Re Donkin, C.J. v Ex parte AGC Advances Ltd
[1994] FCA 588
•24 AUGUST 1994
RE: COLIN JOHN DONKIN
EX PARTE: AGC ADVANCES LIMITED
No. QN443 of 1994
FED No. 588/94
Number of pages - 7
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
DRUMMOND J
CATCHWORDS
Bankruptcy - application pursuant to s. 41(7) Bankruptcy Act 1966 that applicant has counter-claim, set-off or cross demand - material showing outline of cause of action relied on to constitute cross demand with sufficient detail to show debtor's bona fides sufficient to enliven s. 41(7), even though the truth of the allegations in that material is not sworn to.
Bankruptcy Act 1966 - ss. 40(1)(g), 41(7)
Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135
Re Cocciolone (unreported, Cooper J, 30 May, 1994)
Re Cox (1934) 7 ABC 98
Eastick v ANZ Banking Group Ltd. (1981) 53 FLR 91
Ebert v The Union Trustee Co. of Australia Ltd. (1960) 104 CLR 346
Re Hodby; Ex parte Kenny (1986) 12 FCR 134
Re James; Ex parte Carter Holt Harver Roofing (Aust.) Pty. Ltd. (unreported, Hill J, 17 November, 1993)
Re Laybutt; Ex parte Robinson (unreported, Beaumont J, 26 June, 1985)
Re McKechnie; Ex parte Weir (1991) 27 FCR 515
Re Pollnow; Ex parte Queensboro Pty. Limited (unreported, Burchett J, 19 October, 1988)
Vogwell v Vogwell (1939) 11 ABC 83##
HEARING
BRISBANE, 5 August 1994
#DATE 24:8:1994
Counsel for the applicant: A. Vasta QC with P.D.Baker
Solicitors for the applicant: Paul Watts and Associates
Counsel for the respondents: P.H. Morrison QC
with M.E. Eliadis
Solicitors for the respondents: Clayton Utz
ORDER
The further hearing of the application is adjourned to Monday, 28 September, 1994.
NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
DRUMMOND J The applicant seeks an order pursuant to s. 41(7) the Bankruptcy Act 1966 that he has a counter-claim, set-off or cross demand of the kind referred to in s. 40(1)(g) the Bankruptcy Act that exceeds $1,272,844, the amount of a judgment obtained against him by the respondent, which counter-claim, set-off or cross demand could not have been set up in the action in which that judgment was obtained. The purpose of the application is to defeat the bankruptcy notice served on the applicant by the respondent which demands payment of this judgment debt.
The respondent has taken a preliminary point that the affidavit filed by the debtor on 16 June, 1994 is insufficient to enliven s. 41(7). No other material was filed prior to expiry of the time fixed by the bankruptcy notice for compliance with the demand contained in it.
In this affidavit, the applicant raised three matters each of which was, so he asserted, a sufficient answer to the demand in the bankruptcy notice. However, senior counsel for the applicant did not argue that the first two of these matters were sufficient for this purpose. It was only the third of these matters that he contended was raised in sufficient detail in the affidavit to enliven the sub-section.
The information contained in the affidavit identifies the third of these matters as a claim the applicant and his wife say they have against the respondent (and the person appointed by the respondent to be receiver of certain properties and businesses previously owned by the applicant and his wife). This information is limited to a copy of the originating application filed by them on 4 November, 1993 and a copy of their statement of claim filed at the same time in this Court. By the application, they claim, among other things, damages for losses sustained as a result of the sale of their properties and businesses at a gross under-value. In the statement of claim, it is alleged that, by 28 September, 1989, the applicant and his wife had defaulted under securities they had granted to the respondent in respect of a $2,000,000 loan made by the respondent to them in 1986; it is also alleged that written valuations obtained by the National Australia Bank on 10 November, 1989 indicated that two of these properties together then had a market value of about $4,100,000 and the third, a market value of $385,000. The allegation is that the National Australia Bank was then prepared to refinance the applicant and his wife by loaning them $3,000,000, an offer which the bank later withdrew when the amount of their indebtedness to the respondent increased from $2,000,000 to $2,930,000. The applicant and his wife also allege that, in March-April 1990, they entered into a contract for the sale of one of the properties, the Crown Hotel, for $360,000, which fell through because the respondent refused to sanction it, and that in October 1992 the respondent sold that particular property for the sum of $185,000. It is also alleged that in or about June 1990 the applicants entered into a contract for the sale of a one half share in the other two properties for $2,000,000, a sale that also fell through because of the respondent's actions and that, in August 1990, the respondent withdrew all the three properties from sale and appointed the receiver, who it is in turn alleged mismanaged the properties and associated businesses, to the detriment of the applicant and his wife. It is also alleged that in June 1993 the first respondent sold the other two properties (the Heritage Tavern and the Flamingo Nightclub) for $1,900,000. It is alleged that the sales of the first property for $185,000 and of these other properties for $1,900,000 were sales made by the respondent in breach of its duty of care to the applicants. These allegations appear in a pleading drawn by the applicant personally and without legal assistance. It is not clear whether the applicant had legal assistance when he prepared and filed his affidavit on 16 June last, although he is now legally represented. As I read the statement of claim, it asserts, albeit in sketchy outline only, not only that the respondent breached its duty of care to the applicant and his wife as their mortgagee in selling their three properties at undervalues, but it also alleges facts relating to independent valuations of the properties and to sales contracts procured by the applicant and his wife for those properties which fell through, which give the allegations of breach of duty by the respondent a degree of credence. There is thus the outline of a case suggesting that the applicant and his wife may have a claim against the respondent for damages well in excess of the judgment debt.
