Jenkins v Barwicks (A Firm) - [2005] FMCA 1052

FEDERAL MAGISTRATES COURT OF AUSTRALIA

JENKINS & ANOR v BARWICKS (A FIRM)

[2005] FMCA 1052

BANKRUPTCY – Setting aside a Bankruptcy Notice.

Bankruptcy Act 1966, ss.40, 41(1)

James v Abrahams (1981) 34 ALR 657
Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346;
Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135
Guss v Johnstone (2000) 171 ALR 598
Glew v Harrowell [2003] FCA 373
Re Capsanis; Capsanis v The Owners – Strata Plan11727 [2000] FCA 1262
Re Gould; Gould v Day [1999] FCA 1650
Re Errol Hugh Pollnow And: Queensboro Pty Limited and Garden Mews-St. Leonards Pty Limited (unreported Burchett J 19 October 1988)
Eastick v Australia & New Zealand Banking Group Ltd (1981) 53 FLR 91
Re Vinci; Ex parte E.A. Sealy and Co (1982) 64 FLR 323
Jenkins & Anor v Martin & Anor; Barwicks v Jenkins & Anor [2005] QCA 64
Jenkins v National Australia Bank [1999] FCA 1758
Re Gould; Ex Parte Skinner (1983) 72 FLR 393

Applicants:

ROBERT ALEXANDER JENKINS & BERICE HOPE JENKINS

Respondent:

BARWICKS (A FIRM)

File Number:

BRG 71 of 2005

Judgment of:

Rimmer FM

Hearing date:

6 May 2005

Date of Last Submission:

6 May 2005

Delivered at:

Brisbane

Delivered on:

29 July 2005

REPRESENTATION

Counsel for the Applicant:

Mr J Stevens

Solicitors for the Applicant:

Barwick Stevens Lawyers

Counsel for the Respondent:

Mr J Faulkner

Solicitors for the Respondent:

Coyne & Associates

ORDERS

The application filed on 16 February 2005 be dismissed.
That any application for a sequestration order should be made returnable before FM Rimmer.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BRG 71 of 2005

ROBERT ALEXANDER JENKINS & BERICE HOPE JENKINS

Applicants

And

BARWICKS (A FIRM)

Respondent

REASONS FOR JUDGMENT

Application

The original application was an application to set aside a Bankruptcy Notice and an order for extension of time to comply with the Bankruptcy Notice filed by the debtors Mr and Mrs Jenkins on
16 February 2005. The application for extension of time was heard and dismissed by a Registrar of the Court on 23 February 2005. That extension of time was an application brought in reliance upon s.41(6A) of the Bankruptcy Act 1966 as amended (“the Act”). The applicant now placed reliance upon the automatic extension of time provided under s.41(7) of the Act.
The Bankruptcy Notice was issued by the creditor, a firm of solicitors, Barwicks (a Firm). It was served upon the debtors on 28 January 2005 and as it has not been complied with within the required time imposed in the Notice of 18 February 2005 and if there is no automatic extension of time provided by s.41(7) of the Act, an act of bankruptcy has been committed by the debtors.
The respondent creditor opposes the application on the basis that the time under the Bankruptcy Notice has expired and given that the applicants are not now proceeding with an application to set aside the Bankruptcy notice (for reasons I will set out later in these reasons) and that the affidavit filed by the applicants does not satisfy the requirements of that section and no automatic extension of time is afforded to them. The respondent maintains that in light of that the applicants have committed an act of Bankruptcy and no purported tender of the amount to satisfy the judgment debt has to be accepted by them and an act of bankruptcy has occurred.
This is a very unusual application which raises a vexed topic. As I have stated the applicants come before the court today and inform the court that they do not now seek to proceed with any application to set aside the Bankruptcy Notice. The reason for this is that they say that events have overtaken this matter in that during the time between the listing of the matter for hearing and the actual hearing date, the Appeal which they had filed and which was pending for determination by the Queensland Court of Appeal has been heard and was dismissed. The Appeal was dismissed on 18 March 2005. Thereafter and on the day before this hearing the 5 May 2005 the applicants took steps to tender a cheque for payment to the creditors of the amount required under the Bankruptcy Notice in the sum of $20,000. The respondent creditor has refused to accept tender of that amount on the basis that time has expired for compliance and no automatic extension is afforded to the debtors under s.41(7) of the Act.
Therefore the issue for determination is the sufficiency of the affidavit filed by the applicants in reliance upon s.41(7) of the Act and whether the applicants in fact based upon that evidence are afforded the automatic extension of time or whether they have no such extension such that an act of bankruptcy has been committed by the applicants.

