FEDERAL COURT OF AUSTRALIA
Wilson v Arwon Finance Pty Ltd [2021] FCA 1052
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- Case
- [2021] FCA 1052
- Decision Date
CaseChat Overview and Summary
The court considered several authorities in determining the proper construction of section 40(1)(g). It held that the debtor bears the onus of proving they were legally incapable of setting up the counterclaim, and that practical or personal considerations alone are insufficient. The court found that Mr Wilson's lack of awareness or advice suggesting he did not have a counterclaim did not amount to a legal impediment sufficient to set aside the bankruptcy notices. The contentions under section 40(1)(g) were therefore not established and the applications were dismissed with costs.
The court's reasoning was based on the principles set out in various authorities, which held that the debtor must prove a legal inability to set up the counterclaim, and not merely a practical inability or failure to take advantage of an opportunity. The court found that Mr Wilson had not satisfied the requirements of section 40(1)(g) and dismissed his applications to set aside the bankruptcy notices. The final orders were that the application be dismissed and that the applicant pay the respondent's costs.
Orders
Orders of the court
1. The application be dismissed.
2. The applicant pay the costs of the respondent, to be assessed if not agreed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
Evidence
Evidence Before The Court
Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
Each of the respondents also relies upon the Full Court decision in Palaniappan per Gilmour J (McKerracher and Charlesworth JJ relevantly agreeing), setting out the principles applicable to the proper construction of s 40(1)(g) of the Bankruptcy Act as follows (at [32]):The principles applicable to the proper construction of s 40(1)(g) of the Act, which the parties accept, correctly, are relatively well settled. They are relevantly:(1) The question of whether or not a counterclaim or cross-demand “could not have been set up” is a question to be determined with reference to legal inability, not practical or personal considerations: Re Brink at 434, 437.(2) “[A] counter-claim, set-off or cross demand which could not be set up [is] one which, from point of time, or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained. … Mere failure to take advantage of the opportunity can hardly be said to be inability”: Re Stokvis at 57.(3) The debtor bears the onus of satisfying the Court that he/she was legally incapable of setting up his/her counterclaim in the proceedings in which the judgment was obtained: Re Ling; Ex parte Ling v Commonwealth (1995) 58 FCR 129 at 130 and 137.(Emphasis added.) In light of these statements of principle, the nature of the legal inability or impediment required to be established for relief under s 40(1)(g) of the Bankruptcy Act is helpfully illustrated by the following cases:(a)in Re Vicini; Ex parte EA Sealey & Co (1982) 64 FLR 323, (applied in Re Deen; Ex parte Deen v Muller (1995) 58 FCR 441), the applicant claimed that despite best endeavours, he was unable to obtain the factual and expert evidence required to establish his counter-claim, in spite of the fact that the counter-claim had been pleaded as an addendum to the defence in the debtor proceeding. Fisher J held that there was no reason, as a matter of law, why the counter-claim could not have been set up in the original proceeding, stating (at 327) that:The fact that he was unable to pursue [his counter-claim] because of an inability to bring witnesses and evidence before the court at that time in no way assists him to establish that as a matter of law he was unable at the time to set up the counterclaim in the action.(Emphasis added.)(b)in Tzovaras v Nufeno Pty Ltd [2003] FCA 1152; (2003) 1 ABC(NS) 421, the debtor stated that he was unable to bring his cross-claim in the proceedings in which judgment was obtained against him because the District Court of New South Wales did not have jurisdiction to determine his cross-claim as it was beyond the monetary limit set by the court’s empowering legislation. Jacobson J held (at [37]-[52]) that the cross-claim could nevertheless have been set up in the proceeding as a matter of law, because the proceeding could have been removed to the Supreme Court of New South Wales (such that it would have been the same proceeding though in a different court). Although the applicant in Tzovaras had in fact sought an order for removal from the District Court, the order had to be made by the Supreme Court of New South Wales. The applicant’s application for an adjournment so that a removal order could be sought in the Supreme Court was refused. Jacobson J (at [55]-[56]) likened the debtor’s position in that case with the situation prevailing in Re Scott; Ex parte Scott v Beneficial Finance Corporation Ltd (1994) 53 FCR 324 in which the debtor was refused leave to amend his pleading to include the off-setting claim