FEDERAL COURT OF AUSTRALIA Van Leeuwen v Bank of Western Australia Ltd [2001] FCA 1826 BANKRUPTCY - Bankruptcy Notice - judgment debt - application to set aside notice - counter-claim, set-off or cross demand - whether could not have been set up in the action in which the judgment was obtained Bankruptcy Act s 40 s 41 Supreme Court of Judicature Act 1873 Limitation Act 1935 (WA) In re A Bankruptcy Notice (1934) 1 Ch 431 Re Brink; Ex parte The Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 Re Ling; Ex parte Ling v Commonwealth (1995) 58 FCR 129 THEODORUS LEONARDUS VAN LEEUWEN v BANK OF WESTERN AUSTRALIA LTD (ABN 22 050 494 454) W7016 OF 2001 FRENCH J 18 DECEMBER 2001 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W7016 OF 2001 BETWEEN: THEODORUS LEONARDUS VAN LEEUWEN APPLICANT AND: BANK OF WESTERN AUSTRALIA LTD (ABN 22 050 494 454) RESPONDENT JUDGE: FRENCH J DATE OF ORDER: 18 DECEMBER 2001 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant is to pay the respondent'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 WESTERN AUSTRALIA DISTRICT REGISTRY W7016 OF 2001 BETWEEN: THEODORUS LEONARDUS VAN LEEUWEN APPLICANT AND: BANK OF WESTERN AUSTRALIA LTD (ABN 22 050 494 454) RESPONDENT JUDGE: FRENCH J DATE: 18 DECEMBER 2001 PLACE: PERTH REASONS FOR JUDGMENT Introduction 1 On 6 April 2001, Theodorus Leonardus Van Leeuwen was served with a bankruptcy notice issued by the Bank of Western Australia Ltd. The notice asserted a debt of $42,597.82, being the amount of a judgment of the District Court in favour of the Bank against Mr Van Leeuwen. The judgment was by way of a summary judgment given by a Registrar of the District Court on 21 December 2000. An appeal to a judge of the District Court, Muller DCJ, was dismissed on 3 May 2001. 2 On 10 April 2001, Mr Van Leeuwen filed an application in this Court to set aside the bankruptcy notice on the ground that he had a counterclaim, set off or cross demand, equal to or exceeding the sum specified in the bankruptcy notice as owing to the Bank. The application was dismissed by Deputy Registrar Rayney on 11 September 2001. On 2 October, a motion for review of the Deputy Registrar's decision by a judge of this Court was filed on behalf of Mr Van Leeuwen. Factual Background 3 Mr Van Leeuwen describes himself as an accountant and business advice consultant. On 14 April 2000, he commenced proceedings against the Bank in the District Court of Western Australia - 973 of 2000. His claim was for a sum of $52,500 plus interest. On 16 May 2000, the Bank took out a chamber summons seeking to dismiss the action. A statement of claim was filed on 14 June 2000 and an amended statement of claim on 23 June 2000. The Bank filed a defence on 3 August 2000. 4 The claim as described in the amended statement of claim alleged that a Mr and Mrs Mosedale were clients of Mr Van Leeuwen and also customers of the Bank. They carried on in partnership a business marketing ice cream and related products in Bunbury under the name Cool Cave Ice-Cream Parlour. In May 1993, according to the amended statement of claim, the Mosedales had an excess of liabilities over assets in the order of $289,000 of which some $217,000 was represented by secured debts owed to the Bank. Mr Van Leeuwen said he prevailed upon the Bank to allow him to implement a plan for realisation of the Mosedales' assets which would reduce the potential loss of $130,000 which the Bank would suffer by enforcing the securities. The Bank he said, agreed at a meeting with him in May 1993, that if he were to undertake the realisation plan it would pay his fees. On the strength of these representations he alleges he implemented the realisation plan keeping the Bank informed of his progress and receiving repeated promises that his fees would be paid. 5 Mr Van Leeuwen alleges that as a result of his activities a mortgagee sale was avoided and an orderly sale at maximum market value of a property in Bunbury was effected. Approval was obtained for the assignment of the lease of the premises from which the Cool Cave Ice-Cream Parlour operated to a proposed purchaser. Approval was also obtained for an extension of the existing lease of the premises for a further period of five years with a further option. He claims to have achieved the satisfactory refitting of the premises to assist in making the Cool Cave Ice-Cream Parlour saleable. Mr Van Leeuwen also says that in December 1993 it was verbally acknowledged and agreed between himself and an officer of the Bank that his fee entitlement was $52,500. On 7 and 23 March 1994 and 14 April 1994 he says he received further verbal assurances from the Bank that his fees would be paid on final settlement of the realisation plan. The final settlement was scheduled for 18 April 1994. However by a letter of 23 March 1994 the Bank informed the selling agents in relation to the proposed settlement of the sale of the Cool Cave Ice-Cream Parlour that all proceeds of the