Re Sgambellone; Ex Parte Jacques

[1994] FCA 722

RE: ENZO SGAMBELLONE
EX PARTE: CHRISTIAN ROGER JACQUES, CATHERINE MAY JACQUES AND POURQUOI PAS PTY.
LTD.
No. QN1148 of 1994
FED No. 722/94
Number of pages - 9
Bankruptcy
(1994) 53 FCR 275

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
DRUMMOND J

CATCHWORDS

Bankruptcy - application to set aside bankruptcy notice on ground that notice overstated amount due - recipient of notice claimed entitlement to set-off of an amount less than the judgment debt - notice that disregards such a set-off and claims full amount of judgment debt conforms with statutory form of notice and is valid - recipient of notice cannot avoid act of bankruptcy by quantifying set-off and tendering payment of amount demanded in notice less amount of set-off - too late, once notice served, for recipient to obtain partial stay of execution of judgment - application dismissed.

Bankruptcy Act 1914 (Eng.) - ss. 1(g), 4(1)(a)
Bankruptcy Act 1966 (Cth) - ss. 40(1)(g), 41(1)(a), 41(5), 41(6), 44(1)(a)
Federal Court Rules - O 37, r 6(2); O 37, r 10
Property Law Act 1974 (Qld) - s 84

In re HB (1904) 1 KB 94
Langworth Pty. Ltd. v Metway Bank Limited (Drummond J, 11 September, 1992, unreported)
Oliveri v Stafford (1989) 24 FCR 413
Re A Debtor (1919) B and CR 221
Re Greenhill; Ex parte Myer (NSW) Ltd. (1984) 5 FCR 84
Re Griffiths (1893) 3 BC (NSW) 71
Re Schekeloff (1989) 22 FCR 407
J.C. Scott Constructions v Mermaid Waters Tavern Pty. Ltd. (No. 2) (1983) 2 QdR 255
Searles v Sadgrave (1855) 5 El and B. 639
Talbot v Frere (1878) 9 ChD 568
T.C. Trustees Ltd. v J.S. Darwen (Successors) Ltd. (1969) 2 QB 295
Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337

HEARING

BRISBANE, 29 September 1994
#DATE 3:10:1994

Counsel for the applicant: P.J. Favell

Solicitors for the applicant: Grasso Searles Romano

Counsel for the respondent: T.W. Quinn

Solicitors for the respondent: Lynch and Co.

ORDER

The Court orders that:

1. The application to set aside the bankruptcy notice is dismissed with costs (excluding the costs incurred on Wednesday, 28 September, 1994 in respect of the attendance of counsel and solicitors, after completion of proceedings before the Registrar).

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

JUDGE1

DRUMMOND J This is an application by the recipient of a bankruptcy notice to set aside the notice. The applicant himself has issued a notice pursuant to s 41(5) the Bankruptcy Act 1966 disputing the validity of the bankruptcy notice on the ground that it mis-states the amount due by him to the Jacques, who are the respondents, along with their company Pourquoi Pas Pty. Ltd., to this application.

1. The Jacques issued the bankruptcy notice on 31 August 1994. It demands payment by Mr. Sgambellone of $140,000.00, being the amount of a final judgment obtained by them in this Court on 29 August last. The judgment was for the sum found due to the Jacques in respect of their costs of the trial of the action which they brought against Sgambellone and a number of other persons, including Cut Price Deli Pty. Ltd., a company of which Sgambellone was chief executive. I will call all these persons the trial respondents. In April 1993, Spender J gave judgment in favour of the Jacques and their company against the trial respondents for $243,000.00. Their liability to the Jacques was joint and several. Cut Price Deli paid this sum, together with accrued interest of $4,181.28, to the Jacques on 4 May, 1993. On 20 May, 1994, the Full Court allowed in part the trial respondents' appeal against Spender J's decision by reducing his judgment in favour of the Jacques by $33,000.00. The order of the Full Court, so far as is relevant, was in these terms:
   

"The order of the Honourable Mr Justice Spender made on 1 April 1993 that there be judgment for the respondents against the appellants in the sum of $243,000 be varied by substituting for the sum of $243,000 the sum of $210,000."

1. It was further ordered that the respondents pay one-sixth of the appellants' costs of the appeal. As at 28 September, 1994 this order had not been perfected. On 24 May, 1994, in proceedings before Cooper J, the trial respondents undertook "not to enforce the entitlement consequent upon the Judgment of the Full Court against the (Jacques), pending final resolution of the question of costs as between the parties." The Jacques for their part gave an undertaking not to seek to enforce a costs order made on 28 April, 1994, a different order from that concerning the $140,000.00.

