Lord, R. v Direct Acceptance Corporation Ltd

[1994] FCA 85

RAYMOND LORD v DIRECT ACCEPTANCE CORPORATION LTD
No. NB2528 of 1993
FED No. 85/94
Number of pages - 6
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
EINFELD J

CATCHWORDS

Bankruptcy - application to set aside the bankruptcy notice on the basis of equitable set-off - claim by debtor that judgment debt should be reduced by amount set off - special leave application pending before High Court in relation to set-off - application to extend time for compliance with the bankruptcy notice pending special leave application - whether appropriate for Court to go behind the judgment

Re Morris ex parte Wardley Australia Property Management Ltd Einfeld J, unreported 24 November 1993

Dittes v Clyde Industries Limited Einfeld J, unreported 10 December 1992

HEARING

SYDNEY, 8 February 1994
#DATE 8:2:1994

Counsel and solicitor for J.E.Thomson and K.E.
the applicant Burke instructed by P.A.

Somerset and Co

Counsel and solicitor for D.E. Ryan instructed by
the respondent Freehill Hollingdale and

Page

ORDER

1. Application to set aside bankruptcy notice dismissed.

2. The applicant to pay the respondent's costs of the amended application.

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

JUDGE1

EINFELD J The respondent Direct Acceptance Corporation Limited (the company) is now in liquidation. At relevant times prior to the company going into receivership on 17 September 1991, the applicant, Raymond Lord, was a director and the major figure in the company. It appears that at the time there were 4040 debenture holders in the company with advances of $38,299,642 owing and some 1068 unsecured noteholders who were owed $11,931,731. In total, therefore, the company's deficiency was something in excess of $50 million.

1. The evidence establishes that there has only been one definite distribution of funds since the appointment of the receiver, namely on 12 June 1992 when debenture holders received 8.5 cents in the dollar. On the evidence before me, they may recently have received or will shortly receive another distribution of about 5 cents in the dollar, but it seems unlikely that they will recover anything remotely approaching 100 cents in the dollar on their investments. The noteholders are unlikely to receive anything. The evidence is that the majority of the debenture and noteholders are elderly persons or pensioners with an average investment of between $2,000 and $10,000. The evidence also establishes satisfactorily for present circumstances that within a week of the appointment of a receiver and manager of the company, Mr Lord left Australia for Turkey and did not return until April 1993. He was, therefore, not available in Australia to assist in the conduct of the receivership.

2. On 2 September 1992 proceedings were commenced by the company against Mr Lord in the Commercial Division of the Supreme Court of New South Wales claiming an amount exceeding $12 million. They were known as the Bonnie Breck proceedings. In due course the amount claimed was scaled back by various forms of agreement and in various ways to a sum in excess of $10 million. The allegation was that Direct Acceptance made a loan to another company secured by a fixed and floating charge over the assets of that company and a guarantee given by Mr Lord. The loan was not repaid and Direct Acceptance claimed payment from Mr Lord under the guarantee. Mr Lord contended that the amount claimed should be reduced by an amount representing a sum placed by another company controlled by him on deposit with Direct Acceptance as part of the loan agreement. In general, the arguments put forward were that under the terms of the contract that amount should be set off, that the principles relating to what is known as equitable set-off applied, and that because Direct Acceptance was in liquidation, the liquidator was required by statute to appropriate the deposit in satisfaction of the debt. Although Mr Lord also sought orders that the receiver and manager should make an interim distribution, the claim was basically defended only as to quantum. On 29 April 1993 Giles J rejected Mr Lord's arguments and gave judgment in favour of the company for $10,434,752.49.

3. The matter went on appeal to the Court of Appeal which heard it, on an order for expedition by Meagher JA, on 20 October 1993. On 25 November 1993 the Court of Appeal unanimously dismissed the appeal, holding that it was in the discretion of the company as to whether to appropriate the deposit in satisfaction of the debt. As it was not so appropriated, the third party contract did not reduce the debt. The Court of Appeal held that there was no equity to impeach the company's title to demand payment and no basis for equitable set-off. It held further that there was nothing upon which the Bankruptcy Act could produce a positive balance by set-off and there was no basis for an interim distribution of funds. An application for a stay of Giles J's judgment was refused by the Court of Appeal.

