Hadden v KETCH Nominees Pty Ltd - [2005] FMCA 794

FEDERAL MAGISTRATES COURT OF AUSTRALIA

HADDEN v KETCH NOMINEES PTY LTD

[2005] FMCA 794

BANKRUPTCY – Application to set aside Bankruptcy notice – whether counterclaim/set off could have been set up in local court proceedings.

Bankruptcy Act 1966, ss.40(1)(g), 52
Local Court Act 1904, s.34(1)

Batiste v Lenin (2002) NSWSC 233
Re Stokvis (1934) 7 ABC 53
Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 130 ALR 596
Re Vicini; Ex parte E A Sealey & Co (1982) 64 FLR 323
Re Vitoria; Ex parte Vitoria (1894) 2 QB 387
Re Huston; Ex parte Kendall, McAdam & O'Dwyer (1985) 8 FCR 355

Applicant:

HEIDI HADDEN

Respondent:

KETCH NOMINEES PTY LTD

File Number:

PEG 49 of 2005

Judgment of:

McInnis FM

Hearing date:

16 May 2005

Delivered at:

Perth

Delivered on:

3 August 2005

REPRESENTATION

Applicant:

In person

Counsel for the Respondent:

Mr. D. Skender

Solicitors for the Respondent:

Gadens Lawyers

ORDERS

The Application filed 10 March 2005 be dismissed.
In the event that the Respondent files a creditor’s petition in reliance on the Applicant’s failure to comply with the Bankruptcy Notice dated 11 February 2005 and a sequestration order being made, the Respondent’s costs of the application (including any reserved costs) be paid in priority from the assets of the Applicant as costs of the petition pursuant to s.109 of the Bankruptcy Act 1966 (Cth).
Otherwise, the Applicant shall pay the Respondent’s costs of the application (including any reserved costs) to be taxed if not agreed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
PERTH

