Lord v Rankine
[2010] FMCA 668
•3 September 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| LORD & ANOR v RANKINE & ORS | [2010] FMCA 668 |
| BANKRUPTCY – Application to set aside bankruptcy notice – Applicants joint liquidators of respondents’ company, Neilson & Moller Autoglass – where bankruptcy notice based on costs order awarded against liquidators – where original judgment and subsequent bankruptcy notice incorrectly named each of the respondents as creditors when only Mr and Mrs Rankine were entitled to recover the debt – whether notice should be amended or considered defective – where local court filing fee was added to amount stated on bankruptcy notice – whether bankruptcy notice overstated amount of the debt and therefore defective – whether original judgment was a nullity. Cross claim – where applicants had commenced by way of cross claim in the NSW Supreme Court proceedings against respondents in their capacity as joint liquidators – where applicants’ cross demand would exceed judgment debt – mutuality – where original claim for costs involved the applicants in their personal capacity and the cross demand was brought in their capacity as liquidators of Neilson & Moller Autoglass. Abuse of process – whether bankruptcy notice issued for improper purposes – solvency. |
| Legal Profession Act 2004 (NSW), s.368 Uniform Civil Procedure Rules 2005 (NSW) |
| Re; Nielsen and Moller Autoglass (NSW) Pty Ltd (in liq) [2008] NSWSC 1197 Lo v Nielsen & Moller Autoglass (NSW) Pty Limited [2008] NSWSC 407 Adams v Lambert (2006) 228 CLR 409 James v Federal Commissioner of Taxation (1955) 93 CLR 631 Pillai v Comptroller of Income Tax [1970] AC 1124 Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 Dimasi t/as F & M Dimasi & Anor v Nangiloc Colignan Farms Pty Limited (2007) 239 ALR 330 Matthews v Collett [2000] FCA 224 MacDonald v Official Trustee in Bankruptcy [2001] FCA 140 Green v Solomon [2001] FCA 698 Kingsway Group Limited v Hawkins [2010] FMCA 403 ING Bank Australia Limited v Athanasakis [2010] FMCA 307 Provident Capital Ltd v Mollinger [2009] FMCA 536 MacDonald v Official Trustee in Bankruptcy [2001] FCA 140 Clyne v Deputy Commissioner of Taxation (1983) 48 ALR 545 Re John A Gilmore (Debtor) Ex Parte: Phillip James Carlyle (Creditor) [1990] FCA 461 Wren v Mahony (1972) 126 CLR 212 Croker v The Commissioner of Taxation [2005] FCA 127 Jackson v Goldsmith (1950) 81 CLR 446 Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 Silvia v Brodyn Pty Ltd [2007] NSWCA 55 Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 Gye v McIntyre (1991) 98 ALR 393 DCT v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592 Cresvale Far East v Cresvale Securities (No 2) [2001] NSWSC 791 Stec v Orfanos [1999] FCA 457 James v Abrahams (1981) 34 ALR 657 Maxwell-Smith v S & E Hall Pty Ltd (2006) 233 ALR 81 Kossaifi v Eakin & Ors [2010] FMCA 102 Slack v Bottoms English Solicitors [2002] FCA 1445 Re Sarina; Ex Parte Council of the Shire of Wollondilly (1980) 43 FLR 163 Brunninghausen v Glavanics [1998] FCA 230 Hunter v Chief Constable of West Midlands Police [1982] AC 529 Peruvian Guano Co v Bockwoldt (1883) 23 Ch D 225 Hanrahan v Ainsworth (1990) 22 NSWLR 73 Waterer v Freeman (1617) Hob 266; 80 ER 412 Grainger v Hill (1836) 4 Bing NC 212; 132 ER 769 Gilding v Eyre (1861) 10 CBNS 592; 142 ER 584 Griffin, Ex parte; Re Adams (1879) 12 Ch D 480 Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509 Rozenbes v Kronhill (1956) 95 CLR 407 |
| Applicants: | JOHN FREDERICK LORD AND ALTE CROWE-MAXWELL IN THEIR CAPACITIES AS THE JOINT LIQUIDATORS (FORMERLY THE SPECIAL PURPOSE LIQUIDATORS) OF NIELSEN & MOLLER AUTOGLASS (NSW) PTY LIMITED (IN LIQUIDATION) ACN 107 721 595 |
| Respondents: | GEOFFREY JAMES RANKINE, KARIN ELKE RANKINE AND SOUTHERN CROSS AUTOGLASS PTY LIMITED ACN 129 010 019 |
| File Number: | SYG 1210 of 2010 |
| Judgment of: | Raphael FM |
| Hearing date: | 12 August 2010 |
| Date of Last Submission: | 12 August 2010 |
| Delivered at: | Sydney |
| Delivered on: | 3 September 2010 |
REPRESENTATION
| Counsel for the Applicants: | Mr J Svehla |
| Solicitors for the Applicants: | McInnes Attorneys |
| Counsel for the Respondents: | Mr A Fernon |
| Solicitors for the Respondents: | Yates Beaggi Lawyers |
ORDERS
Bankruptcy Notice NN1325 of 2010 be set aside.
