Smits v Shirlaw - [2011] FMCA 510

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SMITS v SHIRLAW

[2011] FMCA 510

BANKRUPTCY – Bankruptcy notice – application to set aside – alternatively extension of time for compliance with Bankruptcy notice.

BANKRUPTCY – PRACTICE & PROCEDURE – Application for extension of time pending application for special leave to appeal to High Court – factors to be considered – whether applicant must show that arguable that special leave application will be granted.

BANKRUPTCY – Bankruptcy notice – judgment debt – validity – power of court to go behind judgment.

BANKRUPTCY – Bankruptcy notice – whether discretion to set aside Bankruptcy notice on debtor’s solvency – whether use of Bankruptcy notice can be characterised as an abuse of process.

Bankruptcy Act 1966 (Cth), s.30, s.41(6A), s.41(6C), s.41(7), s.41G,
Civil Procedure Act2005 (NSW), s.22
District Court Act1973 (NSW) s.4, s.44(1), s.51, s.134(1)(h), s.140
Uniform Civil Procedure Rules2005 (NSW), r.9.1, r.9.8

Amos v Brisbane TV Ltd [2000] FCA 825; (2000) 100 FCR 82
Re Bryant; Ex parte Bryant v Commonwealth Bank of Australia (Hill J) (unreported 9 May 1994) (BC9405749)
Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264
Ciccarelli v Cavasinni Developments [2004] NSWSC 788
Conway v Jackson [2001] FCA 230; (2001) 107 FCR 201
Corney v Brien (1951) 84 CLR 343
Re Baker; Ex parte Baker v Staples [1995] FCA 703
O’Loughlin v Glenmont Investments Pty Ltd [2001] FCA 925
Re Brink; Ex parte the Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135
Re Franks; Ex parte GIO Holdings Ltd (1990) 24 FCR 398
Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129
Re Taylor; Ex parte Deputy Commissioner of Taxation (1983) 74 FLR 377
Wren v Mahony (1972) 126 CLR 212
SDN Children’s Services Inc v Hughes (unreported 14 May 2002 Transcript number S35 of 2002)
State Rail Authority of New South Wales v Barnes [2001] NSWCA 133
Tzovaras v Nufeno Pty Limited [2003] FCA 1152
Westpac Banking Corporation v Carver (2003) 126 FCR 113; [2003] FCA 221
McDonald, Henry and Meek on Bankruptcy Law in Australia

Applicant:

LEONARDUS GERARDUS SMITS

Respondent:

ANDREW CHARLES SHIRLAW

File Number:

BRG 314 of 2011

Judgment of:

Burnett FM

Hearing date:

30 June 2011

Date of Last Submission:

30 June 2011

Delivered at:

Brisbane

Delivered on:

30 June 2011

REPRESENTATION

Counsel for the Applicant:

Ms D. Skennar

Solicitors for the Applicant:

Morgan Conley Solicitors

Counsel for the Respondent:

Mr J. Davies

Solicitors for the Respondent:

Rodgers Barnes & Green

ORDERS

That the Bankruptcy Notice be set aside pursuant to s.30 of the Bankruptcy Act 1966 (Cth).
That costs be reserved.
That the matter be adjourned for mention to 26 August 2011 commencing at 10.00am.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT BRISBANE

BRG 314 of 2011

LEONARDUS GERARDUS SMITS

Applicant

and

ANDREW CHARLES SHIRLAW

Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

The applicant, Leonardus Gerardus Smits seeks to set aside bankruptcy notice 2194 issued 14 April 2011. Alternatively, he seeks an extension of time for compliance with the provisions of the Bankruptcy Act 1966 (Cth) (the Act) until 14 days after determination of an application for special leave to the High Court and any appeal consequent upon the granting of special leave. Broadly, the facts of this case are as follows: the notice was based upon a judgment of the New South Wales District Court in favour of the respondent. The judgment has been subject of appeal which will be spoken of shortly.
In broad terms the facts preceding the judgment are these: on or about 11 November 2005, the respondent’s father executed a deed of declaration of trust personally and as the receiver and manager of Ostabridge Pty Ltd, whereby he would hold mortgages which were then to be acquired over property in Yeppoon, in favour of himself, Pioneer Investments Aust (Pty Ltd) and the applicant as beneficiaries. Subsequently on 14 November he did indeed acquire the mortgages. On 16 December 2005 Kevin Shirlaw then exercised his power of sale under one of the mortgages over the Yeppoon property and transferred it for consideration $3.4 million to Zonebar Proprietary Limited.
Kevin Shirlaw then assigned to the applicant 50 per cent of the net proceeds of the sale receivable under the deed of company arrangement for Ostabridge and all other benefits arising from the property at Penrose in the southern highlands of New South Wales. Mr Smits then commenced proceedings against Mr Shirlaw in the Supreme Court of Queensland in relation to this assignment.
On 31 July 2006 Kevin Shirlaw executed a transfer and deed of assignment in favour of the applicant transferring his interest in the mortgages held on trust and five other mortgages to the applicant. Shortly after, on 13 June 2007, Pioneer assigned its beneficial interest in the mortgages to the applicant. On 15 October 2008 the applicant and Kevin Shirlaw then entered into a deed of settlement in relation to the sum of $87,000.
Presently, the applicant has on foot proceedings in the Supreme Court in relation to the respondent’s failure to account to him for the proceeds of sale of the Yeppoon property, Queensland Supreme Court proceedings BS9771 of 2009. The amended statement of claim in those proceedings is before the Court but it is unnecessary to expand upon it at this time. The judgment which gave rise to the applicant’s present difficulties relates back to a deed of agreement dated

