Pollnow v Queensboro Pty Ltd

[1988] FCA 625

CATCHWORDS

Bankruptcy notice - Cross demand under s.4O(l)(g) - Effect of . , I

s.41(7) and sufficiency of relevant affidavit - Value of cross

demand not quantified in affidavit	- “Benevolent construction“	!
applied - Sufficiency of evidence to establish cross demand	-	t
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Cross demand being subject	of dismissed proceedings now under	i.

appeal, issue was not whether prima facie case shown but whether

real possibility debtor’s appeal will succeed.

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Bankruptcy Act 1966, ss.4O(l)(g), 41(7)

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POLLNOW (Debtor)	-V- QUEENSBORO PTY LIMITED	& ANOR (Petitioning
Creditors)
B.2391 Of 1988 B. 378 Of 1988
Burchett J.
19 October 1988
Sydney

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IN THE FEDERAL COURT OF AUSTRALIA )

GENERAL DIVISION	1	, .
BANKRUPTCY DISTRICT OF THE STATE )
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OF NEW SOUTH WALES AND THE 1

AUSTRALIAN CAPITAL TERRITORY 1

B.2391 of 1988 BETWEEN:

ERROL HUGH POLLNOW

Debtor

AND :

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QUEENSBORO PTY LIMITED

Petitioning Creditor

BETWEEN:

ERROL HUGH POLLNOW

Debtor

AND :

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GARDEN NEWS-ST. LEONARDS

PTY LIMITED

Petitioning Creditor

MINUTE OF ORDERS OF THE COURT (MADE IN EACH CASE)

Judge Making Order: Burchett J.

Date of Order:	19 October 1988
Where wade:	Sydney
THE COURT DECLARES THAT:

It is satisfied that the debtor has	cross demand of
the type referred to in	s.4O(l)(g).

THE COURT ORDERS THAT:

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i	debtor's	creditor	the	The	c s .	pay
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l	-	NOTE :	Settlement and entry of orders is dealt with in rule	124
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IN THE FEDERAL COURT OF AUSTRALIA )

GENERAL DIVISION 1 BANKRUPTCY DISTRICT OF THE STATE ) OF NEW SOUTH WALES AND THE )

AUSTRALIAN CAPITAL TERRITORY 1

B.2391 of 1988 BETWEEN:

!.

ERROL HUGH POLLNOW

Debtor

- AND :

QUEENSBORO PTY LIMITED

Petitioning Creditor

B.378 Of 1988 BETWEEN:

ERROL HUGH POLLNOW

Debtor

- AND :

GARDEN MEWS-ST. LEONARDS

PTY LIMITED

Petitioning Creditor

EX-TEMPORE REASONS FOR JUDGMENT i

BURCHETT J.

These are applications, whi.ch were heard together by

consent, in respect of two bankruptcy notices.

By s.4O(l)(g) of the Bankruptcy Act 1966 provision is

made for the service of a bankruptcy notice requiring a debtor,

within a fixed time, to "comply with the requirements of the

notice or satisfy the Court that he has	a counter-claim, set-off
or cross demand equal to	or exceeding the amount of the judgment

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debt or sum payable under the final order, as the case may be,

being a counter-claim, set-off or cross demand that he could not

have set up in the action or proceeding in which the judgment or

order was obtained." Section 41(7) provides:

"Where, before the expiration of the time

fixed for compliance with the requirements of
a bankruptcy notice, the debtor has filed
with the Registrar an affidavit to the effect
that he has such a counter-claim, set-off or
cross demand as is referred to in paragraph
40(l)(g), and the Court has not, before the
expiration of that time, determined whether
it is satisfied that the debtor has such a
counter-claim, set-off or cross demand, that
time shall be deemed to have been extended,

immediately before its expiration, until and

including the day on which the Court

determines whether it is o satisfied."

In Re Laybutt; Ex parte Robinson (unreported, 17 July

1985), I	referred to the operation of s.41 in the following
terms:

"The structure of s.41 distinguishes between

such a claim [i.e. a claim to have a

counter-claim set-off or cross demand within s.4O(l)(g)l and the claim to set aside a

bankruptcy notice. Where	a debtor seeks to
set up a counter-claim, set off,	or cross
demand, the provisions of s.41(7), provided	i
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they are complied with, produce	an extension

by force of the statute. They do not provide

for an extension by the Court."

