Gertig v Davies

GERTIG v DAVIES & ANOR
[2003] SASC 86
Full Court: Doyle CJ, Mullighan and Besanko JJ

DOYLE CJ: The outcome of this appeal turns on the meaning to be given to s 58(3) of the Bankruptcy Act 1966 (Cth) (“the Act”). It provides as follows:
“(3)Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.”
The expression “the property of the bankrupt” is defined by s 5 as follows:
“the property of the bankrupt, in relation to a bankrupt, means:
(a)except in subsections 58(3) and (4):
(i)the property divisible among the bankrupt’s creditors; and
(ii)any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt; and
(b)in subsections 58(3) and (4):
(i)the property, rights and powers referred to in paragraph (a) of this definition; and
(ii)any other property of the bankrupt.”
Background
Mr Davies sued Mr Gertig for damages for personal injuries sustained in a motor vehicle accident. On 23 August 2001, after a trial, a Judge of this Court directed that judgment be entered for Mr Davies against Mr Gertig for damages and interest amounting to $314,124.30. That judgment has not been drawn up and entered.
On 28 August 2001 the Judge ordered that Mr Davies recover costs against Mr Gertig up to fourteen days after 14 December 2000 (the date of filing of a Rules of Court offer by Mr Gertig), and that Mr Gertig recover costs against Mr Davies thereafter. He ordered that the lesser amount of costs be set-off against the greater amount. He ordered a stay of execution of the judgment for damages. It was anticipated by all parties that there would be a substantial balance owing to Mr Gertig on account of costs, after the set-off ordered by the Judge.
On that day counsel for Mr Gertig also sought an order under r 101.01(1)(c) of the Supreme Court Rules that the balance of costs payable to Mr Gertig be set-off against the damages payable by Mr Gertig to Mr Davies. It was likely that if that order was made nothing would be payable to Mr Davies on account of damages.
The Judge deferred a decision on that application. The Judge was told that Mr Davies owed money to a number of creditors. Mr Davies became bankrupt on his own petition, the bankruptcy commencing from 23 January 2002.
The Official Receiver stated that he had no interest in the damages payable to Mr Davies.
Later the Judge heard submissions on the application for an order that costs be set-off as against damages, that application having been made on 28 August 2001.
On appeal it was common ground that Mr Gertig’s entitlement to costs was a debt provable in Mr Davies’ bankruptcy. This had been disputed by Mr Gertig before the Judge below, but the Judge’s decision that the costs order gives rise to a provable debt is now accepted.
On 6 August 2002 the Judge held that s 58(3)(a) of the Act prevented him from ordering that the costs payable by Mr Davies be set-off against the damages payable to Mr Davies. He summarised the submission before him, and gave his answer to that submission as follows (at [130-132]):
“Mr McNamara QC put an interesting argument as to the application of s 58(3)(a) to the effect that to obtain a set-off ‘in respect of a provable debt’ is not to ‘enforce’ a ‘remedy’ against the person or the property of the bankrupt within the meaning of s 58(3)(a). This argument was predicated upon his submission, soundly based in the authorities to which I have referred, that a true set-off, that is, a set-off of the kind provided for in the statutes of set-off, is not a ‘remedy’ which may be enforced, but operates by way of a defence or plea in bar which, if successful, reduces the claim against which it operates.
However, I think that to approach s 58(3)(a) on a footing that the words ‘to enforce any remedy’ are not apt to include an order for a set-off made pursuant to SCR r 101.01(1)(c), would be to construe the phrase too narrowly.
Section 58(1)(3) [sic] of the Act is clearly an expression of the legislative intention to confine a bankrupt’s creditors, whose debts are provable in bankruptcy, to their right to so prove. Against that background, to allow a set-off in the circumstances of this case, in practical terms, would be to circumvent that intention. In the broad sense, a set-off of the kind which may be ordered under SCR r 101.01(1)(c) affords to the party obtaining it a ‘remedy’, namely payment of the costs by way of a reduction, pro tanto, of the judgment.”
