Re Guss, Joseph Ex Parte Guss, Joseph

[1996] FCA 457

IN THE FEDERAL COURT
OF AUSTRALIA

EXERCISING FEDERAL  VN 525 of 1996

JURISDICTION IN BANKRUPTCY

BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA

RE:  JOSEPH GUSS  Judgment Debtor

EX PARTE:  JOSEPH GUSS  Applicant
  and
  RAYMOND MARSHALL JOHNSTONE              Respondent

COURT:         NORTHROP J
DATE: 29 MAY 1996
PLACE:         MELBOURNE

REASONS FOR JUDGMENT

In this matter the judgment creditor caused a bankruptcy notice to be served on the judgment debtor on 12 April 1996 requiring the debtor to pay the sum of $4,434.90, being a judgment debt obtained against the debtor pursuant to an order for taxation made on 23 May 1995 and authenticated on 6 June 1995, whereby the Taxing Master ordered that the costs of the creditor be taxed and allowed in the sum of $4,434.90.  The bankruptcy notice was dated 14 March 1996 and was served on 12 April 1996.  It was a 14 day notice and it is agreed by the parties that normally an act of bankruptcy for non compliance with the notice would have occurred on Monday 29 April, the 14 day period
ending on 27 April, which was a Saturday. On 26 April 1996 an affidavit was filed by Denise Leanne Page purporting to be in conformity with subsection 41(7) of the Bankruptcy Act 1966 which provides:-

"(7) 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(1)(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 so satisfied."

The relevant parts of paragraph 40(1)(g) of the Bankruptcy Act provide that a debtor commits an act of bankruptcy if the debtor does not comply with the requirements of a bankruptcy notice or does not, within the period of notice,

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

The affidavit filed in this case has a number of deficiencies in it, but before turning to those reference should be made to the law to be applied in cases of this kind.  The principles were discussed by me in the judgment of Re Doherty in matter No. VN1166 of 1993, unreported, judgment in which was given on 8 October 1993. At page 13 of the reasons for judgment, a summary was given of what must be satisfied in order to show compliance with the requirements of subsection 41(7) of the Bankruptcy Act  Two
of these matters are relevant:-

"1. The judgment debtors must show they have a prima facie case.  The Court must be satisfied they have a fair chance of success."

In addition, the Court must be satisfied that:-

"6.The cross demand could not have been set up in the action in which the judgment was obtained."

It must be remembered that it is also clear from the authorities, and this is referred to at pages 7 to 9 of the reasons for judgment in Doherty, that the affidavit or affidavits filed before the expiration of the time specified in bankruptcy notice, must contain sufficient material to satisfy the requirements of paragraph 40(1)(g) of the Bankruptcy Act.  It is also clear that the Court, in looking at these affidavits, should adopt a benevolent approach to the initial affidavit or affidavits.  This was the view expressed in Re Brink; Ex parte the Commercial Banking Company of Sydney (1980) 44 FLR 135 per Lockhart J at pages 141 to 142. Similar views, and the whole question, have been expressed and discussed in a number of the cases referred to in the passage referred to at pages 8 and 9 of Doherty.  I adopt that approach in the present case.

The first issue is whether the affidavit filed in this matter shows the existence of a cross-claim sufficient to comply with subsection 41(7) of the Bankruptcy Act.  Is there sufficient to illustrate a prima facie case sufficient to satisfy the Court that the debtor has a fair chance of success but approaching the whole matter on the basis of the benevolent approach to the affidavit as explained earlier ?

Reference is made also to what was said by Hill J in Re James;  ex parte  Roofing (Construction) Pty Ltd Carter Holt-Harvey (1993) 46 FCR 183 at pages 188 to 189:-

"The debtors, within the time limited for compliance with the bankruptcy notice, filed two affidavits.  These affidavits, individually or cumulatively, did little more than assert the existence of a cross-claim, cross-demand, or set-off, and in my view did not comply with the provisions of s 41(7).  The affidavit of which s 41(7) speaks must do more than merely assert the existence of a cross-claim etc of the relevant value.  It must contain evidence which established that there is an effective cross-claim, a claim that is real; cf Lukin J in Re Vogwell; Ex parte Vogwell (1939) 11 ABC 75 at 77, affirmed on appeal by the High Court in Vogwell v Vogwell (1939) 11 ABC 83 at 85;  Ebert v Union Trustee Co of Australia Ltd (No 2) (1960) 104 CLR 346 at 350; Re McKechnie; Ex parte Weir (1991) 27 FCR 515 at 519-520 per Foster J. This is so because the affidavit in question is required to "show" a relevant counter-claim, set-off or cross-demand. An insufficient affidavit does not bring the provisions of s 41(7) into operation.

Although the debtors filed out of time an affidavit setting out the facts upon which they would rely to show a relevant cross-claim, cross-demand or cross-action, that affidavit, while it might be read to expand matters in an affidavit otherwise complying with s 41(7) filed in time, cannot be used to supplement any deficiency where no sufficient affidavit has been filed within the terms of s 41(7)."

This passage was read out in the course of submissions and makes it very clear that the mere assertion of the existence of a cross-claim, or cross-demand or set off, is not sufficient to satisfy the requirements of subsection 41(7). The affidavit must contain evidence which establishes that there is an effective cross-claim etc that is real.

