"yy \ cr CATCHWORDS BANKRUPTCY ~ whether a "counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt" - nature of affidavit required under s.41(1) of the Act - extension of time for compliance with Bankruptcy Notice. Bankruptcy Act, 1966 (Cwlth), s.40(1)(g), s.40(3){b) and (d), s.41(7) Re: RONALD WALLACE GOULD, ELAINE MARGARET GOULD and JULIE GAY GOULD Ex parte: IAN ROBERT SKINNER and DAYLE KERRY SMITH Bankruptcy Nos. 1871 and 1872 of 1982 FITZGERALD J. BRISBANE 19 APRIL 1983 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION Bankruptcy Nos. 1871 and 1872 of 1982 BANKRUPTCY DISTRICT OF THE SOUTHERN ) ) ) ) ) DISTRICT OF THE STATE OF QUEENSLAND ) Re: RONALD WALLACE GOULD, ELAINE MARGARET GOULD and JULIE GAY GOULD Ex parte: IAN ROBERT SKINNER and DAYLE KERRY SMITH ORDER JUDGE MAKING ORDER: Fitzgerald J. DATE OF ORDER: 19 April 1983 WHERE MADE: Brisbane THE COURT ORDERS THAT: 1. The Court declares it is satisfied that the judgment debtors have in action No. 1473 of 1982 a counter-claim, set-off or cross demand exceeding the amount of the debts which are the subject of the orders for costs upon which the bankruptcy notices are founded which could not have been set up in the proceedings in which those orders were obtained. 2. The costs of and incidental to the proceedings in this matter, including reserved costs, if any, shall follow the event in action No. 1473 of 1982 in the Supreme Court of Queensland if the action proceeds to finality and shall otherwise be paid by the judgment 7 debtors to the judgment creditors. IN THE PEDERAL COURT OF AUSTRALIA ) QUEENSLAND DISTRICT REGISTRY ) Bankruptcy Nos. GENERAL DIVISION ) 1871 and 1872 of 1982 ) ) ) BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND Re: RONALD WALLACE GOULD, ELAINE MARGARET GOULD and JULIE GAY GOULD Ex parte: IAN ROBERT SKINNER and DAYLE KERRY SMITH FITZGERALD J. 19 APRIL 1983 REASONS FOR JUDGMENT On 17 December 1982, bankruptcy notices numbers 1871 of 1982 and 1872 of 1982 were issued by the Deputy Registrar in Bankruptcy on the application of Messrs Ian Robert Skinner and Dayle Kerry Smith ("the judgment creditors") addressed to Ronald Wallace Gould, Elaine Margaret Gould and Julie Gay Gould {"the judgment debtors"). Julie Gay Gould ("the daughter") is the daughter of Ronald Wallace Gould ("Mr Gould") and Elaine Margaret Gould ("Mrs Gould"). Applications for the notices had been made on 3 November 1982 but their 1ssue had been delayed because the Registrar had referred the applications to the Court for advice and direction. That matter was argued on 6 December 1982 and decided on 14 December 1982. 2. Mr Gould was served with the bankruptcy notices on 23 December 1982. Mrs Gould and the daughter were each served on 12 January 1983. On 6 January 1983, Mr Gould filed an affidavit in respect of each of the bankruptcy notices. At the same time, he filed an application to set aside bankruptcy notice 1872 of 1982 but not bankruptcy notice 1871 of 1982. Mrs Gould and the daughter followed a similar course on 26 January 1983. In each case, the affidavits were directed to satisfying the court of the existence of one or more counter-claims, set-offs or cross-demands such as are referred to in paragraph 40(1)(g) of the Bankruptcy Act 1966 ("the Act"). The judgment debtors by their counsel have asked during the hearing that both bankruptcy notices be set aside. In all cases, the sole ground pursued is the alleged existence of appropriate counter-claims, set-offs or cross-demands. The judgment creditors were formerly the solicitors for the judgment debtors. It is often convenient to speak of the judgment debtors although the daughter is involved only to a limited extent. The judgment creditors acted for the judgment debtors in various matters, some of which were litigious, over a period of 5 years up until early 1982. In respect of a number of the matters, perhaps all of them, the judgment creditors have not yet been paid. Memoranda of Costs have been delivered in short form but the judgment 'debtors have requested Bills in taxable form 1n accordance $3 with the provisions of the Costs Act 1867 (Qld). Some such 3. bills have now been delivered but no bills in respect of work performed by the judgment creditors as solicitors for the judgment debtors have yet been taxed. The bankruptcy notices do not relate to costs due by the judgment debtors to the judgment creditors as their former solicitors but to orders for costs which have been made against the judgment debtors in some of the impressive array of litigation which is now in existence between them and the judgment creditors. One matter in which the judgment creditors acted as solicitors for Mr and Mrs Gould was Supreme Court action No. 173 of 1978 ("the South Molle Island litigation"). The trial took place between 20 July and 15 September 1981 and occupied 7 weeks. It resulted in a judgment in favour of Mr and Mrs Gould for $1.47 million. The judgment was reduced on appeal to $700,000.00 by the Full Court of the Supreme Court of Queensland. The stranger to these present disputes against whom judgment has been given in the South Molle Island litigation is appealing to the Privy Council. Mr and Mrs Gould are appealing to the High Court. Another of the matters in which the judgment creditors acted as solicitors for the judgment debtors involved the purchase of a farmlet in the Currumbin Valley ("the Currumbin Valley property"). The property was purchased in the names of the judgment debtors and a number of other persons as trustees of the Gould Family Trust. 