Re Lee, Andrew Charles Robert Ex Parte Lee, Andrew Charles Robert and Anor

[1996] FCA 998

CATCHWORDS

BANKRUPTCY - application for extension of time for compliance with bankruptcy notice - whether time for compliance already expired - whether affidavit evidenced counter-claim, set-off or cross demand.

Bankruptcy Act 1966 (Cth) - s 40(1)(g), s 41(7)

Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135
Ebert v Union Trustee Co of Australia Limited (1960) 104 CLR 346
Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183

Re ANDREW CHARLES ROBERT LEE; Ex parte ANDREW CHARLES ROBERT LEE and NATIONAL AUSTRALIA BANK LTD

No. NN 1762 of 1996

CORAM:    FOSTER J
DATE:     8 OCTOBER 1996
PLACE:    SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA )
  )
NEW SOUTH WALES DISTRICT REGISTRY )    No. NN 1762 of 1996
  )
BANKRUPTCY DIVISION              )

RE:ANDREW CHARLES ROBERT LEE

Debtor/Applicant

EX PARTE:ANDREW CHARLES ROBERT LEE

Creditor/Respondent

NATIONAL AUSTRALIA BANK LTD

Creditor/Respondent

JUDGE MAKING ORDERS:    FOSTER J

DATE:     8 OCTOBER 1996

PLACE:    SYDNEY

MINUTE OF ORDERS

THE COURT ORDERS THAT:

1.The application be dismissed.

2.The applicant pay the respondent's costs.

Note:  Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA )
  )
NEW SOUTH WALES DISTRICT REGISTRY )    No. NN 1762 of 1996
  )
BANKRUPTCY DIVISION              )

RE:ANDREW CHARLES ROBERT LEE

Debtor/Applicant

EX PARTE:ANDREW CHARLES ROBERT LEE

Creditor/Respondent

NATIONAL AUSTRALIA BANK LTD

Creditor/Respondent

CORAM:    FOSTER J

DATE:     8 OCTOBER 1996

PLACE:    SYDNEY

REASONS FOR JUDGMENT
  (Extempore)

HIS HONOUR:   The application before me is one for the extension of time for compliance with a bankruptcy notice dated 12 June 1996 and served shortly thereafter on the applicant, Mr Lee.  This notice required compliance within 21 days.  Of course, according to its terms, that time for compliance has long since passed.  However, it is uncontested before me that after the service of the notice, Registrars of the Court extended the time for compliance with it up to and including 19 September 1996. 

Clearly, the power to extend the time for compliance was available on the basis that there were bona fide steps being taken in the Local Court of North Sydney to set aside the judgment debt upon which the notice was founded.  The judgment debt sought to be set aside was in the sum of $12,168.27, the judgment having been obtained on 5 July 1996.  Again, it is not contested that the application to the Local Court for the setting aside of the judgment was unsuccessful.

Upon that failure, of course, there no longer existed, as a ground for extension of the bankruptcy notice, the fact that bona fide steps were being taken to set aside the notice. Reliance was then placed upon what is an alternative ground, namely that the debtor had, within the terms of s 40(1)(g) of the Bankruptcy Act, a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt being a counter-claim, set-off or cross demand that he could not have set up in the actual proceeding in which the judgment was obtained.

In relation to that provision, an affidavit was filed by the applicant on 18 September 1996, the day before the then current period of extension expired.  On 19 September the parties came to Court before the Registrar and orders were made.  The orders were made upon a form which clearly enough is used as a pro forma in relation to applications for adjournment of bankruptcy notices.  The form was adapted to provide for orders that were made on that day.  The adaptation consisted of the striking out of certain parts of the form, and the addition of written material on the form and also a schedule which became part of it and which set out certain orders. 

I note that a printed provision of the form allowed for the extension of time for compliance with the requirements of the bankruptcy notice.  That particular part of the pro forma was struck out and no order was made in the orders that are recorded on the form and in the schedule, for the extension of the time for compliance with the bankruptcy notice to any particular time in the future.  Indeed, it has been made clear to me in argument by Ms Sofroniou, who has said everything that can possibly be said in respect of her client's case, that no reliance is placed upon any order having been made as, quite apparently, no order was made. 