The Judge took the view that s 58(3)(b) of the Act was not an obstacle to the making of the order. This was because the application for the order was made before Mr Davies became bankrupt, and so even if the making of the application was a “fresh step” in a “legal proceeding in respect of a provable debt” (the provable debt being the costs and the legal proceeding being the application for an order for set-off), that had occurred before Mr Davies became bankrupt.
The Judge granted Mr Gertig leave to appeal.
Before us, Mr McNamara QC for Mr Gertig renewed the submission rejected by the Judge in relation to the meaning of s 58(3)(a). He relied again on the submission in relation to subpar (b), but submitted that if the Court did not accept that submission his client should be allowed an opportunity to seek leave to proceed from the Federal Court.
The statutory scheme
Section 58 of the Act plays an important part in the scheme of the Act. The statutory scheme was outlined by Brennan CJ, Gaudron and McHugh JJ in Cummings v Clairemont Petroleum NL (1996) 185 CLR 124 at 132 as follows:
“The Act follows the pattern of earlier bankruptcy law. Broadly, and not precisely, the effect of bankruptcy is to divest a bankrupt of his property, to vest that property in a trustee and to make it available for the payment of provable debts. The right to commence or take a fresh step in legal proceedings or to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt are, in general, denied to creditors when sequestration is ordered (s 58(3)). The right of the bankrupt to prosecute proceedings that he has commenced is restricted by s 60(2). The bankrupt’s concerns as to the administration of his property and the payment of his creditors can be addressed by the Court in the exercise of its supervisory jurisdiction over the conduct of the trustee. Section 178 of the Act provides:
‘If the bankrupt, a creditor or any other person is affected by any act, omission or decision of the trustee, he may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.’ ”
(Footnotes omitted.)
The purpose of the statutory scheme was summarised by Hill J in Re McMaster (1991) 105 ALR 156 at 159 as follows:
“The modern bankruptcy law serves three purposes. The first is to ensure that the assets of the bankrupt are distributed rateably among creditors. The second, which is interrelated to the first, is to ensure that one creditor does not obtain an undue advantage over other creditors. The third is to bring about the discharge of the debtor from future liability for his existing debts, so that the debtor may start afresh.” (Footnote omitted.)
Section 58(1) of the Act vests the (divisible) property of the bankrupt in a trustee, and section 58(3) of the Act protects a bankrupt and the property of the bankrupt against the enforcement of remedies and enables the Court to control proceedings in respect of a provable debt.
The part played by s 58(3) is to prevent a creditor from obtaining an advantage over other creditors (by enforcing remedies against person or property) and to prevent the wasteful dissipation of funds on legal proceedings: see Storey v Lane (1981) 147 CLR 549 at 557 Gibbs J. To the extent that s 58(3) protects property not divisible among creditors (see s 116(2) of the Act) the purpose appears to be to preserve to the bankrupt a modest level of resources to enable the bankrupt to make a living and to maintain himself or herself and any dependants, and also to protect certain favoured kinds of savings (such as life insurance policies) and certain other property such as the fruits of a claim for damages for personal injury: see Re Heenan (1992) 116 ALR 146 at 150-151 French J. Assets acquired with the proceeds of a damages claim are also excluded from the property divisible among creditors: s 116(3).
It is convenient at this stage to make some points about the issue before the Court, referable to the statutory scheme.
If Mr Gertig’s claim is successful, Mr Davies’ award of damages for personal injuries will certainly be reduced and probably will be eliminated. An asset which Parliament has seen fit to withhold from the creditors will be diminished or lost. The asset will go in reduction of a provable claim by a creditor.
However, the statutory protection of the damages operates only in relation to creditors and possible debts. As far as I can tell, the damages are available to satisfy a debt incurred by the bankrupt after his bankruptcy, but not, of course, if he is bankrupted a second time.
If Mr Gertig’s claim succeeds the creditors generally will benefit, to the extent that his claim is no longer a claim against property of Mr Davies that vests in the trustee. While Mr Gertig will secure a better outcome than other creditors, that will not be at the expense of other creditors because they have no right of access to the asset represented by the award of damages.
If the action in which the award of costs was made was a right of action that vested in the trustee, it seems that s 86 of the Act would operate to require that there be a set-off as between the award of damages and the order for costs. Before the date of the bankruptcy the Judge ordered that judgment be entered for Mr Davies for damages, and made the order as to costs. The judgment for damages and the order for costs arise out of the one action and appear to me, within the meaning of the authorities, to be the result of mutual dealings between Mr Davies and Mr Gertig. A set-off under s 86 is not available only because the damages award does not vest in the trustee.
The order that Mr Gertig seeks would give Mr Gertig an advantage not available to most creditors, but the principle of set-off in bankruptcy is well established and is seen as effecting “substantial justice”: see Gye v McIntyre (1991) 171 CLR 609 at 618-619.
The power to order a set-off of costs
Rule 101.01(1) of the Supreme Court Rules sets out certain powers that the Court may exercise when awarding costs. Subpar (c) provides that the Court may:
“direct whether or not the costs are to be set-off.”
Authority supports the view that the Rule reflects an inherent power possessed by the Court, reflecting a longstanding practice: Pryor v Hennessy [1973] VR 221; Burke v Lunn [1976] VR 268 and Watkins Ltd v Ranger Uranium Mines Pty Ltd (1985) 35 NTR 27. The same view has been taken in England: see Derham, Set-Off (2^nd ed OUP 1996) par 1.4.3 and the cases cited there. The author says that a set-off in such a case:
“... is allowed in the discretion of the Court as part of its inherent jurisdiction.”
This view is supported by judges of this Court, as is the view that the power extends to ordering that costs be set-off against an award of damages in the action in which the costs are awarded: McGregor-Dey v SACAE and Anor (1993) 171 LSJS 290; Settlement Wine Co Pty Ltd v National and General Insurance (No 2) (1994) 175 LSJS 282.
I proceed on the basis that in the present case the Court has an inherent power to order that Mr Davies’ liability to pay costs be set-off against Mr Gertig’s liability to pay damages, and that in the circumstances of the case it would be appropriate to so order, subject to the point now in issue and subject to two other matters. In this respect I agree with the Judge below: at [89]. The first matter to which I just referred is the claim by Mr Davies’ solicitors for a lien on the judgment sum to secure the payment of costs and disbursements claimed by them in connection with the proceedings. The Judge has not yet ruled on that claim. The second matter is the possibility of any person claiming on any other basis an entitlement to payment from the judgment money. As far as I am aware, no other person has made such a claim.
Mr McNamara submitted that Mr Gertig is entitled to rely on a true equitable set-off, in the alternative to a set-off in exercise of the Court’s inherent power. As to this kind of set-off, see Meagher Gummow and Lehane, Equity Doctrine and Remedies (3^rd ed Butterworths 1992) p815.
It is not necessary to deal with this submission. My view is that if s 58(3) of the Act is an obstacle to the making of the order, it is an obstacle whether the order is made in exercise of the Court’s inherent power or in the exercise of the Court’s equitable jurisdiction.
How a set-off operates
I agree with the Judge below that a set-off is not effective or operative until the Court so orders. The Court has a discretion in that respect. In that sense, a set-off operates procedurally. But to say that is to say no more than the set-off is not self-executing.
The sequence of events will often be, as happened here, that an order is made that judgment be entered for a party for a stated amount, as a result of the Court’s decision on a claim. This will be followed by orders as to costs, often made when the order is made that judgment be entered, but sometimes made later. Orders as to the setting-off of costs against judgment would usually be made when the orders for costs are made, but not necessarily. It is conceivable, although unlikely, that if the liability to pay costs and the amount of costs payable was known when the Court directed that judgment be entered on the claim, there might only ever be a single judgment for an amount that reflects the monetary outcome of the direction that costs be set-off against the judgment. But even then that outcome would depend on the Court first directing that there be a set-off. In a case in which it is ordered that costs be set-off against an amount for which judgment has been directed to be entered, presumably that direction would be recalled and a fresh direction or order would be made, reflecting the impact of the decision to order a set-off.
This serves to emphasise the procedural nature of a set-off. However, to my mind it also emphasises that the process is one by which, in the case of a money claim, the Court determines for whom judgment will be entered (in the sense of an enforceable judgment) and for how much. In that sense there is a substantive aspect to the entitlement to a set-off, and to the ordering of a set-off.
