FEDERAL COURT OF AUSTRALIA George Tzovaras v Nufeno Pty Limited [2003] FCA 1152 BANKRUPTCY – counter-claim filed in the District Court which had no jurisdiction to hear the counter-claim – whether counter claim could not have been set up in the action or proceeding in which the judgment or order was obtained WORDS AND PHRASES – proceeding, proceedings Bankruptcy Act 1966 (Cth), ss 40(1)(g), 41(7) District Court Act 1973 (NSW), ss 134, 145 Supreme Court Rules (NSW), Pt 74 r 2 KBRV Resort Operations Pty Limited t/a Kingfisher Bay Resort and Village v Chilcott (2001) 51 NSWLR 516 applied Rawlinson v Oliver [1995] 3 NZLR 62 referred to Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 applied Re Hodby; Ex parte Kenny (1986) 12 FCR 134 referred to Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129 applied Re Racheha; Ex parte Antonios (1980) 49 FLR 423 applied Re Scott; Ex parte Scott v Beneficial Finance Corporation Limited (1994) 53 FCR 324 referred to Re Willats; Ex parte Nissan Finance Corporation Limited (1991) 31 FCR 206 referred to Smart v Esanda Finance Corp Ltd (2000) FCA 235 referred to GEORGE TZOVARAS v NUFENO PTY LIMITED N7234 of 2003 JACOBSON J 23 OCTOBER 2003 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7234 of 2003 BETWEEN: GEORGE TZOVARAS APPLICANT AND: NUFENO PTY LIMITED ACN 002 523 248 RESPONDENT JUDGE: JACOBSON J DATE OF ORDER: 23 OCTOBER 2003 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The Application be dismissed. 2. The Applicant pay the Respondent's 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 7234 of 2003 BETWEEN: GEORGE TZOVARAS APPLICANT AND: NUFENO PTY LIMITED ACN 002 523 248 RESPONDENT JUDGE: JACOBSON J DATE: 23 OCTOBER 2003 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 This is an application under s 41(7) of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act ") to set aside a bankruptcy notice upon the ground that the Applicant has a counter-claim, set-off or cross-demand as referred to in s 40(1)(g) of the Act. 2 The Bankruptcy Notice in question is No NN 1430/03 which was issued on 17 June 2003 at the request of the Respondent. The Bankruptcy Notice was served on the Applicant by the Respondent on 10 July 2003. 3 The debt upon which the Bankruptcy Notice was based was a District Court judgment of 8 August 2002 in the sum of $655,962.13 for the Respondent against the Applicant. The judgment was entered by consent. 4 The application to set aside the Bankruptcy Notice was filed on 30 July 2003. On that date, Deputy District Registrar Kavallaris extended the time limited for compliance with the Bankruptcy Notice to 12 August 2003. 5 Section 41(7) of the Act permits the Court to set aside a bankruptcy notice where the debtor satisfies the Court that he or she has a counter-claim, set-off or cross-demand as referred to in s 40(1)(g), namely:- "… 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". (emphasis added) 6 The judgment in the District Court was entered by Naughton DCJ pursuant to a Heads of Agreement which provided for judgment in the sum of $655,962.13 "to be entered forthwith with the cross-claim be dismissed" (sic). 7 Notwithstanding this, the Applicant claims that he has a cross-claim which he could not have set up in the District Court action. The cross-claim upon which the Applicant relies is a claim for equitable damages said to arise from a breach of fiduciary duty. One of the many difficulties which the Applicant faces is that the fiduciary obligation is said to arise from a partnership or joint-venture made with a person who is not the Respondent to this application and who did not issue the Bankruptcy Notice. 8 The judgment in the District Court is for a guarantee of money lent by the Respondent to Australand Pty Limited ("Australand") under a deed of loan dated 9 March 1998 ("the Loan Agreement"). The guarantee was contained in a deed entered into on the same date ("the Guarantee"). The Loan Agreement and the Guarantee contained the terms on which the Respondent provided funding for the purchase of a property at Wade Island. 9 The substance of the cross-claim, which the Applicant says he could not set up in the District Court, is that the Loan Agreement and the Guarantee were put forward by a Mr Peter Montgomery in breach of the terms of an oral agreement made between the Applicant and Mr Montgomery for the acquisition and development of the Wade Island land. The District Court Proceedings 10 The proceedings in the District Court were commenced by a statement of liquidated claim filed on 22 May 2001 (the "Statement of Claim"). 11 The Statement of Claim sought judgment against Australand for the moneys advanced by the Respondent under the Loan Agreement. It also claimed judgment against the Applicant under the Guarantee. 12 The Applicant filed a cross-claim and a third party cross-claim in the District Court. He was the second cross-claimant in an amended third party cross-claim in which Nufeno Pty Limited (i.e. the present respondent) was named as the first cross-defendant. Mr Montgomery was the second cross-defendant. 13 It is unnecessary to record the detail of the cross-claims. It is sufficient to say that they were equitable claims arising from various joint-ventures or partnerships said to have been entered into by Australand and the present respondent (or an entity controlled by one or both of the Respondent and Mr Montgomery) for the acquisition, development, marketing and sale of various rural properties. 