PEG 49 of 2005

HEIDI HADDEN

Applicant

And

KETCH NOMINEES PTY LTD

Respondent

REASONS FOR JUDGMENT

In this application the Applicant seeks to set aside a bankruptcy notice issued on 11 February 2005 and served on 23 February 2005. The bankruptcy notice issued at the request of the Respondent Creditor claims that the Applicant owes the Creditor the sum of $3,280.50 and relies upon a judgment of the Local Court of Western Australia on 19 February 2003. That judgment was based on a claim by the Respondent against the Applicant arising from a failure by the Applicant to pay certain amounts due to the Respondent pursuant to a lease for tavern premises owned by the Respondent.
In her application seeking to set aside the bankruptcy notice, the Applicant, who is unrepresented, refers to the notice being "dismissed", and has asserted that she has a genuine counterclaim or set‑off which far exceeds the amount of the judgment and that the judgment was given in her absence. She further claims in the application that part of her claim in pending Supreme Court proceedings is for $63,866.00 and alleges that she has a total claim of over $400,000.00. She asserts that the Respondent has admitted owing the Applicant $25,072.00, which after deducting the amount owed in the bankruptcy notice of $3,403.50 leaves a balance in her credit owed by the Creditor to her of $21,669.49. She further claims in the application that if the bankruptcy notice is not set aside, then this will prevent a pending action in the Supreme Court from proceeding and will cause irreparable damage to her. Further, she claims that as no set‑off is being given, the Respondent will be paid twice, if not more.
The Respondent opposes the application and has submitted that it should be dismissed with costs.
It is relevant to note at the outset that the proceedings which led to the judgment relied upon in the bankruptcy notice were recorded as complaint number 121/2002 (the Local Court action). Other Local Court actions appear to have been issued by the Respondent against the Applicant seeking to recover what were claimed to be various amounts of rent due and payable between the period 19 February 2002 and 19 July 2002, namely, action numbers 29, 35, 36, 39, 53, 71 and 84 of 2002. The Respondent had instructed a firm of solicitors in Bunbury to seek summary judgment in actions 29, 35, 36 and 39 which were heard on 19 June 2002 (the first summary judgment application). The first summary judgment application was unsuccessful. During the course of that hearing the Applicant raised what has clearly become a significant issue, namely, that certain repairs which the Applicant alleged were required to be carried out by the Respondent as Landlords of the premises were not carried out. After the failure to obtain the first summary judgment the Respondent issued action 53 on 3 May 2002. The Applicant failed to enter an appearance in that action and judgment was entered by default and thereafter the Applicant applied to set aside the judgment. On 21 August 2002 the Local Court Magistrate apparently considered the Applicant was not able to defend the matter on the basis that she could deduct money from rent, taking into account the authority of the decision of the Supreme Court of New South Wales in Batiste v Lenin (2002) NSWSC 233. At a later hearing on 18 September 2002 the Applicant's application to set aside the judgment was dismissed and a warrant of execution subsequently issued in respect of that judgment.
It is common ground that on 30 August 2002 the Applicant commenced proceedings against the Respondent by Writ of Summons in the Supreme Court of Western Australia in action number CIV 2227/2002 (the Supreme Court proceedings). The Respondent engaged another firm of solicitors to defend the Supreme Court proceedings on its behalf. I should note in passing that it is perhaps not surprising that the Applicant at times expressed some confusion concerning proceedings given that the Respondent has effectively engaged three different firms of solicitors in matters directly relating to the Applicant, including these proceedings. The writ appears to be generally endorsed with a claim against the Respondent for "specific performance damages, aggravated damages, exemplary damages and a refund of all monies paid". Apparently the Applicant commenced proceedings against the Respondent by way of an interlocutory injunction in the Supreme Court of Western Australia seeking to restrain the Respondent from dealing with the stock, plant and equipment remaining at the premises when the Respondent took possession of the premises on or about 21 August 2002. An injunction was granted on the usual basis of undertakings being given.
