Starrs v Commonwealth Bank of Australia
[2013] FCCA 2381
•5 December 2013
FEDERAL CIRCUIT COURT OF AUSTRALIA
| STARRS & ANOR v COMMONWEALTH BANK OF AUSTRALIA | [2013] FCCA 2381 |
| Catchwords: BANKRUPTCY – Application to set aside Bankruptcy Notice – debtors allege creditor has breached arrangement pursuant to which the creditor agreed not to bankrupt the debtors – whether allegations amount to counter-claim, set of or cross-demand. |
| Legislation: Federal Circuit Court Act 1999 Bankruptcy Act 1966 s.40 |
| Cases Cited: Zakrzewski v Rodgers (2000) 178 ALR 694 Gould Ex Parte Skinner (1983) 72 FLR Guss v Johnstone (2000) 171 ALR 598 James v Abraham (1981) 51 FLR 16 Vogwel v Vogwel (1939) 11 ABC 83 |
| First Applicant: | JANINNE RUTH STARRS |
| Second Applicant: | CHRISTOPHER DAMIEN STARRS |
| Respondent: | COMMONWEALTH BANK OF AUSTRALIA |
| File Number: | ADG 16 of 2013 |
| Judgment of: | Judge Lindsay |
| Hearing date: | 5 December 2013 |
| Date of Last Submission: | 5 December 2013 |
| Delivered at: | Adelaide |
| Delivered on: | 5 December 2013 |
REPRESENTATION
| Counsel for the First Applicant: | In Person |
| Solicitors for the First Applicant: | Not applicable |
| Solicitors for the Second Applicant: | In Person |
| Solicitors for the Second Applicant: | Not applicable |
| Counsel for the Respondent: | Mr S. Thomas |
| Solicitors for the Respondent: | Commonwealth Bank Group, Legal Services |
ORDERS
The application for the setting aside of the Bankruptcy Notice filed 29 January 2014 be refused.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT ADELAIDE |
ADG 16 of 2013
| JANINE RUTH STARRS |
First Applicant
| CHRISTOPHER DAMIEN STARRS |
Second Applicant
And
| COMMONWEALTH BANK OF AUSTRALIA |
Respondent
REASONS FOR JUDGMENT
This is an application for Review of a decision of a Registrar. The decision of the Registrar is dated 24 October 2013, and it dismissed the applicants’ application to set aside a bankruptcy notice. In making that order, the Registrar was exercising a power delegated to her under section 103 of the Federal Circuit Court Act. Because it involves the exercise of a power given to a Justice appointed pursuant to Chapter III of the Constitution, it must be amenable to review, firstly, and the nature of the review must ensure a de novo hearing is conducted – the review is conducted as a de novo hearing so that it is more than a mere rehearing, and more than an appeal in the even stricter sense.
As I say, the Registrar’s order was made on 24 October 2013. She dealt with a number of matters on that day. She dismissed an application in a case filed by the applicants on 18 October 2013, which sought an adjournment to file additional material, and as I have indicated, she dismissed the application filed on 29 January 2013 to set aside the bankruptcy notice issued on 8 January 2013. I should note a couple of other matters relating to the procedural history of the matter. Mr Starrs himself filed an application on 12 February 2013 in the same terms as Mrs Starrs’ application, and on 18 February 2013, the Registrar made orders which had the effect of consolidating the hearing of the two applications.
I should also note that the hearing of the applications were adjourned on at least two occasions, as far as I can discern, while an appeal was undertaken in the Supreme Court in respect of the judgment debt, which is referred to in the bankruptcy notice. The appeal was dismissed on 17 September 2013, and I should also note that the adjournment of the proceedings on that basis was – the order for the adjournment was accompanied by an extension for the time for compliance with the bankruptcy, pursuant to s.41(6A) of the Bankruptcy Act, and I have, of course, continued those extensions.
