Labraga v Exception Holdings Pty Ltd (in Liq)
[2009] FMCA 397
•28 May 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| LABRAGA v EXCEPTION HOLDINGS PTY LTD (IN LIQ) | [2009] FMCA 397 |
| BANKRUPTCY – Challenge to bankruptcy notice – whether the bankruptcy notice was stale when it was served considered – whether the debtor has a set off of equal or greater value than the amount due under the notice considered – whether the notice was defective considered. |
| Bankruptcy Act 1966 (Cth), ss.40, 41, 86, 306 Bankruptcy Regulations Civil Judgments Enforcement Act 2004 (WA) Civil Procedure Act 2005 (NSW), s.98 Corporations Act 2001 (Cth), ss.55, 466, 459H, 513C, 553C, 556, 588FGA Legal Profession Act 2004 (NSW), ss.353, 368, 372 Limitation Act 1969 (NSW) Uniform Civil Procedure Rules 2005 |
| Adams v Lambert (2006) 228 CLR 409 Alloway v Steere (1882) 10 QBD 22 Chesson v Smith (1992) 35 FCR 594 Deputy Commissioner of Taxation v Moss (No 2) [2006] FMCA 225 EquusCorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 24 ACSR 194 Gye v McIntyre (1991)171 CLR 609; 65 ALJR 221; 98 ALR 393 Hall v Poolman (2007) 65 ACSR 123 Hiley v Peoples Prudential Assurance Co Ltd (1938) 60 CLR 468 James v Deputy Commissioner of Taxation (1957) 97 CLR 23 John Shearer Ltd v Gehl Company (1995) 60 FCR 136 Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 Massih v Esber (2008) 250 ALR 648 Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd [1995] 2 VR 457 Pearson’s Products Pty Ltd v CP Technologies Pty Ltd [1999] NSWSC 575 Pollnow v Queensboro Pty Ltd (1988) 217 ALR 49 Re A Bankruptcy Notice [1934] 1 Ch 431 Re Brink; Ex parte The Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 Re Ling; Ex parte Ling v Commonwealth (1995) 58 FCR 129 Re Parker (1997) 80 FCR 1 Re Ryan; Ex parte Ryan v Jupiter’s Management Ltd (1992) 111 ALR 246 Skalkos v T&S Recoveries Pty Ltd (2004) 213 ALR 311 Stec v Orfanos [1999] FCA 457 Turner v Mortgage Elimination Services Pty Ltd [2009] FMCA 27 Van Leeuwen v Bank of Western Australian Ltd [2001] FCA 1826 | ||
| Applicant: | JULIO CESAR LABRAGA | |
| Respondent: | EXCEPTION HOLDINGS PTY LTD (IN LIQUIDATION) |
| File Number: | SYG 3203 of 2008 |
| Judgment of: | Driver FM |
| Hearing date: | 29 April 2009 |
| Delivered at: | Sydney |
| Delivered on: | 28 May 2009 |
REPRESENTATION
| Counsel for the Applicant: | Mr S Docker |
| Solicitors for the Applicant: | Kemp Strang |
| Counsel for the Respondent: | Mr S Ipp |
| Solicitors for the Respondent: | Henry Davis York |
ORDERS
Bankruptcy Notice NN1623 of 2008 issued on 9 May 2008 is set aside.
The respondent shall pay the applicant’s costs of the application filed on 4 December 2008.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 3203 of 2008
| JULIO CESAR LABRAGA |
Applicant
And
| EXCEPTION HOLDINGS PTY LTD (IN LIQUIDATION) |
Respondent
REASONS FOR JUDGMENT
Introduction and background
On 4 December 2008 Mr Labraga applied to the Court for orders that:
a)bankruptcy notice NN1623 of 2008 issued on 9 May 2008 be set aside pursuant to s.41(7) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”);
b)in the alternative, that the bankruptcy notice be set aside on the basis that it is defective; and
c)that the respondent pay the costs of and incidental to the application.
The application sought an interim order in addition that the time for compliance with the bankruptcy notice be extended up to and including the hearing of the application to set aside the bankruptcy notice pursuant to s.41(6A) of the Bankruptcy Act.
On 4 March 2009 I made an order in chambers extending the time for compliance with the bankruptcy notice up to and including 29 April 2009. I declined to make a further order extending time for compliance with the bankruptcy notice pursuant to s.41(6A) of the Bankruptcy Act when I reserved judgment in this matter on the basis that there was an unresolved challenge to the bankruptcy notice pursuant to s.41(7) and hence an order pursuant to s.41(6A) of the Bankruptcy Act was unnecessary. I also noted an undertaking given by the respondent that it would take no action on the bankruptcy notice until judgment in this matter is delivered.
The application is opposed by Exception Holdings.
The application is supported by two affidavits by Mr Labraga made on 4 December 2008 and 15 April 2009 and the documents exhibited to those affidavits. Mr Labraga was not required for cross-examination. Exception Holdings relies upon the affidavit of Killara Marilla Maher made on 20 November 2008[1]. Ms Maher was also not required for cross-examination.
