James v Hill
[2005] FMCA 743
•3 June 2005
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| JAMES v HILL | [2005] FMCA 743 |
| BANKRUPTCY – Application to set aside bankruptcy notice – where debtor alleges cross claim, cross demand or set off constituted by costs order in proceedings and other rights assigned to him – whether there is sufficient evidence of quantum and possibility of success in proceedings – where evidence indicates no loss to assignor – whether set offs equal or exceed the amount claimed in bankruptcy notice – whether time for compliance should be extended until after hearing of proceedings in Supreme Court. |
| Bankruptcy Act 1966, ss.40(1)(g), s.41(7) Federal Court Act and Rules Australian Bankruptcy Law and Practice Darvall and Fernon 5th Ed (McDonald Henry & Meek) |
| Ebert v The Union Trustee Co of Australia Limited (1960) 104 CLR 346 Glew v Harrowell [2003] FCA 373 Guss v Johnstone (2002) 74 ALJR 884 Re Brink: Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 Johnstone v Guss (1997) 484 FCA Sundberg J Poulton v The Commonwealth and Others 89 CLR 541 |
| Applicant: | DAVID ANTHONY JAMES |
| Respondent: | TERRY DONALD HILL |
| File Number: | SYG915 of 2005 |
| Judgment of: | Raphael FM |
| Hearing date: | 31 May 2005 |
| Date of Last Submission: | 31 May 2005 |
| Delivered at: | Sydney |
| Delivered on: | 3 June 2005 |
REPRESENTATION
| Counsel for the Applicant: | Mr D Allen |
| Solicitors for the Applicant: | Brooks & Co |
| Counsel for the Respondent: | Mr M Aldridge SC |
| Solicitors for the Respondent: | Brown & Partners |
ORDERS
Application dismissed.
Time for compliance with the bankruptcy notice be extended until 17 June 2005.
Applicant pay the respondent’s costs to be taxed if not agreed according to the Federal Court Act and Rules
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG915 of 2005
| DAVID ANTHONY JAMES |
Applicant
And
| TERRY DONALD HILL |
Respondent
REASONS FOR JUDGMENT
Introduction
This proceeding is an application, commenced on 14 April 2005, by the debtor for Bankruptcy Notice numbered NN3422/04 to be set aside or alternatively the time for compliance be extended until after judgment is delivered in certain Supreme Court proceedings. The Bankruptcy Notice, which was issued on 22 December 2004 claims that the debtor is indebted to the creditor in the sum of $383,271.36 pursuant to an order of the Commercial List of the Supreme Court of New South Wales made on 26 February 2004 by Bergin J. The principal sum claimed in the bankruptcy notice was discounted by the amount of $79,953.83 being the value of a costs order made in favour of the debtor against the creditor.
The grounds for setting aside the bankruptcy notice are said to be those appearing at s.40(1)(g) and s.41(7) Bankruptcy Act 1966 (Cth) namely that the debtor has a counter claim, set off or cross demand equal to or exceeding the amount of the judgment debt that he could not have set up in the action or proceeding in which the judgment or order was obtained.
There are several constituents of the alleged cross claim which will be discussed below. It is conceded that none of the constituents could have been raised in the original proceedings.
The head note of the Court of Appeal Judgment explains the factual matrix in respect of which the judgment was obtained.
“Hill wished to acquire a wine business from a liquidator. The liquidator was not prepared to deal with Hill. As a result Hill organised that James would purchase the business from the liquidator and contemporaneously on-sell it to Hill at the same price. It was understood that James would be buying and on-selling the business for $10.3 million. James and Hill then entered a contract to this effect. It was a term of the contract that Hill was to pay the deposit for the sale between James and the liquidator (the deposit). It was also a term that if Hill were unable to complete (in which case James would not purchase the business from the liquidators), then Hill would have no claim against James in respect of the deposit.
Meanwhile, as a means of securing funds so as to complete the purchase from James, Hill entered into negotiations with Wehrle where Hill planned to sell 45% of the business to Wehrle. However, Hill represented to Wehrle that the business was worth $24 milllion and intentionally failed to disclose the fact that he (Hill) was only buying the business for $10.3 million.
James, having become aware that Hill stood to profit if Wehrle purchased 45% of the business, negotiated with the liquidators to buy the business for $6.9 million, but hid this fact from Hill such that Hill continued to act on the basis that he was buying the business for $10.3 million. Accordingly, James stood to benefit at Hill’s expense by on-selling the business.
At the time for completion Hill, who was not ready willing and able to complete, discovered James’ actual purchase price. At first Hill sought an order for specific performance, thereby attempting to keep the contract on foot, before finally deciding to terminate and sue for breach. Hill also sought relief against forfeiture in relation to the deposit, sue for misleading and deceptive conduct and sought exemplary damages for deceit.”
