Willoughby v Clayton Utz
[2008] FMCA 627
•15 May 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| WILLOUGHBY v CLAYTON UTZ | [2008] FMCA 627 |
| BANKRUPTCY – Application to set aside bankruptcy notice – counterclaim set-off or cross demand – what constitutes. BANKRUPTCY – Application to set aside bankruptcy notice – sufficiency of evidence. |
| Bankruptcy Act 1966, ss.40, 41, 58, 116, 178, 306 Federal Magistrates Court (Bankruptcy) Rules 2006, r.2.01, 3.02 |
| Jackson v Goldsmith (1950) 81 CLR 446 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Bhagat v Global Custodians Ltd [2002] FCAFC 223 James v Hill [2005] FCA 981 Crimmins v Glenview Home Units Pty Ltd [1999] FCA 515 Re Brink; ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 Eastick v Australia and New Zealand Banking Group Ltd (1981) 53 FLR 91 Adams v Lambert (2006) 228 CLR 409 Harding v Lithgow Corporation (1937) 57 CLR 186 re Vicini; ex parte E A Sealey & Co (1982) 64 FLR 323 Jensen v Queensland Law Society Incorporated [2004] FCA 1630 Re Deen; ex parte Deen v Muller (1995) 58 FCR 441 Re Ling; ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129 Re Gould; ex parte Skinner (1983) 72 FLR Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346 Hawkins v Clayton (1988) 164 CLR 539 Bryant v Commonwealth Bank of Australia (1996) 70 ALJR 306 |
| Applicant: | BERYL FRANCES WILLOUGHBY |
| Respondent: | CLAYTON UTZ |
| File Number: | BRG 951 of 2007 |
| Applicant: | MICHAEL STEPHEN WILLOUGHBY |
| Respondent: | CLAYTON UTZ |
| File Number: | BRG 999 of 2007 |
| Applicant: | JOHN FRANCIS WILLOUGHBY |
| Respondent: | CLAYTON UTZ |
| File Number: | BRG 1000 of 2007 |
| Judgment of: | Wilson FM |
| Hearing date: | 12 March 2008 |
| Date of Last Submission: | 12 March 2008 |
| Delivered at: | Brisbane |
| Delivered on: | 15 May 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr Coulsen |
| Solicitors for the Applicant: | Sajen Legal |
| Counsel for the Respondent: | Ms Wheatley |
| Solicitors for the Respondent: | Freehills |
ORDERS
That the application to set aside the bankruptcy notice in each matter is dismissed
That each applicant pay the respondent’s costs of and incidental to the application to be taxed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 951 of 2007
| BERYL FRANCES WILLOUGHBY |
Applicant
And
| CLAYTON UTZ |
Respondent
BRG 999 of 2007
| MICHAEL STEPHEN WILLOUGHBY |
Applicant
And
| CLAYTON UTZ |
Respondent
BRG 1000 of 2007
| JOHN FRANCIS WILLOUGHBY |
Applicant
And
| CLAYTON UTZ |
Respondent
REASONS FOR JUDGMENT
Three applications to set aside bankruptcy notices served on each of the applicants were heard together. They raise a common issue. It is whether a cause of action in the applicants against the respondent can and does amount to a counterclaim set-off or cross demand that could not have been set up in proceedings in which the respondent’s judgment was obtained. What makes these applications unusual is that the respondent’s judgment is an order for costs obtained on its application to have the applicants’ proceedings against it dismissed as a nullity. That application succeeded because the applicants did not have standing to bring the action, at the time they did. The applicants now argue that their same cause of action, that presently stands dismissed, is sufficient to entitle this court to set aside the bankruptcy notices.
It seems somewhat counterintuitive that a claim by the applicants against the respondent that has already been determined adversely to the applicants could amount to a proceeding that they “could not have set up in the action or proceeding in which the action was obtained”. However, on closer analysis, that initial reaction may not be correct.
Section 40(1)(g) Bankruptcy Act 1966 provides relevantly that an act of bankruptcy is not committed if a debtor satisfies the Court:
“that he or she has a counterclaim, 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 counterclaim, 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”.
