Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2)

[1994] FCA 376

JUDGMENT No. .,.-

XU THE F	T	-	OF AUBTRALIA	)
)
1 No 2755 of 1993

Re:  and LINETTE

Debtors

Ex parte:

Petitioning Creditor

Corm:	Olney J.
Plaae :	Brisbane

RECEIVED

Date :  3 June 1994

2 0 JUN 1994
FEDQucCOVRTOF

1.    A Sequestration Order be made against the estate of the

Debtors, ALAN HOWELL JAMES and LYNETTE MARGARET JAMES.

2.    The Petitioning Creditor's costs of and incidental to: (a) the Petition; and

NOTE :	Settlement and entry of orders is dealt with in rule
124 of the Bankruptcy Rules.

(b) the Application by the Debtors to set aside Bankruptcy

Notice number 1305 of 1993,

in this matter be taxed and paid in accordance with the

Bankruptcy Act 1966.

Date bf commission of act of bankruptcy 28 October 1993

COURT OF AUS-

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Re:  and LXNEZTE

v

Debtors

EX parte: VT HARVEY ROOFING

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Petitioning Creditor

Coram:	Olnep J.
Place :	Melbourne (Heard in Brisbane)
Date :	24 May 1994

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Carter Holt Harvey Roofing Pty Ltd (the petitioning creditor) has petitioned the Court for a sequestration order against the estates of Alan Howell James and Lynette Margaret James (the

debtors) .

The petitioning creditor relies upon an act of bankruptcy	committed by the debtors when they failed to comply with the
requirements of a bankruptcy notice.
The debtors oppose the petition on the ground that they currently

h	have pending in the New South Wales Registry of the Federal Court of Australia an action for damages against the petitioning creditor for a sum which it is said will be sufficient to entirely extinguish the claim of the petitioning creditor against the debtors.
THLmmsm
The bankruptcy notice which gave rise to the act of bankruptcy was based upon a judgment of the Supreme Court of Queensland obtained by the petitioning creditor against the debtors in the sum of $124,545.97 on 14 September 1993. The circumstances

-- giving rise to the judgment are as follows.

The petitioning creditor commenced proceedings against the debtors in the Queensland District Registry of the Federal Court on 20 July 1993 when he filed an application and statement of claim in which he claimed from the debtors $124,545.97 and interest being the price of goods sold and delivered by the

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petitioning creditor tothe debtors or alternatively, damages for breach of contract. The debtors entered an appearance on 3

August 1993. At the first directions hearing on 17 August 1993 Spender J ordered that the matter be transferred to the Supreme Court of Queensland pursuant to the cross-vesting legislation. On l September 1993 the petitioning creditor filed a summons in the Supreme Court of Queensland pursuant to Order 18 of the Rules

of the Supreme Court seeking summary judgment. The matter went before Dowsett J of the Supreme Court on 14 September 1993. The debtors appeared on the hearing of the summons and were represented by counsel but they did not file any material in opposition to the summons. Rather, they sought an adjournment on the ground, as indicated by their counsel, that they intended to bring an action in New South Wales for damages for breach of the provisions of the Trade Practices Act. Dowsett J observed that no material had been put before him to justify the course sought by the debtors and that the debtors did not seek an adjournment for the purpose of so doing but instead merely asserted that they wished to start such proceedings. In these circumstances the adjournment was refused, and being otherwise satisfied it was appropriate to do so, his Honour gave judgment for the amount claimed.

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The bankruptcy notice was issued by the Registrar for the Bankruptcy District of the State of Queensland on 27 September

1993. The primary demand of the notice was to require payment of the sum of $124,989.56 (being the amount of the judgment obtained on 14 September 1993 and interest pursuant to the Common Law Practice Act) within 28 days after service. Service was effected on both debtors on 30 September 1993. On 28 October 1993, the debtors filed an application seeking an order that all proceedings on the bankruptcy notice be stayed. The application

wae supported by two affidavits filed by the first named debtor

(hereafter referred to as James) sworn respectively on 21 and 26

October 1993.