4. Towards the end of July 1981, the trustees of the Gould Family Trust executed a Bill of Encumbrance over the Currumbin Valley property in favour of the judgment creditors. According to its terms the Bill of Encumbrance was to secure payment to the judgment creditors of their costs as solicitors for the judgment debtors. Mr Smith, one of the judgment creditors, has sworn that that indeed was the purpose for which the Bill of Encumbrance was given. The judgment debtors swear that the Bill of Encumbrance was given to the judgment creditors because Mr Smith told Mrs Gould "that there was a threat to the Currumbin Valley property an the event that the South Molle Island litigation was ultimately unsuccessful and that the only way to ensure its safety would be to encumber it". It was for that purpose, according. to the judgment debtors, that the Currumbin Valley property was encumbered to the judgment creditors. The judgment debtors further swear that: "Tt was at all times agreed that, notwithstanding the terms of the formal Bill of Encumbrance which purported to secure the property to Messrs Skinner and Smith for costs, the property was only to be held by Messrs Skinner and Smith as encumbrancees to protect it against claims by third parties and was not to be utilised to Meet costs owed to Messrs Skinner and Smith arising out of the South Molle Island litigation." 5. Shortly prior to the hearing of the appeal from the judgment at first instance in the South Molle Tsland litigation, Mr and Mrs Gould, on 27 January 1982, executed a Deed of Assignment to the judgment creditors of the benefit and advantage of the judgment in that action. Interim accounts, totalling in excess of $200,000.00 for costs and outlays in respect of the trial, had been delivered some months previously. Before me, counsel for the judgment creditors acknowledged that the assignment was by way of security only. The appeal in the South Molle Island litigation was heard by the Full Court of Queensland on 8, 9, 10, and 11 February 1982. It was at about that time that the judgment creditors'retainer as solicitors for the judgment debtors came to an end. On 9 February 1982, the judgment creditors delivered to the judgment debtors a Bill of Costs which it is said complied with the provisions of the Costs Act 1867 (Qld) in respect of the trial of the South Molle Island litigation. A summary of the Bill is as follows: Total Professional Fees $154,309.39 Outlays (already paid) 80,964.14 Anticipated outlays (yet to be paid) 41,852.74 Less credits received 17,166.36 $259,959.91 6. On 17 February 1982 the judgment creditors delivered to the judgment debtors a Bill of Costs which it is said complied with the provisions of the Costs Act 1867 (Q1d) for professional fees and disbursements in respect of the appeal to the Full Court of the Supreme Court of Queensland in the South Molle Island litigation. A summary of that Bill is as follows: Total Professional Fees $18,056.00 Outlays (already paid) 306.88 Anticipated outlays (yet to be paid) 45,986.20 $64,349.08 The outlays and anticipated outlays referred to un each of the above summaries related to counsels' fees and fees for professional services rendered by persons other than the judgment creditors in the course of preparation for the trial and the appeal in the South Molle Island litigation. Since the Bills were delivered, further of the anticipated outlays referred to have been paid by the judgment creditors. The Bills of Cost referred to have not yet been taxed but are presently before the Taxing Master of the Supreme Court of Queensland. The Bill of Encumbrance over the Currumbin Valley property was registered in the office of the Registrar of Titles in Brisbane on 2 March 1982, i.e. shortly after the termination of the judgment creditors' retainer. 7. On or about 22 April 1982, the judgment creditors obtained a valuation from one William Douglas Gardiner, a registered valuer employed by a firm of real estate agents, Richard Ellis Ray White. Mr Gardiner valued the Currumbin Valley property at that time at $85,000.00. At about the same time, the judgment creditors commenced steps to sell the Currumbin Valley property as encumbrancees. In their capacity as (by then) sole trustees of the Gould Family Trust, the judgment debtors caveated, commenced proceedings in the Supreme Court of Queensland to stop the sale and sought an interlocutory injunction to restrain the sale. The action in the Supreme Court of Queensland, No. 1473 of 1982, was commenced on 6 May 1982. Bankruptcy Notice No. 1871 of 1982 is based upon an order made in a proceeding OS No. 340 of 1982, in the Supreme Court of Queensland on 26 May 1982, by which it was ordered that the caveat lodged by the judgment debtors be removed and that the judgment debtors pay the judgment creditors' taxed costs of and incidental to the proceedings. The costs were taxed and allowed in the sum of $744.35. Bankruptcy Notice No. 1872 of 1982 is based upon an order made in action No. 1473 of 1982 in the Supreme Court of Queensland also on 26 May 1982, by which the application by the judgment debtors for an interlocutory injunction was dismissed and the judgment debtors were ordered .to pay the judgment creditors' taxed costs including reserved bosts. The costs were taxed and allowed in the sum of $4493.30. 8. The judgment debtors failed in their attempts to stop the sale because the learned Supreme Court judge held that they had failed to establish that they could give undertakings as to damages which would have any substance, No decision, final or interlocutory, was made as to the merits of the judgment debtors' claim in relation to the Bill of Encumbrance. By letter dated 10 June 1982, Mr Gardiner informed the judgment creditors that, in his opinion, the value of the Currumbin Valley property had declined to $66,500.00. On or about 22 June 1982, the judgment creditors, as encumbrancees, contracted to sell the Currumbin Valley property for a price of $67,500.00 and the contract was completed that day. According to the judgment debtors, the sale was at an undervalue and the value of the Currumbin Valley property at the time of the sale was between $90,000.00 and $100,000.00. They have recently obtained a valuation of the Currumbin Valley property at the time of the sale at $92,500.00. A notice of completion of the sale as required by s.85 of the Property Law Act 1974 (Qld) was given by the judgment creditors to the judgment debtors. The notice stated that, after payment out of the mortgage of the property and the deduction of various costs claimed to be -associated with the transaction, but not including the costs P| ordered to be paid and which are the subject of the 9. Bankruptcy Notices, a net balance of $35,175.69 was "applied in part reduction of overall indebtedness of Encumbrancers to Encumbrancees". That