FEDERAL COURT OF AUSTRALIA Smart v Esanda Finance Corp Ltd [2000] FCA 235 BANKRUPTCY – Creditor's petition – sequestration order – whether debtor had counterclaim, set‑off or cross demand equal to, or greater than, the judgment debt which could not have been set up in the proceeding in which the judgment was obtained – whether there was sufficient cause why a sequestration order should not be made. Bankruptcy Act 1966 (Cth): s 40(1)(g), s 52(2)(b) Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129 considered ANTHONY IVAN SMART v ESANDA FINANCE CORPORATION LIMITED V 478 of 1999 LEE, GOLDBERG & KENNY JJ 8 MARCH 2000 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 478 of 1999 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: ANTHONY IVAN SMART Appellant AND: ESANDA FINANCE CORPORATION LIMITED Respondent JUDGES: LEE, GOLDBERG & KENNY JJ DATE OF ORDER: 8 MARCH 2000 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant pay the respondent's costs of and incidental to the appeal including reserved costs. 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 V 478 of 1999 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: ANTHONY IVAN SMART Appellant AND: ESANDA FINANCE CORPORATION LIMITED Respondent JUDGES: LEE, GOLDBERG & KENNY JJ DATE: 8 MARCH 2000 PLACE: MELBOURNE REASONS FOR JUDGMENT THE COURT: 1 The appellant appeals from an order of Merkel J on 30 July 1999 made on a petition filed by the respondent that the estate of the appellant be sequestrated and the respondent's costs, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth) ("the Act"). The appellant appeared in person before Merkel J and prepared and filed his own notice of appeal. On the hearing of the appeal counsel appeared for the appellant pursuant to the pro bono scheme established under O 80 of the Federal Court Rules. Counsel did not seek to rely on the grounds set out in the notice of appeal but rather relied on the following grounds: "(1) His Honour erred in finding that [the appellant's] 'cross demand' could not have been set up in the action being the action commenced by [the appellant] on 15 February 1996 (2) On all the material available, His Honour, pursuant to section 52(2)(b) of the Bankruptcy Act should have dismissed the petition because 'for some other sufficient cause a sequestration order … should not be made'." 2 The primary judge was satisfied that the appellant had committed the act of bankruptcy alleged in the petition, namely, a failure to comply with a bankruptcy notice which had been served upon him. The bankruptcy notice was based upon a judgment obtained by the respondent against the appellant in the County Court at Melbourne on 3 December 1998 in the sum of $12,779.45 which consisted of an amount of taxed costs and interest thereon. The primary judge was not satisfied that the appellant had a counter‑claim, set‑off or cross demand equal to or exceeding the amount of the judgment debt which could not have been set up in the proceeding in which the judgment in the County Court was obtained. 3 We are not satisfied that any of the grounds of appeal are made out and in order to understand how we have reached this conclusion it is necessary to understand the path by which the respondent came to file its creditor's petition against the appellant. 4 The respondent says that in 1990 the appellant entered into two hire purchase contracts with the respondent in relation to two items of equipment, a Caterpillar Scraper and a Vibrating Sheep Foot Roller ("the equipment"). In affidavits sworn this year in response to the petition the appellant has denied he entered into these contracts. On 10 July 1992 the respondent issued a proceeding in the County Court against the appellant claiming the sum of $72,029.20, being the money allegedly due under the two contracts. The respondent obtained a default judgment in that proceeding on 18 August 1992. After obtaining judgment the respondent "repossessed" the goods and sold them applying the proceeds of sale to reducing the judgment debt to a sum of approximately $20,000‑$30,000. 5 The appellant made four applications in the County Court to set aside that judgment which either did not proceed or were dismissed. The first application was filed on 28 August 1992 and subsequently withdrawn. The second application was filed on 3 June 1993 and subsequently struck out. The third application was filed on 30 October 1995 and on 13 December 1995 a Judge of the County Court ordered that execution by the respondent on the judgment be stayed pending the prosecution of a claim to be made by the appellant against the respondent. Later, that application was struck out when the appellant failed to comply with another interlocutory order made in the proceeding. A further application was made in September 1998 and was dismissed on 19 November 1998. That order of dismissal is the subject of a notice of appeal to the Court of Appeal of the Supreme Court of Victoria. 6 In February 1996 the appellant had issued a proceeding in the County Court against the respondent claiming damages. In his statement of claim the appellant alleged that: (1) two hire purchase contracts were entered into between him and the respondent dated 5 February 1990 and 15 March 1990 in relation to the equipment; (2) the respondent had no right to terminate the contracts; (3) the respondent entered judgment in default against the appellant in the County Court on 18 August 1992 for damages for failure to deliver up the equipment and that by reason of the judgment: (a) the respondent had repudiated the hire purchase contracts; (b) the respondent was estopped from denying that it had elected not to repossess the equipment and that the appellant had title to the equipment; and (c) the hire purchase contracts had merged in the judgment; (4) the respondent wrongfully seized the equipment or, alternatively, did not sell it for the best price reasonably obtainable; and (5) the respondent had wrongfully converted the equipment or, alternatively, had not complied with the provisions of the Hire-Purchase Act 1959 (Vic) in repossessing the equipment. 