It is not easy to classify a right of set-off as either substantive or procedural, as Meagher Gummow and Lehane acknowledge at 825 and at 818. They are there referring to an equitable set-off. Set-off in bankruptcy under s 86 of the Act has been said to have a substantive effect because if there is a balance payable to the trustee, only that balance of the amount owing is payable: McIntyre v Gye and Perks (1990) 22 FCR 260 at 270 Gummow and von Doussa JJ. In my view similar reasoning applies to a set-off in exercise of the Court’s inherent power. Such a set-off appears to operate in the same manner. See also Derham (above) at 57, where that author expresses a slightly different view in relation to an equitable set-off.
I do not need to resolve this controversy about the nature of set-offs. The point that is relevant is that the entitlement to a set-off of costs against damages recoverable by judgment can operate to extinguish or reduce the entitlement under the judgment against which the costs are set-off, although this can occur only after and consequent upon an order by the Court. The Court can control the situation until it makes a decision on an application for a set-off by staying enforcement of the judgment on the claim, if it has directed that judgment be entered. To that extent a set-off has a substantive effect. It operates before the Court finally determines whether a judgment will be entered or enforced and for how much.
Effect of s 58(3)
I accept Mr McNamara’s submission that after Mr Davies’ bankruptcy, Mr Gertig continued to have a claim against Mr Davies which could be the subject of a set-off under r 101.01(1)(c). If the Judge intended to decide otherwise (I am not sure that he did) I respectfully disagree.
Although it is convenient to speak of a debt provable in bankruptcy as merging in the bankruptcy, or as converted into a right to prove in the bankruptcy, the amount owing by the bankrupt can still be described as a debt, and is so referred to in the Act: Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 579 at 594. This is so, even though the bankrupt is no longer obliged to pay the debt, and is disabled from doing so. In my view the supervening bankruptcy does not, of itself, produce the result that Mr Gertig no longer has an entitlement to a debt that is capable of being set-off against Mr Davies’ entitlement to damages.
Will the making of an order that Mr Davies’ liability to pay costs to Mr Gertig be set-off against Mr Gertig’s liability under the direction that judgment be entered for damages, amount to enforcing a “remedy against … the property of the bankrupt in respect of a provable debt”?
Mr McNamara submits that to make the order is to do no more than to recognise a “defensive right or entitlement” in Mr Gertig. He submits that the right asserted is defensive and not remedial. It is a shield, not a sword. The right can never result in an order for the payment of money to Mr Gertig, or in anything that can be enforced in his favour. It can only diminish or eliminate the entitlement of Mr Davies to an order against Mr Gertig. On that basis he submits that what is being enforced is not a remedy.
In my view that is too narrow an approach to the meaning of the word “remedy”, at least in this context. The term “remedy” is well able to be read as embracing an order for a set-off, however precisely one may analyse the nature of such an order.
However, in my opinion the making of an order that costs be set-off against damages is not the enforcement of a remedy against the property of Mr Davies. It may be a remedy, but it is not a remedy against property. In my view the making of the order sought is a step in the process of determining whether an enforceable judgment will be entered in favour of Mr Davies, and if so for what amount. The process of determining whether or not a set-off should be ordered is not the enforcement of a remedy against property of Mr Davies, but a process of reconciling or adjusting mutual claims as between Mr Davies and Mr Gertig arising out of the proceedings brought by Mr Davies. As I have said, the Court is determining whether an enforceable judgment will be entered in favour of Mr Davies, and if so for what amount. It does not seem to me to be accurate to call that a process of enforcing a remedy against property of Mr Davies, the property being the damages that the Court has determined are recoverable by him.
In other words, in my view the focus should be on the scope of the concept of a remedy against property of the bankrupt, rather than on the scope of the concept of a remedy as such.
I recognise that the order for a set-off is sought after the Court has decided that Mr Davies is entitled to a judgment for damages, and after the Court has determined that Mr Gertig is entitled to an order for costs. But the sequence in which the events occur does not alter the substance of the process in which the Court is engaging. And, as I have already said, in substance the Court has yet to determine whether or not an enforceable judgment will be entered for Mr Davies, and if so for what amount. In other words, the Court has not yet determined what amount is payable as between Mr Davies and Mr Gertig, although it has determined that on the one side there is an entitlement to damages in a specified amount, and on the other side an entitlement to costs in an amount yet to be determined and specified.