The law

Section 40(1)(g) of the Act provides for the service of a bankruptcy notice requiring a debtor, within a fixed time, to comply with the requirements of the notice or satisfy the court that he has a set-off, counter-claim 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 as is referred to in s.41(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 that it is so satisfied under the provisions of s.41(7).
In James v Abrahams (1981) 34 ALR 657 at 661, Deane and Lockhart JJ said of the filing of an affidavit under s.41(7):
“It operates as an automatic extension of time for compliance with the bankruptcy notice until the court can determine whether it is satisfied by the debtor that the debtor has a counter-claim, set-off or cross demand of the type referred to in s40(1)9g). If the court is so satisfied, it is neither required not empowered to make an order setting aside the bankruptcy notice. The result of the court’s being so satisfied, within either the time originally fixed by the bankruptcy notice for compliance or the extended time resulting from the operation of s41(7), is that failure to comply with the requirements of the bankruptcy notice does not constitute an act of bankruptcy. After the court has been so satisfied, the bankruptcy notice is spent.”
The requirements of s.41(7) have been considered in several cases, particularly Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 and Guss v Johnstone (2000) 171 ALR 598.
All of these cases were considered by Lindgren J in Glew v Harrowell [2003] FCA 373 where between [9] and [12] his Honour elucidated by reference to them and also certain other cases such as Re Capsanis; Capsanis v The Owners – Strata Plan11727 [2000] FCA 1262 and Re Gould; Gould v Day [1999] FCA 1650 the current interpretation of the requirement:
“[9] There are authorities suggesting that Glew and Tresidder must satisfy me of the following interrelated and sometimes overlapping matters:
* that they have a "prima facie case", even if they do not adduce evidence which would be admissible on a final hearing making out that case (Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 ("Ebert") at 350; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 ("Brink") at 141; Gomez v State Bank of NSW Ltd [2002] FCAFC 101 at [17], [18]);
* that they have "a fair chance of success" or are "fairly entitled to litigate" the claim: Brink at 141; Re Gould; Gould v Day [1999] FCA 1650 at [27], [28]; Re Capsanis; Capsanis v The Owners - Strata Plan 11727 [2000] FCA 1262 at [11]); and
* that they are advancing a "genuine" or "bona fide" claim (Re Capsanis; Capsanis v The Owners - Strata Plan 11727 [2000] FCA 1262 at [11]).
It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at 141) the reference to a "prima facie case" in Ebert as a reference to "a fair chance of success".
[10] In Brink Lockhart J said (at 141) that the Court is not required to "undertake a preliminary trial of the counter-claim, set-off or cross demand". But, clearly, the application of the criteria above requires the Court to make some kind of preliminary assessment, though obviously not to determine the counter-claim, set-off or cross demand finally. And in Guss v Johnstone (2000) 171 ALR 598, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ stated (at 606):
"[40] The state of satisfaction referred to in s.40(1)(g), and s.41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.”
[11] Plainly, in order to "satisfy" the Court for the purposes of par 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor's claim was being finally determined, but by reference to the question whether the Court should be satisfied that the debtor has a claim deserving to be finally determined.
[12] Perhaps little more can usefully be said than that a debtor must satisfy the Court that there is sufficient substance to the counter-claim, set-off or cross demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.”