In order to understand the circumstances in which the current application arises, it is necessary to understand the background facts.
The applicants commenced proceedings against the respondent firm in the Federal Court of Australia on 22 December 1998. When the proceedings were instituted the applicants claimed damages pursuant to the Trade Practices Act 1974, and in contract and negligence. Those proceedings were subsequently transferred to the Supreme Court of Western Australia. To avoid confusion, those proceedings are referred to as the first proceedings against the respondent.
In their Amended Statement of Claim filed in the first proceedings against the respondent, the applicants allege:
a)they brought proceedings in the Federal Court on their own behalf and on behalf of corporate entities controlled by them against a financier alleging misleading and deceptive conduct relevant to the acquisition of a hotel business;
b)they were made bankrupt on 10 December 1990, as a result of losing that action;
c)their trustee in bankruptcy, the Official Trustee, by deed dated 9 February 2001, assigned to the applicants the right to appeal against the judgment at first instance;
d)they were successful on their appeal, and their action was remitted for the assessment of damages;
e)they engaged the respondent firm in October 1991 to assist and advise them with respect to the claim for damages;
f)on 28 October 1993 the respondent firm recommended that the applicants compromise their claim;
g)in reliance on that advice, the applicants compromised their claim in November 1993;
h)the advice to compromise was negligent and in breach of the contract of retainer, as a result of which the applicants have suffered damage;
i)damages are claimed in excess of $5 million (at one point damages were sought in excess of $30 million).
The applicants were not discharged from bankruptcy until 16 January 1994. It follows that the applicants’ causes of action against the respondent that accrued in November 1993 (when the allegedly negligent advice was given and relied upon), were property as defined in s.116 Bankruptcy Act, and vested in their trustee in bankruptcy by reason of s.58(1)(b) Bankruptcy Act. So much is not gainsaid by the applicants.
There is a further complication so far as two of the applicants are concerned. Beryl Frances Willoughby and John Francis Willoughby again became bankrupt on 18 August 1997 and 25 November 1997 respectively. At the time the first set of proceedings was commenced against the respondent they were again bankrupt. If their causes of action did not vest in their first trustee in bankruptcy, they would have vested in their second trustee.
On 30 March 2005, on the application of the respondent, the first proceedings against the respondent were dismissed by Master Newnes (as his Honour then was). In his reasons for judgment, the Master set out some more of the history that I will shortly encapsulate, and reasoned:
a)The causes of action pleaded by the applicants are property within s.116 of the Act
b)By s.58(1)(b) of the Act the causes of action vested in the applicants’ trustee in bankruptcy;
c)The causes of action remained vested in the trustee notwithstanding the applicants’ discharge from bankruptcy;
d)When the applicants commenced the first proceedings against the respondent they had no standing to do so;
e)That position was not altered by a deed of assignment which did not act retrospectively;
f)It was not until the causes of action were assigned by deed that the applicants had a viable cause of action and were entitled to commence proceedings against the defendant in their own right;
g)In those circumstances the proceedings were fatally flawed and the proceedings were dismissed.
An appeal from this decision to the Full Court was unsuccessful. The applicants failed in their application to obtain special leave to appeal to the High Court of Australia. The first proceedings against the respondent stand dismissed.
It seems the need for an assignment of the causes of action by their trustee was recognised by the applicants. They sought such an assignment. The trustee in bankruptcy eventually decided to assign the causes of action to LawCover Pty Ltd on 14 April, 1999. LawCover Pty Ltd was the respondent’s insurer. It was hardly likely to litigate the applicants’ claim against its insured.
The applicants sought a review of their trustee’s decision to assign the causes of action, pursuant to s.178 of the Act. That application was refused on 10 December 1999. An appeal to the Full Federal Court was successful and on 8 June 2000 the application was remitted for rehearing. On 20 June 2001 Nicholson J in the Federal Court set aside the assignment and ordered the Official Trustee to assign the underlying causes of action to the applicants.
