Re F.E. Cocciolone

[1994] FCA 358

Bankruptcy - bankruptcy notice - applicat~on for adjournment of applicat~on seeking

orders that judgment debtors have a counterclaim, set-off or cross-demand of the land
referred to in section 40(l)(g) of the Bankruotcv Act 1966 - adjournment sought for

judgment debtors to file supplementary atfidavit - whether or not or~ginal affidavits

sufficient to enliven section 41(7) of the Act - Extent of detail requlred in ong~nal

affidavits to enliven section 41(7) - whether or not facts deposed to ~n original

affidavits estabt~sh a real and effect~ve cross-clam against the judgment creditor.

Bankruptcv Act 1966 sectlons 40(l)(g), 41(7)

Re Brink: Ex parte the Commercial Banking Com~anv	of Svdnev L~mlted	(1980) 44
FLR 135

Lavbutt: Ex parte Roblnson (Unreported - Beaurnont J. - 26 June, 1985)

P e r (1991) 27 FCR 515

p e James:  Ex Darte Carter Holt Harver Roofing (Australia) Ptv. Ltd. (Unreported -

Hill J. - 17 November, 1993)

Ebert . v. (1960) 104 CLR 346

R e ~ o u l d (1983) 72 FLR 393 :

-	B
QN 1640 of 1993
Coooer J.. Brisbane. 30 Mav. 1994

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT

OF THE STATE OF OUEENSLAND No. ON 1640 of 1993

~

Judement Debtors

JUDGE MAKING ORDER:  Cooper J.

m MADE: Brisbane

DATE OF ORDER:  30 May, 1994

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The application be adjourned to l5 June, 1994.

2. The costs of today's appearance wlll be reserved.

m:	Settlement and entry of orders 1s dealt with m Order 36 of the Federal Court
Rules. (See also Order 37 rule 2(3)).

THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT

OF THE STATE OF QUEENSLAND No. ON 1640 of 1993

F F

Judement Debtors

GQkL%:	Cooper J.
PLACE:	Brisbane
&?im	30 May, 1994

pEAsONS FOR JUDGMENT

This is an application to adjourn the determination by the Court of the
question of whether or not the judgment debtors have a counterclaim, set-off or cross-

demand of the lund referred to in section 40(l)(g) of the Bankruotcv Act 1966 ("the

Act").

The purpose of the adjournment is to enable additional matenal to be
fded to supplement the affidavits filed by the judgment debtors during the time for

compliance with the bankruptcy notice served on them by the judgment creditor. The

served by an adjournment, the o n p a l affidavits being Insufficient to enliven sectlon	application is opposed by the judgment creditor on the ground that no purpose is
41(7) of the Act. The insufficiency alleged is an absence of factual material deposed to in the affidavits which establishes that the judgment debtors have a real and
effective cross-clam against the judgment creditor.

It is insufficient to enliven section 41(7) of the Act to file an affidavit

which merely asserts a right to a counterclaim, set-off or cross-demand m the requisite

amount; the question is what additlonal matenal is necessary to satlsfy the section.

In Re Brink. Ex ~ a r t e the Cornrnerc~al Bankine Comvanv of Sydney

Limited (1980) 44 FLR 135, Lockhart J . sald (at 143) :-

"In my opiniorl the affidavzt cannot merely contaul an assertion that the debtor has a courtterclaim, set-off or cross demand which he could not have set up in the action rn which the judgment or order was obtained. The ajj7davit must show a counterclaim, set-off or cross demand which equals or exceeds the amount of the judgment debt and which the debtor could not have set rcp in the action in which the judgment or order was obtained: see VogweU v.

VogweU (1939) 11 A.B.C., at p. 85, Ebert's Case (1960) 104 CLR, at p. 350; Re A Debtor per Slesser W. [I9351 I

Ch. 347, at p. 352.

It is as well to remember that the initial affidavit has to be fled within a limited time, namely, the number of days afrer service of tlte bankruptcy notice rcpon the debtorfired by the Registrar. These fimes are fixed by him without any knowledge on his part of the possibility of a counterclaim, set-off or cross demand being propounded by the debtor. In many cases it is diflcult, if not impossible, for the debtor to present more than a mere outlrne of ~ L F case in the tzme available.

