Re McKenchniw, R.l. v Ex parte Weir, R.W

Re: ROBERT LACHLAN McKECHNIE
Ex parte: REGINALD WITWORTH WEIR
No. P 79 of 1990
FED No. 177
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF
NORTHERN TERRITORY
Morling J.(1)

CATCHWORDS

Bankruptcy - bankruptcy notice - notice based on final order of taxing master - whether notice valid - counter-claim, set-off or cross demand - partnership - whether partnership assets properly sold - whether creditor's further claims can be set off against debtor's cross claim

Bankruptcy Act 1966, s.40(1)(g)

HEARING

SYDNEY

#DATE 18:4:1991

Counsel for the debtor: Mrs S. Gearin
instructed by Elston and Gilchrist

Counsel for the creditor: Mr S. Southwood
instructed by Ward Keller

ORDER

The Court declares that it is not satisfied that the debt or has a counter-claim; set-off or cross demand of a kind referred to in para. 40(1)(g) of the Bankruptcy Act 1966.

Debtor to pay judgment creditor's costs.

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

JUDGE1

On 14 August 1990 the judgment creditor ("Weir") served on the debtor ("McKechnie") a 14 day bankruptcy notice founded upon an order made in the Supreme Court of the Northern Territory of Australia on 8 December 1989. The order was made by Master Lefevre and was in respect of the amount referred to in a bill of costs taxed by him pursuant to a judgment of the Court dated 22 February 1988. The order made on 8 December 1989 was that McKechnie should pay Weir's costs in the sum of $22,467.93.

McKechnie did not pay the sum claimed, nor secure its payment nor compound it within the time limited by the bankruptcy notice as required by the notice. However, within that time, he filed and served an affidavit in purported compliance with s.41(7) of the Bankruptcy Act 1966 and rule 10 made thereunder. Rule 10 provides as follows:

"Where a debtor on whom a bankruptcy notice has been served files an affidavit to the effect that he has a counter-claim, set-files off or cross demand of a kind referred to in paragraph 40(1)(g) of the Act, and giving details of the counter-claim, set-off or cross demand, as the case requires, and the reasons why he was unable to set up the counter-claim, set-off or cross demand, the Registrar -

(a) shall fix a date, time and place at which the debtor may appear before the Court for the purpose of satisfying the Court that he has the counter-claim, set-off or cross demand referred to in the affidavit, and:

(b) shall serve notice of the date, time and place so fixed on the solicitor for the debtor and the solicitor for the judgment creditor specified in the notice, respectively."

The Registrar took the view that the affidavit filed by McKechnie did not comply with the requirements of s.41(7). McKechnie sought of a review of the Registrar's decision and on 14 January 1991, Foster J set aside the Registrar's decision and remitted the matter to the Registrar to fix a date for the hearing by the Court. Pursuant to Foster J's orders the matter has now come on for hearing for the purpose of McKechnie satisfying the Court that he has the counter-claim, set-off or cross demand referred to in his affidavit.
When the matter was called on for hearing Ms Gearin, counsel for McKechnie, took a preliminary point. She submitted that the bankruptcy notice was invalid because it did not correctly identify the order which gave rise to McKechnie's liability to pay the debt referred to in the bankruptcy notice. It is convenient to deal with this point before addressing the more substantive matters relied upon by the debtor.
Relevantly, the bankruptcy notice reads as follows:

"TO: ROBERT LACHLAN McKECHNIE Unit 1, 3 Banyan Street, Fannie Bay in the Northern Territory of Australia, Retired Caretaker.".

WHEREAS REGINALD WITWORTH WEIR of 135 Backbeach Road Portsea in

the State of Victoria (hereinafter referred to as 'the judgment

creditor') has claimed that the sum of $22,467.93 is due by you to

him under a final order obtained by him against you in the Supreme

Court of the Northern Territory of Australia on the 8th day of

December 1989 being an order the execution of which has not been stayed.

THEREFORE TAKE NOTICE that within fourteen (14) days after service

of this notice on you excluding the day on which this notice is

served on you, you are required:

(a) to pay the sum of $22,467.93 so claimed by the Judgment

Creditor to the Judgment Creditor; or

(b) to secure the payment of the sum referred to in paragraph

(a) to the satisfaction of the Federal Court of Australia General Division Bankruptcy District of the Northern Territory of Australia at Darwin or the judgment creditor (or his agent whose name and address is Ward Keller 1st Floor 19 The Mall Darwin in the Northern Territory of Australia) or compound the sum so specified to the satisfaction of the judgment creditor (or his said agent).