in the form that it would later be brought in a different court due to the lateness of the amendment and previous procedural non-compliance. Einfeld J summarised the position in Re Scott as follows (at 327G-328A):In this case there was no reason at law why the applicant could not have raised his cross-claim in the Supreme Court proceedings. Had it formed part of his initial defence, and been properly pleaded, it is difficult to see how he would have been prevented from fully ventilating it. Having filed a defence without including these matters he then sought to amend his defence to include them. He evidently did so in a most unsatisfactory form, and at least partly for that reason, was refused leave.In this circumstance it can hardly be said in light of the authorities to which I have referred, that the counterclaim could not have been set up. The applicant failed to take advantage of the opportunity afforded him to plead the matters in a timely and proper manner. As a result of this finding. I conclude that the applicant has not satisfied s 40(1)(g) of the Act.(Emphasis added.)(c)in Palaniappan (at [44]-[47] and [50]), it was held that the debtor was not legally incapable of setting up a counter-claim even when faced with a ‘no set-off’ clause under the principal agreement with the judgment creditor. This claimed ‘legal inhibition’ was held not to be a ‘positive inhibition’ of the kind referred to by Lukin J in Re Stokvis (at 57). Gilmour J also emphasised (at [45]) that the phrase ‘positive inhibition’ is not contained in s 40(1)(g) and that ‘it is the language of the section to which attention must be given, rather than the language of judgments of the Court’; (d)In Re Ling, the debtor asserted an off-setting claim against the Commonwealth for negligent misstatement or alternatively, defamation. He proffered two reasons why the claim could not have been set up in the debtor proceeding. Only the first is presently relevant (though both failed to meet the requirement of s 40(1)(g)), and the debtor explained it in his supporting affidavit as recorded by Hill J (at 132):I was not advised by my solicitors in the proceedings in which the judgment was obtained that I had a claim against the Commonwealth of Australia except for the defamation claim. My current solicitors have advised me that I do have a claim against the Commonwealth of Australia exceeding the judgment debt in favour of the Commonwealth.His Honour rejected this explanation as follows:What emerges here is that the practical reason why no action was taken against the Commonwealth, whether by the institution of a cross-claim or otherwise, is that the debtor was not advised that he could do so. But that does not suffice to make the claim one which the debtor could not have set up in the Commonwealth proceedings. That is not a question to be determined by reference to practicalities; it is a question to be answered by reference to legal considerations: Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135; Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183; Walton v National Mutual Life Association of Australasia Ltd (1994) 49 FCR 406 at 408; Re Scott; Ex parte Scott v Beneficial Finance Corporation Ltd (1994) 53 FCR 324; Re Martinovic (unreported, Federal Court, Kiefel J, 23 June 1995).(Emphasis added.)(e)in Walton v National Mutual Life Association of A/asia (1994) 49 FCR 406, a suggestion during the hearing of the set aside application that the off-setting claim could not have been set up due to a solicitor’s negligence was held not to fall within the meaning of ‘could not have set up’ under s 40(1)(g) (at 408D);(f)in Re a Debtor [1914] 3 KB 726, however, after judgment had been obtained against the debtor, the debtor took an assignment of a debt that was owing by the judgment creditor to a third party. It was there held that the assigned debt was a claim that could not have been set up in the original proceedings; and(g)although the Full Court in Eastick v Australia and New Zealand Banking Group Ltd (1981) 53 FLR 91 refused to disturb the primary judge’s findings of fact, it considered that the alleged off-setting claim could not have been set up in the debtor proceeding. In that proceeding, the creditor sought to enforce a guarantee given by the debtor which included a term to the effect that a certificate issued by the creditor would be conclusive evidence of the amount owing. Such a certificate was issued almost a year after the creditor commenced proceedings to enforce the guarantee and judgment was entered against the debtor on that basis. The off-setting claim was said to be for damages in the sum of the judgment debt on the basis that the certificate had been negligently prepared. The Court considered that the claim could not have been set up in the debtor proceeding ‘because the damage alleged to have been suffered by the appellant was the obtaining of judgment in those proceedings as a result of the use of the certificate in the actual course of the proceedings’ (at 96).MR WILSON’S CONTENTIONS