Respondents to pay the Applicants’ costs to be taxed, if not agreed, pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1210 of 2010
| JOHN FREDERICK LORD AND ALTE CROWE-MAXWELL IN THEIR CAPACITIES AS THE JOINT LIQUIDATORS (FORMERLY THE SPECIAL PURPOSE LIQUIDATORS) OF NIELSEN & MOLLER AUTOGLASS (NSW) PTY LIMITED (IN LIQUIDATION) ACN 107 721 595 |
Applicants
And
| GEOFFREY JAMES RANKINE, KARIN ELKE RANKINE AND SOUTHERN CROSS AUTOGLASS PTY LIMITED ACN 129 010 019 |
Respondents
REASONS FOR JUDGMENT
This application to set aside a bankruptcy notice numbered NN1325 of 2010, which was served on the applicants on 12 May 2010, has been brought by two registered liquidators against whom a judgment was entered on 3 March 2010 for $24,995.25 in respect of a costs order made in favour of the first and second respondents in the Supreme Court of New South Wales; Re; Nielsen and Moller Autoglass (NSW) Pty Ltd (in liq) [2008] NSWSC 1197. The applicants, who had been appointed special purpose liquidators of Nielsen & Moller Autoglass (NSW) Pty Limited pursuant to an order of Barrett J in Lo v Nielsen & Moller Autoglass (NSW) Pty Limited [2008] NSWSC 407, had sought the production of certain documents in examination proceedings which they had commenced in that capacity. The production of the documents was resisted by Mr and Mrs Rankine and they were successful in that resistance. They were awarded their costs by Hammerschlag J, and having had them assessed, registered the order in the Local Court of New South Wales pursuant to the provisions of s.368 of the Legal Profession Act 2004 (NSW) (“LPA”). The applicants seek orders that the bankruptcy notice be set aside under ss.40(1)(g), 41(1)(a), 41(3)(a), 41(3)(b) and 41(5) of the Bankruptcy Act 1966 (Cth) (“BA”). They also seek additional orders for indemnity costs and an injunction to prevent the further issuance of bankruptcy notices arising out of the judgment.
Ground 1 – The Respondents are not a creditor of the applicants
The respondents are Mr and Mrs Rankine and their company Southern Cross Autoglass Pty Limited (“Southern Cross”). Southern Cross is not a creditor of the applicants. The certificate of determination of costs issued under s.368 of the LPA[1] states that the cost applicants are Geoffrey James Rankine and Karin Elke Rankine and Southern Cross Autoglass Pty Limited and the cost respondent is John Frederick Lord and Alte Crowe-Maxwell in their capacities as the special purpose liquidators of Nielsen & Moller Autoglass (NSW) Pty Limited (In liquidation). The sections on determination state:
i)THE APPLICATION IS DETERMINED BY ASSESSING AS A FAIR AND REASONABLE AMOUNT OF COSTS TO BE PAID TO THE COSTS APPLICANT SOUTHERN CROSS AUTOGLASS PTY LIMITED THE SUM OF NIL (emphasis added);
ii)THE APPLICATION IS DETERMINED BY ASSESSING AS A FAIR AND REASONABLE AMOUNT OF COSTS TO BE PAID TO THE COSTS APPLICANTS GEOFFREY JAMES RANKINE AND KARIN ELKE RANKINE THE SUM OF $24,485.25;
iii)THE COSTS RESPONDENT IS TO PAY TO THE COSTS APPLICANTS GEOFFREY JAMES RANKINE AND KARIN ELKE RANKINE THE SUM OF $24,845.25.
[1] Affidavit of Gregory Arthur McInnes 31 May 2010 Exhibit “GM36”
There is a letter from the costs assessor Mr Scammel addressed to the solicitors for the parties dated 22 September 2009[2]. In the letter the costs assessor states:
[2] Exhibit “GM38” to Affidavit of McInnes sworn 31 May 2010.
“I made the following decisions with regard to the objections and issues raised by the parties:
(i)Southern Cross Autoglass Pty Limited was not a party to the proceedings, and no costs are payable to it.
(ii) …
(iii)…
(iv)…
(v)The costs as allowed relate to work done for the costs applicants Geoffrey Rankine and Karin Rankine.”
When the solicitors for Mr and Mrs Rankine received the certificate of determination they filed it in the office of the registry of the Local Court pursuant to s.368(5) of the LPA. Thereupon it became, without further action, a judgment of the Local Court. The judgment was issued by the Registrar of the Local Court on 30 March 2010 but it states that the judgment was given on 3 March 2010 and entered on that day. The judgment names as plaintiff Mr and Mrs Rankine and Southern Cross Autoglass Pty Limited. This judgment is annexed to the bankruptcy notice that was issued by the Official Receiver on 8 April 2010. It is clear that Southern Cross Autoglass was not a creditor of the applicants. No assessment of costs was made in its favour. The judgment which was taken out of the Local Court was erroneous in nominating Southern Cross Autoglass as a plaintiff. On 28 May 2010 the applicants filed an application in the Local Court to set aside the judgment and on 10 June 2010 that application was heard. The judgment was not set aside but the Court amended the judgment to remove Southern Cross as a plaintiff. The amended judgment gave effect to the legal consequence of filing the certificate under s.368(5) of the LPA.
The applicants argue that s.41(1) of the BA which provides:
“(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 $5,000; 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 $5,000.”
and s.41(3) of the Act which provides:
“(3) A bankruptcy notice shall not be issued in relation to a debtor:
(a) except on the application of a creditor who has obtained against the debtor a final judgment or final order within the meaning of paragraph 40(1)(g) or a person who, by virtue of paragraph 40(3)(d), is to be deemed to be such a creditor;
(b) if, at the time of the application for the issue of the bankruptcy notice, execution of a judgment or order to which it relates has been stayed; or
(c) in respect of a judgment or order for the payment of money if:
(i) a period of more than 6 years has elapsed since the judgment was given or the order was made; or
(ii) the operation of the judgment or order is suspended under section 37.”
