FEDERAL COURT OF AUSTRALIA Patane v Asteron Life Ltd (formerly Royal & Sun Alliance Financial Services Ltd) (ACN 001 698 228) [2004] FCA 232 BANKRUPTCY – appeal from a decision of Federal Magistrate dismissing application for review of Registrar's decision refusing application to set aside bankruptcy notice – whether appellant had 'counter-claim, set-off or cross demand equal to or exceeding the amount' in the bankruptcy notice – claim under policy of insurance brought in District Court – date at which quantum of 'counter-claim, set-off or cross demand' should be calculated for purposes of s 40(1)(g) of the Bankruptcy Act 1966 (Cth) – appeal dismissed. Federal Court Rules O 77 r 7 Federal Magistrates Court Rules r 20.00A, r 20.03 Bankruptcy Act 1966 (Cth) ss 40(1)(g), 41(7), 41(6A) Insurance Contracts Act 1984 (Cth) District Court Act 1991 (SA) Patane v Royal & Sun Alliance Financial Services Ltd [2003] FMCA 128 affirmed Patane v Associated National Life Insurance [2000] SADC 60 referred to Associated National Life Insurance Co and Tyndall Life Insurance v Patane [2000] SASC 443 referred to In re GEB, a debtor [1903] 2 KB 340 cited In re a Bankruptcy Notice (1934) Ch 431 cited Guss v Johnstone (2000) 171 ALR 598 discussed Moss and Moss v Sun Alliance (1990) 55 SASR 145 referred to Settlement Wine Company Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40 followed Tatt v NRMA Insurance Ltd (1988) 5 ANZ Insurance Cases 75,196 referred to CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 cited Elilade Pty Ltd v Nonpareil Pty Ltd [2002] FCA 909 cited Re Schmidt; Ex parte Angelwood Pty Ltd (1968) 13 FLR 111 distinguished ANTONIO PATANE v ASTERON LIFE LTD (FORMERLY ROYAL & SUN ALLIANCE FINANCIAL SERVICES LTD) (ACN 001 698 228) No S 539 of 2003 LANDER J ADELAIDE 16 MARCH 2004 IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY S 539 OF 2003 BETWEEN: ANTONIO PATANE APPELLANT AND: ASTERON LIFE LTD (FORMERLY ROYAL & SUN ALLIANCE FINANCIAL SERVICES LTD) (ACN 001 698 228) RESPONDENT JUDGE: LANDER J DATE OF ORDER: 16 MARCH 2004 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant 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 SOUTH AUSTRALIA DISTRICT REGISTRY S 539 OF 2003 BETWEEN: ANTONIO PATANE APPELLANT AND: ASTERON LIFE LTD (FORMERLY ROYAL & SUN ALLIANCE FINANCIAL SERVICES LTD) (ACN 001 698 228) RESPONDENT JUDGE: LANDER J DATE: 16 MARCH 2004 PLACE: ADELAIDE REASONS FOR JUDGMENT 1 This is an appeal from a decision of a Federal Magistrate given on 9 May 2003 dismissing an application for review of a decision of a registrar of this Court who had refused to set aside a bankruptcy notice. 2 The issue on appeal is a short one but the circumstances giving rise to the issue of the bankruptcy notice and the consequent proceedings need to be explained. 3 The appellant is a bricklayer who is now aged 51 and who has been carrying on his trade since 1972. 4 On 1 May 1985 he entered into a contract of insurance entitled 'Income Continuation Insurance Policy' with the Associated National Life Insurance Co Ltd (Inc in NSW). The respondent to this appeal is the successor to that insurer. The circumstances in which the present respondent came to be the insurer are not important. There is no dispute that the respondent issued the policy of insurance and that the appellant is the insured. The policy offers a form of income protection. 5 The policy responds in these circumstances: 'During any one continuous period of Disability whilst this Policy is in force, a Monthly Benefit (being the Insured Benefit stated in the Schedule subject to General Provisions and Conditions No 7 of this Policy) shall be paid commencing from the end of the Waiting Period and terminating at the end of the Benefit Period.' 6 The appellant suffered an injury to his right arm and shoulder on 12 November 1995 and the respondent paid monthly benefits for the disability arising out of that injury. On or about 6 July 1996 he suffered an injury to his lower back and groin. On 13 July 1996 he suffered a further injury to his lower back and groin and he claimed and received monthly benefits. On or about 18 January 1997 he suffered an injury whilst working on a building site in the nature of an aggravation of pre-existing disc degenerative changes in his spine. He claimed that he suffered disability and made a further claim. The respondent admitted the claim and paid benefits pursuant to the policy until February 1998, when a medical practitioner who examined the appellant on behalf of the respondent reported that the appellant was fit to continue in full-time work as a brick layer. 7 The appellant brought proceeding, in the District Court in South Australia (the first action) against the respondent seeking a declaration that the contract of insurance to which I have referred was in existence, a declaration that the appellant was suffering from a disability, a declaration that the respondent had failed to 'properly pay benefits to the [appellant] in respect of his total and permanent disability', a money sum representing the benefits under the policy, a further sum representing 'damages for breach of contract and breach of duty of good faith', and lastly exemplary damages. 