Smith v Wikramanayake
[2008] FMCA 1425
•14 October 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| SMITH v WIKRAMANAYAKE & ANOR | [2008] FMCA 1425 |
| BANKRUPTCY – Application to set aside a bankruptcy notice – cross claim or set off – where costs had not been assessed – whether set off existed – cross claim for percentage of profit on sale – whether set off of the type described in s.40(1)(g) Bankruptcy Act 1966 (Cth) – where debtor had no interest in property and there was no obligation to sell property – whether set off could have been raised in the proceedings in which the bankruptcy notice was issued. |
| Bankruptcy Act 1966 (Cth), ss.40(1)(g), (3)(b), 41(7) Legal Profession Act 1987 (NSW) Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) |
| James v Hill [2005] FMCA 743 Esber v Massih [2006] NSWSC 321 In Re A Bankruptcy Notice [1934] 1 Ch 431 Re Glew; Glew v Harrowell [2003] FCA 373 Massih v Esber [2008] FCA 1452 Snelgrove v Roskell [2007] FCA 122 Re Franks; Franks v Warringah Council [2003] FCA 1047 Minister for Immigration v SZANS (2005) 215 ALR 733 SZGME v Minister for Immigration [2008] FCAFC 91 Re Gould; Ex parte Skinner (1983) 72 FLR 393 Pollnow v Queensbrough Pty Limited (1988) 217 ALR 49 Chesson v Smith (1992) 35 FCR 594 Re Gibbs; Ex Parte Triscott (1995) 133 ALR 718 Re Ravaiso; Ex parte Leonard Norman Pty Limited (1965) 6 FLR 373 |
| Applicant: | DAVID SMITH |
| Respondents: | MARGARET ANNE WIKRAMANAYAKE, PRENITHA SRIMATH WIKRAMANAYAKE AND WAGGA ROAD PROPERTIES PTY LIMITED ACN 108 886 568 |
| File number: | SYG 1213 of 2008 |
| Judgment of: | Raphael FM |
| Hearing date: | 24 September 2008 |
| Date of last submission: | 24 September 2008 |
| Delivered at: | Sydney |
| Delivered on: | 14 October 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr A Justice |
| Solicitors for the Applicant: | The Law Company Pty Limited |
| Counsel for the Respondent: | Mr P Bolster |
| Solicitors for the Respondent: | Verekers Lawyers |
ORDERS
Application dismissed.
Applicant to pay the respondents’ costs to be taxed if not agreed in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1213 of 2008
| DAVID SMITH |
Applicant
And
| MARGARET ANNE WIKRAMANAYAKE, PRENITHA SRIMATH WIKRAMANAYAKE, WAGGA ROAD PROPERTIES PTY LIMITED ACN 108 886 568 |
Respondents
REASONS FOR JUDGMENT
Introduction
This is an application to set aside Bankruptcy Notice NN196/08 issued by the Official Receiver on 10 April 2008 claiming a debt of $106,901.90 based upon a judgment for costs made in the Supreme Court on 5 December 2007 and entered on 1 April 2008. The amount of the judgment in the sum of $127,261.38 plus some interest, was reduced by a set off arising out of proceedings in the Local Court of New South Wales. The substantive decision of Hammerschlag J in which the order for costs was made was given on 28 February 2007.
The applicant debtor seeks to set aside the bankruptcy notice pursuant to the provisions of ss.40(1)(g) and 41(7) of the Bankruptcy Act 1966 (Cth) (the “Act”) on the basis that he has a cross claim, set off or cross demand which could not have been set up in the action or proceeding in which the judgment or order was obtained. At the commencement of this application there were three such set offs put forward by the applicant. The first was a claim for costs of the Local Court proceedings to which I previously referred in the sum of $45,046.05. The second was in relation to a claim for a share of profits arising out of a joint venture that would be due to the debtor when the joint venture property was sold. The third related to an alleged agreement of a similar nature to that described above but in respect of an earlier sale of the property. This claim was abandoned during the course of the proceedings. I will give a brief outline of the facts relating to the dispute between the parties and then deal with each of the two alleged set offs in turn.