4. On 16 December 1993 Mr Lord applied for special leave to appeal to the High Court. In the affidavit filed in support of his application for special leave, a number of grounds were given but essentially the attack is based upon the rejection of the claim for an equitable set-off. I am advised that the special leave application is expected to be heard later this year.

5. Meanwhile, other proceedings have been commenced by Direct Acceptance against Mr Lord in the Commercial Division of the Supreme Court. These are known as the Kirung proceedings and are fixed for hearing before Giles J on 26 April next. I am led to believe that his Honour's normal promptness in delivering judgment can be expected to result in the completion of the proceedings probably by some time in May or June.

6. It is Mr Lord's assertion here that the Kirung proceedings could and should have been heard at the same time as the Bonnie Breck proceedings. There is no need for me to examine that question in any detail. It will suffice to say that for one reason or another they were not heard together and are being dealt with separately. The important fact is the assertion on behalf of Mr Lord that, in the event that he is successful in the Kirung proceedings, he will become entitled to an amount which, together with the amount to which he will become entitled if his High Court proceedings succeed, will result in a set-off exceeding the amount of the judgment debt pronounced in the Bonnie Breck proceedings. In the event that the High Court proceedings are successful but the Kirung proceedings fail, the amount of the judgment debt will be reduced to about half a million dollars or a little less. In this event Mr Lord hopes to be able to raise sufficient funds to pay the debt. If leave is refused by the High Court or the appeal is otherwise dismissed, Mr Lord concedes that he could do little in relation to the bankruptcy notice whatever the result of the Kirung judgment because there would remain a very substantial debt owing to Direct Acceptance.

7. On 5 July 1993 a bankruptcy notice was issued on the basis of the judgment obtained from Giles J in April and time for compliance with that notice has been successively extended to 15 February 1994. Mr Lord applies to the Court today for two orders. One is to extend the time for compliance with the bankruptcy notice further until after the High Court proceedings have been heard; the other is to set aside the bankruptcy notice.

8. It is appropriate to deal with the application to extend time first. There is some dispute in the cases as to whether the court has power to extend time for compliance with bankruptcy notices on the grounds that there is outstanding an appeal against the judgment on which the bankruptcy notice is based. For the reasons I gave in Dittes v Clyde Industries Limited unreported 10 December 1992 where a number of the cases were discussed, and for other reasons which it is not necessary now to detail, I believe that there is power in the court to extend time for compliance with bankruptcy notices in such circumstances.

9. The cases permit a bankruptcy court to, as it is commonly described, "go behind a judgment", i.e. to entertain proceedings designed to consider whether there is a true amount owing or a real debt: see Re Morris ex parte Wardley Australia Property Management Ltd Einfeld J, unreported 24 November 1993. However, the nature of Mr Lord's application here would require the Bankruptcy Court, in my opinion, to do far more than to examine whether there is a true debt. For Mr Lord seeks now, not merely that the Court go behind the judgment to see if there is a true debt, but that it determine that he is unlikely at the end of other proceedings to have to pay anything under the bankruptcy notice at all, or at least that he has a presentable chance of achieving that result. To require the Court to examine the respective arguments of the parties as to whether he could or could not conceivably achieve that result would involve an attempt to second guess the High Court and come to at least some preliminary conclusions as to what will happen in the Kirung proceedings.

10. This exercise would require the Court to go far further than any of the authorities have ever suggested would be a proper exercise for a bankruptcy court. It would demand a detailed analysis of the first instance judgment of Giles J, the judgment of the Court of Appeal, the pleadings, facts and circumstances in the Kirung proceedings, and a whole host of material which would convert the Bankruptcy Court into a second litigating forum for the disputes between these parties. The parliament could never have intended that the Bankruptcy Act produce such a result.

11. Accordingly, I must use the general discretionary powers that are opened up by this application for relief. I have read, because they are in evidence and are relied upon, the judgment of the Court of Appeal and of Giles J. I have given careful attention to the affidavit in support of the application for leave to appeal to the High Court. Although the argument to be presented to the High Court has a degree of superficial appeal, my opinion for what it is worth is that its chances of success are somewhat less than rosy. However, I refuse to engage in an exercise which would result in my sitting in judgment on a unanimous decision of three judges of the Court of Appeal and a trial judge, and to attempt to imagine what the High Court will do in the argument about equitable set-off. Moreover, I could not conceivably imagine it to be the task of the Bankruptcy Court to examine proceedings fixed for hearing but not yet heard, such as the Kirung proceedings, and try to speculate about or pre-determine their result. Even if the evidence in that case were before me in the form of affidavits or statements, and it is not, it would be not at all desirable to form opinions about its chances of success.