14 The proceedings came on for hearing before Naughton DCJ on 7 August 2002. During the course of the hearing, the Applicant sought to further amend the third party cross-claim so as to allege in the alternative that the joint-venture or partnership agreement was made between the Applicant and Mr Montgomery personally. 15 The Applicant also sought by this amendment, consequential orders for a dissolution of the partnership with Mr Montgomery and an account. 16 Naughton DCJ was of the view that the District Court did not have jurisdiction under s 134 of the District Court Act 1973 (NSW) to hear proceedings for a dissolution of partnership. His Honour therefore refused the application to further amend the cross-claim. 17 The Applicant then applied to his Honour to transfer the proceedings to the Supreme Court. However, his Honour expressed the view that he did not have jurisdiction to transfer the proceedings to the Supreme Court under s 145 of the District Court Act. His Honour pointed out that the section provides that proceedings can only be removed to the Supreme Court by an order of that Court. 18 The Applicant then sought an adjournment of the District Court proceedings for the purpose of making an application to the Supreme Court for the removal of the proceedings into that Court. His Honour, in the exercise of his discretion, refused to grant an adjournment. 19 The proceedings then continued until they were settled pursuant to the Heads of Agreement to which I have referred. The Applicant's Evidence 20 The Applicant filed three affidavits in support of this application. They were sworn on 30 July 2003, 9 August 2003 and 9 September 2003. There were a large number of exhibits to the affidavits. They were so lengthy that they comprised most of seven volumes of Court Books, which were prepared by the Applicant. There was an eighth volume of Court Book produced on the morning of the hearing. It contained the transcript of the District Court proceedings. 21 The gist of the Applicant's evidence was that he entered into an oral joint venture agreement with Mr Montgomery for the acquisition and development of the Wade Island land on the same terms as those which were contained in a written joint venture agreement for the acquisition and development of land known as the "Craigee land". Under the Craigee joint venture agreement, Mr Montgomery's company, Sadeli Pty Limited, was required to provide the finance for the acquisition, sub-division, marketing and sale of the land. There was no personal obligation on the Applicant to repay the funding. Nor did he guarantee it. 22 Thus, the effect of the Applicant's evidence is that he was not bound to repay the moneys advanced by Mr Montgomery for the acquisition and development of Wade Island. 23 Nevertheless, the written terms of agreement under which the funding was provided for the Wade Island land, (i.e. the Loan Agreement and Guarantee), were quite inconsistent with the terms of the joint venture for which the Applicant contends. 24 The Applicant was cross-examined on these documents. He agreed that he had legal advice when he signed them. He said that he regarded the Loan Agreements and the Guarantee as a breach of the agreement which he had made with Mr Montgomery and a breach of the trust which he placed in Mr Montgomery as a partner but he signed the documents because he had "no choice". This was because he was committed to the purchase of the Wade Island land. 25 Notwithstanding what the Applicant claims to be a serious breach of contract and a breach of trust, he took no steps whatsoever to enforce the contract for which the Applicant contends. Nor did he put forward his claims in any court until he sought to raise them by way of amendment over four years later in his defence to the District Court claim. 26 In paragraph 9 of his affidavit of 9 August 2003 the Applicant deposed to his understanding of the terms of settlement of the District Court proceedings recorded in the Heads of Agreement. He swore that he did not consider that he was giving up his right to prosecute his claims for fiduciary duty against the Respondent or against Mr Montgomery. 27 Nevertheless, on 1 November 2002, that is to say approximately three months after the Heads of Agreement, the parties entered into a Deed of Settlement, the effect of which was to extend the time for Australand and the Applicant to pay the judgment debt. 28 Clause 2.1 of the Deed of Settlement provided for Australand and the Applicant to pay to the Respondent the sum of $475,000 plus interest on or before 8 June 2003. Clause 2.3 provided for the balance to be paid by 8 December 2003. The Applicant conceded that the sum due on 8 June 2003 was not paid. 29 Clause 6.1 of the Deed of Settlement provided that if Australand and the Applicant failed to make payment, the Respondent could immediately and without further notice enforce the judgment obtained in the District Court. 30 On 7 August 2003, (i.e. approximately one month after the service of the Bankruptcy Notice and five days prior to the date to which compliance with the notice was extended), the Applicant filed a Statement of Claim in the Supreme Court. 31 Paragraph 3 of the Statement of Claim alleges that, in about June 1997, Australand and Mr Montgomery entered into a joint venture agreement or partnership for the acquisition and development of various properties. 