enigmatic notation on the notice of completion of the sale is also referred to in the affidavit of Mr Smith, one of the judgment creditors. In paragraph 41, he says: "On or about 22 June 1982, the Goulds account with the Judgment Creditors was reduced by a credit of $35,175.69." The same matter is again taken up in paragraph 43 of his affidavit where, after referring to the Bills of Cost in respect of the trial and appeal in the South Molle Island litigation, Mr Smith says: "As the Bills presently stand, the Goulds total indebtedness to this firm in respect of the costs of the trial in the appeal are made up as follows - Balance outstanding on trial bill $259,959.91 Balance outstanding on appeal bill $64,349.08 $314,308.99 Less credit referred to in paragraph 41 hereof 35,175.69 Total balance indebtedness of the Goulds $289,133.30 10. On 23 November 1982, the judgment creditors commenced separate actions in the Supreme Court of Queensland, Nos. 5890 and 5891 of 1982, in which they claimed from Mr and Mrs Gould $224,784.22 (the amount of the Bill for the trial in the South Molle Island litigation less the credit from the sale of the Currumbin Valley property) and $64,349.08 (the amount of the Bill in respect of the appeal in the South Molle Island litigation) respectively. On 2 December 1982, a Master of the Supreme Court of Queensland referred the Bills in respect of the South Molle Island litigation to taxation and stayed actions Nos 5891 and 5892 of 1982 pending the taxation of the Bills. On the same day, 2 December 1982, Mr and Mrs Gould commenced a further action in the Supreme Court of Queensland, No. 6091 of 1982, in respect of the Deed of Assignment to the judgment creditors of the judgment in the South Molle Island litigation. As stated, the bankruptcy notices in question in these proceedings were issued on 17 December 1982. Additional affidavits to those initially filed by the judgment debtors within the times for compliance with the bankruptcy notices have been filed by them and affidavits have also been filed on behalf of the judgment creditors. 11. On 24 February 1983, an application by the judgment creditors that action 6091 of 1982 in the Supreme Court of Queensland be dismissed under the Supreme Court's inherent jurisdiction was dismissed and the judgment creditors were ordered to pay to Mr and Mrs Gould their costs of the application to be taxed. On the same day, 24 February 1983, the Supreme Court of Queensland dismissed an application by the judgment creditors against Mr and Mrs Gould for a declaration that the effect of the Deed of Assignment was that the judgment creditors were entitled to have the conduct of the South Molle Island litigation and the judgment creditors were ordered to pay to Mr and Mrs Gould their costs of that application to be taxed. Neither order for costs against the judgment creditors in favour of Mr and Mrs Gould has yet been taxed. On 9 March 1983, Mr and Mrs Gould delivered a Statement of Claim in action No. 6091 of 1982 in the Supreme Court of Queensland claiming: 12. "{a) A declaration that the parties were induced to execute the said Deed by undue influence and/or duress; (b) a declaration that the Plaintiffs have duly terminated the said Deed; (c) delivery up of the said Deed to enable it to be set aside; (d) an Injunction restraining the Defendants from enforcing, or attempting to enforce, the provisions of the said Deed; (e) further or other relief; (£) costs." A Defence to that Statement of Claim simply denying certain allegations has since been delivered by the judgment creditors. The Statement of Claim in action No. 1473 of 1982 in the Supreme Court of Queensland was not delivered until 21 March 1983 and then only after it had been ordered to be delivered by a Master of that Court. In part at least, that may have been due to delays in the grant of legal aid to the judgment debtors. It is a feature of that pleading that the claims made against the judgment creditors are made by the judgment debtors in their capacity as trustees of the Gould Pamily Trust. That is in direct contradiction of their evidence in these proceedings that, on or about 6 January 1983, (on which date Mr Gould filed his application and affidavits in respect of the Bankruptcy Notices), the judgment debtors as trustees of the Gould Family Trust "assigned to ourselves ad 13. as Beneficiaries of the said Trust, as we are entitled to do under the instrument creating the Trust, all rights arising out of the sale by the Petitioning Creditors herein of the Currumbin Valley property, including all rights of action in Supreme Court Writ No. 1473 of 1982." Indeed, the judgment creditors do not dispute that the assignment was possible and has been accomplished. Paragraph 1 of their defence in action NO. 1473 of 1982 in the Supreme Court of Queensland is in the following terms: "1. The Defendants submit that the Plaintiffs no longer have an interest in the cause or causes of action set up by the Amended Statement of Claim herein, in that on or about the sixth day of January 1983, they did, as Trustees of the GOULD FAMILY TRUST assign to beneficiaries of the said Trust all rights arising out of the sale by the Defendants herein of the property described 1n paragraph 3(a) of the Amended Statement of Claim including all rights of action in this action and the Plaintiffs submit that the action as presently constituted has become defective." Before me, counsel for the judgment creditors accepted that 1t was sufficiently arguable for present purposes that the cause of action in action No. 1473 of 1982 in the Supreme Court of Queensland had been assigned to the judgment debtors, and reference was made to Re Timothy's Pty Ltd and the Companies Act 1982 [2 N.S.W.L.R. 706] and Trendtex Trading Corporation v. Credit Suisse [1982] A.C. 679. 