Pursuant to orders made by a Registrar in the Supreme Court on 16 October 2002, the Applicant amended the writ of summons to include a claim of unconscionable conduct and unjust enrichment and added others as defendants, namely, Mr and Mrs Oliver who are directors of the Respondent.
Further proceedings were commenced in the Supreme Court by the Applicant seeking a stay of the warrant of execution issued in action number 53. That application was dismissed in the Supreme Court on 26 February 2003. The Local Court action which is the subject of the bankruptcy notice was commenced by a summons on 9 October 2002, seeking rent payable under the relevant lease of $2,970.00 for the period 19 June to 19 July 2002, due on 19 June 2002, and $2,970.00 owing for the period 19 July 2002 to 19 August 2002, due on 19 July 2002. It is claimed by the Respondent that the summons was served on 27 November 2002 and that the Applicant lodged a notice of intention to defend the Local Court action on or about 9 December 2002.
Undeterred by the lack of success of the first summary judgment application, the Respondent by chamber summons dated 6 January 2003 sought summary judgment in relation to the Local Court action along with actions 29, 36, 39, 71 and 84 of 2002. It is claimed that the chamber summons was sent to the Applicant at the premises and her last‑known address at the time, namely, McGrath Place, Armadale. The Applicant claims not to have received the chamber summons.
It appears the second summary judgment application was heard on 19 February 2003 and that the Applicant did not appear at the hearing. According to the material before the Court, it appears that actions 29, 35, 36 and 39 were consolidated into one action and no judgment was given. Judgment was granted in respect of actions 71 and 84 and, significantly, judgment granted in respect of the Local Court action only to the extent of the claim for July rent. It is that Local Court action, as indicated, which is relied upon in the bankruptcy notice which the Applicant seeks to set aside.
It does not appear to be in dispute that the Applicant has not sought to raise any set‑off, counterclaim or cross‑demand in the Local Court action, though it is clear she had done so successfully in the first summary judgment application.
Apart from denying being served with the chamber summons in the Local Court action, the Applicant has otherwise argued that she has a defence to that action and/or a counterclaim, set‑off or cross‑demand equal to or exceeding the amount of the judgment debt or sum payable under that order.
In this Court the Applicant relies upon s.40(1)(g) of the Bankruptcy Act 1966 (“the Act”) which provides as follows:-
“(1)A debtor commits an act of bankruptcy in each of the following cases:
…
(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 affect 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;”
I accept for the present purposes as submitted by the Respondent that there is an onus on the Applicant, in order to succeed, to demonstrate on the basis of admissible evidence the set‑off, counterclaim or cross‑demand claim of the Applicant which she seeks to raise "could not have been set up" in the Local Court action.
The present case history of litigation and the fact that there are pending Supreme Court proceedings for present purposes at least provide sufficient evidence that there is a counterclaim, set‑off or cross‑demand equal to or exceeding the amount of the judgment debt which the Applicant has against the Respondent. The critical issue is whether or not the Applicant can successfully argue that the counterclaim, set‑off or cross‑demand could not have been set up in the Local Court action. In considering the issue of whether the action could not have been set up in the Local Court action, I accept that the Court needs to consider the nature, the relative timing of the claim of the action and the absence of any empowering provisions or positive inhibitions which would prevent the Applicant from setting up the counterclaim, set‑off or cross‑demand in the Local Court action (see Re Stokvis (1934) 7 ABC 53 at 57).
I further accept that in considering the question of whether or not the cross‑demand could have been set up in the Local Court proceedings for the purpose of s.40(1)(g) of the Act, the Court has to answer the question by reference to legal considerations and not practicalities. The fact that some indirect course was required to be adopted, including discontinuing or remitting or transferring matters between different Courts, or that some tortuous route had to be followed requiring directions of the Court to be satisfied does not prevent the claim from being one which could have been set up in a proceeding.

