FEDERAL COURT OF AUSTRALIA Esanda Finance Corporations Limited v Smart [1999] FCA 1209 BANKRUPTCY – creditor's petition – notice of intention to oppose creditor's petition –whether cross-demand could not have been set up in the proceeding in which judgment was obtained. Bankruptcy Act 1966 (Cth) ss 40(1)(g) and 52(1) Ling v Commonwealth (1995) 130 ALR 596 - cited ESANDA FINANCE CORPORATIONS LIMITED V SMART V7241 of 1999 JUDGE: MERKEL J DATE: 30 JULY 1999 PLACE: MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V7241 OF 1999 BETWEEN: ESANDA FINANCE CORPORATION LIMITED Applicant AND: ANTHONY IVAN SMART Respondent JUDGE: MERKEL J DATE: 30 JULY 1999 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 Pursuant to its creditor's petition Esanda Finance Corporation Ltd ("Esanda"), as the applicant creditor, is claiming that the respondent debtor has failed to pay an amount of $12,779.45, being the monies owing pursuant to a judgment in that amount entered in the County Court of Victoria at Melbourne against the respondent debtor on 3 December 1997. The respondent debtor has given a notice of intention to oppose the petition on the ground that he has a cross-demand equal to or exceeding the amount of the sum payable under the judgment on which the creditor's petition is based, being a cross-demand that could not be set up in the proceeding in which the judgment was obtained: see s 40(1)(g) of the Bankruptcy Act 1966 (Cth). 2 The history of the dispute underlying the applicant creditor's claim is long and complicated. However, stripping that dispute down to its essentials, it relates to the purchase of two items of equipment said to be the subject of hire‑purchase contracts by Esanda to the respondent debtor, Mr Smart. The contracts were said to have been entered into in 1990. In July 1992 Esanda issued a proceeding in the County Court claiming the sum of $72,029.20 against Mr Smart, being the money allegedly due under the two contracts. A default judgment was entered by Esanda in that proceeding in August 1992. There were four applications by Mr Smart to set aside that judgment, the last being in September 1998. 3 The applications either did not proceed or were dismissed. In particular, the last application was dismissed by Judge Stott on 19 November, but was the subject of a notice of appeal to the Court of Appeal. Mr Smart has made certain serious allegations against Esanda in respect of the hire-purchase contracts including allegations of fraud, forgery and non‑payment of the purchase price. If all of those allegations are made out and he persuades the Court of Appeal to set aside the default judgment in that proceeding, he will be entitled to claim that he owes no money to Esanda as a result of the hire‑purchase contracts. 4 After the issue of its proceeding, Esanda obtained possession of goods and sold the equipment, reducing the debt to a sum of some $20,000 to $30,000. That occurred during 1992 or 1993. In pursuit of his complaints against Esanda, Mr Smart issued his own proceeding for damages in the County Court on 15 February 1996. The statement of claim was signed by counsel. In that proceeding Mr Smart put forward the gravamen of all of the complaints in relation to his dealings with Esanda concerning the hire-purchase contracts and the repossession and sale of the equipment. He claimed that, as a result of the conduct set out in the pleading, he suffered loss and damage, being the value of the equipment and loss of its use. A statement of further particulars was to be supplied in due course. Damages were claimed to the limit of the jurisdiction of the County Court. 5 As a result of a default in compliance with interlocutory orders or requirements in relation to Mr Smart's proceeding, an order was made by Judge Meagher in the County Court on 1 May 1997 that the proceeding be struck out. A costs order was made which led to an application by summons after judgment for the taxation of those costs, which were taxed and fixed in the sum of $11,055.88 on 25 November 1997. On 3 December 1998 the judgment, which formed the basis for the creditor's petition, was entered in the County Court. The judgment debt was for the amount ordered for costs together with an additional amount of interest that had accrued. The interest was in the sum of $1,723.57, making a total debt under the judgment of $12,779.45. 6 A bankruptcy notice was served, claiming the amount of the judgment debt and setting out how it was calculated. Affixed to that notice was a copy of the authenticated order of the County Court pursuant to which the debt was payable. The amount claimed in the notice was not paid. An act of bankruptcy was therefore committed. That led to the creditor's petition and to the dispute currently before the Court. 7 Mr Smart has claimed, and has a substantial body of affidavit material to support the claim, that he has a good defence to the claim by Esanda in the original Esanda proceeding. It can be accepted that if that defence is established he may have arguable grounds for having claimed that he suffered loss or some of the loss claimed in his own proceeding in the County Court. However, the present basis upon which he wishes to oppose the creditor's petition under s 40(1)(g) is, in my view, misconceived. Under the sub-section Mr Smart must satisfy the Court that he has, relevantly, a cross-demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, relevantly again, a cross-demand that he could not have set up in the action or proceeding in which the judgment or order was obtained. 8 The fundamental misconception in Mr Smart's opposition to the present petition is that the cross-demand upon which he now relies was in fact set up in the proceeding in which the judgment was obtained. It is important to appreciate that his proceeding was issued on 15 February 1996 with the assistance of counsel. All of the events upon which he relied occurred back in the early part of the 1990s. There is no doubt in my mind that the matters, the subject of the cross-demand that he says he wishes to raise under section 40(1)(g), were in fact raised in that proceeding. But if I am wrong and there were some additional matters that he could have raised but failed to, then he nevertheless is caught by the requirement in s 40(1)(g) that the cross-demand could not have been set up in that proceedings. 9 There is a substantial body of authority that "could not have been set up" as used in the sub-section means, "could not by law have been set up in the action", (see Ling v Commonwealth (1995) 130 ALR 596 and the other cases referred to in the notes to section 40(1)(g) in the annotated Bankruptcy Act at para 80,910.15). Accordingly, notwithstanding the body of material relied upon by Mr Smart, it seems to me that the ground upon which he wishes to oppose the petition has not been made out. 10 The circumstances which have now arisen were raised by me with Mr Smart at an earlier hearing of this matter. There has been an adjournment already to enable him to consider his position and, in particular, the problem which he must confront under his notice of intention to oppose the petition, which I have outlined. Notwithstanding that, he has chosen to come along today and contest the matter on that ground, as he is fully entitled to do. But as at today no step has been taken nor has any been foreshadowed to challenge the original order by which Judge Meagher struck out Mr Smart's proceeding. 11 In those circumstances it seems to me that there is no basis upon which I can properly decline to make the orders sought by the applicant creditor. I am satisfied that the respondent debtor committed the act of bankruptcy alleged in the petition. I am also satisfied as to the other matters of which subsection 52(1) of the Bankruptcy Act requires proof. 12 Accordingly, I make a sequestration order against the estate of Anthony Ivan Smart and order that the applicant creditor's costs including reserve costs be taxed and paid in accordance with the Act. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel Associate: Dated: 30 July 1999 Counsel for the Applicant: Mrs S Marks Solicitor for the Applicant: Corrs Chambers Westgarth For the Respondent: Respondent appeared in person Date of Hearing: 30 July 1999 Date of Judgment: 30 July 1999