14. Accordingly, it is appropriate that I proceed on the basis that the claims in action No. 1473 of 1982 in the Supreme Court of Queensland are presently being pursued against the judgment creditors by the judgment debtors personally. Shortly stated, those allegations are that the execution of the Bill of Encumbrance was a result of undue influence on the part of the judgment creditors in their role as solicitors and fraudulent misrepresentations by the judgment creditors as to what they intended as encumbrancees under the Bill of Encumbrance, and that the judgment creditors breached their obligation as encumbrancees to exercise reasonable care to ensure that the Currumbin Valley property was sold at its market value. The alleged breaches of that obligation are a failure to advertise the proposed sale adequately or over a sufficient period (a matter in respect of which no evidence has been adduced before me by the judgment debtors), and that the sale price was substantially less than what the judgment creditors had been informed was the market value at the time, $85,000. The latter allegation was obviously made by the pleader in ignorance of the fact that the judgment creditors had received a reduced valuation prior to the sale. The relief claimed in action No. 1473 of 1982 is in the following terms: ""(a) a declaration that Lhe said Lrustees as encumbrancers were induced to execute the said bill of encumbrance by undue influence and/or fraudulent misrepresentation; (b) an account of what is due from the defendants, in respect of the defendants' sale of the plaintiffs' property in reliance on such bill of encumbrance which was: (i) procured by undue influence; and/or (ii) induced by fraudulent misrepresentation; (c) further or alternatively, damages for deceit; (d) alternatively, an account of what is due from the defendants in respect of their said breach of duty in selling the said property; (e) further or alternatively, damages for breach of statutory duty; (f) interest pursuant to the "Common Law Practict Act, 1867-1978" on all moneys found due to the plaintiffs; {g) an order that the said bill of encumbrance be delivered up for cancellation; (h) further or alternative relief; (i) costs." The judgment debtors' other major alleged claim against the judgment creditors relates to the judgment debtors' former matrimonial home at 13th Avenue, Palm Beach in the State of Queensland. That property, of which Mrs Gould was the registered proprietor, was transferred by her to the judgment creditors by a Memorandum of Transfer dated 27 June 1979,and registered on 1 August 1979. The Paim Beach property had been subject to a B111 of Mortgage in favour of the Commercial Bank of Australia Limited which had been given the mortgage as a collateral security for monies owned to that bahk by Gould Holdings Pty Ltd, a family company which was in 16. financial difficulty. Prior to the transfer, the bank had threatened to sell the Palm Beach property as mortgagee. After Mrs Gould transferred the Palm Beach property to them, the judgment creditors used it as security to borrow from another source. The mortgage to the bank was discharged by a payment from the money borrowed of the amount owed to the bank on the security of its mortgage, the sum of $30,997.47. No doubt that may be appropriately treated as a payment made by Mrs Gould to the bank and, if the transfer to the judgment creditors was a transfer on sale, a payment to that extent of the purchase price payable by the judgment creditors to Mrs Gould. There is no evidence of the amount borrowed by the judgment creditors on the security of the Palm Beach property. The transfer from Mrs Gould acknowledges receipt of a consideration of $50,000.00 and a finding was made in the Supreme Court of Queensland at first instance in the South Molle Island litigation that the difference between that amount and the amount paid to the bank to satisfy its mortgage was paid over to Mrs Gould. Certainly there was evidence before the Supreme Court of a "sale" of the Palm Beach property from Mrs Gould to the judgment creditors for $50,000.00. However, none of the extracts of evidence from the Supreme Court proceedings put before me directly indicates that any payment was made to Mrs Gould although that was no doubt an appropriate inference which might have been drawn in the Supreme Court proceedings. As will appear 17. the finding of a payment to Mrs Gould was not of importance in those proceedings. Neither party has suggested in these proceedings that the sum in question, approximately $19,000.00, was either paid to Mrs Gould or appropriated to her account e.g. in respect of liabilities owed by her or her husband. Mr Smith's evidence in these proceedings was that the amount borrowed by the judgment creditors on the security of the Palm Beach property, less the amount paid to the bank to discharge its mortgage,was "lent" to the judgment creditors' solicitors practice "to enable that firm to meet its obligations to counsel retained to represent the Goulds". Mr Smith has sworn that the judgment creditors purchased the Palm Beach property from Mrs Gould "after having first obtained a valuation thereof". The purchase price is said to have been $50,000.00, the amount stated in the transfer. There is in evidence a reasonably current valuation dated 19 February 1979, which was only a few months prior to the transfer, by which the property was valued at $51,800.00. According to Mr Smith, the judgment creditors "let" the Palm Beach property to the judgment debtors on a monthly tenancy with a right for them to sub-let the premises as it was then their family home. According to Mr Smith, it was a term of the tenancy that Mr and Mrs Gould pay the rent and all the outgoings in respect of the Palm Beach property and they did sub-let the premises or part thereof and derive income therefrom. There is no written tenancy agreement. There is evidence that payments were made and described by Mrs Gould as rent. 18. In or about the month of October 1981 the Palm Beach property was sold by the judgment creditors for approximately $180,000.00. The judgment creditors have retained the profit and claim that they are beneficially entitled to it. No doubt the monies borrowed by the judgment creditors on the security of the Palm Beach property after it was transferred to them were repaid out of the sale price when it was sold by them but, insofar asa distinction may be drawn between the judgment creditors and their firm as solicitors, 1t is equally obvious that the latter remains indebted