...."

Order 63, rule 54 of the Northern Territory Supreme Court Rules provides, in part, as follows:

"54. (1) Where the Taxing Master taxes a bill, otherwise

fixes or assesses an amount for costs, or makes an order under or

in pursuance of rule 63.51(2) or 63.52(2), he shall state the

result in the form of an order.

(2) The Taxing Master, may after the conclusion of the

taxation of a bill make a final order in respect of the amount at

which he allows the costs or of his disallowance of the costs."

It is not in dispute that the order made by Master Lefevre, as the Taxing Master, on 8 December 1989 was a final order in terms of rule 54(2).
Section 40(1)(g) of the Bankruptcy Act provides that a debtor commits an act of bankruptcy:

"if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not -

(i) where the notice was served in Australia - within the time fixed by the Registrar by whom the notice was issued; or

(ii) where the notice was served elsewhere - within the time fixed for the purpose by the order giving leave to effect the service,

comply with the requirements of the notice or 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;"

In my opinion the bankruptcy notice is in proper form. It correctly identifies the final order pursuant to which the sum of $22,467.93 is due by McKechnie to Weir. The Taxing Master's order was a final order. It was given that character by rule 54. I see no reason why it should not be regarded as a final order for the purposes of s.40(1)(g) of the Act.
Ms Gearin sought support for her submission in the decision of Beaumont J in Wilmot v Buckley (1984) 56 ALR 589. In my opinion that decision is distinguishable. In that case the applicant was served with a bankruptcy notice which described the respondents as "judgment creditors" and referred to a specified amount as being due by the applicant to the respondents under a certificate of taxation. There was no evidence of a formal judgment having been drawn up in relation to the claimed amount. It was held that the bankruptcy notice was bad because by describing the respondents as "judgment creditors" and referring to the amount due as under the certificate of taxation, the notice could be construed as suggesting that the certificate of taxation was the source of the applicant's liability and that the certificate was a judgment, and that to convey that impression would be capable of misleading the debtor. It was also held that the notice failed to identify the final judgment or order upon which it was based and that there was no final judgment or order for the purposes of s.40(1)(g) of the Act.
In the present case the effect of rule 54 is to empower the Taxing Master to make a final order in respect of the amount which he allows for costs. It was by virtue of his final order of 8 December 1989 that the debtor's liability arose. The position in Wilmot v Buckley was quite different. The order for costs upon which the bankruptcy notice was founded in that case was an order of the Supreme Court of New South Wales. There does not appear to have been any provision in the rules of that Court equivalent to the relevant rule of the Supreme Court of the Northern Territory. And even if there had been, there was no evidence in the case before Beaumont J that a formal judgment dealing with costs had been drawn up, as contemplated by Part 52 rule 63 of the New South Wales Supreme Court Rules.
Ms Gearin also relied uponmc ALJsion Re Cartwright; Ex parte Cartwright v Barker (1975) 2 All ER 970. In that case a bankruptcy notice specified the debt claimed as being "the amount due on a final judgment or order obtained by (the petitioning creditor) against you (the joint debtors) in the High Court of Justice dated 20 March 1974, whereon execution has not been stayed." In fact the amount claimed was the sum certified by a Taxing Master on 20 March 1974, as being the amount of costs owing to the petitioning creditor under a judgment obtained by him against the debtors on 5 November 1970 in the High Court. It was held that the bankruptcy notice was bad for the reason, inter alia, that it did not show under what judgment or order the sum claimed was due and that in the case of costs the effective judgment was the order of the court itself, not the certificate quantifying their amount. In that case Goulding J, after referring to earlier decisions of the Court of Appeal, said (p 972):

"They show to my mind quite clearly that in the case of costs the effective judgment is the decree of the court itself ordering costs to be paid, not the certificate quantifying them at a given figure. Accordingly, the relevant judgment or order for the purpose of a bankruptcy notice is the former though no doubt the latter may have to be referred to in order to specify the sum."