15 October 2008 whereby the applicant agreed that he owed to the respondent, a sum of $87,000.
That fact appears from paragraph [9] of the judgment of Sorby DCJ in the District Court of New South Wales, who in trying the matter, summarised the claim to $87,000 as follows:
“By declaration of trust dated 11 November 2005, Kevin Shirlaw undertook to acquire and hold on trust for himself the defendant and Pioneer Investments Aust Pty Ltd various mortgages in relation to a property at Yeppoon, Queensland. By transfer dated 14 November 2005 Kevin Shirlaw became the registered owner of the mortgages as assignee from Citimark (The Galleries) Pty Ltd. Kevin Shirlaw exercised a power of sale under one of the mortgages, selling the Yeppoon property for $3,400,000. The sale concluded on 23 December 2005. By agreement dated 31 July 2006 the defendant undertook to indemnify Kevin Shirlaw from debts incurred by him in relation to Ostabridge Pty Ltd in return for the assignment to the defendant of his interests in:
a) The mortgages,
b) Kevin Shirlaw’s right in relation to the sale of the property, and
c) the trust under the declaration of trust dated 11 November 2005”.
The dispute arose in relation to the amount by which the defendant was required to indemnify Kevin Shirlaw. That dispute was in turn resolved by the deed of settlement dated 15 October 2008 for a sum of $87,000. That debt in turn was then assigned by Kevin Shirlaw to the applicant in the proceedings before Sorby DCJ and that fact appears in the pleadings.
In the claim before the District Court, the respondent to this application, that is Andrew Shirlaw, who is the son of Kevin Shirlaw, claimed the sum of $87,000 from the applicant/debtor pursuant to the deed of settlement. The debtor defended the claim in the District Court of New South Wales on two bases.
The first being a claim for an equitable set-off against Andrew Shirlaw’s claim arising as a result of a breach of trust and failure to account to the debtor, that is the subject of proceedings in the Queensland Supreme Court BS9771/09. Secondly, damages in respect of a breach of an agreement between the debtor and Mr Kevin Shirlaw, pursuant to which Kevin Shirlaw was required to acknowledge certain tax invoices to the Australian Tax Office (ATO), and take all reasonable relevant and lawful steps in facilitating recovery by the defendant of input tax credits in respect of those invoices.
In his judgment Sorby DCJ accepted that it would be inequitable for Andrew Shirlaw to enforce obligations owed to him by the debtor without taking into account the obligations which Kevin Shirlaw owed to the debtor. His Honour further found that the set-off is the subject of the Supreme Court of Queensland proceedings, and that matter should be determined by the Supreme Court of Queensland. In relation to the ATO agreement, his Honour looked at the interim determination by the ATO in relation to the debtor’s claim for input tax credits and found that the debtor had failed to demonstrate that the decision was based, in any way, on the failure of Kevin Shirlaw to submit and rely upon invoices in question.
His Honour said that damages could result if the debtor satisfied him that the invoices and any new representations by Mr Kevin Shirlaw would have resulted in a favourable ruling from the ATO. Based on that reasoning, his Honour concluded that the defendant had failed to do so and therefore the set-off failed. Those notices were subject to appeal to the New South Wales Court of Appeal which appeal was dismissed. Subsequently, application for special leave to appeal to the High Court has been sought. That matter has not yet been determined and the application is presently at an early stage.
It is however, I think important at this time to outline something of the Supreme Court proceedings which I have just spoken of. On