The Court of Appeal Orders were in the following form:
“1 The appeal of the first appellant be allowed in part.
2 The appeal of the second appellant be dismissed.
3 Order 1 made by Bergin J on 26 February 2004 in the Supreme Court of New South Wales Equity Division Commercial List proceedings number 50149 of 2002 be set aside.
4 The respondent pay 60% of the first appellant’s costs of the appeal but to have a certificate under the Suitor’s Fund Act 1951 if otherwise qualified.
5 The first cross-appeal be dismissed.
6 The cross-appellant pay the first cross-respondent’s costs of the first cross-appeal.
7 The second cross-appeal be dismissed.
8 The cross-appellants pay the cross-respondent’s costs of the second cross-appeal.”
These orders left an amount of approximately $365,000.00 plus interest owing by Mr James to Mr Hill together with some costs. There were costs orders in favour of Mr James against Mr Hill. These costs orders are part of the alleged cross claim.
On 24 June 2004, prior to the handing down of the Court of Appeal decision, a firm of solicitors known as NOT Lawyers wrote a letter to a firm of solicitors acting on behalf of Southcorp Wines and Carlton & United Breweries Limited. These companies were major suppliers to a liquor business operated by a company known as Liquor National Wholesale Pty Limited of which the applicant debtor is the sole shareholder. The letter purports to advise the solicitors for the suppliers of the situation regarding the appeal against the decision of Justice Bergin which, in addition to the amount of damages for deceit sustained in the Court of Appeal, also ordered that the debtor pay the creditor the sum of $942,500.00. It was this order that was set aside by Order 3 of the Court of Appeal. The letter contained the following paragraph:
“It was previously advised that the bankruptcy notices had been issued against David James and David Brooks. Due to a technical error in the bankruptcy notices it was necessary to reissue the bankruptcy notices to David James and David Brooks. David James has been served with the bankruptcy notice and the time for compliance with that notice has now expired. A creditor’s petition is being prepared.”
It is accepted that at the time this letter was written the time for compliance with the bankruptcy notice issued against Mr James had not expired and nor was any creditor’s petition with a proper foundation being prepared against him. Mr James has commenced proceedings in the Supreme Court of New South Wales against Mr Hill and the lawyers and his claim for damages in defamation is another part of the cross claim alleged to comply with the provisions of s.40(1)(g).
By a Deed of Assignment dated 1 December 2004 Liquor National Wholesale Pty Limited purported to assign to Mr James and Mr Brooks all the right title and interest it had in an alleged claim for injurious falsehood and misleading and deceptive conduct against Mr Hill. On 2 February 2005 Mr James and Mr Brooks commenced proceedings in the Supreme Court of New South Wales under the assignment alleging damage caused to the business of National Wholesale Pty Limited arising out of the letter previously discussed. The damage suffered by the company was claimed, in the proceedings before me, to be loss of revenue occasioned by the reduction in credit facilities granted by Southcorp Wines and Carlton & United Breweries. The damages arising out of this alleged tort constituted the third element in the cross claim.
Affidavits were filed on behalf of both the creditor and the debtor which were severely pruned after objections were upheld. Mr James was cross examined on his affidavit.
The requirements of sub-section 40(1)(g)
At page 2621 of Australian Bankruptcy Law and Practice Darvall and Fernon 5th Ed (McDonald Henry & Meek) the learned authors set out what a debtor must do to satisfy the sub-section and the authorities such as Ebert v The Union Trustee Co of Australia Limited (1960) 104 CLR 346; Glew v Harrowell [2003] FCA 373; Guss v Johnstone (2002) 74 ALJR 884; Re Brink: Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 which support them. The requirements are:
·“The debtor must satisfy the court that he has a genuine demand …but … a demand must be more than bona fide; the court must be satisfied that it has a reasonable probability of success.
·The debtor must show that he or she has a prima facie case, even if there and then he or she does not adduce admissible evidence which would make out a prima facie case before a court trying the issues that are involved.
·The matter to which the court looks is this – whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue; in other words, whether it is a claim which it is proper and reasonable to litigate.
·The state of satisfaction referred to in ss.40(1)(g) and 41(7) involves weighing up considerations as to the legal and factual merit of the claim relied on by the debtor and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.
·The application of the criteria above requires the court to note some kind of preliminary assessment, though obviously not to determine the counter claim, set off or cross demand finally. … The mere production of a Statement of Claim in an action alleging facts which, if true, might give rise to such a claim will be insufficient to satisfy the court as required. The debtor must “show” the existence of the counter claim, set off or cross demand by producing evidence.”
