Sobbi v Singer - [2009] FMCA 743

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SOBBI v SINGER

[2009] FMCA 743

BANKRUPTCY – Application to set aside a Bankruptcy Notice – counter-claim set-off or cross claim not established – application dismissed.

Bankruptcy Act 1966 (Cth), ss.40(1)(g), 41(7)
Civil Procedure Act 2005 (NSW), ss.67, 96
Local Courts Act 1982 (NSW), (repealed), s.57
Local Court Act 2007 (NSW), s.64
Legal Profession Act 1987 (NSW) (repealed), ss.208, 208A
Legal Profession Act 2004 (NSW), ss.367(1), 368
Uniform Civil Procedure Rules (NSW), rr.9.1, 9.10

Bhattacharya v Berger [1999] FCA 883
Ebert v The Union Trust Company of Australia Limited [1960] 104 CLR 246
Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135
Re Judd: Ex-parte Pike (1924) 24 SR (NSW) 537

Applicant:

GHANDI FAIZI SOBBI

Respondent:

SIMON JAMES SINGER T/AS DAVID LANDA STEWART LAWYERS

File Number:

SYG 3647 of 2007

Judgment of:

Lloyd-Jones FM

Hearing date:

2 June 2009

Delivered at:

Sydney

Delivered on:

10 August 2009

REPRESENTATION

Mr Ghandi Sobbi assisted by his son Mr Alan Sobbi

Solicitors for the Respondent:

David Landa Stewart Lawyers

ORDERS

The application filed on 26 November 2007 seeking Bankruptcy Notice NN4266 of 2007 be set aside is dismissed.
The applicant is to pay the respondent’s costs fixed in the sum of $3,500.00 plus GST.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 3647 of 2007

GHANDI FAIZI SOBBI

Applicant

And

SIMON JAMES SINGER
T/AS DAVID LANDA STEWART LAWYERS

Respondent

REASONS FOR JUDGMENT

The proceedings

By an application filed on 26 November 2007, Ghandi Faizi Sobbi (the applicant debtor) sought pursuant to s.40(1)(g) of the Bankruptcy Act 1966 (Cth) to have the Bankruptcy Notice NN4266 of 2007 issued by Simon James Singer trading as David Landa Stewart Lawyers (the respondent creditor) set aside on the basis that Mr Sobbi has a counter-claim, set-off or cross-demand equal to or exceeding the sum specified in the Bankruptcy Notice.
There is essentially one issue agitated in this matter, that is, whether

Mr Sobbi can establish to the Court’s satisfaction that a cross-claim, counter-claim or set-off within the bounds of the Bankruptcy Act exists. The Court has been advised of a stay of enforcement of the Supreme Court of New South Wales judgment on which this Bankruptcy Notice is based. As long as that stay remains in force, the creditor is prevented from presenting a Creditor’s Petition which relies on the act of bankruptcy that occurs under the force of the Bankruptcy Notice NN4266 of 2007.

Background

On 23 February 2006, the creditor filed an application for a costs assessment against Mr Sobbi under the Legal Profession Act 1987 (NSW) (repealed). It sought an assessment of a number of invoices issued to Mr Sobbi in respect of legal services provided. Mr Sobbi raised the issue of having deposited with the creditor a quantity of opals as security or payment for fees.
The costs assessors concluded the assessment and on 30 April 2007 the local court at the Downing Centre entered judgment against Mr Sobbi in the amount of $41,284.23 following the filing of the certificate under ss.367(1) and 368 of the Legal Profession Act 2004 (NSW).