4 September 2009 the debtor commenced an action against Kevin Shirlaw by filing a claim and making a claim in the Supreme Court of Queensland, which were proceedings number BS 9771 of 2009. In the statement of claim the debtor alleged that he had acquired by deed and transfer executed on 31 July 2006 all the interests of Kevin Shirlaw in certain mortgage securities. It also made allegations against Kevin Shirlaw of breach of trust and failures to account and pay to him as a holder of all beneficial interests under a trust all and any of the proceeds of sale of certain land.
These were the same with respect to the same properties sought to be subject of the deed in the District Court proceedings. In that proceeding the debtor claimed among other things, an order for an accounting by Kevin Shirlaw of proceeds of sale of land, or for payment of $340,000 and or such other sum as may be found due by Kevin Shirlaw to the debtor and for an order for accounting by Kevin Shirlaw of the proceeds in realisation in respect of the transfer of the mortgagee security of 31 July 2006.
It is also important at this time to briefly address what transpired between the parties after these events. On 22 January 2010 the respondent’s solicitors received an email from the debtor indicating that the debtor proposed to counter-claim against Kevin Shirlaw in the District Court of New South Wales proceedings, and that the counter-claim would exceed the District Court jurisdictional limit, and that the proceedings may well all be transferable to the Supreme Court of New South Wales. In response to that, the respondent’s solicitors received a proposed statement of cross-claim from the debtor in the District Court of New South Wales proceedings.
On 9 March 2010 the debtor then informed the respondent’s solicitors that he would include the cross-claim in the proceedings in the Supreme Court of Queensland, that is in BS 9771 of 2009. On 28 October 2010 the respondent then obtained his judgment against the applicant in the District Court proceedings in New South Wales which I have earlier indicated were then subject to the appeals and subsequent application for special leave to appeal. In the meantime, on 18 January 2011, the debtor filed an amended statement of claim in the Queensland Supreme Court proceedings, alleging that in breach of trust, Kevin Shirlaw had paid $1,368,112.32 of the net proceeds of sale of the land to a company entitled Business Bridging Finance Proprietary Limited. He claimed equitable compensation in respect of that sum against Kevin Shirlaw in the amended statement of claim.
At or about the same time he commenced a second action against Kevin Shirlaw by filing a claim and statement of claim in the Supreme Court being proceedings BS 363 of 2011. In that statement of claim he alleged that Kevin Shirlaw was indebted to him in sums of $260,189.44 and $2,000,062 pursuant to clauses 1 and 5 of an agreement entered into between himself and Kevin Shirlaw on 18 April 2006, and claimed for judgment against Kevin Shirlaw in respect of those amounts.
It is against that background that the bankruptcy notice was issued on the request of the judgment creditor, Andrew Charles Shirlaw, and served upon the judgment debtor, Leonardus Gerardus Smits. In his application the applicant seeks, first, that there be an extension of time pursuant to s.41(6A) of the Act for compliance with the bankruptcy notice.
Section 41(6A) relevantly provides an extension of time by a court:
“...where, before the expiration of time fixed for compliance with the requirements of a bankruptcy notice;
(a) proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor or,
(b) an application has been made to the court to set aside the bankruptcy notice;
The court may, subject to subsection (6C) extend the time for compliance with the bankruptcy notice.”
Subsection (6C) provides:
“Where:
(a)     a debtor applies to the court for an extension of time for complying with the bankruptcy notice on the ground that proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor;
(b)     the court is of the opinion that the proceedings to set aside the judgment or order;
(i)     have not been instituted bona fide or;
(ii)   are not being prosecuted with due diligence;
the court shall not extend the time for compliance with the bankruptcy notice.”
In this instance there has been compliance with the essential procedural requirements required by the rules. In essence, the applicant contends that by it having filed its application for special leave to appeal in the High Court, and accepting at this time that there is no reason to believe such application has not been instituted bona fide and that it will be prosecuted with due diligence, the applicant submits that this is an appropriate occasion to accept that process as giving rise to an instance where, within time, application has been made to set aside the judgment.
It is not contested that the filing of a notice of appeal in the ordinary course would not be considered to be an application to set aside a judgment or order, see Bryant v North Bank of Australia[1] and Re Baker; Ex parte Baker v Staples[2] and Conway v Jackson.[3] It is further contended on the part of the applicant that an application for special leave to appeal to the High Court constitutes a procedure to set aside the judgment, see O’Loughlin v Glenmont Investments Pty Ltd[4] although that decision is distinguishable because the judgment in that instance which supported the bankruptcy notice was a Court of Appeal judgment and that was a judgment which was subject to the special leave application. The distinction is, I think, one which is not material by reason of the observations made by the court in Conway v Jackson (supra). There the court noted, at paragraph [19]:
“We consider that the purpose of section 41(6A) would more usefully be served by adopting the construction of the relevant words which includes an appeal from the judgment on which the bankruptcy notice if founded where that appeal in fact seeks to set aside the judgment.”
Their honours continued:
“That policy would not be served by restricting the ability to exercise that power so as to exclude its exercise in all cases where the judgment debtor has appealed from the judgment at first instance and seeks to set it aside. In Bryant at first instance Hill J made the point pithily in the following terms. “As a matter of policy it is hard to imagine why the court should have power to extend time for compliance where an application has been lodged in the same court in which judgment has been entered to set that judgment aside, but is refused that same power where judgment has been given but there has been an appeal against that judgment.” For those reasons, and subject to considering the cases on the meaning of section 41(6A)(a) we are of the view the expression “proceedings to set aside the judgment or order” includes the institution of an appeal from a judgment or order in respect of which the bankruptcy notice was issued where that appeal does in reality seek to have that judgment or order set aside.”
[1] (Unreported 9 May 1994) (BC9405749)
[2] [1995] FCA 703
[3] [2001] FCA 230; (2001) 107 FCR 207
[4] [2001] FCA 925
For reasons which I will address in a moment, applications for special leave are different to appeals but in any event, the object of the application and in turn any order that may follow following that application is, of course, in reality, to seek to have the judgment or order supporting the bankruptcy notice set aside on appeal and accordingly it follows in my view that the point of distinction has no bearing in these circumstances.
For the respondent, however, it was submitted that the situation here falls squarely within the situation considered by Lehane J in Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264 and Beaumont J in Westpac Banking Corporation v Carver (2003) 126 FCR 113; [2003] FCA 221. That is, where the debtor has sought special leave to appeal the judgment of the High Court, rather than commence an appeal as a right, it is not sufficient to ask whether the appeal is genuine and if there is an obvious or manifest error of law or fact in the judgment from which special leave is sought; it was submitted that the debtor must go further and show that there are arguable grounds for concluding that special leave to appeal will be granted.
In this case the debtor’s counsel submits that the Court of Appeal has conceded that the learned District Court Judge was in error; see State Rail Authority of New South Wales v Barnes [2001] NSWCA 133 at [13]. Notwithstanding that matter the court concluded at paragraph [14], the error did not justify the grant of special leave. The court in addressing the arguments at paragraph [15] and [16] concluded that the decision of the learned District Court Judge ultimately turned upon the exercise of discretion concluding at paragraph [17]:
“Having regard to all the considerations I have adverted to on the material provided to this court the chance that the Court of Appeal would exercise a discretion to give effect to the equitable set off claimed by [ ..... ] is insufficient to justify granting leave to appeal.”
In the application for special leave to appeal to the High Court, the grounds which were advanced were as follows.
“2.    The application relies on the following grounds:
2.1    The Court of Appeal erred in finding at 15 that equitable set off requires or permits the court to exercise a discretion as to whether to determine the merits of the defence, having regard either to the state of the evidence or the existence of other proceedings.
2.2    The Court of Appeal erred in finding at 16 that the absence of evidence as to whether Kevin Shirlaw was insolvent was irrelevant to whether the court should give effect to an equitable set off.
2.3    The Court of Appeal ought to have found that the primary judge erred in failing to determine the question as to whether Kevin Shirlaw had failed to account to the applicant on the basis of concurrent proceedings.
2.4    The Court of Appeal ought to have found that the primary judge did not have a discretion to refuse to consider that issue.
2.5    The discretion of the Court of Appeal in granting leave to appeal thereby miscarried.
2.6    The Court of Appeal ought to have found that the proposed appeal raised an important question of principle as to the obligation of the court to exercise its jurisdiction and to determine the questions in dispute.
2.7 The Court of Appeal erred in not deciding that the court below was obliged to order the transcript of proceedings to the Supreme Court of New South Wales under subsection 144(2) of the Civil Procedure Act 2005 NSW.”

