Tadros v Wakim & Anor (No.2) - [2010] FMCA 733

FEDERAL MAGISTRATES COURT OF AUSTRALIA

TADROS v WAKIM & ANOR (No.2)

[2010] FMCA 733

BANKRUPTCY – Application to set aside bankruptcy notice – whether counter-claim, set-off or cross demand within s.40(1)(g) of the Bankruptcy Act.

Bankruptcy Act 1966 (Cth), ss.40, 41
Civil Procedure Act 2005 (NSW), ss.99, 140
Fair Trading Act 1987 (NSW), s.42
Federal Court of Australia Act 1976 (Cth), s.31A
Trade Practices Act 1974 (Cth), s.52
Uniform Civil Procedure Rules 2005 (NSW), rr.12.7, 14.28

Barnes v Addy (1874) LR9ChApp 244; (1874) 43 LJ Ch 513; (1874) 30 LT 4; (1874) 22 WR 505

Farah Constructions Pty Limited and Others v Say-Dee Pty Limited (2007) 230 CLR 89; [2007] HCA 22

Guss v Johnstone (2000) 74 ALJR 884; [2000] HCA 26

James v Federal Commissioner of Taxation (1955) 93 CLR 631; [1955] HCA 75

Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd and Others (2008) 167 FCR 372; [2008] FCAFC 60

Kowalski v MMAL Staff Superannuation Fund Pty Ltd and Another (2009) 178 FCR 401; [2009] FCAFC 117

Luck v University of Southern Queensland (2009) 176 FCR 268; [2009] FCAFC 73

Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433; [1980] FCA 78

Re Cox (1934) 7 ABC 98

Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331; [2003] FCA 373

Slack v Bottoms English Solicitors [2002] FCA 1445

Stec v Orfanos [1999] FCA 457

Tadros v J & R Investment Services Pty Ltd [2007] FCA 1041

Tadros v J & R Investment Services Pty Ltd (No.2) [2008] FCA 832

Tadros v J & R Investment Services Pty Ltd & Ors [2008] NSWSC 63

Vogwell v Vogwell (1939) 11 ABC 83

Applicant:

ANTHONY TADROS

First Respondent:

JOSEPH WAKIM

Second Respondent:

RITA WAKIM

File Number:

SYG 568 of 2010

Judgment of:

Barnes FM

Hearing dates:

29 June 2010 and 29 July 2010

Delivered at:

Sydney

Delivered on:

28 September 2010

REPRESENTATION

Solicitors for the Applicant:

Morgan Ardino & Co

Counsel for the Respondents:

Mr C Robinson

Solicitors for the Respondents:

Cambridge Law

ORDERS

The application be dismissed.
The applicant pay the costs of the respondents as agreed and in the absence of agreement taxed in accordance with the Federal Court Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 568 of 2010

ANTHONY TADROS

Applicant

And

JOSEPH WAKIM

First Respondent

RITA WAKIM

Second Respondent

REASONS FOR JUDGMENT

This is an application to set aside Bankruptcy Notice NN540 of 2010 on the basis that the applicant has a counter-claim, set-off or cross demand within s.40(1)(g) of the Bankruptcy Act 1966 (Cth) (the Act). The Bankruptcy Notice was based on a judgment of the Local Court of New South Wales of 30 July 2008 in the sum of $42,785.16. A claim that the Bankruptcy Notice was not served on the applicant was not pressed.
Mr Tadros, the applicant, also sought an interim order that pending the hearing of this application the respondents be restrained “from applying for a Bankruptcy Petition”. The basis for such an order was not clarified. As it is not in dispute that there has been a deemed extension of time for compliance with the Bankruptcy Notice under s.41(7) of the Act, there is no basis on the evidence before the court to make such an order.
In his affidavit sworn on 15 February 2010 Mr Tadros also sought to “stay the hearing of the Creditor’s Petition (sic) pending the hearing of my Application to Set Aside the said Judgement (sic) in the District Court”.
This is not the hearing of a creditor’s petition. There is no evidence before the court of any proceedings in the District Court to set aside the Local Court judgment on which the Bankruptcy Notice was based. It has not been established that there should be any “stay” or restraint on any future proceedings on this basis.
When the matter came before me (after several adjournments while the matter was before a registrar) the solicitor for the applicant sought a further adjournment until resolution of proceedings in the Supreme Court of New South Wales. That application was unsuccessful and the hearing of the application to set aside the Bankruptcy Notice proceeded.
In his application, Mr Tadros also sought an order that the respondents “be restrained from commencing any Bankruptcy proceedings pending the finalisation of the proceedings in the Supreme Court Equity Division, matter number (sic).”
The solicitor for the applicant explained that this was a reference to proceedings in the Supreme Court of NSW commenced on 26 November 2007 (matter number 5728 of 2007). Mr Elias George Wakim (referred to as Mr E.G. Wakim), who is the brother of Joseph Wakim, one of the respondents in these proceedings, commenced those proceedings against Mr Tadros claiming payment of a sum of money. There are a number of other defendants to those proceedings, including Mr and Mrs Wakim, the respondents to these proceedings. Mr Tadros filed a cross-claim against Mr and Mrs Wakim and other cross-defendants, and a defence in the Supreme Court on 25 January 2008.
I am not satisfied that there should be any “stay” on proceedings until the NSW Supreme Court proceedings are determined. Insofar as the applicant intended to seek an adjournment, that was considered prior to the hearing of this matter. The applicant has not established any basis on which there should be a stay or a restraint on the commencement of any bankruptcy proceedings by the respondent creditors.
This application is an application under s.41(7) of the Bankruptcy Act, which is as follows:
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 on which the Court determines whether it is so satisfied.
Section 40(1)(g) of the Act is to the effect that a debtor commits an act of bankruptcy:
if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i) where the notice was served in Australia--within the time specified in the notice; …
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
Mr Tadros relied on his affidavit accompanying the application to set aside the Bankruptcy Notice sworn on 15 February 2010 and an affidavit of Rocco Michael Ardino (his solicitor) sworn on 11 June 2010. The solicitor for the applicant tendered a number of documents and provided written submissions, including post-hearing written submissions which, it must be said, went well beyond submissions in reply to those of the respondents.
The “Bundle of Exhibits” referred to in Mr Tadros’ affidavit of 15 February 2010 was not tendered, but a copy of the cross-claim filed in the Supreme Court proceedings referred to in Mr Tadros’ affidavit as contained in that “Bundle” was in the material relied on by the respondents.
Mr Tadros initially relied on that cross-claim as constituting a counter claim within s.40(1)(g) of the Act. However, Mr and Mrs Wakim and other cross-defendants have filed a notice of motion to strike out Mr Tadros’ cross-claim, which is listed to be heard in the Supreme Court in October 2010, at the same time as a motion by Mr Tadros to stay the whole of the Supreme Court proceedings “pending an enquiry as to the mental capacity of the fifth Cross-Defendant (Marie Kannan) to conduct the proceedings on her own behalf without the appointment of a Tutor.”
Annexed to Mr Ardino’s affidavit sworn on 11 June 2010 and filed on 28 June 2010 is a proposed amended cross-claim to be filed in the Supreme Court proceedings which, oddly, states that it was signed by Mr Ardino on 30 August 2010 (sic). By notice of motion Mr Tadros intends to seek leave of the Supreme Court to rely on the amended cross-claim. Mr Tadros now seeks to rely on this proposed cross-claim as a s.40(1)(g) claim.
Mr and Mrs Wakim oppose the orders sought in these proceedings on the basis that Mr Tadros has no valid counter-claim, set-off or cross demand against either or both of them, that in the interests of justice the Bankruptcy Notice should not be set aside and that they should not be prevented from initiating bankruptcy proceedings. They relied on a notice of opposition and on affidavits sworn by Raed Rahal (their solicitor) on 12 May 2010 and 21 June 2010, tendered documents and written submissions.
In order to consider whether the applicant has a counter-claim or cross demand as contended it is necessary to outline the background to these proceedings. There are several relevant proceedings between the parties.