Reliance is instead placed by the applicant upon the provisions of s 41(7) of the Bankruptcy Act. It has been submitted that that section results in it being deemed that the time for compliance with the relevant bankruptcy notice has been extended by force of the statute up until the time when the Court, in fact, decides whether the applicant debtor has satisfied it that a relevant counter-claim, set-off or cross demand has been established within the meaning of and to the extent required by s 40(1)(g) of the Act.

During the course of general discussion of this application between bench and bar it became quite apparent that there was a preliminary point in these proceedings, and that it was desirable that it be determined at the outset. That point, put simply, was whether s 41(7) had been relevantly enlivened on 18 September 1996, with the result that there had been a statutorily deemed extension of the time for compliance with the bankruptcy notice. If no enlivenment under that section had, in fact, taken place, then the bankruptcy notice has already expired and these proceedings for its extension would lack basis and would necessarily have to be dismissed.

The operation of s 41(7) has been considered in a number of cases in this Court. I have been referred to them and I have heard arguments as to their effect put by both counsel in a comprehensive way. I have taken into account all the submissions that have been made to me and which I do not find necessary to set out in these short reasons.

A starting point for consideration of the operation of the section is the case of Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135. In that case Lockhart J provided an extensive consideration of the section in a number of passages to which my attention has been drawn, and in respect of which reliance has been placed by counsel on both sides. His Honour gave detailed consideration to earlier authorities relating to the operation of s 41(7) and also s 40(1), and in particular to the High Court decision of Ebert v Union Trustee Co of Australia Limited (1960) 104 CLR 346. His Honour stated (at 141) that, in his opinion, "this Court should follow the decision of the High Court in Ebert's case".  He then went on to say:-

"Hence a debtor must show that he has a prima facie case.  However, I do not understand Ebert's case as deciding that this Court must undertake a preliminary trial of the counterclaim, set-off or cross demand; rather this Court must be satisfied that the debtor has a fair chance of success."

He then gave consideration to circumstances in which the court may be called upon to decide whether there has been compliance with s 41(7). The section reads as follows:-

"41(7)  [Counter-claim, set-off or cross demand]  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."

His Honour said (at 141-2):

"Upon the hearing of a matter under s 41(7) the court has before it the initial affidavit which brings the subsection into play. There may, of course, be no other evidence. On the other hand there may be a great deal of evidence. This will depend upon the circumstances of each case. Plainly this Court has power to permit the debtor to supplement his case by additional evidence. The initial affidavit filed under s 41(7) operates to extend time for compliance with the requirements of the bankruptcy notice until the court determines whether it is satisfied that the debtor has the requisite counterclaim, set-off or cross demand. Although the mere filing of a requisite affidavit brings the statutory extension automatically into play, the court thereafter controls the matter."

And his Honour went on to mention that cases might be complex and require directions to define issues and the like.  He then said (at 142):

"The filing of the affidavit operates as a statutory injunction to preserve the status quo until the court determines the matter, ensuring that, in the meantime, there is no act of bankruptcy."

I should state at this stage that I do not understand his Honour to be saying that, in determining whether s 41(7) has been brought into play, the Court can look at any material other than the initial affidavit, which, as his Honour said, was the one that brought the subsection into play. I am of the view that his Honour's remarks in the balance of the penultimate paragraph which I have cited refer to the ultimate hearing, and the right of an applicant to supplement, for the purpose of the Court's ultimate decision, the affidavit which he has filed to obtain what his Honour has described as the "statutory injunction to preserve the status quo" until the matter is finally determined. I think this is made quite clear by his Honour's later remarks that earlier cases here and in England have had little to say as to what the initial affidavit must itself contain. His Honour then goes on to say (at 142):

"In my opinion the affidavit cannot merely contain an assertion that the debtor has a counterclaim, 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 counterclaim, 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."

His Honour went on to indicate, as must frequently be the case, that the initial affidavit has to be filed in a limited time and that in those circumstances it may not be possible for the debtor to present more than "a mere outline of his case".  His Honour also went on to point out that because of time constraints it is reasonable that courts adopt a benevolent construction in relation to the initial affidavit.

Other cases have made reference to his Honour's decision in Re Brink, and it can be safely stated that that case has been universally followed as a correct exposition of the operation of s 41(7).