In its submissions the debtor contended, as earlier noted, that there was no suggestion that the application for special leave was not bona fide or would not be prosecuted diligently. It contended significant sums were involved and the issue involved parties who were involved in a dispute over assets of significant value. They were, to the mind of the applicants, matters that gave rise to significant public interest issues.
It contended further that it is well settled that it is not appropriate for a court in these circumstances, that is upon hearing an application to set aside a bankruptcy notice, to make a preliminary determination of the likely outcome on appeal or in this instance of the special leave application.
It is submitted that it was apparent from the arguments advanced and the submissions filed on behalf of the applicant and respondent in relation to the leave to appeal application before the New South Wales Full Court which will follow into the special leave application, that both the application and the application for special leave and the appeal before the High Court are arguable. It was contended this is immediately apparent from a reading of a decision of the primary judge. It was submitted his decision demonstrates that he did not fully consider the question of equitable set off arising by reason of the Supreme Court proceeding and that his Honour’s comments that it was appropriate for the matter to be determined by the Supreme Court of Queensland were made without giving full consideration to the issue and giving proper reasons for that decision.
Those matters are dressed up in the grounds advanced or the grounds articulated in the application for special leave to appeal.
However, notwithstanding those matters, the respondent contended that it is difficult to see any basis for an assertion that the prospects for special leave are strong particularly when one has regard to the matters which must be considered in the context of an application for special leave.
The respondent particularly relied upon the observations of the court in Westpac Banking Corporation v Carver (supra) where Beaumont J, in considering a case involving an application in respect of a creditor’s petition considered the approach to be taken.
At paragraph [14] his Honour noted:
“It will be noted that the provisions of section 35A of the Judiciary Act are prefaced by the recognition that in considering whether to grant special leave the High Court may have regard to any matters that it considers relevant. What follows in subsections (a) and (b) are mandatory considerations.”
I interpolate here they are:
(a)whether the proceedings in which the judgment to which the application related was pronounced involved a question of law;
(i)that is of public importance whether because of its general application or otherwise or;
(ii) in respect of which a decision of the High Court, as the final appellate court, is required to resolve differences of opinion between different courts, or within one court, as to the state of the law;
(b)whether the interests of administration of justice, either generally or in the particular case, require considerations by the High Court of the judgment to which the application relates.
His Honour continued:
“The general approach taken by the High Court in considering whether to grant special leave in the exercise of its discretion to choose the appeals it will hear, has been explained by David Jackson in the title “Leave to Appeal” in Tony Blackshield Michael Coper and George Williams Oxford Companion to the High Court of Australia at page 426 as follows:
‘The selection of cases in which special leave is granted identifies the areas in which the law may be changed or confirmed and also the possible extent and pace of any change. For example, one result of the expanded requirement for special leave is that criminal appeals have become a significantly larger part of the Court’s work….The mix of cases plays a part in determining the extent to which the court attracts a description such as activist or conservative.
Cases where special leave to appeal is granted fall into two broad categories. Those in which a sufficiently important legal issue is involved and those where there has been a significant irregularity in the way in which the matter was dealt with in the courts below....The second category has been of particular importance in criminal cases but is also important in ensuring that civil cases at all levels are conducted according to law…
Applicants for special leave ordinarily need to demonstrate that the issue they seek to agitate is of sufficient importance to merit the grant of special leave and that the case is a suitable vehicle for the resolution of that issue and that their contentions on that issue are sufficiently arguable.
A case may not give rise to an issue of sufficient importance if it involves only a question of construction of a particular contract or a statute of limited application or a question that is otherwise unlikely to arise again or if the decision sought to be appealed from is interlocutory or if in reality only a question of fact is involved. A case may not be a “suitable vehicle” if the resolution of the issue is not essential to the ultimate determination of the litigation or is premature or if the necessary findings of fact have not been made or have been made against the applicant. Special leave will not be granted if the decision appealed from is not sufficiently attended by doubt. Even if the reasoning of the court below may be dubious, special leave will not be granted if the result arrived by that court is not sufficiently in doubt.’”
His Honour, Beaumont J then went on to consider what might be described as the special character of special leave applications which distinguish them in principle and practise from the exercise of appeals jurisdiction as was explained by McHugh J in SDN Children’s Services Inc v Hughes[5] which matters do not require any expansion in this instance except to explain that his Honour proceeded to note:
“By miscarriage of justice I mean such a departure from the rules that govern judicial procedures as to make the decision of the court below not a judicial decision in the proper sense of the term and therefore one where the business of the administration of justice requires the grant of leave.”
[5] Transcript No. 535 of 2002, 14 May 2002 unreported
His Honour concluded by resolving the issue for whether or not leave ought to be given in these terms, at paragraph [18]:
“In other words the question for this court is not simply whether the appeal is genuine and that there is an obvious or manifest error of law or a fact in the judgment from which special leave is sought. The respondent debtor must go further and show not only that the application for special leave to appeal is genuine but that there are arguable grounds for concluding that special leave to appeal will be granted given not only the provisions of section 35A of the Judiciary Act but also the other considerations explained by Mr Jackson.” (Being a reference back to the observations identified in paragraph 4 and which I have noted above.)
In considering that issue generally I am mindful that the debtor has on foot the proceedings in the Supreme Court which have not been resolved and furthermore that the present judgment has not been stayed although arguably can be subject to an application for a stay. Overall, while not wishing to express any particular view on the ultimate prospects of the debtor’s application for special leave, I am more inclined to the view that having regard to the background facts and in particular when one considers the judgment against the offsetting claim continued in another court and the reasons advanced by the Court of Appeal, the prospects are not such that they would be especially strong when particularly considered against the third criteria which I have identified.
As noted by McHugh J, that is whether the issue in question involves some matter of public importance or miscarriage of justice; meaning not a miscarriage in the sense merely because it appears that the decision below was wrongly decided but in the sense the miscarriage meant such a departure from the rules that govern judicial procedure is to make the decision not a judicial decision in the proper sense of the term.
The debtor’s application, based upon the decisions noted, is clearly going to be difficult when measured against those tests. In any event, the matter of whether or not an extension of time ought to be permitted under s.41(6A) is also one which must be considered by reference to general discretions at large; Byron v Southern Cross Star Group Proprietary Limited (supra); Re Taylor; Ex parte Deputy Commissioner of Taxation.[6]
[6] (1983) 74 FLR377
It is a discretion which should be exercised having regard to all relevant factors and not fettered of any particular rules. Here the relevant discretionary factors which were submitted ought apply are first, the application for special leave, secondly, whether or not the stay application has been made and/or granted, and thirdly, the question of general solvency.