History
The dispute relates to an aged care facility known as Lavender Lodge situated at 286 Warren Street Lavington near Albury in New South Wales. The site upon which the facility stands was originally owned by a company called Combined House Pty Limited which had retained the debtor and a Mr James as consultants in 1999. A development application for twenty-four apartments had been lodged but the company ran out of money and Mr Smith and Mr James approached the creditors as possible financiers. An agreement was reached whereby the Wikramanayakes lent money to Combined House for the purposes of the development. No formal documentation concerning the arrangements between the parties was entered into at this stage although “It is common cause between the parties that there was an arrangement between them that when the facility was sold the profit would be split in equal parts.” Although the Wikramanayakes had provided financing to Combined House, that company was unable to complete the development and so the property was sold by Combined House to Wagga Road Properties Pty Limited, a company owned and controlled by the Wikramanayakes for $407,581.30. The Wikramanayakes took out a loan from the National Australia Bank for $700,000.00 and that money was used to pay Combined House $407,581.30 and the balance was used to assist in completion of the development. The Wikramanayakes continued to advance money to the company until as at 1 July 2005 the sum of $1,201,707.52 with interest accruing was owed. Under the arrangements between the Wikramanayakes and Mr Smith and Mr James, those two gentlemen managed the property as they had expertise in the management of aged care facilities. Eventually the arrangements between them and the Wikramanayakes broke down and on 8 July 2005 Wagga Road took possession of the facility and has operated it ever since. The proceeding in the Supreme Court of New South Wales was brought by Smith and James against the Wikramanayakes for a declaration that they had an interest in Wagga Road as a result of oral agreements or representations made. The Wikramanayakes in turn instituted cross claims against the company associated with Smith and James known as Plus 55 Village Management Albury Pty Ltd. In the judgment delivered by Hammerschlag J, his Honour did not accept the existence of the agreement alleged by Smith and James and dismissed their claims. He gave judgment for Wagga Road against Plus 55 in the amounts of $626,833.16 and $72,126.22 and ordered that the plaintiffs were to pay the defendants’ costs of the proceedings including the costs of the cross claims. [This précis of the history is taken from the judgment of Hammerschlag J].
The costs of the Supreme Court proceedings were assessed and in accordance with the Legal Profession Act 1987 (NSW) (“Legal Profession Act”) judgment was entered for the amount assessed in that court.
The Local Court Set Off
I am able to deal with the Local Court set off without any discussion of the nature of s.41(7) of the Act because to my mind the debtor has not been able to satisfy me that such a set off currently exists. True it is that there was an order for costs made in proceedings No 3038 of 2007 in the Local Court of New South Wales. Those costs have been not been assessed. The only evidence that the applicant brings as to the value of those costs is contained in his affidavit filed on 14 May 2008 as Annexure A pages 3 and 4. On page 3 there is a statement of account from The Law Company Pty Limited to Mr Smith for a period between 8 February 2008 to 7 May 2008 and a notation as follows:
“Costs and disbursements incurred on all your matters for the specified period.
MATTER 90+ DAYS 60 DAYS 30 DAYS CURRENT BALANCE
60766 RE: Smith & James v Wagga Road P/L:
35,732.07 1,907.17 272.67 712.60 38,624.51
There is no direct reference on this document to the Local Court proceedings and as it is known that there were many proceedings between Mr Smith and Wagga Road Pty Limited the document cannot satisfy me that the amount of $38,624.51 relates solely to the Local Court litigation. The statement of account on page 4 of the affidavit is from Davidsons Solicitors and relates to a period between 1 July 2006 and 29 September 2006, the total sum is $6,047.60, but that document is equally unhelpful in providing proof of the existence of a cross claim related to the costs of the Local Court proceedings. It is also clear that even though the debtor has the right to make a claim for the costs against the creditors I would need to know the quantum of the claim in order to calculate whether it alone (or it together with any other claim allowed) equalled or exceeded the amount of the judgment debt. In James v Hill [2005] FMCA 743 I dealt with a claim such as this where the costs had not been assessed and I said at [12]:
“A claim of this type seems to be no different to a claim in respect of which judgment has been entered for damages to be assessed. The court must therefore come to a view of the value of the claim based upon evidence provided to it. Johnstone v Guss (1997) 484 FCA Sundberg J.”