The Local Court proceedings

On or about 14 June 2006 Mr and Mrs Wakim commenced proceedings against Mr Tadros in the Local Court seeking outstanding rent and fees pursuant to the lease of a car yard and a licence to use an advertising sign together with interest (the Local Court proceedings). Mr Tadros filed a defence and a cross-claim on 19 July 2006 which named J & R Investment Services Pty Ltd (J & R) as the first cross-defendant and Mr Wakim (Joseph Wakim) as the second cross-defendant and sought an accounting of partnership profits and losses, damages and other orders. Mrs Rita Wakim was not named as a cross-defendant. It was alleged in that cross-claim that Mr Wakim was indebted to Mr Tadros in a substantial sum of money. Mr Tadros claimed damages for future economic loss as a result of closure of his joint venture business with J & R and another company, loss of profits, monies paid to either J & R or Mr Wakim “under duress” and that J & R and Mr Wakim pay Mr E.G. Wakim an amount of $500,000 said to have been lent to Mr Tadros by Mr E.G. Wakim. The cross-claim traversed the history of the involvement of Mr Tadros, J & R and Mr Wakim (as a director of J &R) in relation to used car partnerships in which Mr Tadros and J & R were involved.
In September 2006 the cross-claim was struck out on the basis that it exceeded the Local Court’s jurisdiction. It appears that the Local Court re-instated Mr Tadros’ defence and cross-claim in December 2006. However on 31 August 2007 the Local Court struck out the cross-claim.
A notice of motion in the nature of a stay filed by Mr Tadros in August 2007 was part heard in February 2008 and then withdrawn. The solicitor for Mr Tadros was ordered to pay costs on an indemnity basis under s.99 of the Civil Procedure Act 2005 (NSW) in relation to proceedings on three dates between 31 August 2007 and 15 February 2008.
The Local Court proceedings were finally determined on 30 July 2008. The Local Court ordered: “Verdict and Judgment for the Plaintiff against the Defendant, Mr Anthony Tadros in the amount of $42785.16”. It is this judgment that forms the basis for the Bankruptcy Notice.