8 In the first action the appellant claimed that he was partially disabled, as a result suffered a loss of income, and that the contract of insurance required the respondent to compensate him for that loss. The details of the claim and the issues involved (which were many) are unimportant. What is important is that that claim was in respect of what I might loosely call a partial disability. 9 The appellant succeeded in his claim in part before the trial judge, who made the first declaration sought and a declaration that the respondent had wrongfully terminated the proportion of monthly benefits payable to the appellant and that the appellant was entitled to receive the same until 30 June 1998. The trial judge, however, refused to make a declaration that the appellant was entitled to receive proportionate monthly benefits from 1 July 1998 to 30 June 1999: Patane v Associated National Life Insurance [2000] SADC 60. 10 The respondent appealed from that decision to the Full Court of the Supreme Court of South Australia which allowed the appeal and set aside the declarations made by the trial judge and entered judgment for the respondent: Associated National Life Insurance Co and Tyndall Life Insurance v Patane [2000] SASC 443. 11 The Full Court did not need to consider, as the trial judge had, whether the appellant had suffered an injury and whether he was genuine in his claim that he had suffered a disability which prevented him carrying out his trade. The Full Court reached its conclusion that the appellant was not entitled to the declarations sought, or any money sum, because the appellant had not proved before the trial judge that he had suffered any loss of income which gave rise to a benefit under the contract of insurance. 12 The Supreme Court made an order requiring the appellant to pay the respondent's costs of the trial and of the appeal. 13 The parties agreed the costs of the trial in the sum of $75,684.91 and the costs of the appeal in the sum of $22,645.25. 14 The appellant has not paid the respondent's costs. 15 On 12 June 2002 the respondent issued a bankruptcy notice which was served on the appellant on 19 June 2002 and was founded upon an allocatur certifying the costs of trial as $75,684.11. 16 If a debtor fails to comply with a bankruptcy notice the debtor commits an act of bankruptcy. Section 40(1)(g) of the Bankruptcy Act 1966 (the Act) provides for a debtor's obligations if served with a bankruptcy notice. It provides that: 'A debtor commits an act of bankruptcy … (g) if a creditor who has obtained against the debtor a final judgment or final order …has served on the debtor … a bankruptcy notice under this Act and the debtor does not: (i) … within the time specified in the notice; (or) … 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.' 17 On 9 July 2002, pursuant to s 41(7) of the Act, the appellant sought an extension of time within which to comply with the bankruptcy notice, and an order setting aside the bankruptcy notice on the ground that the applicant had a counter-claim set-off or cross demand of the kind referred to in s 40(1)(g) of the Act. 18 Section 41(7) provides: '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.' 19 The bankruptcy notice required the appellant to comply with the notice within 21 days. The proceedings brought by the appellant on 9 July 2002 therefore had the effect of extending the time fixed for compliance with the requirements of the bankruptcy notice, at least until the application for the order setting aside the bankruptcy notice on the ground that the applicant had a counter-claim, set-off or cross demand had been determined. 20 On 20 August 2002 the plaintiff commenced proceedings against the respondent in the District Court of South Australia (the second action) claiming that he had suffered the injuries to which I have referred, and that those injuries had disabled him from fully engaging in his occupation since January 1997 and that since 1 July 2000 he has been totally disabled and thereby prevented from engaging in his usual occupation of a brick layer or any occupation for which he is suited by training, education or experience. 21 In the second action, unlike the first action, the appellant claims that he is totally disabled. He claims to be entitled to the benefits payable under the policy because he has been totally disabled since 1 July 2000. 22 On 14 October 2002 the respondent filed its defence denying any liability for a number of reasons which are unimportant on this appeal. However, as part of the defence, the respondent claimed to be entitled to set-off against any liability to the appellant the sum of $98,329.36 together with interest being the judgment debt 'owed by the [appellant] to the [respondent] in respect of Actions Nos. 459 of 1999 (District Court of South Australia) and 539 of 2000 (Supreme Court of South Australia)'. 23 In that action the respondent sought to set-off the costs of the trial in the District Court which are also the subject matter of the bankruptcy notice. 24 On the same day the respondent made an application to a Master of the District Court seeking the following orders: '… 3. That this action be stayed pending payment by the plaintiff to the defendant of judgment debts owed by him to the defendant as referred to in paragraph (6) of the affidavit of Andrew Mark Dnistriansky … 4. That the plaintiff provide security for the defendant's costs of this action pursuant to Rule 100 ...' 