CATCHWORDS Bankruptcy - bankruptcy notice - what constitutes an affidavit under sub-s. 41 (7) - principles applicable to s. 41 (7) applications - requirements to satisfy the Court that the debtor has the requisite counter-claim, set-off or cross demand. Bankruptcy Act 1966 (Cth) ss. 30; 33 (1) (c), (2) (c); 40 (1) (g), 44 (7) RE: ROY EDWARD.BRINK EX PARTE: THE COMMERCIAL BANKING COMPANY OF SYDNEY LIMITED NO. B 1030 OF 1980 LOCKHART J. 27 JUNE 1980 AT SYDNEY IN_THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE No. B 1030 of 1980 OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: ROY EDWARD BRINK Applicant EX PARTE: THE COMMERCIAL BANKING COMPANY OF SYDNEY LIMITED Respondent ORDER. JUDGE MAKING ORDER: LOCKHART J. DATE OF ORDER: FRIDAY 27 JUNE 1980 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. There be no deemed extension of time to comply with the requirements of the bankruptcy notice. 2. The application under sub-s. 41 (7) be dismissed. 3. The costs of both parties be reserved. IN_ THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE ) No. B 1030 of 1980 OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: ROY EDWARD BRINK Applicant EX PARTE: THE COMMERCIAL BANKING COMPANY OF SYDNEY LIMITED Respondent REASONS FOR JUDGMENT JL? Gree 1980 LOCKHART J. At Sydney On 14 September 1979 the respondent, The Commercial Banking Company of Sydney Limited ("the respondent"), signed judgment against the applicant, Roy Edward Brink ("the applicant"), in the District Court of New South Wales in the sum of $8,524.14. On 29 February 1980 a Deputy Registrar issued a bankruptcy notice directed to the applicant. It is common ground that, before the expiration of the time fixed for compliance with the requirements of the bankruptcy notice, the applicant filed with the Registrar an affidavit. It was intended by the applicant that the affidavit answer the description of "an affidavit to the effect that he has such a counter-claim, set-off, or cross demand as is referred to in paragraph (g) of sub-s. (1) of the last preceding section" within the meaning of sub-s. 41 (7) of the Bankruptcy Act, 1966 ("the Act"). The Registrar gave notice to the applicant and the respondent that the matter had been set down for hearing by this court. The matter was heard by me on 20 June 1980. ...f2 Counsel for the parties submitted that the matter fell conveniently into two parts: first, the question whether the affidavit was of the kind mentioned in sub-s. 41 (7) and second, if it was such an affidavit, whether the court is satisfied that the applicant has the requisite counter-claim, set-off or cross demand. Counsel informed me that they wished to deal with the first question as a preliminary point, so that 1f I answered it against the applicant that would be an end of the whole matter; but, if I answered it against the respondent, there should be an adjournment so that each party could prepare for the hearing. I agreed to this course and heard argument on the first question only. The first question is one of general importance in bankruptcy as sub-s. 41 (7) is often resorted to by debtors and, in many cases, the present case being one, the affidavits are prepared and filed by debtors themselves without the benefit of legal advice. Sub-s. 41 (7) provides:- "41. (7) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has filed with the Registrar an affidavit to the effect that he has such a counter-claim, set-off or cross demand as is referred to 1n paragraph (g) of sub-section (1) of the last preceding section, 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 1s so satisfied." Paragraph 40 (1) (g) provides:- "40 (1) A debtor commits an act of bankruptcy in each of the following cases:-... .»/3 (g) 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 fixed by the Registrar by whom the notice was issued; or (ii) where the notice was served elsewhere-- within the time fixed for the purpose by the order giving leave to effect the service, comply with the requirements of the notice or satisfy the Court that he 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 could not have set up in the action or proceeding in which the judgment or order was obtained;..." These are some of the provisions of the Act relating to extensions of time for compliance with the requirements of bankruptcy notices. It is helpful to refer to the other provisions for a better understanding of the work done by sub-s. 41 (7). Before the Bankruptcy Amendment Act 1980 (the relevant sections of which came into operation on 8 April 1980) the Act did not expressly confer power on the Court to extend time for compliance with the requirements of bankruptcy