Khera, J. v L.R. Allen & Company Ltd

[1995] FCA 617

CATCHWORDS

BANKRUPTCY - bankruptcy notice - affidavit under s.41(7) of Bankruptcy Act 1966 deposing to a counter-claim, set-off or cross demand - court in which judgment was obtained has no jurisdiction to hear the action being the subject of the counter-claim, set-off or cross demand - whether counter-claim, set-off or cross demand could have been set up in action in which judgment was obtained - whether affidavit sufficient for purposes of s.41(7).

DEFAMATION - liability of client for defamatory statement made by solicitor.

Bankruptcy Act 1966, ss.40(1)(g), 41(7).
Local Courts (Civil Claims) Act 1970 (NSW), ss.19, 21B

JASWANT KHERA T/as KHERA FINNEY ORCHISTON v L.R. ALLEN & COMPANY LIMITED T/as ALLEN BURWOOD CALENDARS

No. NN4209 of 1994

CORAM:    SHEPPARD J

PLACE:    SYDNEY

DATE:     26 JUNE 1995

IN THE FEDERAL COURT OF AUSTRALIA )
  )
NEW SOUTH WALES DISTRICT REGISTRY )    No. NN4209 of 1994
  )
GENERAL DIVISION                 )

RE:JASWANT KHERA T/as KHERA FINNEY ORCHISTON

Applicant

EX PARTE:L.R. ALLEN & COMPANY LIMITED T/as ALLEN BURWOOD CALENDARS

Respondent

CORAM:    SHEPPARD J
PLACE:    SYDNEY
DATE:     26 JUNE 1995

REASONS FOR JUDGMENT (EX TEMPORE)

HIS HONOUR:   This case concerns the sufficiency of an affidavit sworn by the debtor on 27 April 1995.  The question is whether the affidavit is a sufficient compliance with the provisions of subsec. 41(7) of the Bankruptcy Act 1966. The bankruptcy notice in the matter was issued on 9 December 1994. It was based on a judgment recovered in the Local Court on 19 April 1993. The bankruptcy notice provided:

"Whereas L.R. Allen & Company Limited... has claimed that the sum of $3500.06 together with interest thereon in accordance with Annexure hereto which at 5 December, 1994 amounted to $608.72 making a total of $4108.78, and no more is due by you [that is the debtor] to it under a final judgment obtained by it against the debtor in the Local Court at Parramatta on 19 April 1993 being a judgment, the execution of
which has not been stayed.  Therefore take notice that within 21 days after 7 April 1995 excluding that date that you are required (a) to pay the sum of $4108.78 and no more so claimed by the judgment creditor to the judgment creditor."

There was then the usual provision about the securing or compounding of the sum to the satisfaction of the judgment creditor or his agent and the notice continued:

"Further take notice that if within the period set out above you fail to comply... [that is to say the debtor fails to comply] or to satisfy the requirement of this notice or to satisfy the Federal Court of Australia that you have a counter claim, set-off or cross-demand equal to or exceeding the sum specified in paragraph (a) being a counter claim, set-off or cross demand that you could not have set up in the action in which the judgment was obtained, you will have committed an act of bankruptcy on which bankruptcy proceedings may be taken against you."

There followed a further note, after the signature of the Deputy Registrar, drawing the debtor's attention to the provisions of subsec. 41(7) of the Act.  That subsection provides:

"Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has filed with the Registrar an affidavit to the effect that he 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 in which the Court determines whether it is so satisfied."

Paragraph 40(1)(g) of the Act is the paragraph which provides for the act of bankruptcy based on a failure to comply with a bankruptcy notice.  The relevant part of the paragraph refers to the debtor not complying with the requirements of the notice or satisfying 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, as the case may be, being a counter-claim, set off or cross-demand that he could not have set up in the action or proceeding in which the judgment or order was obtained.