In his affidavit of 21 October 1993 James asserted that the debtors had a set-off against the petitioning creditor, and he exhibited two documents said to be respectively an application and statement of claim which were about to be filed in the Federal Court and in which it was claimed that the petitioning

creditor had committed breaches of ss 46 and 49 of the T r a d e

P r a c t i c e s A c t . James also asserted that the amount claimed in

respect of the alleged contraventions exceeded the amount of the judgment debt. In his second affidavit James exhibited copies of an application and statement of claim filed in the New South Wales District Registry of the Federal Court on 26 October 1993. These documents are in a form substantially similar to the documents exhibited to his previous affidavit. In the second affidavit James said that the claim in the Federal Court proceedings were not pleaded by way of set-off and cross demand in the proceedings in the Supreme Court of Queensland because the debtors were at that stage awaiting further advice from counsel as to whether they had a set-off against the petitioning creditor's claim.

On 15 November 1993 the debtors1 solicitors advised the petitioning creditor's solicitors that on the hearing of the application for stay of the bankruptcy notice they would seek to have the notice set aside on the ground that the amount claimed

overstated the amount due on the judgment. therein was excessive as the amount of interest claimed

A third affidavit sworn by James (on 15 November 1993) was filed in support of his application relating to the bankruptcy notice. In this affidavit the facts on which the debtors intended to rely in the Federal Court proceedings were canvassed at some length. It is not necessary at this stage to pursue that aspect of the matter.

Following a hearing before Hill J on 17 November 1993, the debtors1 application to set aside or stay the bankruptcy notice was dismissed. On the application to set aside the bankruptcy notice his Honour held that there had been no overstatement of the interest due on the judgment. The debtors' claim that they had a relevant cross-demand or set-off against the petitioning creditor failed for two reasons. First, his Honour held that there had not been a proper and timely response by the debtors to satisfy the requirement of S 4 1 ( 7 ) and second, in any event, the debtors' claim was not one which could not have been set up in the action or proceeding in which the judgment was obtained.

By virtue of S 41(7) of the Bankruptcy Act, the time for complying with the bankruptcy notice (which would otherwise have expired on 28 October 1993) was extended pending the hearing and determination of the debtors' application, and in fact expired on 17 November 1993 when the application was dismissed. The act of bankruptcy was accordingly committed on 17 November 1993.

The petition in this matter appears to have been presented to the Registrar in Bankruptcy on 1 December 1993 but was not sealed by

the Registrar until 23 December 1993. Service is not in issue.

On 27 January 1994 the debtors gave notice of their intention to oppose the petition on two grounds, namely:

1.     Thm petition is band upon a judgment of the Supreme Court of Quunsland and the debtors have applied to the Supzrme

Couxt of Quwnsl~nd for a stay of that judgment; and

2.     The debtors have filed a clam in the Regrstry of the Federal Court of New South Wales against the petitroner. The quantum of the Debtors' clam m these pendrng proceedrngs is sufficient to entrrely extrngu~sh the ptrtioner's claim agarnst the Judgment Debtors.

The first ground was not proceeded with. On 27 January 1994 the

debtors filed a summons in the Supreme Court of Queensland

seeking a stay of the judgment obtained by the petitioning

creditor on 14 September 1993. The summons came before Thomas J on 2 February 1994 and was dismissed. In his reasons, after canvassing the history of the matter, including t h e bankruptcy proceedings, his Honour concluded as follows:

I have not found the determination of this point, short though it may be, to be easy. In support of the applicants' case, counsel submrts that unless the stay is granted bankruptcy rs inevitable and the prosecution of the proceedmgs will be frustrated. The material suggests that his clrents have no assets other (sic) this claim. There is also an offer to pay interest untrl trial and to prosecute the matter diligently. The material also suggests that the plaintrffs, who are respondrng in the Federal Court, have not acted wrth full dilrgence.

I have a discretron under Order 47 Rule 18 to stay execution on a judgment, but, of course, Courts are cautious in depriving a successful party of the frurts of rts judgment. I note that after obtainrng the judgment the respondent has incurred further expense in attempting to obtarn the benefrts of that judgment, namely, the commencement of the bankruptcy proceedmgs. Whilst that is not a form of execution, it rs rn practical terms a means of endeavouring to obtain payment of the m u n t that the Court has ordered.