The bankruptcy notice which the applicant challenges is not exhibited to his affidavit and the applicant did not seek to tender it. The respondent submits that I cannot have regard to it but must confine myself, in dealing with the preliminary point, to what appears in the applicant's affidavit. It seems to me, however, that the bankruptcy notice is sufficiently incorporated by reference in the applicant's affidavit to enable me to have regard to it in these proceedings, the whole purpose of which is to defeat the efficacy of that notice. Reference to the notice on the Court file shows that the amount of $1,272,844, payment of which is demanded by the notice, is the balance claimed to be due in respect of a judgment given in this Court on 24 December, 1991 for $3,008,640, after bringing into account the realisation for $1,900,000 and $185,000 respectively of the securities over the Heritage Tavern (including the Flamingo Night Club) and the Crown Hotel, i.e., the properties and businesses the subject of the action which the applicant and his wife commenced against the respondent and its receiver on 4 November last. This cause of action would only have finally crystallised when the Heritage Tavern and Flamingo Night Club were sold by the respondent in June 1993. The claim for damages the applicant relies upon is thus a claim which could not have been set up in the action in which the judgment upon which the bankruptcy notice is founded was given.
The respondent submits that the applicant's affidavit of 16 June last is insufficient to enliven s. 41(7), for a number of reasons. The respondent points to the fact that the allegations in the statement of claim filed 4 November, 1993 are nowhere verified by the applicant or anyone else: they are mere pleading allegations. The respondent also submits that there is nothing in the applicant's affidavit of 16 June last to explain whether that action has advanced any further than its institution and the filing of the statement of claim, on 4 November, 1993: it is said that this deficiency does nothing to assure the Court that the applicant is seeking to make bona fide use of s. 41(7).
As against that, there is before me material suggesting, in broad outline, that the applicant has a claim against the respondent that overtops the amount, payment of which is demanded by the notice, and which claim could not have been set up in the proceedings in which the judgment was given against the applicant. I also take into account the fact that, on 7 July, the applicant filed the application, supported by a supplementary affidavit sworn by the applicant on 1 July, as relevant to the question of his bona fides, although I do not, of course, take any notice of the contents of that affidavit in determining the preliminary point now taken. That he moved promptly to bring the matter before the Court for determination suggests that he did seek to invoke the section in good faith when he filed his original affidavit. There is nothing in the affidavit and accompanying material that suggests that the applicant may be reluctant to go on oath to verify the allegations in this material.
In Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 at 142, Lockhart J observed that the prior cases were concerned primarily with the exercise of the Court's power under s. 41(7), and the equivalent provisions in the English bankruptcy legislation, but had little to say as to what the initial affidavit itself had to contain. Since Lockhart J's decision, it is now common, where a debtor seeks to defeat a bankruptcy notice by pointing to a cross demand, for the matter to be looked at in two stages: firstly, to determine whether the material filed within the time limited by the notice for compliance with the demand therein contained meets the requirements of s. 41(7) and so is sufficient to determine whether time for compliance with the notice demand is automatically extended and, secondly, if so, whether the Court is satisfied, on all the material proper for it to take into account and to the degree of conviction required, that the debtor has such a cross demand.