The critical words that require consideration in this case are the words "being a counter-claim, set off or cross-demand that he could not have set up in the action or proceeding in which the judgment or order was obtained".  The counter-claim which the debtor claims to have is a counter-claim based on an action for defamation which he says he has against the judgment creditor.  The circumstances in which that cause of action is said to have arisen are recounted in the affidavit sworn on 27 April 1995.  They are based upon a conversation which it is said an employee of the debtor, who carries on practice as a solicitor, had with the judgment creditor's solicitor, Mr Selvaggio.  Annexed to the affidavit is a diary note of the conversation in which the defamatory words were alleged to have been spoken.  The diary note is not signed or initialled in handwriting but it bears the letters "EB" in typescript at the end of it, those as I understand it being the initials of the employee who had the conversation.
     The note so far as it is relevant says:

"Telephone conversation with Mr Ross Selvaggio.

When I spoke to Mr Selvaggio to offer to pay by way of instalments over 12 months of approximately $346.85 per month commencing 1st July 1992 I also said to Mr Selvaggio per instructions from Mr Khera, that our client [that is a reference to Mr Khera, the debtor] has a taxable income of less than $15,000 per annum.  Mr Selvaggio's immediate comment to me was, "that's your principal you are talking about.  I would be a bit worried if I was you.  I hope he pays you more than that."  I said to Mr Selvaggio that they were my instructions in relation to our client's [that is to say, Mr Khera] taxable income.  And I asked whether he would get his client's instructions in relation to the offer.

Mr Selvaggio telephoned back later that day he said to me that the offer was rejected and he wanted it noted that an offer to pay by instalments had been put before and this had been rejected.  He suggested at the least if it was offered to pay in three instalments in three months it might be accepted by his client."

The balance of the note is not important for present purposes. In para. 10 of the affidavit, Mr Khera said:

"On 13 May 1992 my employed solicitor, Ms Elenor Baker, who had the conduct of my matter against the Judgment Creditor, carried out a conversation with the judgment creditor's solicitor, Mr Selvaggio, in connection with this matter.  Soon after the said conversation Ms Baker spoke to me about her conversation with Mr Ross Selvaggio and informed me that as a result of her conversation she was very distressed and she was contemplating leaving my employ.  Ms Baker informed me that Mr Ross Selvaggio was rude to her and certain things Mr Selvaggio said to her has got her worried about her employment with me."

The file note to which I have referred was then annexed.  Mr Khera continued:

"Ms Baker was an extremely valuable employee and prior to the incident referred to in the preceding paragraph she seemed to be happy with her employment. Soon after the incident mentioned in the preceding paragraph she left my employ.  As a result of Ms Baker's leaving my employ I have suffered, inter alia, a great deal of loss, damage, costs, hardship, inconvenience and stress which I estimate to be in the vicinity of $16,500.

I say that had it not been for the incident mentioned in the preceding paragraph and more particularly the two sentences contained in paragraph 2 of the file note commencing with the words, 'I would be a bit worried if I was you', and the sentence immediately following, Ms Baker would have continued her employ with me."

There followed the formal request for the court to set aside the bankruptcy notice.  I should say in passing in relation to the affidavit that there is some pencilled notation on the original copy of it.  It has no relevance.  I do not know in whose handwriting it is.

The Local Court proceedings were commenced by a statement of liquidated claim on 31 October 1991.  A defence was filed on 24 February 1992, that is almost three months before the conversation which is relied upon to found the defamation action, took place.  The matter was referred to arbitration on 3 December 1992 for a hearing on 26 February 1993.  The matter was adjourned on that day.  On 17 March 1993 when it was again in the list the matter was determined and an award was made against the judgment debtor.  On 21 April 1993 he applied to the court for a re-hearing.  The matter was listed before the Registrar on 27 May 1993.  The judgment debtor did not appear and, in consequence, the judgment, which was the subject of the bankruptcy notice, was entered on 19 April 1993.  I am not sure how this apparent backdating came about.