I gain some slight support for this view from the reasoning of Lockhart J in Taylor v Secretary, Department of Social Security (1988) 79 ALR 327. In that case it was determined that Ms Taylor had been overpaid a widow’s pension, and that the overpayment would be recovered by deductions from continuing payments of her pension. She later became bankrupt. The issue on appeal was whether the fact that she was bankrupt prevented the deduction from her pension of amounts representing the overpayments. Much of the reasoning of the Full Court of the Federal Court was concerned with provisions of the Social Security Act. However, one of the submissions advanced was that s 58(3) of the Act applied, and that the making of the deduction was the enforcement of a remedy against the property of Ms Taylor. Some of the deductions were made before the expression “the property of the bankrupt” had been amended to include property of the bankrupt other than property divisible among creditors, for the purposes of s 58(3) and (4) of the Act. But some of the deductions were made after that amendment. And so the issue that arises in this case arose in that case.
In part the reasoning of Lockhart J (at 340) was that the deduction was made pursuant to a statutory command in the Social Security Act. But Lockhart J also reasoned (at 341) that the making of the deduction was no more than an administrative adjustment, and was not an enforcement of a remedy against the property of Ms Taylor. On the other hand, Beaumont J appears to have rested his decision in favour of the Commonwealth entirely on the provisions of the Social Security Act, and to have regarded the position of the Commonwealth as analogous to that of a secured creditor. Wilcox J agreed with each of them.
In Fraser v Deputy Commissioner of Taxation (1996) 138 ALR 689; 69 FCR 99 the Court considered the application of s 58(3) of the Act to an application made by the Commissioner under the Family Law Act for the setting aside of an under made under that Act for the transfer to a woman of property in which her husband, later bankrupted, had an interest. (The way in which that interest arose does not matter.) The Court held that the making of the application was a legal proceeding for the purposes of s 58(3)(b) but was not the enforcement of a remedy for the purposes of s 58(3)(a). At ALR 699, FCR 111 Beaumont J said that an obvious example of the enforcement of a remedy against the property of a bankrupt would be “to levy execution against the lands or goods of the bankrupt.” He said that the words “enforcement” of a “remedy” should be “interpreted as having their settled meaning.” He took the view that the “absolute bar” imposed by s 58(3)(a) should not be read too widely, as I understand him. I acknowledge the force of the point he makes, but am cautious about accepting the view that s 58(3)(a) is limited to traditional forms of execution. However, his reasons were agreed in by the other two members of the Court, and the decision is one which this Court should follow.
A point that may be made in support of his view is that Parliament has not chosen words apt to embrace any means at all of obtaining payment of a provable debt, but has chosen to use an expression with a limited reach and which, at least in its core area, clearly does refer to traditional forms of execution.
I do not treat this decision as determining the issue, because it is not clear that Beaumont J meant to hold that the provision can only apply to traditional forms of execution. My impression is that what he meant was, as he said, that such a thing was an “obvious example” of the enforcement of a remedy, without necessarily being the only thing that would fall within s 58(3)(a). Nevertheless, this decision does support the view that I favour.
I have not been able to find any other decisions in point, nor did counsel.
My conclusion that the making of an order for a set-off is not the enforcement of a remedy against the property of Mr Davies is, I consider, supported by the fact that to so decide does not run counter to the policy or purposes behind s 58 of the Act. The Judge said that s 58(3) expresses a legislative intention to confine provable creditors to their right of proof, and that to allow a set-off in the present case would be to circumvent that intention.
It is true that creditors of the bankrupt with claims provable in bankruptcy are given a right to prove in the bankruptcy, and are subjected to restrictions on their ability to enforce their debts in the usual way. Section 58 in particular is central to that part of the legislative strategy. Nor is s 58(3) to be interpreted narrowly. To the contrary, it should be interpreted in a manner that reflects the statutory policy referred to. But in the end, the issue is the extent of the prohibition created by s 58(3). The provision is the legislative expression of the intention to confine creditors to their right to prove, and the extent to which they are confined is to be measured by the scope of that provision. Other provisions of the Act, such as the statutory provision for a set-off, make it clear that the Act does not in all circumstances confine creditors to their right to prove.