The Federal Court proceedings

In October 2006 (after his cross-claim was first struck out in the Local Court proceedings) Mr Tadros commenced proceedings NSD1924 of 2006 in the Federal Court of Australia against six respondents, including both Joseph and Rita Wakim and their then solicitor (the Federal Court proceedings). These proceedings, which raised and expanded on the matters that had been asserted by Mr Tadros in his Local Court cross-claim, were said to arise from an alleged joint venture or partnership between Mr Tadros and J & R and another company and relied in essence on the Trade Practices Act 1974 (Cth), the Fair Trading Act 1987 (NSW) and the Partnership Act 1892 (NSW).
On or about 3 October 2006 Mr Tadros filed a notice of motion in the Federal Court seeking that the whole of the Local Court proceedings be transferred to the Federal Court and be heard together with the proceedings before the Federal Court. That application was dismissed.
In addition, in July 2007 Buchanan J set aside an order in the nature of an asset preservation order that had been made on an urgent basis by the Duty Judge on 28 December 2006 on the application of Mr Tadros (who alleged various kinds of wrongdoing by Mr Wakim) restraining Mr and Mrs Wakim from divesting themselves of certain properties, including their home, and disposing of the proceeds of sale. In the meantime, Mr Tadros had commenced proceedings in the Supreme Court to extend a caveat lodged on the Wakims’ home that were discontinued by consent. According to Buchanan J (see Tadros v J & R Investment Services Pty Ltd [2007] FCA 1041) the claim that a sale of the property in question was imminent later proved to be incorrect. Buchanan J found that the tests for the imposition of such restraints were not satisfied (and had not been satisfied in the first instance) and vacated the orders.
Buchanan J also observed (at [2]) that Mr Tadros’ statement of claim was “not in a satisfactory form”, that it did not comply with the Federal Court Rules and that he had “indicated on two earlier occasions that attention should be given to pleading the applicant’s case in a satisfactory way”. His Honour made further directions for the filing of an amended statement of claim by 27 July 2007.
Mr Tadros filed an amended statement of claim in the Federal Court (outside the time allowed) on 31 July 2007. The amended statement of claim elaborated on Mr Tadros’ claims, including a claim that Mr Wakim (but not Mrs Wakim) had breached s.52 of the Trade Practices Act or s.42 of the Fair Trading Act and alleged “undue harassment and coercion” on the part of Mr Wakim. Mr Tadros sought damages and “enquiries … with respect to the partnership accounting”.
During the currency of the Federal Court proceedings Mr Tadros also unsuccessfully attempted to prevent the Wakims’ solicitor from continuing to act for them and made an application to the Guardianship Tribunal for a guardianship order in relation to Mrs Rita Wakim. That application was dismissed on 22 November 2007 as Mr Tadros did not have standing to make such an application. The Guardianship Tribunal found that it could not be satisfied that Mr Tadros’ primary motivation for the application was a desire to advance Mrs Wakim’s welfare.
On 24 August 2007 four of the respondents to the Federal Court proceedings filed a notice of motion to strike out Mr Tadros’s amended statement of claim as vexatious and “wanting of a cause of action” (according to Mr Ardino).
On the same day the applicant filed a notice of motion in the Federal Court seeking to have the Federal Court proceedings transferred to the Supreme Court of New South Wales. Buchanan J dismissed that notice of motion on 29 August 2007 on the basis that there were no proceedings pending before the Supreme Court which might provide a foundation for the transfer request (see Tadros v J & R Investment Services Pty Ltd (No.2) [2008] FCA 832 at [2]).
The respondents’ notice of motion (and an application for security for costs filed by another respondent) were listed on 15 October 2007, but were adjourned because, according to Buchanan J (in Tadros v J & R (No.2) at [3]), “the parties were not ready”. The matter was eventually adjourned to 12 December 2007. According to Buchanan J (at [3]) the parties “indulged themselves” in other “interlocutory skirmishes” around this time.
However, on 12 December 2007 Buchanan J made orders by consent to the effect that:
1. the strike out motion be adjourned generally with liberty to restore;
2. Mr Tadros have leave to file and serve a notice of motion for leave to file a further amended statement of claim and amended application by 1 February 2008;
3. Mr Tadros pay the respondents’ costs of the motion for strike out in the amount of $22,000 by 25 January 2008; and
4. should Mr Tadros fail to comply with Order 3, Order 2 be vacated and “the whole of the Amended Statement of Claim is struck out”.
The proceedings were adjourned to 7 March 2008, on which date Buchanan J was informed that there had been no compliance with Order 3 made on 12 December 2007. The consequence was that amended statement of claim was struck out. This left unresolved the issue of costs.
The Federal Court proceedings were finally resolved on 3 June 2008 (the delay being occasioned in part by non-compliance by the respondents with orders for the filing of submissions). Buchanan J found that there was a “proper foundation” for a further costs order against Mr Tadros, referring to the fact that neither the statement of claim nor the amended statement of claim was in satisfactory form. His Honour stated at [12]: “I have no doubt if it had not been dealt with by consent on 12 December 2007 [the amended statement of claim] would have been struck out in whole or in part”. After observing that counsel for Mr Tadros was not able to resist such an order, Buchanan J then dismissed the proceedings pursuant to s.31A of the Federal Court of Australia Act 1976 (Cth) which provides that the court may give judgment for one party against another if the court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding.

Two Supreme Court Proceedings

In the meantime on 23 August 2007 Mr Tadros had filed a summons seeking orders from the Supreme Court of NSW that the Local Court proceedings be transferred to the Supreme Court and that the Local Court proceedings be stayed pending determination of the summons. He then sought that the cross-claim he had filed in the Local Court proceedings (that was struck out by order of that court) be reinstated in the Supreme Court proceedings. By an amended summons, Mr Tadros sought that the Local Court proceedings be heard together with the proceedings commenced in the Supreme Court by Mr E.G. Wakim on 26 November 2007.
In his defence filed on 25 January 2008 in the Supreme Court proceedings initiated by Mr E.G. Wakim, Mr Tadros admitted the facts relied on by the plaintiff (E.G. Wakim), conceded that he had no valid defence and submitted to judgment being entered against him with costs. On the same date Mr Tadros filed a statement of cross-claim in those Supreme Court proceedings raising issues akin to those he had pleaded in the amended statement of claim that had been filed in the Federal Court proceedings (albeit not in identical terms in all respects). Interestingly, 25 January 2008 was the date by which compliance with the Federal Court order to pay the respondent’s costs was required, in default of which the amended statement of claim was to be struck out.
On 7 February 2008 Palmer J dismissed Mr Tadros’ amended summons seeking transfer of the Local Court proceedings to the Supreme Court (see Tadros v J & R Investment Services Pty Ltd & Ors [2008] NSWSC 63). His Honour found that while the evidence suggested that the relationship between Mr Tadros, Mr and Mrs Wakim and Mr .E.G. Wakim was “long and complex”, that did “not necessarily mean that every dispute between those parties should be heard in the one set of proceedings” and that the question (which was eventually one of case management) was whether the claim by Mr and Mrs Wakim against Mr Tadros in the Local Court proceedings involved “substantially the same substratum of facts and circumstances as may be in issue in the proceedings [that had been] initiated by Mr [E.G.] Wakim” in the Supreme Court and in the Federal Court proceedings initiated by Mr Tadros against Mr and Mrs Wakim (at [3]).

