CATCHWORDS BANKRUPTCY - Bankruptcy notice - Counter-claim, set-off or cross demand - Satisfaction of court - Delay in prosecuting claim - Relevance. Bankruptcy Act 1966 ss40(1)(g), 47 James v Abrahams (1981) 34 ALR 657 Re Donkin; Ex parte AGC Advances Ltd (1994) 52 FCR 271 Ebert v Union Trustee Co (Aust) Ltd (1960) 104 CLR 346 Re Smith; Ex parte Chesson (1992) 106 ALR 159 Re a Bankruptcy Notice [1934] Ch 431 Re Judd; Ex parte Pike (1924) 24 SR (NSW) 537 Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 Re Gould; Ex parte Skinner (1983) 72 FLR 393 Re Isaac; Ex parte Isaac (1885) 2 Mor 258 Re Brown; Ex parte Peisley Bros (1892) 3 BC (NSW) 13 RAYMOND JOHNSTONE v JOSEPH GUSS VG 2041 of 1996 COURT:Sundberg J PLACE:Melbourne DATE:30 May 1997 IN THE FEDERAL COURT OF AUSTRALIA) VICTORIA DISTRICT REGISTRY)No VG 2041 of 1996 BANKRUPTCY DIVISION) BETWEEN:RAYMOND JOHNSTONE Judgment Creditor AND:JOSEPH GUSS Judgment Debtor COURT:Sundberg J DATE:30 May 1997 PLACE:Melbourne MINUTES OF ORDER 1.The Court declares that it is not satisfied that the judgment debtor possesses a counter-claim, set-off or cross demand of the type referred to in s40(1)(g) of the Bankruptcy Act 1966. 2.The Court orders that the judgment debtor pay the judgment creditor's costs of the application. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA) VICTORIA DISTRICT REGISTRY)No VG 2041 of 1996 BANKRUPTCY DIVISION) BETWEEN:RAYMOND JOHNSTONE Judgment Creditor AND:JOSEPH GUSS Judgment Debtor COURT:Sundberg J DATE:30 May 1997 PLACE:Melbourne REASONS FOR JUDGMENT SUNDBERG J: Background In September 1992 the judgment creditor, a barrister, commenced proceedings in the Magistrates' Court to recover fees he claimed were owing by the judgment debtor, a solicitor. The creditor obtained judgment for $8,430 together with interest and costs. The debtor's application to the Magistrates' Court to set aside the judgment was dismissed. An application for leave to appeal from that order was dismissed by a Master of the Supreme Court. An appeal from that dismissal was dismissed by Beach J. A further application to the Magistrates' Court to set aside the judgment was dismissed. The debtor then applied to the Supreme Court for a declaration that that dismissal was a nullity. That application was dismissed by Hayne J. The debtor appealed to the Full Court against his Honour's decision. On 22 August 1994 the Full Court ordered the debtor to give security for costs in default of which the appeal would be dismissed. The debtor was ordered to pay the creditor's costs. The security was not provided and the appeal was dismissed. The creditor's costs were taxed in the sum of $4,989.40. The bankruptcy notice A bankruptcy notice was issued on 19 September 1994 requiring the debtor, within fourteen days of service of the notice, to pay the sum of $4,989.40 (the taxed costs), to secure its payment to the satisfaction of the Court or the creditor, or to compound the sum to the creditor's satisfaction. At that time s40(1)(g) of the Bankruptcy Act 1966 provided that a debtor commits an act of bankruptcy if a creditor who has obtained a final judgment has served on the debtor a bankruptcy notice and the debtor does not within the time fixed for compliance with it 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 .... Before the expiration of the fourteen day period specified in the bankruptcy notice the debtor filed an affidavit, the effect of which was that the time for compliance with the notice was extended until the Court determined whether it was satisfied that the debtor had such a counter-claim, set-off or cross demand as is referred to in s40(1)(g). The extension of time resulted from s41(7) which provided: 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 in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter-claim, set-off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied. On the relationship between s40(1)(g) and s41(7) see James v Abrahams (1981) 34 ALR 657 at 661-662. The debtor's affidavit The debtor's affidavit tells the following story. In 1991 and 1992 he acted as solicitor for the plaintiffs in an action in the Supreme Court of Victoria. The plaintiffs included Tropitone Furniture Co International Pty Ltd ("Tropitone") and the debtor himself. The defendants were Sietel Limited and Tropitone Furniture Co Pty Ltd (In liquidation) ("TFC"). The plaintiffs sought to recover property which Sietel was holding at premises at Moorabbin. The action was settled on the basis that Tropitone as TFC's agent would be permitted access to the premises to remove the property. In breach of the terms of settlement Sietel refused to give continued access to the premises, and the property remained there. The debtor briefed the creditor for advice as to the course to be pursued in the events that had happened. The creditor advised that the plaintiffs should take out a summons in the Supreme Court proceeding, and another summons in the TFC winding up proceeding in that court, in each case for orders compelling Sietel to provide access. The creditor drew the necessary documents and appeared in the Practice Court on the making of the applications. It then became apparent that the proceedings were misconceived. They should have been brought by the liquidator of TFC. It was accordingly necessary for the debtor to arrange for TFC to bring proceedings against Sietel. The liquidator would only do so if the plaintiffs paid his costs of the contemplated action. In the circumstances the plaintiff had to agree, and the debtor "had to agree (with his clients) to pay such costs". The liquidator then