As was the case in Wilmot v Buckley, there appears to have been no provision in the rules pursuant to which costs are taxed in the High Court of Justice in England equivalent to Order 63, rule 54 of the Northern Territory Supreme Court Rules. For that reason, I think Re Cartwright is also distinguishable.
I turn now to the substance of the matter, which is whether McKechnie has satisfied the Court that he has a counter-claim, set-off or cross demand which equals or exceeds the amount referred to in the bankruptcy notice. It was common ground before me that it was necessary for McKechnie to show that he has a prima facie case that he has such a counter-claim, set-off or cross demand which has a "fair chance of success" - see per Lockhart J in Re Brink; Ex parte The Commercial Banking Company of Sydney (1980) 44 FLR 135 at 140 where the relevant authorities are collected.
McKechnie's claims are of three kinds. They arise out of the circumstance that he carried on business in partnership with Weir for some time after the death of one Squires in 1984. Prior to his death, Squires carried on a caravan park business in partnership with McKechnie. Squires died intestate, and the Public Trustee became his administrator. Weir became entitled to the deceased's estate. It seems common ground that shortly after Letters of Administration were granted to the Public Trustee, Weir and McKechnie agreed to carry on the partnership business. It is in respect of dealings in this partnership that McKechnie claims to have a counter-claim, set-off or cross demand equal to or exceeding the amount of the costs referred to in the final order identified in the bankruptcy notice.
First, McKechnie claims that he has paid a sum of approximately $1,200 for electricity and that he has not been reimbursed for the payment. It is sufficient to say that if McKechnie has a claim for reimbursement for this amount, it is a claim against the estate of the deceased Squires, and not against Weir. Indeed, I did not understand this claim to be pressed in final argument by Ms Gearin.
Secondly, McKechnie alleges that he has a claim against Weir in respect of the disposition of certain of the partnership assets. On 7 December 1989 an order was made by the Supreme Court of the Northern Territory that the assets of the partnership be sold. The sale of the partnership assets took place on 9 December 1989. According to McKechnie not all the assets of the partnership were sold. In his original affidavit he identified some assets which he believed had not been sold. In subsequent affidavits and evidence he gave varying accounts of what he claimed not to have been sold. The evidence called on behalf of Weir is that all the assets which could be sold were in fact sold. McKechnie gave evidence that he himself was at the sale and successfully bid a total of $400 for some of the chattels offered for sale. He claims that after the sale the auctioneer refused to take his money and would not sell him the items which had been knocked down to him.
I am quite unpersuaded by McKechnie's evidence as to what happened at the sale. After the sale the auctioneers sent letters to the solicitors for Weir and McKechnie advising them of the results of the auction and enclosing lot sheets disclosing the prices achieved. They advised the solicitors that the total proceeds of the sale were $5872 and that this sum was being held on account in the joint names of the solicitors. No complaint was made by McKechnie's solicitors as to the manner in which the sale had been conducted. McKechnie's main complaint about the sale is that some 3,000 glass and metal louvres which formed part of the partnership property were not sold. He claims that these were left on the site at the end of the auction and that they subsequently disappeared or were destroyed. It appears that these articles were some 17 years old at the date of the auction. Although McKechnie claimed that they had not deteriorated, it seems to me that if they were not sold at the auction it is unlikely that they were saleable. There is no evidence before me to suggest that the auctioneers were incompetent or dishonest or acted in dereliction of their duty. I do not think there is a prima facie case that they failed to achieve the best prices available for the partnership assets.
Mr David Loveridge, the auctioneer who conducted the sale, gave evidence on affidavit and was not cross-examined. He said that he and his staff inspected the property on several occasions before the sale, made an inventory of the chattels to be sold and that the inventory was made available to McKechnie and Weir to peruse. The inventory was used as a catalogue for the auction sale. He said he was not aware of any items in the inventory which were not still on the property when the auction was conducted. He regarded the auction as "practically a junk sale" and said that all items were in extremely poor condition. I would have expected him to have been cross examined had it been intended to have been suggested on behalf of McKechnie that his evidence was not reliable.
Weir's solicitor also gave evidence on affidavit and was not cross examined. He said that he was present at the sale, that he observed McKechnie was present and that he (McKechnie) did not object that the auction was being conducted in an improper manner. He said that prior to the auction he examined the articles for sale and formed the view that all items were in an extremely poor condition and that the majority of them could only be described as "worthless junk".
There was other evidence from persons who, for the most part, did not see the articles sold, and who placed much value upon them. I do not think this evidence goes any way to establishing McKechnie's claims.
Moreover, and perhaps more importantly, I do not think there is any evidence making out a prima facie case against Weir that he is liable to McKechnie for any failure to sell the partnership assets at proper prices. It is true that the assets (which consisted of chattels) were located on land owned by Weir and that McKechnie had been ejected from the land by order of the Supreme Court. It is also true that after McKechnie was ejected from the land the chattels were at Weir's risk. But that is not to say that there is a prima facie case established against Weir that he disposed of the assets in such a way as to make him liable to McKechnie for damages. It was in Weir's interests, as much as McKechnie's, that the saleable partnership assets be sold and the best prices obtained for them. As the evidence stands, I am not persuaded that McKechnie has a claim upon which he has any real prospects of success against Weir in respect of the sale of the partnership assets.
The third claim which McKechnie raises against Weir is that, on the taking of partnership accounts, there will be found to be a considerable amount of money owing to him by Weir. According to McKechnie's calculations, the amount which will be found to be owing to him is in the vicinity of $22,400. However, as I understand his evidence, he concedes that, in making these calculations, he omitted to take into account two sums totalling $7,100 which he himself had received. When these sums are taken into account, and bearing in mind that he had a 2/3rds interest in the partnership, his entitlement would be reduced to about $20,000.
However, in calculating the sum to which he claims to be entitled on the taking of accounts, McKechnie assumed that a sum of $17,328.54 paid for rates and taxes on the land upon which the partnership business was conducted and for insurance of buildings from which the partnership business was conducted were wholly the responsibility of Weir. In other words, he claimed that, upon the taking of accounts, Weir would be required to refund this sum to the partnership.
I am conscious of the fact that, on the hearing of this application, it is not incumbent on McKechnie to show that he will succeed on this issue when accounts are taken. It is sufficient that he be able to show that he has a prima facie case. But in my opinion he has not made out a prima facie case on this issue. It was McKechnie who drew the cheques for payment of the amounts which he now says should have been paid by Weir. When he swore his first affidavit in support of his contention that he had a counter-claim, set-off or cross claim against Weir he made no mention of this sum of $17,328.54 or of the payments for rates, taxes and insurance premiums which make it up. In two subsequent affidavits he likewise made no mention of this claim. His own accountant prepared a set of accounts of the partnership, presumably under McKechnie's instructions, and made no mention of the payments as having been made in discharge of partnership liabilities. The accountant was not called to say that he had made a mistake in preparing the accounts or that they did not accord with the instructions given to him by McKechnie.
Having regard to all the evidence, I do not think there is any real prospect that McKechnie would succeed on the taking of accounts in showing that Weir is required to reimburse the abovementioned sum of $17,388.54 to the partnership.