On 6 November 2007, the Bankruptcy Notice was served on Mr Sobbi. On 26 November 2007, the application to have the Bankruptcy Notice set aside was filed. On 10 December 2007, separate proceedings were commenced by Mr Sobbi, his wife and son in the Supreme Court of New South Wales.
The following material has been filed by Mr Sobbi although he has made no formal application to read the affidavits. As he is self-represented and does not appear to be conversant with the procedures of the Court, I will record the material filed in order to complete the Court records:
a)Affidavit of Ghandi Faizi Sobbi sworn on 15 November 2007;
b)Affidavit of Alan Sobbi sworn on 25 March 2008;
c)Affidavit of Alan Sobbi sworn on 26 May 2009.
At the commencement of the hearing, Alan Sobbi sought leave to tender the Statement of Claim in the Supreme Court of New South Wales proceedings 16215 of 2007. As the respondent did not object to its tender, I accepted the document into evidence.

Submissions made on behalf of Mr Sobbi

Alan Sobbi, on behalf of his father, submits that the security provided to Mr Singer was not the actual security the Sobbis gave to him, being a package of opals. Alan Sobbi submits that the opals now held and which were recently inspected are not the opals that the Sobbi’s provided to Michael Zwar, a solicitor previously employed at David Landa Stewart Lawyers. There has been no explanation provided to the Sobbis as to where the original opals are. The Court was advised that this issue is being pursued in the Supreme Court and scheduled for hearing in September 2009. The evidence to be presented in that Court is recorded in the affidavit of Alan Sobbi sworn on 26 May 2009. That evidence is the extent of Mr Sobbi’s case.

Creditor’s submissions

Mr Bors, for the respondent, submits that the Bankruptcy Act and the relevant authorities are clear that there are three hurdles Mr Sobbi needs to overcome to establish a bona fide claim (although it is not necessary to prosecute the claim). One element not referred to in the applicant’s evidence is that the counter-claim could not have been set up as a matter of law in proceedings where the judgment of the Bankruptcy Notice came about. There are two possibilities in this regard:
a)Whether the counter claim could have been set up in the costs assessment regime; or
b)Whether the counter-claim could have been set up in the Local Court, being the court which issued the judgment following presentation of a certificate of a costs assessment.
Mr Bors submits with respect to the costs assessment regime that if regard is given to the letters from the costs assessor (affidavit of Alan Sobbi sworn 25 March 2008), in particular para.5 of the letter from MG Filewood (annexure A) which mentions Alan Sobbi’s letter to the Court of 14 March 2006 that opals to the value of $70,512 were delivered to
Mr Stewart for his fee or part thereof. Annexure G to the same affidavit is correspondence from the costs assessor to Mr and Mrs Sobbi which refers again to the issue of the opals. Paragraph 3 states:
With respect to the issue of the jewellery I do not believe I am in a position to factually determine whether the same was delivered as security of costs for the briefing of counsel or otherwise. There is no application before me for assessment of a counsel’s fees. I am not in a position as assessor factually determine the value of the jewellery. The only which appears to be common ground is that some jewellery was delivered by Mr Alan Sobbi and is held in a safe at David Landa Stewart. I am not in a position to determine ownership or otherwise of that jewellery.
Mr Bors submits that both the Summons and Statement of Claim suggest that there was an arrangement to provide a package of opals either as security or in payment of fees. It is clear from the terms of ss.208 and 208A of the Legal Profession Act 1987 (repealed) that was within the powers of the assessor to construe the terms of the agreement to provide legal services. To the extent that it has been suggested that the opals were either given in payment of fees or as security for fees to be incurred, the assessor has the power to construe this on the contract. If it was suggested that credit ought to be given for a value to be given to those opals, then again there was a matter that the costs assessor might have determined. Further, Annexure A to the same affidavit (letter from MG Filewood to David Landa Stewart) shows that Mr Sobbi had made a payment of $2000 towards fees on at least one occasion.
Mr Bors submits that, consequently, the counter-claim arose at least out of the contract to provide legal services and could have been dealt with by the costs assessor in the costs assessment framework.
Alternatively in respect of whether or not the counter-claim could have been pursued in the Local Court (being the Court which issued the judgment) following presentation of the certificate of a costs assessment, the Uniform Civil Procedure Rules2005 (NSW) specifically provides that a cross-claim may be prosecuted even after judgment has been given. Mr Sobbi could also have availed himself of the provisions relating to set-off of a judgment in the same Court. Consequently the position in respect of a counter-claim could have been, as a matter of law, ventilated in either the costs assessment or in the Local Court. There is no evidence to the contrary before the Court.
Mr Bors referred to Bhattacharya v Berger [1999] FCA 883 at [36] where Einfeld J addressed the issue in a costs assessment framework having regard to ss.208 and 208A of the Legal Professional Act 1987 (repealed).
Mr Bors raised the following issues in respect of the counter-claim equalling or exceeding the amount the subject of the Bankruptcy Notice:
a)That the counter-claim does not seem to be quantified in the correct terms other than a reference to the entry listed in Annexure A to the affidavit of Ghandi Sobbi. Mr Bors directed the Court’s attention to the differential between the cost price and the retail value which is double the cost price.
b)That there is no point of departure between the relief sought in the Statement of Claim and the Summons and, significantly, that no monetary relief was claimed but rather a declaratory relief.
c)That the presence of Alan Sobbi as plaintiff in the Supreme Court action raises an issue of whether there are any changes in the figures at stake or the entitlement of any of the parties.
d)That the counter-claim relied upon in the terms of s.40(1)(g) of the Bankruptcy Act could have been set up in proceedings relevant to that claim.