2. The present applicant seeks to set aside the notice on the ground that it overstates the amount due by him. He relies, firstly, on the fact that, as a result of the Full Court judgment, Cut Price Deli is entitled to repayment of the amount of $33,000.00 by which the judgment in favour of the Jacques was reduced by the Full Court; secondly, on the fact that the Jacques are, so it is said, liable under O 35, r 8 to pay interest on the $33,000.00 from 4 May, 1993 to 14 September, 1994, which the applicant's solicitor calculates to amount to a further $4,938.24; and, thirdly, on the fact that the Full Court ordered the Jacques to pay one-sixth of the trial respondents' appeal costs. These costs have not as yet been taxed, although a bill has been filed in respect of them, one-sixth of which is $11,160.15. Fourthly, the applicant relies upon the fact that the trial respondents have an order for the payment by the Jacques of $924.00 in respect of costs awarded to them against the Jacques. The material does not indicate whether this order was made before or after issue of the bankruptcy notice. The Jacques' solicitor in his affidavit of 26 September, 1994, sworn after the service of the application now before me, deposes to payment by the Jacques of this sum of $924.00 by the posting on that day of the solicitor's trust account cheque to the applicant's solicitors. Fifthly, and finally, the applicant relies upon the fact that, although the costs order for $140,000.00 which the Jacques obtained against the trial respondents on 29 August, 1994 was a final order, it left unresolved for later determination the question whether the Jacques or the trial respondents should recover the costs of that particular taxation. The applicant's solicitor refers to the fact that the Jacques presented a bill for their trial costs in excess of $300,000.00 and that they only recovered $140,000.00 in respect of those trial costs. That solicitor goes on to say:
   

"I am of the opinion that if costs were awarded in favour of the respondents in relation to the Bill referred to in paragraph 9 hereof (i.e., the trial costs) that such costs would be in an amount of approximately $15,000."

1. He does not further explain how he arrived at this estimate of $15,000.00.

2. It appears from the Deputy Registrar's decision of 27 July, 1994 that the reason the Jacques recovered only $140,000.00 in respect of their costs of trial was that, despite their claim for a much greater amount, they had agreed with their solicitor that their maximum liability to him in respect of the trial costs would be $165,000.00. Spender J, as trial judge, ordered that they recover from the trial respondents 90 per cent of their costs of trial.

3. In the taxation proceedings before the Deputy Registrar the trial respondents conceded that the Jacques would be entitled to a final certificate for the costs of trial of 90 per cent of $165,000.00, i.e., $148,500.00. However, they contended that they should have the costs of the taxation proceedings, a matter which is, as I have mentioned, still unresolved. The Deputy Registrar, in making his order for the payment of the $140,000.00 to the Jacques in respect of their trial costs, appears to have reduced the amount which the trial respondents conceded the Jacques were entitled to recover for those trial costs by $8,500.00, pending resolution of the question whether those respondents were entitled to recover from the Jacques their costs of the taxation proceedings. The Deputy Registrar no doubt did this to ensure that the trial respondents would not have to pay on his order more than that which they might ultimately be found liable to pay to the Jacques in respect, firstly, of the latter's trial costs and, secondly, in respect of the contested taxation of those same costs.

4. Counsel for the applicant on the motion before me presented a simple argument. He relied on an obiter dictum in Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 where the Chief Justice, with whom the other members of the Court agreed, said at 339:
   

"There is no doubt that a bankruptcy notice will be invalid if the sum specified in the notice as the amount due to the creditor exceeds the amount for which the creditor is entitled to issue execution, provided that the debtor give timely notice under s 41(5) of the Bankruptcy Act 1966

(Cth), as amended, that he disputes the validity of the notice on that ground."

1. Counsel also relied on Re Greenhill; Ex parte Myer (NSW) Ltd. (1984) 5 FCR 84, a case in which Morling J accepted this dictum as an accurate statement of the law and set aside a bankruptcy notice demanding payment of a judgment debt of $4,426.50 because, prior to entry of the judgment, the debtor had paid $200.00 in respect of his indebtedness to the judgment creditor, which $200.00 was not brought into account in the bankruptcy notice. The applicant's counsel then submitted that because "the creditors were ordered by the Full Court of the Federal Court of Australia to pay to the debtor $33,000.00, together with one-sixth of the debtor's (sic) costs of the appeal", the bankruptcy notice overstates the amount due by the present applicant by at least $33,000.00 and is therefore bad. Counsel's alternative argument was that the present applicant was entitled to set-off against the judgment debt the $33,000.00 and, of course, the other amounts that his solicitor referred to in his affidavit to which I have referred, all of which total $65,022.39. It was submitted, in effect, that the Court should declare that payment of the difference between that sum of $65,022.39 and the $140,000.00 demanded in the bankruptcy notice would constitute a sufficient compliance with the notice.

