Re Malhotra, D. v Ex parte Dennis Lee Investments Pty Ltd

[1991] FCA 316

JUDGPvIENT No. 3I~s / ..9! ,...,

NOT SUITABLE FOR DISTRIBUTION

IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION

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BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES

RE :  DEEPAK MPLHOTRA

EX PARTE:  DENNIS LEE INVESTMENTS PTY
LIMITED

JUDGE MAKING ORDERS: Burchett J.

WHERE ORDERS MADE : Sydney

DATE OF ORDERS:  14 June 1991

MINUTE OF ORDERS OF THE COURT

THE COURT ORDERS THAT the application of Deepak Malhotra be dismissed with costs.

REGISTRY

NOTE:	Settlement and entry of Orders is dealt with in Rule
124 of the Bankruptcy Rules.

RECEIVED

FEDERAL COURT OF

AUGTRAUA PRINCIPAL

NOT SUITABLE FOR DISTRIBUTION

IN THE FEDERAL COURT OF AUSTRALIA )

GENERAL DIVISION	)
BANKRUPTCY DISTRICT OF THE	) B 0515 of 1991
STATE OF NEW SOUTH WALES	1

RE :  DEEPAK MALHOTRA

EX PARTE:  DENNIS LEE INVESTMENTS PTY
LIMITED

CORAM:	Burchett J.
PLACE :	Sydney
DATE :	14 June 1991

REASONS FOR JUDGMENT

BURCHETT J .

On 12 April 1991, Dr Deepak Malhotra was served with a bankruptcy notice in respect of a judgment debt in the sum of $116,169.77, together with interest to 13 February 199 1 bringing the total sum due under the judgment to $120,281.86. The pegiod for satisfaction of the bankruptcy notice was 21 days. Within that period, Dr Malhotra filed in the registry	an affidavit purporting to comply with the requirements of S.	41(7) of the Bankru~tcv Act 1966. The question for
determination is whether a sufficient case has been shown to entitle Dr Malhotra to the benefit of that section.

The judgment debt was for rent and mesne profits in an

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action .iq .ej ctment heard by a judge of the Supreme Court of	4%
New So,uthv	wal&s:  Behind that hearing, there was a history of

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dispute' ,about the rights and obligations created by a lease. I I

On 12 January 1987, Dr Malhotra and one Dalip Shahani, as intending lessees, had entered into an agreement to lease certain commercial premises consisting of a ground floor and first floor at 322 Military Road, North Cremorne. The title was under the Real Pro~ertv Act 1900 (NSW), and the lessor was to be Kretek Holdings Pty Limited. Dr Malhotra proposed to set up in the premises a surgery for the conduct of a medical practice, and he and M r Shahani planned to make provision also for a pharmacy and other professional or business accommodation for sub-letting. The lease was to be for a term of six years from 19 January 1987, with an option of renewal.

On 26 November 1987, a formal lease was executed. It made provision for regular increases in the rent and that: "All outgoings of the building shall be paid by the Lessee." Clause 8.01 provided: "The Lessee shall not use the Premises otherwise than for the purpose stated in Item 16 of the Reference Schedule. " That item named as permitted uses : "Medical Surgery and Associated Off ices & Pharmacy". Clause

8.02, however, provided: 

"The Lessor does not in any way warrant that the Premises are or will remain suitable or adequate for any of the purposes of the Lessee and to the full extent permitted by law all warranties as to suitability and as to adequacy implied by law are expressly negatived."

There was also a covenant against assignment "without the prior written consent of the Lessor" and subject to certain conditions; and a covenant in respect of sub-letting (cl. 5.01) as follows:

"The Lessee covenants not to sub-let or otherwise deal with its right to possession of the Premises without the prior written consent of the Lessor."

From the beginning, there seem to have been difficulties. payments due by the lessees were made late, while the lessor failed to deal adequately with a complaint of a leaking roof above one (and possibly more than one) of the upstairs rooms. Water actually penetrated to Dr Malhotrars surgery downstairs. It may be that part of the problem arose out of the change of ownership which occurred shortly after the execution of the lease, when the lessor transferred the title to Dennis Lee Investments Pty Limited. However, occupation had commenced early in 1987 under the agreement for lease, so that the problems would appear to have lasted for about a year before Dennis Lee Investments Pty Limited became involved. They had not led to the lessees declining to execute the lease.

Complaints were continually made by the new lessor's

managing agent that the lessees were in default in the payment of rent and outgoings payable by them. This problem had indeed existed even before the advent of the new owner. Rent had apparently been withheld by the lessees, either in protest against the landlord's failure to repair the roof, or upon the pretext that such a failure had occurred. Whichever view of the true genesis of this situation is correct, it is plain as a matter of law that a tenant is not entitled to withhold rent on any such basis: Camden Nominees. Limited v. Forcey [l9401 1 Ch. 352 at 356. In any case, whether or not there was a good ground of complaint against the original landlord, the lessees faced a considerable problem in asserting any liability on the part of Dennis Lee Investments Pty Limited. That company became, of course, bound by the covenants of the lease; but counsel did not refer me to any specific covenant of which it

was said to be in breach. It had the protection of cl. 8.02,

excluding any warranty of suitability or adequacy of the
premises for the purposes of the lessees.