Mr Davies’ claim for damages does not vest in his trustee. The proceeds of his claim for damages are not divisible among the creditors in his bankruptcy. In that sense the entitlement to damages is protected from his creditors. But s 116(2)(g) of the Act does no more than provide that the damages are not property divisible among the creditors. There is no legislative provision to the effect that the damages are to be protected in any other way.
Mr Gertig’s entitlement to costs arises from the action in which Mr Davies claimed damages, and is based on the events that occurred in that action. If his entitlement to costs was not a provable debt, there would be nothing to prevent Mr Davies from obtaining the order for set-off that he now seeks. That points up the fact that the damages are not “protected property”, except in the sense that they are not divisible among the creditors in the bankruptcy. Mr Gertig makes his application to the Court for an order for set-off not in his capacity as a creditor of the bankrupt, but in his capacity as a defendant in the action, and with reference to events arising in the course of the action.
If an order for set-off is made, the making of that order reflects events that have occurred in the course of an action between Mr Davies and Mr Gertig. My view is that if viewed this way, to allow a set-off is not to circumvent the statutory intention. The set-off arises from the action in this Court, not from the fact that Mr Gertig is a creditor of Mr Davies.
There are some other points that may be made here. If a set-off is allowed, as I noted earlier, Mr Gertig will be in a better position than other creditors. On the other hand, that is not achieved at the expense of other creditors. Indeed, they all benefit because his claim will no longer be a claim for a share in the assets held by the trustee.
For those reasons, my view is that my interpretation of s 58(3)(a) of the Act does not produce a result that is contrary to the statutory scheme, and to the extent that that supports the conclusion that I have reached, I rely upon it.
I therefore conclude that s 58(3)(a) does not prevent the Court from making the order that Mr Gertig seeks.
I turn now to s 58(3)(b).
I consider that the expression “legal proceeding” has its usual meaning, and is not limited to proceedings under the Act, by virtue of the definition in s 5 of the Act: see Green v Schneller [2001] NSWSC 897; (2001) 189 ALR 464 at [9] Barrett J.
The proceedings by Mr Davies when instituted were not a “legal proceeding in respect of a provable debt.”
Once Mr Gertig obtained an order for costs, can it be said that those proceedings became a legal proceeding in respect of a provable debt? In Fraser at ALR 699-703, FCR 112-115 Beaumont J explained why this provision should be given a relatively liberal or wide meaning. He proceeded on the basis that the words “in respect of” should be given:
“… a wide meaning in order to promote the policy of the Act, which was to assist in ensuring that the assets of a bankrupt were distributed in the interests of creditors generally and to prevent one creditor obtaining an undue advantage over the others …”.
See also Green v Schneller at [14]-[15].
I begin by making the point that the action by Mr Davies could be said to be in respect of a provable debt and also to be a proceeding for damages. I see no reason why it should be necessary to characterise the action exclusively as one thing or the other.
What then is the nexus between the proceedings and the costs order, which gives rise to the provable debt? The costs order was made in the proceedings, and is based on events that occurred in those proceedings. The amount of the provable debt will be determined in those proceedings, albeit by a determination of a subsidiary matter after judgment. I consider that the action can now be said to be a legal proceeding in respect of a provable debt, because of the relationship between the action and the provable debt.
Moreover, the making of the application for an order for costs can also be regarded as the commencement of a legal proceeding in respect of a provable debt. Once again, I see no reason why the concept of a “legal proceeding” should be read as limited to a separate action or proceeding such as the action for damages. There is no reason why the expression cannot apply to a distinct step in an existing action, such as an application for costs. That application can be called a “legal proceeding”.
But the action itself, and the application for costs, were each commenced before Mr Davies became bankrupt. Accordingly, they are not caught by the prohibition against the commencement of “any legal proceeding.”
Accordingly, the issue is whether the hearing before the Judge, at which Mr Gertig pursued his application for an order for set-off, was the taking of a fresh step in the relevant legal proceeding.