The first two matters I have largely addressed and as I earlier indicated, on balance fall against the debtor’s application. So far as solvency is concerned it is clear from the uncontested evidence that the applicant himself is plainly solvent but for reasons that I will address shortly authority is also well settled that solvency itself does not ground a discretionary right to have an application for notice of extension of time for compliance granted.
Whilst evidence of solvency, which I will address in due course, will militate in favour of the grant of an extension of time, the fact remains that if the special leave application is unsuccessful then the time for compliance will automatically commence to run and matters of insolvency will not bear upon that fact.
On balance, I am of the view that this is not an appropriate application for an extension of time under s.41(6A) and accordingly will not make an order in those terms.
The second ground advanced by the applicant is for an extension pursuant to s.41(7). Section 41(7) relevantly provides where before the expiration of the time fixed for compliance of the requirements of the bankruptcy notice the debtor has applied to the court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counter-claim, set-off or cross-demand as is referred to in s.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, setoff 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.
In this regard the debtor contends that it has a set-off or cross-demand that he could not set up in the District Court proceeding. That is the equitable set-off in the judgment of Sorby DCJ and which now is the subject of the Supreme Court of Queensland proceedings. In addition, there is the second Supreme Court proceeding which the debtor pursues seeking to recover the $1.368 million from Kevin Shirlaw as a result of, among other things, alleged breaches of trust by Kevin Shirlaw following the sale on 16 December 2005 of the mortgaged property acquired by Kevin Shirlaw on trust for himself and the debtor and Pioneer Investments Australia Pty Ltd.
The defence to that proceeding pleads an alleged arrangement with the debtor to sell the property and pay the sum in dispute to a mortgagee, Bridging Finance Proprietary Limited. The pleadings were before me and there is perhaps little, to say beyond noting the broad canvass of the dispute. Unquestionably there is a serious question of fact to be determined in that application.
Broadly, the applicant submits the doctrine of comity effectively prevented Sorby DCJ from hearing, in his application, any part of the Supreme Court BS9771/09 proceedings, he having so found that the effect is that the claim on those proceedings was not set up in the District Court proceeding.
It was contended that once Sorby DCJ had found that he could not determine the issues raised in proceedings BS9771 of 2009, the effect of this was that they were not part of the matters before him and as a consequence of the finding an issue estoppel arose against the respondent. The debtor contends that the decision of Sorby DC.J refusing to entertain a cross-claim based on the matters raised in the Queensland Supreme Court proceedings BS9771/09 had the effect of an issue estoppel such that the respondent is estopped from asserting that equitable estoppel was able to be set up in the District Court proceedings and that that would be a complete answer to the respondent’s assertions on that point.
In respect of the second proceeding, the applicant contended that there is no doubt that in respect of that matter there is a prima facie case by the debtor against Kevin Shirlaw in relation to the agreement because broadly the agreement has been admitted; Mr Kevin Shirlaw has admitted to receiving a sum of approximately $2 million in relation to the sale of the property; and, Mr Shirlaw has referred to the disposition of part of the amount received, although he does not plead it in any defence. In relation to the other part, apart from perhaps an allegation that there was no obligation in the agreement to pay the funds, that there were no funds available at the time of the agreement. And in relation to the $520,000, in relation to the proceeds from Mr Alberrans net of expenses, he simply denies the amount received by him fits the description because he says the amount was not net of expenses and refers to an indemnity agreement between the parties as precluded in the claim.
However, the respondent contends that this outcome, whilst accepting it may now give rise to an issue estoppel, does not answer the question to be addressed by reference to s.40(1)(g). That is that it was a “counter-claim, set-off or cross-demand” that he could not have set up in the action or proceeding which the judgment or order was obtained. In short, the respondent focuses upon the prospects whereas the applicant focuses upon the actual outcomes.
So far as is relevant, the principles to be applied are conveniently summarised by Jacobson J in Tzovaras v Nufeno Pty Ltd [2003] FCA 1152 at 34-36 as follows:
“The question which arises is whether the cross-claim could have been set up as a matter of law. The position was stated succinctly by Lockhart J in re Brink ex parte the Commercial Banking Co of Sydney Limited. ‘The words that he could not have set up on the action of proceedings in which the judgment or order was obtained’ mean which he could not by law set up in the action. See re Jocumsen, etcetera, especially per Lukin J where his Honour said; “I take a counter-claim, se tup or cross-demand which could not be set up as one which from the point of time or from its nature or from the absence of empowering provisions or positive inhibition to do so could not be set up in the particular case in which judgment was obtained….failure to take advantage of the opportunity can hardly to be said to be inability”.
Hill J observed in re Ling, the question is not to be determined by reference to practicalities. It is to be answered by reference to legal considerations. Thus, as his Honour said, the mere fact that there was in that case an excuse as to why a cross-claim was not brought will not avail a debtor who seeks to come within section 41(7) of the Bankruptcy Act if a cross-claim could legally have been brought.”
In this instance, the creditor contends that the debtor’s right to cross-claim in proceedings in the Court of New South Wales is governed by s.22 of the Civil Procedure Act2005 NSW (CPA) and rule 9.1 of the Uniform Civil Procedure Rules2005 NSW (UCPR).
Section 22 of the CPA provides, subsection (2):
“The court may grant to the defendant in any proceedings, the first proceedings, such relief against any person whether or not a plaintiff in the proceedings as the court might grant against that person in separate proceedings commenced by the defendant for that purpose.
(2) Relief may not be mounted under this section against a person who is not a plaintiff in the first proceedings unless the relief relates to, or is connected with, the subject of the first proceedings.”
Rule 9.1 of the UCPR provides, 9.1:
“ (1) A party (the cross-claimant) may make a cross-claim;
(a) in proceedings commenced by statement of claim within the time limited for the party to file a defence or;
(b) …or within such further time as the court may allow”.
Rule 9.8 of the UCPR provides:
“The court may at any stage of the proceedings;
(a) may order that any cross-claim or question in or arising on any cross-claim is to be separately tried;
(b) direct generally the extent to which the usual procedures at a trial or hearing are to be modified because of the joinder of the cross-defendant”.
It was contended that the degree of connection, sufficient to justify a cross-claim against a third party is described in generous terms of s.22 of the CPA and the right to a cross-claim conferred by UCPR or rule 9.1 leaves the court with a discretion to refuse to allow a cross-claim in the proceedings. So much I think is correct.
At s.22.10 of the commentary of Volume 1 of Ritchie’s Uniform Civil Procedure New South Wales, the author comments that if the proposed cross-claim has a relevant connection with the subject matter of the proceedings and is brought in a timely fashion it would usually be appropriate to make facilitating directions under rule 9.8 of the UCPR rather than to disallow the cross-claim in the proceedings.
In relation to the position of a debtor who may need the court to exercise a discretion in his favour before he can set up a cross-claim as a cross-claimant in proceedings, Hill J, in Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129 observed:
“These cases, it seems to me, establish that a cross-claim would be one which could be set up in the action notwithstanding that to do so the debtor may need to transfer the proceedings first to another court or may need to obtain in his or her favour the exercise of a discretion before doing so. The onus of showing that the claim is not one that could have been set up in the creditor’s proceeding lies upon the debtor. That onus will not be satisfied merely by showing that some indirect course may need to be followed (that course being in the discretion of the debtor) nor by showing that there existed a discretion which could have been exercised against the setting up of the claim as a cross-claim. To satisfy that onus the debtor must show that as a matter of law and in the circumstances prevailing, he or she could not have set up the cross-claim.”
In this case the claims of set-off made by the debtor against