It is not in dispute that the judgment creditor may be liable for a defamatory statement of the kind here made, if it be defamatory, notwithstanding that the statement was made by the judgment creditor's solicitor in the circumstances to which I have referred.  But it was submitted that the statement was not capable of a defamatory meaning.  It was also sought to distinguish between Mr Khera, as I understood it, in his personal capacity and Mr Khera in the practice which he carried on as a solicitor.

Reference was made to some authority on the point but it did not seem to me to support the proposition which counsel contended for.  There was no other submission that the words in question, particularly the words, "I would be a bit worried if I was you, I hope he pays you more than that -" were not defamatory or were not capable of being defamatory.  In those circumstances it seems to me that I should conclude, and there was really no opposition to this, that the affidavit relied upon did disclose prima facie that the judgment debtor has a cause of action in defamation not only against Mr Selvaggio but against the judgment creditor who has issued the bankruptcy notice.

In the circumstances, I do not need to refer extensively to authority in relation to the matter but in passing I note the decision of the High Court in Colonial Mutual Life Assurance Society Limited v Producers and Citizens Co-operative Assurance Company of Australia Limited (1931) 46 CLR 41 (at 46) in the joint judgment of the Chief Justice and Starke J and (at 50) in the judgment of Dixon J (as he then was). There his Honour said:

"If the view be right which I have already expressed, that the "agent" represented the Company in soliciting proposals so that he was acting in right of the Company with its authority, it follows that the Company in confiding to his judgment, within the limits of relevance and of reasonableness, the choice of inducements and arguments, authorised him on its behalf to address to prospective proponents such observations as appeared to him appropriate.  The undertaking contained in his contract not to disparage other institutions is not a limitation of his authority but a promise as to the manner of its exercise.  In these circumstances I do not think it is any extension of principle to hold the Company liable for the slanders which he thought proper to include in his apparatus of persuasion."

There is, nevertheless, despite the existence of the cause of action to which I have referred, a question whether the affidavit does show that the claim which the judgment debtor has could not have been set up in the action in which the judgment was obtained.  A number of things need to be said about that argument.  The first is that pursuant to subsec. 19(1)(b) of the Local Courts (Civil Claims) Act 1970 (NSW), the Local Court has no jurisdiction in defamation proceedings. It would have been necessary, if the judgment debtor were to seek to bring an action by way of cross-claim in the Local Court based on this matter, for him to have applied to the Local Court to have the action removed into the District Court, which would have had jurisdiction to try it. So much is clear from the provisions of s.21B of the Local Courts (Civil Claims) Act 1970. Section 21B(1) provides that if an action is pending in a court, that is to say a Local Court:

"... the District Court may on application by a party to the action order that the action, including any cross-claim brought in relation to the action, be removed into the District Court sitting at such proclaimed place as the District Court may specify in the order."

Subsection 21B(5) provides:

"Where the District Court has made an order for removal under subsection (1), the Registrar of the court in which the action was pending shall forthwith, after a copy of the order authenticated in accordance with the rules is lodged with the Registrar, deliver or send by post the whole record thereof to the Registrar of the District Court for the proclaimed place specified in the order."

Section 21E provides:

"Where an order under section 21B(1) for removal into the District Court of an action in a court takes effect, the action ceases to be an action in the court, but proceedings on the action continue in accordance with rules made under the District Court Act 1973 in the District Court as if the action had been duly commenced and any cross-claim brought in relation to the action had been duly pleaded, in the District Court at the proclaimed place specified in the order on the date on which the action was commenced, or the cross-claim was brought, as the case may be, in the court."

In Local Courts Civil Procedure New South Wales (1992), which as I understand it is the recognised practice book in the Local Court's civil claims area, there are some notes to
s.21B to which I should refer. In relation to discretion the author says (at 2440):

"No criteria to aid in the exercise of the discretion are specified in the section. However a guide to the principles to be applied may be obtained from the authorities governing section 145 of the District Court Act relating to the removal of actions from the District Court into the Supreme Court.  From these authorities it is clear that the court superior in the hierarchy 'has an absolute discretion' in determining whether the proceedings should be removed from one court to the other but that this discretion must be exercised judicially."