to the judgment creditors in respect of the monies which had been borrowed by the judgment creditors and "lent" to their firm. According to Mrs Gould, she did not sell the Palm Beach property to the judgment creditors but transferred it to them on trust for her and her husband in order that it might be used as a basis for borrowing "so that some interim funds could be made available for costs". According to her, that was necessary because the judgment debtors "credit rating ... was, at that time, virtually non-existent". There is no written evidence of such a trust. Mr and Mrs Gould made the periodic repayments of monies borrowed by the judgment creditors up until their resale of the property. Mr Smith claims that there were outgoings payable under the tenancy. There may be some superficial support for the judgment creditors' claim to have purchased the Palm Beachproperty in the language used in the pleadings and evidence in the South Molle Island litigation where references are 19. to be found to a "sale" of the Palm Beach property by Mrs Gould. However, that is perhaps equivocal as between the judgment debtors and the judgment creditors who were then the solicitors for the judgment debtors. Further, the sole relevance of the Palm Beach property to the South Molle Island litigation seems to have been in relation to Mr and Mrs Gould's claim as plaintiffs in that litigation to recover as damages only the amount of approximately $30,000.00 which Mrs Gould paid to the bank in respect of the indebtedness to the bank of Gould Holdings Pty Ltd. It is immaterial for present purposes whether that claim in those proceedings was well founded. All that is presently significant is that such an amount was paid whether the transfer of the Palm Beach property to the judgment creditors was a transfer on sale or on trust. Even if Mrs Gould did sell the Palm Beach property to the judgment creditors, she may have a claim against them on the basis of undue influence. The amount which they borrowed on the property if not the amount for which they later sold it may in due course indicate that the value was in excess of $50,000.00 at the time of the transfer, even if that amount was paid in full by way of purchase price. However, thus far at least, the only suggested claim in respect of the Palm Beach property is a claim by Mr and Mrs Gould as beneficiaries under the trust alleged by Mrs Gould. No proceedings had been started by the time of the hearing before me although I was informed 20. that a writ had been settled by Senior Counsel and an undertaking was given that it would be issued within 2 days from Thursday 14 April 1983. The proposed indorsement was not revealed. Further, whether or not the claim will be prosecuted seems clearly dependent on whether or not legal aid is granted. The foregoing may not be an exhaustive summary of the evidence in these proceedings but serves, I think, to reflect the position. It does not seem essential to go further. Although it has been necessary because of the wide scope of the material relied on by the parties to analyse their respective contentions in some detail, the critical issues are, in the end, of quite narrow compass, Despite the procedure which has been followed, which suggests an element of confusion, no occasion arises for the Court to consider whether the bankruptcy notices should or can be set aside. The position is clearly illustrated by what was said in the joint judgment of Deane and Lockhart JJ in James v. Abrahams (1981) 24 A.L.R. 657, 659-662: "The affidavit filed on behalf of the debtor was plainly intended to raise for determination a question under s.40(1)(g) of the Bankruptcy Act 1966 (the Act). That question was whether the court was satisfied by the debtor that he had "a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt -.. 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 ... was obtained". 7 wee 21. Section 40(1) of the Act, provides, for present purposes, that a debtor:- 'l.. commits an act of bankruptcy ... :- (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 ... 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; ... 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;' Section 41(7) of the Act provides: '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-clain, set-off or cross demand as is referredto in ... [para 40(1)(g)] ... and the Court has not, before the expiration of that time, determined whether 1t 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 debtor did not, within the time which the notice fixed for compliance with its terms, either comply with the requirement of the notice or satisfy the court that he had a counter-claim, set-off or cross demand of the type described in s.40(1) (g). The failure to comply with the requirements of the bankruptcy notice constituted an act of bankruptcy unless the provisions of s.41(7) operated to extend the time for compliance. Whether the time for compliance was so extended depends upon whether the affidavit which the debtor filed wath the Registrar was, within s.41(7), "an affidavit to the effect that he has such a counter-claim, set-off or cross demand as is referred to"in s.40(1) (g). 22. The filing within the time specified in s.41(7), of an affidavit to the effect that a debtor has a counter-claim, set-off or cross demand of the type mentioned in s.40(1)(g), does not constitute an application to set the bankruptcy notice aside. It operates as an automatic extension of time for compliance with the bankruptcy notice until the court can determine whether it is satisfied by the debtor that the debtor has a counter-claim, set-off or cross demand of the type referred to in s.40(1)(g). If the court is so satisfied, it 1s neither required nor empowered to make an order setting aside the bankruptcy notice. The result of the court's being so satisfied, within either the time originally fixed by the bankruptcy notice for compliance or the extended time resulting from the operation of s.41(7), is that failure to comply with the requirements of the bankruptcy notice does not constitute an act of bankruptcy. After the court has been so satisfied, the bankruptcy notice is spent. ... If the affidavit