I do not think ary good purpose would be sewed by my

original affidavit must contain. That must depend in every	attempting to evpress a definrtive formula as to what the
case on the particular facts and circrcmstances: see Re A Debtor; Ex porte the Debtor v Tmaun per Upjohn U.
[I 9631 1 WLR, at p. 56.
llze fact that it is within the power of tlte court to determule when the hearing of a matter under section 41(7) will take place, and thus the length of the extemwn of time to comply with the requirements of the b a n h p t q notice; and the diflculty, if not impossibrlizy 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 pornt to the corzclurion that the courts should adopt a benevolent corlstncctwn to the initial aftidavu".
Beaumont J. in Lavbutt: Ex Darte Robinson (Unreported 26 June,

1985) sald at page 8 of his reasons :-

"In my opinion, the Act and the rules provide for two separate inquiries where a debtor seeks to set aside a bankruptcy notice in the present circumstances. In the first instance, the debtor must in his afhiavit provide material which is sulyicient to satisfV the Registrar of the exirtence of a bona jide counter-claim or the like which could not be set up in the earlier proceedings. At this stage, the Registrar is essentially cortcemed to inquire into the bona jides of the debtor's claim; if it is obviously demirrable as disclosutg no possible cause of action, the affidavit should be rejected by the Regirtrar as raising no case for ertquby see Re A Bankruptcy Noiice (1900) 16 WN (NSW) 180; In Re a Debtor Ex parte Debmr [I9351 1 Ch. 347.

At the second stage, the Court enquires into the matter in order to sat@ itself of the existence of an approptiute cross- claim or something like rt. At this stage, the judge will require evidence in proper form to indicate the exirter~ce of such a claim. This is not to say that the afhiavit evidence including evidence supplementing the earlzer affidavit for the purpose of explication withoict going beyond rts scope, must be in a form in which evidence would be required to be given at a final hearing. But, so that the Cozirt may form a view as to the bona fdes of the debtor's claim, the amavit should contain a statemertt of the legal bass of the clazm and an outline of tile facts relied on (see Re Joaunsen (1929) 1 ABC 82) and reasons why the debtor was unable to set up the counter-claim or the like (see rule 10).

The above passages were cited wth approval by Foster J. in tus reasons

in Re McKechnie: Ex oarte Weir (1991) 27 FCR 515 at 518-520. Thereafter His

Honour continued (at 520) :-

'Yn my opirtion these passages all illustrate an underlyrng acceptance that the role of the Registrar in relation to the operation of section 41(7) and r10 is intended to be fairly minimal. It is for the Court to decide at the hearing whether the indial a f f i v i t , which, in most circumstances, wdl be supplemented by other material, indicates a suflcient prima facie case to prevent the occurrence of an act of bankruptcy. In my view, it is the clear uttentiort of tlte legirlature that the maner should come before the Court for decision, except in circumstances where nothing is slaown to warrant the Registrar placing the matter before the Court. It IS clear tltat in very many cases, especially where the quarrtificatiorr of the amount of a cross-claim, set-off or cross-demand will require valuation evidence, notltarg more cart be done in the debtor's initial afwavlt than to indicate tlte existence of the cause of actwn or causes of action upon which reliance IS to be placed, give art outlirre of tlrerr nuiure, and provide material to base an assertwrt that their prosecutiorr will produce indebtedness in tlte ludgmertt credrtor in excess of the debtor's debt. The fact thaf consuierably more muy in all probability be necessary to pemuade tlte Court on tlte appointed day that tlre reqrcisrte prima facie case is made out, does not alter this situation. The demonstration of bona fide reliance on the section i~ the main function of tlte initial affidavit. It must be borne in mind that the section require.^ only that the affidavit be 'to the effect' that the debtor has the necessary couizterclarm efc".

The judgment credltor relies in particular upon the judgment of H111 J.

in Re James: Ex parte Carter Holt Harver Roofine fAustralla) Ptv. Ltd. (Unreported

17 November, 1993). His Honour said at pages 11-12 of hls reasons :-

"l7ze debtors, witItLr the rime limrted for compliartce wzth the bankruptcy notice, filed two affidavits. These affidavits individually or cumulatively, did little more than assert the

my view did not comply with the provirwns of s.41(7). The	existence of a cross-claim, cross demand or set-ofi: and in
affidavit of which s.41(7) speaks must do more than merely assert the exirence of a cross-claim etc. of the relevarrt value. It must contain evidence whrcla establishes that there LF air effective cross-claim, a claim that is real: cf Lukin J. in Re VogweU; Ex parte VogweU (1939) 11 ABC 75 at 77, afFrmed on appeal by the High Court in Vogwell v. Vogwell (1939) 11 ABC 83 at 85; Ebe# v Union lhsee Co. of Austmlia Limited (1960) 104 CLR 346 at 350; Re
McKedvrie; Ex parte Weir (1991) 27 FCR 515 at 519-520
per Foster J. This IS so because tlre affidavit w question is required to ''show" a relevant counter-claim, set-off or cross demand. An insufficient affidavit does not bring the proviriom of s.41(7) into operation.
Although the debtors filed out of nme an apuvz t seitirzg out the facts upon which they would rely to show a relevant cross-claim, cross demand or cross-actiorz, that alfdavir, while it might be read to expand matters in an affdavit otlterwke complying with s.41(7) filed in time, cannot be used to supplement arty deficietzcy where no sufficierzt affidavit has been filed witlzaz the terms of S. 41 (7)".
I do not read Hi11 J. as holding that the in~tial affidavit is required to

satisfy some higher standard of proof, or serve some different purpose from those identified by Foster J. in JVlcKechnle. Indeed, Hill J. cites with approval the judgment

of Foster J. at 519-520 where the passages from Re Br~nk and Re Lavbutt are set out

and where his Honour's observations quoted above are also set out.