[1] See related file SYG2463 of 2008
The following statement of background facts is derived from written submissions by the parties handed up in court during the trial of this matter on 29 April 2009.
Mr Labraga is a former director of Exception Holdings, which was the holding company for three other companies, being Exception Finance Pty Ltd (“EF), Exception Advertising Pty Ltd (“EA”) and Exception Commercial Pty Ltd (“EC”). His affidavit shows he advanced the following amounts on the following dates to Exception Holdings which have not been repaid:
a)$13,000 on 3 may 2004: paragraph 15;
b)$300,000 on 1 December 2004: paragraph 24;
c)$20,000 on 5 January 2005: paragraph 25.
It is alleged that, despite its agreement to do so, Exception Holdings failed to pay interest on the loans.
In February 2005, relations between Mr Labraga and his fellow director of Exception Holdings, Mr Pomfret, broke down and Mr Labraga applied to the Supreme Court of NSW for an order winding up Exception Holdings. On 19 May 2005, a provisional liquidator was appointed to Exception Holdings and on 29 September 2005 Young J of the Supreme Court gave judgment that Exception Holdings be wound up on the just and equitable ground. However, the winding up order appears to have been made on 11 October 2005 and an order made that Mr Ryan be appointed liquidator to the company.
Also on 11 October 2005 an order was made that the company pay the costs of Mr Labraga in the winding up proceedings. The Supreme Court ordered that Mr Labraga’s costs of the winding up proceedings be paid from Exception Holdings’s property pursuant to s.466(2) and s.556(1)(b) of the Corporations Act 2001 (Cth) (“the costs order”): p61 JCL1. Subsections 466(1)-(2) provide:
(1) The persons, other than the company itself or the liquidator of the company, on whose application any winding up order is made must, at their own cost, prosecute all proceedings in the winding up until a liquidator has been appointed under this Part.
(2) The liquidator must, unless the Court orders otherwise, reimburse the applicant out of the property of the company the taxed costs incurred by the applicant in any such proceedings.
Section 556 is headed “Priority Payments” and ss.(1)(a)-(b) provide:
(1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:
(a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business;
(b) if the Court ordered the winding up--next, the costs in respect of the application for the order (including the applicant's taxed costs payable under section 466);
On 5 April 2007, the costs order was assessed at $59,965.89: pp63-4 JCL1. Mr Labraga has submitted a proof of debt to the liquidator of the company in which he claims the Labraga costs order, an amount for loans made to the company and unpaid salary ($36,000). No payment has been made by Exception Holdings.
In 2007, Mr Labraga attempted to enforce the costs order in the Western Australian District Court by way of a debt appropriation order pursuant to Part 4 Division 5 of the Civil Judgments Enforcement Act 2004 (WA). He was unsuccessful and a costs order was made against him, which was taxed at $18,793.46. This is the amount claimed in the bankruptcy notice.
Mr Labraga failed to satisfy the company costs order.
Submissions
Mr Labraga wishes to raise three arguments why the bankruptcy notice ought to be set aside or the Court should find he has committed no act of bankruptcy, being:
a)that the bankruptcy notice was served more than six months after it was issued in breach of regulation 4.02A of the Bankruptcy Regulations (“Bankruptcy Regulations”);
b)that he has a set-off, counter-claim or cross demand; and
c)that the bankruptcy notice is defective.
In relation to the first assertion, Mr Labraga relies upon order 4 made by Registrar Segal on 29 October 2008 in proceedings SYG2463 of 2008. The registrar ordered that the bankruptcy notice shall be deemed to be served on 14 November 2008. That was one day after the six month period prescribed by regulation 4.02A. On that issue, Exception Holdings submits that the bankruptcy notice was in fact served on 31 October 2008 in accordance with regulation 16.01 of the Bankruptcy Regulations.
In relation to the second issue, Mr Labraga submits that he advanced various amounts to Exception Holdings over a period of time as loans and has a claim for the recovery of that and other money. He has lodged a proof of debt with the liquidator of the company which has not yet been dealt with. In addition, Mr Labraga obtained a costs order in proceedings to have the company wound up and that costs order has been quantified. The costs order as quantified well exceeds the amount due on the bankruptcy notice.
On that issue, Exception Holdings submits that Mr Labraga can have no off setting claim against the company because it is in liquidation, unless he can satisfy s.553C of the Corporations Act.
Finally, on the third issue, Mr Labraga submits that the bankruptcy notice is defective because the amount claimed under the bankruptcy notice arises from a judgment or order, yet no amount is specified on item 1 of the schedule to the bankruptcy notice on page 3. The correct amount of $18,793.46 is specified as legal costs at item 2 of the schedule on that page. Exception Holdings concedes that the amount claimed should have been included at item 1 but seeks to rely on s.306 of the Bankruptcy Act. Exception Holdings submits that the error is not an irremediable defect and that the error does not give rise to any confusion, particularly when regard is had to the annexed judgment.