commenced fresh proceedings for the same relief as had been sought in the earlier proceedings. The matter was heard in the Practice Court, and eventually access was given by Sietel. The liquidator's costs amounted to $11,898.57 which the debtor "had to bear". The debtor produced a "final bill" from the liquidator's solicitors addressed to the liquidator but marked "for payment by Joseph Guss" and the other plaintiffs, from which it appeared that the sum of $16,200 had been held in trust by the solicitors from which their costs of $11,889.57 were deducted, leaving a balance of $4,310.43. Under cover of a letter the solicitors sent the account to the debtor "as requested" in an earlier telephone conversation, together with a cheque for the balance. After the conclusion of the liquidator's proceeding it became apparent that Sietel had moved some of the property from the premises. It was later discovered at other premises, but Sietel claimed that under the terms of settlement with the liquidator it was not required to hand over the property. The creditor had participated in the drawing of the terms which he had shown to the debtor before they were signed. The debtor had told the creditor he was not happy with the terms because they did not contain a specific provision "for access for removal to the premises of the missing property". The creditor told the debtor he had an undertaking from counsel for Sietel that Sietel would deliver up any missing items not collected in the course of the removal under the earlier terms of settlement, and that the plaintiffs in the earlier proceedings "were protected thereby". After Sietel had refused to hand over the property, relying on the terms of settlement as its authority so to do, the debtor saw the creditor in chambers and told him of these developments. The creditor said "there was nothing we could now do". The property Tropitone has thus been unable to collect is worth approximately $50,000, and it has suffered damages in the sum of approximately $100,000 for delay in recommencement of its business. The debtor then claimed that in another proceeding in this court he had obtained an order for costs against the creditor. The costs had not been taxed or agreed, but in the debtor's opinion, as an experienced solicitor, they amounted to approximately $2,500. "Cross demand" The question canvassed before me was whether the debtor has a counter-claim, set-off or cross demand for the purposes of s40(1)(g), and not whether his affidavit satisfies the description in s41(7). Cf Re Donkin; Ex parte AGC Advances Ltd (1994) 52 FCR 271 at 274. In order to satisfy the Court that he has a counter-claim, set-off or cross demand, the debtor must show 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 involved in the counter-claim, set-off or cross demand: Ebert v Union Trustee Co (Aust) Ltd (1960) 104 CLR 346 at 350. The words "cross demand" in s40(1)(g) have a wider meaning than set-off and counter-claim. A set-off provides a defence to a claim, for it diminishes or wipes out the amount claimed. A counter-claim is one that can be heard in the claimant's action. Though it is not in truth a defence, because it does directly answer the claim, it will if established result in relief being available in favour of the counter-claimant against the claimant. See Re Smith; Ex parte Chesson (1992) 106 ALR 159 at 363. In Re a Bankruptcy Notice [1934] Ch 431 at 438 Lord Hanworth MR said: 'Cross-demand' seems to me to be a word introduced in order to give a wider ambit to the meaning of these claims, something that would not be described, certainly, as a set-off, something that could not have been brought in the action, something that still lies outside a counter-claim, but is of a nature which can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt. A claim for unliquidated damages in tort or contract can be a cross demand. A cross demand need have no connection with the cause of action out of which the judgment debt arose: Re Judd; Ex parte Pike (1924) 24 SR (NSW) 537 at 539-540; Re Smith; Ex parte Chesson (1992) 106 ALR at 363; Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 at 139; Re Gould; Ex parte Skinner (1983) 72 FLR 393 at 406. The file in the Supreme Court proceeding was before me. On 27 February 1992 the plaintiffs' action and the summons in the winding up were dismissed with no order as to costs. But the plaintiffs would have had to have borne their own costs, and the plaintiffs other than the debtor may have had a claim against him for those costs as costs thrown away as a result of misconceived proceedings. On his story, the debtor could have recovered the amount of these costs from the creditor as damages for negligence or breach of contract. But in his affidavit the debtor makes no such claim. Rather he says the plaintiffs had to put the liquidator in funds before he would agree to commence proceedings for the recovery of their property. But that is something they would have had to have done in any event. On the debtor's story, had the creditor given proper advice, it would have been necessary for the debtor to have convinced the liquidator to commence proceedings, and the liquidator would have said - "put me in funds". So I do not consider the debtor has shown a causal connection between the negligence he alleges and the loss he claims to have suffered. In that part of his affidavit setting out the loss suffered by Tropitone ($50,000 for loss of its property and $100,000 for delay in recommencing its business), the debtor simply describes it as loss suffered by Tropitone. He does not attempt