7 The appellant claimed that as a result of the conduct of the respondent set out in the statement of claim he had suffered loss and damage being the value of the equipment and the loss of its use. Alternatively, he sought a declaration that he was not indebted to the respondent in respect of the equipment and an order that the judgment be set aside. 8 As a result of the appellant's failure to comply with an interlocutory order requiring him to answer interrogatories delivered to him in that proceeding, the County Court ordered on 1 May 1997 that the appellant's proceeding be struck out with costs. In due course the respondent's costs were taxed and the amount of the taxed costs and interest thereon became the sum in which judgment was entered. 9 The respondent served on the appellant a bankruptcy notice issued on 18 February 1999 demanding payment of the amount of the judgment debt and setting out how it was calculated. There was affixed to the bankruptcy notice a copy of the authenticated order of the Court pursuant to which the debt was payable. The appellant did not pay the amount claimed in the bankruptcy notice and thereby committed an act of bankruptcy. 10 On 16 March 1999 the appellant applied to set aside the bankruptcy notice and on 30 March 1999 that application was dismissed by a Registrar. 11 The issue before the primary judge was whether the appellant could satisfy him that the appellant had, relevantly, a cross demand equal to or exceeding the amount of the judgment debt which he could not have set up in the County Court proceeding. The appellant claimed that he had a good defence to the claim by the respondent in the original 1992 County Court proceeding. The primary judge noted that the appellant made certain serious allegations against the respondent in respect of the hire purchase contracts including allegations of fraud, forgery and non‑payment of any purchase price for the equipment. His Honour accepted that if the allegations were made out and the appellant persuaded the Court of Appeal to set aside the default judgment obtained by the respondent in the County Court in 1992, the appellant would be entitled to assert that the respondent has no claim against the appellant for monies due to it by the appellant under hire purchase contracts. 12 His Honour found, however, that there was a fundamental misconception in the appellant's opposition to the petition because the cross demand upon which he apparently relied was in fact set up in the proceeding in which the judgment was obtained, namely the proceeding brought by the appellant on 15 February 1996 in which he had filed a statement of claim which set out his complaints against the respondent concerning the hire purchase contracts and the repossession and sale of the equipment. His Honour found: "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 that 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." 13 His Honour referred to the substantial body of authority that the expression "could not have been set up" as used in s 40(1)(g) meant "could not by law have been set up in the action": Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129. His Honour also referred to other cases set out in the notes to s 40(1)(g) in the annotated Bankruptcy Act at para 80, 910.15. 14 His Honour therefore found that notwithstanding the body of material relied upon by the appellant, the ground upon which the appellant wished to oppose the petition had not been made out. It followed that a sequestration order should be made. 15 Counsel for the appellant referred to a number of affidavits filed by the appellant in which he set out his claims that the hire purchase contracts had not been entered into by him and that various documents had been forged. It is not necessary to refer to these affidavits in any detail other than to note that they were before the primary judge. Counsel submitted that the primary judge erred when he found that the appellant's cross demand, identified in his affidavits, was in fact raised in his County Court proceeding could have been raised in that proceeding. He submitted that the appellant could not have raised his proposed cross‑claim in his County Court proceeding because of the existence of the respondent's proceeding in respect of which judgment had been entered on 10 August 1992. He submitted that the proceeding which the appellant had commenced on 15 February 1996 was misconceived because it sought to attack the validity of the judgment in the first proceeding. In short, he submitted that the appellant's proceeding was not competent because he could not set up a claim of fraud or make the allegation that he had not entered into the two hire purchase contracts in relation to the subject‑matter of the first proceeding. Rather, he submitted, that could only be done in the first proceeding itself in respect of which there was presently outstanding the notice of appeal in relation to the order refusing to set aside that judgment. Counsel further submitted that the primary judge's reliance on Re Ling; Ex parte Ling v Commonwealth of Australia (supra) was misplaced because there was no choice available to the appellant notwithstanding the existence of the proceeding he had commenced on 15 February 1996 because although