transmit the whole record of 'the action' to the Registrar of the District Court: s.12(3).

After 'the action' has been transferred to the District Court, all proceedings 'therein' shall be taken in the District Court 'as if the action had been commenced therein on the date on which the plaint commencing the action was filed': s.12(4). It is plain that it is the same action that is transferred from the Court of Petty Sessions to the District Court, pursuant to s.12, and continued in the District Court. The very notion of 'transfer' suggests this, as does the language of s.12 itself. Indeed, any other construction would lead to curious and anomalous results. One example suffices. A plaintiff may file a plaint in a Court of Petty Sessions one month before the expiration of the time limited by the relevant limitation of actions legislation; yet, because he sues for more than $1,250 he may find himself, say, three months later, necessarily in the District Court if the defendant calls in aid s.12. If his action in the District Court is a fresh action, the defendant may plead the Statute of Limitations and defeat the plaintiff's claim. That would be a conclusion which I would be loath to draw in the absence of the plainest language.

Section 123 is couched in language that clearly assumes the continuance in the District Court of the same action that was commenced in the Court of Petty Sessions. All that has happened is that the action is to be continued in the District Court because of the amount of money involved.

If s.40(1)(g) had used the words 'being a counterclaim, set-off or cross demand that he could not have set up in the court in which the judgment or order was obtained' probably the result would be different; but this is not the language of par (g)

The relevant provisions of the District Court Act and the District Court Rules

1. The relevant jurisdictional limits of the District Court are dealt with by the following provisions. By s.44(1)(a) of the District Court Act, the District Court has jurisdiction to hear and dispose of any personal action at law where the amount claimed does not exceed $100,000, whether on Balance of account or after an admitted set-off or otherwise. By s.50, a plaintiff who has a cause of action for more than the amount for which an action may be brought on that cause of action may abandon the excess. (A similar provision is found in the District Court Rules dealing with cross-claims: see Part 20 r.2.) By s.51(2), where the Court would not have jurisdiction to hear and dispose of an action or cross-claim by reason only of the fact that the amount claimed exceeds $100,000, the Court shall have jurisdiction to hear and dispose of that action or cross-claim if a party to the action filed a memorandum of consent in respect of the action or cross-claim.

2. Section 145 of the District Court Act provides for the transfer of proceedings to the Supreme Court in the terms previously stated. Removal depends upon the exercise of the Supreme Court's discretion, but it has been said that the discretion appears to be "extremely wide" (see O'Grady, District Court Practice at p 229).
   Were the debtors "unable" to set up their cross-claim in the action in which judgment was obtained

3. In my opinion, it cannot be said that Mr and Mrs Franks were "unable" to set up their cross-claim in the proceeding in the District Court. It was clearly open to them to pursue their application under s.145 of the District Court Act to transfer the proceeding to the Supreme Court. They elected not to do so, but there is no reason to suppose that the discretion to transfer would not have been exercised in their favour if they had requested the transfer. That being so, the present case falls squarely within the observations of Lord Greene previously cited. This result is also consistent with the reasoning of Lockhart J. in Re Racheha above.
   Orders proposed

4. I propose to grant appropriate relief to GIO, with costs. I will make the following orders:
   

1. Declare that the Court is not satisfied that the debtors have a counter-claim, set-off or cross-demand as is referred to in s.40(1)(g) of the Bankruptcy Act 1966.

2. Order that the debtors pay the creditor's costs of the application.