It seems to me that the bankruptcy of the applicants is not necessarily the end of the action. If it is sufficiently

promising - and that is a matter that others will be m a better

position than I am to assess - it might be pursued. It is quite clear that the present proceeding is at least in part a tactical attempt to influence the fate of the bankruptcy proceedings. I am not at a11 critical of the applicants rn their attempt to do so. 1 note, however, that the Federal Court still retarns the discretion to refuse the declaration of bankruptcy and to refuse to make a sequestration order, whether or not I grant the present stay of execution.

In the end, it seams to me that the present application is an attempt to turn back the clock. No attempt was made to place

material before the Court w h ~ c h granted the judgment, relevant to

the granting of a stay. Although the matter is perhaps close to being finely balanced, I do not think that the circumstances are sufficient for me to order that execution on the current valid judgment be stayed and I shall refuse the application.

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Section 52(1) requires that on the hearing of a creditor's petition the Court shall require proof of certain matters therein specified, and if it is satisfied with the proof of those matters it may make a sequestration order against the estate of the debtor.

In this matter there is no issue between the parties as to the proof of the matters specified in S 52(1) and I am satisfied that these matters have been proved. The Court is therefore entitled to make a sequestration order against the debtors. The Court may however dismiss a petition if it is satisfied that the debtors are able to pay their debts or that for some other sufficient cause a-sequestration order ought not to be made (S 52(2)).

The petitioning creditor submits that in circumstances, as the matters required by S 52(1) have been proved, the petitioning creditor has a prima facie entitlement to a sequestration order.

The debtors have not sought to resist the petition on the ground	that they are able to pay their debts. Accordingly, the only
basis for their opposition is that provided by s 5 2 ( 2 ) (b), namely that for "other sufficient cause" a sequestration order ought not to be made.
Counsel for the petitioning creditor has referred to a passage
from the report in Gab v V~&&Q (1933) 48 CLR 639 in which the
Full Court of the High Court expressed its agreement with the
judgment of the primary judge (recorded at pp 640-647 of the report) which contains the following passage (at p 646):

... prima facie, on proof of the matters mentioned rn sec 5 6 ( 2 ) ,

(the predecessor of s 5 2 ( 2 ) ) the Court will proceed to make an order for sequestration, and that it is for the debtor to show some cause overriding the interest of the publrc rn the stopping of unrmnunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the Court to outwergh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order.

The same passage was quoted with approval by the High Court in

w a s v K r u (1956) 95 CLR 407 a t p 414; and more

recently applied by the Full Court of the Federal Court in re

B u r b c k v De~utv CPlslgission of Taxati- (Black CJ,

Sweeney and Ryan JJ; 10 May 1994; unreported).

The debtors have put material before the Court which they assert outweighs the considerations referred to in the passage quoted so as to provide a sufficient cause for the Court to dismiss the petition.

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b) be a ?

There appears to be no logical reason why in an appropriate case

the Court should not treat the existence of a claim by the debtor	to a set-off or cross demand against the petitioning creditor as
a sufficient cause to decline to make a sequestration order.

Ex ~ a r t e w o o d Ptv Ltd (1968) 13 FLR 111, m

Ex m m (1992) 8 ACSR 395 and

v -na rroua Ltd (Olney J, 14 February 1994,

unreported) are cases in which the Court dealt with such a circumstance. However, in none of these cases, nor indeed in any other case which counsel was able to cite, was it the case

that the debtor had first unsuccessfully sought to establish the existence of a set-off, counter-claim or cross demand of the type referred to in S 40(l)(g) in response to a bankruptcy notlce and later sought to rely upon the same set-off counter-claim or cross demand as the basis of an argument that the Court should be satisfied that there existed sufficient cause to decline to make a sequestration order.

Whilst it may well seem that the present debtors are attempting to have two bites at the same cherry, and that therefore they ought not now to be allowed to run the same argument which they ran unsuccessfully before Hill J, such is not really the case.