The difficulty in this matter is that the claim has been heard and has been lost. A further difficulty is that the Appeal was heard, determined and dismissed as of 18 March 2005 when the Queensland Court of Appeal delivered their reasons for judgments. The cheque tendered by the applicants to satisfy the requirements of the bankruptcy notice was not made until 5 May 2005. At the hearing of this matter, in effect, the applicants do not seek at all to have this court to determine the questions that arise as to the possible set-off, counter-claim or cross-demand. They do however rely upon the automatic extension provided under s.41(7).
Section 41(7) is clear in it’s terms, the automatic extension afforded to the applicant’s is provided to them “…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…..and the Court has not, before the expiration of that time determined whether it is satisfied that the debtor has such set-off, counter claim or cross-demand….time shall be deemed to have extended until, and including the day on which the Court determines whether it is so satisfied”.
In Re Errol Hugh Pollnow And: Queensboro Pty Limited and Garden Mews-St. Leonards Pty Limited (unreported Burchett J 19 October 1988) His Honour dealt with a case where two related proceedings were at an appellate stage. The first proceedings were the subject of an application for special leave to the High Court which had been adjourned pending the hearing of the second proceedings. The second proceedings were due to be heard by the Court of Appeal for New South Wales two months hence. His Honour said at [13]:
“[13] It seems to me that a case where the debtor's claim is the subject of current litigation, which is incomplete in the sense that appeals remain to be determined, raises somewhat different questions from those which are raised in the normal case of a claim yet to come before a court. In the normal case, it is appropriate to ask whether the debtor has shown "that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross demand". (See Re Brink) … But in a case such as the present, a court has already pronounced upon the prima facie case the debtor would seek to propound. The pronouncement, however, has not been finally affirmed, and has been put in question by appellate proceedings. I have not been referred to any authority which discusses this problem. It would clearly be invidious for this Court to attempt to assess the prospect that the Court of Appeal may overrule the decision of Hodgson J., or that the High Court may ultimately grant special leave and allow an appeal on the question on which a majority of the Court of Appeal, with Priestley J. dissenting, has overruled the decision of Kearney J. The issue should rather be whether there is a real possibility that the debtor's claim will ultimately be established. The stage of considering whether there is a prima facie case has already been passed. It is necessary to bear in mind that s.40(1)(g) does not require the debtor to satisfy the Court that he will succeed in his claim; the ordinary test of whether he has merely shown a prima facie case makes that plain.”
The evidence provided in the only affidavit which can be considered is the affidavit filed by the applicant’s solicitor William Patrick Cusak on 16 February 2005. This is the only affidavit filed by the applicants prior to the date upon which the time for compliance with the bankruptcy notice has expired which was 18 February 2005. It is clear from the authorities that only affidavits filed prior to that time can be relied upon by the applicant under s.41(7).[1]
[1] Re Brink; Ex parte the Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 per Lockhart J @ 141 -142; Eastick v Australia & New Zealand Banking Group Ltd (1981) 53 FLR 91; Re Vinci; Ex parte E.A. Sealy and Co (1982) 64 FLR 323
A review of that affidavit provides the following information:
·That he was the solicitor instructed to act for the applicants and to provide this affidavit on their behalf as they were elderly and lived in North Queensland;
·
That the applicants were served with a bankruptcy notice on