A number of authorities are then referred to and the author continues (at 2440):

"Factors meriting consideration were the amount of the claim, whether the case involved questions of a complex or a highly difficult nature requiring the knowledge and experience of the judges of the superior court for their determination, and which is the court in which justice in the particular case may be more speedily obtained."

The authors do not deal with a case such as this where the Local Court had no jurisdiction to deal with the cause of action upon which the would be cross-claimant wishes to rely.  But in a further note the author says (at 2441):

"In ordinary circumstances a plaintiff alleging he has a cause of action based upon reasonable grounds which would entitle him to be compensated beyond the jurisdictional limit of an inferior court should be permitted to have his action removed into the appropriate court superior in the hierarchy."

Then there is a reference to delay to which I need not refer.

Another matter to which I should refer at this stage is that the defence, as earlier mentioned, had already been filed before the defamatory statements relied upon were made.  The rules of the Local Court, however, provide for extensions of time.  The relevant provisions are to be found in Part IV, rule 2, which provides:

"(1)A court may on terms by order extend or abridge any time fixed by these rules or by any judgment or order.

(2)A court may extend time under subrule (1) after as well as before the time expires, whether or not an application for the extension is made before the time expires or at all."

The only problem about that from the point of view of this case is that the action being one for defamation, which is outside the jurisdiction of the Local Court, means that it would not have been appropriate for the judgment debtor to apply to the Local Court for an extension of time in which to bring a cross-claim because the Local Court would have had no jurisdiction to entertain it.

The provisions of the Local Court rules in relation to cross claims are to be found in Part 18 rule 1, but in the light of what I have just said I do not find it necessary to refer further to that matter.  The question which I have to decide is whether the judgment creditor is entitled to say, notwithstanding the absence of jurisdiction in the Local Court to entertain the claim for defamation, that the judgment debtor could still have made the claim by seeking to have the
matter transferred into the District Court and raising the matter by way of counter-claim there.

Obviously such a course would require the exercise of discretion by the District Court judge who was asked to transfer the matter to the District Court to transfer it. Bound up with this question would be the exercise of discretion to allow the judgment debtor to raise the matter by way of cross-claim rather than to rely upon an independent action brought in the District Court.

The question of the need for lower courts to exercise discretion, in circumstances not dissimilar from those in existence here, although with some differences, has been the subject of consideration by three of the judges of this Court.  Firstly there is the decision of Lockhart J in Re Racheha; ex parte Antonios (1980) 49 FLR 423. His Honour was there dealing with a case brought in the then Court of Petty Sessions and a proposed counter-claim, the amount of which would exceed the amount of the jurisdiction of the Court of Petty Sessions. Amongst other things Lockhart J said (at 428):

"It was submitted on behalf of the judgment debtor that if he invoked the procedure afforded by s.12(2) the action in the District Court would have been a different action from the action in the Court of Petty Sessions and that, in the result, his counter claim set off or cross demand propounded in the District Court would have been one that he could not have set up in the action in which the judgment was obtained, namely the action in the Court of Petty Sessions.

Upon a defendant invoking the procedures afforded by s.12(2), the Registrar of the Court of Petty Sessions is required to order that 'the action' be transferred to the District Court; and when that order is made the Registrar of the Court of Petty Sessions is required to transmit the whole record of 'the action' to the Registrar of the District Court."

And a reference is made to s.12(3).  I interpose to say that the provisions of the legislation being considered by his Honour are not very different from those in question here.  His Honour continued (at 428):

"After 'the action' has been transferred to the District Court all proceedings 'therein' shall be taken in the District Court 'as if the action had been commenced therein on the date on which the plaint commencing the action was filed.'"

And reference is made to subsec. 12(4) which may be compared with s.21E of the current Act to which I have referred.