Kevin Shirlaw in the first proceeding and the second proceeding, are related or are connected with the subject matter of the claim made by the debtor against the creditor in the District Court proceedings in the following respects. First, in the first proceeding the applicant alleges that by transfer and deed of assignment, both dated 31 July 2006, Kevin Shirlaw assigned all of his legal and beneficial interest in certain mortgages held on trust and other mortgagees to the debtor and that in breach of the trust Kevin Shirlaw failed to account to the debtor for those proceeds and failed to pay to the applicant part of the consideration of the sale of one of the lots of land.
In the second proceeding the debtor alleges that by handwritten agreement executed on 10 April 2006 by Kevin Shirlaw and the debtor, Kevin Shirlaw assigned to him 50 per cent of the net proceeds receivable under a deed of company arrangement for Ostabridge, administered by Mr Alberrans and all other benefits arising from the property at Penrose in the southern highlands of New South Wales.

He further alleges that Kevin Shirlaw is indebted to him pursuant to clauses 1 and 5 of an agreement dated 18 April 2006.

In the District Court proceedings, the creditor sued the debtor for a debt due to Kevin Shirlaw under the deed of settlement dated 15 October 2008 which Kevin Shirlaw had assigned to the creditor. The deed of settlement contained the following recitals:
a)On 18 April 2006 and 31 July 2006, Leo gave written indemnities to Kevin in respect of any receivership liabilities incurred, suffered or assumed by Kevin in connection with Ostabridge Pty Ltd, the indemnities;
b)disputes have arisen between the parties as to the quantum of the moneys owed to me by Kevin under and pursuant to the indemnities;
c)the parties have agreed to settle Leo’s liability to Kevin under the indemnities upon the terms and conditions recorded below.
The next matter advanced by the creditor is that in the debtor’s defence in the District Court proceedings he alleged that the deed of settlement was made between he and Kevin Shirlaw in respect of indemnities contained in and arising out of the two assignment agreements made between the parties on 18 April 2006 and 31 July 2006 and that the assignment by Kevin Shirlaw of his rights under the deed of settlement were subject to equities and included the rights of set-off available to the debtor arising out of the breaches of trust and failures to account arising out of the deed of assignment dated 31 July 2006. Finally, it was contended that the breaches and failures to account were the subject of the first proceeding, that is the Supreme Court proceedings, between the debtor, as plaintiff, and Kevin Shirlaw as defendant.
It follows that in the first proceeding the applicant has claimed equitable compensation of $1.36 million against Kevin Shirlaw and in the second proceeding, the debtor has claimed judgment against