25 On 4 April 2003 the Master made the following orders: '(1) On the defendant's application (FDN 4) there be a stay of proceedings. Liberty to apply for review when the bankruptcy petition is served or within six months. (2) In the alternative on the defendant's application, there be an order that the plaintiff provides security for costs as follows: 2.1 $20,000 up to and including the first day of trial; 2.2 $25,000 payable no later than 28 days prior to the commencement of the trial; 2.3 If the costs are not paid as directed, there will be a stay of proceedings. (3) The plaintiff is to pay the costs of and incidental to this application. (4) Liberty to apply.' 26 It is not for me to comment on the orders made by the Master except to say, in passing, that it is difficult to understand how the Master could have made an order staying the proceedings and at that same time made an order requiring the appellant to give security for costs and, if security was not given, ordering a further stay. 27 In any event, in my opinion, the orders do not affect the appellant's contention that the appellant has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt. True it is that the proceedings have presently been stayed but the future of the stay might depend upon this decision. Moreover, the appellant is entitled to proceed in the District Court of South Australia if the appellant provides the requisite security for costs and I was informed at the hearing of this appeal that the sum of $20,000 had been paid into Court by the appellant on 16 September 2003. 28 It is accepted by both parties that the appellant, in order to succeed on this appeal, and indeed on his application, must establish that he has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt of $75,684.11. 29 Next the appellant must establish that the counter-claim, set-off or cross demand could not have been set up in the action or proceeding in which the judgment debt was obtained. 30 The judgment in the first action was given on 23 May 2000. The judgment in the Full Court of the Supreme Court was given on 19 December 2000. Whilst the orders for costs, one of which is the subject matter of this bankruptcy notice, were not made until 19 December 2000, the costs order, the subject matter of the bankruptcy notice, is in the action which was heard and completed on 23 May 2000. 31 Thus it is common ground that the appellant's second action in the District Court of South Australia could not have been set up in the action or proceeding in which the order for costs was made, because the second action relates only to a period subsequent to the date upon which judgment was given in the first action. 32 The only issue before both the registrar and the magistrate was whether the second action was for a sum of money equal to or exceeding the amount of the judgment debt in the first action, namely the order for costs in the sum of $75,684.11. 33 Both the registrar and the magistrate adopted the same approach. Both examined the contract of insurance to determine whether, if the appellant was successful in his claim that he was totally disabled, he would be entitled to benefits since 1 July 2000 which equalled or exceeded the amount of the District Court costs order. Both concluded, for similar reasons, that the appellant did not have a claim in the second action which would give rise to a sum which equalled or exceeded the amount of the costs. Both concluded, again for similar reasons, that on the true construction of the policy the monthly payment payable to the appellant, in the event that he established that he was totally disabled, could not amount to more than $2,000. I will explain why they reached that conclusion when I refer to the terms of the policy. 34 Both the appellant and respondent on this appeal properly proceeded, in my opinion, on the basis that it could be assumed, for the purpose of these proceedings only, that the appellant has been totally disabled from engaging in or attending to his occupation or engaging in any occupation for remuneration or profit for which the appellant could be reasonably considered qualified by his general experience and training since 1 July 2000. Both parties assumed that he was entitled to claim under the contract of insurance. The matter proceeded before the registrar, the magistrate and myself upon the basis of those assumptions. 35 The quantum of the appellant's claim therefore falls to be determined by reference to his entitlements upon the assumptions properly made. That requires an examination of the contract of insurance. 36 Although the first action in the District Court, and on appeal in the Supreme Court, concerned entitlements for a partial disability, this policy of insurance is essentially an income replacement policy for total disability. There is a circumstance where an insured person is entitled to a proportionate benefit when the insured person has suffered a partial disability but that is an exception to the policy. 37 The insured and the insurer have been identified. The period of insurance is from 1 May 1985 until 1 May 2011. 