Treadwell v Hickey
[2006] FMCA 1727
•3 November 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| TREADWELL v HICKEY | [2006] FMCA 1727 |
| BANKRUPTCY – Bankruptcy notice – judgment debt for costs assessed following discontinuance of claim brought by debtor and debtor’s company – company’s claim assigned to debtor after discontinuance – whether able to be set up in costs assessment – whether existed at date of discontinuance – fresh proceeding brought in Supreme Court – significance of stay pending payment of costs order – bankruptcy notice set aside. |
Bankruptcy Act 1966 (Cth), ss.40(1)(g), 41(7)
Legal Profession Act 2004 (NSW), ss.353, 353(1), 368, 368(5)
Uniform Civil Procedure Rules 2005 (NSW), r.12.4
Carver v Westpac Banking Corporation [2000] FCA 1517
Ebert v The Union Trustee Company of Australia Ltd (1960) 104 CLR 346
Farrugia v Farrugia (2000) 99 FCR 16
Glew v Harrowell of Hunt & Hunt Lawyers(2003) 198 ALR 331, [2003] FCA 373
In the matter of Sylvia Amos. Sylvia Amos v Joanne Catherine Lillyman [1998] 1725 FCA
Maniotis v Valimi Pty Ltd [2002] VSCA 91
Melbourne v Relativity Pty Ltd [1999] FCA 160
Re Deen; Ex Parte Deen v Muller (1995) 58 FCR 441
| Applicant: | ROBIN ERNEST TREADWELL |
| Respondent: | RICHARD JOHN HICKEY |
| File Number: | SYG2241 of 2006 |
| Judgment of: | Smith FM |
| Hearing date: | 3 November 2006 |
| Delivered at: | Sydney |
| Delivered on: | 3 November 2006 |
REPRESENTATION
| Counsel for the Applicant: | Mr D Fitzpatrick |
| Solicitors for the Applicant: | Fitzpatrick Solicitors Pty Ltd |
| Counsel for the Respondent: | Mr R Wilson |
| Solicitors for the Respondent: | McMahons National Lawyers |
ORDERS
Bankruptcy Notice NN2668 of 2006 is set aside.
The respondent must pay the applicant’s costs as agreed or assessed in accordance with the Bankruptcy Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG2241 of 2006
| ROBIN ERNEST TREADWELL |
Applicant
And
| RICHARD JOHN HICKEY |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
I have before me an application filed on 14 August 2006, seeking an order to set aside a bankruptcy notice issued on 7 July 2006, being Bankruptcy Notice NN2668/06 (“the bankruptcy notice”) issued at the request of the respondent. The notice claims that a debt of $28,938.54 is owing under an order of the Local Court of NSW entered on 16 May 2006.
The basis of the application, as presented to me at the hearing today, is that the applicant’s failure to pay the judgment debt upon which the bankruptcy notice is based could not give rise to an act of bankruptcy, because the Court should be satisfied that the applicant at all relevant dates, i.e at the time of its issuance, service, date for compliance, and today, had, within the terms of s.40(1)(g) of the Bankruptcy Act 1966 (Cth):
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;
The background to the bankruptcy notice can be explained briefly. Further details appear in the affidavits that were read in the matter. The applicant was at relevant times the managing director of a group of companies which the evidence refers to as “The Greenfold Group”, and which included a company “Greenfold Consulting Pty Ltd”, as well as a company “Wenrob Pty Ltd” and several other companies (“the Greenfold companies”).
From 1998 until about 2001 the respondent was engaged to perform accountancy services for the applicant and the Greenfold companies. His offices were adjacent to the companies’ offices, and for a period he became involved in the management of the companies as a director. The applicant asserts a long list of professional omissions and misconduct by the respondent over the years of his involvement in the companies, in relation to the lodgement of statutory notices and other obligations on the companies. The applicant alleges that the respondent’s actions and omissions gave rise to significant pecuniary penalties, expenses and losses, including significant amounts of remuneration paid to the respondent which were not properly earned.