His Honour continued (at 428-429):

"It is plain that it is the same action that is transferred from the Court of Petty Sessions to the District Court pursuant to section 12 and continued in the District Court.  The very notion of 'transfer' suggests this, as does the language of section 12 itself.  Indeed, any other construction would lead to curious and ominous results.  One example suffices.  A plaintiff may file a plaint in the Court of Petty Sessions one month before the expiration of the time limited by the relevant limitation of actions legislation, yet, because he sues for more than $1250 he may find himself, say, three months later, necessarily in the District Court if the defendant calls in aid section 12.

If his action in the District Court is a fresh action the defendant may plead the statute of limitations and defeat the plaintiff's claim.  That would be a conclusion which I would be loathe to draw in the absence of the plainest language.  Section 12 is couched in language that clearly assumes the continuance in the District Court of the same action that was commenced in the Court of Petty Sessions.  All that has happened is that the action is to be continued in the District Court because of the amount of money involved.

If section 40(1)(g) of the Bankruptcy Act had used the words, being a counter claim set off or cross demand that he could not have set up in the court in which the judgment or order was obtained, probably the result would be different, but that is not the language of paragraph (g). The judgment debtor could have invoked the machinery of section 12(2) and prosecuted the counter claim set off or cross demand for $3250 in the District Court, but in the same action."

That case was followed by Beaumont J in Re Franks; Ex Parte GIO Holdings Limited (1990) 24 FCR 398. In relation to the case before him, Beaumont J said (at 403):

"In my opinion it cannot be said that Mr & Mrs Franks were 'unable' to set up their cross-claims in the proceedings in the District Court. It was clearly open to them to pursue their application under section 145 of the District Court Act to transfer the proceeding to the Supreme Court. They elected not to do so but there is no reason to suppose that the discretion to transfer would not have been exercised in their favour if they had requested the transfer. That being so the present case falls squarely within the observations of Lord Greene previously cited. The result is also consistent with the reasoning of Lockhart J in Re Racheha."

The reference to the judgment of Lord Greene is a reference to his Lordship's judgment in Re A Debtor (1947) 116 LJR 1413.  The passage in his Lordship's judgment is set out
by Beaumont J (at 401).  It is at 1415-1416 of Volume 116 of the Law Journal Reports and I do not quote it here.

Finally, in McDonald Henry and Meek, Australian Bankruptcy Law and Practice, the current practice in bankruptcy, there is a note (at 1058) in para. [204] to the effect that the fact that the rules of court require a debtor to obtain leave before entering a defence or a counter-claim does not render the counter-claim one which the debtor could not have set up in the action. Reference is made to Re Willats; Ex Parte Nissan Finance Corporation Limited, an unreported decision of O'Loughlin J of this Court given on 30 August 1991.

It seems to me that the cases to which I have referred establish, subject to one matter with which I shall deal in a moment, that, notwithstanding the need for transfer to the District Court and the need for leave to be given by that Court to bring a counter-claim in those proceedings, the counter-claim which the debtor wished to rely upon, contrary to his submissions, could have been set up in the action in which the judgment was obtained.  I think that what Lockhart J said in Re Racheha makes this abundantly clear.

The only question is whether or not I should take a different view because this is not an action which cannot remain in the Local Court because the amount claimed is too great.  It is an action which cannot be brought by way of counter-claim or otherwise in the Local Court because the Local Court has no jurisdiction to try it.  What would have to have happened would have been that the debtor would have had to make an application to a District Court judge for the removal of the matter on the ground that he wished to bring a counter-claim based on defamation and ask on that ground for the matter to be removed.  He would also have had to ask the District Court judge for leave to bring the proceeding he wished to rely upon by way of a counter-claim filed out of time.

Obviously there are questions about how the District Court would have exercised its discretion.  But it seems to me, provided that the evidence upon which the debtor wished to rely was clear enough - and I want to say something about the amount of his claim in a moment - that the likelihood is that the discretion in each case would have been exercised in his favour.  Nobody, of course, can be sure of that any more than could the judges who decided Re Racheha and the cases which followed it could have been satisfied of that sort of thing in their cases.  But the hurdle which a debtor in the position of the judgment debtor here faces is a high one.  It is not insurmountable but after all, the Act is dealing with bankruptcy, which is a matter concerning the solvency, and thus the ability to trade, of people in the community.  It is only natural that the legislature should have set up, as the courts have found, a barrier which is not easy to overcome.