that proceeding had been instituted it was not competent to raise the issues therein relied upon. 16 We have some doubt about the primary judge's observation that the matters which are the subject of the cross demand and which the appellant now wishes to raise were in fact raised in the proceeding commenced on 15 February 1996. If his Honour was referring to the prayer for relief in that proceeding that the appellant was not indebted to the respondent in respect of the two hire purchase contracts, his Honour's observation was correctly made. However, if his Honour was referring to the allegations of forgery and that the appellant had not entered into the hire purchase contracts, then it was not correct to say that these matters were in fact raised in that proceeding. In the event, it does not matter whether this is what his Honour found because we are satisfied that those claims of forgery and non‑execution of the hire purchase contracts could have been set up in the appellant's County Court proceeding. 17 The question whether the cross demand "could not have been set up" in the proceeding in which the judgment was obtained for the purposes of s 40(1)(g) of the Act is a question "to be answered by reference to legal considerations": Re Ling; Ex parte Ling v Commonwealth of Australia (supra) at 599. Counsel submitted that the allegations of forgery and not signing the hire purchase contracts could not have been set up in the appellant's County Court proceeding because he would have been met with a plea or defence of res judicata or issue estoppel. Whether or not a cross‑claim could be set up does not depend upon whether it could be set up successfully but whether it could be set up as a matter of law: Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 at 138‑139; Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183 at 189. 18 The appellant's second ground of appeal is that the primary judge should have exercised his discretion under s 52(2)(b) of the Act and dismissed the petition because there was a sufficient cause why the sequestration order should not be made. It was submitted that that sufficient cause was the fact of the outstanding appeal before the Court of Appeal in respect of which the notice of appeal had been filed on 2 December 1998. It does not appear that direct submissions on this point were made to the primary judge when the appellant appeared in person. 19 Counsel submitted that the appellant had raised s 52(2) of the Act by saying that he would be able to pay his debts, although counsel conceded that the appellant had failed to assert in terms that there was "other sufficient cause". In fact what the appellant had said in an affidavit before the primary judge was: "Pursuant to Section 52(2) of the Bankruptcy Act 1966, I say that I will be able to pay my debts, by reason of my Cross Demand, and therefore I cannot be considered insolvent." Although the primary judge did not refer in his reasons to s 52(2)(b) explicitly, he did say after analysing the circumstances which had arisen, including the fact that the dismissal of his application to set aside the judgment of the County Court was the subject of a notice of appeal to the Court of Appeal, that: "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". It seems to us that his Honour was responding to all the matters raised by the appellant including a contention that the primary judge should exercise a discretion under s 52(2) of the Act. Earlier in his Honour's reasons he had said: "If all of those allegations [the allegations of fraud and not having entered into the hire purchase contracts] 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". In all the circumstances it appears that his Honour considered the pending appeal and was not persuaded that it provided cause not to make a sequestration order. We can see no reason to disturb the manner in which his Honour approached his task under s 52(2)(b) of the Act. 20 If we are wrong in our understanding of his Honour's reasons, in our view, his Honour could only have reached the same conclusion, particularly having regard to the period of time over which the litigation had progressed and the absence of any information before him as to the progress of the appeal. If the appeal were to succeed then there would be a substantial further effluxion of time before there could be any resolution of that litigation which had commenced in 1992. 21 We should also point out that even if the appellant succeeds in the Court of Appeal in having the default judgment set aside that will not, of itself, yield any money sum to the appellant. 22 The appeal will be dismissed with costs. 23 This case is yet another example of the Court being assisted by the services rendered to it and to litigants in person by members of the profession who, pursuant to the pro bono scheme referred to above, undertake without expectation of reward to appear as solicitor or counsel in the preparation or presentation of cases in order that the interests of justice may be served. It is important that it be recognised that in rendering such public service members of the profession who participate in the pro bono scheme not only obtain no reward but assume the usual professional duties owed by practitioners to the persons for whom they appear and to the Court. I certify that the preceding twenty‑three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Lee, Goldberg and Kenny JJ. Associate: Dated: March 2000 Counsel for the Appellant: Mr W Gillies – Counsel appeared pro bono Counsel for the Respondent: Ms S Marks Solicitor for the Respondent: Corrs Chambers Westgarth Date of Hearing: 26 November 1999 Date of Judgment: 8 March 2000