Proceedings to recover damages from the respondent under these heads were commenced in 2003 in the Supreme Court of New South Wales, Equity Division, No.3125 of 2003. In that proceeding, Greenfold Consulting Pty Ltd, Wenrob Pty Ltd and the applicant were the plaintiffs and the respondent was the defendant. It contained particularised allegations of professional fault and damages which it is unnecessary for me to explore in detail.
The history of the matter in the Supreme Court is shown in a computer printout of the Court listings. This indicates multiple listings before the Registrar in Equity, with the giving of directions that appear not to have been complied with. Ultimately, and shortly before an application by the respondent for dismissal of the matter for want of prosecution, the Registrar on 11 March 2005 gave leave to the plaintiffs to file a notice of discontinuance. A notice of discontinuance was filed in Court, and the Registrar ordered that: “plaintiff to pay defendant’s costs of the proceedings”.
The applicant in his evidence to this Court suggests that the discontinuance was also related to one of the plaintiffs, Greenfold Consulting Pty Ltd, being placed in liquidation on 22 September 2004. The evidence before me is insufficient for me to arrive at a clear finding as to the reasons for the discontinuance. However, it seems that the applicant had not abandoned hope of obtaining damages from the respondent.
On 26 July 2005, the applicant executed a deed of assignment with the liquidator of Greenfold Consulting Pty Ltd, in which the liquidator assigned to the applicant causes of action including “all available Causes of Action against Richard John Hickey”, i.e. the present respondent creditor. The causes of action thereby assigned included causes of action which originally accrued to other companies in the Greenfold Group, and had been the subject of earlier assignments between their liquidators and Greenfold Consulting Pty Ltd before it went into liquidation itself. The applicant therefore acquired the title to most, if not all, of the causes of action which had previously been the subject of the Supreme Court proceedings which were discontinued.
On 10 August 2005, he and Wenrob Pty Ltd commenced a new proceeding in the Supreme Court of New South Wales, Equity Division, against the respondent. This encompassed the assigned causes of action which I have referred to above. It contained particularised allegations of fault on the part of the respondent, and claimed itemised losses totalling $497,155.58. Alternative and additional amounts were also claimed, and declarations in relation to Corporations Act contraventions were also sought.
The respondent’s response to the commencement of that proceeding was to bring a notice of motion seeking a stay on the proceeding under r.12.4 of the Uniform Civil Procedure Rules 2005 (NSW). This rule empowered the Supreme Court to stay a proceeding brought after the discontinuance of an earlier proceeding “until those costs [of the discontinued proceeding] are paid”.
According to a computer printout of the listings in that proceeding, on 10 March 2006 the motion was resolved:
By consent proceedings number 4422 of 2005 be stayed until such time as the costs pursuant to the costs order made by Registrar Berecry on 11.3.05 in proceedings number 3125 of 2003 are agreed or assessed and subsequently paid.
The motion was subsequently listed before Brereton J on 11 July 2006. It is unclear what the issues were that were argued before his Honour, and his Honour’s ex tempore judgment is not before me, but the listing record indicates that the orders made were:
That the plaintiffs pay the defendant’s costs of the notice of motion filed on 7 November 2005 up to and including 10 March 2006. Stood over to 17 October 2006 at 9.30 before Registrar for directions.
No further evidence is before me as to the current state of the matter in the Supreme Court, although I was told from the bar table that further listings are imminent, including a listing in which the respondent will be seeking the summary dismissal of the proceeding.