I refer to and apply the decision of the Court in Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 130 ALR 596 at 601‑603 (Ling) as follows:-
“19.Whether an order for consolidation would have been made had such an order been sought, or whether the Court might have merely made an order that the two separate proceedings be heard together, is difficult to assess hypothetically. The matter would lie in the discretion of the Judge before whom such an application for consolidation was brought, in the light of the attitudes of the parties and all circumstances put before that Judge. It could certainly not be said in the present case that it would have been unlikely that such an order would have been made. On the contrary, it is likely that such an order would have been made if requested.
20.In short, it may be said that by a somewhat tortuous path and with the aid of discretions exercised in his favour, the debtor was legally capable of bringing about the situation where the claims in tort could have become cross claims in the Commonwealth proceedings. In case it may be thought that the effect of consolidation would have resulted in the consolidated proceedings being a new and different proceeding from that commenced by the Commonwealth against the debtor, that is of no consequence for the Commonwealth would then have obtained judgment in the new proceeding against the debtor; that is to say, the cross claims would have been set up in the same proceeding as that in which the judgment was obtained.
21.The question is whether the possibility of this tortuous route and the existence of the discretions which would be encountered on the way (both of the High Court to remit and of this Court to order consolidation) permit the debtor to argue that the claims in tort were such that they could not have been set up in the Commonwealth proceedings.
22.The provisions of s40(1)(g) can be traced back at least to s4(1)(g) of the Bankruptcy Act 1883 (UK). Discussing that section Avory J, with whom Horridge J agreed, in In re A Debtor (1914) 3 KB 726 at 730 said:
‘I think that upon the true interpretation of the section a debtor is entitled to set up in answer to a bankruptcy notice a counter-claim which rebus sic stantibus he could not in law have set up in the action in which the judgment was obtained...’.
23.The policy inherent in the section would seem to be that a debtor should be allowed to challenge a bankruptcy notice based upon a judgment obtained, so long as the debtor had prima facie a counter-claim etc of a value at least as great as the judgment obtained which he could bring against the judgment creditor. Conversely, however, the debtor could not challenge the bankruptcy notice if the debtor could have brought the counter-claim in a timely way at the same time as the proceedings brought against him, but failed to do so. The section could on its face have no application if the debtor had brought the counter-claim in the proceedings and was either successful or unsuccessful with that counter-claim.
24.Re Stokvis (1934) 7 ABC 53, a case relied upon by the Commonwealth, concerned a debtor who in fact had commenced proceedings in the Supreme Court of New South Wales prior to the proceedings being commenced against him by the creditor. Under the then pleading rules in that Court he could not plead a cross action in the latter proceedings without discontinuing his own proceedings. He thus had a choice. He could have proceeded with his own writ or have withdrawn it and with leave of the Court set up the cross claim in the creditor's action. Possibly he could have had the actions consolidated. He did nothing. It was held that his claim was one he could have set up in the creditor's proceedings. Lukin J said (at 57):
‘I take a counter claim, set off, or cross demand which could not be set up as one which, from 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. Here from the point of view of time, from its nature, and from the empowering provisions of the Act and rules, the counter claim might have been set up if Stokvis had wished, or chosen, to do so. Mere failure to take advantage of the opportunity can hardly be said to be inability.’
25.It will have been noted that the possibility of consolidation was involved in that case also, and that leave of the Court would have been necessary, either for the consolidation or for the withdrawal of the debtor's claim and alternative pleading as a cross claim. Neither matter appears to have led to the conclusion that the cross claim could not have been set up in the creditor's proceedings.
26.Subsequently in Re a Debtor (1947) LJR 1413, a judgment was signed against the debtor on the same day as his alleged counter-claim became enforceable. It was open to the debtor to have sought leave to defend. It was held that the counter-claim was one which could have been brought in the creditor's proceeding, notwithstanding that leave would have been required.
Lord Greene MR said (at 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 counter claim 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 counter claim. 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 counter claim.’
27.Both Re Stokvis and In re a Debtor were cited by Lockhart J in Re Brink; Ex parte Commercial Banking Co of Sydney (1980) 30 ALR 433 at 437. In Re Racheha; Ex parte Antonios (1980) 49 FLR 423 the creditor had commenced proceedings against the debtor in the Court of Petty Sessions. The amount sued for exceeded the jurisdiction of that Court but the debtor had failed to object to the jurisdiction prior to judgment being obtained against him. Had he done so the action would have been transferred to the District Court. The debtor had, however, sent to the Registrar of the Court of Petty Sessions a notice of set-off and counter-claim, but it had been rejected on the basis that it exceeded the jurisdictional limit of that Court. The debtor had a choice of abandoning the excess or commencing separate proceedings in the District Court, or of objecting to the jurisdiction of the Court to hear the plaintiff's claim and having that transferred to the District Court where there was no relevant jurisdictional limit that would have precluded him setting up his cross claim. Lockhart J held that in these circumstances the debtor had a cross claim etc which could have been set up in the District Court had the debtor either elected to abandon the excess or have the matter moved to the District Court.
28.While Re Racheha was not a case where there was a need to have a favourable exercise of a Court's discretion before the cross claim could have been set up in the main proceeding, it does stand as authority for the proposition that the fact that steps would need be taken by the debtor to have the cross claim raised in the creditor's action where it could not be raised directly does not bring about the result that the debtor could not have raised the cross claim in the creditor's proceeding.
29.Re Racheha was followed by Beaumont J in Re Franks; Ex parte GIO Holdings Ltd (1989) 101 ALR 504 in somewhat analogous circumstances. In so doing his Honour quoted with approval the passage cited earlier from Lord Greene in Re a Debtor.
30.More recently O'Loughlin J was called upon in Re Willats; Ex parte Nissan Finance Corporation Ltd (1991) 31 FCR 206 to consider whether a counter-claim was one which could have been set up in the creditor's proceedings where leave would have been required to do so, there having been an application for summary judgment. His Honour held that it could have been, citing the cases already discussed above and commenting that failure to seek leave could never be the exclusive test.
31.These cases, it seems to me, establish that a cross claim will be one which could be set up in the action, notwithstanding that to do so the debtor may need to transfer the proceedings first to another court, or may need to obtain in his or her favour the exercise of a discretion before doing so. The onus of showing that the claim is not one that could have been set up in the creditor's proceedings lies upon the debtor. That onus will not be satisfied merely by showing that some indirect course may need be followed (that course being in the discretion of the debtor) nor by showing that there existed a discretion which could have been exercised against the setting up of the claim as a cross claim. To satisfy that onus the debtor must show that, as a matter of law and in the circumstances prevailing, he or she could not have set up the cross claim. That the debtor has not done in the present case.
32.I do not find the result strange having regard to the evident policy underlying s.40(1)(g) to which I have earlier referred. A debtor having a claim against his or her creditor can not just stand by while judgment is obtained and later seek to use that claim to set aside a bankruptcy notice founded upon that judgment. If machinery is available for that claim to be agitated as a cross claim in the proceedings, even if application must be made in a timely way to another court or leave must be obtained, that application should be made or that leave sought. Otherwise the debtor will be bound by his or her conduct.
33.I do not need to decide and in fact do not decide what the situation would be if, although a discretion were in the way of a debtor setting up a claim as a cross claim, it were shown by the debtor to be unlikely on the balance of probabilities that that discretion would be exercised in favour of the debtor. That is a question for another day.
34.I thus conclude that the claims in tort against the Commonwealth which the debtor alleges are such that they could have been raised in the Commonwealth proceedings as cross claims and accordingly may not now be advanced by the debtor as a ground to set aside the bankruptcy notice.”