2. The applicant's primary argument must be rejected. The Full Court reduced the damages payable by the applicant and the other trial respondents by $33,000.00, but did not make any order that the Jacques re-pay the $33,000.00 which, in the light of the Full Court's decision, the trial respondent, Cut Price Deli, overpaid the Jacques on 4 May, 1993. At most, Cut Price Deli has an equitable set-off for $33,000.00 against its liability to the Jacques under the order of 29 August, 1994 for payment by all the trial respondents, including the present applicant, to the Jacques of the $140,000.00.

3. It is to the applicant's alternative argument that I now turn. In my opinion, even if the dictum in Walsh is accepted as accurately stating the law, it was not directed to and does not touch on the present situation where the bankruptcy notice is said to overstate the amount due under the judgment at the date of the bankruptcy notice because it leaves out of account a set-off against the judgment debt available to the debtor that is less than the amount of the judgment. In Re Greenhill, there was no discussion of this particular question either.

4. Section 40(1)(g) the Bankruptcy Act provides, so far as is relevant, as follows:
   

"(1) A debtor commits an act of bankruptcy ... (g) 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 ... a bankruptcy notice ... and the debtor does not ... within the time fixed by the Registrar by whom the notice was issued ... 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 ... 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 ..."

1. A bankruptcy notice must be in the form prescribed: s. 41(1)(a) - i.e, in Form 4 of Schedule 1. See rule 8. It must contain a claim that a stipulated sum is due under a final judgment or order and a demand for payment of that sum, together with advice that, if a debtor does not satisfy the court of a cross-claim equal to or in excess of that amount within the time allowed, he will commit an act of bankruptcy. Where the judgment debt has been partly-paid before the issue of a notice, Walsh and Re Greenhill show that it is essential, if the notice is to be valid, for it to claim only the balance due. It is only that lesser sum that the judgment creditor can properly claim in his bankruptcy notice to be due to him under the judgment and properly demand to be paid. Cf In re HB (1904) 1 KB 94 at 105. But, even assuming it is open to a debtor to rely on the existence of a set-off that is sufficient in amount to meet in part, but not wholly, a judgment debt (a matter not debated in argument), a bankruptcy notice that disregards the set-off and claims payment of the full amount of the judgment debt - X dollars - is one which conforms with the statutory form of notice to the debtor in that it recites a claim by the judgment creditor "that the sum of X dollars is due by you to him under a final judgment" and contains a demand for payment of that sum. Even if it is open to a judgment debtor to partly satisfy a judgment debt by relying on a set-off of lesser amount than that debt, a bankruptcy notice demanding payment of that debt is not invalid, as a matter of construction, because it leaves out of account the set off. As Gummow J said in Oliveri v Stafford (1989) 24 FCR 413 at 432, while there is no act of bankruptcy for the purposes of s 40(1)(g), where the debtor satisfies the Court that he has a set-off, that will assist the debtor only if the set-off is equal to or in excess of the judgment debt. His Honour was clearly of the view that, as a matter of construction of the sub-section, the existence of a set-off less than the judgment debt provides no basis for invalidating a bankruptcy notice that does not bring it into account.

2. In Langworth Pty. Ltd. v Metway Bank Limited (Federal Court, 11 September, 1992, unreported), I acknowledged that the over-statement of the amount claimed to be due under a mortgage in a notice issued under s 84 the Property Law Act 1974 (Qld) could, according to the circumstances, invalidate the notice. Section 84 conditions the exercise of the mortgagee's default powers on service of a valid statutory notice of demand and on non-compliance by the mortgagor with that demand within the time allowed. The section, so far as is relevant, provides:
   

"(1) A mortgagee shall not exercise the power of sale conferred by this Act or otherwise unless and until -

(a) default has been made in payment of the principal money or interest or any part of it secured by the instrument of mortgage, and notice requiring payment of the amount the failure to pay which constituted the default under such instrument of mortgage has been served on the mortgagor and such default has continued for a space of 30 days from service of the notice."

1. I said at page 32:
   

"But a notice will not, in my view, be invalidated where it claims the correct amount that would be payable in respect of principal and interest, but for the existence of an equitable set-off that either over tops that amount or is for an amount less than that claimed in the notice. Notwithstanding the existence of such a set-off, it can still be said that there has been "default ... in payment of the principal money or interest ... secured by the instrument of mortgage" within section 84(1) of the Property Law Act.