notices. Paragraph 33 (1) (c) empowered the Court (and para. 33 (2) (b) empowered the Registrar) to extend any time limited by the Act for doing an act or thing. It was held by C. A. Sweeney J. in Lipov's Case (1979 24 A.L.R. 616 that para. 33 (1) (c) empowered the Court to extend time to comply with the requirements of bankruptcy notices. Nor did the Act expressly confer power on the Court to set aside bankruptcy 2/4 notices. The Court not infrequently set aside bankruptcy notices; but whether its power to do so stemmed from its inherent gjuris- diction or s. 30 of the Act 1s perhaps open to some question: see Re K. A. Studwell, my judgment delivered 27 May 1980, unreported. Following the amendments made by the Bankruptcy Amendment Act 1980 to paras. 33 (1) (c) and (2) (c) and the additions of sub-ss. 6 (A), (B) and (C) to s. 41, the Court may extend times fixed by the Court or the Registrar for compliance with the requirements of a bankruptcy notice where the debtor is seeking to set aside the notice itself or the judgment or order on which the notice is based providing the debtor is acting bona fide and with due diligence. The Registrar is given similar power in relation to times for compliance fixed by him. Although the Court is not expressly empowered to set aside bankruptcy notices, it has power to do so pursuant to s. 30: see Re Sterling, my judgment delivered 2 June 1980, unreported. Under the Bankruptcy Act 1924 (Cth.) and the Bankruptcy Rules thereunder the filing of the affidavit now referred to in sub-s. 41 (7) operated as an application to set aside the bankruptcy notice: see sub-s. 53 (2) of the 1924 Act and rules 146-7. This still obtains in England. The counter-claim, set-off or cross demand mentioned in sub-s. 41 (7) and para. 40 (1) (g) must be something sounding in money. It must be in respect of a money demand, whether liquidated or unliquidated: see Re Jocumsen (1929) 1 A.B.C. 82 per Henchman J. at p. 85 and Vogwell v. Vogwell (1939) 11 A.B.C. 83 per Latham C.J. at p. 85. As to the meaning of the words "counter-claim", "set-off" or "cross demand" I respectfully agree with the following passage oe /5 from the judgment of Maughan A. J. In re BE. E. Judd; Ex parte Pike (1924) 24 S.R. (N.S.W.) 537 at pp. 539-540:- "There is no authority of which I am aware deciding what limits (if any) ought to be placed on the words 'counter-clain, set-off or cross-demand.' I think that the Legislature by the word 'counter-—claim' probably referred to those claims which might be the subject of a counter-claim in equity and by the word 'set-off' to those claims which might be the subject of a set-off at common law. The other term 'cross-demand,' however, is not a technical term and must in my opinion refer to claims other than those which would be comprised in the two expressions 'counter-claim' and 'set-off.! Taking the ordinary meaning of the word itself, I can see no reasons why 'cross- demand! should not be held to include a claim for unliquidated damages for a tort. The case of Re Griffin; Ex parte Soutar (1 B.C. 29) Shows that 'cross—demand' includes a claim for unliquidated damages for breach of contract. In the case of Re Smyth; Ex parte North (3 B.C. 17) a common law action of Smyth v. North is referred to as constituting a cross-demand. I have sent for and perused the papers in this case and here agan it appears that the cause of action was a claim for unliquidated damages for breach of contract. Two recent cases in England -- In re G.E.B.(1903 2 K.B. 340) and In re A Debtor(1914 3 K.B. 726) -- show that the cross—-demand need not have any connection with the cause of action out of which the judgment debt arose -- so much so, that a judgment debtor may even buy up a claim against the judgment creditor in order to have a 'cross-demand.' These cases are all in favour of an unrestricted meaning being given to the word. Passing away from the actual meaning of the word itself, I can find nothing in the context or in the subject matter requiring the Court to give restricted meaning to the word. Counsel for the respondent argued that, inasmuch as a cause of action arising in tort does not pass to the official assignee but remains in the bankrupt, ../6 the claim arising out of such a cause of action cannot be the subject of a cross-demand under s. 4 (1) g. I think this consideration is irrelevant. The object of the Legislature in providing machinery for the setting aside of a bankruptcy notice where a judgment debtor has a cross—demand is obviously to prevent a judgment creditor from pursuing bankruptcy proceedings when, as between himself and the judgment debtor, the balance of account is in favour of the judgment debtor; if this be the reason for the creation of the machinery 1t is quite unimportant whether the cross—demand is one which, in the event of bankruptcy supervening, would belong to the official assignee or the bankrupt. I therefore hold that the term 'cross-demand' in s. 4 (J) g includes a claim for unliquidated damages for tort." 