Palmer J summarised the matters in issue as follows at [4] – [6]:
The issues in the Local Court proceedings proceedings are quite straightforward. By their statement of claim Mr and Mrs Wakim sue Mr Tadros for arrears of rent under a written lease and for damages, being the cost of reletting the premises when the lease was allegedly terminated. The amount claimed by the plaintiffs in those proceedings is well within the jurisdictional limit of the Local Court.
By his defence in the Local Court proceedings, Mr Tadros raises only three matters. He says that there was an agreement between himself and Mr and Mrs Wakim whereby he would obtain a release from his obligations under the lease in consideration of certain promises by him. One of those promises was that he would vacate the premises by the end of June 2005. Another was that he would carry out substantial repairs on two vehicles owned by the Plaintiff. Another ground of defence is that there had not been any demand for the outstanding rent by Mr and Mrs Wakim.
Those are the only issues raised by way of defence to Mr and Mrs Wakim’s claim in the Local Court proceedings. A Cross Claim, however, was filed in the Local Court proceedings which traversed the history of Mr Joseph Wakim and Mr Tadros in a series of car dealing partnerships over a considerable time.
His Honour described the facts and circumstances alleged in the cross-claim filed in the Local Court which sought an accounting of profits which, it was alleged, would show that Mr Wakim was indebted to Mr Tadros in a substantial sum of money. He explained that the cross-claim also sought damages for future economic loss arising from alleged breaches of Mr J Wakim’s alleged duty as a partner in the partnership (albeit J & R was said to be the partner) and claimed that Mr and Mrs J Wakim should discharge a debt of $500,000 owed by Mr Tadros to Mr E.G.Wakim.
Palmer J found that it was clear that the cross-claim involved a claim for a sum of money beyond the Local Court’s jurisdiction and also that the facts and circumstances relied on in the cross-claim were not part of the same substratum of facts relied on by the Wakims in their Local Court claim and by Mr Tadros in his defence of that claim.
His Honour also referred to the fact that the cross-claim had been struck out in the Local Court on the basis that the claims pleaded therein exceeded the Local Court’s jurisdiction and noted that before the cross-claim was struck out in the Local Court Mr Tadros had commenced proceedings in the Federal Court against Mr and Mrs Wakim “pleading in substance the matters which had been set out in the Cross Claim filed in the Local Court proceedings” (at [10]). As his Honour observed (at [12]), Mr Tadros’ had had leave to replead on payment of costs. This had not occurred and the Federal Court proceedings remained “in abeyance” at that time (as indicated above, the Federal Court proceedings were later dismissed on the basis that Mr Tadros had no reasonable prospects of success).
After outlining the nature of the Supreme Court proceedings between Mr E.G. Wakim and Mr Tadros and others and the allegations by Mr Tadros against Mr Wakim and other cross-defendants (including a solicitor and a finance company employee), Palmer J found that none of the matters raised in the cross-claim in the Local Court, in the statement of claim in the Federal Court or in Mr Tadros’ proposed defence to Mr E.G. Wakim’s claim were sufficiently connected to the “simple issues” raised in the Local Court proceedings such as to require all issues be brought into the one set of proceedings (at [14]). His Honour found that an orderly disposition of the disputes between the parties required that the straightforward issues in the Local Court be heard separately and that the other claims be determined in the Federal Court (or in the Supreme Court if the Federal Court proceedings were transferred into the Supreme Court). His Honour concluded that it was not appropriate to bring the Local Court proceedings into the Supreme Court pursuant to s.140 of the Civil Procedure Act.
On or about 30 October 2008, the defendants (other than Mr Tadros) in the Supreme Court proceedings filed a notice of motion seeking to strike out both Mr E.G. Wakim’s statement of claim and Mr Tadros’ cross-claim or that the cross-claim be stayed pending payment by Mr Tadros to various cross-defendants of costs ordered in the Local Court, Supreme Court and Federal Court. Subsequently, an amended notice of motion was filed seeking that the cross-claim be struck out under r.14.28 (no reasonable cause of action, embarrassment, or abuse of process) or r.12.7 (dismissal of proceedings for want of due dispatch) of the Uniform Civil Procedure Rules 2005 (NSW).
Mr Tadros filed a notice of motion in the Supreme Court in or about January 2009 seeking to prevent the Wakims’ then solicitor from acting for them in the Supreme Court proceedings and made another attempt to have the Protective Commissioner appointed as tutor for Mrs Wakim.
The Supreme Court proceedings which commenced in November 2007 (including the motions to strike out Mr Tadros’ cross-claim and the statement of claim) have been adjourned on a number of occasions, apparently on the basis that Mr E.G. Wakim and Mr Tadros were seeking legal aid and the opportunity to prepare fresh pleadings. The motions were listed for hearing on 8 April 2010, but Mr E.G. Wakim (supported by Mr Tadros) sought an adjournment to prepare fresh proceedings. Relevantly, the Supreme Court ordered that Mr Tadros’ proposed amended pleadings be served on the Wakims by 30 April 2010. The evidence before the court is that this did not occur, although on about 1 May 2010 the Wakims’ solicitors received a copy of a proposed amended statement of claim. Mr Tadros sought leave on 14 May 2010 to file a proposed amended cross-claim but also sought an order that the proceedings be stayed pending an inquiry into the mental capacity of another cross-defendant (Mrs Kannan) or the appointment of a tutor or the Protective Commissioner. In a supporting affidavit sworn on 4 May 2010 Mr Tadros claimed generally that as a direct result of the closure of his motor dealership business and other conduct of the cross-defendants he could not meet any of the costs orders that had been made in favour of the defendants.
Moreover, his solicitor, Mr Ardino, filed a supporting affidavit in the Supreme Court proceedings referring to the proposed addition of two further cross-defendants. He sought leave to file a “Preliminary Report” of Mr Ian Paul, Forensic Accountant, dated 8 February 2010, contending that “[u]pon the basis of the matters set out by Mr Paul … the matters set out in the proposed Amended Cross-Claim are reasonably arguable and … the Amended Cross-Claim itself has merit.” It appears that the Supreme Court has yet to consider the application for leave to rely on the proposed amended cross-claim.
In post hearing submissions in these proceedings Mr Ardino referred to the cross-claim in the Supreme Court and advised that “The matter is now set down for hearing on the 15 October 2010 in the SC Equity Division”. However the solicitor for the Wakims advised that the October 2010 date has been fixed for the hearing of the motions, including the motions to strike out Mr E.G. Wakims’ statement of claim and Mr Tadros’ existing cross-claim in those proceedings.