That this was in fact the position had already been held in James -

v. Abrahams (1981) 34 A.L.R.	657 at 661 where Deane and Lockhart
JJ. said of the filing of an affidavit under	s.41(7):

"It operates as an automatic extension of time

for compliance with the bankruptcy notice
until the court can determine whether it is
satisfied by the debtor that the debtor has a
counter-claim, set-off or cross demand of the

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type referred to in s.4O(l)(g). If the court is so satisfied, it is neither required nor empowered to make an order setting aside the

bankruptcy notice. The result of the court's

being so	satisfled, within either the time
originally flxed	by the bankruptcy notice for
compliance or	the extended time resulting

from the operation of s.41(7), is that

failure to comply with the requirements of

the bankruptcy notice does not constitute an

act of bankruptcy. After the court has been

so satisfied, the bankruptcy notice is

spent. 'I

If, as was pointed out in both the cases cited, an

affidavit filed in purported compliance with	s.41(7) does not in
fact meet the requirements of that provision, the result is simply that the time has not been extended by its filing and, if	I
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nothing further occurs, an act of bankruptcy will result from the	l
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expiration of	the time limited in the notice. It will then be

too late to take any other step which may have been open to the

debtor if it had been taken in time.

Accordingly, the first question in cases under s.41(7)

is the sufficiency of the affidavit filed within the period

allowed and upon the basis of which, pursuant to rule 10, the

matter has been brought before the Court. Upon that question

hangs the issue whether	or not an act of bankruptcy has been
committed.

It was pointed out by Lockhart J. in Re Brink; Ex parte

Commercial Banking Company of Sydney Limlted (1980) 30 A.L.R.

433 at 439, in a ~udgment which received the approval of the Full

Court in Eastick	v. Australia and New Zealand Banking Group
Limited (1981) 53	F.L.R. 91 and was applied in Re Racheha; Ex

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parte Antonios (1980) 49 F.L.R. 423, that the affidavit must

contain more than a mere assertion of the existence of the

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requisite counter-claim, set-off or cross demand which could not

have been set up in the action in which the judgment or order was

obtained. The affidavit must "show" such a counter-claim,

set-off or cross demand.

But in Eastick's case (supra) at 95 the joint judgment

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of Deane, Fisher and Sheppard JJ. accepted as sufficient in the
particular circumstances an affidavit which did not verify an

essential ingredient of the cause of action sought to be set up

except by asserting the debtor's belief	as	to the matter in
question. Their Honours said:

! "The question whether an affidavit is an

affidavit 'to the effect' required by s.41(7)

must, as we have indicated, depend in every

particular the case on facts nd

circumstances and should be determined on a

benevolent construction of the relevant

affidavit . I'

They went on to hold that it also appeared from the affidavit

!	that the claim was not one which could have been set up in the
was obtained.
proceedings in which the judgment founding the bankruptcy notice

In accepting that the affidavit must be given a

I	benevolent construction, the joint Judgment at 93-94 quoted at
length from the judgment in Re Brink, where Lockhart J. pointed
out that the exigencies of time might render it "difficult, if
not impossible, for the debtor to present more than a mere
outline of his case in the time available."

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Re Brink also contains a valuable indication of what is

meant by a "cross demand" in the relevant sense. It accepted

earlier authority to the effect that the term is not a echnical

one, and that it has a wider meaning than the expressions which
accompany it, "counter-claim'' and "set-off". At 139, Lockhart J.

adopted the view that the object of the legislature "is obviously

to prevent a judgment creditor from pursuing bankruptcy

proceedings when, as between himself and the judgment debtor, the

balance of account is in favour of the judgment debtor."

I turn to the affidavits in the present cases, which are

in substantially identical terms. What they disclose is that the
debts founding the bankruptcy notices arose upon orders for costs

made against the debtor in interlocutory proceedings in an equity I '

suit commenced by him against the creditors and others. The	r
cross demand relied upon consists of the claims made in the principal suit. The relevant "proceeding" for the purposes of
s.4O(l)(g)	is either the application for interlocutory orders in

the suit or the application for a costs order in that

interlocutory application - in either case the substantial claim

in the principal proceeding could not have been set up in answer

to the	creditor's	application	for	a	costs	order	in	the
interlocutory	matter.	That	followed	from	the	nature	of	the

proceeding. But	is the affidavit "to the effect that" the debtor
has a cross demand equal to or exceeding the amount of	the debt?

It does not seek to quantify in figures the value of the claim . ,.

set out in it. But if the affidavit is given a "benevolent construction", it seems to me appropriate to note that each of the debts here in question is relatively small, arising upon a

partial costs order in an interlocutory proceeding, whereas the

claim itself has been litigated upon a separate question as far
as the High Court of Australia, where the prospect of special

leave being granted, once all issues have been determined, is

said (without objection) to have been held out. A further

separate question has also been determined and is about to be	i -
dealt with in a further appeal.	In these circumstances, it can

scarcely be doubted that, if the debtor ultimately succeeds in

his suit, the costs orders alone are likely far to exceed the

debts the subject of the bankruptcy notices. The amended

Statement of Claim in the Supreme Court, filed pursuant to leave

given by McLelland J., has been verified by the debtor, and a ,

verified copy is annexed to the affidavit. It does far more than

assert the existence of a claim; it pleads that claim in detail,

and alleges damages resulting both from the incurring of

liabilities as a guarantor, and from the loss of the benefit of

employment as a consultant and executive director upon which the

debtor is alleged to have been financially dependent. It also

claims an order for costs against each of the creditors.