filed by the debtor was to the required effect, the time for compliance with the requirements of the bankruptcy notice was automatically extended by the provisions of s.41(7). If the affidavit was not to the required effect, the time for compliance had expired and the act of bankruptcy had been committed. ... As we have said, para (g) of s.40(1) and sub-s. (7) of s.41, are self-operating. Provided the requisite affidavit has been filed, sub-s. (7) extends time until the court determines whether it is satisfied as to the issue propounded under para (g): the resolution, in a manner favourable to the debtor of the question propounded by para (g) precludes non-compliance with the requirements of a bankruptcy notice from constituting an act of bankruptcy." As in that case, the real question here is whether eath of the debtors "filed within the relevant time an affidavit or affidavits to the effect referred to in s.41(7) of the Act" (p.662 line 35). As in that case, the judgment creditors argued: 23. & "ll. that the matters set out in the affidavits filed by the debtor are not 'to the effect that {the debtor] has such a counter~claim, set-off or cross demand as is referred to' in s.40(1) (g). It was argued that the facts appearing from that affidavit do not indicate that the debtor had ta counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt'. It was further argued that, in any event, any such counter-claim, set-off or cross demand could have been 'set up by the debtor in the action or proceedings in which the judgment ... was obtained'. n The extent to which the judgment debtors must go in relation to the first of these two questions is well illustrated by another judgment of Lockhart J. In Re Brink; ex parte Commercial Banking Company of Sydney Ltd (1980) 30 A.L.R. 433. His Honour, after a review of the authorities including Ebert v. Union Trustee Co of Australia Ltd (1960) 104 C.L.R. 346, said at p.439 - "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." It is convenient to start with the judgment debtors' action against the judgment creditors in the Supreme Court of Queensland, No. 1473 of 1982. Applying what was said in Brink's Case, supra, I am not satisfied that the judgment debtors have shown that they have a fair chance of success in respect of their allegations concerning the conduct of the sale cE On 24. of the Currumbin Valley property by the judgment creditors as encumbrancees. An arguable case is made out that the property was worth considerably more than it was sold for an the sense that there is an unresolved conflict of valuation evidence. If the judgment debtors' valuer is accepted, the difference between the true value and the sale price exceeds the aggregate of the amounts of the orders for costs upon which the bankruptcy notices are founded. However, the evidence does not support either of the breaches of duty by the encumbrancees which are alleged in the Statement of Claim in the action and no attempt was made to assert any wider or different cause of action. The relevant duty has now been the subject of consideration by the High Court in Commercial and General Acceptance Ltd v. Nixon (1982) 56 A.L.J.R. 130. However, as has already been stated, the judgment debtors also allege that the bill of encumbrance was obtained by the judgment creditors by undue influence and/or fraudulent misrepresentations. The relief asked includes claims for - "(b) an account of what is due from the defendants, in respect of the defendants' sale of the plaintiffs' property in reliance on such bill of encumbrance which was: - {i) procured by undue influence; and/or (ii) induced by fraudulent misrepresentation; (c) further or alternatively, damages for deceit;" 25. Taking into account the unusual circumstances which surround not only the Currumbin Valley transaction but also that with respect to the Palm Beach property, I am satisfied that the judgment debtors have a sufficient prospect of success with respect to their allegations concerning these claims to meet what is required for the purpose of these proceedings. That is not, however, the end of the matter. It is established that not every claim which a debtor may have against a creditor meets the requirements of paragraph 40(1)(g) of the Act. In James' Case, supra, the debtors established a prima facie claim that certain property was held on trust by the creditor for himself and the debtor. Were the debtor's claim to have prevailed, the value of his beneficial interest in the property would have exceeded the amount of the judgment debt against him. The debtor's claim was described as "a claim for the proper administration of the trust which he alleges exists and, one would presume, ultimately for an order for sale or for the appointment of a different trustee for sale" (p.664 line 1-4). The majority of Deane and Lockhart JJ considered that such a claim was not sufficient for the purpose of para. 40(1) (g). 26. James' Case 18 authority for the proposition that a "counter-claim, set-off or cross-demand equal to or exceeding the amount of the judgment debt" for the purposes of para 40(1)(g) of the Act must be one "in respect of a money demand, either liquidated or unliquidated" (pp. 663-664), "which 1£ ultimately established, will result in an order for the payment of a sum of money by the judgment creditor to the judgment debtor" (p.664), subject to a possible qualification which was not relevant in that case and is not relevant here. It was because the debtor's claim against the creditor in that case was not such a money claim that Deane and Lockhart JJ. held that it did not satisfy para 40(1)(g) of the Act. At p.664, they said: "The debtor's claim against the creditor for a declaration of trust in the present case is neither a claim which sounds in money nor a claim for immediate delivery of a specific chattel. Indeed, even if the debtor succeeds in obtaining against the creditor a declaration of trust and, ultimately, an order for sale, that declaration and order would not provide legal justification for a refusal to pay the amount of the judgment debt on account of money lent. It follows that the debtor's primary claim in the present matter is nota counter-claim, set-off or cross demand of the relevant type". It may be added that the reference to "legal justification for a refusal to pay" does not import the notion that the "counter-claim set-off or cross-demand" must be one which would constitute, or would have constituted, a defence to the creditor's claim. The relevant provisions of the Act are concerned with claims by debtors which could not have been set up in the proceedings in which the creditor's claim was established. 