28 January 2005;
·That he has acted as solicitor for the applicants in proceedings in the Supreme Court of Queensland which was an action by the respondents against the applicants for their costs and counsel’s fees of $316,000.00;
(i)These legal fees arose as a result of the fact that the respondents had acted as solicitors for the applicants in a Supreme Court action by the applicants in defence of proceedings brought against them by General Credits Limited (“GCL”). This action arose as a result of issues of performance of obligations arising under a certain Deed of Settlement executed in September 1995 in relation to shares and units in joint venture companies which owned a parcel of land for development at Arlie Beach in the Whitsunday’s, Queensland;
·That these proceedings concluded in a manner which was unfavourable to the applicants.
·That the respondent’s instituted the above proceedings to recover their legal costs;
·That the applicants defended a summary judgment application brought by the respondents in the Supreme Court on 27 June 1997 on the basis of a counter-claim for negligence on the part of the respondents. The applicants contention is that the counter-claim for negligence was only able to be based on limited information which was available to them at that time and that as a result of further investigations, the applicants altered the allegations in the counter-claim and particularised their claim in greater detail as this information became available to them;
·An application was made in March 2000 by the applicants to join Mr Martin QC as a party to those proceedings. That as this was not consented to by Mr Martin QC the applicants then filed a fresh application with Mr Martin QC as the defendant and the two applications were to be consolidated and heard together;
·That the applicants allege that they obtained documents which show that GCL had a strong perception that the applicant’s claims were devoid of legal and commercial merit and that the overly aggressive conduct of proceedings by Barwicks and Mr Martin QC spoiled the applicant’s prospects of a co-operative settlement;
·A consolidated Statement of Claim was delivered by the applicant in March 2002 and that in this the applicants claims were pleaded as negligence;
·The applicants were then pressing for a speedy trial. That there were numerous requests for further and better particulars of the Statement of Claim and then consequential amendments to include such particulars;
·In early 2003 it was agreed that the applicants would again deliver an Amended Statement of Claim but that the applicants experienced difficulties in having Counsel settle their Statement of Claim;
·That Barwicks applied to strike our the amended version of the Statements of Claim but leave was granted by McMurdo J of the Supreme Court on 22 November 2003;
·The applicants then briefed further Counsel to recast the Statement of Claim but that such Counsel did not meet this time estimate and a further application was made by the respondents to strike out which resulted in a consent guillotine order being made on 12 February 2004;
·That difficulties arose for the applicants Counsel who ultimately advised the applicants that he could not act and returned the brief;
·That the applicants then attempted to make an application for interpretation of the respondents retainer letter but McMurdo J refused to hear any such application until a compliant Statement of Claim was delivered by the applicants;
·On 22 July 2004 McMurdo J heard the applicant’s application for leave and the cross-applications by the respondents and Mr Martin QC to strike out the action of the applicants for want of prosecution. At this hearing the respondents gave an undertaking not to proceed with their action of recovery of costs incurred in their acting for the applicants in the prior Supreme Court action with GCL;
·That McMurdo J in determining the application to dismiss the applicants’ counter-claim of negligence did so on the basis of findings in respect of the applicants inordinate and unreasonable delay in prosecuting their action. His Honour also refused the applicants leave to raise on their pleadings the case of fraud against the respondents and refused leave to the applicants to amend, again, their Statement of Claim;
·That the applicants appealed against the decision of McMurdo J which was to be heard on 25 February 2005;
·In perusing the appeal the applicants contend that the allegations of fraud and particulars of the applicants damages in negligence were not made belatedly;
·That the bankruptcy notice is founded on interlocutory costs orders made in the above proceedings and that if the appeal is upheld that the potential damages recoverable would far exceed the amounts of the orders in respect of which the notice issued;
·That the applicants’ damages, if the appeal is successful and the Supreme Court action based on their counter-claim would be in the order of $19.5 million reflecting the value of the shares and units together with the value of lost opportunity to develop and sell the land.
I accept that there is no doubt that the authorities provide for the proposition that the Court “should adopt a benevolent construction to the initial affidavit”.[2]
[2] Eastick v Australia and New Zealand Banking Group (1981) 53 FLR 91 @95
It is submitted by the applicants that the Court is no longer required to look at the merits of the application for counter-claim, set-off or cross demand as raised on the affidavit of Mr Cusak as the claim has been determined by the Court of Appeal and there has simply been an automatic extension of the time for compliance with the bankruptcy notice. I cannot accept this submission. As a matter of logic and proper construction of s.41(7) of the Act it is flawed. If that were the case a person could simply gain an extension of time automatically by filing an application which relies on s.41(7) of the Act and just prior to the date of hearing simply discontinue or abandon the application based on a counter-claim, set-off or cross demand and claim the automatic extension of time. What is clearly established on the many authorities is that the affidavit filed in compliance with s.41(7) satisfy the court of a number of things which are[3]:
a)That the judgment debtors must show that they have a prima facie case. The court must be able to determine from that affidavit that the applicants have a fair chance of success.
b)That the counter-claim, set-off or cross-demand must be equal to or exceed the amount of the judgment debt.
c)That the “cross-demand” are not confined to claims which might be made the subject of a traditions counter-claim or set-off. They extend to claims which have no connection with the cause of action out of which the judgment creditors judgment arose.
d)That the counter-claim, set-off or cross demand must have arisen before the time for compliance with the bankruptcy notice has expired.
e)The counter-claim, set-off or cross demand must be against the judgment creditors in the same right as is the judgment debt against the debtors.
f)The counter-claim, set-off or cross demand could not have been set up on the action in which the judgment was obtained.
[3] Ebert v The union Trustee Company of Australia Ltd (1960) 104 CLR 346; Re Gould; Ex Parte Skinner (1983) 72 FLR 393.