Consideration

In order to succeed, Mr Sobbi must satisfy the Court that:
a)He has a counter-claim, set-off or cross-demand, and
b)That the counter-claim could not have been, as a matter of law, set up in the proceedings in which the judgment or order was obtained, and
c)The counter-claim is equal to or exceeds the amount of the judgment debt.
Mr Sobbi bears the onus of establishing each of these elements to the satisfaction of the Court.
The test for a counter-claim is found in Ebert v The Union Trust Company of Australia Limited [1960] 104 CLR 246 at 350 per Dickson CJ, McTernan and Windeyer JJ:
The debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make a prima facie case before a court trying the issue that are involved in his counter-claim, set-off or cross-demand.
In Re Judd: Ex-parte Pike (1924) 24 SR (NSW) 537, Maughan AJ stated:
There is no authority which I am ware decided what limits (if any) or to be placed on the words “counter-claim, set-off or cross-demand” I think that the legislature by the word “counter-claim” probably refers to those claims which might be subject to a counter-claim in equity and by the word “set-off” to those claims which might be subject to a set-off at common law. The other term “cross-demand” however is not a technical term and must in my opinion refer to the claim other than those which would be comprised in two expressions “counter-claim” and “set-off”.
This passage was cited with approval by Lockhardt J in Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135.
The extent of the counter-claim relied upon by Ghandi Sobbi is encompassed in the Supreme Court of New South Wales Summons in proceedings 16215 of 2007, which sets out the following pleadings and particulars:
1. The first, second and third plaintiffs are at all times natural persons.
2. The first plaintiff is a Jeweller and was trading at 227 Macquarie Liverpool and 325 Westfield Burwood.
3. The second plaintiff is the son of the first and third plaintiffs and at all material times is and was a Jeweller employed by the first Plaintiff.
4. The First Defendant is and was at all material times a Solicitor, Partner who practised at 86-90 Bay Street Broadway NSW, under the firm name David Landa Stewart.
5. Michael Zwar is and was at all material times a solicitor and was a partner who practised at 86-90 Bay Street Broadway NSW, under the firm name of David Landa Stewart and was the first defendant in these proceedings.
6. On or about 14 April 2003, the plaintiff contracted the First Defendant to provide legal services in relation to a settlement of a loan and discharge of a mortgage.
7. In early August 2003, an agreement was reached between the First Plaintiff and Michael Zwar, the First Defendant, whereby the first plaintiff agreed to provide jewellery as security and or payment for legal costs in return for legal services.
8. On or about 10 August 2003, the second plaintiff delivered to the First Defendant 29 opal stones valued at $72,512.00.
Particulars
Inventory supplied opals on 10 August 2003.
9. On or about April 2004, the plaintiff terminated the retainer of the Defendant.
10. On or about 23 June 2006, the Defendant made an application for an assessment of costs, claiming costs in dispute totalling $71,227.35 plus interest.
11. The first and second Plaintiffs sent letters to the first Defendant and Mr Michael Zwar demanding payment or the return of the opals delivered by the second plaintiff into the defendant’s custody on or about 10 August 2003.
12. On or about 24 January 2008 the second plaintiff attended the offices of the first defendant to inspect the opal stones delivered by the second plaintiff into the defendant’s custody on or about 10 August 2003.
13. The first defendant produced 32 Opal stones for inspection; Non[e] of 32 Opal stones were the Opal stones delivered by the second plaintiff into the defendant’s custody on or about 10 August 2003.
14. The first defendant refused to set off the quantum of the assessed bill of costs against the value of the Opal stones delivered by the second plaintiff into the defendant’s custody on or about 10 August 2003 and pay the remaining amount after set-off.
15. The Opal stones produced by the first defendant to the Court on 30 June 2008 are not the Opal stones delivered by the second plaintiff into the defenant’s custody on or about 10 August 2003.
The details set out in the Supreme Court particulars and pleadings are substantially the same as those contained in the affidavit of Ghandi Sobbi sworn on 15 November 2007. However it should be noted that the Bankruptcy Notice was issued against Ghandi Sobbi whereas the proceedings commenced in the Supreme Court had three plaintiffs – Ghandi Sobbi, his son, Alan Sobbi, and his wife, Zakiyeh Sobbi. Whether or not the presence of the additional two plaintiffs in the Supreme Court proceedings will lead to any change in the pleadings or the entitlement of either party is not known until the matter finalised. Significantly, both set of pleadings do not correctly claim monetary relief but are rather expressed in terms of declaratory relief. The nature of the documents before this Court do not express the normal terms of a counter-claim as a qualified amount.