and s.40(1)(g) of the Act 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;”
when taken together restrict the category of persons who may issue and rely upon a bankruptcy notice to creditors of the debtor. Southern Cross was never a creditor of the applicants and it never obtained against the applicants a final judgment or final order within the meaning of ss.40(1)(g) and 41(1)(a) of the BA. The judgment of the Local Court, which was clearly erroneous, could not make it a creditor or give it standing to issue a bankruptcy notice. The applicants argue that it is a requirement made essential by the Act that the only person who has standing to make an application to the Official Receiver for the issuance of a bankruptcy notice is a creditor of the person to whom the bankruptcy notice is issued. It argues that even though the judgment has now been amended this is ex post facto of the issuance of the bankruptcy notice and it is to the bankruptcy notice that one looks to decide whether or not the defect or irregularity in it is formal or otherwise. In Adams v Lambert (2006) 228 CLR 409 at [25] the High Court, Gleeson CJ, Gummow, Kirby, Hayne, Callinan, Heydon and Crennan JJ, approved the views expressed in James v Federal Commissioner of Taxation (1955) 93 CLR 631 at 644 and Pillai v Comptroller of Income Tax [1970] AC 1124 at 1135 paraphrased by the majority in Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 at [79]:
“The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice.”
The respondents argue that the defect is remediable under s.306 and the applicants were not misled. But the test of whether or not a defect is misleading is an objective one; James v Commissioner of Taxation (supra) at 644. In this particular case Southern Cross could not give a good discharge for any monies received because it was not entitled to them. It seems to me that the applicants would be misled by the notice because it required them to make out the cheque to three persons, only two of whom had a claim upon them. See Dimasi t/as F & M Dimasi & Anor v Nangiloc Colignan Farms Pty Limited (2007) 239 ALR 330.
The respondents argue that the Court should exercise its discretion to amend the bankruptcy notice pursuant to the provisions of s.33(1)(b). They say that the time for compliance with the bankruptcy notice has been extended and compliance was in abeyance at the time that the applicants obtained the order of the Local Court amending the judgment. The applicants say that any amendment can only be done within the context of s.40 of the Act and as Southern Cross was never a creditor the jurisdiction to issue a bankruptcy notice was never invoked in the first place. The error was so fundamental that the notice is a nullity. In Kleinwort (supra) the Court said in such cases a notice is a nullity whether or not the debtor is misled. The applicants say that they have been unable to find any decision of a court possessed of powers to hear bankruptcy matters that go so far as to allow an amendment to a bankruptcy notice to exclude a person named as a creditor. The cases that the applicants provided to the Court, Matthews v Collett [2000] FCA 224; MacDonald v Official Trustee in Bankruptcy [2001] FCA 140; Green v Solomon [2001] FCA 698; Kingsway Group Limited v Hawkins [2010] FMCA 403 and ING Bank Australia Limited v Athanasakis [2010] FMCA 307, are all proceedings in respect of creditor’s petitions where the ability to amend is generally considered more available than that in regard to bankruptcy notices. It was also a petition that was sought to be amended in Provident Capital Ltd v Mollinger [2009] FMCA 536. There FM Lloyd-Jones made reference to MacDonald v Official Trustee in Bankruptcy [2001] FCA 140 where the Full Court said at [25]:
“There is extensive authority for the proposition that the power of amendment in s 33(1)(b) extends to authorising the amendment of petitions to cure omissions of allegations made mandatory by the various provisions of the Bankruptcy Act and Rules, ie, to cure what can be accepted to be more serious deficiencies in petitions than "formal defects or irregularities" within s 306.”
Adams v Lambert (supra) and the cases therein referred to dealt with bankruptcy notices and I believe that I should restrict myself when considering the question of amendment to those authorities. I do not accept the respondents’ argument that there existed a final judgment in the name of the wrong creditor which remained valid until altered by order of the Local Court. The extract from Clyne v Deputy Commissioner of Taxation (1983) 48 ALR 545;
“The second ground of appeal was that the judgment of the Supreme Court, on which the bankruptcy notice was founded, was not a final judgment. A final judgment within the meaning of the provisions of the Bankruptcy Act has been held to mean a judgment obtained in an action by which the question whether there was a pre-existing right of the plaintiff against the defendant is ascertained or established: Opie v Opie (1951) 84 CLR 362 at 372. In other words it is a judgment which finally disposes of the rights of the parties: see Licul v Corney(1976) 8 ALR 437 ; 50 ALJR 439 at 444. The fact that a judgment is subject to appeal or that it may later be set aside or become inoperative does not mean that it is not final: Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378.”
is of no assistance to the respondents. The judgment to which that case refers is certainly a final judgment in respect of which a pre-existing right of a plaintiff against a defendant has been ascertained. What has been ascertained in the instant case is that there was no pre-existing right of Southern Cross Autoglass against the applicants and an error by the respondents’ solicitor in completing the necessary forms for the registration of the judgment does not give a judgment that it is clearly incorrect the status of those referred to by the High Court in Clyne. The ability of a court with jurisdiction in bankruptcy matters to go behind the judgment exemplified in Re John A Gilmore (Debtor) Ex Parte: Phillip James Carlyle (Creditor) [1990] FCA 461 per Pinkus J is subject to the restrictions set by the High Court in Wren v Mahony (1972) 126 CLR 212 at 224. It is the right to see whether, behind the judgment, there was in truth and reality a debt due. If one went behind this particular judgment one would find immediately that there was no debt due.
I am satisfied that the bankruptcy notice issued in the name of Southern Cross Autoglass Pty Limited was defective, that it was likely to mislead a debtor and cannot be saved either by amendment pursuant to s.33(1)(b) or pursuant to s.306 of the BA. The bankruptcy notice should be set aside on this ground.