These proceedings

In these circumstances, Mr Tadros seeks an order from this court setting aside Bankruptcy Notice NN540 of 2010 on the basis that he has a cross-claim within s.40(1)(g) of the Bankruptcy Act.
The Local Court judgment that formed the basis for the bankruptcy notice was a default judgment made in Mr Tadros’ absence in relation to arrears of rent owed by him to the creditors Mr and Mrs Wakim.
Mr Tadros’ evidence is that during the course of the Local Court proceedings that led to the judgment on which the Bankruptcy Notice was based he was ill and unable to attend in court and that he could not afford the legal fees to run his defence. The relevance of this claim is not clear. There is no evidence of any appeal from the judgment of the Local Court. Mr Tadros’ asserted cross-claim is based on a claim that he incurred substantial loss and damage prior to the time of the Local Court proceedings as a result of misleading, deceptive and negligent conduct of certain parties, including the judgment creditors, including a liability in favour of Mr E.G. Wakim (the plaintiff in the Supreme Court proceedings) for the sum of $500,000 plus interest. Mr Tadros claimed that these matters could not have been raised in the Local Court proceedings because of the absence of sufficient “commonality” for the transfer of proceedings to the Supreme Court and because the amount claimed by way of damages exceeded the threshold for claiming in the Local Court.
The applicant contended that given the nature of his cross-claim, as it was on foot in the Supreme Court proceedings, it was fair and just that those proceedings be finalised prior to the commencement of any “formal” bankruptcy proceedings.
Mr Tadros submitted generally that he had a valid cause of action in his proposed amended cross-claim as against the Wakims and that if he was successful the damages he was likely to receive would be in the order of $1 million or more and hence would be in excess of the judgment obtained by the creditors in the Local Court which formed the basis for the Bankruptcy Notice.
At the hearing, the solicitor for the applicant sought to tender a document said to be a “Preliminary Report” from a forensic accountant. This was said to be intended to be relied on as evidence as to likely damages on the hearing of the proposed amended cross-claim.
In light of the manner in which this issue was raised, the respondents were given the opportunity to file post-hearing supplementary submissions. These elaborated on the respondents’ contentions in relation to the claimed counter-claim and addressed the draft report. In “reply” the applicant filed a 23 page written submission in which the solicitor for the applicant sought leave to adduce further evidence. That application was refused.
In pre-hearing written submissions the solicitor for Mr Tadros referred to the fact that the proposed amended cross-claim had been settled by counsel, who was said to have advised that the applicant had reasonable prospects of success largely based on alleged misleading and deceptive conduct on the part of the Wakims. It was submitted that it would be unfair and unjust to deny the debtor the opportunity of advancing his claim prior to the final hearing of the Supreme Court proceedings.
These submissions were elaborated on in the post-hearing submissions. It was contended that the cross-claim was bona fide, that the applicant could make out a prima facie case and that he had a fair chance of success. It was submitted that the proposed amended cross-claim pleaded different and additional facts and causes of action to its predecessors and that the applicant had consistently attempted to consolidate his claims into a single proceeding, that he had been blocked by decisions of a technical nature and that his access to justice had been denied. As indicated, it was claimed: “The matter is now set down for hearing on the 15 October 2010 in the SC Equity Division”. However I am satisfied that the hearing in October 2010 is not a hearing of the substantive matter.
The applicant contended that deficiencies in his pleading had been rectified (and that any other defects could be rectified) and that the quantum of the cross-claim could be ascertained from the “Preliminary Report” tendered in these proceedings as it quantified claims against the respondents for damages for breach of fiduciary duties, “misleading and deceptive conduct, negligence, tortuous (sic) interference with the applicant’s contract and economic relations with” Mr E.G. Wakim, “an action in equity against Rita Wakim under the Barnes v Addy principle” and for aiding and abetting Mr Wakim in misleading Mr Tadros. Vicarious liability for the actions of J & R, Mr Kannan and Mr Wakim is also asserted.
It was contended that the affidavit and testimonial evidence of Mr E.G. Wakim would corroborate Mr Tadros’ evidence in the Supreme Court proceedings (although no such evidence is before the court) and that the “Preliminary Report” also indicated the bona fides of the cross-claim.
Somewhat confusingly, it was also contended that to allow the respondents’ notice would oppress the applicant’s legal rights as a defendant in the Supreme Court proceedings as he would be deprived of a defence. It is not clear whether this is a reference to the Bankruptcy Notice or the notice of motion in the Supreme Court proceedings. It was submitted that it was apparent from the evidence before the court that the cross-claim exceeded the respondents’ claim and that it could not have been set up in the earlier proceedings, having regard to the applicant’s unsuccessful attempts to transfer the Local Court matter to the Supreme Court. In written submissions the applicant took issue with the correctness of the decision of Palmer J in generally expressed terms. There has, however, been no appeal or application for leave to appeal from that decision. It was also contended that not all the “damages, issues and facts” were known at the time of the Local Court proceedings and that Mr Tadros had not acted unreasonably.
