McClymont v Wright Designed Pty Ltd

[2006] FMCA 4

FEDERAL MAGISTRATES COURT OF AUSTRALIA

McCLYMONT & ANOR v WRIGHT DESIGNED PTY LTD [2006] FMCA 4

BANKRUPTCY – Application by joint debtors to set aside bankruptcy notice – whether the bankruptcy notice is invalid – where the creditor is a company that is the subject of deed of company arrangement – whether the creditor’s authorised agent was responsible for authorising the issue of the bankruptcy notice – whether there has been a failure to comply with s.450E of the Corporations Act – where there is a joint debt between a husband and wife – where the creditor availed itself of the right to issue a joint bankruptcy notice – where a petition for a sequestration order against the debtors was found invalid and an order for costs was made for each of the debtors – whether the creditor could have issued two separate bankruptcy notices for two different amounts – whether the creditor should have issued a joint bankruptcy notice without giving the credits – whether the credits constitute a true set-off against the joint debt.

Corporations Act 2001(Cth), s.450E(2)
Bankruptcy Act 1966 (Cth), s.41

Yu v Farrow Mortgage Services Pty Limited (In Liquidation) (1995) 60 FCR 300
Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183
Kleinwort Benson Ltd v Crowl (1998) 165 CLR 71
Tindall v Westpac Banking Corporation [1999] FCA 210
Bank of New Zealand v Harry M. Miller & Co. Ltd (1992) 26 NSWLR 48
Hanak v Green [1958] 2 QB 9
Gye v McIntyre (1990) 171 CLR 609
Re: Day & Dent Constructions Pty. Ltd. (In liquidation) And: North Australian Properties Pty. Ltd. (Provisional Liquidator Appointed) (1981) 54 FLR 277
Re ACN 007 537 000 Pty Ltd (in liq); Ex parte Parker (1997) 150 ALR 92
Handberg v Smarter Way (Aust) Pty Ltd (V7074 of 2001) (2002) 190 ALR 130

Applicants: SELMA & GRAHAM McCLYMONT

Respondent: WRIGHT DESIGNED PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 094 558 200

File Number: SYG 3401 of 2005

Judgment of: Raphael FM

Hearing date: 14 December 2005

Date of Last Submission: 14 December 2005

Delivered at: Sydney

Delivered on: 16 January 2006

REPRESENTATION

Solicitors for the Applicant: Bowles Lawyers Pty Ltd

Solicitor for the Respondent: Mr A Cohen

ORDERS

1. Application dismissed.

2. The applicants to pay the respondent’s costs to be taxed if not agreed pursuant to the Federal Court Act and Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 3401 of 2005

SELMA & GRAHAM McCLYMONT

Applicants

And

WRIGHT DESIGNED PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT ) ACN 094 558 200

Respondent

REASONS FOR JUDGMENT

1. There is before me an application by joint debtors to set aside a bankruptcy notice issued against them by the Official Receiver for the Bankruptcy District of NSW on 26 August 2005. The bankruptcy notice states that the creditor is Wright Designed Pty Ltd (subject to a deed of company arrangement) ACN 094 558 200. It alleges that the debtors are indebted to the creditor in the sum of $11,898.95 made up in the manner shown on the schedule, which does not include any interest. The bankruptcy notice is signed by a solicitor, Andrew Cohen, who by his signature confirms that he is the creditor’s authorised agent. The bankruptcy notice annexes a certificate of judgment out of the Local Court of NSW which states that the judgment creditor is Wright Designed Pty Ltd T/as Capell of Chatswood Kitchen. The date of the judgment is said to be 28 June 2004 and the date of the certificate is given as 23 July 2004.

2. The applicants claim that the bankruptcy notice is invalid for a number of reasons with which I shall now deal.

Creditor’s authorised agent

1. The creditor is a company that went into administration in 2004 and became the subject of a deed of company arrangement dated 18 June 2004. The deed of company arrangement provides for a fund to be created and to be administered by the company’s administrators. The proceeds of the fund were to be made up of $10,000 provided by a director of the company and certain other payments that were to be due to the company, including payments made by the company’s debtors as at the date of the deed. The deed provided that the responsibility for collecting those debts would fall upon the company which would continue in being under the control of Mr Wright, its principal director.

2. Although there was some confusion at the commencement of the hearing as to who each party said was responsible for authorising Mr Cohen to issue the bankruptcy notice, the proceedings concluded on the basis that Mr Bowles, who appeared for the debtors, was submitting that the person responsible for authorising Mr Cohen was Mr Wright. Mr Cohen accepted that position and argued that on the evidence he had satisfied me on the balance of probabilities that Mr Wright had so authorised him. I am satisfied that Mr Bowles’ assertion and Mr Cohen’s concurrence with it were correct. The whole purpose of a deed of company arrangement is to allow a company to remain in being and continue trading whilst past creditors are dealt with through the administration of the deed. The deed clearly states that it is the company which is to collect the debts and Mr Wright who is to cause the company to do that and to meet any expenses in so doing. By the time the bankruptcy notice was issued the deed of company arrangement had been signed and the administrator’s functions were limited to the funds that the company had collected and caused to be placed into the deed fund.