Ground 2 – The judgment is for an amount greater than the certificate
The certificate of determination of costs is for a figure of $24,845.25. The judgment is for $24,995.25. The difference is the amount of $150.00 which is constituted by a fee of $75.00 charged to each of Mr and Mrs Rankine by the Local Court as natural persons for having the Local Court issue the judgment; s.133(1) of the Civil Procedure Act 2005 (NSW) (the “CPA”); Part 36 Rule 36.10 and Part 36 Rule 26.11(1), (2) and (3) of the Uniform Civil Procedure Rules 2005 (NSW) (the “UCPR”) clauses 4(1)(c), 2(a), 7(1)(a) and 8(1) and Schedule 1 Part 5 Item 3 Columns 1 and 2 of the Civil Procedure Regulations 2005 (NSW) (the “CPI”).
Section 133 of the CPA states:
“133 Judgments and orders unenforceable until entered
(1) A judgment or order of the court may not be enforced until it has been entered in accordance with the uniform rules.
(2) This section extends to:
(a) any judgment, order, determination or decree of a court, and
(b) any adjudication or award of a person having authority to make an adjudication or award,
that may be filed or registered in the court, or of which a certificate may be filed or registered in the court, under any other Act or law.
(3) In subsection (2), "law" includes:
(a) a law of the Commonwealth, and
(b) a law of another State or Territory, and
(c) in relation to the Supreme Court, a law of a foreign country.”
Schedule 1 Column 1 Item 3 of the CPI prescribes a fee of $75.00 for:
“Filing or registering a copy or certificate of a judgment, order, determination, decree, adjudication or award of any other court or person under section 133 of the Civil Procedure Act 2005”
Clause 4 of the CPI applies in relation to civil proceedings in the Local Court and states:
“(2) Subject to this Regulation, the fee that a person must pay in respect of a matter referred to in Column 1 of Schedule 1 is:
(a) except as provided by paragraph (b), the fee specified in respect of that matter in Column 2 of that Schedule, or
(b) if the person is a corporation and a fee is specified in respect of that matter in Column 3 of that Schedule, the fee so specified.”
The approved form for the registration or filing of a certificate of judgment or order is Form 45. That requires a copy of the certificate of the judgment or order to be attached and refers to a registration filing fee but none of s.368(1) and (5) of the LPA, s.133 of the CPA, UCPR Pt 36 r 36.10 and 36.11, which relates to the entry of judgments or orders, or CPR clauses 4(1)(c) and 2(a), 7(1)(a), 8(1) and Sch Pt 5, Item 3, Columns 1 and 2 authorise the issuance of a judgment on a certificate in the amount of $150.00 which the Rankines were required to pay in order to have the certificate issued. The form itself is permissive. The power to charge the costs is not created by the form. The applicants do not accept the respondents’ argument that the fee is in fact part of the costs in the proceedings which, pursuant to s.98 of the CPA, the Court is entitled to award. There has been no award of costs in this separate proceeding created by the registration of the certificate.
Hely J considered this matter in Croker v The Commissioner of Taxation [2005] FCA 127 (“Croker”) in respect of a costs certificate made pursuant to s.208J(3) of the Legal Profession Act 1987 which was the predecessor of the current Legal Profession Act, the relevant section of which is 368(5) and in respect of which there is no material difference. In that case costs were assessed at $12,972.30, the costs of registration were $63.00 and the certificate of judgment which issued under the seal of the Local Court stated that the plaintiff recovered judgment against the defendant in the sum of $13,035.30. A bankruptcy notice was issued against Mr Croker claiming $13,221.72 made up of the amount of the judgment or order $13,035.30 and accrued interest $186.42. Mr Croker argued that the bankruptcy notice was invalid because it overstated the quantum of his debt to the Commissioner in the sum of $63.00 and in a further sum being the proportion of the interest claimed which is referable to the inclusion of the $63.00 and the amount of the judgment or order. The applicants in the instant case make the same point. His Honour stated at [10]:
“Mr Croker’s contention that the amount of the debt as claimed in the bankruptcy notice is overstated should be accepted. That is because s 208J(3) of the LPA specifies the consequences of filing a certificate in the Local Court, namely that the certificate is taken to be a judgment of that Court for the amount of the unpaid costs, ie a judgment for $12,972.30. Mr Melrose, the solicitor for the Commissioner, was unable to point to any legislative or regulatory provision which would authorise entry of judgment in the sum of $13,035.30. My attention was not directed to any provision equivalent to s 107(1)(a) of the Service & Execution of Process Act (Cth) which, in cases to which it applies (and the present is not such a case) allows recovery of the costs and expenses incidental to the lodging of a copy of the judgment in an appropriate Court of a State other than the place of rendition.”
and continued at [12]:
“[12]There have been cases such as Bhattacharya v Berger[1999] FCA 883 (on appeal [1999] FCA 1302) where the Court has proceeded on the assumption that the costs of registration of a certificate in the Local Court were properly added to the amount of the certified costs, but my attention has not been directed to any case in which the issue has been squarely argued or decided.”
and at [13] and [14]:
[13]In Croker v Federal Commissioner of Taxation (2003) 52 ADR 226 the Full Court said of a certificate such as the present (at 230):
‘The purported "registration" of such a certificate as a judgment by the registrar of the Local Court is a mere clerical entry in the records of that court. It is not an order pronounced or a judgment given by a superior court of record.’
[14]When a certificate is filed with the Local Court, the Local Court does not adjudicate upon anything. The records of the Local Court either correctly reflect the operation of s 208J(3) of the LPA in the circumstances of the case or they do not. If they do not, then the issue of a ‘certificate of judgment’ which incorrectly reflects the operation of s 208J(3) is devoid of any legal effect.”
His Honour set aside the bankruptcy notice. Although the UCPR and Regulations have overtaken the legislation under which Croker was considered, there is in my view still no power to add the amount of the fee. I do not believe that the charging of the fee constitutes an award of costs and whilst the situation may be unsatisfactory it is one that can be easily cured by amendment to the legislation. In the instant case the applicants have filed a notice under s.41(5) of the BA that there has been an overstatement in the amount of the bankruptcy notice. I am satisfied that it is appropriate in all the circumstances to set aside the bankruptcy notice on this ground.