27. Purther, it has been pointed out that "cross demands" are not confined to claims which might be made the subject of "counter-claims" or "set-offs" but extend to claims by a debtor which have no connection wath the cause of action out of which the creditor's judgment debt arose: see In re a Bankruptcy Notice [1934] 1 Ch. 431 and Re Brink, supra, per Lockhart J. at pp 436-437, citing Re Judd, ex parte Pike (1924) 25 S.R. (NSW) 537, at pp 539-540, where Maughan AJ pointed out "that a judgment debtor may even buy up a claim against the judgment creditor in order to have a 'cross demand'", a course analogous to the acquisition by assignment of the claims in respect of the Currumbin Valley property which was followed by the judgment debtors in the present case. To return to James' Case, supra, Deane and Lockhart JJ continued at p. 665: "In the result, the affidavit or affidavits filed on behalf of the debtor fail to assert that the debtor has, for the purposes of para (g), a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt. That being the case, the affidavit filed within the time fixed for compliance with the terms of the bankruptcy notice, was not, for the purposes of s.41(7), "an affidavit to the effect that [the debtor] has such a counter-claim, set-off or cross demand as is referred to in para 40(1) (g)". It follows that the time for compliance with the bankruptcy notice was not extended by the provisions of s.41(7) and that the court could not, on the evidence, be satisfied that the debtor had a counter-claim, set-off or cross demand of the , kind mentioned in s.40(1)(g). The time for compliance with the bankruptcy notice, not having been extended, the debtor committed an act of bankruptcy on the expiry of 17 June 1980 by havang failed to comply with the requirements of the notice." Foes - 28. Pisher J. agreed with that conclusion, but preferred to hase his decision on the ground that the debtor's claim was not against the creditor personally but as trustee of the property. In the present case, I am saved from considering whether the judgment debtors' claim for an account is a cross-demand against the judgment creditors within the meaning of para 40(1){(g) of the Act by the claim for damages for deceit. (It may however be observed that here the property has been sold and there is no suggestion of attempting to trace the proceeds or that there is any claim to a specific fund or other claim in rem.) The Statement of Claim in action No. 1473 of 1982 in the Supreme Court of Queensland relies upon an alleged fraudulent misrepresentation as to the intention of the judgment creditors with respect to the enforcement of the Bill of Encumbrance in connection with both the case of undue influence and the case of deceit which is set up. Undue influence can itself be a form of deceit giving rise to damages. In the circumstances, the judgment debtors have a sufficiently arguable money claim for unliquidated damages for a sufficient amount to bring themselves within para 40(1)(g) of the Act. The judgment creditors' final argument on this aspect was that nonetheless the cross demand is outside the relevant provision insofar as Bankruptcy Notice 1872 of 1982 is concerned because it is raised in the very action in which the order for costs was made upon which that notice 7 18 founded. However, I am unable to accept that submission. 29. By paragraph 41(3) of the Bankruptcy Act 1966, a bankruptcy notice may not be issued in relation to a debtor except on the application of a creditor who has obtained against the debtor a final judgment or final order within the meaning of para 40(1)(g) or of a person who is to be deemed to be such a creditor by virtue of para 40(3)(d). As was conceded by counsel for the judgment debtors, the order for costs on the dismissal of the judgment debtors' application for an interlocutory injunction in Queensland Supreme Court action No. 1473 of 1982 is only a final judgment by virtue of para 40(3) (b) of the Act. It is therefore necessary to see how that provision operates in relation to the requirement in para 40(1)(g) that the cross demand be one which could not have been "set up in the action or proceeding in which the judgment or order was obtained". Paragraph 40(3)(b) of the Act provides: "(3) For the purposes of paragraph (1) (g) - (b) a judgment or order that is enforceable as, or in the same manner as, a final judgment obtained in an action shall be deemed to be a final judgment so obtained and the proceedings in which, or in consequence of which, the judgment or order was obtained shall be deemed to be the action in which it was obtained." 30. It was not in dispute before me that the order for costs upon the dismissal of the application for an interlocutory injunction in Queensland Supreme Court action No. 1473 of 1982 is one which is enforceable as or in the same manner as a final judgment obtained in an action in that Court. The order for costs is therefore deemed by para 40(3)(b) of the Act to be a "final judgment so obtained", i.e. a "final judgment" obtained in an "action". However, para 40(3) (b) of the Act does not stop there; the "action" is identified. For the purposes of para 40(1)(g), the statutory fiction effected by the deeming is extended to convert the "proceedings" in which the order was in fact obtained 1Mto0; the "action" in which the notional "final judgment" was obtained. In my opinion, the test in such circumstances called for by para 40(1)(g) of the Act is to ascertain not whether the cross demand could have been set up in the Supreme Court action No. 1473 of 1982, but whether 1t could have been set up in the deemed action, the proceeding in which the order for costs was made, i.e., the