It would not, I think, be in keeping with the

requirement of the relevant bankruptcy law, that I should

construe the affidavit benevolently, to fail	to	accept it as
sufficient to comply with the requirements of s.41(7).	I	think
it	is	"to the effect" that the debtor has the requisite cross

demand.

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The remaining question IS the sufficiency of the

evidence to establish the case propounded. For this purpose, more is required than merely compliance with s.41(7) by the filing of an affidavit to the relevant effect. The Court must be

satisfied, within the meaning of s.40(1)(g), that the debtor has

the appropriate cross demand. I have found this the most

difficult question in the present cases. The information

furnished in the affidavits is sparse in the extreme. It is not

satisfactory that a court should be asked to infer matters which

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could easily have been the subJect of evidence. Further

affidavits can be filed on behalf of	a debtor, provided any
affidavits filed within the time limlted by s.41(7) raise	a
sufficient case to comply with the requirements of that section.	!-

(See Laybutt's case (supra).) However, the parties agreed on

certain further facts which were stated	from the bar table, and
any inferences which	do arise from the material before me can

more confidently be drawn since the respondents have not chosen

to call any evidence. What has emerged is that the principal

proceeding, raising the alleged cross demand, challenges the

appointment of certain receivers and managers over the assets of

a company of which the debtor was executive director. In those

proceedings, two separate issues have been tried. The first,	t .
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which related to the legal validity of the appointment, was

determined in the debtor's favour at first instance by Kearney

J.,	whose decision, however, was reversed by a majority of the
Court of Appeal of New South Wales, with Priestley	J. dissenting.

It was this decision which was the subject of an application for special leave to the High Court, which was rejected, not on the basis that the case was in itself inappropriate for special

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leave, but on the ground the application was premature since the

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question would remain open until the final determination of the ..

suit. A second separate question was determined adversely to the ..

debtor by Hodgson J., and an appeal from that decision is due to

be heard by the Court of Appeal in December.

It seems to me that a case where the debtor's claim is

the subject of current litigation, which is incomplete in the

sense that appeals remain to be determined, raises somewhat

different questions from those which are raised in the normal I -

case of a claim yet to come before a court. In the normal case,

it is appropriate to ask whether the debtor has shown "that he

has a prima facie case, even if then and there he does not adduce

the admissible evidence which would make out a prima facie case

before a court trying the issues that are involved in his

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counter-claim, set-off or cross demand". (See Re Brink (supra at	, I
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1411, citing the decision of the High Court in Ebert	v. The Union

Trustee Company of Australia Limited (1960) 104 C.L.R. 346 at

350.) But in a case such as the present, a court has already

pronounced upon the prima facie case the debtor would seek to

propound. The pronouncement, however, has not been finally

affirmed, and has been put in question by appellate proceedings.	!
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I have not been referred to any authority which discusses this

problem. It would clearly be invidious for this Court to attempt

to assess the prospect that the Court of Appeal may overrule the

decision of Hodgson J., or that the High Court may ultimately

grant special leave and allow an appeal on the question on whlch

a majority of the Court of Appeal, with Prlestley J. dissentlng, has overruled the decision of Kearney J.The issue should rather

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be whether there is a real possibility that the debtor's claim

will ultimately be established. The stage of considering whether

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there is	a prima facie case has already been passed. It	is
necessary to bear	In mlnd that s.40(l)(g)	does not require the

debtor to satisfy the Court that he - will succeed in his claim;

the ordinary test of whether he has merely shown a prima facie

case makes that plain.

In the present cases, the dissenting ludgment of

priestley J. seems to me, taken in conjunction with the other

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circumstances, to show that the debtor has a cross demand within

the meaning of s.4O(l)(g).	Accordingly I declare that	I	am	I
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satisfied, in each case, that the debtor has a cross demand of

the type referred to in s.4O(l)(q).

I certify that this and the

preceding eight ( 8 ) pages are
a true copy of the Reasons for

Judgment herein of his Honour

Mr. Justice Burchett.

&au Associate

Dated: 19 October, 1988.

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Counsel for the Debtor:  Mr. S.D. Epstein

Solicitors for the Debtor:	Beston & Riordan
Counsel for the Petltioning Creditor:	Mr. J.E. Sexton
Solicitors for the Petitioning
Creditor:	McKimm & Associates
Date of hearing:	18 October 1988