Meanwhile, the respondent obtained an assessment of the costs ordered on 11 March 2005. The procedures which were followed to achieve this are not revealed in the evidence before me. This contains only a judgment of the Local Court of New South Wales, in which the plaintiff is shown as the present respondent and the defendants are shown as Wenrob Pty Ltd and the present applicant. The certificate of the Registrar of the Local Court, which is attached to the present bankruptcy notice, reads:
JUDGMENT/ORDER DETAILS
Judgment in favour of: RICHARD J HICKEYDate entered: 16/05/2006
Amount of judgment: $28,938.54
(exclusive of costs to be assessed)
There is no evidence before me as to the assessment certificate, which I am asked to assume gave rise to that judgment. However, it appears to be common ground that it was a certificate issued on a cost assessment initiated by an application under s.353 of the Legal Profession Act 2004 (NSW) for a party/party costs assessment. That provision states:
353Application for assessment of party/party costs
(1)A person who has paid or is liable to pay, or who is entitled to receive or who has received, costs as a result of an order for the payment of an unspecified amount of costs made by a court or a tribunal may apply to the Manager, Costs Assessment for an assessment of the whole of, or any part of, those costs.
The Legal Profession Act then provides a procedure for referral to a costs assessor, investigation by the cost assessor, and the making of a determination under s.368 by the costs assessor, resulting in the issuing of “a certificate that sets out the determination”. In relation to any unpaid amount under that certificate, s.368(5) provides:
368Certificate as to determination
…
(5)In the case of an amount of costs that has not been paid, the certificate is, on the filing of the certificate in the office or registry of a court having jurisdiction to order the payment of that amount of money, and with no further action, taken to be a judgment of that court for the amount of unpaid costs, and the rate of any interest payable in respect of that amount of costs is the rate of interest in the court in which the certificate is filed.
It appears to be common ground that the present judgment of the Local Court arose under that provision.
Soon after obtaining the judgment, the present respondent attempted to commence bankruptcy proceedings by way of the issuing of a bankruptcy notice against the applicant. However, that notice was subsequently conceded to be invalid.
A new notice, being the present bankruptcy notice, was then issued on 7 July 2006. No issues are raised as to its formal validity. It claims a debt of $28,938.54 as shown in the Schedule. The Schedule identifies that amount as the amount of the judgment or orders, and the attached certificate is the judgment or order of the Local Court which I have referred to above.
The present application to set aside the bankruptcy notice was filed on 14 August 2006, and has been adjourned several times by consent before being set down for hearing by me today.
No written submission has been filed to indicate the basis for the application, but the application states:
A.FINAL ORDERS SOUGHT BY APPLICANT
This Application is made pursuant to section 30, 40(1)(g), and 41 of the Bankruptcy Act 1966 to set aside a Bankruptcy Notice upon the basis of a cross claim, set off or cross demand within the terms of section 41(7) of the Bankruptcy Act 1966 and upon the basis that the issue and service of the Bankruptcy Notice is an abuse of process under the Bankruptcy Act 1966.
On the grounds stated in the supporting affidavit or statement of claim, the applicant seeks the following orders:
1.An order setting aside the Bankruptcy Notice issued at the request of the Respondent on 7 July 2006 (No. NN2668 of 2006) and served on 24 July 2006.
2.Costs.
3.Such further or other order(s) as to the Court seems fit.
The applicant’s representative today presented his arguments on the first basis indicated in the application, and did not make any submissions in relation to abuse of process. It is unnecessary for me therefore to consider that question.
Although the pleading in the current matter in the Supreme Court appears to encompass some personal claims by the applicant which were not the subject of the assignment from Greenfold Consulting Pty Ltd, the applicant’s representatives relied in support of the present application upon only those claims against the respondent which passed to the applicant under the July 2005 assignment, i.e. after the conclusion of the first proceeding, and after the costs order. In relation to those claims it was argued:
i)the applicant could not have set up those claims in the proceeding “in which the judgment or order was obtained”, because that proceeding was the costs assessment proceeding only, and the procedures for the costs assessment did not permit the raising of counter‑claims or set‑offs; or
ii)alternatively, if the relevant “proceeding” which produced the Local Court judgment was, or encompassed, the discontinued Supreme Court proceeding, the applicant was not able to set up the present claims in that proceeding, since he only acquired title to them subsequent to the termination of that proceeding;
iii)the assigned claims were genuine claims, of sufficient prima facie merit to satisfy the description “a counter‑claim, set‑off or cross demand” within s.40(1)(g);
iv)the fact that the current proceeding in the Supreme Court is subject to a stay under r.12.4, does not prevent the claim falling within the exclusion in s.40(1)(g), and should not cause the Court to decline to set aside the bankruptcy notice, since the stay should be regarded as temporary;
v)considerations of justice or discretion in relation to giving relief in setting aside the bankruptcy notice or terminating proceedings relying on it, fell in favour of the applicant.