In Vogwell v Vogwell (1939) 11 ABC 83, Re Cox (1934) 7 ABC 98 and Ebert v The Union Trustee Co. of Australia Ltd. (1960) 104 CLR 346, the Court was concerned with the second issue, as was the Court in Re Cox (1934) 7 ABC 98; when, in reliance upon the 1885 English decision, In re Foster, Lukin J there said that "real evidence" was required, he did not say that there had to be evidence proving every element of the cause of action relied on as constituting the cross-demand, only that there had to be evidence to show "that there is a reasonable ground for instituting such an action as is maintained in the counter-claim". This seems to me to be consistent with the decision in Ebert. In Ebert, in the context of dealing with what I have called the second issue, the Court said at 350:
"The (debtor) cannot satisfy the Court that a cross demand exists by showing no more than that she propounds one and states how she suggests that she can make it out. In Re Duncan; Ex parte Modlan, Street J said that the debtor need not satisfy the Court that there are reasonable grounds for believing that he will establish his cross action, but only that he has a bona fide claim which he is fairly entitled to litigate. This perhaps is expressed too favourably to the debtor ... Perhaps the standard may be expressed by saying that the debtor must show that he has a primary 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 counter-claim, set-off or cross demand."
In Re Brink at 141, Lockhart J referred to this passage and said that it should be followed. His Honour then turned to consider what was required of an affidavit relied on to bring the automatic statutory extension of the time allowed for complying with the demand in a bankruptcy notice into play, by force of s. 41(7). His Honour said in this regard, at 142:
"The authorities are concerned primarily with the exercise of the court's power under s. 41(7) and the equivalent provisions in the Bankruptcy Act 1924 (Cth) and the English Bankruptcy legislation; but they say little as to what the initial affidavit must itself contain.
In my opinion the affidavit cannot merely contain an assertion that the debtor has a counter-claim, set-off, or cross demand which he could not have set up in the action in which the judgment or order was obtained. The affidavit must show a counter-claim, set-off or cross demand which equals or exceeds the amount of the judgment debt and which the debtor could not have set up in the action in which the judgment or order was obtained: see Vogwell v Vogwell, supra, at 85; Ebert's case, supra, at 350; Re A Debtor
(1935) 1 Ch 347, per Slesser LJ at 352.
It is as well to remember that the initial affidavit has to be filed within a limited time namely, the number of days after service of the bankruptcy notice upon the debtor fixed by the Registrar. These times are fixed by him without any knowledge on his part of the possibility of a counter-claim, set-off or cross demand being propounded by the debtor. In many cases it is difficult, if not impossible, for the debtor to present more than a mere outline of his case in the time available.
I do not think any good purpose would be served by my attempting to express a definitive formula as to what the original affidavit must contain. That must depend in every case on the particular facts and circumstances: see Re A Debtor; Ex parte The Debtor v Tossoun (1963) 1 WLR 51, per Upjohn LJ at 56.
The fact that it is within the power of the court to determine when the hearing of a matter under s. 41(7) will take place, and thus the length of the extension of time to comply with the requirements of the bankruptcy notice; and the difficulty, if not impossibility in some cases, of the initial affidavit being anything other than a mere outline of the debtor's case due to the temporal constraints imposed by the notice, all point to the conclusion that the courts should adopt a benevolent construction to the initial affidavit."
In Eastick v ANZ Banking Group Ltd. (1981) 53 FLR 91, the Full Court of this Court cited this passage with evident approval at 93. The Court emphasised, at p. 95, that "the question whether an affidavit is an affidavit 'to the effect' required by s. 41(7) must ... depend in every case on the particular facts and circumstances and should be determined on a benevolent construction of the relevant affidavit". Understandably, when a question arises as to whether the affidavit material filed within the time allowed for compliance with the demand contained in a bankruptcy notice is sufficient to bring about the statutory extension of that time, subsequent courts have followed this approach. It is this approach which governs the fate of the preliminary point taken here, not some mechanical test that depends upon whether, e.g., all essential elements in the cause of action relied on to show the existence of the cross demand have been identified and verified on oath.
The modern cases in which attention is focused on the sufficiency of the initial affidavit to enliven s. 41(7), as distinct from whether, when the matter comes before the Court, the debtor's material is sufficient to satisfy the Court of the matters referred to in the sub-section, show that it is not regarded as essential that the initial affidavit must contain sworn evidence verifying every element of the claim relied on by the debtor as giving rise to the cross demand.
In Eastick, supra, although the Court affirmed the primary judge's conclusion that the debtor had failed to satisfy the Court that he had a cross demand which he could not have set up in the proceedings in which the judgment debt arose, upon which the bankruptcy notice was founded, the debtor succeeded in overturning the primary judge's ruling that the only affidavit he had filed within the time fixed by the notice for compliance with the demand was not a sufficient affidavit for the purposes of s. 41(7). The affidavit annexed a statement of claim, which the debtor proposed to file in the Supreme Court by way of instituting proceedings to establish the existence of the cause of action upon which his cross demand was said to be founded; the debtor verified the truth of most of the allegations in the draft statement of claim, but he did not anywhere deny his indebtedness to the judgment creditor. But, as appears from page 95, because there was an unverified denial of that indebtedness in the draft statement of claim, the Court was prepared to hold that:
"...the affidavit when read with the annexed draft statement of claim, was to the effect that the appellant had the relevant claim in negligence against the respondent."
