RESTRICTED DISTRIBUTION "197 IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) QLD PET BN1160 of BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: BARRYMORE FRANCIS CLARKE and MARJORIE CLARKE EX PARTE: THE ABOVENAMED and PETER SHEEHY SPENDER J. BRISBANE 22 MAY 1986 REASONS FOR JUDGMENT On 5 February 1985, Peter Sheehy, a solicitor of the Supreme Court of Queensland, obtained a final judgment against Barrymore Francis Clarke and Marjorie Clarke ("the applicants") in the Supreme Court of Queensland for one thousand six hundred and fifty-one dollars and fifty cents ($1,651.50). On 7 June 1985, the Deputy Registrar issued a Bankruptcy Notice based on that judgment directed to the applicants, and on 17 July 1985, before the expiration of the time fixed for compliance with the requirements of the Bankruptcy Notice, the applicants filed with the Registrar an affidavit of the kind referred to in s.41(7) of the Bankruptcy Act 1966 ("the Act"), directed to satisfying the Court of the existence of a counter-claim, set-off or cross demand as is referred to in s.41(g) of the Act. The claim asserted by the applicants, conformably with the requirements of s.40(1)(g) of the Act, exceeds the amount of the judgment debt on which the Bankruptcy Notice 1s founded. The claim of the applicants against the respondent 1s for damages for professional negligence and/or breach of contract said to arise out of the negligent manner in which he performed his duties as solicitor for the applicants in Action No.2205 of 1982 in the Supreme Court of Queensland between the applicants as First Plaintiffs and B. & M. Clarke Enterprises Pty.Ltd., Second Plaintiff, and Japan Machines (Australia) Pty.Ltd. as First Defendant and Citicorp Australia Limited as Second Defendant. Mr. Sheehy had acted for the applicants in the preparation for trial and in instructing counsel on the trial. The action was tried by Mr. Justice G.N. Williams without a jury on 26, 27, 28, 29 and 30 September and 3 and 4 October, 1984. Senior and junior counsel appeared for both the plaintiffs and the defendants. On 4 October 1984, the matter was settled. On 5 February 1985, the applicants applied in the same action, 2205 of 1982, before Williams J. for certain orders including an order that, amongst others, Mr. Sheehy and the counsel who appeared for the applicants at the trial be added as defendants in those proceedings. Williams J. dismissed the application, ordered the plaintiff to pay the taxed costs of, inter alia, Mr. Sheehy and those costs were taxed in the sum of $1,651.50 and constitute the amount in the Bankruptcy Notice. It is common ground that the nature of the applicants' claim meets the description contained in s.40(1)(g) of the Act, namely it is a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt, and one which could not have been set up in the action or proceeding in which the judgment was obtained. The sole question for determination is whether the Court 15 satisfied that the applicants have the requisite counter-claimn, set-off or cross demand. The applicants acknowledge that they must satisfy the Court that they have a prima facie case in the sense of satisfying the Court that they have afair chance of success: Re Brink; Ex parte Commercial Banking Company of Sydney Limited (1980) 30 A.L.R. 433 at 438-9, where Lockhart J refers ta Ebert v. Union Trustee Co. of Australia Ltd. (1960) i104 C.L.R. 346 and the observations by Dixon C.d., McTrernan and Windeyer JJ. at 350: see also Re Gould; Ex parte Skinner (1983) 72 F.L.R.393. The Court therefore has to make a factual assessment of the performance of the respondent in connection with his retainer as solicitor for the applicants. The involved the supply (Australia) Pty.Limited for use by the applicants in the litigation was of a complex, commercial kind and sheetmetal business. It was alleged that this machine associated equipment were defective and, as a consequence those defects, losses. Citicorp was involved in the leasing of the machinery. Mr. the present applicants incurred significant Sheehy was said to have failed to exercise reasonable care and skill in relation to his retainer solicitor for the applicants in the Supreme Court action, he allegedly:- (b) (c) (d) (e) (f) (g) did not obtain full and proper discovery of the defendants, in that some categories of documents were discovered very late in the proceedings and others were not discovered at ail; failed to obtain full and proper insvection and testing of the machine the subject of the action, in particular, such parts af the defective machine which remained in the possession of the defendants for some period prior to the time of the trial; failed to obtain statements from relevant witnesses; fa1rled fully to instruct counsel; farled to promptly tax orders for costs obtained 1n favour of the plaintiffs in the action; terminated his retainer to act on the defendants' behalf without giving them the time or the opportunity to seek alternative legal representation; and failed to give proper advice to the plaintiffs in that action and stood by allowing the plaintiffs to settle the action on disadvantageous terms , placing them ina position where they were obliged to settle the claim on terms which otherwise they would not have accepted. of a sophisticated