Before Hill J the issues which arose under s 40(l)(g) and s 41(7) were first, whether the debtors had a set-off or cross demand equal to or exceeding the judgment on which the bankruptcy notice was based and (if so) second whether that set-off or cross demand could have been set up in the action or proceeding in which the judgment was obtained. Once the facts were found

against the debtors, the judge had no discretion.	Upon him not
being satisfied as to the factual basis for the debtors'	application, the inevitable result was that an act of bankruptcy
was committed. No question of solvency then arose nor did the question of other sufficient cause.
In the case of a bankruptcy petition the issues are quite different. Notwithstanding that the Court is satisfied that the petitioner has proved the matters referred to in S 52(1), the Court is not obliged to make a sequestration order. The debtor

may upon the hearing of the petition raise the question of
solvency or other sufficient cause in answer to the petition.

It is not every potential act of bankruptcy that can be contested in the manner contemplated by s 40(l)(g). Indeed, s 40 (l)(g) (together with the related provisions in s 41) is unique in that it provides a scheme whereby a debtor can seek the Court's intervention to prevent an act of bankruptcy from being committed. Furthermore, the opportunity to establish the existence of a set-off or cross demand in response to a bankruptcy notice will only arise if the debtor acts in a timely manner, and in so doing complies with the requirements of S 41(7) in providing a satisfactory evidentiary basis for his claim.

In this case, although it was filed within time, Hill J found that the debtors' affidavit material was inadequate to satisfy what was required by S 41(7).

I have no difficulty with the proposition that upon the hearing

of the petition the debtors may seek to raise a claimed set-off

or cross demand as the basis for seeking to persuade the Court	of the existence of a sufficient cause to dismiss the petition,
and this notwithstanding that in doing so they have raised an issue which was a live issue in the proceedings under s 41(7). Had it been necessary for Hill J to enter upon a consideration of the strength of the claimed set-off or cross demand in order to reach a conclusion as to whether the debtors had a set-off or cross demand that would be a sufficient answer to the bankruptcy notice, different considerations may well have arisen, but that
case is not this case, and I am of the opinion that it is open to the debtors to now seek to oppose the petition on the ground that there exists matters which override the prima facie considerations which arise from the formal proof of the matters specified in S 52(1).
C) a1 Court Eroceedlnas
The parties have placed before the Court a considerable volume of affidavit evidence relating to the facts intended to be relied upon in support of, and in opposition to, the debtors' proceedings under the Trade Practices Act. For the most part, the evidence takes the form of assertion and counter assertion, and much of it is argumentative.
Obviously, it is not for this Court to decide, on incomplete material, the ultimate result of the debtors' Trade Practices Act claim. The extent of this Court's enquiry into a claim by a debtor in this context was considered by Gibbs J (in the Federal Court of Bankruptcy) in -: Ex parte Analewood Ptv LtQ
debtor claimed to be entitled to unliquidated damages in tort (1968) 13 FLR 111, where his Honour said in a case in which a
against the petitioning creditor (at p 116):

... A s a general r u l e t h i s Court i s not an appropriate forum t o

decide such a c la im and is l imi ted t o forming a view a s t o whether it appears t h a t t h e r e i s s u f f i c i e n t v a l i d i t y i n t h e

debtor ' s claims t o j u s t i f y a dismissal o r adjournment of the

pe t i t ion . I agree i n genera l with what was sa id i n Re Player i n

r e l a t i o n t o t h i s quest ion. Considerable evidence d i rec ted t o t h i s ismue ham been given before m e and it seems t o ma t h a t I ought t o consider t h i a evidence f o r t h e purpose of deciding only

whether it is probable t h a t t h e debtor has agains t t h e

p e t i t i o n i n g e r e d i t o r a claim which is l i k a l y t o succeed. I f 1 m

s a t i s f i e d t h a t t h e deb to r has a claim agains t t h e p e t i t i o n i n g

c r d i t o r oqual t o or e x c e d i n g t h o .mount of	t h e judgment	debt,
I should not make a soques t ra t ion order.	I f , however,	it
w a r s t h a t t h e -0s	has a c la im which	is less than t h e amount

