Patane v ROYAL and Sun Alliance Financial Services Ltd

[2003] FMCA 128

FEDERAL MAGISTRATES COURT OF AUSTRALIA

PATANE v ROYAL & SUN ALLIANCE FINANCIAL SERVICES LTD [2003] FMCA 128

BANKRUPTCY – Review of Registrar’s decision – application to set aside bankruptcy notice – whether applicant has a counter-claim, set-off or cross demand exceeding the amount due to the creditor – income continuation policy of insurance – whether the applicant has a prima facie case of a claim under the policy exceeding the amount due to the creditor.

Bankruptcy Act 1966 (Cth), ss.40, 41(6A)

Federal Court Rules

Federal Magistrates Act 1999 (Cth), s.104

Eslie v Bowin Design Pty Ltd [1999] FCA 333
Melbourne v Relativity Pty Ltd [1999] FCA 160
Phyllis Graves; ex parte Phyllis Graves v Kevin Seggie (unreported, 29 August 1997, per Sackville J)

Re Sgambellone; ex parte Jacques & Ors (1994) 126 ALR 71

Applicant: ANTONIO PATANE

Respondent:

ROYAL & SUN ALLIANCE FINANCIAL SERVICES LTD

ACN 001 698 228

File No: AZ168 of 2002

Delivered on: 9 May 2003

Delivered at: Sydney, by telephone to Adelaide

Hearing date: 7 April 2003

Judgment of: Driver FM

REPRESENTATION

Solicitors for the Applicant: Ms H Pertsinidis
Ms A Gregory
Andersons Solicitors

Counsel for the Respondent: Mr M O’Donnell

Solicitors for the Respondent: Thomson Playford

ORDERS

1. The application is dismissed.

2. The applicant is to pay the respondent’s costs and disbursements, taxed in accordance with the Federal Court Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
ADELAIDE

AZ168 of 2002

ANTONIO PATANE

Applicant

And

ROYAL & SUN ALLIANCE FINANCIAL SERVICES LTD

ACN 001 698 228

Respondent

REASONS FOR JUDGMENT

Introduction and background

1. This is an application made under s.104(2) of the Federal Magistrates Act1999 (Cth) to review a decision by Registrar Christie on 16 January 2003 to dismiss an application by Mr Patane to set aside bankruptcy notice 229 of 2000. Mr Patane had also sought an extension of time to comply with the bankruptcy notice. Registrar Christie dismissed both applications with costs.

2. The applicant contends that he has a counterclaim, set-off or cross demand of the kind referred to in s.40(1)(g) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”). The application for an extension of time was made pursuant to s.41(7) of the Bankruptcy Act.

3. Registrar Christie provided written reasons for her decision.  At paragraph 4, she noted that the disputed bankruptcy notice, which was dated 12 June 2002 and served on 19 June 2002, was founded upon an allocatur certifying costs of $75,684.11 payable by the applicant to the respondent in South Australian District Court action 459 of 1999.  That action dealt with claims by the applicant under an income continuation insurance policy in respect of loss of income.  Judgment was delivered on 23 May 2000. 

4. The applicant claims to have a good counterclaim, set-off or cross demand greater than the sum claimed under the bankruptcy notice.  The applicant has issued fresh proceedings on 20 August 2002 claiming the benefit of a personal accident insurance policy entered into on 1 May 1985, being policy number B500569 issued by the respondent.  The applicant claims that he is entitled to, pursuant to the policy, a monthly benefit from the date that he was totally incapacitated for work until 1 May 2011.  Initially, the monthly benefit was stated to be $2,222 per month but with time it is asserted to have increased to $4,334.82 per month.  The applicant claims that he suffered injuries in November 1995, July 1996 (twice) and January 1997 to the right arm and shoulder, lower back and groin and an aggravation of a pre-existing degenerative changes in his spine.  Each of the injuries, it is said in the South Australian District Court action, contributed to his overall worsening conditions.  The applicant asserts that he was disabled from work from January 1997 and remains totally disabled at the present time.  The applicant says that he has not been engaged in his occupation of bricklaying or any other occupation where he can earn an income.  The respondent made payments under the policy from time to time from January 1997 until February 1998 but nothing has been paid since then.