machine by Japan Machines in that These broad allegations were particularised and Mr. Sheehy was cross-examined by counsel for the applicants before me. Mr. Sheehy commenced to act as solicitor for the applicants in January 1983 in respect of this litigation. He took over as their solicitor from Messrs. Clayton & Company. Mr. Sheehy, was a sole practitioner with no employed solicitors or legal staff. He anticipated that the trial would occupy some three months. The applicants assert that the dimensions of the litigation were simply beyond his resources and capacity, which resulted in the failure adequately to prepare anda failure properly to instruct. It was asserted that this lack of competence was evidenced by the extensive and numerous conferences held by him particularly with junzor counsel. I accept that such conferences occurred, but it seems to me that this does not advance the case for the applicants. Whether or not such conferences were more numerous or extensive than would normally be the case, they had the consequence that counsel was intimately concerned with the preparation for trial on a very extensive scale in the months preceding the trial. This fact makes it difficult to accept that the preparation of the applicants' case for trial was professionally negligent. About six to eight weeks before the trial commenced, it was set down for hearing. Mr. Pincus Q.C., as he then was, had been engaged as senior counsel for the plaintiffs at that stage. When the proposed dates for trial were indicated at the callover, Mr. Pincus indicated that he would be unavailable for those dates. After consultations between Mr. Sheehy, the applicants and junior counsel, the offered dates were nonetheless retained. Mr. Boyce 9.C. was retained as senior counsel either on the day of the callover or on the following day. I do not accept that there was anything wayward, let alone negligent, in that aspect of the handling of litigation. On the weekend following the first five days of hearing of the trial, Mr. Sheehy, after conferences on that weekend with the applicants, indicated that ethically he could go no further in the matter for the applicants. This crucial turn of events arose in this way: Approximately a week before the trial there had been a payment into court. Mr. Sheehy, on the advice of counsel and after conferences with the accountant, reached the conclusion that the loss of profits and loss of goodwill claimed would be difficult to prove at the level contained originally in the accountant's report, taking into account that there was' the liability to pay the balance of the lease repayments to Citicorp. The view he reached, considering the amount paid into Court (which had, up until that stage, been rejected), the offer by the defendants to forego the balance of the lease repayments, and the costs of the trial estimated at that stage to take ten weeks, was that there was "no chance, even if we had won 100%, at coming out ahead at the end of it." Mr. Clarke, according to Mr. Sheehy, instructed him to go on with the trial anyway. Mr. Clarke told him that at the end of the trial, "I won't he able to pay anyone; I am bankrupt now." The applicants were advised in conference with senior and junior counsel and Mr. Sheehy, on the Saturday after the first five days of the trial, that neither counsel nor solicitor could ethically continue with the trial for the sole purpose of running up costs against the other side. The advice to settle on the terms offered was rejected. As a consequence, senior counsel, on the resumption of the hearing, told his Honour:- "I have to indicate to your Honour that very shortly the legal representatives of the plaintiffs will at that stage have no further instructions in the matter and will have to withdraw from the case. When that situation is reached, I am instructed that Mr. & Mrs. Clarke would wish to continue the case on their own behalf and that Mr. Clarke would wish to conduct the case on behalf of the plaintiff company, of which he and his wife are the only directors." The learned trial judge then made a number of observations and continued:- ",..it does appear to me that the parties may see this as an opportune time to give some consideration toa resolution of the matters in dispute without the necessity of there being a determination by the court." After referring to the magnitude of this litigation and the factual complexity associated with it, his Honour commented:- "I certainly have not formed any definite views and, of course, it would be improper for me to do so having regard to the fact that so little of the totality of available evidence is yet before the Court. However, two observations may be of some assistance to the parties if they see fit to enter into meaningful discussions: firstly, it would appear that there were, at least prima facie, a larger number of problems with this machine in its early days than one would ordinarily expect with a machine of this nature. The fact that some modifications were made after delivery to the Plaintiff may be indicative of the fact that there were some problems associated with it which ought not to have been there. On the other side of the coin, the mere fact that such problems did in fact exist does not necessarily entitle the plaintiff to recover