Likewise, I accept that any personal considerations of the Applicant preventing her as a matter of practical reality from pursuing a set‑off, counterclaim or a cross‑demand in the proceeding in which judgment was given does not prevent the claim from being one which could have been set up in the proceeding (see Re Vicini; Ex parte E A Sealey & Co (1982) 64 FLR 323).
The assertion by an Applicant that he or she was not provided legal advice again does not of itself lead the Court to conclude that the claim could have been set up in the proceeding (see Ling at page 599).
Given the Applicant's assertion that she was not properly served with the chamber summons in the Local Court proceedings, it is significant to further note that having filed a notice of intention to defend in those proceedings, it was open to her to set up the counterclaim, set‑off or cross‑demand at or about that time.
There is no doubt that the judgment in the Local Court action remains unimpeached until set aside by the Court which gave the judgment (see Re Vitoria; Ex parte Vitoria (1894) 2 QB 387).
As submitted by the Respondent, I further accept that the Court is usually reluctant to go behind a judgment once it has been the subject of adjudication even if there were problems with the Debtor's representation or unusual features about the hearing at which it was obtained (see Re Huston; Ex parte Kendall, McAdam & O'Dwyer (1985) 8 FCR 355).
Applying the principles in the cases to which I have referred and having regard to the evidence before the Court, I am satisfied that service of the chamber summons was effected according to law and in the alternative, even if not effected according to law, I am further satisfied that the Applicant in the Local Court action at the time of filing a notice of intention to defend had the opportunity to then set up a counterclaim, set‑off or cross‑demand. It is noteworthy in this case that she had clearly done so or at least argued the basis of that counterclaim, set‑off or cross‑demand at the first summary judgment application. Whilst there may be some debate as to whether or not the set‑off could have been relied upon, I further accept as submitted for and on behalf of the Respondent that the relevant Local Court Rules provided the opportunity for a notice of set‑off or counterclaim to be filed and given the Local Court jurisdiction at the time would have been exceeded by the Applicant's set‑off or counterclaim, that other provisions in the Local Court Act 1904 then applied which would allow the matter to proceed if both parties consented or the Applicant in the proceedings did not object. Alternatively, the Local Court action could have been remitted to the Supreme Court of Western Australia pursuant to s.34(1) of the Local Court Act 1904. Further I accept, as submitted by the Respondent, despite the fact that it would seem cumbersome and perhaps somewhat unreasonable for an unrepresented party, that her pending Supreme Court proceedings could have been either discontinued or consolidated with a remitted action (see Orders 23 and 83 of the Supreme Court Rules1971).
Whilst as a practical matter the Court is concerned that the possible consequences of dismissing the application to set aside the bankruptcy notice might ultimately lead to a creditors petition and bankruptcy thereby preventing the Applicant from pursuing her Supreme Court action, that fact alone is not enough in the circumstances as a matter of law having regard to the authorities to set aside the bankruptcy notice.
It follows, accordingly, that the application should be dismissed. It should be noted, however, that in dismissing the application to set aside the bankruptcy notice, that does not prevent the Court in bankruptcy upon the filing of a creditors petition from otherwise considering the matters within the Court's discretion pursuant to s.52 of the Act, including issues which may arise in the circumstances of this case which may possibly lead a Court at some future date to find that there is indeed ‘other sufficient cause’ which would lead to a conclusion that a sequestration order ought not be made and the petition dismissed.
It is noted that the Supreme Court proceedings pending will be the subject of further consideration by that Court following discovery issues on 23 May 2005 and presumably a timetable will be fixed for the hearing and determination of the Supreme Court proceedings. Updated and detailed information concerning the progress of those Supreme Court proceedings may of course be relevant for any Court in bankruptcy considering in the future a creditors petition if indeed the Respondent decides to file a petition.
However, for the reasons given it is appropriate, as indicated, that this application to set aside the bankruptcy notice should be dismissed.

I certify that the preceding twenty-five (25) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 3 August 2005