The respondents have argued that the issue has been determined by the Local Court and is now the subject of res judicata and/or issue estoppel and so cannot be raised again. They refer to the application to the Local Court to set aside the judgment which was heard by a Local Court Magistrate on 28 May 2010. I am advised that the matter proceeded before a Magistrate in the motions list. In an affidavit sworn by Gregory Arthur McInnes on 12 August 2010 he deposes to being the solicitor for the applicants and to have attended the hearing before the Local Court Magistrate together with Mr Svehla. He made notes of the Magistrate’s decision. The Magistrate noted that there was agreement between the parties that the judgment should be amended to delete Southern Cross and that was done. In regard to the $150.00 filing fee the Magistrate said words to the following effect:
“As to the $150.00 filing fee, it is an arguable issue somewhere else, but to me it is de minimis. It is a technical argument only and won’t be enforced in the local court.”
He then went on to deal with the special purpose liquidator and then said:
“As to the context of the Federal Magistrate’s Court, that is not the test in the Local Court. The test in the Local Court is whether the judgment was entered illegally or otherwise than in good faith. The second argument is de minimis. The third argument should be raised in the Federal Bankruptcy Court when the matter comes before the Federal Bankruptcy Court. I am exercising my discretion, quick, just and cheap disposition.”
My reading of this decision with regard to the claim that the judgment should not have included the $150.00 filing fee is that the matter was not determined. I do not believe it can be the subject of a res judicata or issue estoppel. The rule as to res judicata is that, where an action has been brought and judgment has been entered in that action, no other proceedings may be maintained on the same cause of action. In this case the earlier cause of action was an application to set aside judgment. The current cause of action is an application to set aside a bankruptcy notice. Issue estoppel, on the other hand, operates to prevent further litigation of an issue which has already been litigated and determined between the same parties; Jackson v Goldsmith (1950) 81 CLR 446 at 466. The Magistrate clearly was aware that the issue of the $150.00 filing fee would be debated before this Court and appears to specifically allow for this in his decision.
The applicants have a counter claim, set off or cross demand
The applicants claim to have a counter claim, set off or cross demand which is equal to or exceeds the amount of the judgment or sum payable under the final order which they could not have set up in the action or proceeding in which the judgment was obtained within the meaning of s.40(1)(g) of the BA. The nature of the cross claim is best understood by the following history.
Mr and Mrs Rankine were directors and principals of Nielsen & Moller Autoglass (NSW) Pty Limited. On 31 January 2008 Nielsen & Moller was placed into administration and then into creditor’s voluntary winding up pursuant to Part 5.3A of the Corporations Act 2001 (Cth) (“CA”). A Mrs Lo, who had a judgment against the company for $38,895.69 from the Federal Court on 26 October 2007 that had not been satisfied, applied to the Supreme Court of New South Wales for the appointment of a special purpose liquidator to investigate certain financial dealings between Nielsen & Moller, Mr and Mrs Rankine and Southern Cross. Mrs Lo claimed that the evidence enabled an inference to be drawn that the Rankines, together with others, were to various degrees involved in a scheme to transfer the assets of Nielsen & Moller to Southern Cross Autoglass, a company owned and controlled by the Rankines, leaving over $160,000.00 of unsecured creditors in the original company. Schemes of this type have been described as “phoenix” schemes. Mrs Lo was successful before Barrett J and he made orders appointing the applicants as the special purpose liquidators. Pursuant to those orders the applicants made arrangements for the examination of Mr and Mrs Rankine. In order to assist in the investigation and examinations, ordered pursuant to s.596A and 596B of the CA, certain examination production orders were obtained and served upon Mr and Mrs Rankine. On 16 September 2008 the Rankines made an application that the examination for production orders be set aside and on 14 November 2008 Hammerschlag J found in their favour. His honour felt that the examination for production orders could not be amended, they should be set aside and the special purpose liquidators were required to pay the Rankines’ costs in respect of their amended interlocutory process in the examination proceedings. It is this costs order and the later assessment that was made pursuant to it that became the judgment in the Local Court pursuant to which the bankruptcy notice was issued.
There were further proceedings before Hammerschlag J who, on 15 December 2008, ordered that Mr Wykes, the then liquidator of Nielsen & Moller be removed and that the applicants replace him. Mr Wykes had been appointed liquidator on 27 February 2008. The power to appoint a special purpose liquidator was explained by Barrett J in his judgment Nielsen & Moller (Autoglass) (supra) at [26] and [27]:
“[26] In the case of a court ordered winding up, it was held by Needham J in Re Eastern Properties Pty Ltd[1981] 1 NSWLR 499 that where several liquidators are appointed, one of them might be designated to attend to a particular matter. His Honour referred to the statement of Chitty J in Re Midland Land and Investment Corporation [1887] WN (Eng) 58:
“In a liquidation, whether compulsory or under supervision, the Court has jurisdiction to give the conduct of any particular matter arising in the course of the liquidation to one of several liquidators.”
[27] The same passage was relied upon by Thomas J in Re Obie Pty Ltd (No 4) (1984) 8 ACLR 967, the case probably most often cited in connection with the appointment of an additional liquidator in an already existing winding up by the court. His Honour said at 971:
“It was submitted for the Lewises that the court has no power to give a limited function to a particular liquidator; that an additional liquidator can only be appointed on a winding up, resignation, removal or occurrence of a vacancy; and that in any event the transference of this issue to an independent liquidator ought to be postponed until the removal proceedings are completed.