In particular, I have continued them by an order in chambers made yesterday when the reservation of judgment originally set for yesterday was adjourned to today. This is not at all about identifying error in the decision of the Registrar, but it is obviously pertinent and appropriate for me to consider the Reasons the Registrar gave, and when I look at the Reasons, it can be seen that most of the Registrar’s Reasons address the issue of the s.41(6A) extension requests, both as they were tied up with the Application in a Case I have referred to with the 18 October 2013, and also as they were based upon other matters such as what was said to be an application for special leave to appeal to the High Court from the decision of the Full Court of the Supreme Court.
So the account of the reasons itself does not contain a great deal, if any, discussion of the reasons why the application to set aside the bankruptcy notice is dismissed, but they are matters that are certainly addressed by the Registrar in argument during the course of the applicant’s argument and, in particular, at page 9 and 10 of the transcript of the hearing of 24 October. The Registrar indicated a view there in relation to the application, which is closely related to the view I have come to in relation to the application, and which I am articulating in these reasons.
The applicants relied upon the affidavits of Mrs Starrs filed on 20 November 2013, 24 October 2013, and 18 October 2013, and Mrs Starrs made submissions on behalf of both applicants. The Review was filed on 30 October 2013 and, in addition to seeking the order which I am dealing with now, it sought a miscellany of procedural orders which have already been dealt with during the course of the Review hearing. The applicants say that the respondent is estopped from proceeding to bankrupt them, or either of them, on account of arrangements said to have been agreed by the applicants and the respondent relating to the manner in which the sale of real properties owned by the applicants and subject to registered mortgages held by the respondent were to be carried out.
These agreed arrangements alleged go back to the period of September/October 2009. The relevant properties secured guarantees given by the applicants for moneys advanced to Starrs and Co. in respect of the Truscott and Casual Living Enterprises. The advances to that company were the subject of default earlier in 2009. The relevant properties were situated at Gilberton, and at Jeffcott Street, North Adelaide. Essentially, the applicants say that in return for their co-operating with the sale of the properties, and the Jeffcott Street property to begin with, the respondent agreed through its officers, or officer in particular, not to proceed to bankrupt them or either of them.
That is the essence of the argument. The cooperation given by the applicants was said to be constituted by both of them keeping the respondent informed of the terms of and conditions and conduct of the sale, and both of them keeping the respondent involved as to matters relating to the reserve price and such matters. I am summarising matters that were partly put in the affidavits of Mrs Starrs, and there was reference to a good deal of email communication between Mr Starrs and a particular officer of the respondent, but the texture of the argument, the factual matters upon which it was based, were also, to some extent, put from the bar table, and to some extent elicited by me in questioning of Mrs Starrs during the course of the making of her submissions.
Essentially, what she was alleging was an entitlement to obtain orders by way of declaration and injunction on account of the doctrine of promissory estoppel, or estoppel by conduct to the extent to which those doctrines can be differentiated now, and reliance was placed in particular upon the summary of the principles relating to promissory estoppel discussed by the High Court in The Commonwealth of Australia v Verwayen (1990) 170 CLR 394. In terms of what was said to be the advantage inuring to the respondent from these agreed arrangements, it was said that there was the advantage of the sale not being conducted as a mortgagee sale, and as I have indicated, I was given a detailed account of how the applicants say that they did cooperate, and how they manifested that cooperation by giving disclosure.
I have indicated there was reference to, and I have had regard to, email communications between Mr Starrs and a Mr Bennett, the relevant office holder of the respondent. That email communication focused particularly on matters relating, or leading up to, the auction of the Jeffcott Street property on 30 September 2009, although inexplicably Mr Bennett thought at the end of that email, the relevant email correspondence, that the auction was scheduled for 1 October 2009. As it turned out, the property sold at auction on 30 September. It sold to a company called Heywood Proprietary Limited, which is the trustee of Mr Starrs’ superannuation fund, and it sold for a price of $875,000.
The property did not settle following the auction. I do not propose to go into detail as to why that did not occur, but it did not settle, and the respondents ended up taking possession of the property and it was subsequently sold at auction for $1.16 million, and the events following the auction, the conduct of the respondent following the auction, was said by the applicants to have entitled them to repudiate their obligations under the agreed arrangement, in particular as that related to the marketing of the Northcott Street, Gilberton property.