38 The policy responds if the insured person suffers a continuous period of disability. Disability is defined to mean where the insured is totally unable, due solely to sickness or accident, to engage in or attend to his occupation, during the first two years of the disability, and during the remainder of such disability to engage in any occupation for remuneration or profit for which the person insured could be reasonably considered qualified by his general experience and training. 39 The important point, however, is that the policy responds where the insured is totally unable to engage in his or her occupation and then only if due to sickness or accident. If that be the case, the insured becomes entitled to a monthly benefit (which is a sum stated in the Schedule) which in this case is $2,222. The monthly benefit shall be paid commencing from the end of the waiting period, which in this case is 14 days, and terminate at the end of the benefit period, which is the date when the disability ceases or the expiry date of the period of insurance. 40 The monthly benefit to which I have referred is also subject to the general provisions in the policy of insurance and in particular to condition number seven of the policy. 41 Clause 3 provides: 'Recurrent Disability If, within six months of the cessation of a period of Disability in respect of which benefits have been paid under this Policy, the Person Insured again suffers Disability solely from the same cause or causes then the Waiting Period stated in the Schedule shall be waived in respect of the further period of Disability and such subsequent period of Disability shall be regarded as continuous with and part of the previous period of Disability.' 42 Thus it is that if the insured suffers disability from the same cause or causes within six months of the cessation of a period of disability, then the insured will not be subject to the waiting period. That means the period of 14 days when no benefits are payable would not apply. More importantly however the subsequent period of disability is regarded as continuous with and part of the previous period of disability. That second point may be important in some cases in considering an insured's income and loss of income. I will return to that. 43 The monthly benefit is $2,222 being the sum stated in the Schedule. However, cl 4 applies in some circumstances and in particular in this case. 44 Clause 4 provides: 'Cost of Living Adjustments If this additional benefit is included as stated in the Schedule then the following applies – After a monthly benefit shall have been paid under this Policy continuously for one year it shall be increased at yearly intervals for so long as it is payable by the lesser of the rate of increase in the "Consumer Price Index All Groups Six State Capital Cities" (as published by the Australian Bureau of Statistics from time to time) between the beginning and the end of the year and the percentage stated in the Schedule. At the termination of payments of benefit the Insured Benefit will revert to the amount shown in the Schedule.' 45 Clause 4 does have application in this case. The Schedule provides for additional benefits and it provides for cost of living adjustments of 5 per cent per year. 46 That clause in my opinion is perfectly plain. The additional benefits become payable by the insurer after a monthly benefit has been paid under the policy continuously for one year and not before. The calculation of that additional benefit is in accordance with the terms of cl 4. When the monthly benefit ceases the insured benefit will revert to the amount shown in the Schedule, vis $2,222. 47 Notwithstanding what I think are the clear terms of the policy, the parties agreed that in fact the monthly benefit was $4,125 rather than $2,222. 48 Various correspondence had ensued over the years between the respondent and the appellant relating to the monthly benefits and the premium payable. By letter dated 7 May 2001 the respondent advised the appellant the monthly benefit was $4,125 and that the premium had increased to $212.75 a month. Therefore, for the purpose of this application, the parties agreed that the appropriate monthly benefit was $4,125. 49 I think the parties were also agreed that cl 4 operated in its terms upon the monthly benefit, whatever it might be. Therefore, if the appellant was disabled (totally disabled) and received monthly benefits for more than one year the appropriate monthly benefit increased by the lesser of the consumer price index or 5 per cent. Rather than over-complicate the matter at this stage, I think it was assumed that if the monthly benefit was a figure of $4,125 that sum would increase by 5 per cent after one year of the payment of monthly benefits. I think the additional benefits would accrue as compound interest. 50 The policy's response is subject to cl 7 which reads: 'Limitation of Benefits Payable At any time during a period of Disability, the Insured Benefit stated in the Schedule shall be reduced by the amount of the excess (if any) of the total monthly benefits over 75% Average Income but no such reduction shall be applied to any extent that would cause the aggregate of the Insured Benefit, as reduced, and any other monthly benefits to be less than the lesser of $2,000 and the Insured Benefit stated in the Schedule:- where "total monthly benefits" means the aggregate of the Insured Benefit and any other monthly benefits and "other monthly benefits" means other monetary benefits (other than a business expense or office overhead disability insurance to identify the policyowner) payable on account of any disability of the Person Insured resulting from sickness or accident, converted to an equivalent monthly basis in such manner as the Company in its discretion shall determine: in such conversion calculation, the first One Hundred Thousand Dollars of any lump sum benefits payable in consequence of total and permanent disability, will be disregarded.' 