That assignment was perfected in a Deed of Assignment dated 29 May 2002. The applicants were then in a position to pursue their causes of action, subject of course to time limits, which I will refer to in due course.
After some further delay, the first proceedings against the respondent were, as I have said, transferred to the Supreme Court of Western Australia on 28 February 2003. The respondent’s application to summarily dismiss the proceedings was heard on 14 February 2005, and the first proceedings were terminated on 30 March 2005.
On 28 June 2005 the applicants issued the second proceedings against the respondent firm. These proceedings, by and large, sought the same relief and relied on the same factual matrix as in the first proceedings.
On 26 September 2007 Acting Master Chapman acceded to an application by the respondent to dismiss the second proceedings. The reasons of the Master, which were put before me, concluded that the principles of res judicata applied and the applicants cannot bring the same proceedings again. His Honour reasoned that as a matter of record a cause of action had been alleged by the applicants and there was an order of the court dismissing the action (relying on Jackson v Goldsmith (1950) 81 CLR 446 and Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589). This was despite there being no determination on the merits, more importantly, the Acting Master decided that the proceedings were brought out of time. The applicants have lodged a notice of appeal against the decision of Acting Master Chapman. That appeal is awaiting hearing.
At the hearing before me, notwithstanding other grounds set out in the respective applications, counsel for the applicants stated that he intended to argue one ground only, namely that there was a counterclaim set-off or cross demand that satisfied the requirements of s.40(1)(g) of the Act. Questions as to the formal validity of the bankruptcy notice and the name of the respondent therefore do not have to be addressed. No issue was taken as to service of the bankruptcy notices, and each application was made within the requisite time after service.
Further, no issue was taken by the respondent that if the claim sought to be agitated by the applicants was accepted by the court, that the amount of the applicants’ claim against the respondent exceeded the amount of the judgment debt on which the bankruptcy notice is based.
The respondent did argue one procedural matter. It was pointed out that until an amended application was filed in each matter on 21 December 2007, no application was made for an extension of time within which to comply with the bankruptcy notices, and no application has in fact been made pursuant to s.41(6A) of the Act. It was argued, therefore, that each of the applicants has already committed an act of bankruptcy.
Section 41(6A) of the Act provides:
(6A) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:
(a) proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or
(b) an application has been made to the Court to set aside the bankruptcy notice;
the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.
Section 41(6C) is not relevant on this application; because the applicants do not seek to set aside the judgment for costs obtained against them. Section 41(7) is, however, relevant. It provides:
(7) 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.
The respondent argues there is no deemed extension of time under either subsection (6A) or (7) because, at the time for compliance with the bankruptcy notices expired, no proper application had been made to set them aside. It was argued that the Federal Magistrates Court (Bankruptcy) Rules 2006 have not been complied with. Particular reference is made to Rules 2.01(3) and 3.02(2). They provide:
2.01(3) An application must state:
(a) each section of the Bankruptcy Act, or each regulation of the Bankruptcy Regulations, under which the proceedings is brought; and
(b) the relief sought.
3.02(2) If the application is based on the ground that the debtor has a counter-claim, set-off or cross demand mentioned in paragraph 40(1)(g) of the Bankruptcy Act, the affidavit must also state:
(a)the full details of the counter-claim, set-off or cross demand; and
(b)the amount of the counter-claim, set-off or cross demand and the amount by which it exceeds the amount claimed in the bankruptcy notice; and
(c)why the counter-claim, set-off or cross demand was not raised in the proceeding that resulted in the judgment or order in relation to which the bankruptcy notice was issued.
It is quite plain that Rule 2.01(3) was not complied with before the expiration of time for compliance with the bankruptcy notices. No sections of the Act were referred to at all in the original application.