It should be noted too that a significant part of the applicants’ argument as to the matters going to their entitlement to the declaration and injunction was the evidence of Mr Bennett, given in the Supreme Court proceedings, at which he is said to have confirmed his promise to the applicants.
The application before the Registrar and now before me arises pursuant to the terms of s.40 of the Bankruptcy Act. Section 40(1) provides that:
A debtor commits an act of bankruptcy in each of the following cases.
And then instances a number of cases, and they include at subparagraph (g) the following case, which I will read in full onto the transcript:
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 and 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.
At s.43 of the Act, it goes on, in the context of creditors’ petitions, to indicate that a prerequisite of the presentation of a petition seeking the making of a sequestration order is that the debtor has committed an act of bankruptcy. There are differing expressions in the cases of the way in which section 40(1)(g) grounds an entitlement to an order setting aside the bankruptcy notice. Madgwick J in the case of Re Zakrzewski v Rodgers (2000) 178 ALR 694 says this at 700:
Although section 41(7) does not by its terms provide a power to set aside a bankruptcy notice, where the court is satisfied that a counter-claim, set-off, or cross demand exists of the type referred to in section 40(1)(g), it is well settled that such a power is to be implied from section 41(7) and other provisions of the Act.
And of course, for completeness, I will read s.41(7) into the transcript:
Where before the expiration of the time fixed for compliance with the requirements of a 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 paragraph 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, set-off, or cross demand, that time shall be deemed to have been extended immediately before its expiration until and including the day in which the court determines whether it is so satisfied.
Now, a different view as to the way in which those two sections operate together to ground the type of application that is before me on this review is to be found in the decision of Fitzgerald J in the Federal Court in ReGould Ex Parte Skinner (1983) 72 FLR 393, where his Honour says at 404:
The finding within the time specified in section 41(7) of an affidavit to the effect that a debtor has a counter-claim, set-off, or cross demand of the type mentioned in section 41(g) does not constitute an application to set the bankruptcy notice aside. It operates as an automatic extension of time for compliance with the bankruptcy notice until the court can determine whether it is satisfied by the debtor that the debtor has a counter-claim, set-off, or cross demand of the type referred to in section 41(g). If the court is so satisfied, it is neither required nor empowered to make an order setting aside the bankruptcy notice. The result of the court’s being so satisfied within either the time originally fixed by the bankruptcy notice for compliance or the extended time resulting from the operation of section 41(7) is that failure to comply with the requirements of the bankruptcy notice does not constitute an act of bankruptcy. After the court has been so satisfied, the bankruptcy notice is spent.
But whichever of those two views of the legislative mechanisms by which the power is provided, the court obviously has, and it was accepted by the respondent, a jurisdiction to entertain the kind of application that was before the Registrar and before me on Review. The applicants say that what they have lost by the respondent resiling from the agreed arrangements were firstly the expenses associated with the conduct of the auction. I am not certain, and I am sorry if I have overlooked it, but I am not certain that those expenses have been accurately quantified, but I do know that they, for all purposes relevant to this application, do not amount to – they are not equal to the amount of the judgment debt.
I have some idea of their magnitude, and it is nothing resembling the judgment debt which is set out in the bankruptcy notice, and perhaps for the sake of completeness in these Reasons, I should set out what the bankruptcy notice says the judgment debt is, and it is a jointly owed debt of $2,387,976.48. So the first item of loss that the applicants allege arising from the respondent resiling from the agreed arrangements were those expenses I have mentioned, and secondly, as Mrs Starrs proclaimed it to me in answer to my question, the fact of them being bankrupted in itself.
If the applicants sued on their application as it, relates to promissory estoppel – and whilst Mrs Starrs didn’t articulate that the remedy sought would be the declarations and injunctions to which I have referred, I am satisfied that is what she intended to put to me, insofar as they related to the promise not to bankrupt – if they sued in pursuit of such a remedy and were successful, if I posit the success of such an application, they would obtain obviously the expenses of the auction and they would obtain an injunction and declaration, effectively giving them an immunity from the exercise by the respondent of the bankruptcy remedy.