51 The purpose of cl 7 is to prevent an insured person profiting by reason of his or her disability. It guards against circumstances of double insurance in respect of policies either with the insurer or other insurers. It also means that benefits payable under the policy will be limited by reference to any benefits payable under any Workers' Compensation legislation. 52 It was argued by the respondent that, in determining the appropriate insured benefit, the respondent was also entitled to have regard, to any amount paid or payable to the insured under any Commonwealth legislation which provides social securities for persons who are disabled by reason of sickness or accident. No particular benefit was identified. 53 I am not convinced that is so but more particularly I am not convinced that is relevant in the circumstances of this case. There was no evidence before me, nor was there any before the registrar or magistrate, that the appellant was receiving or had received social security benefits resulting from his disability due to his injuries. More particularly there is nothing before me which would establish that he was entitled to receive those benefits irrespective of his entitlements under this contract of insurance. Because the respondent did not identify the particular social security benefit that the appellant had received I cannot know, if the District Court finds that he is entitled to monthly benefits, whether the social security benefit must be repaid. The respondent has not established, in my opinion, either the payment and receipt of social securities resulting from sickness or accident or the appellant's immunity from liability to repay those amounts. 54 There is one further matter that needs to be mentioned. Let it be assumed, as the respondent suggested, that the appellant has received social security benefits by reason of his disabilities caused by his injuries. Those payments would only have been received because the respondent has not paid the monthly benefits under the contract of insurance. Let it be also assumed that the District Court finds that the respondent should have paid those monthly benefits. It is only if the respondent should have and has not paid the monthly benefits that the appellant's receipt of social security benefits becomes relevant. It would be a surprising result if the respondent could take into account in its favour the receipt of those benefits in calculating the monthly benefits when those payments were only paid because of its default. 55 It follows in my opinion that, in the calculation of the insured benefit, in the circumstances of this case, and on the evidence presently available, no regard needs to be had to 'any other monthly benefits', as defined in cl 7, and therefore it would be appropriate to proceed upon the basis that 'the total monthly benefits' is in fact the sum of $4,125 which was the sum that both the appellant and respondent agreed was the sum which should be understood to be the insured benefit in the Schedule. 56 However, that does not mean that cl 7 has no work to do. Indeed it does. The insured benefit must still be calculated in accordance with that part of cl 7 which requires a reduction of the insured benefit ($4,125) by the amount of the excess of the total monthly benefits over 75 per cent of 'average income'. 57 For that purpose, the appellant's average income must be calculated. 58 Average income is defined in the contract of insurance to mean '… the average monthly income earned by the Person Insured in his occupation during the 12 months prior to Disability'. 59 In this case the disability is said to arise on 1 July 2000. Therefore, the appellant's average income must be calculated by reference to his income between 1 July 1999 and 30 June 2000. 60 In fact, the appellant did not work for much of that time because he claimed he was suffering from a partial disability. The respondent asserts that over that period the appellant's tax return indicates an annual income of only $11,948. It is the respondent's contention that it is that sum which must be used, for the purpose of calculating the insured benefit under cl 7. 61 The respondent asserts that the appellant cannot have regard to the financial period 1 July 1998 to 30 June 1999 because there is no period of disability earlier than 1 July 2000. The respondent asserts the appellant cannot claim the benefit of cl 3 of the policy and claim a recurrent disability because disability under the policy means total disability. The respondent argues that because the appellant has not asserted a total disability which ceased within six months prior to 1 July 2000 there is no recurrent disability to which cl 3 applies. 62 I agree with the respondent's argument. Clause 3 only applies in circumstances where the previous disability was a total disability and ceased within six months of the subsequent disability upon which the claim is based. 