Kevin Shirlaw in the sum of $2.26 million. Pursuant to s.4 and s.44(1) of the District Court Act1973 (NSW) (DCA), the District Court of New South Wales has jurisdiction to hear and dispose of actions up to the court’s jurisdictional limit of $750,000. Section 134(1)(h) of the DCA provides the District Court of New South Wales has the same jurisdiction as the Supreme Court of New South Wales in proceedings for:
“…any equitable claim or demand for recovery of money or damages whether liquidated or unliquidated in an amount not exceeding the court’s jurisdiction limited.”
It has been accepted that in construing s.134(1)(h) the court has power to enforce an equitable claim for recovery of money or damages and thus it would apply to a claim between a mortgagor and mortgagee or a claim for equitable damages or equitable compensation, Ciccarelli v Cavasinni Developments [2004] NSWSC 788 at 87.
Pursuant to s.51 of the DCA, the District Court has jurisdiction to hear and dispose of an action or cross-claim or for an unliquidated amount if a part to the action or cross-claim files a memorandum of consent signed by each party to the action or cross-claim. Section 140 of the Act provides that the Supreme Court may of its own motion or an application by a party to the proceedings before the District Court or the Local Court order that the proceedings, including any cross-claim in the proceedings, be transferred to the Supreme Court.
Further more s.144 of the DCA provides:
(2) “If during proceedings to which this section applies the District Court decides that it lacks or may lack jurisdiction to hear and dispose of the proceedings the District Court must order that the proceedings be transferred to the Supreme Court.
(3) Proceedings that are transferred to the Supreme Court, subsection (2)(a) are to be continued in the Supreme Court;
(1) As if the proceeding had been duly commenced in the Supreme Court on the date in which they were commenced in the District Court;
(2) as if any cross-claim in the proceedings have been duly made in the Supreme Court on the date on which it was made in the District Court.”
In Tzovaras v Nufeno (supra), an applicant applied under ss.47(1) of the Act to set aside a bankruptcy notice upon grounds that the applicant had a counter-claim, set-off or cross-demand as referred to in s.40(1)(g). There the applicant claimed he had a cross-claim for equitable damages which he could not have set up in the action or proceedings below in the District Court of New South Wales.
Jacobson J there was of the opinion that the District Court did not have jurisdiction as the proposed cross-claim was not an equitable claim of the type referred to in s.134(1)(h) of the DCA and said at [39]:
“But it does not follow that the cross-claim was one which could not have been set up “in the action or proceeding.” This is because section 145 of the District Court Act provides that proceedings may be removed into the Supreme Court by order of that court on such terms as the Supreme Court thinks fit.”
At paragraph [54], his Honour continued:
“In any event, the principle which applies in circumstances where leave to file a cross-claim is needed was, in my view, correctly by O’Loughlin J in re Willats ex parte Nissan Finance Corporation Limited. There his Honour said: ‘ If the particular circumstances of a case requires a debtor to seek and obtain leave to file a defence and/or counter-claim and he seeks and obtains that leave, then his counter-claim is one which, in my opinion, he could have set up in the relevant action and this will be so whether he does or does not file his counter-claim. If, on the other hand, he either fails to seek leave or having sought leave, fails to obtain it, it cannot be said that the counter-claim thereby becomes one which he could not have set up. His failure to act or his failure to obtain leave can never be the exclusive test. One must look at the substance of the counter-claim and determine whether it comes with the definition of Lukin J in Stokvis’ case.’”
In Re Franks; Ex parte GIO Holdings Ltd (1990) 24 FCR 398 the debtor argued that the cross-claim could not have been set up in the District Court because it exceeded the jurisdictional limit. It was held that the plaintiff may have either abandoned the excess over the monetary limit of the District Court or applied to the Supreme Court to have the proceedings transferred. However, it was clearly open to the debtor to pursue this application. The debtor elected not to do so. There is no reason to suppose that the discretion to transfer would not have been exercised in the debtor’s favour or the cross-claim may have been set up in the action or proceedings in which the judgment was obtained.
Of course, a plaintiff, in the same situation as in the Franks’ (supra) case has a third option and that is to consent to the unlimited jurisdiction to the District Court under s.51 of that Act. In any event, the case established that a failure to obtain a leave to make a claim or failure to bring an application to have an action removed to another court with jurisdiction to entertain the monetary limit of the claim is merely a failure to take advantage of an opportunity and does not amount to a claim which could not, as a matter of law, have been set up in the original action: InRe Brink; Ex parte the Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135.
The evidence was that in the period from 22 January to 2010 to