It has long been held that the court has jurisdiction to give the conduct of any particular matter arising in the course of the liquidation to one of several liquidators: Re Midland Land and Investment Corporation [1887] WN 58. In my own experience courts have made such orders when there is a matter to be dealt with in a liquidation which it would be embarrassing for the liquidators to handle. In such circumstances an additional liquidator is appointed to handle that matter, and the great expense and loss of efficiency involved in resignation and replacement in a partially completed administration is avoided.””
After the Hammerschlag J order of 15 December 2008 removing Mr Wykes and appointing the applicants as liquidators of Nielsen & Moller there was no need for a special purpose liquidator. The special purpose had merged with the general purposes of the liquidator. There were no powers given to the special purpose liquidator that were exclusive of powers available to a general purpose liquidator. The liquidator’s powers are those contained in s.477 of the CA which powers include those in s.477(2)(a):
“477(20(a)To bring or defend any legal proceeding in the name and on behalf of the company.”
The judgment is a nullity
On 16 April 2009, after the appointment of the applicants as liquidators, the Rankines and Southern Cross filed the application for a costs assessment of the costs order in the examination proceedings. The application was made by them utilising the heading in the action in which the costs order was made. The heading showed the applicants as special purpose liquidators. The applicants argued that the issuance of a certificate nominating the applicants in this way was a nullity and therefore the judgment based upon it and the bankruptcy notice and even the amended judgment are all a nullity as against the applicants. I do not accept this argument. If the applicants’ duties as special purpose liquidators were subsumed in their general duties as liquidators upon their appointment as such then they are still liable for the obligations which they incurred in their former capacity. The capacity in which a liquidator incurs a debt is only relevant as between the liquidator and the corporation. This will be discussed further in relation to my findings on mutuality, but put shortly the liquidators have personal liabilities when they have commenced proceedings; Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at [285] per Oliver J cited in Silvia v Brodyn Pty Ltd [2007] NSWCA 55 Hodgson, Ipp and Basten JJA at [50]. It is the name in which the proceedings are commenced that is relevant, not the capacity, where the liquidators have direct liability.
The cross claim resumed - mutuality
The applicants as liquidators were the subject of an application in the Supreme Court of New South Wales No 3415 of 2009 commenced by Mr and Mrs Rankine against them and Nielsen & Moller seeking that they, as liquidators, account for funds of approximately $73,768.99. On 19 October 2009 there was filed a document entitled “interlocutory process” on behalf of the applicants and Nielsen & Moller (in liquidation) seeking relief in proceedings 3415 of 2009 against the Rankines for breaches of their statutory duties as directors of Nielsen & Moller as well as other relief including compensation to Nielsen & Moller arising out of what I have loosely described as the creation of the “phoenix” company. It is accepted by the respondents that the damages sought from them pursuant to this cross demand would exceed the amount of the costs orders. For the sake of completeness I would note that the liquidators have two interlocutory costs orders against the Rankines in proceedings 3194 of 2009 but those costs have not been the subject of assessment and I do not believe that I am in a position to ascertain to the required degree of satisfaction that they have a value in excess of the amount claimed under the bankruptcy notice; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135. The question that the Court must therefore resolve is whether or not there is mutuality in respect of the cross demand and the original claim. The respondents argue that there is no mutuality, they say that the costs debt is one owed by the applicants in their personal capacity and that although they have a possible right of indemnity, subject to the approval of a committee of inspection or of the Court, against the assets of the company, this is only a secondary right. The action that the liquidator applicants are taking in the cross demand is action taken on behalf of Nielsen & Moller and they have no right to any of the funds that might be recoverable thereunder except in their capacity as liquidators to bring in and distribute the moneys in accordance with the CA.
In Gye v McIntyre (1991) 98 ALR 393 the Full Bench of the High Court explained that the object of a set off in bankruptcy is “to do substantial justice between the parties where a debt is really due from the bankrupt to the debtor to his estate.” The Court accepted that it was established by authority that a provision such as s.86 of the BA should be given “the widest possible scope”:
“On the other hand, “substantial justice” requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same… Thus, it is established by the cases that set-off under a provision such as s.86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and debits do not correspond.” [401]
The Court also opined at [402]:
“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, or the claims arising from 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 that they must ultimately sound in money.”
It is only the second aspect of mutuality that is in contest here. The position of a liquidator of a company is not the same as a trustee in bankruptcy. The property of the company does not vest in him. He is the agent of the company with fiduciary responsibilities towards it; DCT v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592. But the position of the trustee or personal representative who institutes proceedings is no different to that of the liquidator:
“…if he litigates, he litigates at his own risk and so, in my judgment, it should be with the liquidator and the authorities which point that way seem to me, if I may say so respectfully, to be completely reasonable.”
Re Wilson Lovatt & Sons Ltd (supra) at 285. See also Cresvale Far East v Cresvale Securities (No 2) [2001] NSWSC 791 (“Cresvale”) at [21]. In Cresvale at [37] Austin J said:
“In the case of a liquidator suing personally as plaintiff and being unsuccessful, the order for costs is made without prejudice to any application by the liquidator that costs be allowed out of the company’s assets (Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274, 278 per Oliver J quoting from Buckley on the Companies Acts 13th ed (1957). It has been held, however, that the order should not be limited to the assets of the company (Re Wilson Lovatt & Sons Ltd). It is open to the liquidator to seek recovery out of the assets but that claim does not involve the other parties to the proceedings and does not limit their rights.”