The respondent also argued that the affidavit of KJ Kimball in each matter, relied on by the applicants, did not satisfy the requirements of Rule 3.02(2). Reference was made to the decision of the Full Federal Court in Bhagat v Global Custodians Ltd [2002] FCAFC 223 at [53]:
“Counsel for Global submitted, quite correctly, that the mere production of claim in an action that pleads facts which, if proved, would support a claim, has long been held to be insufficient: “[a] statement of claim is no evidence of anything”: In re Foster, Ex parte Basan (1885) 2 Morr 29 at 33 per Brett MR: see also Re Cox (supra) at 101 and Re Verma; Ex parte Deputy Commissioner of Taxation (1985) 4 FCR 181 at 187. It is not even sufficient for a debtor to file an affidavit which merely propounds a claim and states how the debtor proposes to establish it: Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 at 350. There is an obligation on the debtor to adduce evidence that provides reasonable grounds for the institution of proceedings Vogwell v Vogwell (supra) at 85 per Lathan CJ. The task that Mr Bhagat faced was an onerous task. He has raised serious allegations but has not placed before the Court the material (if indeed such material exists) that would justify a Bankruptcy Court from interfering with the judgment that founded the Bankruptcy Notice.”
In James v Hill [2005] FCA 981 at [7] Branson J said:
“The appellant did not comply with the requirements of r 30.02 or seek an order from the learned Federal Magistrate waiving the requirement for compliance with the rule. It may well be that in these circumstances the deemed extension of time for compliance with the bankruptcy notice for which s 47(7) of the Act provides did not come into effect. As I discussed in Crimmins v Glenview Home Units [1999] FCA 515, where a rule of court governs the procedure to be followed when making a particular application, a litigant is obliged to follows that procedure or alternatively, obtain an order excusing him or her from doing so. However, neither before the Federal Magistrates Court nor on this appeal had the respondent placed reliance on the appellant’s failure to comply with r 30.02. An order was made in the Federal Magistrates Court extending the time within which the appellant was required to comply with the bankruptcy notice until judgment or further order. Although it is not clear what was the source of power in the Federal Magistrates Court thereby invoked, no application has at any time been made to have the order set aside. For this reason it has never been necessary for the appellant to place reliance on the deemed extension of time for which s 41(7) of the Act provides.”
Earlier, in Crimmins v Glenview Home Units Pty Ltd [1999] FCA 515 her Honour by reference to Re Brink; ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 said that the authorities made it plain that to comply with the requirement of filing an affidavit it was necessary for the affidavit to do more than assert the existence of a counterclaim, set-off or cross demand. It was necessary for the affidavit to contain sufficient details to show that the debtor was bona fide in his or her contention that the counterclaim set-off or cross demand existed.
At [19] her Honour construed the analogous Federal Court Rule to Rule 3.02(2) as being satisfied only if the affidavit states details that are sufficient to show the nature and substance of the cross action and to demonstrate that the debtor is bona fide in his or her contention that the cross action exists.
The affidavit of Mr Kimball says, at paragraph 5, that the facts, matters and circumstances that give rise to the counterclaim, set off or cross demand are referred to in the Amended Statement of Claim in the first proceedings against the respondent, to which I have already made reference. As Bhagat makes clear that is not sufficient to comply with the Rules. However, in the present case, Mr Kimball’s affidavit also exhibits an affidavit of the applicant John Francis Willoughby filed in the Western Australia Supreme Court. There are also the reasons for judgment of both Master Newnes and Acting Master Chapman.
In my view, although the affidavit of Mr Willoughby does not descend to much detail about the advice given by the respondent firm, or the circumstances in which it is said that loss was occasioned by the applicants’ reliance upon it, I think the affidavit of Mr Kimball, when read with the affidavit of Mr Willoughby and the Amended Statement of Claim does sufficiently comply with Rule 3.02. The nature of the applicants’ claim against the respondent is particularised, there is a schedule of damages, and an explanation is given of why the claim was not able to be adjudicated upon in the first set of proceedings. The respondent knows enough about the nature of the application to meaningfully respond to it. As Lockhart J said in Re Brink; ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 136 at 142 the precise requirements of an affidavit that satisfies the Rules and the Act must depend on the facts and circumstances of the case. In Eastick v Australia and New Zealand Banking Group Ltd (1981) 53 FLR 91 the Full Federal Court held that in considering whether an affidavit complies with ss.40(1)(g) and 41(7) of the Act the court should adopt a benevolent construction.
