Guss, Joseph v Johnstone, Raymond

[1997] FCA 1222

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 293 of 1997

ON APPEAL FROM A JUDGMENT OF A SINGLE JUDGE OF THE FEDERAL
COURT OF AUSTRALIA

BETWEEN:	JOSEPH GUSS Appellant
AND:	RAYMOND JOHNSTONE Respondent
JUDGES:		RYAN, WHITLAM AND MARSHALL JJ
DATE OF ORDER:		13 NOVEMBER 1997
WHERE MADE:		MELBOURNE

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The appeal be dismissed.

1. In the event that a sequestration order be subsequently made on the basis of the bankruptcy notice issued on 19 September 1996, the respondent’s costs of this appeal shall form part of the petitioning creditor’s costs, but that otherwise the appellant pay the respondent’s costs of this appeal, such costs to be taxed in default of agreement.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 293 of 1997

ON APPEAL FROM A JUDGMENT OF A SINGLE JUDGE OF THE FEDERAL
COURT OF AUSTRALIA

BETWEEN:	JOSEPH GUSS Appellant
AND:	RAYMOND JOHNSTONE Respondent

JUDGES:	RYAN, WHITLAM AND MARSHALL JJ
DATE:	13 NOVEMBER 1997
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

THE COURT:  This appeal concerns a bankruptcy notice dated 19 September 1996 issued at the instance of the respondent, Raymond Johnstone, (“the creditor”) requiring the debtor, Joseph Guss, to pay the sum of $4,989.40 due under an order for costs in the Supreme Court of Victoria or to secure payment of, or compound for, that sum.  The debtor sought to set aside the bankruptcy notice relying on an affidavit sworn 13 December 1996 to the effect that he, a solicitor, had retained the creditor, a barrister, to act in relation to certain proceedings in the Supreme Court of Victoria in or about 1992 on behalf of Tropitone Furniture Co International Pty Ltd (“Tropitone”) and others including the debtor.

It was asserted that certain proceedings taken on the advice of the creditor and embodied in documents drawn by him were misconceived and should have been brought by the liquidator of Tropitone Furniture Co Pty Ltd (in liquidation) (“TFC”).  Fresh proceedings were instituted in the name of TFC but that was only done after the debtor and interests associated with him had agreed to pay the liquidator’s costs of those proceedings amounting to $11,898.57.  The fresh proceedings in which the creditor continued to act as counsel for Mr Guss and interests associated with him were settled on terms negotiated by the creditor and signed by Mr Guss.  It is alleged that, because of an omission from, or deficiency in, the terms of settlement, Tropitone and other persons and entities associated with it suffered further loss because of their resultant inability to recover all the goods to which it is said they should have been entitled had the terms of settlement been properly drawn.  Those damages, including consequential loss flowing from deprivation of the use of the goods, were estimated by Mr Guss to amount in all to $150,000.  The debtor also referred to an order for costs in his favour against the creditor in this Court which he estimated should result in his being entitled to an amount in the order of $2,500. 

Paragraph 12 of Mr Guss’ affidavit was in these terms:

The order referred to in the Bankruptcy Notice herein was an order made by the Full Court of the Supreme Court of Victoria in respect of the costs of an application by the Judgement Creditor for security for his costs in respect to an appeal by me from a decision by His Honour, Mr. Justice Hayne of the Supreme Court of Victoria dismissing proceedings commenced by me for Judicial Review of an order of the Magistrates Court.  Accordingly I was unable to set up the counterclaim set off or cross demand and courses [sic] of action referred to above in the application to the Full Court from which the order the subject to the Bankruptcy Notice herein was obtained.

The learned primary Judge declined to find that the debtor had a cross demand against the creditor for the amount of $11,889.57 in respect of the costs for which he had been obliged to indemnify the liquidator of TFC.  His Honour’s reasons for taking this course were explained as follows:

On 27 February 1992 the plaintiffs’ action and summons in the winding up [“the misconceived proceedings”] were dismissed with no order as to costs.  But the plaintiffs would have had to have borne their own costs, and the plaintiffs other than the debtor may have had a claim against him for those costs as costs thrown away as a result of misconceived proceedings.  On his story, the debtor could have recovered the amount of these costs from the creditor as damages for negligence or breach of contract.  But in his affidavit the debtor makes no such claim.  Rather he says the plaintiffs had to put the liquidator in funds before he would agree to commence proceedings for the recovery of their property.  But that is something they would have had to have done in any event.  On the debtor’s story, had the creditor given proper advice, it would have been necessary for the debtor to have convinced the liquidator to commence proceedings, and the liquidator would have said - “put me in funds”.  So I do not consider the debtor has shown a causal connection between the negligence he alleges and the loss he claims to have suffered.