I am therefore of opinion, guided by the authorities to which I have referred, that the view I should take is that this was a counter-claim which could have been set up in the action in which the judgment was obtained.  The judgment debtor who has appeared in person has submitted that there was no evidence brought against his bald assertion in the affidavit relied upon that he could not have brought the counter-claim in the original proceedings.  But it seems to me that his statement in the affidavit is argumentative, and although a statement commonly made in affidavits of that kind so as to indicate the nature of what the affidavit is about, it does not provide evidence which has to be contradicted by the creditor.  The matter is not a matter of evidence.

Then it was put to me, I think without any real evidence, that the debtor was unable to bring the action at the relevant time because he only had an unsigned and otherwise unidentified file note from his former employee and could not tender it for that reason.  But it seems to me that, if he has the claim, he will have to call his former employee to give evidence.  It would seem most unlikely to me, even bearing in mind the business records provisions of the Evidence Act 1905, that he would be able successfully to go to trial without her evidence if there were a real issue about whether the words in question were said.

It may be in the light of some evidence given by Mr Selvaggio at a previous hearing when he was being cross-examined that there is no issue about the fact that the words were said.  If that be the case, of course, it may be that her evidence is not necessary.  But there is nothing in what I have, either in the form of evidence or submission, which persuades me in the slightest degree that the judgment debtor could not have pursued his claim by calling his former employee to give evidence in his case issuing her with a subpoena to attend court if that should have proved a necessary precaution.  In those circumstances I see no reason to take any view other than the one that I have indicated, namely that the cross-claim was one which could have been set up in the proceedings in which the judgment was obtained.

There is one further matter that I need to mention in relation to the affidavit. It seems to me that an affidavit under s.41(7) of the Act needs to be sufficient on its face to show what the section requires it to show. I have referred to the relevant paragraphs of the affidavit in relation to the claim which the judgment debtor wishes to bring. It is true that he has filed a later affidavit but I think there is a question whether he is able to rely upon that affidavit to supplement the one which purports to be the affidavit under subsec. 41(7). All he says about the amount in para. 12 of the affidavit is that he suffered, "a great deal of loss, damage, costs, hardship, inconvenience and stress" which he estimates to be in the vicinity of $16,500.

There is no need for me to cite authority for the proposition that in defamation damages are at large.  It is true of course that a plaintiff in a defamation action may seek to prove particular or special damage.  But damage is not the gist of the action and damages may be recovered without any evidence of special damage.  They may range in amount from a nominal figure of a cent or a dollar to a very substantial amount.  The point I am endeavouring to make is that the affidavit does not on its face establish clearly that the amount of the cross-claim which the debtor claims to have would necessarily have equalled or exceeded the amount of the judgment.

This matter was not the subject of argument or submission by either party and I have not relied upon it in order to decide the matter.  I did raise the matter at an early stage of the hearing and it was mentioned again at further hearings and also this morning.  I mention it only to indicate that I have given the matter some consideration, but without argument from either side on the point it would not be right for me to base my decision upon that matter and I do not.  I base it upon the matter that I have earlier dealt with.  In the circumstances my conclusion is that the affidavit filed by the
debtor on 27 April 1995 purportedly under subsec. 41(7) of the Act was not a sufficient affidavit.

I certify that this and the eighteen (18) preceding pages are a true copy of the reasons for judgment herein of the Honourable Justice Sheppard.

Associate

Dated

APPEARANCES

Judgment debtor:                 J. Khera (in person)

Counsel for judgment creditor:    R.K. Eassie

Solicitors for judgment creditor: Mr Selvaggio

Ross Selvaggio & Associates

Dates of Hearing:                20 June 1995 and

26 June 1995

Place of Hearing:                Sydney

Date of Judgment:                26 June 1995