Fisher J, in Re Hodby; Ex parte Kenny (1986) 12 FCR 134 at 137, found in what the Full Court said in Eastick, supra, authority for the proposition that an affidavit, to be sufficient to meet the requirements of s. 41(7), "need not contain or indicate the evidence on which the judgment debtor will rely upon in his attempt to have the bankruptcy notice set aside". In Re Pollnow; Ex parte Queensboro Pty. Limited (unreported, Burchett J, 19 October, 1988), Burchett J, in determining whether an affidavit was sufficient for the purposes of s. 41(7) adopted the comments of Lockhart J in Re Brink, observed that the Full Court in Eastick 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 and went on to hold that the affidavit, on the "benevolent construction" directed by Re Brink, was "to the effect that" the debtor had a cross-demand of the requisite kind even though it did not seek to quantify the value of the claim set out in it: his Honour was able to infer from the nature of the claim and the circumstances in which it was made that it would very likely, if well-founded, be for an amount in excess of the judgment debt upon which the notice was founded. His Honour pointed out that, while it is not enough for there to be a mere assertion in the affidavit relied on of the existence of the requisite cross demand and that the affidavit must "show" such a cross demand, the affidavit there in question did far more than assert the existence of a claim; it pleaded that claim in detail and was therefore "to the effect" that the debtor had the requisite cross demand. In Re McKechnie; Ex parte Weir (1991) 27 FCR 515, Foster J said:
"It is clear that in very many cases, especially where the quantification of the amount of a cross- claim, set-off or cross demand will require valuation evidence, nothing more can be done in the debtor's initial affidavit than to indicate the existence of the cause of action or causes of action upon which reliance is to be placed, give an outline of their nature, and provide material to base an assertion that their prosecution will produce indebtedness in the judgment creditor in excess of the debtor's debt. The fact that considerably more may, in all probability, be necessary to persuade the Court on the appointed day, that the requisite prima facie case is made out, does not alter this situation. The demonstration of bona fide reliance on the section is the main function of the initial affidavit. It must be borne in mind that the section requires only that the affidavit be `to the effect that' the debtor has the necessary counter-claim etc. ..." (p. 520)
In Re Cocciolone (unreported, Cooper J, 30 May, 1994), his Honour reviewed the authorities, including Re Brink, and held that in order to determine whether an affidavit is sufficient for the purposes of s. 41(7):
"The requisite approach is one that requires a determination of whether there is a bona fide reliance on section 41(7) of the Act and whether there is identified a cause or causes of action which arise out of an outline of facts relied upon by the judgment debtor." (p. 5)
Like Cooper J in Re Cocciolone, I do not regard the comments of Hill J in Re James; Ex parte Carter Holt Harver Roofing (Aust.) Pty. Ltd. (unreported, 17 November, 1993) as supporting the proposition that explicit proof of each element of the cause of action said to give rise to the cross demand is required in the affidavit relied on to bring the sub-section into operation.
An outline of the cause of action relied on by the debtor to constitute the cross demand, with sufficient accompanying detail to show that the debtor is bona fide in his contention that he has such a cross demand, is all that is required of the initial affidavit. For the reasons I have already given, I think the applicant's affidavit of 16 June, 1994 is sufficient to enliven s. 41(7).
It is unnecessary to express any final view on the extent to which a debtor can properly rely on material supplementary to the material filed within the time allowed by the bankruptcy notice for compliance with the demand there made, when the matter comes before the Court and the debtor is seeking to satisfy the Court that he has the requisite cross demand. However, it is at least permissible for a debtor then to rely on "evidence supplementing the earlier affidavit for the purpose of explication without going beyond its scope": Re Laybutt; Ex parte Robinson (unreported, Beaumont J, 26 June, 1985) and on material which expands on matters in the affidavit filed within time, although the debtor cannot supplement any deficiency in that material where no sufficient affidavit has been filed within the time allowed by s. 41(7) and the relevant bankruptcy notice: Re James; Ex parte Carter Holt Harver Roofing (Aust.) Pty. Ltd., supra.
The preliminary point taken by the respondent fails. The further hearing of the application is adjourned to 28 September, 1994.
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