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.": see Re Jocumsen (supra) at p. 85; In re A Debtor 1914 4 K.B. 726 per Avory J. at p. 730 and Re Stockviss§ (1934) 7 A.B.C. 53 especially per Lukin J. at p. 57 where his Honour said:- "T take a counter claim, set off, or cross demand which could not be set up as 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." There is some variance in the authorities as to what is sufficient to satisfy the Court that the debtor has the requisite counter-claim, set-off or cross demand. It has been said that it is enough if there is a "genuine claim" to the particular amount: In re A Debtor 1963 1 W.L.R. 51 per Lord Denning M.R. at p. 55 and Upjohn L. J. at p. 56. -7- In Cameron v. Cole (1944) 68 C.L.R. 571 Rich J. said at p. 592:- "It was not, of course, necessary for him to establish that his claim to a set-off was valid, or was likely to be successful; but it was necessary for him to show that he had a bona fide claim which he was entitled to litigate (Re Duncan; Ex parte Modlin (1917) 17 S.R. (N.S.W.) 152;).7 In Vogwell v. Vogwell (supra) Latham C. J. said at p. 85:- "Tt must be a real claim; it is insufficient that the debtor believes that he has a claim, and the authorities show that the matter to which the court looks is this, -- whether it is just that the claim should be determined pefore the bankruptcy proceedings are allowed to continue; in other words, whether it is a claim which it is proper and reasonable to litigate. That is the effect of the decisions in Re Rivett; Ex parte Edward Fay Ltd. ((1932) 5 A.B.C. 782) and Re Duncan; Ex parte Modlin ((1917) 17 S.R. (NUS.W.) S55). thereto Therefore, there must appear to be some substance in the counter- claim, set-off or cross demand which is relied upon." At pp. 88 and 89 his Honour said:- "Accordingly, the result is in my mind this: that while it is not the duty of the Court of Bankruptcy to try in advance the counter-clain, set-offs or cross demands which are relied upon under s. 52 (j), 1t must appear that they are real counter~claims,..." In Re Foster, Ex parte Basan (1885) 2 Morr. 29 Cotton L.J. at p. 33 posed the test as being whether the debtor had made out a prima facie case; Brett M. R. said at p. 34 that there had to be a "reasonable ground for instituting such an action as is maintained in the counter-claim", In Ebert v. The Union Trustee Company of Australia Limited (1960) 104 C.L.R. 346 Dixon C. J., McTiernan and Windeyer JJ. said at p. 350:- .f/8 "Section 52 (3) makes 1t necessary that a debtor served with a bankruptcy notice, if he does not comply with its requirements, should satisfy the Court of Bankruptcy that he has a counter-claim, set-off or cross demand which equals or exceeds the amount of the judgment debt. The debtor clearly must satisfy the Court that there exists in him a counter-claim, set-off or cross demand. 'Cross demand' is the word relied upon here. The appellant cannot satisfy the Court that a cross demand exists by showing no more than that she propounds one and states how she suggests that she can make it out. In Re Duncan; Ex arte Modlin (1917) 17 S.R. (N.S.W.) 152; Er, W.N. 49 Street J. said that the debtor need not satisfy the Court that there are reasonable grounds for believing that he will establish his cross action, but only that he has a bona fide claim which he is fairly entitled to litigate. This perhaps is expressed too favourably to the debtor. In Re A Debtor (1958) 1 Ch. 81 Roxburgh J. said: 'But not every demand will suffice. A demand made in bad faith would not be good enough. The debtor must satisfy the Court that he has a genuine demand..But in my opinion a demand must be more than bona fide: the Court must be satisfied that it has a reasonable probability of success' (1958) 1 Ch. at p. 99. 