Counsel for the Wakims referred to the principles applicable in relation to satisfying the court of the existence of a counter-claim or cross demand within s.40(1)(g) and s.41(7) of the Bankruptcy Act, including the need for the debtor to establish the merits of the claims upon which he relies and for the court to weigh up considerations as to the legal and factual merits of each claims and the justice of allowing bankruptcy proceedings to go ahead or requiring such proceedings to await determination of the claim (Guss v Johnstone (2000) 74 ALJR 884; [2000] HCA 26). The court must determine whether it was just that the claims should be determined before the bankruptcy proceedings are allowed to continue or, in other words, whether it is a claim that was proper and reasonable to litigate (Vogwell v Vogwell (1939) 11 ABC 83).
Reliance was placed on the fact that the Federal Court had dismissed proceedings in substantially the same form as the cross-claim now sought to be relied on in the Supreme Court proceedings on the basis that Mr Tadros had no reasonable prospects of successfully prosecuting the proceedings. It was submitted that although there had been some division of opinion in the Federal Court, in Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd and Others (2008) 167 FCR 372; [2008] FCAFC 60, a majority of the Full Court of the Federal Court held that where the entire proceeding has been dealt with, an order under s.31A of the Federal Court of Australia Act was final and not interlocutory. It was pointed out that when Mr Tadros’ application in the Federal Court was dismissed on 3 June 2008 he was represented by both solicitors and counsel and that he had previously consented to orders allowing him the further opportunity to amend his pleading, which he did not do.
Reference was also made to the fact that Mr Tadros took no issue with the dismissal of the Federal Court proceedings and had taken no further steps in the Federal Court. Nor had he taken any step in connection with the judgment upon which the Bankruptcy Notice was founded. Rather, he had sought to proceed on a claim in the NSW Supreme Court founded on the same causes of action as had been alleged in the Federal Court proceedings.
It was pointed out that Mr Tadros was currently facing strike-out applications in relation to his current cross-claim in the Supreme Court proceedings by, amongst others, the respondent creditors, that would be heard in October 2010 in circumstances where those pleadings relied on the same assertions as those pleaded in the Federal Court proceedings.
On this basis it was submitted that the counter-claim, set-off or cross demand on which the applicant relied to attack the Bankruptcy Notice was doomed to fail and that he could not satisfy the standard of proof required under s.40(1)(g) and s.41(7).
It was also submitted that it was relevant that the respondent creditors had been kept out of the benefit of their judgment for more than two years while they had been put to considerable expense and that although they had obtained judgments and costs orders against Mr Tadros in the Local Court, Supreme Court and Federal Court there was little likelihood that these orders would ever be met, yet Mr Tadros had conceded liability to Mr E.G. Wakim in the Supreme Court proceedings for the sum of $500,000.
In these circumstances it was submitted that justice required that the bankruptcy proceedings be allowed to proceed and that the application to set aside the Bankruptcy Notice be dismissed with costs.
I have borne in mind that it is for the debtor to satisfy the court that he has a counter-claim, set-off or cross demand. In Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331; [2003] FCA 373 Lindgren J pointed out that what a debtor must do to satisfy the court had been variously described, and summarised the law to the effect that the debtor must satisfy the court of the following interrelated and sometimes overlapping matters (at [9] – [12]) as follows:
* that they have a "prima facie case", even if they do not adduce evidence which would be admissible on a final hearing making out that case (Ebert v The Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 ("Ebert") at 350; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 ("Brink") at 141; Gomez v State Bank of NSW Ltd [2002] FCAFC 101 at [17], [18]);
* that they have "a fair chance of success" or are "fairly entitled to litigate" the claim: Brink at 141; Re Gould; Gould v Day [1999] FCA 1650 at [27], [28]; Re Capsanis; Capsanis v The Owners - Strata Plan 11727 [2000] FCA 1262 at [11]); and
* that they are advancing a "genuine" or "bona fide" claim (Re Capsanis; Capsanis v The Owners - Strata Plan 11727 [2000] FCA 1262 at [11]).
It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at 141) the reference to a "prima facie case" in Ebert as a reference to "a fair chance of success".
In Brink Lockhart J said (at 141) that the Court is not required to "undertake a preliminary trial of the counter-claim, set-off or cross demand". But, clearly, the application of the criteria above requires the Court to make some kind of preliminary assessment, though obviously not to determine the counter-claim, set-off or cross demand finally. And in Guss v Johnstone (2000) 171 ALR 598, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ stated (at 606):
"[40] The state of satisfaction referred to in s 40(1)(g), and s 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."
Plainly, in order to "satisfy" the Court for the purposes of par 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor's claim was being finally determined, but by reference to the question whether the Court should be satisfied that the debtor has a claim deserving to be finally determined.
Perhaps little more can usefully be said than that a debtor must satisfy the Court that there is sufficient substance to the counter-claim, set-off or cross demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.