As to the larger loss, including consequential loss, said to have flowed from the inadequacy of the terms of settlement of the fresh proceedings in which TFC (in liquidation) was the plaintiff, his Honour said:

In that part of his affidavit setting out the loss suffered by Tropitone ($50,000 for loss of its property and $100,000 for delay in recommencing its business), the debtor simply describes it as loss suffered by Tropitone.  He does not attempt to make it his loss.  In an earlier part of the affidavit, however, immediately after dealing with the costs question, he says that as a result of the creditor’s negligent advice “the costs of the abovementioned proceedings were increased and recovery of the property of Tropitone, myself and the other Plaintiffs ... were delayed giving rise to further losses to Tropitone in that it was further delayed in the recommencement of its business”.  The handwritten words “for which I am liable” have then been added.  That assertion, unsupported by any facts showing that Tropitone has made such a claim against the debtor, does not satisfy me that the debtor has a claim against the creditor measured by the amount of Tropitone’s loss.

The learned primary Judge declined to hold that the debtor’s delay in seeking to set up a counter-claim or cross demand against the creditor entailed that he could not assert the existence of such a counter-claim or cross demand within the meaning of s 40(1)(g) of the Bankruptcy Act 1966 (“the Act”). However, his Honour did regard that delay as reinforcing his inability to be satisfied of the existence of the counter-claim or cross demand to which the debtor had pointed, observing at p 9 of the reasons:

In the present case, the fact that over five years have passed since the alleged loss was suffered without the debtor having commenced proceedings against the creditor, contributes to my lack of satisfaction that he has a prima facie case in relation to the money paid to the liquidator, and reinforces my lack of satisfaction that he has a prima facie case in relation to the loss allegedly suffered by Tropitone.

Conclusion

I am not satisfied that the debtor has a prima facie case against the creditor in relation to the costs paid to the liquidator or in relation to the damage allegedly suffered by Tropitone.  The unquantified order for costs (estimated at $2,500) is less than the amount the subject of the bankruptcy notice.  Assuming it to amount to a cross demand, it does not satisfy the description in s40(1)(g).

Accordingly, an order was made on 30 May 1997 in the form of a declaration that the Court “is not satisfied that the judgment debtor possesses a counterclaim, setoff or cross demand of the type referred to in s 40(1)(g) of the Bankruptcy Act 1966”.

On 1 July 1997 the same Judge refused an application by the debtor for a stay of the earlier order of 30 May 1997 observing:

The effect of the declaration made on 30 May was that the time for compliance with the notice expired on that day, and the demand made by it not having been satisfied, the debtor committed an act of bankruptcy.

During argument on the stay application I expressed some doubt as to the efficacy of staying the orders made on 30 May.  It did not seem to me that a stay of the declaration would “undo” the act of bankruptcy that had been committed some three weeks earlier.  In reliance on the act of bankruptcy, on 16 June the creditor petitioned the Court for a sequestration order against the debtor’s estate.  The petition is to be heard on 15 July.  I suggested to the debtor’s counsel that the appropriate course was to apply on that day for the hearing of the petition to be adjourned pending the outcome of the appeal.  But counsel insisted that the effect of s41(7) was that a stay would extend the time for compliance until the hearing of the appeal.  I do not agree.  That provision is spent. It operated to extend the time for compliance until 30 May.  The demand in the notice was not met by the close of that day, and accordingly an act of bankruptcy was committed.  A stay of the declaration made on 30 May will not alter that fact.

The debtor’s present amended notice of appeal extends to an appeal against the latter order refusing a stay. 

It was first argued on behalf of the appellant that the learned primary Judge had erred in failing to find a causal connection between the payment by the debtor to the solicitors for TFC of $11,898.57 and the alleged negligence of the creditor.  The debtor had, so it was submitted, assumed responsibility for the consequences of that negligence and had been led by that assumption of responsibility to defray TFC’s costs of the fresh proceedings which, it was conceded, would have been payable by the former plaintiffs in any event.  Reference was made to paragraph 6 of the debtor’s affidavit of 13 December 1996 where it was deposed:

In the circumstances I and the other parties concerned had to agree (and I had to agree with the parties for whom I acted to pay such costs) and TFC and the Liquidator thereof then commenced Proceedings No. 5085 of 1992 seeking the orders sought.