In that case I had been provided with an affidavit from a solicitor indicating what he thought the quantum was. I found that there was sufficient evidence before me in that case to establish a cross claim of approximately the amount put forward by the debtor. The evidence in this case is far less precise than that found in James v Hill (supra). I do not have any evidence of what the costs are likely to be assessed at in the Local Court.
There is an additional matter relating to the Local Court costs and that is the existence of a practice note in the Local Court of New South Wales known as Practice Note 2 of 2007 amended on 1 June 2008 and said to have commenced on 1 March 2007. The purpose of the practice note is to indicate a limitation on the maximum amount of costs that will generally be awarded in proceedings for liquidated claims to which this practice note applies. The gravamen of the note is that:
“Where the amount claimed is $20,000.00 or less the Court’s discretion as to costs in proceedings will in general terms be exercised so that the maximum amount of costs awarded in respect of the proceedings, after the first defence is filed, is limited pursuant to Rule 42.4 of the Uniform Civil Procedure Rules, 2005. Maximum costs should NOT be considered as a standard amount to be awarded. Costs will be subject to agreement or assessment in appropriate proceedings, however the amount of costs should not exceed the maximum unless the court otherwise orders.”
The maximum costs order found as Rule 42.4 and is stated as being 25% of the amount awarded by the court. If this rule applied to the Local Court proceedings then the maximum amount that could be obtained (the debtor not having made an application to the court for any larger figure) would be $5,000.00. The amount claimed in the Statement of Claim was $19,738.00 but there was also a claim for interest in the sum of $2,335.65. I have had no evidence presented to me of the practice in the District Court in considering what makes up the figure of $20,000.00 in respect of this particular practice note. Whilst I would tend to a view that interest would be included, the failure of the debtor to satisfy me of the situation is another reason why I would be disinclined to make a finding that a set off exists in any particular amount arising from the Local Court decision.
“The Profit on Sale” Cross Claim
In his judgment of 28 February 2007 Hammerschlag J explained this cross claim as follows:
“1On the morning of the fourth and final day of the four days for which this matter was set down for hearing, Mr Weaver of Counsel on behalf of the plaintiffs moved the Court for an amendment to the Further Amended Statement of Claim by insertion into the prayers for relief a prayer or a declaration that there is on foot between the parties an agreement that in the event that the facility known as Lavender Lodge, which is the subject of this proceeding, is sold, the first plaintiff and second plaintiff are each entitled to a one third share of the profits.
2Subsequently Mr Weaver changed course slightly and asked for an adjournment to enable the pleading to be amended in that fashion for the further hearing of the matter to take place at some later time which the Court might be able to accommodate.
…
4The principal issue in this case is, and has always been, an allegation by the plaintiffs of an oral agreement entered into in 2004 that the first and second defendants would transfer to the first and second plaintiffs each a on third interest in the company or such other entity as holds the property known as Lavender Lodge. That agreement was alleged to have come after an earlier agreement to split the profits on sale.
5An earlier agreement to split the profits on sale is, or is effectively, admitted by the defendants on the pleadings and its original existence was accepted by both the first defendant and the second defendant in their oral testimony. There is no evidence of any imminent sale of the facility.
…
10Also, Mr Bell gave an undertaking on behalf of the defendants that in the event these proceedings were determined on the present issues and thereafter the plaintiffs wished to prosecute a claim as envisaged in the proposed amendment, no Anshun (Port of Melbourne Authority v Anshun Proprietary Ltd (1981) 147 CLR 589) or issue estoppel or analogue point would be taken.
11Having regard to the forensic prejudice to the defendants, to the undertaking given, to the fact that there is no imminent sale of the property, and in the absence, in my opinion, of any prejudice to the plaintiffs apart from costs of bringing new proceedings should they wish to do so (which in the first instance so far as their case is concerned would have to be borne by them anyway), I considered that justice would be better served in the present case by refusing the application and I accordingly did so.”