5. In the South Australian District Court proceedings the applicant claims $105,000, although I was told at trial in these proceedings that the value of the claim was in excess of $135,000.  In the applicant’s further written submissions filed on 15 April 2003, the claim is valued at $141,122.64.

6. The respondent filed a defence in the South Australian District Court on 14 October 2002.  The respondent pleads in that defence that the benefits payable under the policy were terminated on 9 February 1998 in accordance with the terms of the policy:

   Which termination was upheld as lawful and proper by the Full Court of the Supreme Court of South Australia in action number 443 of 2000.

7. In paragraph 14 of the defence the respondent also claims set-off in the sum of $98,329.36 being the judgment debt following the previous District Court and Supreme Court actions plus interest. 

8. It is apparent that the claim at issue in the present District Court proceedings and in the proceedings before me arises out of the same policy of insurance that was in issue in the original District Court and Supreme Court proceedings.  However, the earlier proceedings were based upon a claim of partial incapacity and the payment of a “proportionate benefit” under the policy.  The applicant was at least partially successful in the original proceedings in the South Australian District Court but the decision was reversed by the Full Court of the Supreme Court of South Australia.  The applicant was ordered to pay the costs of both proceedings and the amount due under the bankruptcy notice comprises the cost of the original District Court proceedings.  The claim now being agitated by the applicant in the South Australian District Court is a claim of total and permanent disability said to arise from 1 July 2000, although I was told that the applicant plans to amend his claim in those proceedings in order to claim payments from 1 June 1999. 

Consideration and findings

1. At paragraphs 7 to 23 of her decision, Registrar Christie correctly analysed the law in relation to a claim based upon s.40(1)(g) of the Bankruptcy Act. The applicant must establish that he has a counterclaim, set-off or cross demand, quantifiable in money terms, equal to or exceeding the judgment sum or sum payable under the final order which could not have been set up at the time of the original action. In the proceedings before the Registrar the respondent conceded that the applicant had established a prima facie basis for a claim based upon the insurance policy and that the claim is quantifiable in money terms. In addition, it was not disputed that the claim could not have been set up in the original proceedings in the District Court, given that it relates to a later period. However, the respondent disputed that the applicant’s claim exceeded the amount due under the bankruptcy notice.

2. Registrar Christie correctly found that the applicant not only had to establish a prima facie basis for the claim as a whole, but also had to establish a prima facie basis for the quantum of the claim: Re Sgambellone; ex parte Jacques & Ors (1994) 126 ALR 71 at 75 per Drummond J; Leslie v Bowin Design Pty Ltd [1999] FCA 333 per Burchett J at [4]; Melbourne v Relativity Pty Ltd [1999] FCA 160 per Moore J at [34]; Phyllis Graves; ex parte Phyllis Graves v Kevin Seggie (unreported, 29 August 1997, per Sackville J at paragraph 13).  At paragraph 21 the Registrar said:

   In my view, the cases referred to above point to a requirement that the debtor must show not only that he has “a fair chance” of succeeding in establishing the counterclaim, set-off or cross demand asserted, but also that he has “a fair chance” of succeeding in establishing that the amount of the claim equals or exceeds the amount of the relevant judgment or order.

3. The Registrar then proceeded to consider the amount claimed by the applicant by reference to the amount claimable under the insurance policy, considering in particular whether there were any limitations on the amount claimable under the policy and, if so, the reasons for those limitations.  I agree entirely with that approach taken by the Registrar.

4. The applicant failed before the Registrar because of the interpretation she placed on condition 7 in the policy of insurance at issue.  That clause reads as follows:

   Limitations of Benefits Payable

   At any time during the period of Disability, the Insured Benefit stated in the Schedule shall be reduced by the amount of the excess (if any) of the total monthly benefits over 75 per cent average income but no such reduction shall be applied to the extent that ought to cause the aggregate of the Insured Benefit, as reduced, and any other monthly benefits to be less than the lesser of $2,000 and the Insured Benefit stated in the Schedule: - where “total monthly benefits” means the aggregate of the Insured Benefit and “other monthly benefits” means other monthly benefits (other than a business expense or office overhead disability insurance to indemnify the policy owner) payable on account of any disability of the Person Insured resulting from sickness or accident, converted to an equivalent monthly basis in such manner as the Company in its discretion shall determine: in such conversion calculation, the first $100,000 of any lump sum benefits payable in consequence of permanent and total disability shall be disregarded.