The respondent also points out that a complete copy of the bankruptcy notice was not attached to the affidavit in each matter, the date service was effected was not stated, and, in the case of application BRG 951/07 the application was not served within three days of its being filed.
The applicants do not cavil with these deficiencies in the applications. I accept that there has been non-compliance with Rule 2.02(3) and Rule 3.02(2). I also accept that the failure to properly comply with those Rules has the consequence that there was no deemed extension of time under s.41(7) of the Act.
The court does, however, still have jurisdiction to determine the applications to set aside the bankruptcy notices, if it permits the applications to be pursued. Counsel for the applicants argues that each of the matters complained of is a formal defect or irregularity capable of being excused under s.306(1) of the Act. That subsection provides:
(1) Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.
This remedial section was given a liberal interpretation by the High Court of Australia in Adams v Lambert (2006) 228 CLR 409. On the basis of that decision, I would not be prepared to dismiss the applications on the procedural ground argued. Whilst the applicants have undoubtedly failed to comply with the Rules in the manner identified by the respondent, it could not be said that the respondent is prejudiced or that substantial injustice would be occasioned to it if the applications were decided on the merits.
After all, the principal point for determination is essentially a legal one. No attention was directed by either side to the merits of the professional negligence action itself. Rather, the argument was focussed on whether the claim sought to be litigated by the applicants fell within the exception to s.40(1) (g) of the Act.
I turn then to consider that important question.
The first issue that must be considered is whether the applicants’ lack of standing in the first proceedings against the respondent meant that the claim they now seek to pursue could not have been set up in the first proceedings. Put another way, are the applicants defeated by their own conduct? That is, their claim could have been validly brought in the first proceedings, if the applicants had first obtained the assignment from their trustee in bankruptcy. Does their failure to first obtain that consent mean that the claim they wish to pursue could have been set up in the first proceedings, subject to that condition precedent?
In this regard, it is important to bear in mind the distinction between those cases where a party has a cause of action, subject to the satisfaction of some condition precedent, and those where the party does not have a cause of action (because it is vested in someone else). In the latter type of case, the person does not have the valid title to sue. The distinction is explained in cases such as Harding v Lithgow Corporation (1937) 57 CLR 186.
The present case falls into the latter category. As a consequence of their bankruptcy the applicants could not sue in their own right on causes of action vested in their trustee in bankruptcy. In Re Brink, supra, Lockhart J at p 139 said that the words “that he could not have set up in the action or proceeding in which the judgment or order was obtained” mean “which he could not by law set up in the action”. This view was endorsed by Fisher J in re Vicini; ex parte E A Sealey & Co (1982) 64 FLR 323 at 326
In Jensen v Queensland Law Society Incorporated [2004] FCA 1630 Kiefel J at [10] said the question posed by s.40(1) (g) of the Act is answered by reference to legal considerations, not practicalities. The question is whether the counterclaim, set off or cross demand could have been set up as a matter of law (relying on Re Brink, supra).
In my view, the applicants could not have set up their claim against the respondent in the proceedings in which the respondent obtained its order for costs which is the judgment on which the bankruptcy notice is based. They were precluded, as a matter of law, from doing so.
Re Deen; ex parte Deen v Muller (1995) 58 FCR 441 supports the applicants’ argument. In that case the debtor secured an assignment of a cause of action against the creditor after judgment had been entered. Drummond J at 442 – 3 said:
“The debtor, in reliance upon this assignment, asserts that he has a good counterclaim sufficient to defeat the bankruptcy notice. Authority supports him in this contention. In a very similar factual situation, the Divisional Court in Re A Debtor [1914] 3 KB 726, under a provision similar to s 40(1)(g) of the Bankruptcy Act, held that even accepting that the debtor could have, had he so chosen, obtained the assignment in time to set up the counterclaim in the action, the bankruptcy notice still had to be set aside inasmuch as 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. That is an approach which has been applied in this Court by Fisher J in Re Vicini; Ex parte E A Sealey & Co (1982) 64 FLR 323 at 326. His Honour regarded the ruling in Re A Debtor as stating a principle applicable to proceedings under the Australian legislation.