As the Judge pointed out, the application for the order for a set-off was also made before the bankruptcy commenced. It was made orally by counsel for Mr Gertig on 28 August 2001. But in my view the “fresh step” of claiming an order for a set-off was not completed on the day on which the application was made orally by counsel. That step was still being taken when the Judge heard submissions on a later day. I would not read the reference to taking “any fresh step” as referring only to the oral making of the application. I would read it as extending to the hearing of the application and to the making of a decision on the application. Although the fresh step began before Mr Davies became bankrupt, it continued after he became bankrupt, and so in my opinion was still taken (in that sense) after he became bankrupt.
If I am wrong in that, and the making of the application was itself the relevant fresh step, I would nevertheless hold that the pronouncement of the order for a set-off is itself a fresh step. In other words, I would distinguish between the application and the order. I appreciate that the order is made by the Court, while the application was made by counsel for Mr Gertig. But an order pronounced on an application made by Mr Gertig remains, in my opinion, a step in the proceeding taken by Mr Gertig. In other words, I would regard an order made on application by a party as a step in the proceedings by that party.
In reaching these conclusions I am influenced by the consideration that s 58(3)(b) should be read liberally, its purpose being to give the Federal Court the ability to control proceedings in respect of a provable debt, in the interests of creditors generally.
For those reasons in my opinion it was open to the Judge to make the order for a set-off, but only if Mr Gertig obtained leave from the Federal Court to take the “fresh step” of applying for the order, or of having the order made on his application.
It was not disputed before us that leave can be granted only by the Federal Court: see Green v Schneller at [29]. Accordingly, an application will have to be made to that Court for leave.
Conclusions
I would allow the appeal, set aside the order dismissing the application for a set-off, and order that the matter be remitted to the Judge for further consideration in light of these reasons. On my approach Mr Gertig will have to obtain leave to proceed from the Federal Court. It may be that Mr Davies’ solicitors will also need leave to pursue their claim for a lien, but I emphasise that we heard no submissions on that point and I express no view on it.
MULLIGHAN J: I agree that the appeal should be allowed for the reasons given by the Chief Justice. I also agree with the orders proposed by him.
BESANKO J: This appeal raises questions as to the proper interpretation of s 58(3) of the Bankruptcy Act 1966 (Cth) (“the Act”). That subsection provides as follows:
“(3)Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.”
The expression “the property of the bankrupt” is defined in s 5 of the Act. It is unnecessary to set out the definition.
The Chief Justice has set out the facts in this matter and I gratefully adopted his statement of the facts. For the reasons he gives, I agree with the Chief Justice that s 58(3)(a) of the Act does not prevent the Court from making the order that Mr Gertig seeks. I also agree with the Chief Justice that Mr Gertig’s application is not caught by the prohibition in s 58(3)(b) against the commencement of “any legal proceeding”. However, I respectfully disagree with the conclusion of the Chief Justice that the hearing of the application or the making of a decision on the application constitutes a “fresh step” in the relevant proceeding.
The application by Mr Gertig for an order that his entitlement to costs be set-off against Mr Davies’ entitlement to damages (“the relevant order”) was made orally by counsel for Mr Gertig on 28 August 2001. It is not suggested that it was inappropriate to make the application at that particular time or that the application fell foul of the Rules of Court in some way. Counsel for Mr Davies opposed the making of the relevant order and said that Mr Davies had other creditors and that the order sought would put Mr Gertig in a position of priority in terms of Mr Davies’ other creditors.
The trial Judge raised a question as to how long it would take the respective parties to tax their costs. The trial Judge ordered a stay of execution of the judgment in favour of Mr Davies. The trial Judge also made an order that in relation to the respective orders for costs “the lesser amount of costs be offset against the greater amount of costs payable”. The trial Judge indicated that he was not prepared to make the relevant order at that time.
Mr Gertig’s solicitors prepared a Short Form Bill of Costs, and that Bill of Costs was served on Mr Davies on 7 September 2001. By letter to Mr Gertig’s solicitors dated 24 September 2001 the solicitors for Mr Davies made a claim for (plaintiff’s) costs in the sum of $54,631.57. By letter to Mr Gertig’s solicitors dated 3 October 2001, the solicitors for Mr Davies indicated that they would not agree to a number of items in Mr Gertig’s Short Form Bill of Costs.