So given those circumstances, I am obliged to consider whether that action constitutes, in the language of s.41(g), a set-off, counter-claim, or cross demand equal to or exceeding the amount of the judgment debt and payable under the final order.
The nature of the exercise on which I am embarking was summarised by the High Court in the case of Guss v Johnstone (2000) 171 ALR 598 when considering an appeal from the Full Court of the Federal Court, which itself had heard an appeal from the judgment of Sundberg J, who was not satisfied of the existence of the relevant counter-claim, set-off, or cross demand. The High Court say this at paragraphs 38 to 40:
The nature of the exercise upon which Sundberg J was engaged is well established by a long line of authority.
At [39]:
In Vogwel v Vogwel, Latham CJ said in relation to a corresponding provision, “The authorities show that the matter to which the court looks is this. Whether it is just that the claim should be determined before the bankruptcy’s proceedings are allowed to continue. In other words, whether it is a claim which is proper and reasonable to litigate.”
And then:
A state of satisfaction referred to in section 41(g) and section 41(7) involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor and the justice of allowing the bankruptcy proceedings to go ahead, or requiring them to await the determination of the claim.
The decision of Guss v Johnstone was itself discussed by Lander J in one of the authorities to which I was referred to by Mr Thomas, the authority of Patane v Asteron Life Limited [2004] FCA 232, which I will come to in a moment. But the discussion by his Honour of the case there was on a point not relevant to the determination of these proceedings, which was to do with whether an appellate court, if satisfied that an application had been wrongly refused, but there had been no extension of time for compliance with the bankruptcy notice, could itself fashion orders which have the effect of delaying the bankruptcy proceedings until that claim is litigated. But Patane is relevant to these proceedings on another topic which I will come to in a moment.
Mrs Starrs, generally speaking, confined herself to referring to the adumbrated claim as being a set-off, but I do not think I should take her to have confined her argument to that. Whether the proposed claim satisfied either of the three descriptions, I think, is a matter I should regard as having been open to me on her argument. But whichever of the three categories of claim it is, the authorities make clear that it must sound in money.
That is something discussed in the decision of the Full Court of the Federal Court in James v Abrahams (1981) 51 FLR 16. I do not propose to go into the facts of that matter, but the cause of action said to ground the relevant entitlement to a set-off or counter-claim or cross demand was in relation to the declaration of a trust, and at page 23 of the report, the court say this:
The essential facts set out above suffice, in our view, to make out a prima facie case that the creditor holds the Cromer land in trust for the debtor and herself.
So the court was satisfied that the creditor held land in trust for the debtor and herself, and it was in respect of that land that the debtor indicated an intention to pursue orders by way of declaration and consequential orders. And the High Court had this to say at page 24:
The debtor’s claim to a declaration that the Cromer land is held upon trust for the creditor and himself related to property which, on the evidence, is valued at $90,000. If the debtor’s claim prevails, the value of his beneficial interest in that property will exceed the amount of judgment debt against him. His claim is not, however, a claim that the creditor pay him an amount of money. It is not a claim in respect of a money demand, either liquidated or unliquidated. It is a claim for the proper administration of the trust which he alleges exists and, one would presume, ultimately for an order for sale or the appointment of a different trustee for sale.
Reference is then made to the decision of Vogwel v Vogwel, a decision of the High Court reported (1939) 11 ABC 83, and a passage from the judgment of Latham CJ in that case is set out on page 24 of James v Abrahams as follows:
The words of the section are that the debtor must satisfy the court that he has a counter-claim, set-off, or cross demand which equals or exceeds the amount of the judgment debt. In the first place, it is accordingly clear that the counter-claim, set-off, or cross demand must be something sounding in money. What the section contemplates is a claim to the enforcement of a right sounding in money.
And then their Honours go on (in James v Abrahams) in commenting upon that passage to say as follows:
As we understand his Honour’s reference to something sounding in money, it is to a claim, set-off, or demand which if ultimately established will result in an order for the payment of a sum of money by the judgment creditor to the judgment debtor.