Consideration
I accept Mr Labraga’s submissions concerning the statutory framework. Part IV of the Bankruptcy Act deals with proceedings in connection with bankruptcy. Section 40 contains and defines various acts of bankruptcy upon which a creditor’s petition may be founded. The relevant subsection is (1)(g), which provides:
(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 effect the service;
comply with the requirements of the notice or satisfy the Court that he or she has a counter‑claim, set‑off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter‑claim, set‑off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;
Section 41 deals specifically with bankruptcy notices and provides, relevantly:
(1) An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor:
(a) a final judgment or final order that:
(i) is of the kind described in paragraph 40(1)(g); and
(ii) is for an amount of at least $2,000; or
(b) 2 or more final judgments or final orders that:
(i) are of the kind described in paragraph 40(1)(g); and
(ii) taken together are for an amount of at least $2,000.
(2) The notice must be in accordance with the form prescribed by the regulations.
…
(6A) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:
(a) proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or
(b) an application has been made to the Court to set aside the bankruptcy notice;
the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.
...
(7) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counter‑claim, set‑off or cross demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter‑claim, set‑off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied.
Regulations 4.02A and 16.01 of the Bankruptcy Regulations provide:
4.02A
A bankruptcy notice must be served within:
(a) the period of 6 months commencing on the date of issue of the bankruptcy notice; or
(b) any further period that the Official Receiver allows (whether within or outside that period of 6 months).
Note If paragraph (b) applies to a bankruptcy notice, a fee is payable under the 2006 Fees Determination.
16.01
(1) Unless the contrary intention appears, where a document is required or permitted by the Act or these Regulations to be given or sent to, or served on, a person (other than a person mentioned in regulation 16.02) , the document may be:
(a) sent by post, or by a courier service, to the person at his or her last‑known address; or
(b) left, in an envelope or similar packaging marked with the person's name and any relevant document exchange number, at a document exchange where the person maintains a document exchange facility; or
(c) left, in an envelope or similar packaging marked with the person's name, at the last‑known address of the person; or
(d) personally delivered to the person; or
(e)sent by facsimile transmission or another mode of electronic transmission:
(i) to a facility maintained by the person for receipt of electronically transmitted documents; or
(ii) in such a manner (for example, by electronic mail) that the document should, in the ordinary course of events, be received by the person.
(2)A document given or sent to, or served on, a person in accordance with subregulation (1) is taken, in the absence of proof to the contrary, to have been received by, or served on, the person:
(a) in the case of service in accordance with paragraph (1) (a) or (b) -- when the document would, in the due course of post or business practice, as the case requires, be delivered to the person's address or document exchange facility; and
(b) in the case of service in accordance with paragraph (1) (c), (d) or (e) -- when the document is left, delivered or transmitted, as the case requires.
Was the bankruptcy notice stale when served?
A registrar of this Court made the following orders on 29 October 2008:
1. Personal Service of the Bankruptcy Notice no. 1623 of 2008 issued on 13 May 2008 be dispensed with.
2. An official copy of the bankruptcy notice signed by the Official Receiver be served by:
(a) delivery of the same along with a copy of these orders, in a sealed envelope marked to the attention of Sarina Roppolo to the office of the solicitors for the judgment debtor, Kemp Strang, at Level 16, 55 Hunter St, Sydney NSW 2000;
(b) posting the same in a sealed envelope along with a copy of these orders, to Julio Labraga, Capital Fusion, level 29, 2 Chifley tower, Sydney NSW 2000;
(c) posting the same in a sealed envelope along with a copy of these orders to Julio Labraga, PO Box 189 Leichhardt NSW 2040; and
(d) emailing a copy of the notice and these orders to Mr Labraga at [email protected],
by 5pm on 31 October 2008.
3. That Service in accordance with this order shall be deemed good and sufficient service of the Bankruptcy Notice upon the Debtor.
4. The Bankruptcy Notice shall be deemed to be served on 14 November 2008.
5. A copy of the Bankruptcy Notice to be served pursuant to paragraph 2 of this order is to be annexed to any affidavit proving that service.
6. The copies of the Bankruptcy Notice for service and proof of service all be amended by deleting the words in paragraph 3 of this notice “after service on you of this notice” and substituting “after 14 November 2008”.
7. A copy of this order be given to the Official Receiver in Sydney.
8. The costs of this application be reserved for purposes of any petition based on this Bankruptcy Notice.
Exception Holdings complied with the substituted service orders in respect of service of the bankruptcy notice, which included serving a copy of the substituted service orders with the bankruptcy notice. The effect of such compliance was that the bankruptcy notice was deemed to be served on 14 November 2008 in accordance with order 4 of the substituted service orders. It is clear Mr Labraga understood the bankruptcy notice was served in accordance with such orders as he filed this application on 4 December 2008, which is the 20th day after 14 November 2008.
Mr Labraga contends that, as service of the bankruptcy notice occurred more than six months after its issue, it was served in breach of regulation 4.02A of the Bankruptcy Regulations. On that basis, there would be no act of bankruptcy in failing to comply with a bankruptcy notice after it was served out of time: James v Deputy Commissioner of Taxation (1957) 97 CLR 23 at 33 and see Deputy Commissioner of Taxation v Moss (No 2) [2006] FMCA 225 at [22] and [24].