In view of the above findings, I am not satisfied that McKechnie has a counter-claim, set-off or cross demand of the kind referred to in para. 40(1)(g) of the Act. This makes it unnecessary for me to rule upon an interesting submission made by Mr Southwood, who appeared for the judgment creditor. This submission was based upon the undisputed fact that the judgment creditor has obtained final orders against the judgment debtor in the Supreme Court of the Northern Territory of Australia for the payment of about $13,000 ("the additional orders"), none of which has been paid. Mr Southwood submitted that the judgment debtor was himself entitled to set up, in opposition to the debtor's claim, the amount due under the additional orders.
So far as my own researches and those of counsel have revealed, there is no Australian authority on this point. However, there is clear authority in England in support of Mr Southwood's submission. In Re a debtor (No 75N of 1982, Warrington), ex parte the debtor v National Westminster Bank plc (1983) 3 All ER 545, Warner J (with whose judgment Sir Robert Megarry V-C concurred) held that on the true construction of s.1(1)(g) of the English Bankruptcy Act 1914 (which is in not dissimilar terms from s.40(1)(g)), a judgment creditor who is confronted with a counter claim, set off or cross demand by the judgment debtor may himself set up in opposition thereto, another claim of his own against the judgment debtor which, when added to the judgment debt, overtops the debtor's counter claim, set off or cross demand. Warner J, having said that the point was a novel one on which there was no authority, said (at p 558):

"It seems to me that, when the section refers to the judgment debtor having `a counter-claim set off or cross demand which equals or exceeds the amount of the judgment debt', it cannot mean a counter claim, set-off or cross- demand which, if set up in an independent action, would itself be defeated by a counterclaim by the creditor. It must ... mean a cross-demand having at least some chance of success."

With all respect to the views expressed by their Lordships, I would have thought there is much to be said for the view that s.40(1)(g) contemplates that it is sufficient for the judgment debtor to satisfy the court that he has a counter claim, set-off or cross-demand equal to or exceeding the amount of the judgment debt upon which the bankruptcy notice is based. I would ordinarily follow such a decision of the Chancery Division but since the point is a novel one and need not be decided for the purposes of disposing of the present application it is best left for another day.

[1991] FCA 177

18 APRIL 1991