Leslie v Bowin Design Pty Ltd

[1999] FCA 333

FEDERAL COURT OF AUSTRALIA

Leslie v Bowin Design Pty Ltd [1999] FCA 333

BANKRUPTCY – application to set aside bankruptcy notice – set-off not equal to judgment debt – application to go behind judgment given on contested hearing – available defence not raised but Court declined to go behind judgment because parties had chosen their battle field – appropriate costs order.

Bankruptcy Act 1966 (Cwth), ss 40(1)(g), 41(7)

Re Sgambellone; Ex parte Jacques (1994) 126 ALR 71
Olivieri v Stafford (1989) 24 FCR 413
Langford Pty Limited v Finlay [1978] 1 NSWLR 14

FREDERICK JOHN LESLIE v BOWIN DESIGN PTY LIMITED

NG 7379 of 1998

Burchett J
22 March 1999
Sydney

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 7379 of 1998

BETWEEN:	FREDERICK JOHN LESLIE Applicant
AND:	BOWIN DESIGN PTY LIMITED Respondent
JUDGE:	BURCHETT J
DATE OF ORDER:	22 MARCH 1999
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.        The application be dismissed.

2.The debtor pay the costs of the application, including reserved costs and the costs incurred on the previous occasion that has been mentioned.  Should the debtor be made bankrupt upon a petition grounded on the bankruptcy notice the subject of this proceeding, then those costs shall have priority in that bankruptcy.

3.        By consent, the bankruptcy notice is extended to and including 12 April 1999.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 7379 of 1998

BETWEEN:	FREDERICK JOHN LESLIE Applicant
AND:	BOWIN DESIGN PTY LIMITED Respondent

JUDGE:	BURCHETT J
DATE:	22 MARCH 1999
PLACE:	SYDNEY

EX TEMPORE REASONS FOR JUDGMENT

1. In this matter, I am asked to set aside a bankruptcy notice on two grounds: first, I am asked to go behind the judgment on which the bankruptcy notice is founded, a judgment of the Local Court at Manly given after a contested hearing and, I should say, a very careful and thorough consideration of the defences that had been raised at that hearing; and secondly, it is put that the debtor has a counter-claim set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable, within the meaning of s 40(1)(g) and s 41(7) of the Bankruptcy Act 1966.

2. The circumstances are very unfortunate.  It is plain there has been a long-running dispute between the judgment creditor and the debtor.  At one stage, proceedings were due to be heard in Campbelltown Local Court, or rather, I think, before arbitrators, in respect of proceedings in Campbelltown Local Court, designed to resolve the issues between a company of which the debtor was a director, Fishers Ghost Plumbing Pty Limited, and the judgment creditor, Bowin Design Pty Limited, a company which supplies gas heaters.  The dispute, which did not at that stage come on for hearing because Fishers Ghost Plumbing Pty Limited went into liquidation and the proceedings thus came to a complete stop, concerned a substantial building contract in respect of a public school at Lucas Heights, in which Fishers Ghost Plumbing Pty Limited was engaged as a subcontractor.  Apparently, between about December 1991 and May 1992, during the currency of this contract, consignments of heaters were delivered and ultimately installed.  There was some dispute as to how and where they were stored prior to installation, and in what state they were at delivery and at installation.  Unfortunately, though that dispute seems to have been somewhat bitter and both sides seem to have taken somewhat adamant stands, the truth of that matter has never been resolved.  Had this case proceeded the full distance, doubtless I would have heard much cross-examination on the conflicting versions.  Whatever the precise position may have been, the fact is that Fishers Ghost Plumbing Pty Limited did incur costs and expenses in rectifying heaters which were found, after their installation, to have parts missing.  Fishers Ghost Plumbing Pty Limited refused to pay a sum of just over $10,000 in respect of the price of the heaters.

3. Following the liquidation of Fishers Ghost Plumbing Pty Limited, the creditor sued the debtor, as guarantor, and did so in the Manly Local Court.  That is the proceeding out of which the bankruptcy notice arises.  The guarantee commences in the following terms:

   “In consideration of Modern Flame Gas Appliances (A division of Bowin Design Pty Limited) of Brookvale, NSW, at my request, supplying or agreeing to supply Fishers Ghost Plumbing Pty Limited -

   and I interpose its address was supplied and it was referred to as "the Company" -

   with goods up to such amount as you think proper or at your option allowing the Company to have a standing or continuous credit in your books, I John Leslie of 12 Shoalhaven Street, Ruse, do hereby guarantee to you the payment by the Company of all its indebtedness to you for such supplies and my liability to you under this Guarantee shall not be limited to any amount.”

   There were further clauses of a fairly common nature conferring on the creditor a discretion to refuse further supplies, or give time, or compromise, or give any other indulgence, without affecting the guarantor's liability, and also providing that all dividends and payments received from the company or from the receiver or liquidator of the company, should be applied as payments in gross, and that the guarantor should not be entitled to prove in the receivership or liquidation until the creditor had received the full amount of its claims against the guarantor.