It is important to note that the cross claim is for a percentage of profits. It is not an entitlement to a share in the property. If there are no profits there is no cross claim. A right to profits (without more) would generally give rise to a liability for losses Esber v Massih [2006] NSWSC 321 at [6]. A number of questions arise in relation to the cross claim identified by Hammerschlag J.
Is there a relevant set off?
The right of the applicant to have the bankruptcy notice set aside pursuant to the provisions of s.41(7) of the Act is contingent upon the existence of a counter claim, set off or cross demand of the type described in s.40(1)g of the Act:
“(1) A debtor commits an act of bankruptcy in each of the following cases:
(a) – (h) …
(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 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 specified in the notice; 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 or she 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 or she could not have set up in the action or proceeding in which the judgment or order was obtained;”
Is this such a set off or cross demand?
In the proceedings before Justice Hammerschlag (and indeed before me) the creditors agreed that there had been at some time an agreement whereby one third of the profit upon sale would be paid to Mr Smith and Mr James. But no admissions were made that this agreement continued and currently exists. The creditors say the agreement has been repudiated and this is a matter to be tried. If the matter was tried and the debtors were successful they would obtain no more than a declaration unless the property had previously been sold. There would need to be an account of profits before the final amount of the cross demand could be ascertained. When a claim of this type came before the Court of Appeal in In Re A Bankruptcy Notice [1934] 1 Ch 431 Romer LJ after agreement with Lord Hanworth M.R. (at 438) that the claim:
“[I]s certainly not a claim which can be at the moment so definitely quantified as to be described as necessarily equalling or exceeding the amount of the judgment debt. It is a claim which may enure to the benefit of the plaintiff, and he may be able ultimately to receive a sum, but, so far as the position can be taken at the present time, it is difficult to say that it equals or exceeds the amount of the judgment debt.”
added at 439:
“Strictly, of course, a claim or a demand cannot exceed or be equal to or less than the amount of the judgment debt; it is obviously the thing which is claimed or demanded that has to be compared with the amount of the judgment debt. Some things that are claimed or demanded obviously cannot be compared with the amount of the judgment debt. It would be impossible to say that a declaration or an injunction could equal or exceed the amount of the judgment debt, and there are obviously other things which cannot be compared with the amount of a judgment debt. These words seem to me to refer to a case where the judgment debtor is claiming to receive from the judgment creditor something which can properly be said to equal or exceed the judgment debt. I cannot accede to the suggestion made by Mr Braund that the words are satisfied if the judgment debtor is claiming to have an interest in something in the hands of and properly retained by a third party ranking in priority to the interest in that thing claimed by the judgment creditor.”
And Maugham L.J. said at 441:
“[I]t has to be a cross demand against the creditor effective at the time of hearing of the application to set aside the bankruptcy notice, either for an amount equal to or exceeding the amount of the judgment debt or, at any rate, for property of the value which at the moment exceeds the amount of the judgment debt … As already pointed out, there is property in the hands of the third parties in the Chancery action to which they are partially entitled as trustees, and it has not been shown that at the present date the debtor has money or property in the hands of the creditor which amounts to or is in value equal to the amount of the judgment debt.”
Thus here, because the debtor has no interest in the property and there is no profit identified because the property has not been sold and there is no obligation to sell it, I am unable to see how the debtor can claim to have an existing cross demand or set off as properly defined.
If I am wrong in expressing the above view I would in any event conclude that the current status of the evidence cannot satisfy me that any set off or cross demand is equal to or exceeds the judgment debt. The only evidence about the value of the property is a copy of a valuation dated May 2005 attached to the affidavit of Mr Smith. That was a valuation prepared for mortgage purposes and it indicates a value of $1,450,000.00. As of that date the Wikramanayakes had advanced $1,201,707.52 to the company for the purposes of maintaining the property. It is now 2008. It is a time of worldwide financial turmoil. I have no evidence as to the current value of the property that would satisfy me that the claim raised by the debtors would exceed the $106,901.00 odd in respect of which the bankruptcy notice has been issued. The valuation is also not deposed to directly by the valuer.