It is necessary to weigh up considerations as to the legal and factual merits of the claim relied on by the debtor and the justice of allowing bankruptcy proceedings to go ahead (see Guss v Johnstone). The court must determine whether it is just that the asserted claims should be determined before the bankruptcy proceedings are allowed to continue, in other words whether it is a claim that is proper and reasonable to litigate (Vogwell v Vogwell).
A counter-claim may only be set up under s.40(1)(g) if it is due against the judgment creditor in the same right as is the judgment against the debtor which forms the basis of the bankruptcy notice and must be mutual with the debt claimed in the bankruptcy notice (Stec v Orfanos [1999] FCA 457). The value of any unliquidated claim must be quantified to determine whether it is equal to or exceeding the amount of the judgment debt. Further, it must be established that the debtor could not have set up the claim in the proceeding in which judgment was obtained, having regard to legal considerations, not practicalities (Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433; [1980] FCA 78).
In determining whether Mr Tadros has satisfied the court that he has a counter-claim within s.40(1)(g) of the Act, the court has to engage in some kind of preliminary assessment, but does not determine the counter-claim. The evidence tendered on an application to set aside a bankruptcy notice “is to be tested for admissibility, not as if the proceedings were one in which the debtor’s claim was finally being determined, but by reference to the question of whether the court should be satisfied that the debtor has a claim deserving to be finally determined” (see Re Glew at [10] – [12]).
However, there is authority to suggest that the mere production of a statement of claim alleging facts which if true might give rise to such a claim will be insufficient to satisfy the court as requirement (Re Cox (1934) 7 ABC 98). The debtor bears the onus and must “show” the existence of a counter-claim, set-off or cross demand by producing admissible evidence of it (Re Brink).
In this case Mr Tadros relies on the history of proceedings, past cross-claims and the existence of a proposed amended cross-claim which he hopes to obtain leave to rely on in the Supreme Court proceedings and an incomplete “Preliminary Report” tendered in these proceedings which he intends to seek to rely on in the Supreme Court proceedings.
In relation to the history of proceedings, to date all of the various pleadings relied upon by Mr Tadros in each of the proceedings have been struck out or abandoned. The existing cross-claim in the Supreme Court is the subject of another strike-out application.
Importantly, Mr Tadros had the opportunity to amend his pleadings and to pursue any claim against the respondents in the Federal Court proceedings. He consented to orders made on 12 December 2007 giving him leave to file a further amended statement of claim. He did not file a further amended statement of claim, notwithstanding that he had consented to orders that his existing pleadings be struck out on default.
The Federal Court then dismissed the proceedings (which were in substantially the same form as the cross-claim now relied on in the Supreme Court) on the basis that Mr Tadros had no reasonable prospects of successfully prosecuting the proceedings. On the date of that order (3 June 2008) Mr Tadros was represented by both solicitor and counsel. Insofar as Mr Tadros takes issue with the dismissal of the Federal Court proceedings, he took no further steps in the Federal Court.
Counsel for the respondents submitted that while differing views had been expressed in the Federal Court in Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd and Others a majority of the full Federal Court held that where the entire proceedings had been dealt with, an order under s.31A is “final” and not “interlocutory”. On this basis it was submitted that the doctrines of estoppel or res judicata applied to prevent the cross-claim from being successfully prosecuted.
The applicant disputed this. However neither party referred to more recent decisions of the Full Court of the Federal Court (see in particular Luck v University of Southern Queensland (2009) 176 FCR 268; [2009] FCAFC 73 at [101] per Rares J and [58] per Graham J and Kowalski v MMAL Staff Superannuation Fund Pty Ltd and Another (2009) 178 FCR 401; [2009] FCAFC 117) which have held that an order for summary dismissal under s.31A is interlocutory.
While I am not persuaded by the respondents’ submissions based on estoppel or res judicata, what the history of the proceedings (particularly in the Federal Court) does suggest is that there is a lack of substance to the applicant’s asserted cross-claim.
The current cross-claim filed in the Supreme Court is akin to that struck out in the Federal Court and is itself the subject of a strike-out application in the Supreme Court proceedings. While the fact of a strike-out application does not establish a lack of merit, it appears that the challenged pleadings are intended to be superseded by a further proposed cross-claim purporting to include two further cross-defendants and further allegations. It can be inferred that this proposed pleading is proffered to pre-empt the expected result of the strike out applications.
The proposed further cross-claim asserts a number of claims against the company J & R. J & R is not the judgment creditor. The proposed cross-claim also asserts causes of action against a Mr B Kannan, CBD Tax Pty Ltd (accountants), Mr S. El-Hawache and Mr J.J. Lahood (who are both solicitors) and Mr Wakim. While a Marie Kannan is named as a cross-defendant there is no discrete “claim” or “cause of action” against her (albeit that a stay of the whole proceedings is sought by Mr Tadros until she is represented by a tutor).
Allegations are made that fiduciary duties were owed to Mr Tadros by Mr Wakim, Mrs Wakim and J & R and that representations were made by Mr Wakim to Mr Tadros. The proposed pleadings maintain the essential basis of the original asserted cross-claim under the Trade Practices Act. However, most of the causes of action in the proposed amended cross-claim are against J & R interspersed with claims (for example) that when making certain demands as an agent for J & R, Mr Wakim engaged in undue harassment and coercion and made representations for himself or as an agent for Mrs Wakim and/or J & R. Mr Tadros claims that he is entitled to compensation or damages from J & R, and also seems to assert a breach of fiduciary duty and liability on the part of Mr Wakim, although these claims are not pleaded as discrete causes of action against Mr Wakim. He claims Mr Wakim, as well as J & R and a Mr Kannan “engaged ed (sic) in misleading and deceptive conduct in breach of sec 52 of the Trade Practices Act 1974” or “assisted” it within s.75B of the Trade Practices Act. While it was submitted that the proposed cross-claim added claims for “tortuous (sic) interference with contract or economic relations and tortuous (sic) conspiracy against Joseph Wakim and his agent Ben Wakim and for receiving pursuant to the principle in Barnes v Addy against Rita Wakim”, it is not clear that all such claims are raised on the face of the proposed further amended statement of cross-claim. “Ben Wakim” is not a party to those proceedings and there is no clear separate “claim” or “cause of action” against Mr Wakim in this somewhat confusingly drafted document.
The only apparent connection which Mrs Wakim has with the matters alleged in the proposed pleading are allegations that she was a shareholder and director of J & R and wife of Joseph Wakim and that she and Mr Wakim rented premises to Mr Tadros. These relationships appeared to found the only claim (amongst over 20) clearly described as a claim against Rita Wakim in the proposed amended cross-claim. Although references are made to Mrs Wakim in connection with other “claims”, the “Claim against RW” is said to be a claim within the first limb of the rule in Barnes v Addy (1874) LR9ChApp 244; (1874) 43 LJ Ch 513; (1874) 30 LT 4; (1874) 22 WR 505. This appears to be a reference to the liability of those who receive property as a consequence of someone else’s breach of a fiduciary obligation (see generally Farah Constructions Pty Limited and Others v Say-Dee Pty Limited (2007) 230 CLR 89; [2007] HCA 22). Thus it is asserted that Mrs Wakim has been paid monies by J & R that are funds which J & R received from Mr Tadros to which it was not entitled, that when receiving these funds she knew they were paid by Mr Tadros and that neither she nor J & R was entitled to them and that as a consequence Mr Tadros is entitled to an order that Mrs Wakim pay him all monies received by J & R from him and paid to her. However no particulars are provided. Instead it is stated that particulars will be provided at a later time. In addition it is generally asserted without elaboration that: “RW aided and abetted J & R in iuts (sic) misleading and deceptive conduct toward Tadros within the meaning of s75B of the TPA”.
