FEDERAL COURT OF AUSTRALIA Gould, in the matter of Gould v Day [1999] FCA 1650 BANKRUPTCY – application to set aside bankruptcy notice – whether debtor has a counter-claim, set-off or cross demand of the kind set out in s 40(1)(g) Bankruptcy Act 1966 (Cth) Bankruptcy Act 1966 (Cth), ss 40(1)(g), 41(6A), 41(7) Re Gibbs; Ex parte Triscott (1995) 65 FCR 80, cited Ebert v The Union Trustee Company of Australia Ltd (1960) 104 CLR 346, followed Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 30 ALR 433, followed Crimmins v Glenview Home Units [1999] FCA 515, cited Bhattacharya v Berger [1999] FCA 883, cited IN THE MATTER OF STEPHEN GOULD STEPHEN GOULD v JULIAN DAY & ANOR N 8023 OF 1999 JULIAN DAY & ANOR v STEPHEN GOULD N 8054 OF 1999 JUDGE: SACKVILLE J PLACE: SYDNEY DATE: 24 NOVEMBER 1999 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8023 OF 1999 N 8054 OF 1999 N 8023 of 1999: BETWEEN: STEPHEN GOULD Applicant AND: JULIAN DAY First Respondent ALAN MANLY Second Respondent N 8054 of 1999: BETWEEN: JULIAN DAY First Applicant ALAN MANLY Second Applicant AND: STEPHEN GOULD Respondent JUDGE: SACKVILLE J DATE OF ORDER: 24 NOVEMBER 1999 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application to set aside bankruptcy notice NN 1632 of 1999, filed by Mr Gould ("the debtor") on 13 September 1999, be dismissed. 2. The creditors' petition filed by Mr Day and Mr Manly ("the creditors") on 20 September 1999, and amended on 12 October 1999, be struck out. 3. The notice of motion filed by the creditors on 21 September 1999, which seeks to dismiss the debtor's application to set aside the bankruptcy notice on the basis that the application is incompetent, be dismissed. 4. No order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8023 OF 1999 N 8054 OF 1999 N 8023 of 1999: BETWEEN: STEPHEN GOULD Applicant AND: JULIAN DAY First Respondent ALAN MANLY Second Respondent N 8054 of 1999: BETWEEN: JULIAN DAY First Applicant ALAN MANLY Second Applicant AND: STEPHEN GOULD Respondent JUDGE: SACKVILLE J DATE: 24 NOVEMBER 1999 PLACE: SYDNEY EX TEMPORE REASONS FOR JUDGMENT 1 The creditors, Julian Day and Alan Manly, and the debtor, Stephen Gould, are in dispute on a number of fronts. These proceedings concern an attempt by the creditors to obtain a sequestration order against the estate of the debtor founded on non-compliance with the requirements of a bankruptcy notice. It is convenient to commence by outlining the principal events. The Course of Events 2 On 2 December 1994, the debtor commenced proceedings in the District Court of New South Wales against each of the creditors and a body designated as "Australian Information Technology Society". The debtor's statement of liquidated claim pleaded causes of action in contract and in negligence arising out of what was said to be a joint venture to market the Australian Information Technology Society. The debtor claimed losses incurred in the project, loss of income and damages. The debtor was the plaintiff in the proceedings. 3 On 4 November 1997, his Honour Judge Patten delivered a judgment in which he held that the debtor's action failed. Accordingly, his Honour entered verdict and judgment for the creditors. He ordered the debtor to pay the creditors' costs as agreed, or in default of agreement, as assessed pursuant to the Legal Profession Act 1987 (NSW) ("Legal Profession Act"). 4 On 24 September 1998, a Costs Assessor, Mr Scammell, assessed the party and party costs in an amount of $35,808.44. 5 On 16 March 1999, the New South Wales Court of Appeal dismissed with costs the debtor's appeal from the judgment of Judge Patten. The Court did so on the basis that the documents said to constitute binding contracts between the debtor, on the one hand, and the creditors on the other, did not concern the parties to the litigation, that is, the debtor and the creditors. 6 On 30 April 1999, Master Malpass dismissed a summons which purported to be an appeal by the debtor against the decision of the Costs Assessor. The defendants named in the summons were the creditors. As Master Malpass remarked, all parties appeared in person and there was considerable animosity between them. The Master noted that the only appeal as of right was provided by s 208L of the Legal Profession Act and it was restricted to questions of law. He concluded that there was no matter of law which would justify disturbing the determination made by the Costs Assessor. Accordingly, he dismissed the debtor's claim for relief. 