In coming to my conclusion as to the lack of satisfaction I have taken into account the views expressed by Lindgren J in Re Glew; Glew v Harrowell [2003] FCA 373 at [9] and the commentary made upon that decision by Flick J in Massih v Esber [2008] FCA 1452 at [18] and [19].
Could the set off or cross demand have been set up in the action or proceeding in which the judgment or order was obtained?
As Flick J says in Massih (supra) at [29]:
“Whether a claim "could not have been set up" is thus to be determined by reference to legal considerations and not by reference to "practicalities": Re Ling; Ex parte Lingv Commonwealth (1995) 58 FCR 129 at 132.”
This is a matter which was considered by Flick J in Massih, a case which has superficial similarities to the one presently before me. In that case there was also an issue as to rights in respect of a joint development property, but the facts allowed Hall J to come a very different conclusion to that found by Hammerschlag J. His Honour’s orders are set out at [166] of the judgment.
“(a)a declaration that the defendant holds half of the land known as 31 Walker Street, Merrylands, being the land comprised in Folio Identifier B/435743 on trust for the plaintiff;
(b)a declaration that the plaintiff is entitled to half of any profits from the development and sale of the property being two duplex units, 31 Walker Street, Merrylands;
(c)an order that trustees be appointed for the sale of the property referred to in (a) and (b) pursuant to s.66G of the Conveyancing Act 1919 (NSW);
(d)an order that the said property in (a) and (b) be vested in such trustees subject to any encumbrances affecting the entirety of the land but free from encumbrances, if any, affecting any undivided share or shares therein to be held by such trustees upon the statutory trust for sale under Division 6 Part 4 of the Conveyancing Act 1919 (NSW).”
The defendant was ordered to pay the plaintiff’s costs. Those costs were assessed in accordance with the Legal Profession Act and when the assessment was completed and a certificate had issued the certificate was filed in the District Court and a judgment issued out of that court which formed the basis of a bankruptcy notice by the plaintiff against the defendant. The defendant sought that the bankruptcy notice be set aside on the ground that it had a cross claim or set off equal to or exceeding the amount of the judgment debt which could not be raised in the proceedings in which the judgment or order was obtained. It was accepted in the course of the hearing in the Federal Court that the set off (being the amount of the losses on the joint venture) exceeded the amount of the costs. The live issue was therefore whether the set off could have been raised in the proceedings. His Honour concluded that they could not because the relevant proceedings for the purposes of his decision were the proceedings in the District Court whereby the judgment was registered. His Honour took the view, which he believed was consistent with decisions of the Federal Court in Snelgrove v Roskell [2007] FCA 122; Re Franks; Franks v Warringah Council [2003] FCA 1047 that:
“[46] The result of the present Application, it is considered, can be stated simply. For the purposes of the present Application, it was accepted that the joint venture agreement as between the Applicant and the Respondent gave rise to losses, those losses being said to be approximately $160,000. Those losses obviously exceed the judgment debt of $77,498.96. But, as at the date upon which the Bankruptcy Notice was served in February 2008, no account had been taken -- as had been ordered by Hall J in March 2007. Whether an account had or had not been taken, however, those losses could not have been set up during the process whereby the costs assessor made a determination as to costs. Nor could those losses have been set up in opposition to the filing of the Certificate of the costs assessor with the District Court and the judgment thereafter being taken to have been made by reason of s 368(5) of the Legal Profession Act.”