Regulation 4.02A of the Bankruptcy Regulations provides that a bankruptcy notice must be served within six months of the date of issue of the bankruptcy notice. The bankruptcy notice was issued on 13 May 2008. The order for substituted service was made on 29 October 2008 to the effect that upon completion of the steps identified in the order substituted service was deemed to occur on 14 November 2008 (paragraph 4 of the substituted service order).
Mr Labraga contends that, as 14 November 2008 is one day over the six month time period prescribed in regulation 4.02A, service in reliance on the substituted service order would be outside the required time and render the bankruptcy notice a nullity.
However, absent an order for substituted service, service of a bankruptcy notice is governed by regulation 16.01 of the Bankruptcy Regulations. Exception Holdings does not rely on the substituted service order to prove service. It relies instead on regulation 16.01(1)(a) to (e) which provides for five different means of service.
The company’s evidence of service is the affidavit of service sworn by Killara Marilla Maher sworn on 20 November 2008. In her affidavit Ms Maher deposes to having taken various steps to serve the bankruptcy notice in accordance with the substituted service order. Two of the steps taken by Ms Maher, ie service by post to Mr Labraga’s last known address[2] and service by email[3] would constitute proper service pursuant to regulation 16.01(1)(a) and (e)(ii), respectively.
[2] [Maher [2, 3]]
[3] [Maher [4]]
In paragraph 4 of his affidavit sworn 4 December 2008 Mr Labraga states: I was served with the bankruptcy notice by email on 31 October 2008. He sought to qualify that evidence at the trial of this matter but there is no doubt that order 2 of the substituted service orders was complied with.
The overlapping issues then are whether:
a)A “contrary intention appears” (regulation 16.01(1)) so that regulation 16 is unavailable?
b)If regulation 16 is available, has the creditor proved service under the substituted service order or regulation 16?
c)If regulation 16 is unavailable or service under it is not proven, is the relevant date for the purposes of regulation 4.02A the date of actual service or the date of deemed service?
Regulation 16 applies unless the contrary intention appears[4]. Does the making of the substituted service order evince a “contrary intention” to preclude regulation 16? Put another way, does the substituted service order exclude service under regulation 16?
[4] see the opening words to regulation 16.01(1)
In Skalkos v T & S Recoveries Pty Ltd (2004) 213 ALR 311 the Full Federal Court held at page 320 [30] that:
…an order for substituted service will constitute a contrary intention only if it evinces an intention that it is to operate either to the exclusion of reg 16 or to the exclusion of any other mode of service.
I accept that clear and unambiguous words must be used in the substituted service order to exclude regulation 16.01. The substituted service order is silent as to the operation of regulation 16.01. Applying Skalkos as the substituted service order does not constitute a contrary intention for the purposes of regulation 16.01(1) and regulation 16 is hypothetically available.
A similar issue was considered in Turner v Mortgage Elimination Services Pty Ltd [2009] FMCA 27 where Federal Magistrate Lloyd-Jones held at [16] that service in accordance with regulation 16.01(2)(a) was not excluded by a substituted service order. Valid service was held to have occurred as it was in accordance with regulation 16.01 despite service not complying with the terms of a substituted service order. Therefore, the party seeking to prove service could elect to attempt to prove service under regulation 16.01 rather than pursuant to the substituted service order.
I reject the contention that service of this bankruptcy notice occurred in compliance with regulation 16.01. The affidavit of Ms Maher establishes that service was effected on 31 October 2008 for the purpose of complying with the substituted service order, not for the purpose of serving the bankruptcy notice in accordance with regulation 16.01. It is merely coincidental that the methods of service included prescribed methods under the regulation. The decisions in Skalkos and Turner can be distinguished as in those cases there was no compliance with the substituted service order. In other words, while is was open to Exception Holdings to rely upon regulation 16.01 rather than the substituted service order, in proceedings SYG2463 of 2008 it relied upon the substituted service order, and the same evidence was relied upon in this proceeding.
However, it would be an absurd result for the Court to make orders as to service of the bankruptcy notice to achieve an outcome that service could not lawfully be effected. Order 2 of the orders made by Registrar Segal on 29 October 2008 required service of the bankruptcy notice by various means no later than 5.00pm on 31 October 2008. The affidavit of Ms Maher establishes that order 2 was complied with. Her evidence was uncontested. Indeed, Mr Labraga concedes service by email on that date. I do not accept that his belated attempt to qualify that concession achieves anything. The effect of order 4 was not to alter the fact of service by the due time and date but to establish a period from which time for compliance with the bankruptcy notice would run. This is verified by the fact that paragraph 3 of the bankruptcy notice was amended in order to comply with order 4 made by the registrar. Paragraph 3 originally read:
You are required, within 21 days after service on you of this bankruptcy notice…
It was amended to read:
You are required, within 21 days after 14 November 2008…
The amendment was consistent with usual practice where a substituted service order is made. The order establishing the starting point from which time ran for compliance with the bankruptcy notice was not intended to and does not affect the fact of service at an earlier time. In other words, order 4 made by the registrar deems the bankruptcy notice to have been served on 14 November 2008 simply for the purposes of establishing the time for compliance with the bankruptcy notice and not for all purposes. In particular, the order does not deem service to have occurred on 14 November 2008 for the purposes of regulation 4.02A. Service in fact occurred on 31 October 2008 within the period of six months prescribed by that regulation in accordance with the substituted service order and the bankruptcy notice was not stale at the time it was in fact served. I reject the applicant’s contention.