One further case to which I think I should make reference is the case of Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183, a decision of Hill J. In that case his Honour was also considering whether s 41(7) had been enlivened in favour of the applicant. After setting out ss 40(1)(g) and 41(7), his Honour said (at 188):

"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 establishes that there is an effective cross-claim, a claim that is real."

His Honour then made reference to authority, and continued:

"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 when no sufficient affidavit has been filed within the terms of s 41(7)."

In the course of submissions counsel for the present debtor has taken me to material in affidavits filed on behalf of the debtor subsequent to the affidavit of 18 September, and indeed subsequent to the significant date of 19 September.  Those affidavits were read at a point in time before the existence of this preliminary point became exposed during the conduct of the case.  The question for me, however, is whether the material in those later affidavits can be used in relation to the preliminary point itself.  In my view, it is not possible for that material to be used unless I am satisfied that the affidavit of 18 September is itself a sufficient affidavit.  In those circumstances, within the scope of the passage that I have read from the judgment of Hill J in Re James, I could use that material to expand the matters in the earlier affidavit. 

It is quite clear, then, that the critical question in deciding this preliminary point is whether the affidavit of 18 September 1996 is sufficient to bring into operation s 41(7), bearing in mind the guidance provided by the passages from the authorities cited above.

The first point to note about the affidavit is that it merely makes an assertion that there exists a counter-claim, set-off or cross demand exceeding the sum specified. It is quite clear, of course, that mere assertion is insufficient for the purposes of s 41(7). I ask myself, however, whether it is possible to draw out of the material in this affidavit anything that could be said to be indicative of a prima facie case of a relevant cross claim or demand exceeding the amount claimed. Although it may (and I stress may) have been possible to find such material in admissible form in the later affidavits, I am not able to find any such material in this affidavit.

Indeed, having regard to objections which were taken to the subsequent affidavits, which objections have not been ruled upon having regard to the way in which the case has proceeded, I would express the view that it is to the highest degree unlikely that those affidavits would themselves have achieved the result of producing for the debtor the result sought by him under s 40(1)(g). The affidavit of 18 September speaks of a sale of a property at auction for a particular amount in November 1994. There is sufficient indication, no doubt, that that was an attempted sale by the debtor of the property held by the bank as security. There is then reference to a subsequent sale by the bank when only the amount of $400,000 was realised. There is, however, nothing to indicate a time frame, or to indicate that $400,000 was not indeed a proper value for the property at the time it was sold. Although the affidavit contains a general assertion of negligent marketing, it is no more than an assertion. The affidavit does not provide evidence even of the meagre kind contemplated in the authorities to which I have made reference. There is then a claim of application of net proceeds by the bank "as it saw fit without consultation with me." There is nothing in the affidavit to indicate that that was something the bank was not perfectly entitled to do in terms of its security. Following is a general assertion of failure to mitigate the debtor's loss. The material provided in support of that assertion, in my view, has no evidentiary value. It certainly provides no basis for any assertion that there was a relevant cross-demand which could have been used to bring into play s 40(1)(g).

Finally, it should be stated that this affidavit does not address the second requirement, namely, that any relevant cross-claim was not legally available at the time

when the proceedings were heard in respect of which judgment was entered, which judgment was the basis of the bankruptcy notice. 

For these reasons, I am of the view that the preliminary point taken in these proceedings that there has been no relevant enlivening of s 41(7) in favour of the debtor has been made out.

The consequence is that there was, in fact, no extension of time for compliance with this bankruptcy notice after 19 September 1996, and there is therefore no basis upon which these proceedings for this extension can be brought.  The time for compliance has already expired.  Accordingly, I dismiss this present application.  Costs must follow the event, and I order that the applicant pay the respondent's costs.

I certify that this and the preceding ten (10) pages are a true copy of the reasons for judgment herein of the Honourable Justice M. L. Foster.

Associate:

Date:   8 OCTOBER 1996

A P P E A R A N C E S

COUNSEL FOR THE DEBTOR/APPLICANT:   R. SOFRONIOU

INSTRUCTED BY:  WENTWORTH FALLS LEGAL SERVICES

COUNSEL FOR THE CREDITOR/RESPONDENT:  S.M.P. REEVES

INSTRUCTED BY:  MALLESONS STEPHEN JAQUES

DATE OF HEARING:                   8 OCTOBER 1996

DATE OF JUDGMENT:                  8 OCTOBER 1996