…
Finally, the solicitor seeks to distinguish Re A Debtor on the basis that there is a difference which he contends is of present significance between the working of the English Act and the Australian Act. The English Act required a counterclaim, if it was to defeat a bankruptcy notice based on a judgment debt, to be one which the debtor “… could not set up in the action in which the judgment was obtained”.
Under the Australian Act, the counterclaim, if it is to be sufficient for such a purpose, must be one which the debtor “… could not have set up in the action or proceeding in which the judgment or order was obtained”.
The solicitor for the creditor stresses the presence of the word “have” in the Australian, but not in the English, legislation and submits that the debtor here could, by procuring a timely assignment of a debt owing by the creditor to the trust, have set the assignment up as a counterclaim in the action in which the creditor obtained his judgment. In my opinion, this difference in wording between the two sections does not provide any reason for not applying to the Australian legislation the principle in Re A Debtor. The principle for which that case is authority is that in order to determine whether a judgment debtor is entitled to defeat a bankruptcy notice based upon the judgment by reason of a counterclaim, it is only causes of action which the debtor was entitled to plead up to the time the judgment was given that are capable if amounting to a counterclaim of the kind referred to in s 40(1)(g). Such an approach fits in exactly with the ordinary meaning of the relevant phrase in s 40(1)(g) of the Australian Act. The principle in Re A Debtor has, as I have said, been applied by Fisher J to the Australian legislation. I reject the argument.”
In Re Ling; ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129 Hill J held that whether a counterclaim, set off or cross demand could not have been set up is determined by reference to legal considerations. In that case, the debtor suffered judgment. He argued that a claim in tort was a counterclaim etc because it could not have been brought in the Federal Court, in which the Commonwealth was pursuing its action. His Honour held that it was open for the debtor to follow what he described as a tortuous path in commencing proceedings in the High Court, having those proceedings remitted to the Federal Court and consolidated with the proceedings brought by the Commonwealth. His Honour continued at 135:
“The question is whether the possibility of this tortuous route and the existence of the discretions which would be encountered on the way (both of the High Court to remit and of this Court to order consolidation) permit the debtor to argue that the claims in tort were such that they could not have been set up in the Commonwealth proceedings.
The provisions of s 40(1)(g) can be traced back at least to s 4(1)(g) of the Bankruptcy Act 1883 (UK). Discussing that section Avory J, with whom Horridges J agreed, in Re A Debtor [1914] 3 KB 726 at 730 said:
“I think that upon the true interpretation of the section a debtor is entitled to set up in answer to a bankruptcy notice a counterclaim which rebus sic stantibus he could not in law have set up in the action in which the judgment was obtained …”
The policy inherent in the section would seem to be that a debtor should be allowed to challenge a bankruptcy notice based upon a judgment obtained, so long as a debtor had prima facie a counterclaim etc of a value at least as great as judgment obtained which he could bring against the judgment creditor. Conversely, however, the debtor could not challenge the bankruptcy notice if the debtor could have brought the counterclaim in a timely way at the same time as the proceedings brought against him, but failed to do so. The section could on its face have no application if the debtor had brought the counterclaim in the proceedings and was either successful or unsuccessful with that counterclaim.”
After reviewing a number of authorities his Honour said at 137:
“These cases, it seems to me, establish that a cross-claim will be one which could be set up in the action, notwithstanding that to do so the debtor may need to transfer the proceedings first to another court, or may need to obtain in his or her favour the exercise of a discretion before doing so. The onus of showing that the claim is not one that could have been set up in the creditor’s proceedings lies upon the debtor. That onus will not be satisfied merely by showing that some indirect course may be followed (that course being in the discretion of the debtor) nor by showing that there existed a discretion which could have been exercised against the setting up of the claim as a cross-claim. To satisfy that onus the debtor must show that, as a matter of law and in the circumstances prevailing, he or she could not have set up the cross-claim. That the debtor has not done in the present case.”