63 Even if the appellant was suffering from a partial disability in the period six months before he suffered a total disability from the same cause or causes the disabilities are not to be treated as recurrent. The only disabilities which can be treated as recurrent are those which are total disabilities which also have the appropriate connection in time. 64 This conclusion might seem at odds with the issues raised in the first action. In that action the appellant was seeking a proportionate benefit because he claimed he was only able to engage in his occupation to a limited extent. This is the exception I referred to at [35]. 65 Clause 5 provides: 'Proportionate Benefit A Proportionate Monthly Benefit will be paid in accordance with the following provisions if the Person Insured, immediately following a period during which a benefit has been paid for Disability – (i) is able only to a limited extent to engage in his own or any occupation for remuneration or profit, and (ii) does so with the written approval of the Company, and (iii) thereby suffers a Loss of Income of 25% or more of his Average Income. The Proportionate Monthly Benefit shall be such proportion of the Monthly Benefit as the Insured Person's Loss of Income bears to his Average Income. No Proportionate Monthly Benefit shall be payable within ten years of the Expiry Date of the Period of Insurance stated in the Schedule.' 66 The contract of insurance does provide for payment of a proportionate monthly benefit in limited circumstances, but only after a period has been paid for disability. As disability means total disability cl 5 has no application in this second action. 67 In my opinion the respondent's argument that the calculation of the insured benefit pursuant to cl 7 must be by reference to the income returned on the appellant's tax return for the period 30 June 2000 is correct. The calculation should proceed upon the basis that the average annual income was $11,948, i.e. the average monthly income was roughly $995. 68 Because the insured benefit stated in the schedule can be treated as the total monthly benefit and is in the sum of $41,250 that sum must be reduced by the difference between $4,125 and 75 per cent of $995 ($746), namely $3,379. Clause 7 provides that the insured benefit must be reduced by the excess of the total monthly benefits over 75 per cent of the average income. That means that the insured benefit must be treated as $746. In those circumstances the insured benefit is reduced to $2,000 because 'no such reduction shall be applied to any extent that would cause the aggregate of the insured benefit … to be less than the lesser of $2,000 and the insured benefit'. 69 It follows that if the appellant succeeds in the second action, in my opinion, the benefits to which he will be entitled under the contract of insurance are $2,000 per month during the period of his total disablement. He would be entitled to the cost of living adjustments under cl 4 which I shall assume for the purpose of the calculation to be a further sum of 5 per cent after the first year and each subsequent year. 70 That gives rise to the question as to what point in time the calculation should be made in circumstances where the exercise is to quantify the appellant's counter-claim, set-off or cross demand, and in particular to determine whether it equals or exceeds the amount of the judgment debt. 71 During argument various dates were suggested. First the date upon which the appellant brought these proceedings in this Court to set aside the bankruptcy notice (9 July 2002). Secondly, the date upon which the Registrar heard the application (5 December 2002). Thirdly, the date of her decision (16 January 2003). Fourthly, the date of the Magistrate's decision (9 May 2003). Lastly, the date of hearing of this appeal (16 September 2003). I was not directed to any authority directly on point but I think the matter can be resolved by reference to the scheme of the legislation. 72 The purpose of s 40 is to deem various acts to be acts of bankruptcy upon which the creditor can rely. In particular, s 40(1)(g) relieves a creditor of the obligation of proving any of the facts or circumstances which gave rise to the final judgment or order which the creditor has obtained in a Court. After service of the bankruptcy notice, if the debtor fails to comply within the period specified in the notice he or she will have committed an act of bankruptcy. Alternatively he or she can avoid an act of bankruptcy by satisfying 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. If the debtor can establish that he of she has such a counter-claim, set-off or cross demand the bankruptcy notice will be set aside. 73 It seems to me, consistent with the scheme of the legislation, that the quantification of the counter-claim, set-off or cross demand should be at the time when the debtor's application to satisfy the Court of those matters is heard. In most cases it will not matter at what point in time the counter-claim, set-off or cross-demand is quantified but in this case it does. If it were quantified at the date of the hearing before me the counter-claim, set-off or cross demand would exceed the amount of the judgment debt. The appellant's entitlement to the insured benefit under the policy accrues month by month whilst he is totally disabled. It would not be possible for the District Court in my opinion, although this will be a matter for the District Court, to determine the respondent's liability to the appellant after the date of trial because the Court could never know whether the appellant would continue to be disabled within the meaning of the definition in the policy. This is one of these cases therefore where the respondent's liability to the appellant, if the appellant remains disabled, accrues month by month. 