I shall consider these five issues.
In relation to the first issue, neither representative referred me to the relevant costs assessment provisions of the Legal Profession Act which I have set out above, nor to authorities which have examined their effect. Counsel for the respondent cited a judgment of Whitlam J: In the matter of Sylvia Amos. Sylvia Amos v Joanne Catherine Lillyman [1998] 1725 FCA delivered on 1 July 1998, and a judgment of Moore J in Carver v Westpac Banking Corporation [2000] FCA 1517. In those judgments there appears to be an assumption that a judgment for an amount of costs determined following an order for costs made in proceedings in the Supreme Court should be regarded as part of the proceeding in the Supreme Court in which the costs order was made. The reasoning of Whitlam J is not entirely clear, nor is the factual context of Moore J’s judgment. Nor have the submissions presented to me explored whether the costs assessment process at the time of those judgments was equivalent to the current regime.
A judgment of Lindgren J in Glew v Harrowell of Hunt & Hunt Lawyers(2003) 198 ALR 331, [2003] FCA 373 (“Glew”) records a concession by the parties at [7], which might suggest an acceptance by Lindgren J that a judgment entered under the costs assessment process is made in a proceeding in which counter claims, set offs or cross demands cannot be brought. However, I do not consider that his Honour’s judgment addressed that issue.
I am inclined to conclude that a costs assessment proceeding under the present regime of the Legal Profession Act, is a separate proceeding from the proceeding which gave rise to the right to obtain the judgment for quantified costs. If this is right, then it is clear that the applicant’s claims against the respondent “could not have set up in the action or proceeding in which the judgment or order was obtained” within s.40(1)(g). However, I have not had time to conduct my own researches into this issue and, as it will appear, I have reached definite conclusions based upon the assumption that the Local Court judgment can be regarded as part of the discontinued Supreme Court proceedings in which the same claims were, in fact, actually made by Greenfold Consulting Pty Ltd against the respondent.
The second issue therefore arises, and requires me to consider whether the applicant himself “had” these claims while the discontinued Supreme Court proceeding was current, and whether he “could have set [them] up” in that proceeding.
Counsel for the respondent contended that, notwithstanding that the assignment of the causes of action to the applicant occurred subsequent to the discontinuance of the proceeding, the applicant relevantly did “have” the claims now relied on, because as a practical matter an assignment was available to him and could have been obtained earlier and in the course of the discontinued proceeding.
However, at a factual level, I do not accept that the title to make those claims was in fact available to the applicant as “a practical matter”. Prima facie on the evidence before me, the assignment presents a transaction between separate entities, and required consent by or on behalf of both. I am not persuaded that the applicant was able to call upon or obtain the assignment prior to the discontinuance of the proceeding.
Moreover, in my opinion, the authorities do not support the argument that a “practical ability” to procure the assignment would have been enough to allow the presently assigned claims to be characterised as available to the applicant to be set up in the discontinued proceeding.
Counsel for the respondent referred me to a number of cases which are referred to in [40.1.350] of the Australian Bankruptcy Law & Practice (“the Practice”), where courts have held that a person with a title to make a claim cannot argue that it was not relevantly available because leave of the court, or an exercise of discretion, or an order transferring a proceeding to a different jurisdiction, was required. He argued that the obtaining of an assignment of a cause of action presented an analogous situation.