And their Honours go on in (James v Abrahams) at page 25 as follows:
The debtor’s claim against the creditor for a declaration of trust in the present case is neither a claim which sounds in money nor a claim for immediate delivery of a specific chattel. Indeed, even if the debtor succeeds in obtaining against the creditor a declaration of trust and ultimately an order for sale, that declaration and order would not provide legal justification for a refusal to pay the amount of the judgment debt on account of money lent. It follows that the debtor’s primary claim in the present matter is not a counter-claim, set-off, or cross demand of the relevant type.
And I have set out the passages in that judgment which indicate their Honours’ cognisance there of the fruit of the debtor ultimately obtaining the benefit of the judgment he was wanting to pursue, being the obtaining of amount of money which was at least the equivalent of the judgment debt. The authorities are also clear that if a claim is unliquidated, it must be quantified, and that is one of the instances where his Honour Justice Lander’s decision in Patane, is of assistance. His Honour says at paragraph 74 of that judgment:
The counter-claim, set-off, or cross demand must exist at the time when the application to set aside the bankruptcy notice is heard.
Reference is then made to a number of cases, including Guss v Johnstone. And then at paragraph 75:
If the time for determining the existence of the counter-claim, set-off, or cross demand is the date upon which the proceedings to set aside the bankruptcy notice are heard, logically, that should also be the date upon which the quantification of that counter-claim, set-off, or cross demand should occur.
That follows because it is necessary to determine whether the counter-claim, set-off, or cross demand equals or exceeds the judgment debt. And, as I have indicated, unlike the trust property referred to in the James case, the rights sought to be declared here and protected by injunction have no value in money. I am leaving aside the sum relating to the auction and marketing costs. The debt, in this case, would remain, and what would also remain would be the existence of other enforcement remedies. But what the s.40(1)(g) exercise is about is me determining whether an act of bankruptcy has been committed. Arguably, issuing a bankruptcy notice is a step in bankrupting an individual. I have already referred to the provisions of s.43(1) of the Act, which indicate that an act of bankruptcy is required to grant an entitlement to sequestration order. But, to repeat, my task here is to see whether the bankruptcy notice should be set aside on any of the grounds identified in s.40(1)(g).
In the event that a creditor’s petition issues, it may be that s.52 of the Act will come into play, and it is appropriate in light of the number of times that matter has been brought to the attention of the applicants, both before the Registrar and in the review hearing before me, to set out in this judgment the provisions of s.52. Section 52(1) provides that:
At the hearing of a creditor’s petition, the court shall require proof of –
and then certain matters are identified, and it goes on to say:
…and if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor at the discretion -
and I have identified the discretion there in that provision. Section 52(2) goes on to say:
If the court is not satisfied with the proof of any of those matters –
they are the formal matters to which s.52(1) refers –
or is satisfied by the debtor:
(a) that he or she is able to pay his or her debts; or
(b) that for other sufficient cause, a sequestration order ought not to be made, it may dismiss the petition.
But the nature of the proposed cause of action said to ground the claim of a counter-claim, set-off, or cross demand needed only to have been articulated, in my view, for it to be seen that it’s not capable of constituting a claim for money as identified in the cases.
I am leaving altogether to one side in my consideration of the matter whether the other provision of s.41(g) would have been satisfied, and that is whether the counter-claim, set-off, or cross demand was something that could not have been set up in the Supreme Court action. It may be, and it probably is the case, that it could not have been, because the application for orders relating to promissory estoppel, which I have identified and which, for the purposes of this application, I have assumed would be successful when litigated, relates to remedy choice, not the existence of the debt, and so for that reason, that particular arm of s.40(1)(g) was unlikely to have been a difficulty. But that is not of much assistance to the applicants, because it is essentially the same point as, in my view, requires this application for the setting aside of the bankruptcy notice to be refused.
I order accordingly.
I certify that the preceding thirty five (35) paragraphs are a true copy of the reasons for judgment of Judge Lindsay.
Associate:
Date: 7 February 2014
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