settlement were to be made available to the Bank and no payment would be made to Mr Van Leeuwen as previously undertaken. Upon this being made known, he gave instructions to his solicitors to take proceedings. He says he refrained from persisting with these proceedings on receiving a verbal assurance from officers of the Bank by telephone on Friday 15 April 1994, that his fees would be paid upon the settlement. However on the day of the settlement and before its completion, officers of the Bank advised orally that he was not going to be paid by the Bank and requested him to sign a prepared letter addressed to the Bank stating that he would take no recovery action for any of the fees due and payable. He claims the Bank stated that unless he signed the pre-prepared correspondence and repaid a loan of $5,000 advanced to him by the Bank on 26 October 1993, the settlement would not proceed. These requirements were withdrawn, the settlement took place and the Bank recovered all of its secured advances. Mr Van Leeuwen says the loan of $5,000 and accrued interest was accepted as paid by the Bank out of the settlement proceeds effected on the settlement. The Bank, however, did not pay the sum of $52,500. Its failure to do so, he pleaded, constituted a breach of the contract between them. He asserted that the Bank was estopped from denying that it was indebted to him and he claimed restitution in respect of services provided to and for the benefit of the Bank. 6 On 11 September 2000, the Bank itself issued a writ against Mr Van Leeuwen in action number 2363 of 2000. A statement of claim was filed on 29 September 2000, a defence on 16 October 2000, and an application for summary judgment on the part of the Bank on 17 October 2000. 7 In its statement of claim the Bank alleged that by an express written agreement made on or about 22 December 1997 it agreed to provide a business cheque account facility to Mr Van Leeuwen subject to terms and conditions contained in that agreement. Express, and in the alternative, implied terms of the agreement were pleaded. The Bank, it was said, would provide the cheque account facility in the name of Richard Van Leeuwen & Associates, which was the name under which Mr Van Leeuwen traded. He would not overdraw the account without prior agreement with the Bank and if he did the debt balance would be immediately due and payable. There was reference to the Bank's entitlement to calculate interest charges and charge a line of credit fee and a fee for notification that the account was overdrawn. The Bank alleges that in breach of the terms of the Cheque Agreement, Mr Van Leeuwen overdrew the account without its prior approval. The account is said to have become overdrawn on or about 24 December 1997 and never returned to credit. 8 On or about 28 April 1999, the Bank and Mr Van Leeuwen agreed to vary the terms of the agreement so that the Bank would defer require immediate repayment of the balance then outstanding on the account for so long as Mr Van Leeuwen complied with the terms of the variation. The balance then outstanding was $46,039.39. Mr Van Leeuwen was to repay the outstanding balance and interest by monthly instalments over five years. Interest would accrue on the basis of the Bank's fluctuating standard unsecured overdraft rate. Based on the term and rate then prevailing, Mr Van Leeuwen would have to make monthly repayments of $999.87. If he failed to make any repayment the total outstanding on the account would become payable on demand. It is alleged that in breach of the terms of the Cheque Agreement, Mr Van Leeuwen failed to make any repayments after 1 May 2000. On 8 August 2000, the Bank issued a notice of demand that he pay to it the balance then outstanding of $40,737.31. However, he was said to have failed to pay that sum which remained due and owing. Interest was also claimed pursuant to the terms of the Cheque Agreement. 9 The Bank applied for summary judgment against Mr Van Leeuwen in Action Number 2363 of 2000. In the meantime, on 27 September 2000, he applied in the proceedings Action Number 973 of 2000 to consolidate them with 2363 of 2000. The application for consolidation was listed for hearing concurrently with the Bank's application for summary judgment. At the hearing before Registrar Kingsley in the District Court Mr Van Leeuwen argued that he had a set-off against the Bank's claim, being his claim for unpaid fees or restitution. However, on 21 December 2000, the Registrar refused his application and ordered that judgment be entered in favour of the Bank. 10 Mr Van Leeuwen appealed against the decision of Registrar Kingsley. His appeal was heard on 2 April 2001 by Muller DCJ. It was contended on behalf of Mr Van Leeuwen before Muller DCJ that the Bank's claim against Mr Van Leeuwen and his claim against the Bank were inextricably linked and that the Bank would not have lent money to him had it not itself owed money to him. Muller DCJ took the view that in order to establish his claim as an equitable set-off, Mr Van Leeuwen would have to show that it was essentially bound up with the title of the Bank or that it had been brought about by the conduct of the Bank. In the event, Muller DCJ was not satisfied on the material before the Court that the two claims were so inextricably linked to one another that the only reason the Bank lent money to Mr Van Leeuwen was because it knew it owed money to him. An examination of the relationship between the respective claims demonstrated a substantial gulf between them. It could not be said that Mr Van Leeuwen's claim related to the same contractual relationship as the unpaid loans made by the Bank to him. The competing claims arose out of two quite distinct contracts. In the event, his Honour confirmed the decision of the Registrar and dismissed the appeal. 11 Although it was argued in the District Court that Mr Van Leeuwen's claim against the Bank was by way of an equitable set-off, there was no attempt to raise it as a counterclaim to the Bank's claim. It was said, in any event, that it was too late to plead it as a counterclaim in the Bank's action because it would have been out of time. Statutory Framework 12 Section 40 of the Bankruptcy Act appears in Part IV concerned with proceedings in connection with bankruptcy. Section 40 defines the various classes of act that constitute acts of bankruptcy and which will found a creditor's petition. Relevantly it provides: "40(1) A debtor commits an act of bankruptcy in each of the following cases: … (g) if a creditor who has obtained against a debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not: (i) where the notice was served in Australia - within the time specified in the notice; or (ii) where the notice was served elsewhere - within the time fixed for the purpose by the order giving leave to effect the service, comply with the requirements of the notice or satisfy the Court that he or she 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 or she could not have set up in the action or proceeding in which the judgment or order was obtained;" 13 Section 41 of the Act relates specifically to bankruptcy notices and provides, inter alia: "41(1) An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor a final judgment or final order that: (a) is described in 40(1)(g); and (b) is for an amount of at least $2,000. … (6A) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice: (a) proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or (b) an application has been made to the Court to set aside the bankruptcy notice; the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice. … (7) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor 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." Counter-claim, Set-off or Cross Demand 14 The Bank's claim against Mr Van Leeuwen and his claim against the Bank are unrelated except in the sense that he advances, namely that if the Bank had honoured the fee arrangement which he asserted, he would have repaid his debt to the Bank. Mr Van Leeuwen's claim could not, I think, be regarded as a set-off against the Bank's claim. It can constitute a counter-claim albeit that is a concept affected by the rules of court in which the judgment grounding the bankruptcy notice was obtained. It certainly falls within the broader concept of a cross demand. The collocation "counter-claim, set-off or cross demand" derives from the bankruptcy legislation of the United Kingdom. In that context set-off was seen as referring to a claim which, in effect, provided a defence against the primary claim, something properly to be dealt with as diminishing it. The counter-claim was a creature of the Supreme Court of Judicature Act 1873. It is provided for in rules of court in various Australian jurisdictions. A cross demand is a term of wider meaning "…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 counterclaim, 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 - In re A Bankruptcy Notice (1934) 1 Ch 431 at 437-438 (Lord Hanworth MR). The cross demand need not have any connection with the cause of action out of which the judgment debt arose. Indeed a judgment debtor may even take an assignment of a claim against a judgment creditor in order to have a cross demand - Re Brink; Ex parte The Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 at 139 (Lockhart J). As Lockhart J said in that case: "The object of the Legislature in providing machinery for the setting aside of a bankruptcy notice where a judgment debtor has a cross-demand is obviously to prevent a judgment creditor from pursuing bankruptcy proceedings when, as between himself and the judgment debtor, the balance of account is in favour of the judgment debtor; if this be the reason for the creation of the machinery it is quite unimportant whether the cross-demand is one which, in the event of bankruptcy supervening, would belong to the official assignee or the bankrupt." On that basis his Honour held that the term "cross-demand" extended to a claim for unliquidated damages for tort (at 139). 