Does Mr Labraga have an off setting counter-claim, set off or cross demand?
Mr Labraga has provided helpful submissions on this point which I accept. A summary of the relevant principles is contained in the judgment of French J (as his Honour then was) in Van Leeuwen v Bank of Western Australia Ltd [2001] FCA 1826 at [14]-[16]:
The Bank's claim against Mr Van Leeuwen and his claim against the Bank are unrelated except in the sense that he advances, namely that if the Bank had honoured the fee arrangement which he asserted, he would have repaid his debt to the Bank. Mr Van Leeuwen's claim could not, I think, be regarded as a set-off against the Bank's claim. It can constitute a counter-claim albeit that is a concept affected by the rules of court in which the judgment grounding the bankruptcy notice was obtained. It certainly falls within the broader concept of a cross demand. The collocation "counter-claim, set-off or cross demand" derives from the bankruptcy legislation of the United Kingdom. In that context set-off was seen as referring to a claim which, in effect, provided a defence against the primary claim, something properly to be dealt with as diminishing it. The counter-claim was a creature of the Supreme Court of Judicature Act 1873. It is provided for in rules of court in various Australian jurisdictions. A cross demand is a term of wider meaning "...something that would not be described, certainly, as a set-off, something that could not have been brought in the action, something that still lies outside a counterclaim, but is of a nature which can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt - In re A Bankruptcy Notice [1934] 1 Ch 431 at 437-438 (Lord Hanworth MR). The cross demand need not have any connection with the cause of action out of which the judgment debt arose. Indeed a judgment debtor may even take an assignment of a claim against a judgment creditor in order to have a cross demand - Re Brink; Ex parte The Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 at 139 (Lockhart J). As Lockhart J said in that case:
The object of the Legislature in providing machinery for the setting aside of a bankruptcy notice where a judgment debtor has a cross-demand is obviously to prevent a judgment creditor from pursuing bankruptcy proceedings when, as between himself and the judgment debtor, the balance of account is in favour of the judgment debtor; if this be the reason for the creation of the machinery it is quite unimportant whether the cross-demand is one which, in the event of bankruptcy supervening, would belong to the official assignee or the bankrupt.
On that basis his Honour held that the term "cross-demand" extended to a claim for unliquidated damages for tort (at 139).
The provisions of s 40(1)(g) require that the judgment debtor "satisfy" the Court that he or she has a counter-claim, set-off or cross demand. I accept that the requirement for the Court to be so satisfied is that there be a genuine claim with a reasonable chance of success. This does not require that the judgment debtor establish the claim on the balance of probabilities but rather that it put evidence before the Court which, if accepted, would establish an arguable cause of action against the judgment creditor. In this case I am satisfied, on the affidavit evidence of Mr Van Leeuwen, that he is advancing an arguable counter-claim or cross demand. It is to be noted that in its defence to his claim in Action 973 of 2000, the Bank pleads that the claim is out of time under s 38 of the Limitation Act 1935 (WA) on the basis that the cause of action accrued more than six years prior to the commencement of the proceedings. That objection is procedural in character and not to be resolved in these proceedings. It does not detract from the satisfaction of the Court that there is a counter-claim, set-off or cross demand.
There is no doubt that the amount of Mr Van Leeuwen's claim exceeds the amount of the judgment debt. This leaves as the key issue in this case the question whether he could not have set up the counter-claim, set-off or cross demand in the proceedings in which the judgment against him was obtained. This question has to be answered by reference to legal considerations rather than practicalities. That he may have had an excuse for not bringing his own claim in Action 2363 of 2000 does not mean that his claim could not legally have been brought in those proceedings - Re Ling; Ex parte Ling v Commonwealth (1995) 58 FCR 129 at 132 (Hill J). As Hill J said at 137 in that case:
If machinery is available for [the] 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
(see also Massih v Esber (2008) 250 ALR 648 at [13]-[32] per Flick J).
I accept that, as the extract above makes clear, a cross demand is the residual category of the three categories in s.40(1)(g) of the Bankruptcy Act. That is, unlike the other two categories, it has no technical meaning. It must be of a nature that it can be specified and it must exceed the amount of the judgment debt. Also, it must sound in money: Massih v Esber at [22]. However, it need not have any connection with the cause of action out of which the judgment debt arose.