32 Paragraph 5 of the Statement of Claim alleges in the alternative that the joint venture or partnership was between the Applicant and Mr Montgomery. It is said to have been made in conversations between the Applicant and Mr Montgomery. In cross-examination, the Applicant stated that this is the agreement on which he relies for his claim that the proffering by Mr Montgomery of the Loan Agreement and the Guarantee constituted a breach of contract and a breach of trust. That breach is pleaded in paragraph 15 of the Statement of Claim. 33 Paragraph 16 of the Statement of Claim pleads that, as a result of Mr Montgomery's breach, the Applicant and Australand suffered damages particulars of which included judgment in the District Court in the amount of $655,962.13. s 40(1)(g): That "he or she could not have set up in the action or proceeding" 34 The question which arises is whether the cross-claim could have been set up as a matter of law. The position was stated succinctly by Lockhart J in Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 at 139:- "The words 'that he could not have set up in the action or proceeding in which the judgment or order was obtained' mean 'which he could not by law set up in the action': see Re Jocumsen (1929) 1 ABC at 85; Re A Debtor per Avory J [1914] 3 KB at 730 and Re Stockvis (1934) 7 ABC 53 especially per Lukin J where his Honour said: 'I take a counter claim, set off, or cross demand which could not be set up as one which, from the point of time, or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained … Mere failure to take advantage of the opportunity can hardly be said to be inability' (1934) 7 ABC at 57." 35 As Hill J observed in Re Ling; Ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129 at 132, the question is not to be determined by reference to practicalities. It is to be answered by reference to legal considerations. Thus, as his Honour said, the mere fact that there was in that case an excuse as to why the cross-claim was not brought will not avail a debtor who seeks to come within s 41(7) of the Bankruptcy Act if a cross-claim could legally have been brought. 36 These propositions were affirmed by a Full Court (Lee, Goldberg and Kenny JJ) in Smart v Esanda Finance Corp Ltd [2000] FCA 235 at [17]. 37 Here, the Applicant contends that the District Court had no jurisdiction to entertain the proposed cross-claim and, accordingly, it could not have been set up in the action or proceeding in the District Court. 38 In my opinion, the District Court did not have jurisdiction. I do not think it was an equitable claim of the type referred to in s 134(1)(h) of the District Court Act. The other paragraphs of s 134(1) are restricted to claims with a monetary limit of $20,000. 39 But it does not follow that the cross-claim was one which could not have been set up "in the action or proceeding". This is because s 145 of the District Court Act provides that proceedings may be removed into the Supreme Court by order of that court on such terms as the Supreme Court thinks fit. 40 In Re Racheha; Ex parte Antonios (1980) 49 FLR 423, Lockhart J dealt with an application under s 41(7) of the Bankruptcy Act where the debtor alleged that the cross-claim was for a sum which exceeded the jurisdiction of the Court of Petty Sessions. His Honour held that since the debtor could have transferred the action to the District Court under s 12 of the Court of Petty Sessions (Civil Claims) Act, 1970 (NSW), the cross-claim could not be said to be one which could not have been set up in the action. 41 Lockhart J pointed out that it was plain under the Petty Sessions legislation that the action which could be transferred to the District Court was the same action. 42 His Honour observed at 429:- "If s 40(1)(g) had used the words `being a counterclaim, set-off or cross demand that he could not have set up in the court in which the judgment or order was obtained' probably the result would be different; but this is not the language of par.(g)" 43 Section 145 of the District Court Act does not state that the proceedings which may be removed to the Supreme Court are the same proceedings as those which were in the District Court. Nevertheless, in my opinion, that is the effect of the section. 44 Support for this proposition is to be found in the construction placed on the word "proceedings" by the New South Wales Court of Appeal in KBRV Resort Operations Pty Limited t/a Kingfisher Bay Resort and Village v Chilcott (2001) 51 NSWLR 516. There, the question which arose was whether proceedings begun in the District Court, but in which that Court had no jurisdiction, could be transferred to the Supreme Court. 45 Sheller JA, with whom Ipp AJA and Grove AJA agreed, held that the proceedings could be transferred. In coming to this view, his Honour applied the reasoning of the New Zealand Court of Appeal in Rawlinson v Oliver [1995] 3 NZLR 62. There it was held that absolute privilege attached to allegedly defamatory statements made in pleadings or in statements in the New Zealand Family Court which had no jurisdiction in the proceedings. 46 Sheller JA said at [31] that, as was pointed out in the New Zealand Court of Appeal, the word "proceedings" does not have a precise meaning. It is, as his Honour said, broad enough to include those steps taken by and following on the filing of the statement of claim. 