4. I now turn to the cross-claim relied upon pursuant to the two provisions of sections 40 and 41 to which I have already referred.  Drummond J held in Re Sgambellone; Ex parte Jacques (1994) 126 ALR 71 at 75, referring to a decision of Gummow J in Olivieri v Stafford (1989) 24 FCR 413 at 432, that a set-off, counter-claim or cross demand, to satisfy these provisions, must, as the language of the Bankruptcy Act, read literally, makes clear in any case, equal or exceed the amount of the judgment debt referred to in the bankruptcy notice.  After some discussion, it was conceded by counsel for the debtor that if I allowed his claim in full, it would not equal, and, of course, would not exceed, the amount claimed in the bankruptcy notice.  The bankruptcy notice is for a sum slightly over $27,000, and the amount sought to be proved under the counter-claim or cross demand is, at most, $11,539 for rectification work, plus a separate claim of $1200 for a subsequent refusal to deliver heaters, and interest of approximately $7000, a grand total well below the amount in the Bankruptcy Notice.

5. For completeness, I should point out that the counter-claim or cross demand did not exist at the date when the bankruptcy notice was issued, or when it was served, or when it was initially due to expire, as a claim of the debtor.  At each of those periods, it existed as a claim which had been alleged by Fishers Ghost Plumbing Pty Limited in the proceedings in the Local Court at Campbelltown, and in the arbitration which I have mentioned, and those proceedings, of course, had in some manner been stayed, or possibly even dismissed, because of the liquidation.  The sum of $1200, I may add, seems an extremely doubtful claim, as it really represents the additional amount Fishers Ghost Plumbing Pty Limited was required to pay to buy by retail, when the creditor refused to supply by wholesale, in relation to an entirely separate transaction; but whether that be so or not, the whole sum claimed by the counter-claim or cross demand was assigned to the debtor not before the expiry of six months from the date of the bankruptcy notice.  However, the debtor's claim is that, since the bankruptcy notice was extended, and since the extension was not grounded merely upon his obviously invalid claim to have a counter-claim or cross demand, that is, obviously invalid as at the date when it was filed, but was also grounded on his claim to go behind the judgment in the Local Court at Manly, it was open to him to set up, so he says, a counter-claim or cross demand of which he later became possessed, the bankruptcy notice not having expired at the time when he did set it up.  It is unnecessary for the purposes of this case to consider that point.  The reason it is unnecessary is that, as I have already said, the largest amount at which the counter-claim or cross demand could be assessed by me, on the debtor's own submissions, would still not equal or exceed the amount of the bankruptcy notice.  Accordingly, that basis for the debtor's application cannot succeed.

6. This leaves the question whether I should exercise my discretion to go behind the judgment of the Local Court at Manly in the debtor's favour.  This court has a power to go behind a judgment on which a bankruptcy notice is founded, and a duty to do so in appropriate cases, particularly where a judgment founding a bankruptcy notice is a default judgment.  If it be made to appear that there may be some error, or some good reason to examine whether in truth a debt lies behind the judgment, the court will generally go behind it.  The court is much more reluctant to do so in a case where there has been a fully contested hearing, and a decision by a court upon the claim of the creditor in question.

7. In this case, the peculiarity to which the debtor points is the fact that the alleged set-off in respect of the defects in the heaters was not raised in the proceeding in the Manly Court.  The debtor says it was not raised because he could not raise it, but it seems to me that this is incorrect.  In Langford Pty Limited v Finlay [1978] 1 NSWLR 14, a strong court of appeal of New South Wales, in a judgment of the court (Hope, Hutley and Samuels JJA), held (at 17) that a guarantor could take advantage of the reduction in the price to be paid which his principal debtor could claim by reason of defective work. The court noted that in the guarantee there in question, as it said:

   “All that the appellant undertook to pay was what was payable, that is, payable by the debtor.  It was not a guarantee to pay the price, or the price without deduction, but to pay only what the debtor could have been compelled to pay.”

   It seems to me that it is impossible to distinguish this reasoning in a case, such as the present, where what the guarantor guarantees to pay is the indebtedness of the debtor.

8. Accordingly, in my opinion, it was open to the debtor to raise the defence he now wishes to raise before me in the proceeding in the Manly Local Court.  What he in fact did was raise a defence challenging the indebtedness of the debtor on a different footing.  That defence was that it was not the debtor Fishers Ghost Plumbing Pty Limited, but another company with a similar name, which had incurred the debt, and as he had not guaranteed any debts of the other company, he was not liable.  In my opinion, on the particular facts of this case, in which the creditor’s claim was carefully and apparently competently fought out, and decided on the issues on which the parties chose to fight it, it would not be right for this court now to have a second hearing in respect of the same debt, going through the details concerning the delivery and alleged defects of these heaters many years after the event.  The parties chose their battle field and fought their battle; in my opinion, they must abide the result.

9. Therefore, I decline to go behind the judgment.  Since the applicant debtor has failed on both of the issues raised before me, the application must be dismissed. 

10. As to the costs; I order that the debtor pay the costs of the application, including reserved costs and the costs incurred on the previous occasion that has been mentioned.  Should the debtor be made bankrupt upon a petition grounded on the bankruptcy notice the subject of this proceeding, then those costs should have priority in that bankruptcy.

11. By consent, the bankruptcy notice is extended to and including 12 April 1999. 

I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Burchett.

Associate:

Dated:             29 March 1999

Counsel for the Applicant:	Mrs K Leotta
Counsel for the Respondent:	Mr A McInnes
Solicitors for the Respondent:	Anderson & Sjoquist
Date of Hearing:	22 March 1999
Date of Judgment:	22 March 1999