In Stec v Orfanos [1999] FCA 457 the Full Bench, Beaumont, Branson and Sunberg JJ held at [24]:
“Where a debtor seeks to set aside a bankruptcy notice on the ground that the debtor has a cross demand which equals or exceeds the amount of the judgment or order on which the bankruptcy notice is founded, the judgment on the one hand and the cross demand on the other must be mutual and due in the same right: Re Anderson; Ex parte Alexander(1927) 27 SR (NSW) 296; James v Abrahams[1981] FCA 46; (1981) 51 FLR 16 at 27. The requirement that the two claims be "in the same right" is directed to the capacities in which the claimants claim. Thus a claim by a judgment creditor personally cannot be answered by a claim against the creditor as a member of a partnership or as an executor or trustee. See Re Wedd; Ex parte Wedd(1961) 19 ABC 36; Re Molesworth (1907) 51 Sol J 653; Vogwell v Vogwell(1939) 11 ABC 83 at 89. But the requirement relevant to the present case is that the claims be mutual; that is that they be of the same kind or nature. Thus joint debts cannot be set off against several debts: Middleton v Pollock(1875) LR 20 Eq 515 at 518. Here three of Mr Stec's claims were against ERI alone. There is thus no mutuality in relation to these claims. His other claim was against Messrs Conroy, Rybak and Georgopolos. Again there is no mutuality because one of the joint creditors, ERI, is not the subject of the cross claim.”
In James v Abrahams (1981) 34 ALR 657, Fisher J as part of the Full Court considered the question of mutuality.
“To my mind the clear answer to the judgment debtor's claim in this matter is that of Long Innes J. in Re Anderson; Ex parte Alexander (1927) 27 S.R. (N.S.W.) 296 which, apart from the exact quantification of the debtor's claim, can be equally applied in the present matter: "The judgment debt of £81 5s. 7d., upon which the bankruptcy notice is founded, is admittedly due to the respondent in his own right. The question remains whether the respondent is personally liable to the applicant in respect of the cross-demand for £250, which, for present purposes, I must assume to constitute a valid claim, or whether he is liable only as executor or trustee, that is to the extent of the assets in the trust estate and without personal liability".
The contention of the respondent in Anderson's case was that the "cross demand" was not one which could be taken into consideration because it was not due from the respondent in the same right as that in which the judgment debt was due to him. Prior to applying this principle to the cross demand in question, in the words above mentioned, Long Innes J. had this to say: "It was decided by the Court of Appeal in Re Molesworth (1907) 51 Sol. Jo. 653 that when a judgment debtor applies to set aside a bankruptcy notice on the ground that he has a counter-claim or cross-demand which equals or exceeds the amount of the judgment on which the bankruptcy notice is founded, such counter-claim or cross-demand must be mutual and due in the same right--e.g., in answer to a judgment obtained against him by executors the debtor cannot set up a claim against their testator's estate. The same principle was previously applied by Manning J. in Re Davison and Farmer (1892) 3 B.C. (N.S.W.) 28, although the judgment in Re Molesworth suggests at least a doubt as to whether the principle was applicable in the earlier case.
…
The reasons for judgment of the Court of Appeal in Re Molesworth were shortly stated by Cozens Hardy M.R. as follows: “The debtor here is asserting a claim for damages against the testator's estate by virtue of a contract by the testator to leave him a certain amount of money by his will, and he has sued the executors. The executors, on the other hand, have an ordinary judgment for costs against the debtor based upon an order of the Probate Division. The executors' judgment is personal, they sued as individuals, whereas the debtor's claim is not against them as individuals, but is against their testator's estate. What he claims is not due from them in the same right, and I am therefore of opinion that he has no counterclaim at all ...””
If the situation in the instant case is superimposed upon those facts, it will be seen to be almost identical. The applicant debtors here are asserting a claim against the creditors as liquidators i.e. not in their personal interests, but in the interests of the company. The creditors on the other hand have asserted a claim against the debtors in their personal capacity, albeit as liquidators of a company. But it is clear from the authorities already cited that the liability of the liquidators to the creditors will remain whether or not they are able to obtain indemnity from the company. In my view, there is not the requisite mutuality between the claim and the cross-claim and I would not set aside the bankruptcy notice upon the ground found in s.40(1)(g) BA.
Abuse of Process
The applicants argue that the issue of this bankruptcy notice is an abuse of process and that the Court has power under s.30 of the Act to set aside a bankruptcy notice that could be so characterised; Maxwell-Smith v S & E Hall Pty Ltd (2006) 233 ALR 81 at [41]-[42] per Jacobson J; Kossaifi v Eakin & Ors [2010] FMCA 102 at [25] per Barnes FM. It is not appropriate to utilise bankruptcy proceedings to compel a recalcitrant debtor who is otherwise solvent to pay a debt which he declines to pay; Slack v Bottoms English Solicitors [2002] FCA 1445; Re Sarina; Ex Parte Council of the Shire of Wollondilly (1980) 43 FLR 163 (“Re Sarina”) at 165; Brunninghausen v Glavanics [1988] FCA 230. In his helpful written submissions, Mr Svehla sets out at [76] a history of the proceedings between the Rankines and the applicant liquidators. The history is lengthy. It commences on page 24 of the written submissions and continues to page 30. The proceedings are ongoing because the applicants as liquidators are seeking to overturn the arrangements whereby the assets of Nielson & Moller found their way to Southern Cross. My reading of the history as set out in the written submissions which are filed with the papers, the affidavit of Mr McInnes and the documentation annexed thereto is that the respondents are intent on resisting the actions of these officers of the Court. My reading of the history and the correspondence leads me to believe that the request to the official receiver to issue a bankruptcy notice against the liquidators was not so much to secure payment from recalcitrant debtors but to embarrass them.