74 The counter-claim, set-off or cross demand must exist at the time when the application to set aside the bankruptcy notice is heard: In re G.E.B. a debtor [1903] 2 KB 340; In re A Bankruptcy Notice (1934) Ch 431 at 440 – 441; Guss v Johnstone (2000) 171 ALR 598 at 607. 75 If the time for determining the existence of the counter-claim, set-off or cross demand is the date upon which the proceedings to set aside the bankruptcy notice are heard, logically that should also be the date upon which the quantification of that counter-claim, set-off or cross demand should occur. That follows because it is necessary to determine whether the counter-claim, set-off or cross demand equals or exceeds the judgment debt. 76 In my opinion the point of time at which the quantification of the respondent's liability to the appellant had to be determined was at the date when the respondent's application to set aside the bankruptcy notice was heard by the registrar, namely 5 December 2002. 77 In reaching that conclusion I have not overlooked the nature and content of the registrar's jurisdiction. 78 This Court and the Federal Magistrates Court have concurrent jurisdiction in bankruptcy: s 27 of the Bankruptcy Act. Order 77 r 7 of the Federal Court Rules allows this Court to direct a registrar to exercise the power of the Court 'specified in column 2 of an item in Schedule 3' to the Federal Court Rules. Order 77 r 8 provides for the Court to review a registrar's decision. 79 Rule 20.00A of the Federal Magistrates Court Rules delegates to the registrar the powers in Sch 4 of those Rules: r 20.00A(1)(c). 80 A decision of the registrar made under the power of delegation in r 20.00A of the Federal Magistrates Court Rules is subject to a review in accordance with r 20.03. 81 Such a review is a hearing de novo and as such requires the reviewing magistrate to be satisfied for himself or herself of the matters upon which the registrar's decision was based. In other words the magistrate must consider the matter afresh and reach his or her own decision. It might be said, because the review has that character, the magistrate has to calculate the quantum of the counter-claim, set-off or cross demand at the time of the magistrate's review and therefore have regard to the time which has elapsed since the registrar's hearing. 82 But that would be to give the appellant a distinct advantage. The appellant would be entitled to take advantage of the time which has elapsed between hearings. On the other hand the respondent, who would be entitled to interest on the judgment after the judgment was entered (s 40 District Court Act 1991 (SA)) (DC Act) at a rate prescribed by the District Court Rules, would not be entitled to bring that interest to account. 83 In a case such as this it would always be in a debtor's interests to have the proceedings heard before the registrar and then seek a review and thereby obtain the advantage of the time which has elapsed. 84 Because the question to be determined is whether the judgment debtor has 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 proceedings in which the judgment debt was obtained, it is necessary to examine that matter at a particular point of time. That is so because the second limb of s 40(1)(g) involves a consideration of whether the circumstances raised by the debtor excuse the debtor from compliance with the requirements of the bankruptcy notice. Section 41(7) and the cases decided under that subsection supports the proposition that that exercise should be carried out as soon as possible after the debtor has been served with a bankruptcy notice. 85 In my opinion therefore, the time at which the quantum of the counter-claim, set-off or cross demand should be determined is at the first hearing of the proceeding to set aside the bankruptcy notice, which in this case was before the registrar. Sometimes that first hearing might be before a magistrate or a judge but the principle is the same. The time to ascertain whether a counter-claim, set-off or cross demand exists, and if it exists the quantum, is at that first hearing. 86 I think that conclusion is supported by s 41 of the Act. If at that first hearing the Court concludes that the counterclaim, set off or cross demand does not exist or is not equal to the judgment sum and the proceedings are dismissed, s 41(7) operates and, unless an extension of time is granted under s 41(6A), the act of bankruptcy is complete. It would be a strange result if a debtor failed before a registrar but obtained an extension of time under s 41(6A), which prevented the act of bankruptcy completing, but succeeded before the magistrate on review only because the review was heard later. In those circumstances the debtor would succeed in avoiding the consequences of the bankruptcy notice by delay. 