I further accept that the first step is to look at Mr Labraga’s claim or cross demand. The costs part of it is based on an order of the Supreme Court of NSW made pursuant to s.98 of the Civil Procedure Act 2005 (NSW). It is payable from the property of Exception Holdings pursuant to s.466(2) and 556(1)(b) of the Corporations Act. The amount of a costs order made by the Supreme Court may be determined by the Supreme Court or may be assessed under the Legal Profession Act 2004 (NSW) (“the Legal Profession Act”)[5]. The costs order here was assessed under the Legal Profession Act and a certificate was issued under s.368(1). That certificate is final and binding on Mr Labraga and Exception Holdings[6]. If filed in the registry of a NSW court having jurisdiction to order that amount, judgment may be entered for that amount plus interest[7]. The certificate was filed in the Local Court of NSW and judgment was entered in respect of it.
[5] see s.353
[6] s.372
[7] s.368(5) Legal Profession Act and rule 36.10 Uniform Civil Procedure Rules 2005
The nature of the costs order in favour of Mr Labraga from the winding up proceedings in the Supreme Court of NSW has been specified. It also sounds in money and exceeds the amount claimed by Exception Holdings.
Accordingly, even if the costs order does not entitle Mr Labraga to a set-off, it is a cross-demand. Any objection along the lines that the costs order may not be enforced because Exception Holdings is in liquidation is procedural in character because this circumstance merely affects how it may be enforced and, like the Limitation Act objection in Van Leeuwen, need not be resolved on this application. The approach of French J in Van Leeuwen to this issue is consistent with the purpose of s.40(1)(g) of the Bankruptcy Act, which is to prevent a judgment creditor from pursuing bankruptcy proceedings when, as between himself and the judgment debtor, the balance of account is in favour of the judgment debtor.
The loans and unpaid salary owed by Exception Holdings to Mr Labraga arguably come within the same category as the costs order but I make no finding in respect of them. I do not need to.
The costs order is incontrovertible being an order of a superior court which has not been the subject of any appeal and has been quantified by assessment under the Legal Profession Act.
The second step is to consider whether Mr Labraga’s cross demands equal or exceed the amount of the judgment debt on which the bankruptcy notice is based. The amount due in respect of costs to Mr Labraga on its own plainly does.
The final step is to consider whether Mr Labraga could have set up any of his claims in the action or proceeding in which the judgment or order on which the bankruptcy notice is based was obtained. The proceedings referred to by s.40(1)(g) of the Bankruptcy Act is a deemed proceeding and where the order on which a bankruptcy notice is based is an interlocutory costs order the proceeding is either the interlocutory application or the application for costs in the interlocutory application: see Chesson v Smith (1992) 35 FCR 594 at 596-597, Pollnow v Queensboro Pty Ltd (1988) 217 ALR 49 at 51 and Re Ryan; Ex parte Ryan v Jupiter’s Management Ltd (1992) 111 ALR 246 at 252.
The order on which the bankruptcy notice is based is the costs order made on 12 November 2007 by the District Court of Western Australia or the allocatur of taxation of those costs dated 29 February 2008 by the taxing officer. Both were made on the application of Exception Holdings and therefore are interlocutory costs orders. I accept Mr Labraga’s contention that, on the authority of the cases cited above, he could not have set up his claims in proceedings which were those applications.
However, that is not the end of the matter. Exception Holdings contends that, as the company is in liquidation and Mr Labraga seeks to set off a claim against it, to do so he must satisfy the operation of s.553C of the Corporations Act.
Section 553C provides:
(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b) the sum due from the one party is to be set off against any sum due from the other party; and
(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2) A person is not entitled under this section to claim the benefit of a set‑off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.
Exception Holdings contends that Mr Labraga’s claim for a counter claim, set off or cross demand against the company fails for two reasons. First, there were no mutual dealings at the time of the winding up order. Secondly, Mr Labraga had notice that the company was insolvent therefore s.553C(2) applies to preclude any set off.
I accept that, for the purposes of s.553C(1), the time for determining whether a right to a set off exists will be the “relevant date” under s.55 for determining what claims are admissible to proof against the company: Re Parker (1997) 80 FCR 1 at 15. The relevant date is also the date the winding up order is made (s.513C) which was 11 October 2005.
At the date fixed for determining the existence of a set-off there must be mutual dealings which can be set off. The acquisition of a right or a liability after that date cannot be set off: Hiley v Peoples Prudential Assurance Co Ltd (1938) 60 CLR 468 at 497. In other words the claims accruing to Mr Labraga and the claims by the company (the company costs order) must be accruing before 11 October 2005.