47 His Honour then made the following observation:- "Section 145 is remedial and confers a discretionary power on the Supreme Court. In the absence of any express limitation other than those found in s 145(2) and s 145(3), there is no basis for limiting the word to mean only proceedings within the jurisdiction of the District Court. To say, in effect, that there were no proceedings in the District Court would cause considerable inconvenience. It would mean that the District Court, if it concluded after evidence and argument that proceedings begun in that court were outside its jurisdiction, had no power to dispose of the proceedings by striking them out." 48 Once it is accepted that proceedings commenced in the District Court without jurisdiction are not a nullity and that they can be transferred to the Supreme Court, it must follow that the cross claim in the present case is one which could have been set up in the District Court. It would also seem to follow that the proceeding as transferred to the Supreme Court is the same proceeding. 49 The use of the word "removed" in s 145 of the District Court Act lends further support to the view that it is the same proceeding. So too does the language of Part 74 rule 2 of the Supreme Court Rules. That rule provides that proceedings on an application to the Supreme Court under any act (i.e. including the District Court Act) for an order "removing to the Court proceedings pending in any other court" are to be commenced by summons. 50 I do not think that anything turns on the fact that s 145 of the District Court Act and Pt 74 r 2 of the Supreme Court Rules use the word "proceedings" whereas s 40(1)(g) of the Bankruptcy Act speaks of the "proceeding". It seems to me that the words "proceeding" and "proceedings" have the same broad meaning. 51 It is true that the District Court proceedings when removed into the Supreme Court become in a procedural rather than a substantive sense a Supreme Court proceeding. Though transferred "up" rather than "down" they become proceedings in the Supreme Court to be determined in accordance with that Court's procedures in the same way as a matter remitted from the High Court to the Federal Court; see Dinnison v Commonwealth of Australia (1997) 143 ALR 635 at 639 (per Foster J). 52 But that is not an answer to the question of whether the cross claim is one that could not have been set up in the proceeding in the District Court. That question is answered by the observations of Lockhart J and Sheller JA to which I have referred. 53 The Applicant relied on an obiter remark in a decision of Fisher J in Re Hodby; Ex parte Kenny (1986) 12 FCR 134 at 144 to support a submission that the Applicant satisfied the requirements of s 40(1)(g) because he had been refused leave to file the cross-claim in the District Court. However, in my opinion, the refusal of leave to file the cross-claim could not convert it into one which could not have been set up in the proceeding. The reason for this is, as I have said, that the proceeding could have been removed to the Supreme Court under s 145 of the District Court Act. 54 In any event, the principle which applies in circumstances where leave to file a cross-claim is needed was, in my opinion, correctly stated by O'Loughlin J in Re Willats; Ex parte Nissan Finance Corporation Limited (1991) 31 FCR 206 at 212. There, his Honour said:- "If the particular circumstances of a case require a debtor to seek and obtain leave to file a defence and/or a counterclaim, and he seeks and obtains that leave, then his counterclaim is one which, in my opinion, he could have set up in the relevant action – and this will be so whether he does or does not file his counterclaim. If, on the other hand, he either fails to seek leave or, having sought leave, fails to obtain it, it cannot be said that the counterclaim thereby becomes one which he could not have set up. His failure to act or his failure to obtain leave can never be the exclusive test. One must look at the substance of the counterclaim and determine whether it comes within the definition of Lukin J in Stokvis' case." 55 The same approach was taken by Einfeld J in Re Scott; Ex parte Scott v Beneficial Finance Corporation Limited (1994) 53 FCR 324 at 327. 56 Here, the Applicant could not, as a practical matter, set up his cross-claim in the District Court because of his own inordinate delay in bringing it. His position was the same as that of the Applicant in Re Scott. As Einfeld J stated in that case, the Applicant had failed to take advantage of the opportunity afforded him to plead his claim in a timely and proper manner. Other reasons why the application should be dismissed 57 The Respondent's counsel submitted that there were various other reasons why the application should fail. 58 However, in view of the conclusion I have reached that the cross-claim did not fall within s 40(1)(g) it is unnecessary to deal with those submissions. Orders 59 The orders I propose to make are that the application be dismissed with costs. I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson. Associate: Date: 23 October 2003 Counsel for the Applicant: J Hassett (Solicitor) Solicitor for the Applicant: Hassett Dixon Counsel for the Respondent: A Coleman (1st day) B J Skinner (2nd day) Solicitor for the Respondent: Kemp Strang Date of Hearing: 11 September 2003 & 15 October 2003 Date of Judgment: 23 October 2003