However, I do not accept this submission. Rather, I consider that the present situation falls within an authority which is cited elsewhere in the same paragraph by the learned editors of the Practice. This is the judgment of Drummond J in Re Deen; Ex Parte Deen v Muller (1995) 58 FCR 441 at 442‑443. In my opinion the editors correctly identified the effect of this authority at [40.1.350]:
Accordingly, only causes of action the debtor was not entitled, as a matter of law, to plead up to judgment in the relevant proceeding are capable of amounting to counterclaims of the kind referred to in s 40(1)(g): Re Deen; Ex parte Deen v Muller (1995) 58 FCR 441 at 442 443 (Drummond J). Where the claim relied on is one that was assigned to the debtor after judgment was obtained by the creditor on the original proceeding, the counterclaim can be relied on to have a bankruptcy notice set aside, even if the debtor could have procured the assignment to himself or herself prior to judgment: Re Deen; Ex parte Deen v Muller, above, following Re Debtor [1914] 3 KB 726; Re Vicini; Ex parte EA Sealey Co (1982) 64 FLR 323 at 326. That is because “the debtor, as matters stood at the time the action was proceeding, had no legal entitlement to set up the counterclaim in that action before judgment”: Re Deen; Ex parte Deen v Muller (1995) 58 FCR 441 at 442.
In my opinion, the rights obtained by the applicant under the assignment from Greenfold Consulting Pty Ltd fall clearly within that authority cited by the learned editors. I therefore find that the claims now relied upon by the applicant “could not have set up in” the discontinued proceeding or the cost assessment proceeding, and come within the exclusion in s.40(1)(g).
I turn next to the third issue, which is whether I am satisfied that those claims have the requisite merit and substance. In Ebert v The Union Trustee Company of Australia Ltd (1960) 104 CLR 346 at 350, the High Court suggested a standard of satisfaction for a bankruptcy court in the present situation:
Perhaps the standard may be expressed by saying that 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 out a prima facie case before a court trying the issues that are involved in his counter‑claim, set‑off or cross demand.
This authority, and more recent authorities, were summarised by Lindgren J in Glew (supra) at [9] and [10]:
[9]There are authorities suggesting that Glew and Tresidder must satisfy me of the following interrelated and sometimes overlapping matters:
othat 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 Union Trustee Co of Australia Ltd (1960) 104 CLR 346 (Ebert) at 350; Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 at 438‑9 ; 44 FLR 135 at 141 (Brink); Gomez v State Bank of New South Wales Ltd [2002] FCAFC 101; BC200201643 at [17], [18];
othat they have “a fair chance of success” or are “fairly entitled to litigate” the claim: Brink at ALR 438‑9; FLR 141; Gould v Day [1999] FCA 1650; BC9907767 at [27], [28]; Re Capsanis; Capsanis v Owners -- Strata Plan 11727 [2000] FCA 1262; BC200005275 at [11]; and
othat they are advancing a “genuine” or “bona fide” claim: Re Capsanis; Capsanis v Owners -- Strata Plan 11727 [2000] FCA 1262; BC200005275 at [11].
It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at ALR 438‑9; FLR 141) the reference to a “prima facie case” in Ebert as a reference to “a fair chance of success”.
[10]In Brink Lockhart J said (at ALR 438‑9; FLR 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.
In the present case, the evidence in support of the applicant’s claims of professional liability on the part of the respondent is incomplete. However, the pleading which has been filed is detailed. It is verified by affidavit sworn by the applicant, and is supported by further sworn and verified statements of the applicant. In my opinion, he has presented sufficient evidence to show substantial defects in the accounting services provided by the respondent to the Greenfold companies, and has raised a prima facie case for an entitlement of those companies to damages exceeding the amount of the judgment debt.
Counsel for the respondent did not take me into the details of the evidence in this respect, so as to argue against that conclusion, and I do not think it necessary for me to make detailed findings. There was no attempt by the respondent to undermine the sworn evidence of the applicant. Moreover, the Defence which has been filed by the respondent in the current Supreme Court proceeding does not deny liability or quantum, nor raise any substantive defence. Rather, it puts the applicant to proof by a series of “does not admit” pleadings.