5. Put simply, the respondent’s case is that the applicant, even if he succeeded generally in his current proceedings in the South Australian District Court, could not recover more than $2,000 per month which would produce a judgment substantially less than the amount due under the bankruptcy notice.

6. The Registrar agreed.  At paragraph 34 of her written reasons she said:

   Counsel for the respondent creditor submitted that the policy in question is an indemnity policy, not an annuity policy, with the benefits payable therefore impacted by the income or previous income of a claimant.  That seems clear on the face of the policy.  Under the provisions of Condition no 7 of the policy the benefit payable appears to effectively be reduced to an amount of not more than 75 per cent of the Average Income, being the average monthly income being earned by the person in his occupation during the 12 months prior to disability.  However, this reduction is itself capped.  In the words of the policy, the insured benefit has been reduced and other monthly benefits cannot be reduced to “less than the lesser of $2,000 and the Insured Benefit stated in the Schedule”.

7. It was common ground that the Insured Benefit stated in the Schedule was greater than $2,000.  The Insured Benefit in the Schedule is $4,125.  The Registrar found that the applicant’s current claim would be subject to the application of condition 7 and that the quantum of the claim could therefore not exceed the amount due under the bankruptcy notice.

8. In these review proceedings, the applicant takes issue with the Registrar’s findings on the potential value of the applicant’s claim.  Ms Pertsinidis, for the applicant, filed written submissions on 4 April 2003 and also presented oral argument.  She also filed further written submissions on 15 April 2003 pursuant to orders made by me at the end of the trial on 7 April 2003.  The thrust of those submissions is that two types of claim are available under the policy.  The policy provides for a partial disability benefit or a total disability benefit and is said to apply different formulas to the assessment of either type of claim.  Ms Pertsinidis submits that under the policy, a total disability claim is considered based upon the insured person’s income prior to sustaining the relevant injury.  In addition, she points out that the policy provided for an auto increase option, which indexed the pre-existing income by reference to a CPI uplift factor.  The applicant has presented evidence indicating that the predecessor of the respondent (which has since taken over responsibility of the policy) accepted that the applicant’s income prior to him first sustaining an injury was of the order of $4,587 per month.  Ms Pertsinidis submits that under the policy the applicant is entitled to 75 per cent of his pre disability income increased by the auto increase option, which produces an amount of $4,146.31 per month for 1999.  She further submits that the amount of the claim will be further increased because of the application of the auto increase option over time and that, in respect of the period from 1 July 1999 to 18 January 2003, the value of the claim reached $141,122.64.  Ms Pertsinidis submits that clause 7 of the policy has no application to the applicant’s present claim once pre disability earnings are determined because his total monthly benefits are determined by reference to the provisions of the policy.  She submits that condition 7 is, in effect, a safety net provision where the amount of monthly income claimable is not otherwise capable of being determined.  There is no evidence that the safety net of $2,000 per month is itself indexed.