3. Mr Cohen did not put on any evidence about authorisation from Mr Wright. However, he was asked about it in cross-examination by Mr Bowles. Mr Bowles asked Mr Cohen whether Mr Wright had authorised him to issue the bankruptcy notice. Mr Cohen responded that he had told Mr Wright that a previous bankruptcy notice that he had issued had been found to be invalid but he proposed to issue a new bankruptcy notice. Mr Wright said to Mr Cohen words to the effect “Ok you do that, I suppose I will be paying for it as I always do”. I am satisfied that this constitutes authority from Mr Wright as a director of the company to Mr Cohen to issue the bankruptcy notice and to sign it in the manner in which he did. The applicant’s submission on this count therefore fails.

Failure to comply with s.450E Corporations Act

1. I have set out how the judgment creditor is described in the certificate of judgment attached to the bankruptcy notice. It will be seen that there is no mention of the fact that the company was subject to a deed of company arrangement. Mr Bowles argues that the failure to do this is to breach the provisions of s.450E(2) Corporations Act 2001 (Cth) which requires those words to be set out in every public document and in every negotiable instrument of the company. Mr Bowles argues that the creditor cannot rely upon a document which is in breach of the law to support a bankruptcy notice. In Yu v Farrow Mortgage Services Pty Limited (In Liquidation) (1995) 60 FCR 300 Lehane J considered an objection to a bankruptcy notice where the Australian Company Number did not appear. His Honour said:

   “I do not think, however, that it is required to be stated: the notice is not, I think, a public document of the creditor for the purposes of the Corporations Law: see Corporations Law, ss 219(3), 88A.

2. A certificate of judgment is a document prepared, not by the company, but by the registrar of the Local Court of NSW. I am unable to see how it can be considered a public document of the company either. Mr Bowles also argues that the bankruptcy notice must follow the judgment and that the name in the judgment is different from the name in the bankruptcy notice because the judgment does not contain the words previously referred to and does contain the words “T/as Capell of Chatswood Kitchen”. The phrase “follow the judgment” appears to have been derived from the phrase “in accordance with the judgment” which was contained in s.41(2)(a)(1) of the Bankruptcy Act 1966 (Cth) prior to amendments to s.41(2) in 1996 which removed the words “in accordance with judgment or order”. But it is clear from the discussion of the provisions of the Act in the old form found in Kleinwort Benson Ltd v Crowl (1998) 165 CLR 71 at 79-80 that what was being referred to was payment of the debt and not a slavish following of a title of the proceedings. Now that those words have been omitted from the Act there is even less ground upon which to argue that the fact that the name in the certificate of judgment and the name in the bankruptcy notice are not identical is not a failure to comply strictly with the provisions of the Bankruptcy Act, although I accept that it might provide a debtor with an argument that he or she is misled or confused, thus rendering the bankruptcy notice invalid. The misleading or confusing element alleged in this case is the existence of the words “T/as Capell of Chatswood Kitchen” in the certificate but not in the name of the creditor in the bankruptcy notice. I do not think from looking at this matter objectively that a debtor is likely to be confused. The real creditor is the company. It is the company that has to be paid. The company is clearly named in both the certificate and the bankruptcy notice. Mr Bowles argues that the trading name referred to in the judgment may have been disposed of by the company. He makes this argument from a very detailed study of the deed of company arrangement and not from an objective consideration of the situation of a typical debtor. That is the approach that must be taken: Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183. Mr Bowles makes some additional points based upon a detailed reading of the deed of company arrangement. He says:

   “As the certificate of judgment discloses the judgment was recovered on 28 June 2004 and the DOCA provides the administrator will not collect debts post 18 June 2004 it is open for the respondent to conclude that the judgment is not the property of the deed fund.”

3. It is clear that the company is the judgment creditor. And it is clear that in the absence of some deed of assignment the company is the appropriate entity to collect the debt. What happens to the debt thereafter is not a matter of concern to the debtor. If he pays it in accordance with the notice he will have complied with the bankruptcy notice and cannot commit an act of bankruptcy based thereon. He may also have satisfied the judgment debt. I am unable to find that the bankruptcy notice is invalid for these reasons.

Credit applied

1. There is a joint debt of a husband and wife. The creditor availed itself of its right to issue a joint bankruptcy notice. This is the second bankruptcy notice issued. An earlier bankruptcy notice was issued against the joint debtors. It was only served upon one of them. That bankruptcy notice was found at the hearing of the petition for a sequestration order against Selma Maria McClymont to have been invalid. An order for costs was made in Ms McClymont’s favour. On the same day and at the same time the bankruptcy notice issued against Mr McClymont was set aside and an order for costs in a different sum was made in his favour. There was a debt due from the creditor to the debtors. This debt was acknowledged in the bankruptcy notice. Mr Bowles argues on behalf of the debtors that the creditor has allocated individual credits on a joint basis and that the creditor cannot do this. It would have the effect of requiring one of the respondents to comply with the bankruptcy notice by utilising monies to which he or she is not entitled. Mr Bowles argues that the creditor could have issued two separate bankruptcy notices for two different amounts to each of the debtors or alternatively issued a joint bankruptcy notice without giving the credits: Tindall v Westpac Banking Corporation [1999] FCA 210.