Such proposed pleadings may well face some potential difficulties. Leave is required and the proposed further amended cross-claim is yet to be considered by the Supreme Court.
I also note that, in Stec v Orfanos (at [24]), it was stated that where a bankruptcy notice is issued by joint creditors the debtor may not raise a debt owed by one of them individually. The proposed Barnes v Addy claim is against Mrs Wakim only (not Mr and Mrs Wakim jointly). Other claims are apparently intended to be made against Mr Wakim (or Mr Wakim and J & R) (although it must be said that the proposed amended statement of claim is not entirely clear). As Spender J stated in Slack v Bottoms English Solicitors [2002] FCA 1445 at [13] “a debtor can raise, as an answer to a bankruptcy notice issued by a number of joint creditors, only a cross-demand against those creditors jointly” (and see James v Federal Commissioner of Taxation (1955) 93 CLR 631 at 643; [1955] HCA 75).
The onus of proving that he has a counter-claim, set-off or cross demand falls upon the debtor. Insofar as he relies on the proposed amended cross-claim and the fact that it departs from earlier pleadings which have been struck out, the highest that this evidence gets is an unverified draft pleading proved on his solicitor’s affidavit. At best this is evidence of instructions to his solicitor. It is not sufficient to satisfy me of the fact that the debtor has a specific claim which is available to him against both of the respondent creditors.
The mere production of a cross-claim or proposed cross-claim alleging facts which if true might give rise to a counter-claim within s.40(1)(g) is not sufficient (see Re Cox). Both the current and proposed cross-claims are very generally expressed and lack clarity in various respects, notwithstanding the numerous opportunities Mr Tadros has had to replead to show the existence of such a claim. The pleadings and history of proceedings do not satisfy me that there is sufficient substance to the asserted claim against Mr and Mrs Wakim, having regard to the nature of the pleadings and in circumstances where Mr Tadros did not pursue the opportunity to have such claims determined by the Federal Court.
The applicant has not shown the existence of a counter-claim, set-off or cross demand within s.40(1)(g) by producing admissible evidence of it (Re Brink). It was submitted that there would be “affidavit and testimonial” evidence from Mr Tadros and from Mr E.G. Wakim in the Supreme Court proceedings. However such evidence is not before this court. Rather, in his affidavit of 15 February 2010 accompanying the application to set aside the Bankruptcy Notice, Mr Tadros merely asserted generally that he had incurred substantial loss and damages as a result of misleading, deceptive and negligent conduct of Mr and Mrs Wakim, and referred to the then pleadings in the Supreme Court. Mr Ardino’s affidavit addressed procedural issues. It appeared to assert that because he had advice from junior counsel that Mr Tadros’ proposed amended cross-claim discloses “a valid cause of action” and that he had reasonable prospects of success if leave was granted by the Supreme Court for the proposed amended cross-claim to be filed and for the matter to proceed to hearing, the court should be satisfied as required under s.40(1)(g) of the Act. I am not so satisfied.
The only evidence before the court beyond the existing and proposed statements of cross-claim and Mr Tadros’ assertions is a document said to be a “Preliminary Report” pertaining to Four Wheels Business Debts and Assessment of Damages for Anthony Tadros from a forensic accountant. This “Preliminary Report” is not finalised or in proper form to be admitted into evidence as an expert report. It is not signed (although it bears the typed name Ian Paul). There is no curriculum vitae attached and it is not otherwise possible to ascertain who prepared it. None of the information on which it was prepared (except the cross-claim) has been put before the court. It does not prove (or, indeed, purport to prove) any fact not dependant on other factual matters which are not in evidence. It cannot be tested on the material before the court.
The purpose of the “Preliminary Report” is said to be to assess business debts allegedly owed by Mr Tadros to J & R (not to Mr and Mrs Wakim). Insofar as it purports to assess the quantum of damages sustained by Mr Tadros arising out of conduct said to have been engaged in by other parties (including Mr and Mrs Wakim) it relies on assertions in the proposed cross-claim, which, as indicated, is at best evidence of instructions to Mr Tadros’ solicitor who annexed an unverified draft cross-claim to his affidavit.
In considering whether there is evidence that the debtor has a claim of “sufficient substance” against Mr and Mrs Wakim, I have also had regard to the fact that there is no reference to Mrs Wakim in the so-called “Preliminary Report” (as distinct from Mr Wakim and J & R), although it purports to pertain to business debts and assessment of damages sustained by Mr Tadros as a result of the conduct of the parties to the Supreme Court proceedings including Mrs Wakim (except insofar as reference is made to cheques made payable to “J & R Wakim” which are described as payments to Mr Wakim).
There are also assertions of breaches of relationship of trust and confidence between the debtor and the creditors, interspersed with assertions of violent threats and duress in a continuing business relationship. However no evidence from the applicant debtor has been adduced to support these allegations, whether in this court or in any other jurisdiction. The “Preliminary Report” assumes the assertions are true. It does not show that Mr Tadros has a fair chance of success or prima facie case that he has a genuine cross-claim against Mr and Mrs Wakim.
I have borne in mind that in these proceedings the evidence is to be tested for admissibility on the basis suggested by Lindgren J in Re Glew at [10] – [12], that is “by reference to the question whether the Court should be satisfied that the debtor has a claim deserving to be finally determined”. However, the tendered “Preliminary Report” can be given little weight. Taken together, the material before the court does not satisfy me that on balance Mr Tadros has a prima facie case, a fair chance of success or a claim that is proper and reasonable to litigate against Mr and Mrs Wakim such that those claims ought in justice to be heard and determined before bankruptcy proceedings are allowed to continue.
I am not satisfied that Mr Tadros has established that he has a claim within s.40(1)(g) against Mr and Mrs Wakim such that it is in the interests of justice that the Bankruptcy Notice be set aside.
Hence it is not necessary to determine whether based on objective legal considerations any counter-claim, set-off or cross demand could have been set up in the proceedings on which the Bankruptcy Notice was based (a matter raised at the hearing, but not in the notice of opposition).
Finally, insofar as the applicant sought to stay any prospective bankruptcy proceedings until his cross-claim in the Supreme Court proceedings has been finalised, I am of the view that even if I could make such an order it would not be appropriate to do so. As there is no creditor’s petition on foot, there is no justification for any order staying the hearing of a creditor’s petition.
The application should be dismissed.

I certify that the preceding ninety-four (94) paragraphs are a true copy of the reasons for judgment of Barnes FM

Date: 28 September 2010