The same paragraph concludes with this sentence:

The costs of the Solicitors of TFC and the Liquidator thereof amounted to $11,898.57 which I had to bear [emphasis added].

The short answer to this submission is that the debtor had no liability to the persons for whom he acted in respect of the costs of the misconceived proceedings because those persons had never paid those costs.  The learned primary Judge acknowledged as much when he said:

But the plaintiffs would have had to have borne their own costs, and the plaintiffs other than the debtor may have had a claim against him for those costs as costs thrown away as a result of misconceived proceedings.

That conjecture of his Honour was apparently based on an acceptance of the hypothetical possibility that the plaintiffs, other than the debtor, might have been required to defray those costs in the first instance if, for example, they had been payable to an independent solicitor who had acted without negligence.  However, in the events which actually happened, had payment been demanded of them by the debtor, the other plaintiffs could have raised the defence that the costs claimed had been entirely thrown away as a result of the negligence of either or both of the debtor and counsel retained by him.  Accordingly, the debtor’s only liability at law to his clients in respect of TFC’s costs of $11,898.57 was to contribute an appropriate share having regard to his interest in the litigation in which TFC became the nominal plaintiff.

It was next argued that the debtor was entitled to recover from the creditor an amount of at least $4,330 in respect of the misconceived proceedings which could be added to the estimated costs recoverable in this Court to overtop the judgment debt of $4,989.40 relied on as founding the bankruptcy notice.  To make good this argument, Mr Robson QC, who appeared with Mr Paterson for the appellant, referred to the evidence constituted by notations on the back sheet of the brief delivered by the debtor to the creditor in proceedings numbered 8733 of 1991 in the Supreme Court of Victoria.  The back sheet was designated “BRIEF TO COUNSEL TO DRAW DOCUMENTS - $250.00 AND TO APPEAR ON BEHALF OF THE PLAINTIFFS”.  The handwritten notations, apparently made by the creditor, indicated various items of work performed and appearances undertaken by him between 10 February and 27 February 1992 and ascribed a fee to each item or appearance amounting, as far as they can be deciphered from the exhibit, to a total in excess of $6,000.  It is apparent that the back sheet was referable in part to the fresh proceedings numbered 5085 of 1992 which were the fresh proceedings commenced in the name of TFC for which Messrs J M Smith & Emmerton rendered the bill of costs totalling $11,889.57.  It is to be noted in this context that “Heads of Terms of Settlement” dated 27 February 1992 were signed by Counsel for TFC and its liquidator, by Mr Guss “as solicitor for the Plaintiffs in proceedings Nos. 12799 and 12800 of 1991 and for the Applicant under the aforesaid Summons filed the 11th February 1992 [in proceeding No 733 of 1991]” and by a Mr D Rees “On behalf of and as a Director of Sietel Limited”.  Those terms of settlement were headed:

SUPREME COURT PROCEEDINGS NOS.  5085 OF 1992
  12800 of 1991
  8733 of 1991
  12799 of 1991

HEAD OF TERMS OF SETTLEMENT

As we understood the argument, the debtor claims to be able to disentangle from the fees noted by the creditor on the back sheet an amount of at least $4,330.  That amount, so it was said, was included in the sum of $8,430 for which the creditor recovered judgment against the debtor in the Magistrates Court at Heidelberg on 16 June 1993.  Thus, in essence, the debtor has asserted that judgment has been entered against him for an amount of $8,430 as counsel’s fees which included at least $4,330 referable to the misconceived proceedings in respect of which the creditor should have been precluded by his negligence from recovering anything by way of professional remuneration.

It should first be pointed out that this argument was not even hinted at before the learned primary Judge and, except for the fortuitous presence of the exhibit constituted by the back sheet of the brief to the creditor, no foundation for it was laid in the evidence.  Paragraph 4 of the grounds appended to the debtor’s amended notice of appeal to this Court is in the following very general terms:

His Honour erred in failing to find that the Appellant had a prima facie case against the Respondent for a counter-claim, set-off or cross demand equal to or exceeding the .amount of judgment debt.