In order to issue a valid notice under the section, a mortgagee does not have to do more than calculate the amount due in respect of the principal moneys and interest that are identifiable from the provisions of the mortgage as the moneys secured by it to the mortgagee ... he does not have to assess both the validity of a possible set-off and its value and bring all that into account in determining the default amount which he specifies in his notice."

1. Tender by a debtor of part of a debt after deduction, without the consent of a creditor, of the amount of a set-off at law, as distinct from an equitable set-off, is not a good tender: Searles v Sadgrave (1855) 5 El and Bl 639; Talbot v Frere (1878) 9 ChD 568 at 573; Halsbury's Laws of England, 4th Ed, Vol 9, para 523. So, a legal debt, which would include a judgment debt of a kind here in question, is still a debt owing at law, even though, where the debtor can rely on an equitable set-off to answer, in part, the legal debt, equity will not allow the creditor to treat the debtor as being indebted to him, at least to the extent of the equitable set-off. An equitable set-off thus does not operate as an automatic extinguishment to the extent of the set-off of the liability at law. See: Derham, Set-Off, 1987, at pp 47-8 and cf Wood, English and International Set-Off, at paras. 2-39 and 2-40 and para. 2-55. This being so, there is no basis for the proposition that the availability to the debtor of a set-off, either legal or equitable, that is not taken into account by the creditor in his bankruptcy notice, results in the amount of the debt being over-stated. The decision in Re A Debtor (1919) B and CR 221, to which the solicitor for the Jacques referred, also shows that the existence of a set-off, less than the amount of the judgment debt, provides no basis for invalidating the bankruptcy notice where the judgment debtor fails to pay the full amount demanded in the bankruptcy notice in reliance on the set-off. There, Horridge J, with Rowlatt J agreeing, refused to hold that a receiving order was wrongly made because the act of bankruptcy relied on, non compliance with the bankruptcy notice, had not occurred. The debtor had a set-off for an amount less than the judgment debt on a ground independent of the basis on which the judgment was given. Horridge J found in s 1(g) the Bankruptcy Act 1914 (Eng.), which is a provision similar in effect to s 40(1)(g) and s 41(1), (5) and (6) the Bankruptcy Act 1966 (Cth), justification for saying at pages 226-7:
   

"What, then, is the effect of the cases decided on the old Act? It is, I think, that if anything has been paid off the judgment, the amount required to be paid under the bankruptcy notice must be the balance then due upon the judgment. I think they also decide that if any calculation as to other sums, such as costs or interest, are made, they must be correctly made so as to show the actual amount due upon the judgment itself; but I do not think they deal with any possible set-off which the debtor may have against the judgment debt. My reason for so thinking is based on section 1 of the Act."

1. After quoting that provision, his Honour continued:
   

"I think that what was intended was that the notice should properly state the amount actually due on the judgment. If there was a set-off which equalled the amount due on the judgment, then the debtor should set up and comply with the notice by saying that there was such a set-off; but if there was merely a set-off that did not equal the amount due on the judgment, then he none the less committed an act of bankruptcy in not paying the amount due on the judgment, because the fact that he had not a set-off equal to the amount of the judgment presupposes that there must be something due on the judgment, and that he, by not complying with the bankruptcy notice, commits an act of bankruptcy; nevertheless, on the hearing of the petition, he would be entitled to show that he had such a set-off as reduced the petitioning creditors' debt below the amount sufficient to support the petition."

1. It is important to note that the only significance Horridge J was prepared to ascribe to the availability to the debtor of a set-off less than the amount of the judgment debt was where the set-off was sufficient in amount to reduce the judgment debt to one too small to found a debt upon which a petition could be based. Compare s 4(1)(a) of the English Act of 1914 with s 44(1)(a) of the current Commonwealth Act. His Lordship did not suggest that it was open to the debtor who could raise a set-off less than the amount of the judgment debt, to answer the bankruptcy notice by tender of the difference between the judgment debt and the value of the set-off.

2. It is not necessary if there is to be a valid notice, for the judgment creditor to identify the existence of a set-off available to the debtor that partly answers his claim, to assess its validity and quantum, and then bring that into account in determining the amount to be claimed in the notice. It would, as a practical matter, be inappropriate to make the validity of a bankruptcy notice depend upon the judgment creditor doing all that when, moreover, he may be unaware that the judgment debtor has such a set-off. There is nothing in the wording of the relevant provision of the Bankruptcy Act to require a different conclusion to be reached.