of t h e p t r t i o n i n g credrtor 's judgment debt, t h e proper couzse

would seem t o be t o require the debtor, i f he des i res t o avord a sequestration order, t o pay the difference between the amount of the judgment debt and the amount whrch r t seems probable t o me t h a t he w i l l recover i n the proceedings agarnst t he petrtionlng credi tor . In many cases r t would be more convenient, assuming

t h a t t h e debtor showed tha t he had a r e a l claim t o l i t i g a t e , t o

adjourn t h e proceedings t o enable h i s c l a m t o be t r i e d i n t he ordinary courts, but tha t course was not taken i n t he present case, pa r t l y because the existence of any va l id claim was vigorously denied by the petitioning c red i tor and pa r t l y because the proceedings i n t he Supreme Court have been somewhat dilatory.

The Federal Court proceeding was conunended on 26 October 1993. It has progressed to the stage that there has now been mutual discovery of documents. There is no evidence as to when the matter is likely to be ready for trial but it may be assumed that it will be some months before a date for hearing will be known.

The following is a brief summary of the debtors1 amended statement of claim: In about October 1989 the petitioning creditor appointed the debtors as distributors of Decrabond Roofing Tiles. The basis of the distributorship was that the debtors would purchase Decrabond tiles and market them with particular attention to the re-roofing market. (Although it is not pleaded, there is evidence that the debtors' business was

the period June 1990 to June 1991 the debtors had the opportunity conducted in New South Wales). In about May 1990 and also in	to sell Decrabond tiles in Queensland but the petitioning
creditor would not supply stock for that purpose. In about June 1991 the petitioning creditor offered to supply Decrabond tiles to the debtors at a price less favourable than the price at which they were supplied to other customers. The debtors say that at all material times a market existed in Australia, or alternatively in each State and Territory, for the manufacture and sale of Decrabond roof tiles, or alternatively of lightweight
stone-chip imitation roof tlles, for use in domestic re-roofing and that in respect of that market, the petitioning creditor had a 100% market, and within the meaning of S 46 of the T r a d e
P r a c t i c e A c t had a substantial degree of power in each of such
markets. It is further said that at all material times a wholesale market existed in Australia, or alternatively in each State and Territory, for the sale of Decrabond roofing tiles, or alternatively of lightweight stone-chip imitation roof tiles for use in domestic re-roofing and by refusing to supply Decrabond tiles to the debtors as alleged the petitioning creditor took advantage of its power in the markets referred to for the purpose of eliminating or substantially damaging the debtors as competitors of the petitioning creditor in those markets or deterring or preventing the debtors from engaging in competitive conduct therein in contravention of s 46 of the T r a d e P r a c t i c e s
A c t . The debtors say further that the petitioning creditor's
conduct as pleaded had the purpose or effect of substantially lessening competition in the wholesale market for the sale of Decrabond roof tiles, in Australia in contravention of s 49 of
the T r a d e P r a c t i c e s A c t . The debtors claim to have suffered
loss and damage as a result of the alleged contraventions of ss 46 and 49 of the T r a d e P r a c t i c e s A c t which loss and damage they have quantified in respect of each of the contraventions in sums exceeding the amount of the petitioning creditor's judgment against them.
Xn its defence the petitioning creditor denies virtually all of the primary facts alleged by the debtors upon which they rely to establish their case. Further, it denies that at material times a market, within the meaning of Part IV of the Trade Practices Act existed either in Australia for the manufacture and sale of Decrabond roof tiles, or in Australia, or alternatively in each State and Territory, for the manufacture and sale of lightweight stone-chip imitation roof tiles for use in domestic re-roofing. The defence also contains similar denials as to the allegation of the existence of a wholesale market in Decrabond roof tiles or lightweight stone-chip imitation roof tiles, and of the various allegations of market share and related matters, includingthe allegations that the petitioning creditor's conduct contravened either s 46 or S 49 of the Trade Practices Act and that the debtors suffered any loss or damage as a result of its conduct.
The petitioning creditor further pleads that in or about November 1992 James on behalf of the debtors and one Coupland on behalf of the petitioning creditor agreed that the debtors would accept a $20,000 advertising subsidy in full and final satisfaction and
discharge of the debtors' claims as now pleaded and of all damages sustained by the debtors in respect thereof. It is said
that the petitioning creditor thereupon, pursuant to the agreement, credited the debtors' trading account with the sum of $20,000 which the debtors accepted in satisfaction and discharge of their claims.
At this stage the debtors have not pleaded in reply to the petitioning creditor's defence.