Accordingly, I conclude that the substantive claim that the applicants desire to bring against the respondent constitutes a counterclaim, set-off or cross demand that they could not have set up in the proceedings in which the judgment was obtained.
As I have said, there is no contest, on these applications, that the potential quantum of the applicants’ claim exceeds the amount of the judgment debt.
It remains then for the applicants to “satisfy” the court that they have a counterclaim, set off or cross demand that they should be allowed to pursue, and which justifies the setting aside of the bankruptcy notice.
As counsel for the respondent submitted, the test of satisfaction has been expressed in a number of ways. In Re Gould; ex parte Skinner (1983) 72 FLR 393 Fitzgerald J considered that the applicants had to show that they had a prima facie case. The court must be satisfied that the debtor has a fair chance of success. In Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346 at 250 the High Court held that a debtor must establish a prima facie case. Accordingly, that is the test I apply on these applications.
The difficulty for the applicant is that the first proceedings against the respondent have been dismissed. There is no further avenue for appeal available to the applicants.
The second proceedings have also been dismissed. Acting Master Chapman considered that the dismissal of the first action operated as a res judicata or estoppel against the applicants. Although in Walton v National Mutual Life Association of Australasia Limited (1994) 49 FCR 406 the Full Federal Court said that the principles discussed in Anshun should not put an artificial and restricted construction upon the unqualified terms of s.40(1)(g) of the Act, their Honours in that case did not have a situation, like the present, where another court had in fact adjudicated upon the claim sought to be agitated by the debtors.
Whether or not the Acting Master was correct in his application of the principles of res judicata (as to which I have some doubt) in my view it was plain that the applicants’ second proceedings must have failed due to the effluxion of time. Their cause of action accrued in November 1993, and the second set of proceedings were not commenced until 2005.
Before the Acting Master, the applicants conceded that their causes of action were statute barred (reasons, paragraph 13). They argued that the respondent was estopped from relying on any limitations defence, in substantial reliance on the judgment of Deane J in Hawkins v Clayton (1988) 164 CLR 539 at 590.
After argument, the Acting Master concluded, at paragraph 23 of his reasons, that there was nothing in the conduct of the respondent, nor its insurer, which would make it unconscionable for the respondent to rely on the limitation period.
I reject the submission advanced on behalf of the applicants that Acting Master Chapman decided the limitations point prematurely because no defence had been filed by the respondent pleading a limitations defence. On reading the reasons of both Master Newnes and Acting Master Chapman I consider that it was abundantly clear to the applicants that the respondent was arguing for summarily dismissal on the limitations point.
In my view, the reasoning of the Acting Master is (with respect) entirely correct. I do not consider that the appeal enjoys any meaningful prospect of success. The Supreme Court of Western Australia having determined that the applicants’ proceedings stand dismissed, I am unable to conclude that the applicants have satisfied me that they have a prima facie case against the respondent.
Counsel for the applicants submitted that I should adjourn the application to set aside the bankruptcy notices until the Court of Appeal hands down its decision. The difficulty with that position is twofold. First, given the date of service of the bankruptcy notices, there is a need for a decision before 19 May. I do not see why I should defer my decision until an undetermined date in the future.
Secondly, as counsel accepted, the applicants can attempt to persuade the court on the hearing of a creditor’s petition that a sequestration order should not be made for good reason. If the Court of Appeal allows the applicants’ appeal, then the applicants will be on stronger ground in that regard. (Bryant v Commonwealth Bank of Australia (1996) 70 ALJR 306)
It follows that each of the applications to set aside the bankruptcy notices should be dismissed.
I certify that the preceding fifty-seven (57) paragraphs are a true copy of the reasons for judgment of Wilson FM
Associate: Lynnette Chin
Date: 15 May 2008
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