The generality of that ground of appeal probably permits the argument outlined above to be advanced before this Court.  However, the failure before the hearing of this appeal to develop the point now relied on explains the absence of any detailed reference to the relevant facts in the evidence adduced on behalf of the creditor at first instance.

A full determination of the issue now raised would require consideration of the argument advanced on behalf of the creditor that any counter-claim or set-off which the debtor may have had for professional negligence merged in the judgment of the Magistrates Court at Heidelberg in the proceedings in which such counter-claim or set-off could have been raised.  On the present state of the evidence, it seems doubtful that the debtor is precluded by the doctrine of res judicata from claiming to recover the amount of fees charged by the creditor in connection with the misconceived proceedings because that claim was never raised or litigated in the Heidelberg Magistrates Court.  If, as we apprehend it, there was never any adjudication in that court on the merits of the creditor’s claim, the debtor did not, by application of the principles discussed e.g. in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, lose his right to seek to recover damages from the creditor for negligence, including fees paid for work which allegedly proved worthless.

A somewhat related point involves the proper interpretation of s 40(1)(g) of the Act which provides that a debtor commits an act of bankruptcy:

(g)if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:

(i)where the notice was served in Australia - within the time specified in the notice; or

(ii)where the notice was served elsewhere - within the time fixed for the purpose by the order giving leave to effect the service;

comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, 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 counter-claim, set-off 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 question suggested by the present facts is whether the debtor’s putative counter-claim or set-off was one that he could not have set up “in the action or proceeding in which the judgment or order was obtained”.  The words just quoted obviously refer to the action or proceeding in which was obtained the final judgment or final order referred to in the introductory words of para (g).  In the present case the final order relied on was that of a Full Court of the Supreme Court on 22 August 1994 which ordered the debtor to give security for the costs of his appeal against an order of Hayne J dismissing his application for judicial review of the refusal by the Magistrates Court to set aside the original judgment for $8,430.  Clearly, once the taxing master gave his certificate after the taxation of those costs, there was a final order within the meaning of s 40(1);  see e.g. Re Stubberfield; Ex parte Paradise Grove Pty Ltd (1995) 134 ALR 169 which was affirmed on appeal to another Full Court of this Court (Ryan, Whitlam and Kiefel JJ, unreported judgment, 22 May 1996).

The question which is left open on the present state of the authorities is whether that final order for costs was obtained “in the action or proceeding” in which the original order of the Magistrates Court was made and in which the debtor could, presumably, have set up his counter-claim or set-off.  The debtor’s application to the Supreme Court was for judicial review of the refusal by the Magistrates Court to set aside that original order.  In a technical sense that was a different “action” from that in which the original order had been made.  However, it was arguably part of the same “proceeding” which commenced with the creditor’s application to the Magistrates Court and ended with the order of the Supreme Court dismissing the application for judicial review designed to procure the setting aside of the original order of the Magistrates Court.  The words “or proceeding” appear to be by way of extending the connotation of “action”.  As Lukin J said in Re Black; Ex parte Jeffery (1932) 4 ABC 157 at 160 of the precursor of s 40(1)(g):

It will be noted that s. 52 (g) (supra), contemplates a final order not only in an action but also in a proceeding.  A proceeding may mean something as distinct from an action or any step thereunder in which final orders are made for the payment of money.  It may also mean a step in an action, in which proceeding a final order is made for the payment of money.  Sec. 52 (j) does not of itself impose any restricted meaning on the word “proceeding” in the amendment, and there appears to be no reason for doing so.

A more restricted analysis of “order in a proceeding” was adopted by the High Court in Opie v Opie (1951) 84 CLR 362 per Dixon and Williams JJ at 372.

A more fundamental obstacle to the appellant’s succeeding in his attack on the declaration at first instance by relying on a “live” counter-claim or set-off in professional negligence is presented by a different aspect of s 40(1)(g). To avoid committing an act of bankruptcy, a debtor must, within the time specified in the bankruptcy notice (in this case fourteen days after 29 November 1996), comply with 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 or sum payable under the final order. A faculty is afforded by s 41(6A) of the Act for the Court to extend the time for compliance with a bankruptcy notice where an application has been made to the Court to set aside the bankruptcy notice. An extension of time in that way is deemed to have been granted, in the circumstances of the present case, by s 41(7) of the Act which provides:

Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor 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.