substantial damages. The question of damages must be proved and I would merely make the observation that cross-examination on the scheduie of particulars to date would at least make it difficult, if not impossible, for the Court in the absence of further particular evidence, none of which has been opened, to come to the conclusion that specific loss was occasioned by the plaintiff firm in respect of particular machine fault or breakdown. It seems to me that they are the sorts of questions which in the long run must make this Litigation unpredictable ..." Then, after an adjournment and later in the afternoon of that day, Mr. Jackson Q.C., as he was then, who had acted as senior counsel for the defendants, indicated that the parties had reached agreement and asked for an order by consent that the terms of settlement be filed and not published or communicated to any person. It is unnecessary to refer in detail to the material contained in the affidavits filed in support of the 41(7) affidavit and in reply to it, or to make detailed reference to the oral evidence led before me. The detailed criticisms of the handling of this litigation in respect of what was done, the manner in which it was done, and what was said not to have been done, led counsel for the applicants to summarise the basis of the applicants' case in this way:- ",..it is not for you to make a final determination in this case, it is only whether we have made out a prima facie case and, in my submission, your Honour could infer from the evidence which has come here that a sole practitioner undertook a major case when he ought realistically to have said back in January 1983 when Mr. Clarke came in, 'Mr. Clarke, I would love to do your case, but I am a sole practitioner. This is a case going for - it is going to go for weeks. I just have not got the time and I have not got the facilities to handle your case. You have really got to go to someone who is more able to do justice to your case.' He did not do that, and, in my submission, he should have, and his whole handling and lack of attention to detail after that time resulted because he was trying to do too many things, trying to stretch himself far too thinly, and that cannot be a_ responsible and diligent discharge of a retainer to approach litigation of this size in that way." My conclusions can be shortly stated. First, I am not satisfied that the applicants have "a fair chance" of establishing a departure from proper, professional standards on the part of Mr. Sheehy in the course of this litigation. Secondly, and crucially, there is on this material no basis for concluding that, if any such breach were to have been established, as a consequence of such breach, the applicants are worse off by an amount which equals or exceeds the judgment debt on which the Bankruptcy Notice is founded. It is necessary for the applicants to establish a prima facie case that, but for Mr. Sheehy's negligence, they would have recovered more than they did in fact. Even if breach of duty be 10. assumed, the material simply does establish a prima facie case for that conclusion. I am left with the clear impression that Mr. Sheehy addressed a most difficult piece of litigation properly; that the assistance of counsel was sought and relied on more extensively than usual; and that the preparation for and conduct of the trial, including the central question of damage, at all relevant times occurred with the direct involvement of competent and senior counsel. There is a tendency for disappointed litigants to view litigation with the perfect vision that hindsight gives. I am not satisfied that the applicants have a counter-claim, set-off or cross demand as is referred to in s.41(7)} and 41(1)(g) of the Act. There is one final matter. The amount claimed under the Bankruptcy Notice is $1,651.50. The evidence before me disclosed that Mr. Sheehy has issued a Supreme Court Writ for an amount in the order of $32,000.00, which is said to be the balance of professional costs due to him while he acted for the applicants. It was submitted on his behalf that it was necessary for the applicants to establish that they had a counter-claim, set-off or cross demand that was equal to or greater than the amount of the judgment debt on which the Bankruptcy Notice was founded and the amount claimed in the writ for professional costs payable to Mr. Sheehy. ll. In my opinion, this submission is not correct. What the Act requires is that the debtors establish that they have a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt, which is the amount claimed in the Bankruptcy Notice. It is not necessary, in my opinion, for something in the nature of an audit to be conducted on a series of claims andcross claims and, asa result of adding and subtracting these various claims, to derive a net result greater than the amount claimed in the Bankruptcy Notice before the requirements of s.41(7) of the Act are met. It is sufficient if there is a counter-claim, set-off or cross demand greater than the judgment debt claimed in a Bankruptcy Notice. I will hear from the parties as to the appropriate orders I should make in the light of that conclusion. cn I certify thee this ene' = - [© preceding nag writ > creons for in) Sat o pidgmert ho Mr Justic3s So tnior la Ass t2 Dated > Mon Bl, ,