The requisite approach 1s one that requires a determination of whether

there is a bona fide reliance on section 41(7) of the Act and whether there 1s identified a cause or causes of action which arise out of an outllne of facts relied upon

by the judgment debtor. This judgment debtor must demonstrate that if the cause of action is successfully prosecuted, it will produce a money sum payable by the

judgment creditor to the judgment debtor whlch exceeds the judgment debt.

What the cases also make clear is that the ong~nal affidawt may be

insufficient to sat~sfy the prima facle case test that is required by the decisions of

Fbert v. Umon Trustee Co. of Australia Ltd. (1960) 104 CLR 346 at 350, Re Brink at

140-141, Re Gould: Ex Darte S h n e r (1983) 72 FLR 393 at 404-405, and may require

that the original affidawt be supplemented by additlonal matenal. (See Re Bnnk at

142 and Re McKechnle at 520). Provided that the orignal affidawt is sufficient to enl~ven section 41(7) of the Act, objection cannot be taken to the use of additional material filed at a later tlme to make out the prlma faae case test to the requisite degree.

I turn to the materlal in this case. The affidawt Identifies that the

judgment debtors contend that the judgment creditor, when exerclslng h ~ s power of

sale as mortgagee in possession, sold the male debtor's cane farm at $240,000.00 less than its true market value. The true market value contended for 1s alleged to anse out of an enhancement in the value of the property consequent upon a rezoning of it which occurred some months prlor to the exerclse of the power of sale. It is alleged that the judgment credltor breached his duty as mortgagee exercls~ng power of sale as particularised in a Statement of Claim in action 28 of 1992 in the Supreme Court of

Queensland, Townsville Registry, whlch Statement of Clalm is exhlblted to the male

judgment debtor's original affidavlt. The pleading also alleges that the property was

purchased by a company controlled by the judgrnent credltor, or one in whlch he was

interested.

The affidavit matenal discloses that a Certificate of Readiness for Tnal

of the action in the Supreme Court was dehvered by the male judgment debtor's solicitor to the judgment creditor's solicltor on 9 July, 1993. The affidavit is silent as to whether it has been returned slgned and whether the matter 1s now awaitlng a trial date. However, it is perhaps not wlthout some significance that a bankruptcy notlce

issued on 24 February, 1994 based on a default judgment entered on 21 January,
In my opinlon, the affidavit materlal demonstrates a bona fide cross-
claim and the basis upon whlch that cross-claim is being prosecuted. The material
idenhfies the omissions whlch it 1s contended constitute a breach of duty and
quantifies the undervalue at $240,000.00. Success in the Supreme Court actlon would

see a sum substant~ally in excess of the judgment debt being paid by the judgment credltor. Inferentially, the male judgment debtor by hls affidavit contends that the facts pleaded in his Statement of Clalm are true. For the purpose of the orlglnal

affidavit that is sufficient.

The female judgment debtor relies upon the strength or othennse of

the male judgment debtor's counterclaim, set-off or cross-demand, and no cr~ticism	1s
taken by the judgment credltor of her dolng so.	The judgment rel~ed upon was a

default judgment in relation to the d~shonour of a cheque drawn on the jolnt account of the judgment debtors. The female debtor was not a debtor of the judgment creditor under the B111 of Mortgage over the male judgment debtor's cane farm. No point is taken by the judgment creditor that the judgment debtors have faded in their

mdavlts to specifically expla~n why the counterclaim, set-off or cross-demand could	not have been brought in the proceedings giving rise to the judgment debt. The
default judgment was entered on 22 January, 1986. On the pleadings m the Supreme Court action the cane property was sold by the judgment creditor as mortgagee in possession on 18 October, 1986.

The cause of action pleaded in the statement of clalm clearly arose after

the entry of the default judgment.
THE COURT ORDERS THAT:

1. The application be adjourned to 15 June, 1994.

2. The costs of today's appearance will be reserved.

   I certi@ that this and the preceding seven (7) pages are a

true copy of the reasons for judgment herein of his
Honour Mr. Justice Cooper.

Date:  8 June, 1994

Associate

Counsel for the Applicant:  Mr. P.O. Land

Solicitors for the Applicant:	Qulnlan Mlller & Treston as town agents for Lee Turnbull & Co.
Counsel for the Respondent:	Mr. D A. Savage
Solicitors for the Respondent:	Connolly Suthers
Date of Hearing:	30 May, 1994

Date of Judgment:  30 May, 1994