The second issue is whether the counter-claim could have been set up in the proceedings in which the judgment was obtained. This was raised in the Supreme Court proceedings should have been ventilated there but was only raised in the context of the actual costs assessment. Alternatively, the issue could also have been raised by way of a cross-claim in the Local Court proceedings.
The authority for this approach is in Re Brink at 141 where Lockhardt J states:
Usually a hearing under s 41(7) takes place where the debtor has commenced or is about to commence proceedings in a court of competent jurisdiction against a judgment creditor to establish his counter-claim, set-off or cross-demand. Generally it is that court which would hear and determine the counter-claim, set-off or cross-demand not a court exercising jurisdiction in bankruptcy.
In Bhattacharya v Berger, Einfeld J considered that the statutory costs assessment regime under the Legal Profession Act 1987 (NSW) provided for claims to be made and determined in the course of the assessment process. His Honour stated at [36]-[37]:
[36] Clearly, a combination of sections 208(1) and 208A(1) of the Legal Profession Act provided the debtor with the opportunity to raise with the Assessor the negligence and breaches of contract and of statutory duty alleged against Mr Freedman. One item of set off was obviously raised because the Assessor determined that he was to be given a credit for $11,000 already paid. He could also have made the allegations he now makes on appeal from the Assessor's determination, at least in the form that the Assessor erred in law by not considering them as mandated by section 208A(1) and, if considered and rejected, by not giving reasons for their rejection. In fact he did not raise them until a Bankruptcy Notice was issued. The earlier equity proceedings show that until the Bankruptcy Notice, the debtor was holding people other than Mr Freedman responsible for his plight and his losses even if he expressed the causes of action somewhat differently.
[37] In my opinion, the verified statement of claim and the affidavits in support of the application do not establish that the debtor has a counter claim against Mr Freedman exceeding the debt claimed, nor has it been proved that he was prevented by law from setting up within the framework of the application for the assessment of costs the claims there made.
The issue of the value of the opals was raised in the course of the costs assessment (affidavit of Alan Sobbi sworn on 25 March 2008, Annexure A) and further submissions in that regard were sought by the costs assessor (affidavit of Alan Sobbi sworn 25 March 2008, Annexure G). Sections 208 and 208A of the Legal Profession Act 1987 (repealed) empower a costs assessor to construe the terms of the contract to provide legal services and extend any terms in respect of security. Consequently, Mr Sobbi was able to claim a set-off in respect of the value of the opals in the context of the cost assessment. The evidence before the Court suggests that he had pursued this course but appeared to have allowed the claim to lapse. Alan Sobbi did not address this issue in his submissions and it is not immediately apparent why this course was not furthered pursued.
Alternatively, Mr Sobbi could have pursued his counter-claim in the Local Court following entry of the judgment upon which the Bankruptcy Notice was based. Rule 9.10 of the Uniform Civil Procedure Rules provides that a cross-claim may proceed even if:
(a) judgment has been entered on the originating process in the proceedings from which the cross-claim arises or any other cross-claim in the proceedings, or
(b) the proceedings on the originating process or any other cross-claim have been stayed, dismissed, withdrawn or discontinued.
Consequently it is open to Mr Sobbi to:
a)Seek a stay of any enforcement of the Local Court judgment under s.67 of the Civil Procedure Act 2005 (NSW) and/or s.64 of the Local Court Act 2007 (NSW) or s.57 of the Local Courts Act 1982 (NSW) (repealed), depending on when the application was made,
b)Seek leave to issue a cross-claim under r.9.1 of the Uniform Civil Procedure Rules, noting r.9.10,
c)Prosecute his claim for a set-off or cross-claim relying upon s.96 of the Civil Procedure Act 2005 (NSW).
There is no evidence before the Court that this course of action has been pursued. Alan Sobbi made no submissions to indicate that his asserted counter-claim was considered or ventilated before the Local Court.
The third issue to be considered is whether the counter-claim equals or exceeds the debt referred to in the Bankruptcy Notice. Sections 41(7) and 40(1)(g) of the Bankruptcy Act state that a counter-claim, set-off or cross-demand must be expressed in an amount of money although it is not necessary that the claim be for a liquidated sum. The claim is not required to be expressed as a sum of money but it must be capable of being quantified in monetary terms in any affidavits filed in the proceedings: Re Brink (supra) at 138.