12. It goes without saying that if in the ultimate Mr Lord is found not to owe any money at all to Direct Acceptance -- and if his arguments are entirely correct Direct Acceptance will owe him money -- any bankruptcy pronounced would be immediately annulled. As he claims now to be a person with very limited means there would seem no possibility that in the interim the trustee in bankruptcy would be able to recover anything like the amount of the debt claimed in the bankruptcy notice based on the April 1993 judgment of Giles J.

13. In my opinion the discretion of the court should not be exercised so as to extend the time as requested by or on behalf of Mr Lord. It is not likely that the High Court judgment will be available for several months. If it is against him, as I suspect it will be, he has conceded that he could do nothing to prevent his bankruptcy. If it is successful, he is still dependent, to avoid bankruptcy, on raising more money than he says he has or on awaiting the end of the Kirung proceedings. If these proceedings are any guide, it is unlikely that a judgment denying Mr Lord any financial recompense in those proceedings would stop at the first instance judgment, in which case there would be further delay in the appeal process before the matter could be finally resolved.

14. I can see no justification at all for continuing and delaying the present stage of these bankruptcy proceedings until after such an uncertain time. The company went into receivership, as I have pointed out, more than two years ago. The debenture holders have received very little and the noteholders nothing. We are only at the stage of the bankruptcy notice not the pronouncement of a sequestration order. If and when that stage is reached and a sequestration order pronounced, the immediate effect of a bankruptcy will be to call upon Mr Lord to assist the trustee in identifying all possible assets for distribution to creditors. That is a highly desirable event at this stage of the matter, especially as the evidence establishes that the creditors are in large measure elderly persons. Had Mr Lord been in Australia during the time of the company receivership so as to assist the receiver in his work, perhaps that process could have long since been addressed.

15. But as it has not been, I can see a number of reasons to deny the discretion at this point in the proceedings and none to support its exercise in Mr Lord's favour. I regard the speculation about the legal proceedings as insufficient to outweigh the public interest involved in allowing the bankruptcy proceedings to continue. Accordingly, the application to extend the time for compliance with the bankruptcy notice is refused.

16. Mr Lord applies secondly to set aside the bankruptcy notice on the grounds that there is either no debt or that under section 40(1)(g) of the Bankruptcy Act he has:
    

..... a counter claim, set-off or cross demand equal to or exceeding the amount of the judgment debt, 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.

1. So far as concerns the subject matter of the Kirung proceedings, there is a dispute as to whether his claim for set-off could or could not have been set up in the action or proceeding in which the judgment was obtained, but it is not necessary for me to determine that dispute now.

2. Both of the arguments put forward to set aside the bankruptcy notice are in substance based upon the same arguments as were advanced on the application to extend time. In summary again, they are that because of the amount of the equitable set-off to be argued in the High Court, and because of the amount which Mr Lord hopes to obtain in the Kirung proceedings, there will in effect either be an extinguishment of the debt or a counter claim or set-off which will reduce the amount of the judgment debt.

3. Mr Lord has not satisfied me that he has a counter claim, set-off or cross demand equal to or exceeding the amount of the judgment debt even if I accept the argument that it could not have been set up in the earlier proceeding. In fact the argument is rather anomalous. On the one hand, it was contended before me that the Kirung proceedings could and should have been included in the Bonnie Breck proceedings and that it was no fault of Mr Lord and his representatives that this did not occur. In fact there is evidence to support that an attempt was made to have the proceedings heard together but this was refused by the Supreme Court at an interlocutory stage and no longer pursued on the grounds that it would have been futile to do so. On the other hand, there is an argument on the application to set aside the bankruptcy notice that in effect accepts that the counter claim could not have been set up in the Bonnie Breck proceedings but only that it will equal or exceed the amount of the judgment.

4. But overlooking that anomaly and accepting the fact for the purposes of argument that the Kirung set off could not have been set up in the Bonnie Breck proceedings, I am not satisfied that any available counter claim would equal or exceed the amount of the judgment. For that reason, the application to set aside the bankruptcy notice must fail.
   (After discussion)
   

5. I order that the applicant, Mr Lord, pay the respondent company's costs of the amended application.