I turn to the affidavit of Ms Page.  The deponent does not state what her occupation is but I was informed from the bar table by the judgment debtor that she is employed at a place where legal work is done in connection with activities being conducted by the debtor, who is a solicitor.  The evidence, even though on information and belief as to the alleged cross-claim, is as follows:-

"6. That the Judgement Creditor is a barrister and the Judgement Debtor is a Solicitor who briefed the Judgement Debtor (that obviously is a mistake for "judgment creditor") in respect to proceedings in early 1991 in the Supreme Court of Victoria on behalf of Tropitone Furniture Co International Pty Ltd. (Tropitone).  Tropitone proceeded with proceedings as a result of the advice given thereto and the Judgement Debtor, which proved to be misconceived and negligent.  As a result substantial legal costs were incurred which in the circumstances the judgement debtor has been unable to recover and Tropitone suffered substantial loss and damage which is claimable against the judgement debtor by Tropitone.

1. The Judgement Debtor claims that any loss incurred by him by virtue of the negligence of the judgement Creditor is recoverable by him."

Paragraph 8 refers to the amount that is estimated to be no less than $50,000, which is more than the amount claimed by the judgement creditor and then

"9.  Accordingly the Judgement Creditor (that is obviously is a mistake for "judgment debtor"), has a counter-claim set-off or cross demand exceeding the sum claimed by the Judgement Creditor in the said notice."

There is just no material at all in those paragraphs of the affidavit which suggest there is in existence a cross-claim, set-off or cross demand of the type referred to in paragraph 40(1)(g) of the Bankruptcy Act.  This comes fairly and squarely within the views expressed by Hill J in Re James.

Even adopting a benevolent approach to the affidavit, and having been informed from the bar table that the bankruptcy notice was served on the debtor just the day before he was going overseas and he had difficulties in giving instructions in relation to it,
having regard to those circumstances as well, there is just no evidence to suggest the existence of any cross-claim, set-off or cross demand. The affidavit consists of mere assertion. It does not descend to any details whatsoever. Coupled with that is the fact that there has been ample time for a claim to be made, if it is a genuine claim, in relation to the amount sought by way of damages. Accordingly, I find that the affidavit does not comply with the requirements of subsection 41(7).

In those circumstances, I do not need to consider the other matter argued before me today in relation to whether the cross-claim etc could have been brought in the proceedings in which the judgment debt was obtained. In paragraph 11 of her affidavit Ms Page says:-

"The counter-claim, set-off or cross demand aforesaid were not capable of being set up in the abovementioned Supreme Court proceedings having regard to the nature thereof."

In this regard it must be noted that although the judgment debt is the amount for costs, those costs were incurred by the creditor in proceedings  brought in the Supreme Court of Victoria by the debtor.  It is not at all clear to the Court why in those proceedings, the judgment debtor could not have raised his claim, if a claim existed, which is sought now to be relied upon.  Reference is made to what was said by Hill J in Re James at 189:-

"There is another reason why the debtors claim to terminate the operation of the bankruptcy notice, or suspend it, must fail.  For there to be a relevant cross-claim, cross-demand or set-off, that cross-claim, cross-demand or set-off must be one
which could not have been set up in the proceedings in which the judgment was obtained.

As a matter of law there was no reason why the debtors' claim which was sought to be made for damages for breach of Pt IV of the Trade Practices Act 1974 (Cth), could not have been brought in the proceedings in which the judgment was ultimately obtained.

The debtors sought to overcome this problem by evidence, explaining their reasons for not bringing the cross-claim, cross-demand or set-off in those proceedings.  The reasons apparently were twofold.  First, the debtors were impecunious.  Secondly, a greater amount of time was needed to obtain the advice of experienced counsel in trade practices matters, who ultimately, but later than the proceedings in which judgment was obtained, advised that there was an appropriate court of action.

The relevance of this evidence depends upon the proper construction of s 40(1)(g) of the Act.  That subsection refers to a counterclaim, etc, that "could not have set up" in the action or proceeding in which the judgment or order was obtained.

The words, "could not have set up", could be construed either as meaning "could not as a matter of practicality have been set up", or alternatively, "could not as a matter of law have been set up".  It is the latter interpretation which has prevailed.  Thus in Re Willats; Ex parte Nissan Finance Corporation Ltd (1991) 31 FCR 206, O'Loughlin J drew together a number of authorities which have held that the words, "that he could not have set up", meant "which he could not by law set up in the action" (emphasis added); cf Re Jocumsen (1929) 1 ABC 82 at 85 per Henchman J, followed by Lockhart J in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 at 139.

As the law presently stands it would seem that the mere fact that for practical reasons a debtor is unable to bring a cross-action etc will not entitle the debtor to argue that he or she had a cross-action etc which could not have been brought in the original proceedings.  The decisions referred to in Re Willats are consistent with the decision of the Full Court of this Court in Chesson v Smith (1992) 35 FCR 394, although the actual matter in that case was a quite different one from the present."

Accordingly, the Court orders and declares that the affidavit filed on behalf of the judgment debtor does not answer the description of an affidavit required by subsection 41(7) of the Bankruptcy Act.  The effect of that order and declaration is that the act of
bankruptcy is deemed to have occurred when it would otherwise have arisen at the expiration of the bankruptcy notice.

Since giving the oral reasons, I have had the advantage of reading a number of recent authorities relating to subsection 41(7) of the Bankruptcy Act which were not referred to in the course of submissions.  They are Chesson v Smith (1992) 35 FCR 594, referred to by Hill J in re James; re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129; Webb v Hunter (1995) 59 FCR 24 and Re Deen; Ex parte Deen v Muller (1995) 58 FCR 441. All these authorities support the views expressed in my oral reasons and the order and declaration made.

I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Northrop.

Associate:

Date:

Counsel for the applicant  Applicant appeared in person

Solicitors for the applicant  -

Counsel for the respondent  Mr Cook

Solicitors for the respondent  Hawthorne, Black & Tait