Upon all the evidence before me, I find that the applicant does “have” a claim satisfying me to the requisite degree suggested in the above authorities.
Counsel for the respondent submitted that I should find that the applicant has not advanced a “genuine” or “bona fide” claim within the above principles. I was invited to consider the chronology of the matter which I have summarised above, and to take into account the dilatory fashion in which the respondent pursued his claims in the discontinued proceedings, when he was represented by different lawyers.
I was also referred to the fact that, notwithstanding the stay in the current proceeding, the applicant has still to pay the amount of costs which would allow his Supreme Court proceeding to continue. It was submitted in the context of the third issue, and also in relation to general issues of discretion, that the applicant is not seriously maintaining his claims in the Supreme Court, but is merely using them as a basis for avoiding bankruptcy. It was pointed out that in the passage from the High Court’s decision in Guss v Johnstone which was quoted by Lindgren J in the passage extracted above, it is suggested that the Court should take into account “the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim”.
I shall return to consider the broader aspects of these submissions below. However, taking them into account insofar as they bear upon my satisfaction as to the genuineness with which the applicant presents the present Supreme Court proceeding as a claim coming within s.40(1)(g), I am not satisfied that the matters referred to should cause me not to be so satisfied. The reasons why the applicant has been slow or unable to meet the costs order were not explored in the evidence before me nor in cross‑examination. I am not persuaded on the evidence before me that the applicant does not genuinely wish to proceed upon his claims made in the Supreme Court.
Turning to the fourth issue, there are authorities that indicate that the prospects of successful recovery of an amount exceeding the judgment debt should be addressed by the Court (see for example Melbourne v Relativity Pty Ltd [1999] FCA 160 at [34]). On the evidence before me, there is no indication whether the applicant will ever be able to remove the stay on pursuit of the claim in the Supreme Court, so as to be able to recover the damages sought. It is an admitted fact that, since the judgment was entered into the Local Court, the costs have not been paid, and the stay order which was imposed in March 2006 is still on foot.
I raised this issue with the representative of the applicant in the course of his submissions. However, he cited authority in the Court of Appeal of the Supreme Court of Victoria, Maniotis v Valimi Pty Ltd [2002] VSCA 91 (“Maniotis”), in support of a submission that the presence of the stay did not prevent the Supreme Court claim being characterised as one falling within s.40(1)(g).
Maniotis concerned the Corporations Act provision in relation to statutory demands on corporations which is equivalent to s.40(1)(g), and their Honours’ reasoning treated authorities relating to the present bankruptcy context as directly analogous. In that case, the non‑payment of a costs order had resulted in a stay on a proceeding until those costs were paid. The Court of Appeal held that the presence of that stay did not prevent the existence of the stayed proceeding being regarded as an “offsetting claim” which prevented reliance on the statutory demand. The reasoning of their Honours is relevant to considering both this issue, and the general issues of discretion:
CALLAWAY, J.A. said:
[2]The only question that we have to decide is whether a presently existing, and not contingent or inchoate, claim cannot be “a genuine claim that the company has against the respondent” within the meaning of the definition of “offsetting claim” in s.459H(5) by reason only that a proceeding against the respondent in which it is sought to be enforced is temporarily stayed. To my mind, that question answers itself. The company still has the claim, and it is otherwise genuine. The effect of the stay is simply that, for the time being, the proceeding cannot go forward. …
EAMES, J.A. said:
[13]It is necessary to consider the effect of the stay of proceedings in this case. The appellants contend, in effect, that the stay operates in a manner similar to dismissal of the claim. However, a stay of proceedings until payment of costs does not amount to a permanent stay, the latter being a stay whereby the rights of the parties are finally disposed of or conclusively determined. A stay which is not a permanent stay does not bring the action to an end; the action becomes “static” but can be restarted at any time.