   
   

   I am of the view to provide an answer to Mr Bowles’ assertions one is required to look at the law of set off. If these sums constitute a true set-off against the joint debt then I believe that the bankruptcy notice would be valid. But if the sums are not a true set-off but merely a cross claim owned to each of the debtors individually Mr Bowles’ assertion would have substance.

2. A set-off will arise where there exists between debtor and creditor reciprocal demands that naturally abolish a debt. If the costs orders above really amount to a set-off, it will be necessary to first determine from where the right to set-off the sums would arise. In circumstances where either of the parties have been found to be bankrupt or are in liquidation, a right to set-off arises under bankruptcy legislation: s.86 Bankruptcy Act 1966 (Cth). However this is not such a case. Neither of the parties has yet been found to be bankrupt and thus the kind of set-off that could be held to exist will be an equitable set off. In Hanak v Green [1958] 2 QB 9 at 16 Morris LJ held that a cross-claim can be treated as a set-off if:

   “in a court of law it would have been so regarded at the time of the Judicature Acts, or if it would have been regarded by a court of equity as the basis for equitable set-off or for giving protection on equitable grounds to a defendant.”

   Whilst each species of set-off arises under different circumstances, the rules governing them are virtually the same: Bank of New Zealand v Harry M. Miller & Co. Ltd (1992) 26 NSWLR 48.

3. A set off must arise from a prior mutual dealing between the parties: Gye v McIntyre (1990) 171 CLR 609; Re: Day & Dent Constructions Pty. Ltd. (In liquidation) And: North Australian Properties Pty. Ltd. (Provisional Liquidator Appointed) (1981) 54 FLR 277. The requirements for establishing mutuality are three fold and are set out by the High Court in Gye v McIntyre (1990) 171 CLR 609 at 623:

   “In the context of s86 [of the Bankruptcy Act 1966 (Cth)], 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 dealing 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.”

   This passage was cited by the Federal Court in Re ACN 007 537 000 Pty Ltd (in liq); Ex parte Parker (1997) 150 ALR 92 and in Handberg v Smarter Way (Aust) Pty Ltd (V7074 of 2001) (2002) 190 ALR 130 at 137. Whilst mutuality is a strict requirement of the right to set-off under bankruptcy legislation, there may be exceptional circumstances where a right to an equitable set-off is held to exist where complete mutuality is absent. The instant case is not such an exception and in any event it has been noted that a finding of mutuality would almost always be necessary where a right to set-off exists in equity. S.R Derham in his book Set-off, 2^nd ed, 1996, Oxford, p.68 states:

   “… while mutuality is not an absolute prerequisite to an equitable set-off, usually it would not be just or equitable that a set-off occur unless the same parties are beneficially involved in the respective claims.”

   What of where the debts, as is the situation in this case, are between the same persons? Can the joint debt owed by the debtors be set-off against what is owed by the creditor, despite the two separate cost orders? In Handberg v Smarter Way (Aust) Pty Ltd (V7074 of 2001) (2002) 190 ALR 130 Kenny J quoted the following statement from Set-off (Ibid.) p.349, at [34]:

   “In the case of a joint and several liability, each party is severally as well as jointly liable, the indebtedness of a truly joint and several debtor, together with an obligation owing by the creditor to the debtor, constitute dealings between the same people, and may be set off. The occurrence of the set-off would bring about a pro tanto reduction in the joint and several debt, and would release the other debtors as well. [references omitted].”

   Immediately following this passage Kenny J states:

   “In connection the last proposition, the learned author referred to the decision of Willes J in Owen v Wilkinson (1858) 5 CBNS 526 at 527. Own v Wilkinson establishes that a set-off found for one co-debtor should operate for the benefit of another co-debtor who is jointly and severally liable for the same debt. Owen v Wilkinson was not, however, a bankruptcy case.”

4. I think that the correct analysis of the situation is that there is a set-off. The requisite mutuality exists. The dealings are between the same persons, the benefit and the burdens arise in the same interest and the claims sound in money. Mr Bowles says that this finding means that one debtor is “dealing” with the other debtor’s payment by virtue of the reduction of the first debtor’s debt. But whilst that is true it is not unusual in a situation of joint liability. What we are dealing with here is the position as between debtor and creditor. The rights of contribution as between the individual creditors are figuratively “behind the curtain”: in the same way that any joint creditor can be called upon to so satisfy the whole of the joint debt even though as between himself and the other joint debtor he may only have a small liability. Mr Bowles’ submissions do not address a set-off situation. I am therefore unable to set aside the bankruptcy by notice on the grounds put forward.

5. It follows that the whole application must be dismissed and that the applicants must pay the respondent’s costs to be taxed if not agreed pursuant to the Federal Court Act and Rules.

I certify that the preceding thirteen (13) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate: 

Date:  16 January 2006