In this matter it is clear from both the judgment of McMurdo J and the Queensland Court of Appeal, that the very matter which the applicant discloses in the affidavit of Mr Cusak under s.41(7) of the Act as giving rise to the alleged counter-claim or cross demand, are those which were pleaded in the 9^th amended Statement of claim which was before McMurdo J and were dismissed for want of prosecution.
What is also very apparent from the reasons for decision of the Queensland Court of Appeal is that what the applicants were alleging in their pleadings was the applicants earlier case against GCL was always a hopeless one but that they were badly advised by the respondents (and Mr Martin QC) to pursue that claim in the manner which then gave rise to them incurring legal costs and that it was therefore difficult to see how substantial damages could be recovered by the applicants over and above the costs actually incurred in paying their legal advisors.
It is also clear that this was the reason that the respondents then proffered and McMurdo J then accepted their undertaking not to continue with any action against the applicants for the costs recovery in relation to costs incurred in that earlier action with GCL.
This, I find, is a matter which goes to the heart of whether the applicants can demonstrate that they ever had a prima facie case for a set-off, counter-claim or cross demand against the respondents in an amount that would be equal to or exceed the judgment debts which founded the bankruptcy notice. It is clear from the affidavit of Mr Cusak that the applicants were claiming that they had a claim for damages which comprise the value of the shares and units in the development venture and the lost opportunities arising from any potential development of the land.
However, as identified by the Court of Appeal, the entire basis of their counter-claim against the respondents is that the case that they ran against GCL was a hopeless one and they were wrongly and badly advised by the respondents to pursue it, it is not possible on the affidavit of Mr Cusak, even giving it the most benevolent construction how they would mount a claim for the damages based on the loss of the fruits of the dispute they had with GCL over and above the fact that they paid unnecessary legal costs in running that hopeless case. The respondents have undertaken to the Supreme Court not to pursue any costs recovery against the applicant’s for those costs. This remains the case whether or not the applicants allege that this was as a result of negligence on the part of the respondents or some sort of unspecified fraudulent conduct on their part. This was, as the Queensland Court of Appeal identified in their reasons “at the centre of the problems that the appellants current legal advisors have had in drafting a viable Statement of Claim”.[4]
[4] Jenkins & Anor v Martin & Anor; Barwicks v Jenkins & Anor [2005] QCA 64 at paragraph 13
I find that in this present case, there is no proper demonstration of the basis of a reasonably viable claim against the respondents for damages of $19.5 million or even the likelihood of a claim for damages which could be greater than the legal costs they expended in the claim against GCL. Given the undertaking given by the respondents not to pursue their cost recovery in that action from the applicants, it is difficult to see how the applicants would then have any claim for damages against the respondents at all on the basis of the matters raised in the affidavit of Mr Cusak filed in reliance upon s.41(7) of the Act. I agree with the submissions made by counsel for the respondents in this matter that the Appeal was “always doomed to fail”.
I find the applicants cannot establish that they have a prima facie case to a claim for a set-off, counter claim or cross demand for an amount that is equal to or exceeds the amount required by the bankruptcy notice, even providing a most benevolent construction of the affidavit of Mr Cusak filed on 16 February 2005. The simple assertion by the applicant’s in Mr Cusak’s affidavit that this is the case, is clearly not sufficient.
I find therefore that the affidavit of Mr Cusak does not answer the description of an affidavit required by s.41(7) of the Bankruptcy Act. The consequence is that there has been no deemed or automatic extension of time within which to comply with the requirements of the Bankruptcy Notice.
The fact that the applicants have tendered a cheque on 5 May 2005 in purported satisfaction of the judgment debts that found the bankruptcy notice may be a consideration to be taken into account, if and when, any creditors petition is brought by the respondents and the applicants may well be able to put forward cogent arguments as to why a sequestration order should not be made against his estate on this basis. I would therefore propose to make an order similar to that made by Ryan J in Jenkins v National Australia Bank [1999] FCA 1758 that any application for a sequestration order should be made returnable before me.
The applicant debtor has been wholly unsuccessful in these proceedings. I will hear the parties as to costs.

I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of Rimmer FM

Associate:

Date: 29 July 2005