[14]In the present case the debtor has an existing claim, one which is being enforced by an action which is presently stalled. Before the enforcement process can continue the stay must be removed. Neither Re G.E.B., A Debtor nor any of the other cases cited by counsel were concerned with the question of “effectiveness” in the sense that counsel sought to apply that term to the situation when a stay was in operation. Warren, J. accepted that there were authorities which imposed a requirement that the offsetting claim be “effective”, but held that the cross claim made in the respondent’s action was an effective claim, because it was merely stayed, not struck out or dismissed. I do not understand her Honour, thereby, to have been agreeing that there was any additional requirement which had to be imported into the statutory definition of an offsetting claim, but merely acknowledging that the debtor must have a genuine offsetting claim as at the time of the hearing.
[15]Counsel for the appellants complained that unless a requirement is imposed that a cross demand be “effective”, in the sense for which they contend, then an anomalous situation would persist. Counsel contend that what the appellants are seeking to do here is not to defeat the action, but merely to secure payment of costs, as they are entitled to do. If the respondent is permitted to rely on its action as the offsetting claim, notwithstanding the fact that it has been stayed, then, the appellants submit, they are denied recourse to the remedy under s.459G of the Corporations Act.
[16]The appellants contend that to allow the statutory demand to be defeated in that way would allow the debtor to defeat the statutory demand while not having an offsetting claim which was capable of being pursued. The imposition of a requirement that the cross claim must be “effective” overcomes the impasse, they submit, and the respondent is not thereby denied the right to pursue its action, because payment of the costs will allow the action to resume forthwith. Furthermore, counsel submit, even if the costs are not paid and a liquidator is appointed to the company the liquidator might choose to pay the costs and allow the action to proceed.
[17]The appellants are not without remedy to overcome the impasse which the stay produces in their attempt to enforce the statutory notice. In any event, the present impasse is one created by themselves as much as by the respondent. The appellants had chosen not to pursue their application to Bongiorno, J., under R.63.03(3)(a), to have the proceeding dismissed for non payment of interlocutory costs. In pursuing, instead, the alternative application for a stay of proceedings until the costs were paid counsel for the appellants expressly informed his Honour (and Bongiorno, J. treated the information as relevant to his decision to grant a stay) that the appellants did not seek to shut out the respondent from prosecuting its case.
[18]Whatever may be the practical and policy considerations which might justify the imposition of the requirement that a cross‑demand be “effective”, in the sense suggested on behalf of the appellants, the short answer to their contention is that the introduction of such a requirement neither gains support from the authorities cited by counsel with respect to the interpretation of Australian or foreign bankruptcy legislation nor is it a requirement imposed by the terms of the present legislation.
[19]The amendments to Division 3 of Part 5.4 of the Corporations Law which followed upon passage of the Corporate Law Reform Act 1992 (Commonwealth) made considerable changes to the law relating to statutory demands, in particular by removing grounds for technical objection to the statutory demand on account of such matters as formal defects or misdescription which did not create substantial injustice and by providing for the quick resolution of the issue of solvency and determination of the need for winding up of a company. In making such sweeping changes, however, Parliament did not take the opportunity to impose a requirement in s.459H that a counterclaim, set‑off or cross demand had to be “effective” in the manner suggested by the appellants. In my opinion, the court should not now read such a requirement into the definition of “offsetting claim”.
(citations omitted)
O’BRYAN, A.J.A. said:
[37]Reference will need to be made to a number of authorities relied upon by Mr Berglund. Before doing so it is necessary, I consider, to examine the effects of the stay order. The order prohibited the respondent and Thyssen from taking any further step in the primary proceeding. The stay order did not require anything to be undone that had been legally done. It did not require the respondent and Thyssen to alter the legal position that had already been created. It merely prevented anything from being done that would in any way alter the position. “A stay operates to keep things in status quo.”