7 On 4 August 1999, the Registrar of the District Court certified that the creditors had recovered judgment against the debtor on 4 November 1997 in respect of costs, which had since been taxed and allowed at $37,715.94. The certificate does not explain the difference between the determination of the Costs Assessor ($35,808.44) and the certified amount of the judgment ($37,715.94). 8 On 23 August 1999, the creditors caused the bankruptcy notice to be issued by the Official Receiver. The bankruptcy notice claimed that the debtor owed the creditors a debt of $44,515.16 pursuant to a judgment of the District Court, execution of which had not been stayed. The amount of $44,515.16 comprised the amount of the judgment according to the certificate of judgment ($37,715.94), plus interest at ten per cent per annum from 4 November 1997 to the date of the notice ($6,799.22). The notice required the debtor, within twenty-one days of service, to pay the creditors the amount of the debt or to make an arrangement to the creditors' satisfaction for settlement of the debt. The bankruptcy notice was served on the debtor on the day it was issued. 9 On 13 September 1999, the debtor filed an application, purportedly under s 41(6A) and (7) of the Bankruptcy Act 1966 (Cth) ("Bankruptcy Act"). The application sought an order that the bankruptcy notice served on 23 August 1999 be set aside. 10 The affidavit accompanying the application was also filed on 13 September 1999. The text of the affidavit is as follows: "1. The costs were award[ed] in a matter in the Supreme Court 07322/94. The litigants were Stephen Gould Partner Halisa International against Julian DAY and Alan MANLY. The costs should not be claimed against Stephen GOULD in person but against Halisa International. 2. I on behalf of my partners in Halisa International, am appealing the costs award of the costs assessor in the Court of Appeal 40594/99. 3. There is a defamation action in the District Court 6948/98 by Stephen GOULD, the NSW branch of his firm and the OPEN INTERCHANGE CONSORTIUM against Julian DAY whereby the amount claimed far exceeds the amount of the Bankruptcy Notice. 4. There is action underway against Alan MANLY for defamation for an amount that will exceed the amount claimed in the Bankruptcy Notice." 11 On 20 September 1999, the creditors presented a petition seeking a sequestration order against the estate of the debtor. The petition identified the relevant act of bankruptcy committed by the debtor as being the failure of the debtor to comply with the bankruptcy notice served on him on 23 August 1999. One of the creditors, Mr Day, swore an affidavit verifying the statements made in the creditors' petition. Paragraph 4 of that affidavit was as follows: "4. The respondent debtor, Stephen GOULD has not made any application to the Court to set aside the Bankruptcy Notice within 21 days of service of the Bankruptcy Notice." It appears that the creditors' petition and the supporting affidavit were served on the debtor on the same day, 20 September 1999. 12 On 21 September 1999, the creditors filed a notice of motion seeking an order that the application by the debtor to set aside the bankruptcy notice be dismissed as incompetent. An affidavit in support of this notice of motion suggests that the ground for the application is that the costs awarded by his Honour Judge Patten were against the debtor personally. 13 On 27 September 1999, Registrar Quinn ordered that the time for compliance with the requirements of the bankruptcy notice be extended up to and including 11 October 1999, subject to certain conditions. 14 On the same day, 27 September 1999, the debtor filed a notice of motion seeking orders striking out the creditors' petition. The grounds specified in the notice of motion are that one of the creditors, Mr Day, had deceived the Court by stating that an application to set aside the bankruptcy notice had not been filed within twenty-one days. This is presumably intended to be a reference to paragraph 4 of the affidavit verifying the petition. 15 On 11 October 1999, Registrar Quinn ordered that the time for compliance with the requirements of the bankruptcy notice be extended up to and including 2 November 1999. 16 On the same day, 11 October 1999, Meagher JA dismissed a summons by the debtor against the creditors seeking leave to appeal to the Court of Appeal against the decision of Master Malpass given on 30 April 1999. 17 On 12 October 1999, the creditors presented an amended petition. The amended petition makes reference to the various appeals brought by the debtor in the Supreme Court of New South Wales. 