Whilst the judgment of Flick J being a judgment of first instance is not binding on me it is one which I should follow unless I am satisfied that it is plainly wrong: see Minister for Immigration v SZANS (2005) 215 ALR 733 per Weinberg, Jacobson and Lander JJ at [38] and the authorities cited therein; SZGME v Minister for Immigration [2008] FCAFC 91 per Black CJ and Allsop J at [42]. It is suggested by the respondent that one point of difference between the instant case and that of Massih is the provisions of s.40(3)(b) of the Act:
“(3) For the purposes of paragraph (1)(g):
(b) a judgment or order that is enforceable as, or in the same manner as, a final judgment obtained in an action shall be deemed to be a final judgment so obtained and the proceedings in which, or in consequence of which, the judgment or order was obtained shall be deemed to be the action in which it was obtained;”
That sub-section was referred to in his Honour’s judgment at [34]:
“A more broadly phrased submission advanced on behalf of the Applicant in his written submission was that “where an order for costs is made on an interlocutory application within other proceedings, that interlocutory application is itself deemed to be the action in which the relevant order is obtained (see s40(3)(b))”. By the end of oral submissions, however, the Applicant contended that the “action or proceeding” was:
(iii)the “proceeding” in the District Court where judgment was entered for the sum of money assessed in the Certificate of Determination of Costs.”
Cases in which the sub-section have been considered generally have involved interlocutory decisions; Re Gould; Ex parte Skinner (1983) 72 FLR 393 (“Re Gould”); Pollnow v Queensbrough Pty Limited (1988) 217 ALR 49; Chesson v Smith (1992) 35 FCR 594 (“Chesson”). The respondent before me sought to argue that these cases, which were determined before the Legal Profession Act provisions came into force, applied equally to a case such as this and that Flick J had not had the opportunity of considering them. But I do not think that is an acceptable submission because his Honour discusses the nature of s.40(3) at [31] and [32] of his decision and makes reference to Re Gould and Chesson. Even though there are occasions when the separation of “proceedings” between the proceedings under which the costs order is made manifest and the proceedings in which the costs order is merely made would appear to cause unfairness to a creditor against whom a cross claim could have been mounted in the original proceedings but was not, this does appear to be the current law even though it seems, at first sight, to be contrary to the authorities discussed by Drummond J in Re Gibbs; Ex Parte Triscott (1995) 133 ALR 718 which held that an order for costs, once taxed, was within the expression “final judgment” although in this regard see Re Ravaiso; Ex parte Leonard Norman Pty Limited (1965) 6 FLR 373. It is almost certainly best that I do not further muddy these waters and content myself with saying that had I been satisfied that the debtor had a cross demand or set off I would have followed Flick J and found that it could not have been raised in the proceedings pursuant to which the bankruptcy notice had issued.
Finally the respondent argues that the applicant’s delay in having its claim for the set off heard as ordered by Hammerschlag J offends against the requirement that the debtor should raise his cross claims at the earliest opportunity. Mr Bolster says in his helpful written submissions:
“[14]In this respect Re Willats; Ex parte Nissan Finance Corp Ltd (1991) 31 FCR 206 at 212 is authority for the proposition that:
“ … the Act intends a debtor, at the earliest opportunity, to raise against his creditor such counterclaim, if any, as he may have and which can be properly raised in the creditor’s proceedings; if he does not he cannot complain (by way of raising that counter-claim) when the creditor applies to this court to issue a bankruptcy notice.”
[15]Such a claim must be prosecuted with due diligence; Re Brown, Ex parte Peisley Brothers (1892) 3 BC (NSW) 13 at 14 per Manning J. Similarly in Re Ling; Ex parte Ling v Commonwealth (1995) 58 FCR 129 at 137 Hill J observed:
“A debtor having a claim against his or her creditor can not just stand by while judgment is obtained and later seek to use that claim to set aside a bankruptcy notice founded upon that judgment.””
I think in the circumstances of this case the delay in proceeding with the cross claim between February 2007 when his Honour’s judgment was handed down and April 2008 when the bankruptcy notice was served, which has not been explained, would militate against my giving the relief sought in the application.
Conclusion
The debtor has failed to satisfy me in the quantum of either of his alleged set offs or cross demands. I am unable to say that they might individually or together exceed the amount for which the bankruptcy notice issued. In those circumstances I propose to dismiss the application and to order that the applicant pay the respondents’ costs to be taxed if not agreed in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.
I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
Date: 14 October 2008
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