There was no application for an extension of time in the present case so the time for compliance with the bankruptcy notice was deemed to have been extended only until and including the day on which the Court, constituted by the learned primary Judge, determined that it was not satisfied that the debtor had such a counter-claim, set-off or cross demand as is referred to in para 40(1)(g); i.e. on 30 May 1997.   At the end of that day the time for compliance with the bankruptcy notice had expired and it was not capable of being further extended or revised by an order of the Court, whether constituted by the learned primary Judge, this Full Court or otherwise.  See Re Riordan; Ex parte Riordan v Direct Acceptance Corporation Ltd (1995) 63 FCR 147. In McLean v ANZ Banking Group Ltd (1993) 42 FCR 300 Ryan J, at 305, held, following Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125, that:

The existence of an application to have the bankruptcy notice set aside is a condition precedent to the exercise of power contained in s. 41(6A)(b).  The purpose for which an extension of time may be granted is confined by the context of s. 41 to facilitating the hearing and determination by the Court of an application to contest the validity of a bankruptcy notice or the debt upon which it has been based.

That reasoning was subsequently approved by Lindgren J in Re Udowenko; Ex parte Mitchell (1996) 69 FCR 299.

In the present case, the debtor’s application to set aside the bankruptcy notice was determined when the learned primary Judge pronounced that he was not satisfied of the existence of a counter-claim or set-off of the requisite kind. At the end of the same day, therefore, an act of bankruptcy occurred. As a result, there is no utility in this Court’s acceding to the appellant’s invitation to set aside the declaration made at first instance. It should be remembered that, in determining whether or not it is satisfied in terms of s 40(1)(g), this Court does not determine the validity of the set-off or counter-claim but merely decides whether the debtor has a substantial and bona fide claim which he should fairly be permitted to litigate before bankruptcy proceedings are allowed to continue; see e.g. Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 at 350 and Re James; Ex parte Carter Holt Harvey Roofing (Aust) Pty Ltd (1993) 46 FCR 183 at 188.

Accordingly, even if this Court were persuaded to take a different view from the learned primary Judge and decide that issue in favour of the debtor, it would not nullify the act of bankruptcy committed at the end of 30 May 1997.  Nor would it determine the merits of the counter-claim or set-off which the debtor asserts.  It would amount to no more than an expression of an opinion, on necessarily incomplete evidence, which might be taken into account, amongst a multitude of other factors, by the Court differently constituted, in deciding how to exercise its discretion whether or not to make a sequestration order on a petition invoking the ineluctable act of bankruptcy which we have held has been committed.  There is high authority to the effect that a court should not grant declaratory relief which is not confirmatory of an existing right or obligation in controversy between the parties or which would otherwise be of little practical value; see e.g. Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-582, Trans Realties Pty Ltd v Grbac [1975] 1 NSWLR 170 at 176 and 183-184, Gregory v Philip Morris Ltd (1988) 80 ALR 455 at 482 and the recent discussion by Kiefel J in Minister for Immigration v Ozmanian (1996) 71 FCR 1, 31-32.

For these reasons, we decline to consider further the strengths or weaknesses of the counter-claim or set-off on which the appellant seeks to rely.

The same considerations apply to the third basis on which the debtor founded his appeal. That was that he had a claim for indemnity or contribution against the creditor as a joint tortfeasor vis à vis the other plaintiffs in the misconceived proceedings. Sections 23B and 24 of the Wrongs Act 1958 (Vic) provide:

23B.(1)       Subject to the following provisions of this section, a person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with the first-mentioned person or otherwise).

(2)A person shall be entitled to recover contribution by virtue of sub-section (1) notwithstanding that that person has ceased to be liable in respect of the damage in question since the time when the damage occurred provided that that person was so liable immediately before that person made or was ordered or agreed to make the payment in respect of which the contribution is sought.

(3)A person shall be liable to make contribution by virtue of sub-section (1) notwithstanding that that person has ceased to be liable in respect of the damage in question since the time when the damage occurred unless that person ceased to be liable by virtue of the expiry of a period of limitation or prescription which extinguished the right on which the claim against that person in respect of the damage was based.

(4)Subject to section 24(2B), a person who in good faith has made or agreed to make any payment in settlement or compromise of a claim made against that person in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not the person who has made or agreed to make the payment is or ever was liable in respect of the damage provided that that person would have been liable assuming that the factual basis of the claim against that person could be established....