As the company costs order was made on 20 December 2007, being after the relevant date, there were no mutual dealings capable of being set off. It follows that s.553C(1) has no relevant operation. Further, the absence of mutuality may be an objection to a claim of set off under s.41(7). However, it does not follow that Mr Labraga is unable to properly raise his cross demand against the company and his claim to set aside the bankruptcy notice under s.41(7) of the Bankruptcy Act. I reject the contention of Exception Holdings to the contrary. Mutuality is an element of a claim of set off, a cross claim or cross demand under the Bankruptcy Act: see Stec v Orfanos [1999] FCA 457 at [24][8]. It could not be seriously contended, however, that the competing costs liabilities between the parties are not mutual and in the same right under the general law. The High Court of Australia has explained the concept of mutuality under s.86 of the Bankruptcy Act in the following terms[9]:
21.In the context of s.86 the word “mutual” conveys the notion of reciprocity rather than that of correspondence. It does not mean “identical” or “the same”. So understood, there are three aspects of the section’s requirement of mutuality. The first is that the credits, the debts and the claims arising from the other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered … The third requirement of mutuality is that the credits, debts or claims arising from other dealings must be commensurable for the purposes of set off under the section. That means they must ultimately sound in money.
[8] see also s.86 of the Bankruptcy Act which is in similar terms to s.553C of the Corporations Act
[9] Gye v McIntyre (1991) 171 CLR 609; 65 ALJR 221; 98 ALR 393
…
25.… the words of s.86 of the Act should be generously construed. On that approach, dealings in which a creditor and a bankrupt have been involved before the making of a sequestration order and which give rise to mutual claims between them – that is to say, commensurable claims between them in their own interests – are mutual dealings for the purposes of s.86 notwithstanding that other parties may have been involved in the dealings, that either the creditor or the bankrupt may have been involved in the dealings in more than one capacity or that those dealings give rise to different claims between other parties or between the same parties in different beneficial interests. The critical matters for the purposes of s.86 are that there had been dealings in which the creditor and the bankrupt were both involved and that those dealings gave rise to mutual claims between them in the relevant sense.
In my view, an absence of mutuality under s.553C(1) is of no consequence for s.41(7) of the Bankruptcy Act where the competing claims are mutual and in the same right under the general law.
I also accept that, for the reasons advanced by Exception Holdings Mr Labraga is precluded by s.553C(2) from claiming a set off under that section as, at the time of giving credit to the company, Mr Labraga had notice of the fact that the company was insolvent.
Section 553C(2) provides that: a person is not entitled under this section to claim the benefit of a set‑off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent. [emphasis added]
In Hall v Poolman (2007) 65 ACSR 123 Palmer J considered the meaning of the words “giving credit to the company, or at the time of receiving credit from the company” in s.553C(2). In that case a liquidator brought an insolvent trading claim against a former director of the company and the director sought to set off any liability from that claim against a liability he had to the Commissioner under s.588FGA(2) of the Corporations Act.
His Honour held at 217 [428] that:
The words of CA s.553C(2) are apt to a dealing involving a purchase, sale or other transaction in which credit for a sum of money is given by one party to another. However, the section is intended to have a far wider application than to such straightforward dealings. As the decision in Gye makes clear, “dealings” for the purposes of the section may not involve the exchange of any goods or services, let alone an exchange for valuable consideration. Accordingly, “giving credit” and “receiving credit” must be construed so as to find meaning in the particular context of any “mutual dealing” which is within the contemplation of the section. [emphasis added]
Palmer J went on to find in Hall v Poolman that the time of receiving credit from the insolvent company was the time when the company incurred a contingent liability to indemnify one of its directors by entering into an indemnity deed[10]. His Honour rejected the liquidator’s argument that the time of receiving credit from the insolvent company was the time when the company made preferential payments being a time when the director knew that the company was insolvent[11]. This is consistent with the principle that the time of giving credit or receiving credit is the time at which the transactions giving rise to those debits and credits were entered into by the parties[12].
[10] Hall v Poolman 217 [429]
[11] Hall v Poolman 217 [430/431]
[12] eg see Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd [1995] 2 VR 457
Both Mr Labraga and Exception Holdings had notice of the insolvency of the company upon the making of the winding up order on 11 October 2005. The question then arises what were the transactions which constituted the giving and receiving of credit and when did they occur? If the relevant transactions occurred after 11 October 2005 then, together with the fact of notice of the insolvency of the company, s.553C(2) applies to prevent set off under s.553C of the Corporations Act.
Exception Holdings received credit from Mr Labraga within the meaning of s.553C(2) when the Labraga costs order was assessed on 5 April 2007. Mr Labraga received credit from the company when he incurred a debt to the company, namely, the liability to pay the company costs order[13]. Therefore, Mr Labraga received credit from the company on 20 December 2007 and given that the winding up order was made on 11 October 2005, at the relevant time, both Exception Holdings and Mr Labraga had notice of the insolvency of the company. Consequently, s.553C is unavailable to support a claim of set off by Mr Labraga under the Corporations Act in respect of his costs order. However, it does not follow that just because s.553C of the Corporations Act does not apply, Mr Labraga’s claim that he has a cross demand as a basis upon which to set aside the bankruptcy notice under s.41(7) of the Bankruptcy Act must fail.