18 On 2 November 1999, the various proceedings came before me. I made a number of orders for the hearing of the proceedings and extended the time for compliance with the requirements of the bankruptcy notice until 5 pm on 24 November 1999. The Applications 19 It will be seen that there are four applications presently before the Court. · The first is the debtor's application, filed on 13 September 1999, to set aside the bankruptcy notice served on him on 23 August 1999. · The second is the creditors' notice of motion, filed on 21 September 1999, seeking to dismiss the debtor's application to set aside the bankruptcy notice on the basis that the application is incompetent. Mr Cameron, on behalf of the creditors, has indicated that the creditors do not persist with this motion. It is not necessary to say anything more about it. · The third is the creditors' petition, presented on 20 September 1999, as amended on 12 October 1999. · The fourth is the debtor's notice of motion seeking to strike out the creditors' petition, filed on 27 September 1999. The Hearing on 2 November 1999 20 At the hearing before me on 2 November 1999, I granted an adjournment of the various proceedings on the debtor's application. He indicated at that time he wished to have an adjournment in order to obtain legal advice. He has, however, appeared at the hearing without legal representation. 21 At the hearing, I also expressed the view to the creditors that they would be well advised to obtain legal representation, having regard to the complexities of the bankruptcy jurisdiction. They have been represented today by Mr Cameron of counsel. The Creditors' Petition 22 After some discussion this morning, Mr Cameron obtained instructions that his clients did not oppose the striking out of the creditors' petition. Accordingly, I propose to make an order striking out the creditors' petition. It is therefore unnecessary to say anything more about the creditors' petition itself or the affidavit filed in support of the petition. Application to Set Aside Bankruptcy Notice 23 That leaves for consideration the debtor's application to set aside the bankruptcy notice. That application, as the debtor explained it, is based on three grounds. (i) First, the debtor says that the costs judgment against him should not have been awarded because the true plaintiff in the proceedings was not the debtor himself, but a body known as Halisa International. (ii) Secondly, the debtor says that the costs order should not have resulted in the quantum assessed by the Costs Assessor, but should have been for an amount reduced by reason of the conduct of the creditors in the course of the District Court litigation. The debtor contends that costs were increased by reason of the failure of the creditors to comply with certain orders made in the course of the proceedings, or otherwise to conduct those proceedings in a timely fashion. (iii) Thirdly, the debtor claims to have "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…being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained." See Bankruptcy Act, s 40(1)(g); 41(7). 24 The first ground has not been made out. A costs order, if quantified, is capable of constituting a final judgment of order for the purposes of s 40(1)(g) of the Bankruptcy Act: Re Gibbs; Ex parte Triscott (1995) 65 FCR 80, at 84, per Drummond J. It does not appear that the debtor challenged the costs order made by Judge Patten against him on the ground that the order was made against the wrong party. His rights of appeal against that order have been exhausted, except for the unlikely possibility that he may obtain special leave to appeal from the High Court. 25 There are certain limited circumstances in which a court will go behind a final judgment on an application to set aside a bankruptcy notice. However, those circumstances are unusual, especially where the orders have been made in contested proceedings and have been the subject of an unsuccessful appeal. In any event, there is no evidence to support the proposition that the costs order was made against the wrong person. The debtor's contention was that the proceedings were brought on behalf of an entity he described as Halisa International. However, it is quite clear from the pleadings that the debtor was the plaintiff in the District Court proceedings. Since he was unsuccessful, it is hardly surprising that a costs order was made against him personally. Accordingly, no basis has been demonstrated for going behind the judgment. 