24.(2)       Subject to sub-sections (2A) and (2B), in any proceedings for contribution under section 23B the amount of the contribution recoverable from any person shall be such as may be found by the jury or by the court if the trial is without a jury to be just and equitable having regard to the extent of that person’s responsibility for the damage; and the jury or the court if the trial is without a jury shall have power to exempt any person from liability to make contribution, or to direct that the contribution to be recovered from any person shall amount to a complete indemnity.

Of analogous legislation in the United Kingdom, Lord Denning M.R. observed in Scott v West Yorkshire Road Car Co Ltd [1971] 2 QB 651 at 656-7:

I am of opinion that the word “liable” does mean “responsible in law.”  It follows that a tortfeasor is entitled to recover contribution from another tortfeasor (i) when he has been held liable in judgment;  (ii) when he has admitted liability;  and (iii) when he has settled the action by agreeing to make payment to the injured person, even though, in making the settlement, he has not admitted liability. But, of course, when the tortfeasor settles an action, he cannot claim contribution from the other tortfeasor unless he proves that he himself was “liable.”  He must prove, therefore, that, if the claim had been fought out, he would have been held responsible in law and liable to pay in whole or in part for the damage.  At that subsequent stage, therefore, he must admit liability because otherwise he does not bring himself within the section.

Accepting for the purposes of argument that the expression “counter-claim, set-off or cross demand” in s 40(1)(g) of the Act is wide enough to encompass a claim for contribution or indemnity by a debtor as one joint tortfeasor against a creditor as another joint tortfeasor, the appellant is confronted by the obstacle that at the time of his application to set aside the bankruptcy notice he had not been held liable or admitted liability to his co-plaintiffs or settled any claim by them. Even taking the charitable view that the words “which I had to bear” in paragraph 6 of the debtor’s affidavit quoted above as referable to the sum of $11,898.57 amounted to an admission of liability to his co-plaintiffs, we have some difficulty in seeing how any right of indemnity ever arose in respect of the costs thrown away as a result of the misconceived proceedings. Had either Mr Guss or the creditor or both of them sued the other plaintiffs for their professional fees and disbursements in relation to the misconceived proceedings, they would, on the appellant’s case, have been bound to fail when met by a defence based on negligence, breach of contract or a total failure of consideration. Accordingly, Mr Guss never became liable to his co-plaintiffs for any amount of costs and disbursements in connection with the misconceived proceedings for which he could look to the creditor for contribution or indemnity.

All that Mr Guss, on his own account, ever had against the creditor in respect of the misconceived proceedings was a claim in damages, perhaps measured by the amount of fees paid to or recovered by the creditor plus the value of Mr Guss’s own work and any disbursements which were incurred in connection with the misconceived proceedings.  That is, in essence, the claim for $4,330 plus some additional elements which we have just indicated and was available to be pursued by the debtor in the context of the proceedings in the Magistrates Court at Hawthorn.  However, for the reasons explained above there would, in the events which have happened, be no utility in this Court’s making a declaration of the prima facie existence, or otherwise pronouncing on the strength or weakness, of that counter-claim, set-off or cross demand.

As the fourth basis for the appeal, the debtor raised the wider claim for damages available to Tropitone in the sum of $150,000 represented by the value of the goods not recovered from Sietel Ltd and $100,000 being the cost to Tropitone of the delay in recommencing its business.  It was accepted on the authority of Scott v West Yorkshire that the debtor would have to establish that a claim had been made against him by Tropitone for damages calculated in that way.  To that end, counsel for the appellant sought leave further to amend the amended notice of appeal and to adduce fresh evidence in the form of a copy of a writ and statement of claim issued out of the County Court of Victoria in proceedings numbered 97 03491 on behalf of Tropitone (now called “Casualife Furniture Pty Ltd”) claiming damages of $185,494 against Mr Johnstone and Mr Guss and a draft notice of contribution on behalf of the debtor against the creditor as first-named defendant in those proceedings.

That writ was issued on 29 May 1997 after the learned primary Judge had reserved his judgment on the application to set aside the bankruptcy notice.  It appears that on 30 May 1997 when handing down that reserved judgment, his Honour was invited to allow the debtor to re-open his case to adduce evidence of the County Court proceedings to which we have just referred.  That application was refused.  The further amendment to the notice of appeal is sought to allow the appellant to attack that refusal.