[13] Hall v Poolman (2007) 65 ACSR 123 at 217 [429]
In my view, s.553C, while it acts as a bar to any asserted claims of set off under that section of the respective costs orders, does not bar the costs claim by Mr Labraga under s.41(7) of the Bankruptcy Act. This is consistent with the decision of the NSW Supreme Court in Pearson’s Products Pty ltd v CP Technologies Pty Ltd [1999] NSWSC 575 at [16]-[22] per Young J:
Under s.553 of the Corporations Law the claims against the company are provable as at the commencement of the winding up. Under s.553C mutual credits, mutual debts or other mutual dealings between the company and another are considered as at that date and set-off. One of the principal arguments for the defendant is that as this case does not involve a s.553C scenario there is not an off-setting claim within the meaning of s.459H of the Corporations Law. Accordingly, it does not matter what the plaintiff's claim is, it does not qualify for an excuse for setting aside the statutory demand.
Corporations Law s.553C which has been relied on in this case is, to my mind, a red herring. It is the draftperson's attempt to translate s.86 of the Bankruptcy Act 1966 into the field of corporations law. In the bankruptcy situation a claim that is made after the commencement of the bankruptcy against the trustee is a claim against the trustee personally and cannot be set-off under s.86; see eg Alloway v Steere (1882) 10 QBD 22 and the other cases referred to in para [86.1.15] of McDonald Henry and Meek's Australian Bankruptcy Law & Practice (LBC, Sydney, 1996).
Under the Corporations Law the liquidator has no personal liability, so those cases cannot be translated directly across. However, it would seem that the answer is that ordinarily the claim will be a claim against the company for payment which will be made under s.556(1)(a) of the Corporations Law. I say "ordinarily" because there may be some situations where the liquidator has acted ultra vires.
"Off-setting claims" is defined in s.459H (5) of the Corporations Law as:
"A genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates)".
That definition was considered by the Full Federal Court in John Shearer Ltd v Gehl Company (1995) 60 FCR 136. At 142 the three judges said that the word "cross-demand" is a word of considerable width. They pointed out it was not a technical term and said it should not be given too restricted a meaning. Heerey J applied that line of reasoning in the subsequent case of EquusCorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 24 ACSR 194, 203.
There are arguments the other way, as were well put by Mr Pritchard. Those Federal Court decisions are also perhaps inconsistent with some previous State authorities, which were not referred to, and, indeed, Robson's Annotated Corporations Law (LBC, Sydney) is bold enough to say that the Federal Court decisions are wrong (see 1999 edition page 501).
However, this Court should in Corporations Law matters follow the decision of a Full Federal Court. I have no problem in doing so here, especially as the decision reached in that court accords with the way I would, in any event, construe the definition. I hold that there does not have to be a set-off under s.553C in order for there to be an off-setting claim.
The costs order obtained by Mr Labraga is a liability against the company incurred at the time Mr Labraga obtained an order for the winding up of the company. Mr Labraga was unable to execute the quantified order without leave and his attempt to do so resulted in the liability incurred to the company. Section 553C does not prevent Mr Labraga from claiming the benefit of the costs order in his favour in bankruptcy proceedings. Section 553C simply prevents the parties from setting off the costs orders under that section. The section simplifies the administration of companies in liquidation. But where the section does not apply, claims by and against such a company do not cease to exist. Neither do they for that reason alone cease to be enforceable by other means. Once quantified, the costs order in favour of Mr Labraga was effectively a judgment debt. It follows, as I have already found, that the claim for the money could not have been set up in the later proceedings to garnishee the company bank account because the judgment debt had already been obtained. The amount due in costs to Mr Labraga far exceeds the amount due from Mr Labraga to Exception Holdings. I accept that Mr Labraga should obtain the benefit of s.41(7) of the Bankruptcy Act and for that reason, the bankruptcy notice should be set aside.
I will so order.
It is not strictly necessary to deal with the remaining claim that the bankruptcy notice is defective. However, I reject that contention for the reasons advanced by Exception Holdings.
A bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Bankruptcy Act or if it could reasonably mislead a debtor as to what is necessary to comply with the notice: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 79. Neither of these two conditions is satisfied.
The Bankruptcy Act does not require an accurate statement of the total debt payable as a condition of validity of the bankruptcy notice: Adams v Lambert (2006) 228 CLR 409 at [31].
Other defects in a bankruptcy notice described as formal defects will only invalidate the notice if the Court is of the opinion that substantial injustice has been caused by the defect and the injustice cannot be remedied by an order of the Court: s.306 of the Bankruptcy Act.
Section 306 can be applied to rectify a defective bankruptcy notice (see Adams v Lambert (2006) 228 CLR 409 at [17] and Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71. Section 306 of the Bankruptcy Act provides relevantly as follows:
Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.
If the statement of costs in paragraph 2 of the schedule is a defect then it is a defect to which s.306 applies. There was no error in the statement of the amount due. The error was simply to fail to include the amount as a judgment debt, but rather to include it as an amount due as costs of a judgment. The correct position was obvious from the judgment annexed to the bankruptcy notice.
Mr Labraga should receive his costs of the application.
I certify that the preceding seventy-three (73) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 28 May 2009
2
22
8