25 February 2010 the debtor actively took steps with a view to pursuing a proposed cross-claim against Kevin Shirlaw in the District Court Proceedings. He was aware that the quantum of the proposed cross-claim would exceed the jurisdictional limit of the District Court and that an application would be necessary to transfer the proceeding to the Supreme Court. However, on or about 9 March 2010 he abandoned the prospect of pursuing such a cross-claim in the District Court proceedings in favour of pursuing claims against Kevin Shirlaw in the Supreme Court of Queensland. Quite plainly, in this case, there was, in my view, a failure by the debtor to take advantage of an opportunity. This was a failure by the applicant to take advantage of an opportunity, not a case of inability by the debtor to set up a counter-claim, set-off or cross-demand against Kevin Shirlaw in the District Court proceedings.
While undoubtedly the finding against the debtor by Sorby DCJ serves to bind the parties to the prosecution of the action in other proceedings, it was not a finding binding on the rights at issue in the other proceedings. It follows, in my view, for the reasons that I have stated, that this is not a case where the debtor was unable to prosecute his counter-claim, set-off or cross-demand in an action or proceeding in which the judgment was obtained. This ground also fails.
Finally, the applicant advanced two other grounds. The first was that there was in fact no debt and secondly, that the proceedings themselves in any event constitute an abuse of process. So far as there being no debt, the applicant relied principally upon the well established authorities in Wren v Mahony[7] and others that the court may go behind the judgment in the case of an application to satisfy the bankruptcy notice in order to determine whether the judgment debt could be impeached. If so, once the court finds there is doubt as to whether or not there is in truth and reality a debt, then the burden shifts upon the judgment creditor, see Corney v Brien (1951) 84 CLR 343 .
[7] (1972) 126 CLR 212
It was submitted that in this case the court ought to go behind the judgment obtained at the first instance for reasons which were advanced in the debtor’s outline. In particular, the debtor contended it was plain from the judgment of Sorby DCJ that the debtor had an equitable set-off against the respondent and that that set-off was the subject of Supreme Court proceedings. That, of itself it was contended, would permit the court to go behind the judgment. However, that matter does not bear upon the efficacy of the judgment itself. The judgment was a proper judgment. The defence now articulated, was not advanced at that time because of the tactical decisions taken by the debtor in the manner in which the proceedings were prosecuted.
But in any event, the matter of whether or not there was indeed a true debt, I think, comfortably falls into an examination of his second matter which is whether in fact the application constitutes an abuse of process and for that reason I will not expand upon it.
So far as that last matter is concerned, that is whether or not the application is an abuse of process, it is well settled that it is open to a court to dismiss a bankruptcy notice if the applicant proves that he is solvent and identifies that the application is improperly motivated; see generally Amos v Brisbane TV Ltd [2000] FCA 825; (2000) 100 FCR 82.
In that decision his Honour Drummond J considered the context in which an abuse of process arose.
It is fair to say at the outset that solvency itself will not enliven the court’s discretion to set aside a bankruptcy notice under s.30 of the Bankruptcy Act on the basis that it constitutes an abuse of process.
It is, in the current context, unnecessary to expand upon his Honour’s analysis on that matter, particularly commencing at paragraph [15], but rather to proceed immediately to his Honour’s conclusion which was addressed in passing at paragraph [21]. There his Honour said:
“The court can only set aside a valid bankruptcy notice on the ground that the debtor is solvent, if the creditor’s use of the notice can in all the circumstances of the particular case be characterised as an abuse of process.”
Some guidance in relation to this can also be found in the commentary in McDonald, Henry and Meek on Bankruptcy Law in Australia, paragraph 10.0150 where, in part, the learned authors note that if it is apparent that the purpose of the bankruptcy notice is to put pressure on the debtor to pay a debt rather than to invoke the court’s jurisdiction in relation to insolvency then the filing of a bankruptcy notice is an abuse of process.
In this case the relevant background facts require revisiting. I have earlier addressed the principal issues in dispute but in doing so have not touched upon the parties in any great detail. I earlier noted that the judgment creditor and Mr Kevin Richard Shirlaw, are related. It is also worthy of note that the deed underlying the bankruptcy notice, that was a deed entered into between the debtor and Mr Kevin Richard Shirlaw was for a sum of $87,000. Mr Kevin Richard Shirlaw assigned that deed to his son, the judgment creditor, for a sum of $4,350. There appears to be no rational explanation for the significant discount on the transfer or assignment of that chose in action.
Significantly, however, the facts demonstrate, as can be seen in the most recent affidavit of the debtor filed on 13 June 2011, that there was a long extensive history of business dealings and disputes arising from those dealings between the debtor and Mr Kevin Richard Shirlaw. Those dealings become even murkier when one has regard to the second Supreme Court proceeding which involves not only an action between the debtor and Kevin Richard Shirlaw but also a solicitor who has an interest in the outcome of those proceedings as a member of one of the entities, the subject of those proceedings. That solicitor, by reason of his own conduct, has put the parties on notice about risk of an action arising from mortgages that were supposed to be prepared in respect of Zonebar, a company which is referred to in those proceedings.
It is also significant to note that not only are the parties involved in proceedings but the events giving rise to the assignment of the deed between Kevin Richard Shirlaw and the judgment creditor appear to have some temporal relationship with a statement made by the debtor to Kevin Shirlaw’s solicitor at the time, one Malcolm Johns who was also acting for the debtor in another matter.
In the course of conversation, the debtor informed the solicitor that he had been advised by another firm of solicitors in a separate and distinct matter, that he should consider assigning an unrelated debt in order to quarantine it from associated issues for debt recovery purposes.

The inference that one is asked to infer in the circumstances is that, having regard to that advice, the solicitor in turn informed Mr Shirlaw who then in turn acted upon that suggestion to his own advantage by assigning the deed to his son. The material advantage, of course, being to the parties that if one were successful in the prosecution of the application to its conclusion and a trustee was appointed there would be material advantage to all involved in the litigation against the debtor whose conduct of litigation would then be subject to the discretion of his trustee in bankruptcy.
Plainly, having regard to the background facts and the Gordian knot that these inter-twinging proceedings between these parties present, a significant procedural advantage would accrue to those other parties in having the debtor sequestrated in terms of resolving those other matters. It is, in my view, quite plain, having regard to that background and putting aside questions of solvency, that there is more in this application than meets the eye. This is not, from my reading of the material, a vanilla application for sequestration of a plainly insolvent debtor.
As earlier noted, the debtor has significant assets. I have an uncontested valuation of his worth of at least $12 million. However, more significantly there is substantial tactical advantage to be gained by the creditor and those associated with him in tying the debtor up in sequestration proceedings because of the related proceedings which are presently on foot. On that basis I am satisfied that the applicant has indeed demonstrated that, in this instance, the creditor’s use of the notice can be characterised as being an abuse of process.
In all of the circumstances, as I have indicated, I am not prepared to make orders enlarging time to comply with the notice pursuant to s.41(6A) or s.41(7). However I am satisfied this is an appropriate case to and I will, order that the notice be set aside pursuant to s.30 of the Bankruptcy Act. I will reserve the matter of costs.

I certify that the preceding eighty-eight (88) paragraphs are a true copy of the reasons for judgment of Burnett FM

Date: 31 August 2011