Senior Counsel for the appellant candidly acknowledged that the counter-claim, set-off or cross demand stipulated by s 40(1)(g) must exist at the time when the application to set aside the bankruptcy notice is heard. He referred to In re G.E.B. [1903] 2 KB 340 when Vaughan Williams LJ observed, at 348:

What does this sub-s. 1(g) of s. 4 mean?  Does it mean that at the moment of the hearing of the application the debtor must have an effective set-off which he could enforce by action; or is it sufficient that at that moment he has vested in him a right of set-off which, when the proper time comes in bankruptcy, could be used for the purpose either of reducing or wiping out this judgment debt?  Now, in this case he has the latter - that is, an existing right of set-off - but not the former - that is, an effective set-off which he could enforce by action;  and the question we have to answer is whether it is sufficient that he has the latter - that is to say, a right of set-off which is existing, but which can only be effectively used after the making of the receiving order in the bankruptcy proceedings.

Now, not without considerable doubt, I have come to the conclusion that the words of this clause refer to a set-off which can be enforced at the moment of the hearing of the application to set aside the bankruptcy notice.

That case concerned a set-off but the principle is equally applicable to a counter-claim or cross demand.  It is clear that, at the time when the hearing at first instance concluded, any claim for contribution in respect of the cause of action in damages earlier quantified in the sum of $150,000 attributed to Tropitone was inchoate or contingent.  However, the conclusion which we have already reached that there cannot now be declaratory or other relief of any utility in favour of the debtor in respect of the bankruptcy notice entails that it would be a sterile exercise for us to evaluate for ourselves the County Court proceedings as giving rise to a cross demand in the debtor.  Accordingly, the application to further amend the amended notice of appeal and for leave to adduce evidence of the County Court proceedings is refused.

The same reasoning leads us to uphold the learned primary Judge’s refusal on 1 July 1997 of an application for a stay of his order of 30 May 1997 determining that he was not satisfied that the debtor possessed a counter-claim, set-off or cross demand of the type referred to in s 40(1)(g). As we have already explained, at the time of that application to his Honour, there was nothing to stay because an act of bankruptcy occurred once and for all at the end of 30 May 1997.

A somewhat independent attack was made on behalf of the debtor on that part of the learned primary Judge’s reasoning quoted above where his Honour indicated that the debtor’s delay in commencing proceedings “contributes to my lack of satisfaction that he has a prima facie case in relation to the money paid to the liquidator, and reinforces my lack of satisfaction that he has a prima facie case in relation to the loss allegedly suffered by Tropitone”.  However, those two issues on which his Honour expressed himself as not being satisfied have respectively been resolved adversely to the appellant and not pressed on the hearing of the present appeal.  We have indicated our reasons for concluding that the sum of $11,898.57 paid in respect of costs incurred by the liquidator of TFC was never recoverable by the debtor from the creditor.  The learned primary Judge’s lack of satisfaction that the debtor had a prima facie case in relation to the loss allegedly suffered by Tropitone was primarily, and, we consider, correctly, based on the absence of any attempt before 30 May 1997 to make it his loss.  His Honour’s reference to the debtor’s delay as reinforcing his inability to be satisfied of the existence of a counter-claim or cross demand in respect of the loss ascribed to Tropitone therefore cannot be invoked as casting doubt on what we regard as a correct analysis of the evidence as it stood at the end of the hearing below.

Conclusion
For these reasons, the appeal must be dismissed with costs.  However, we shall append to our order for costs a proviso that, in the event that a sequestration order be subsequently made on the basis of the bankruptcy notice issued on 19 September 1996, the respondent’s costs of this appeal shall form part of the petitioning creditor’s costs payable out of the bankrupt estate of the debtor. 

I certify that this and the preceding fifteen (15) pages are a true copy of the Reasons for Judgment herein of the Court.

Associate:

Dated:            13 November 1997

Counsel for the Appellant:	Mr R Robson QC with Mr J Paterson
Solicitors for the Appellant:	Joseph Guss
Counsel for the Respondent:	Mr R E Cook
Solicitors for the Respondent:	Messrs Morley & Naughton
Date of Hearing:	3 October 1997
Date of Judgment:	13 November 1997