I accept the written submissions of Mr Bors that the counter-claim made by the Sobbis has not been expressed in monetary terms and note:
a)There is no evidence quantifying the counter-claim;
b)The summons does not seek monetary relief rather an order that “legal costs be set off against the jewellery”;
c)It is claimed that the opals have a cost/wholesale value of $32,960.00 (including GST) or a retail value of $72,512.00 (including GST): affidavit of Ghandi Sobbi sworn on 15 November 2007, Annexure A;
d)There is no evidentiary basis as to why the “cost/wholesale value” of the opals, rather than their “retail value”, should be applied in the assessment of any set-off;
e)There has been no independent valuation of the opals.

Conclusion

On the evidence before the Court, it is not possible to be satisfied that the three necessary elements to establish the requirements of s.40(1)(g) of the Bankruptcy Act have been satisfied. The claim that a counter-claim, set-off or cross-demand equal too or exceeding the amount in the judgment debt has not been established The application to set aside Bankruptcy Notice NN4266 of 2007 is dismissed. The Court notes that the Supreme Court of New South Wales has issued a stay in respect of enforcement of the judgment underlying the Bankruptcy Notice until proceedings before that Court are finalised. This application is dismissed with costs to be agreed or, in the absence of agreement, to be assessed.

I certify that the preceding twenty-seven (27) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM

Associate:

Date: 10 August 2009