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." In my opinion this Court should follow the decision of the High Court in Ebert's Case. Hence a debtor must show that he has a prima facie case. However, I do not understand Ebert's Case as deciding that this Court must undertake a preliminary trial of the counter-claim, set-off or cross demand; rather this Court must be satisfied that the debtor has a fair chance of success. .../9 ~9- Usually a hearing under sub-s. 41 (7) takes place when the debtor has commenced or is about to commence proceedings in a Court of competent jurisdiction against the judgment creditor to establish his counter-claim, set-off or cross demand. Generally it is that Court which should hear and determine the counter—claim, set-off or cross demand, not a Court exercising jurisdiction in bankruptcy. I do not regard Wren v. Mahony (1972) 126 C.L.R. .212 or Corney v. Brien (1951) 84 C.L.R. 313 as saying anything to the sontrary. Those cases concern the exercise of the power of the Federal Court of Bankruptcy upon the hearing of a petition for sequestration where quite different considerations arise from those involved in the exercise of power under sub-s. 41 (7). Upon the hearing of a matter under sub-s. 41 (7) the Court has before it the initial affidavit which brings the sub- section into play. There may, of course, be no other evidence. On the other hand there may be a great deal of evidence. This will depend upon the circumstances of each case. Plainly this Court has power to permit the debtor to supplement his case by additional evidence. The initial affidavit filed under sub-s. 41 (7) operates to extend time for compliance with the requirements of the bankruptcy notice until the Court determines whether it is satisfied that the debtor has the requisite counter-claim, set-off or cross demand. Although the mere filing of the requisite affidavit brings the statutory extension automatically into play, the Court thereafter controls the matter. The sub-section ../10 ~10~ recognises that the Court may not be able to hear the matter immediately. It may not be convenient to do so or the case may be complex and require that directions be given to both parties to define the issues and as to the giving of evidence. The filing of the affidavit operates as a statutory injunction to preserve the status quo until the Court determines the matter, ensuring that, in the meantime, there is no act of bankruptcy. The authorities are concerned primarily with the exercise of the Court's power under sub-s. 41 (7) and the equivalent provisions in the Bankruptcy Act 1924 (Cth.) and the English Bankruptcy legislation; but they say little as to what the initial affidavit must itself contain. In my opinion the affidavit cannot merely contain an assertion that the debtor has a counter-claim, set-off, or cross demand which he could not have set up in the action in which the gudgment or order was obtained. The affidavit must show a counter-claim, set-off or cross demand which equals or exceeds the amount of the judgment debt and which the debtor could not have set up in the action in which the judgment or order was obtained: see Vogwell v. Vogwell (supra) at p. 85; Ebert's Case (supra) at p. 350; In Re A Debtor 1935 1 Ch. 347 per Slesser L. J. at p. 352. It is as well to remember that the initial affidavit has to be filed within a limited time namely, the number of days after service of the bankruptcy notice upon the debtor fixed by the Registrar. These times are fixed by him without any .-/17 -~11- knowledge on his part of the possibility of a counter-claim, set-off or cross demand being propounded by the debtor. In many cases it is difficult, if not impossible, for the debtor to present more than a mere outline of his case in the time available. I do not think any good purpose would be served by my attempting to express a definitive formula as to what the original affidavit must contain. That must depend in every case on the particular facts and circumstances: see In Re a Debtor 1963 1 W.L.R. 61 per Upjohn L. J. at p. 56. The fact that it 1s within the power of the Court to determine when the hearing of a matter under sub-s. 41 (7) will take place, and thus the length of the extension of time to comply with the requirements of the bankruptcy notice; and the difficulty, if not impossibility in some case, of the initial affidavit being anything other than a mere outline of the debtor's case due to the temporal constraints imposed by the notice, all point to the conclusion that the Courts should adopt a benevolent construction to the initial affidavit. I turn to the affidavit in question. It is hand-written by the applicant and comprises seven paragraphs on one page. There are two documents annexed, each peing a letter in the hand-writing of the applicant from himself to the respondent. The applicant asserts in his affidavit that he has a claim for damages of $168,500.00 against the respondent; that the evidence in support of his claim was obtained as a result 220/12 -12- of the proceedings between the parties culminating 1n the judgment of 14 September 1979. The applicant says: "Prior to this action I had been given false