A great deal of correspondence is in evidence, and I have had regard to it. Despite Dr Malhotra's complaints about the leaking roof, the correspondence leaves me with the impression that the principal difficulty encountered by the lessees in endeavouring to sublet portions of the premises was caused by their own failure to avoid default in payment of rent and outgoings. The lessor, through its managing agent, took l the view that consent under cl. 5.01 would not be forthcoming

whilst the lessees were in default. No attempt was made to	challenge that view, but defaults continued. In those
circumstances, it is hardly surprising that arrangements made in relation to the subletting of portions of the premises fell through. I do not think the evidence demonstrates, even prima facie, that they fell through because of the problem with the roof.

From June 1990, the amounts in respect of which the

lessees were in default mounted rapidly. On 20 September 1990, the lessor commenced proceedings in the Supreme Court of New South Wales in ejectment. The lessees indicated that they intended to raise a cross-claim, apparently for alleged breaches of obligations to repair and to consent to proposed sub-leases. But no cross-claim was ever filed. On 7 December 1990, the matter came before Lee C.J. at C.L., who gave judgment for the lessor and made the order which founded the bankruptcy notice. A motion for a stay, filed 27 February 1991, was refused by the Prothonotary on 5 April 1991. The bankruptcy notice was then served. Subsequently, a motion for review of the refusal of a stay was filed, but had not been heard as at the date of the hearing before me.

What Dr Malhotra seeks to set up in answer to the bankruptcy notice, under s . 41(7) of the Bankru~tcv Act, is an alleged "counter-claim, set-off, or cross demand" based on the same alleged breaches of its obligations under the lease which he faiied to set up against the lessor in the proceedings in

would be necessary for Dr Malhotra to show, first, that he

the Supreme Court. But in order to succeed on this basis, it

does have the requisite right against his creditor; secondly, that the right sounds in an amount "equal to or exceeding the amount of the judgment debt"; and thirdly, that the right is a right which he could not have set up in the action in which the judgment was obtained. Each of these requirements plainly appears from the language of S. 41(7) read with S. 40(l) (g), and each has been asserted in numerous decisions.

In Ebert v. The Union Trustee Com~anv of Australia Limited (1960) 104 CLR 346 at 350, Dixon C.J., McTiernan and Windeyer JJ. stated the position as follows:

"The debtor clearly must satisfy the Court that there exists in him a counter-claim, set-off or cross demand. ... The appellant 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. ... Perhaps the standard may be expressed by saying that the debtor must show that he has a prima 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 the present case, there is, as I have already made clear, real difficulty in the way of an acceptance of Dr Malhotra's contention that he has a counter-claim, set-off or cross demand against the judgment creditor. But if this difficulty be placed on one side, the next question is whether any such claim is of the requisite amount. Dr Malhotra seeks to get -over this hurdle by placing before me figures designed to show that he was deprived by the alleged breaches on the

part of his lessor of large amounts of rent payable under	prospective sub-leases. But there was simply nothing in the
affidavit filed on behalf of Dr Malhotra, and there remains nothing in the evidence before me, to justify the conclusion that Dr Malhotra was deprived of any particular amount of rent for any particular period by reason of either of the breaches alleged. I find myself quite unable to say that Dr Malhotra has shown, prima facie, any claim equal to or exceeding the amount of the judgment debt.
Furthermore, neither the affidavit filed under S. 41(7) nor the evidence before me showed that the alleged counter- claim, set-off or cross demand was one that Dr Malhotra could not have set up in the proceeding in which the judgment founding the bankruptcy notice was obtained. Counsel for Dr Malhotra argued that this requirement was met because "except for certain special cases, a claim by a lessee against the lessor may not be set off against the lessor's claim for rent": Fona v. Cilli (1968) 11 FLR 495. Dr Malhotra's case is that his default in respect of the rent was brought about by the alleged breaches on the part of the lessor. In those circumstances, it seems to me his cross-claim (assuming it to be good) was capable of being raised against the claim for rent as an equitable set-off upon the principles stated in British Anzani (Felixstowe) Ltd v. International Marine Manaaement (U.K. Ltd [l9801 1 Q.B. 137 which were discussed in WestDac Bankina Cor~oration v. Eltran Ptv Ltd (1987) 74 ALR 45 at 52. Dr Malhotra's claim "impeach[ed] the title to the legal demand" and went "to the very foundation of the ...
claim". Although a refusal by Mr Shahani to join in any cross-claim may have been embarrassing, I do not accept that
it would have stultified the claim.
For all these reasons, I do not think Dr Malhotra has made out a case under S. 41(7). There is no other basis on which I can grant any relief in respect of the bankruptcy notice. If, of course, Dr Malhotra does pursue his claims against the judgment creditor, and particularly if he obtains a stay of the judgment, he may be able to raise discretionary defences to any creditor's petition. But whether or not he can successfully do so then, his present application must fail. The order I make is that the application be dismissed with costs.

I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of his Honour M r Justice Burchett.

~ssociate: &	.
Dated: 14 June 1991