On 19 December 2001 Mr Gertig’s solicitors issued an application in the action supported by an affidavit that the Court exercise its discretion to award an interim lump sum to Mr Gertig in lieu of any taxed costs (see r101.01(1)(a) Supreme Court Rules 1987), that an interim allocatur be signed in favour of Mr Gertig in the amount of the interim lump sum and that Mr Gertig’s entitlement to such interim allocatur be offset against the judgment, damages awarded and costs order made in favour of Mr Davies.
The application was listed for a hearing before the Court on 24 January 2001.
Mr Davies was declared bankrupt on his own petition, the sequestration order operating as from the preceding day, that is, 23 January 2002.
The application for the relevant order was made on 28 August 2001 well before Mr Davies was declared bankrupt. It was followed by the interlocutory application issued on 19 December 2001. It is not suggested that Mr Gertig must obtain other orders before he can obtain the relevant order. If he did need to do that then an application for such orders may well constitute a fresh step in the proceedings. If, on the other hand, Mr Gertig obtains the relevant order but it transpires that he must secure further orders to obtain the result that he ultimately seeks then any application for such further orders may well constitute a fresh step in the proceeding. However, that is not the issue before the Court. The issue before the Court is whether the hearing and determination of an application for the relevant order made before Mr Davies became a bankrupt is a fresh step in the proceeding taken by Mr Gertig. I do not think it is.
It is important to note that the words used in s 58(3)(b) are “fresh step” and not simply any “step” in the proceeding. It is also important to note that it is a fresh step taken by a creditor. Ordinarily a person takes a step in a proceeding by issuing an application seeking certain orders. It is possible to say that attendance at a hearing and the making of submissions is a step in the proceeding, but I do not think it can be said to be a fresh step. Nor do I think that it can be said that the act of a Judge in proceeding to consider and then determine a matter is a fresh step taken by a creditor.
I think that there are a number of matters which support the view I take, although I accept that they are not compelling. First, the time at which an application is heard will often be beyond the control of a creditor, and the time at which it is determined will almost certainly always be beyond the control of a creditor. Secondly, one would assume that any leave given would be for the taking of a step clearly defined in the grant of leave. I accept that it is possible to frame a grant of leave in this case, but I think there is some awkwardness about doing so. Thirdly, and this is a negative factor I suppose, I do not think the interpretation I propose runs counter in any way to the purposes of the statutory scheme (Re McMaster; Ex parte McMaster (1991) 33 FCR 70 per Hill J at 72 – 73). It is true that s 58(3)(b) is to be interpreted broadly, but at the same time I note the Legislature has not seen fit to frame the section in terms that clearly prohibit (without leave) any further action in the proceeding.
There appear to be no authorities of direct assistance. In the County Theatres and Hotels Ltd v Knowles [1902] 1 KB 480 the question was whether a defendant had taken a step in legal proceedings for the purposes of a subsequent application by the defendant for a stay under s 4 of the Arbitration Act 1889. An application by a defendant for interlocutory orders was a step in proceedings and the fact that by reason of a Rule of Court all relevant orders could be obtained on one summons issued by the plaintiff did not lead to a different result; the defendant had taken a step in the proceeding when he attended on the hearing of the summons and did not object. I do not think the cases involving the interpretation of the Rule of Court which required a party to a proceeding to give notice to his opponent of his desire to proceed if he had not taken any step in a proceeding for a year are of any assistance (Deighton v Cockle [1912] 1 KB 306; ANZ Banking Group Ltd v Computer Plus [1992] 1 VR 607). I note that in a bankruptcy case (Doran & Anor v Isaacs (1912) 12 SR (NSW) 699) the Court said that signing or entering judgment constituted the taking of a fresh step but there is no statement of general principle in the case. I do not think there is anything in the authorities which suggests that the conclusion I have reached having regard to the words of s 58(3)(b) of the Act is wrong.

The appeal should be allowed and the order dismissing the application for a set-off should be set aside. The matter should be remitted to the Judge for further consideration in light of these reasons.

[2003] SASC 86

25 March 2003