I accept these views of the learned authors as a proper analysis of the law relating to these sub-sections.
Discussion
The first matter raised by the debtor is the existence of costs orders in his favour against the creditor. These costs have not yet been assessed by they are claimed in an amount of $284,232.00 less a margin of 15% to take into account the possibility that the amount claimed will be reduced by the assessor. A claim of this type seems to be no different to a claim in respect of which judgment has been entered for damages to be assessed. The court must therefore come to a view of the value of the claim based upon evidence provided to it. Johnstone v Guss (1997) 484 FCA Sundberg J. In this case I have been provided with an affidavit by Mr Foate, a solicitor, who has set out the quantum of costs. This is made up of the costs in the Court of Appeal in the sum of $66,731.12 and the costs in the proceedings in the sum of $217,501.40. Mr Aldridge’s challenge to this affidavit was not on the basis of the figures themselves, although he said they could not be substantiated, but more on the fact that the costs of the proceedings were the costs of all the parties and not just the applicant. But the right to the costs has been assigned to Mr James pursuant to a Deed of Assignment dated 7 April 2004 so it would appear that he has an entitlement to the entirety of any costs assessed. Mr Foate was not cross examined on his affidavit. The evidence would therefore establish a cross claim of approximately the amount referred to.
The second matter is the claim for damages arising out of the alleged defamation. Mr Brooks, a solicitor, deposes to his opinion of the value of general damages recoverable in the proceedings, being $30,000.00. Mr Brooks was not qualified as an expert in defamation matters, and as no other evidence was brought which might have assisted the court to make a calculation of the prospects of success and the value of the claim in this complex area of the law, I am not satisfied that there is any value in the proceedings.
The third matter is the claim for injurious falsehood. This claim suffers from the following difficulties. Firstly, it is a tortious claim by a company which has purportedly been assigned to the debtor.
The assignment of a chose or the right of an action in tort is not currently permissible under Australian Law Poulton v The Commonwealth and Others 89 CLR 541 at [602] per Williams, Webb and Kitto JJ. The second problem is again one of assessing the value of the damages. Mr James gave some evidence. He attempted to establish that as a result of the letter Southcorp and Carlton & United each reduced the company’s credit facilities. This, he said, resulted in an inability to purchase the goods of those companies and to trade them successfully. The loss manifested itself in a loss of turnover and therefore profit. There was no evidence that the reduction in the credit facilities granted to the company had anything whatsoever to do with the letter. I was asked to make an inference from the fact that the letter had been written to the solicitors for those two companies and that the reduction occurred some time thereafter. But it would appear that those two companies were already aware of problems surrounding the business owned by Mr James and the critical judgment of Bergin J.
Mr James was asked whether he had any written advice of the reduction in the credit facilities and responded that he had not. This is difficult to comprehend given the size of the alleged changes (in the case of Carlton & United from $300,000.00 to $100,000.00). Finally, Mr James was put to the proof of the alleged losses. He had produced an affidavit to which he had annexed an extract from the management accounts of Bluehills Liquor being the P&L summary from July to October 2004, which was the time when it was alleged the damage was done. This document establishes that sales actually rose in August and September of 2004 before falling back in October to a figure that was still over $100,000.00 in excess of the figure for July. There were some additional graphs annexed indicating that gross profit rose in August and, after dipping in September and October to only slightly below the July figure, rose significantly through October into November.
Given the problems surrounding this evidence and the legal justification for the claim I could not be satisfied that the applicant has the set off alleged. The situation is therefore this: the applicant has a set off for costs which is at least $100,000 less than the amount claimed in the bankruptcy notice. He has not satisfied me of any other set offs. He has not met the requirements of the sub section to have a set off that equals or exceeds the amount claimed in the bankruptcy notice. I am unable to set aside the bankruptcy notice on the grounds requested in the application.
The applicant asks alternatively that I extend the time for compliance with the bankruptcy notice until after the hearing of the various cases which have been referred to in these reasons. I would not be prepared to do this. I have had no evidence of the time it might take to bring these cases to court, and as I have already explained, I am doubtful of their prospects of success. It would not be reasonable or in the public interest to prevent the possible commission of an act of bankruptcy in these circumstances. On the other hand, the applicant has asked for a small window of opportunity in which to attempt to comply with the notice. I can see no detriment to the creditor in giving this allowance and I have no evidence of other debts. The orders which I would make are:
(1)Application dismissed.
(2)Time for compliance with the bankruptcy notice be extended until 17 June 2005.
(3)Applicant pay the respondent’s costs to be taxed if not agreed according to the Federal Court Act and Rules.
I certify that the preceding sixteen (16) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
Date:
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