to make it his loss. In an earlier part of the affidavit, however, immediately after dealing with the costs question, he says that as a result of the creditor's negligent advice "the costs of the abovementioned proceedings were increased and recovery of the property of Tropitone, myself and the other Plaintiffs ... were delayed giving rise to further losses to Tropitone in that it was further delayed in the recommencement of its business". The handwritten words "for which I am liable" have then been added. That assertion, unsupported by any facts showing that Tropitone has made such a claim against the debtor, does not satisfy me that the debtor has a claim against the creditor measured by the amount of Tropitone's loss. Delay The advice complained of by the debtor was given in February 1992, and according to the debtor loss was suffered in March 1992. But no proceedings have been launched against the creditor for negligence or breach of contract. Counsel for the creditor referred me to the statement in McDonald, Henry & Meek, Australian Bankruptcy Law and Practice 5th ed (1996) at 2623, in the commentary on "counter-claim, set-off or cross demand", that "the counter-claim, etc, must be prosecuted with due diligence; the debtor will not be allowed to lie by: Re Isaac; Ex parte Isaac (1885) 2 Mor 258; Re Brown; Ex parte Peisley Bros (1892) 3 BC (NSW) 13". In Isaac the debtor allowed judgment to go by default, but subsequently obtained leave to defend on condition that he paid £43 into court. He failed to do so, judgment was entered, a bankruptcy petition was presented, and a receiving order made. The debtor appealed to Divisional Court on the ground that he had a counter-claim, set-off or cross demand which equalled or exceeded the amount of the judgment debt and which he could not set up in the action in which the judgment was obtained within s4(1)(g) of the Bankruptcy Act 1883, a provision in substantially the same terms as s40(1)(g) of our Act. The application was dismissed. Lord Coleridge LCJ simply said he was not satisfied either that the debtor had a set-off or that he could not have set it up. Cave J said: The debtor here had abundant opportunity to set up the set-off. First he let judgment go by default. Then he got that set aside and leave to defend on bringing £43 into Court. He did not do so. This set-off could and ought to have been set up in the action. The debtor failed to do so, and is not within the section. Nothing in the case suggests that a debtor who has a counter-claim etc will lose it for the purpose of s40(1)(g) if he does not prosecute it with due diligence. The case was concerned with the "could not set up" issue, and not with the Court's satisfaction as to the existence of the counter-claim etc. In Brown, speaking of s4(1)(g) of the Bankruptcy Act 1887 (51 Vict No 19), Manning J said: I think I ought to construe the words "could not set up" in the sub-section to mean "could not set up and enable full justice to be done between the parties". The words of the section must not be narrowed; all that it means is that the debtor is not to lie by with his cross claim, but must prosecute it with due diligence. Again the case was concerned with the "could not set up" issue and not with the court's satisfaction as to the existence of the counter-claim etc. His Honour's remarks are directed to the policy behind the phrase "could not set up". The debtor must not lie by. If the debtor could have set up the counter-claim in the action against him, but did not, he will suffer the consequence. In my view there is no requirement of due diligence in connection with establishing the existence of a counter-claim etc. But that is not to say that delay is not relevant to the Court's satisfaction under s40(1)(g). In an appropriate case delay in raising an alleged counter-claim etc may bear on whether a debtor has a viable case. For example, it may indicate that a weak or borderline case is not bona fide. But if the Court is satisfied as to the existence of the counter-claim etc it is not entitled, by imposing a gloss upon the section, to deprive the debtor of the benefit of it simply because he has not earlier sought to enforce it. In the present case, the fact that over five years have passed since the alleged loss was suffered without the debtor having commenced proceedings against the creditor, contributes to my lack of satisfaction that he has a prima facie case in relation to the money paid to the liquidator, and reinforces my lack of satisfaction that he has a prima facie case in relation to the loss allegedly suffered by Tropitone. Conclusion I am not satisfied that the debtor has a prima facie case against the creditor in relation to the costs paid to the liquidator or in relation to the damage allegedly suffered by Tropitone. The unquantified order for costs (estimated at $2,500) is less than the amount the subject of the bankruptcy notice. Assuming it to amount to a cross demand, it does not satisfy the description in s40(1)(g). I will declare that I am not satisfied that the debtor has a cross demand of the type referred to in s40(1)(g). I certify that this and the preceding nine pages are a true copy of the reasons for judgment of the Honourable Justice Sundberg .................................................................. Associate 30 May 1997 Counsel for the judgment debtor:J C Paterson Solicitor for the judgment debtor:J Guss Counsel for the judgment creditor:R E Cook Solicitors for the judgment creditor:Morley & Naughton Date of Hearing:22 May 1997 Place of Hearing:Melbourne Date of Judgment:30 May 1997