3. I accept the submissions for the Jacques that, assuming there is a set-off available to the judgment debtor of a lesser amount than the judgment debt, a notice demanding payment of the full debt without any allowance for the set-off is valid.

4. For reasons I have given, I do not think that in such a case the recipient of the bankruptcy notice can avoid an act of bankruptcy by quantifying his set-off and tendering payment of the amount demanded in the notice less the amount of his set-off. I therefore reject the submission on behalf of the Jacques in which they made that concession. The case of Re Griffiths (1893) 3 BC (NSW) 71, relied on here by counsel for the Jacques is not authority for such a proposition. Re Griffiths was a case in which the judgment debtor, before issue of the bankruptcy notice, tendered payment of part of the amount of the judgment, contending that this was all that the judgment creditor was entitled to since he had a cross-demand against the judgment creditor for the balance. The creditor rejected the tender and then issued his bankruptcy notice for the full amount of the judgment debt. Manning J held that the tender, even though not accepted, "is a satisfaction pro tanto of the judgment debt." That case is like Re Greenhill, where part of the judgment debt was paid before the issue of the bankruptcy notice. To be valid in such a case, the bankruptcy notice must give credit for the part payment. The notice in Re Gilbert would now I think be held invalid for that reason. However, he considered that the debtor should have an opportunity to establish the validity of the cross-demand, so he stayed all proceedings on the bankruptcy notice and he also stayed execution on the judgment debt to allow the judgment debtor to do that. Here there has been no tender of any sum by any of the trial respondents, including the present applicant, in respect of the judgment debt on which the Jacques' bankruptcy notice is founded.

5. The Court has a very wide discretion under O 37, r 10 to stay the execution of any order or judgment. If a judgment debtor has grounds for resisting in part the judgment creditor's entitlement to enforce payment of the full amount of the judgment, his remedy is, I think, to apply for a partial stay of execution of the judgment or order. Although a stay of execution of a judgment is, as a general rule, only granted on grounds relevant to enforcement on the judgment and not on grounds that could have been, but were not raised, in answer to the plaintiff's claim at the trial - 5 The Laws of Australia para. 5.7 (98) and T.C. Trustees Ltd. v J.S. Darwen (Successors) Ltd. (1969) 2 QB 295 at 302 - in J.C. Scott Constructions v Mermaid Waters Tavern Pty. Ltd. (No. 2) (1983) 2 QdR 255 at 259 it was accepted that an unlitigated cross demand by the defendant for a lesser sum than the plaintiff's judgment could, in appropriate circumstances, justify a partial stay of execution of a judgment. In view of O 37, r 6(2), that rule cannot be read as limiting the Court's power to stay execution under O 37, r 10 to a power exercisable only on the basis of events occurring after the judgment, i.e., to events that are irrelevant to whether the judgment should have been ordered at the trial. If a stay is ordered of execution in respect of part of the judgment debt, then, as s 40(1)(g) itself shows, a bankruptcy notice can only be issued demanding payment of that part of the judgment debt, the enforcement of which has not been stayed.

6. But it is too late, the bankruptcy notice here having been served, for the present applicant to obtain a stay now of the costs order of 29 August, 1994 that will have any effect upon the operation of the bankruptcy notice. See Re Schekeloff (1989) 22 FCR 407. There, the applicant applied to the Court to set aside bankruptcy notices issued by the respondent judgment creditor which were founded on judgments, the execution of which had been stayed, but only after the service of the bankruptcy notices on the applicant. Burchett J held that the time for considering, for the purposes of s 40(1)(g) the Bankruptcy Act, whether a judgment on which a bankruptcy notice is founded has not been stayed is the time of issue or, at the latest, service of the notice. He therefore dismissed the applications to set aside the bankruptcy notices, notwithstanding that the judgment debtors had ultimately obtained stays of execution of the relevant judgment debts.

7. Since it could not assist the applicant even if I were to find in his favour on these points, it is unnecessary to consider whether the applicant can rely on the $33,000.00 over-payment, not by himself but by Cut Price Deli, his joint judgment debtor, to answer the bankruptcy notice directed only to him or whether a set-off can be said to exist in his favour in respect of the other matters he relies on in that regard.

8. The application to set aside the bankruptcy notice is therefore dismissed with costs (excluding, however, the costs incurred on Wednesday, 28 September last in respect of the attendance of counsel and solicitors, after completion of proceedings before the Registrar, up to the time I indicated that the matter would not be reached that day. I will not make any order in respect of those costs.).