application for an interlocutory injunction in that action. The answer is clearly negative. It is, of course, obvious that there has been no final judgment in action No. 1473 of 1982 which is still on foot. The same answer is, in any event, required in the present proceedings for another reason. At the time the order for costs was made the immediately relevant claim for present purposes, which 1s a claim for damages consequent upon the sale bi 31. of the Currumbin Valley property at an undervalue, could not have been made because the sale had not occurred and the loss had not been suffered. The unsuccessful injunction proceedings concerned an attempt to stop the sale. In the circumstances, it 1S unnecessary to do more than comment briefly on other matters raised by either the judgment debtors or the judgment creditors. (1) Whatever amount 1s held on taxation to be payable by the judgment debtors or any of them to the judgment creditors as their former solicitors, that liability is of no immediate significance. It has not yet been quantified, and is, in any event, not the subject of the bankruptcy notices. It may be that it is the subject of some arrangement that it would not be paid until the South Molle Island litigation has been finalised (see paragraph 10 of the affidavit of the present solicitor for the judgment debtors), or that 1t 1s secured by the Deed of Assignment of the South Molle Island judgment. None of these questions need be pursued in these proceedings. Nor it is not presently relevant that the judgment debtors or at least two of them, Mr and Mrs Gould, may have, as Mr Smith has sworn, numerous other debts, totalling quite a large amount, which they are unable to pay except out of any judgment ultimately held in the South Molle Island litigation. 32. (ii) Nor does it presently matter that two of the judgment debtors have orders for costs against the judgment Greditors. Other possible objections including the fact that such orders were not made until after the time for compliance with the bankruptcy notices had expired aside, the Bills have not been taxed and there is nothing whatever before me to indicate what amount 1s or may be involved. I might add that I would, had it been necessary, have rejected the judgment debtors' submission that a cross demand arising after the time for compliance with a bankruptcy notice could be . relied on provided that an affidavit claiming some other counter-claim, set-off or cross~demand had been filed in time. Where such an affidavit has been filed, if it shows a counter-claim, set-off or cross demand to the requisite extent, any other cross demand subsequently arising is otiose at least unless the creditor satisfies the original counter-claim, set-off or cross demand. And, if the affidavit claims but does not show a counter-claim, set-off or cross demand, the time expires and the act of bankruptcy is committed and no subsequent claim can affect that position. (121) I would have found difficulty in finding for Mr and Mrs Gould by reference to possible claims against the judgment creditors in relation to the Palm Beach - property. The Palm Beach claims cannot, of course, avail the daughter who was not involved in that transaction and who is not a beneficiary under the trust alleged by Mrs Gould. Further, reference has already been made 33. to the question mark which hangs over these claims which may never be pursued. Clearly, also, it is difficult if not impossible to be satisfied that any claims to be made will be of a description which meets the requirements of para 40(1)(g) of the Act without information as to what relief is to be sought in the writ undertaken to be issued. (iv) Nor could action 6091 of 1982 in the Supreme Court of Queensland by Mr and Mrs Gould assist them in these proceedings. That action may result in establishing that the South Molle Island judgment has not been validly and effectively assigned to the judgment creditors by way of security for their costs as solicitors for all or some of the judgment debtors. However, it seems to me plain beyond argument that the claim in action 6091 of 1982 is not a "counter-claim, set-off or cross demand" in any presently material sense. Reference has already been made to James' Case, supra. See also In re a Bankruptcy Notice, supra, especially per Romer LU at p.439. (v) The only other matter relied on by the judgment debtors in argument concerned the balance proceeds of sale of the Currumbin Valley property which have been appropriated by the judgment creditors to the South Molle Island litigation. No claim to this money, or disputing the course which has been taken by the judgment creditors, has been made by the ! 34. judgment debtors. In any event, the outcome of any such claim would seem to be inextricably associated with the present action in the Supreme Court of Queensland No. 1473 of 1982. I propose to say no more ON these matters. As I have already indicated I am satisfied that the judgment debtors have in action No. 1473 of 1982 a counter-claim, set-off or cross demand exceeding the amount of the debts which are the subject of the orders for costs upon which the bankruptcy notices are founded which could not have been set up in the proceedings in which those orders were obtained. I propose to declare accordingly. Having regard to the totality of the disputes, including the failure of the judgment debtors to deliver a Statement of Claim in respect of their relevant demand on the judgment creditors until ordered to do so,a lengthy period after the issue of the writ in that action and after the time for compliance with the bankruptcy notices would have expired but for the affidavits filed by the judgment debtors, and also to the limited basis upon which the judgment debtors have succeeded, the appropriate order for costs, in my opinion, is that they should follow the event in action No. 1473 of 1982 in the Supreme Court of Queensland if the action proceeds to fanality and should otherwise be paid by the judgment debtors to the judgment creditors. Veerniy thetic cilthe 33001 ting pegeseceo eter ee. s.unc sfue judarnce* bere cf tus Honour Mr. ducuce Fitcocrttd Jit iKe ase. hesociaic Dated 19 April 1983