15 The provisions of s 40(1)(g) require that the judgment debtor "satisfy" the Court that he or she has a counter-claim, set-off or cross demand. I accept that the requirement for the Court to be so satisfied is that there be a genuine claim with a reasonable chance of success. This does not require that the judgment debtor establish the claim on the balance of probabilities but rather that it put evidence before the Court which, if accepted, would establish an arguable cause of action against the judgment creditor. In this case I am satisfied, on the affidavit evidence of Mr Van Leeuwen, that he is advancing an arguable counter-claim or cross demand. It is to be noted that in its defence to his claim in Action 973 of 2000, the Bank pleads that the claim is out of time under s 38 of the Limitation Act 1935 (WA) on the basis that the cause of action accrued more than six years prior to the commencement of the proceedings. That objection is procedural in character and not to be resolved in these proceedings. It does not detract from the satisfaction of the Court that there is a counter-claim, set-off or cross demand. 16 There is no doubt that the amount of Mr Van Leeuwen's claim exceeds the amount of the judgment debt. This leaves as the key issue in this case the question whether he could not have set up the counter-claim, set-off or cross demand in the proceedings in which the judgment against him was obtained. This question has to be answered by reference to legal considerations rather than practicalities. That he may have had an excuse for not bringing his own claim in Action 2363 of 2000 does not mean that his claim could not legally have been brought in those proceedings - Re Ling; Ex parte Ling v Commonwealth (1995) 58 FCR 129 at 132 (Hill J). As Hill J said at 137 in that case: "If machinery is available for [the] claim to be agitated as a cross-claim in the proceedings, even if application must be made in a timely way to another court or leave must be obtained, that application should be made or that leave sought. Otherwise the debtor will be bound by his or her conduct." 17 Order 18 r 2(1) of the Rules of the Supreme Court of Western Australia, which apply to the District Court of Western Australia, provides that: "Subject to Rule 5(2), a defendant in any action who alleges that he has any claim or is entitled to any relief or remedy against a plaintiff in the action in respect of any matter (whenever and however arising) may, instead of bringing a separate action, make a counterclaim in respect of that matter; and where he does so he must add the counterclaim to his defence." Indeed in his affidavit sworn in opposition to the summary judgment application in Action 2363 of 2000, Mr Van Leeuwen sought to set up the claim raised in Action 973 of 2000 as a defence. However he did not attempt to plead it as a counter-claim or cross demand. It is submitted on his behalf that the Bank can hardly advance that argument given that it has pleaded a time limitation against Mr Van Leeuwen's claim in Action 973. But as noted earlier, the time limitation is a procedural matter which does not of itself defeat the cause of action. In my opinion it would have been open to Mr Van Leeuwen to have pleaded his claim as a counter-claim in the proceedings brought by the Bank. 18 It appears that Mr Van Leeuwen's claim did not provide a basis for defeating the Bank's application for summary judgment in Action 2363 because it was advanced as a set-off in the argument before Muller DCJ. Counsel who appeared for Mr Van Leeuwen on that application appears, according to the reasons for judgment delivered by Muller DCJ, to have relied on Mr Van Leeuwen's claim as a set-off. It was dealt with on that basis and failed. It was not advanced as a counter-claim which could have been pleaded and provided a discretionary basis either for dismissing the summary judgment application or for a stay of execution if summary judgment were affirmed. Nor evidently was any argument advanced that the consolidation application should be determined first. Had the proceedings been consolidated then there would have been at the very least a cross demand in the action in which the summary judgment was obtained upon which a stay of execution might have been sought. In these circumstances, I am not satisfied that the requirements of s 40(1)(g) have been met. The application to set aside the bankruptcy notice is dismissed with costs. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French . Associate: Dated: 18 December 2001 Counsel for the Applicant: Mr I Morison Solicitor for the Applicant: BW Duckham & Co Counsel for the Respondent: Mr Abbott Solicitor for the Respondent: John A Pease, BankWest Legal Date of Hearing: 17 December 2001 Date of Judgment: 18 December 2001