There are numerous ways in which to enforce judgment other than the issue of a bankruptcy notice. One of them is a garnishee order. The applicants are partners in a firm of accountants. It would have been simple for a garnishee to be issued against that firm in respect of any drawings or profits payable to the debtors. There has been no suggestion that these applicants are personally insolvent, it is acknowledged that, notwithstanding their personal liability for the costs, they were acting in their capacity as special liquidators and court officers, it is clear that they have very substantial continuing claims in their capacity as liquidators for Nielsen & Moller against the respondents including two costs orders in respect of the Supreme Court proceedings, one made on 18 November 2009 and the second on 22 February 2010. I have not included these as cross-claims available to the applicants because the costs have not yet been assessed. In circumstances like this where the relationship between the parties has become severely strained, as it clearly is, the Court should look very carefully at the way in which it is sought to be used. A misuse of the processes of the Court constitutes an abuse of process; Hunter v Chief Constable of West Midlands Police [1982] AC 529. If an action is brought by one party against another to annoy that party or embarrass it, it can be construed as a vexatious action; Peruvian Guano Co v Bockwoldt (1883) 23 Ch D 225 at 230 per Jessel MR
In Hanrahan v Ainsworth (1990) 22 NSWLR 73 Clark JA discusses in some detail the tort of abuse of process from its earliest beginnings in the early 17th century referring to Waterer v Freeman (1617) Hob 266; 80 ER 412 and moving through Grainger v Hill (1836) 4 Bing NC 212; 132 ER 769 to Gilding v Eyre (1861) 10 CBNS 592; 142 ER 584 and Griffin, Ex parte; Re Adams (1879) 12 Ch D 480 before discussing the Australian cases and, in particular, Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509 at 521-522. His Honour then referred to the decision of the High Court in Rozenbes v Kronhill (1956) 95 CLR 407 at 417 where the Bench, Dixon CJ, Webb J and Fullagar J said:
“… There is an abuse of process if a pending bankruptcy petition, or a threat of proceedings in bankruptcy, is used as a means of extortion. The word ‘extortion’ is not a technical term, and it has in bankruptcy law ‘no special and artificial significance divorced altogether from the ordinary implication of the word’. The court will look strictly at the conduct of a creditor using or threatening bankruptcy proceedings, and extortion may be held to have taken place if the creditor has used, or attempted to use, a pending petition, or a threat of a petition, in order to extract from the debtor money which the debtor is not bound to pay, or in order to obtain some secret and unfair advantage over other creditors. But extortion will not be held to have taken place ‘in the absence of mala fides or anything amounting to oppression in fact’. There must be a real intention on the part of the creditor to use the process for some other end than its legitimate end, and there must be a real exertion of pressure.”
Their Honours went on to approve of the statement in the head note in Griffin (supra) which read:
“When the Court sees that a bankruptcy petition is presented, not with the bona fide view of obtaining an adjudication but for a collateral purpose and with the view of putting pressure on the debtor, it will refuse to make an adjudication even though there be a good petitioning creditor’s debt and an act of bankruptcy has been committed.”
The proper purpose of seeking a sequestration order against the estate of a debtor is so that a debtor, who is unable to pay his debts as and when they fall due, should have his affairs controlled for the benefit of all his creditors and not just specific ones. Allied to this purpose is the prevention of the debtor incurring further obligations which he will not be able to meet. It is a public purpose. The bankruptcy process is not to be used for private ends. That is why in cases like Re Sarina and the other cases cited above sequestration orders were not obtained. The affidavit of Mr McInnes reveals that, at the time of attempted service of the bankruptcy notice on the applicants, the legal representatives for the Rankines and the applicants had been attempting to organise a without prejudice settlement meeting. In what appeared to be a spirit of compromise, the solicitors for the applicants agreed to accept service of the bankruptcy notices on 27 April 2010 at the proposed meeting. But that meeting did not take place. A further one was organised for 17 May 2010 but this was also cancelled. So on 18 May 2010 Mr McInnes forwarded to the respondents’ lawyers a letter requesting that the bankruptcy notice be withdrawn pending determination of the Supreme Court proceedings that his clients were bringing as liquidators. The letter which had been sent by email was responded to some 14 minutes later advising the applicants’ solicitor that the applicants would have to file an application to set aside the bankruptcy notice as the respondents’ solicitors were instructed to “press/prosecute the bankruptcy notice to finality”. It seems to me that this course of dealings and the failure of the respondents to take any other steps to execute upon their judgment is indicative of an intention to utilise the bankruptcy process for reasons other than securing the orderly distribution of the debtor’s estates. Issuing a bankruptcy notice is the first step in this process. It enables the sequestrating court to assume insolvency and thus the need for the imposition of the trustee to handle the debtor’s affairs. In a case where it is clear that the officers of the Court upon whom this personal liability has been impressed have a right of indemnity over the assets of the company and have also been indemnified by Ms Lo, the creditor whose actions caused them to be appointed, and who are partners in an established insolvency practice, it is difficult to infer that the issuance of the notice was undertaken for a bona fide reason. I am of the view that the issuance of this notice constitutes an abuse of process and that it should be set aside on that ground.
In the light of the conclusions which I have come to above, I will order that bankruptcy notice NN1325 of 2010 should be set aside and the respondents should pay the applicants’ costs to be taxed, if not agreed, pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006.
I am not prepared to make an order for indemnity costs, although tempted to do so because of my finding of abuse of process. The applicants made a number of submissions about the notice and they were all susceptible of argument. The applicants were unsuccessful in one submission. It is not appropriate to fillet a costs order into different constituents of a claim.
I would also decline to issue an injunction. I have made it clear that I believe the use of a bankruptcy notice in these circumstances is an abuse. No firm of solicitors or counsel would proceed to issue another notice in the face of this finding. They might well be in contempt if they did so. An injunction should not issue if it is unnecessary.
I certify that the preceding thirty-two (32) paragraphs are a true copy of the reasons for judgment of Raphael FM
Date: 3 September 2010
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