and misleading statements by an officer of the judgment creditor. Consequently I am able to make this claim for damages based on evidence already given to the Court," Paragraph lettered (a) 1n the first letter from the applicant to the respondent of 6 February 1980 refers to some claim for $150,000.00; but counsel for the applicant said that the applicant did not rely upon that to support any counter-clain, set-off or cross demand relevant to the proceedings before this court. Paragraphs lettered (pb), (c) and (d) assert claims against the respondent totalling $18,500.00. Those claims, together with the earlier claim for $150,000.00, total the $168,500.00 referred to 1n paragraph 2 of the applicant's affidavit. Paragraphs (b), (c) and (d) of the letter read as follows:- 'b/ $15,000 (Fifteen thousand dollars) being an amount to cover judgment and costs in an action of the Commercial Banking Company of Sydney versus Roy Edward Brink - judgment an favour of the Banking Company on 714th September 1979 (Roy E. Brink as Guarantor of Sydney Land Projects Pty. Limited) c/ $2,000 (two thousand dollars) being an amount to cover an alleged personal debt to the Commercial Banking Company of Sydney and costs incurred in relation thereto. (Roy E. Brink - privately) d/ $1500 (Fifteen hundred dollars) being an amount to cover an alleged debt to R. W. ../13 -13- Vincents Pty. Limited - window suppliers ~ and costs incurred in relation thereto. (Roy E. Brink as Guarantor for Sydney Land Projects Pty. Limited)" The letter says that "proof of damages are a matter of record" and then states where certain documents are held. The letter goes on:- "Proof of liability is based on the Court Records, Exhibits and Justice Herrons judgment handed down on the 14th September 1979 in the action of the Commercial Banking Company of "Sydney Limited vs Roy E. Brink. His Honour's judgment was that a Guarantee to the Commercial Banking Company of Sydney Limited on behalf of Sydney Land Projects Pty. Limited signed by Roy E. Brink as Guarantor was a valid document and that the consequences of the validity of the document in the specific terms stated therein should follow - He therefore found in favour of the Commercial Banking Company of Sydney in terms of the specific action brought by that Company. However the Court records show that a cash amount of $11000.00 approximately was released from retention by the Housing Commission of New South Wales. This money being the property of Sydney Land Projects Pty. Limited. However it is contended that this amount released in March 1977 was deliberately withheld from payment into Sydney Land Projects Pty. Limited overdrawn bank account in order to avoid the Banks specific obligations under the Guarantee signed by Roy E. Brink. i.e. Payment of the monies into the account when released would have given the Company liquidity once again up to the amount stated in the Guarantee and it could then have avoided the consequences which followed. Those consequences can be shown to be a direct result of the Banks failure to correctly and promptly lodge the monies when released." In my opinion there is an inherent defect in the affidavit namely, that it does not indicate that any counter- claim, set-off or cross demand which may be available to the .-/14 -14- applicant could not have been set up in the District Court proceedings. Under the District Court Rules (Pt. 20 rr. 1~5) a defendant may plead a counter-clain, cross-action, or set-off on any cause of action on which he might have brought an action against the plaintiff in the District Court. There is nothing to suggest from the affidavit of the applicant that all his demands against the respondent could not have been set up in the District Court action. Indeed, the contrary appears to be the case. In these circumstances the original affidavit of the applicant does not answer the description of the affidavit required by sub-s. 41 (7). In the result there has been no deemed extension of time to comply with the requirements of the bankruptcy notice. As to costs, I reserve the costs of both parties. I take this course because on 14 May 1980 when this matter was adjourned until 2 June 1980 certain undertakings were given to the Court by the applicant, and an arrangement as to costs was entered into between the parties pending for their operation on whether a sequestration order 1s ultimately made against the applicant upon the petition of the respondent and those costs include certain of the costs relating to this matter. I certty that this and tho Vi. Veen preced.nj pages are a true cory of the Reasons for Jucgmert hercin ci his Honour Vie Mr, Justice Loc\hart