26 The second ground, likewise, has not been made out. For the same reasons, it is only in unusual circumstances that this Court will go behind a judgment which has resulted from contested proceedings. There is, again, nothing in the evidence which would permit me to reach the conclusion that the Costs Assessor was incorrect in the assessment that was made in relation to the costs order of the District Court. There is therefore simply no basis in the evidence for going behind the assessment. 27 The debtor faces insuperable difficulty as far as his third contention is concerned. It is necessary for him to establish 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: Bankruptcy Act, s 40(1)(g). It follows from Ebert v The Union Trustee Company of Australia Ltd (1960) 104 CLR 346, at 350, and from Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 30 ALR 433, at 439, that the Court does not undertake a preliminary trial of the counter-claim, set-off or cross demand. Rather, it is necessary that the Court be satisfied that the debtor has a fair chance of success. These principles continue to apply under s 41(7) of the Bankruptcy Act in its amended form: see Crimmins v Glenview Home Units [1999] FCA 515. 28 The debtor has not satisfied me to the requisite standard that he has a counter-claim, set-off or cross-demand of the kind referred to in s 40(1)(g) of the Bankruptcy Act. The evidence suggests that the debtor has instituted defamation proceedings in the Supreme Court of New South Wales against the creditor, Mr Day. I accept, for present purposes, that a counter-claim may include a claim for damages in tort, including defamation: Bhattacharya v Berger [1999] FCA 883, at [28]. The statement of claim filed in those proceedings alleges that Mr Day published by e-mail matter defamatory of the debtor. The e-mail is said to convey imputations defamatory of the debtor, including that he is a fraud and a dishonest person. However, the debtor has adduced no substantial evidence to establish that there is a basis for the claim pleaded in the Supreme Court. The pleading in evidence is not verified. There is no evidence of the allegedly defamatory e-mail, nor that it has been published to the persons referred to in the statement of claim. Nor is there any evidence that the imputations are false. 29 I am of course not suggesting that the debtor will necessarily be unable to make out a claim for defamation in due course. My conclusion is simply that, on the evidence before me, he has not established that he has a fair chance of success in the proceedings against Mr Day. 30 The debtor asserts that there is also an action underway against the creditor, Alan Manly, for defamation arising out of a letter allegedly written by Mr Manly to a Member of Commonwealth Parliament. It appears that there are proceedings on foot in the Supreme Court of New South Wales brought by the debtor against Mr Manly, but that no statement of claim alleging a cause of action in defamation has yet been filed. The letter of 20 November 1997, apparently signed by Mr Manly, is in evidence. This is the letter which the debtor claims gives rise to the cause of action in defamation. 31 Once again, there is insufficient evidence to support to the necessary standard the elements of the cause of action in defamation that the debtor would need to make out in order to recover damages against Mr Manly. The debtor has not yet formulated the claim based on the letter. Leaving that to one side, there is no evidence suggesting that whatever imputations may be drawn from the letter are false. Nor does the evidence address the damages that might be recovered by the debtor, should any cause of action ultimately be made out by him against Mr Manly. 32 It follows that the debtor has not made out the grounds identified by him for setting aside the bankruptcy notice. Conclusion 33 The orders that should be made are as follows: 1. The debtor's application to set aside the bankruptcy notice be dismissed. 2. The creditors' petition be struck out. 3. The creditors' notice of motion seeking to dismiss the debtor's application to set aside the bankruptcy notice on the basis that the application is incompetent, be dismissed. 4. No order as to costs. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville. Associate: Dated: 24 November 1999 Counsel for the Debtor: Unrepresented Counsel for the Creditors: Mr R W Cameron Date of Hearing: 24 November 1999 Date of Judgment: 24 November 1999