9. Mr O’Donnell, for the respondent, orally sought to rebut Ms Pertsinidis’ submissions.  He points out that clause 7 of the policy operates during “a period of disability”.  Mr Patane had claimed for a total disability for 50 days from 18 January 1997 to around the end of March in that year.  He then claimed for a period of 324 days partial disability, apparently on the basis that he was making a recovery.  These claims were paid by the then insurer.  It seems that there were four claims in all.  Mr O’Donnell accepted that clause 3 of the policy provides for a continuous period of disability where the insured suffers a further disability within six months of cessation of the period of disability, provided that the cause of the new disability is the same.  However, Mr O’Donnell points out that the definition of disability in the policy is total disability.  The policy provides, in clause 5, for a proportional benefit in respect of partial disability but that does not constitute a period of disability for the purposes of the policy.  Accordingly, in order to qualify as a recurrent disability the fresh disability must manifest itself within six months of the cessation of the period of total disability.  Mr Patane ceased to be totally disabled at the end of March 1997 and was thereafter placed on proportionate benefits.  His present claim dates from 2000, and even if amended, would only go back to 1999.  Therefore, he could not qualify under the recurrent disability provision and his asserted loss of income would have to be assessed on the basis of his income at the time the disability was suffered in 2000 or 1999.  Mr O’Donnell explained that Mr Patane could not reply upon his pre injury income before 1999 in order to establish his present claim under the policy.  There was little evidence of the applicant’s income in 1999 before Registrar Christie and what evidence there was (a tax return for 1999-2000) indicated an annual income of only $11,948.  Additional evidence of the applicant’s income since then was put before me, and that shows an even lower taxable income.  Accordingly, even if one views clause 7 as a safety net provision, the safety net would operate in respect of a claim from 1999 or 2000 and provide a benefit of $2,000 per month.  Accordingly, the applicant’s claim could not exceed the amount due under the bankruptcy notice.

10. Further written submissions were filed on behalf of the respondent on 22 April 2003 but they did not add materially to Mr O’Donnell’s oral submissions.

11. I accept Mr O’Donnell’s submissions. The basis of calculation of the claim relied upon by Ms Pertsinidis would only be valid if there was a continuous period of total disability until the time of the current claim by the applicant. There is a gap of two years. Accordingly, the claim must be valued by reference to Mr Patane’s income at the time that the alleged fresh disability was suffered in 1999 or 2000. The available evidence indicates that Mr Patane’s income at that time was less than the safety net of $2,000 per month stipulated in clause 7. His claim therefore cannot exceed the amount due under the bankruptcy notice. He cannot establish that he has a claim of greater value than the amount he must pay in order to comply with the bankruptcy notice. His application to set aside the bankruptcy notice therefore fails. The decision of the Registrar was correct and she properly dismissed the application to set aside the bankruptcy notice. Upon the dismissal of that application, the applicant was no longer entitled to an extension of time for compliance with the bankruptcy notice pursuant to s.41(7) of the Bankruptcy Act.

12. In addition, on 4 April 2003 the District Court of South Australia stayed the proceedings instituted by the applicant in that court and ordered the applicant to provide $25,000 security for costs.  Ms Pertsinidis submits that this Court is not the appropriate forum to consider that issue, but I disagree.  Mr Patane provided affidavit evidence to the District Court that he would be unable to provide security for costs and that his proceedings in the District Court would be abandoned if security was required.  Security has been required and the proceedings have been stayed.  In the circumstances, although the respondent conceded before the Registrar that the applicant had established a prima facie claim, it now appears that the claim will not be pursued.  It is true that the District Court in staying the proceedings was influenced by the uncertain state of the bankruptcy proceedings.  However, the Court was also influenced by the non payment of costs owing from the earlier proceedings in the District Court and the Supreme Court.  The District Court also had regard to information received about the applicant’s financial position and the disposal of assets.  Further, the District Court required security for costs by reference to the non payment of earlier costs and not by reference to these bankruptcy proceedings.  Having read the reasons for decision of the District Court on 4 April 2003 I think it most unlikely that the security requirement would be waived, even if the applicant were to have succeeded in these proceedings.  Mr Patane is on record as stating that he cannot pay the required security.  In addition, he currently faces a stay of proceedings.  In the circumstances, quite apart from the issue of the quantum of the claim, the applicant has no right of action that he can pursue.  For these reasons also, the application should be dismissed.  I will dismiss the application with costs.

13. In her further written submissions Ms Pertsinidis seeks a “stay” of the bankruptcy notice pending the outcome of the District Court action. If that was intended to be an application to add an application for relief under s.41(6A) of the Bankruptcy Act it is now too late, as this matter was heard before that application was made and time for compliance with the bankruptcy notice ran out when Registrar Christie made her decision on 16 January 2003. In the light of my interpretation of the insurance policy I would not be minded to extend time under s.41(6A) in any event.

I certify that the preceding twenty-one (21) paragraphs are a true copy of the reasons for judgment of Driver FM

Associate: 

Date:  9 May 2003