[38]I consider it is abundantly clear that the stay order in the primary proceeding was not intended by the judge to do more than prevent steps being taken in the proceeding until the costs were paid. Further, in the Court of Appeal, Chernov and Vincent, JJ.A. certainly did not envisage that the order would put at risk the respondent’s and Thyssen’s ability to defend successfully the bankruptcy and liquidation proceedings for they said so. They also said: “The effect of the order is only that the applicants [the respondent and Thyssen] comply with what the law already requires them to do, namely, pay the costs which they have been ordered to pay.” Nor were they disabused of their belief by counsel.
…
[54]No issue arises that the respondent has a genuine claim against the appellant by way of cross‑demand which is of such a nature that it equals or exceeds the amount of the debt claimed in the statutory demand. But the respondent could not proceed to prove its cross‑demand when the application was heard by Warren, J. because of the stay order in the primary proceeding. In my opinion, the claim was untouched by the stay order save that the proceeding could not move forward. It remained in an uncertain state awaiting payment of the costs, or further order, or dismissal of the proceeding by court order pursuant to Rule 63.03(3)(a). Until an order for dismissal is made I am of the opinion that the claim is genuine because the cause of action remains in existence and the claim is enforceable by action in the primary proceeding. Until dismissal the respondent has an offsetting claim. I do not consider that for the purposes of s.459H(1) an offsetting claim means that the claim must be effective in the sense used by Vaughan Williams, L.J. in the G.E.B. case. The offsetting claim must be a genuine claim that the company has at the relevant time.
(citations omitted)
I would respectfully follow their Honour’s reasoning, and find that the present stay in the Supreme Court should be regarded as a temporary impediment on the assigned claims, and not as disproving their existence or relevance for the purpose of s.40(1)(g) and s.41(7).
I therefore turn to the fifth and last issue, as to whether considerations of justice should cause the Court to decline to give relief terminating bankruptcy proceedings based on this bankruptcy notice. There are authorities that recognise that the Court’s intervention in this situation is discretionary, even where a claim falling within the exception in s.40(1)(g) can be identified (see for example Farrugia v Farrugia (2000) 99 FCR 16 at [45] and cases cited). As I have indicated, broad considerations of justice and discretion are also suggested to be relevant in Lindgren J’s judgment in Glew at [10] and the cited statement of the High Court.
Counsel for the respondent relied upon his criticisms of the applicant’s conduct in both the Supreme Court proceedings, as grounds for the Court declining to prevent reliance upon this bankruptcy notice, at least to the extent of declining to set it aside.
The effect of so declining would not, however, prevent the same points being argued if eventually a petition was brought which relied upon the bankruptcy notice. In my view, it is relevant in the present case to consider the convenience of addressing whether this bankruptcy notice should be put out of further consideration at this point. If this does not happen, the applicant and his creditors will face uncertainty as to whether the respondent, or another creditor, might seek to allege an act of bankruptcy based upon non‑compliance with a bankruptcy notice which, in my opinion, is incapable of satisfying s.40(1)(g).
I accept that some substantial criticisms may be made of how the applicant has conducted his claims against the respondent. However, as is pointed out by their Honours in Maniotis, the rules of the Supreme Court provide ample remedies to the respondent to obtain the final termination of proceedings in that court, if grounds for summary dismissal are available. In the present circumstances, I consider that the Supreme Court is the best forum for deciding whether its proceedings are being improperly pursued or should be brought to an end. I do not consider that the bankruptcy court should indirectly be used as the means of terminating the Supreme Court proceeding.
Considering all the circumstances in the present case, I have decided that it is appropriate to give the applicant remedies recognising that an act of bankruptcy under s.40(1)(g) cannot arise by reason of the applicant’s failure to comply with the demands of the present bankruptcy notice. That relief should in my opinion include an order setting aside the bankruptcy notice.
I certify that the preceding fifty‑one (51) paragraphs are a true copy of the reasons for judgment of Smith FM
Associate: Lilian Khaw
Date: 27 November 2006
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