As would be expected from the pleadings, the affidavit evidence filed in relation to the trade practices proceeding is contradictory. To some extent matters in issue will only be resolved after the credibility of the witnesses has been tested at trial. Apart from that, there is a real issue as to whether, as a matter of both fact and law, the markets which the debtors allege exist do, or can exist. Without in any way attempting to resolve those questions in these proceedings, it is fair to say that even on the most favourable view af the facts, it is far from clear that the debtors' claim will succeed and that they will receive an award of damages.

Having regard to the foregoing, I am unable to say (in the words of Gibbs J) that "it is probable that the debtor(s) (have) against the petitioning creditor a claim which is likely to succeed". That being the case, I am not satisfied that there is any "other sufficient cause" to justify the exercise of the Court's discretion to decline to make a sequestration order and to dismiss the petition.

d) of adio-

In the passage from Rc which is quoted above, Gibbs J suggested that in many cases it would be more convenient to adjourn the proceedings to enable the debtor's claim to be tried in the ordinary courts, but such a course would be justified only on the assumption that the debtor showed that he had real claim to litigate. It seems to me that Gibbs J has distinguished

between a claim of the debtor against the petitioning creditor

that is likely to succeed (which would justify the Court refusing to make a sequestration order) and the existence of a ''real claim" which presumably the Court has been unable to classlfy as one that is likely to succeed, but nevertheless is thought to have sufficient integrity to warrant the debtor being given an opportunity to have it litigated. In such a case Gibbs 3 thought that it would be appropriate to adjourn the petition pending resolution of the litigation.

In these proceedings the debtors submit that if the Court is not prepared to dismiss the petition, it should adopt the alternative of adjourningit pending resolution of the trade practices claim.

Even assuming that the debtors have "a real claim to litigate" I do not think that adjournment is in this case an appropriate alternative, and this for the reason that it is not said by the debtors that given a favourable outcome of the trade practices proceeding they would not only be able to extinguish the petitioning creditor's judgment but would also then be solvent.

The debtors' material in this Court is silent on the question of	solvency. Given that the proof of their ability to pay their
debts would be a basis upon which the Court could be expected to dismiss the petition, the inevitable inference which must be drawn from the absence of evidence of that ability is that the debtors are not presently, nor would they be upon a successful conclusion of the trade practices proceeding, be able to pay their &&S. There is therefore no reason to adjourn the
petition. Had the debtors established that a successful conclusion to the trade practices proceeding would leave them solvent, adjournment may well have been a convenient alternative but that is not the case and I reject it as appropriate in the facts of this case.
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The petitioning creditor has satisfied the formal requirements of the Act to enliven the Court's power to make a sequestration order against the estates of the debtors. The debtors have not sought to satisfy the Court that they are unable to pay their debts nor am I satisfied that for some other sufficient cause the petition should be dismissed. A sequestration order will issue against the estates of the debtors.
As these reasons are to be published in Melbourne in the absence
of the parties the following directions are given:
1. The matter be stood over until a date and time to be

notified to the parties by the District Registrar.

2.    within 7 days the petitioning creditor file and serve a minute of the orders sought together with further affidavits of search and continuation of debt.

3.    Upon compliance with direction 2 the District Registrar arrange a telephone hearing for the further consideration of the matter.

I certify that this and the

preceding 17 pages are a true copy of the Reasons for Judgment of the Honourable Mr Justice Olney

Associate: &k	& @ ~ c ( r ,
Dated:	24 May 1994

&u&n: 9 May 1994

ELB(;E: Brisbane

J(JDGMENT: 24 May 1994

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APPEARANCES:

Mr McKenna (instructed by Clayton Utz) appeared for the

petitioning creditor

Mr Savage (instructed by Freehill Hollingdale & Page) appeared for the debtors