87 At the time the registrar heard the application, upon the assumptions already made, the appellant had been disabled for 29 months. For the reasons already given the insured benefit was in the first year $2,000, in the second year $2,100 per month and in the third year $2,205 per month. As at 5 December 2002 the respondent could only have been liable to the appellant in the sum of $60,225.00. The respondent would also be liable to the appellant for interest either under the DC Act or the Insurance Contracts Act 1984 (Cth) (IC Act) but not both. 88 Section 39 of the DC Act provides: ' 39 (1) Unless good reason is shown to the contrary, the Court will, on the application of a party in whose favour a monetary judgment has been, or is to be, given include in the judgment an award of interest in accordance with this section. (2) The interest— (a) will be calculated at a rate fixed by the Court; and (b) will be calculated in respect of a period fixed by the Court (which must, however, in the case of a judgment given on a liquidated claim, be the period running from when the liability to pay the amount of the claim fell due to the date of judgment unless the Court otherwise determines); and (c) is, in accordance with the Court's determination, payable in respect of the whole or part of the amount for which judgment is given. (3) The Court may, without proceeding to calculate interest under subsection (2), award a lump sum instead of interest. (4) This section does not — (a) authorise the award of interest on interest; (b) authorise the award of interest or exemplary or punitive damages; (c) affect damages for dishonour of a negotiable instrument; (d) authorise the award of interest (except by consent) on a sum for which judgment is given by consent; (e) limit or affect the operation of any other enactment or rule of law providing for the award of interest.' 89 Section 57 of the IC Act provides: '(1)Where an insurer is liable to pay a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section. (2) The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days: (a) the day on which payment is made; (b) the day on which payment is sent by post to the person to whom it is payable. (3) The rate at which interest is payable in respect of a day included in the period referred to in subsection (2) is the rate applicable in respect of that day that is prescribed by, or worked out in a manner prescribed by the regulations. (4) This section applies to the exclusion of any other law that would otherwise apply. …' 90 It can be seen that the two sections do not give rise to the same entitlement for a successful party to interest. No argument was put to me as to which section prevails. In particular, no argument was put to me that the two sections were inconsistent and that the Commonwealth legislation would prevail by virtue of s 109 of the Commonwealth Constitution as was held in Moss and Moss v Sun Alliance (1990) 55 SASR 145. 91 In Settlement Wine Company Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40, Perry J refused to follow Moss and Moss v Sun Alliance. He preferred the reasoning of Rogers J in Tatt v NRMA Insurance Ltd (1988) 5 ANZ Insurance Cases 75, 196 and said, at 83: ' In my opinion, the liability of the insurer to pay interest created by s 57(1) is a liability which can be regarded as running concurrently with the liability under some other provision of the law to pay interest, so long as the rate is no lower than the rate prescribed pursuant to s 57. I do not find anything either "expressly or by necessary intendment" in s 57 to indicate that it is operate to oust provisions which would otherwise apply and which would operate to oblige the insurer to pay interest at a rate higher than that prescribed in the section. The section is, after all remedial.' I do not need to resolve the conflicting authorities. I will proceed upon the basis most favourable to the appellant. That will adopt, without deciding that point, the procedure also adopted by Perry J. 92 The rates of interest payable pursuant to the IC Act are prescribed by reg 32 of the Insurance Contracts Regulations 1984 (Cth) (the Regulations). In this case, the applicable rate of interest is to be found by calculating the mean of the rates of the 10-year Treasury Bonds (as set by the Reserve Bank of Australia) at the end of each half financial year falling within the relevant period, and adding 3 per cent. 93 It is unnecessary to calculate the precise rates payable for the purposes of this case because no submissions were put to me concerning the date from which it is said to have been unreasonable for the respondent to have withheld payment of benefits. If the appellant is ultimately successful in the District Court, it will not necessarily be the case that this date will coincide with the date from which the appellant was entitled to benefits: see CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 410; Elilade Pty Ltd v Nonpareil Pty Ltd [2002] FCA 909. 94 The applicable rate for pre-judgment interest in the District Court of South Australia is in the discretion of that Court: s 39(2)(a) DC Act. The rate fixed by the Court might be less than that prescribed under the IC Act and regulations. However, the period in respect of which the interest is payable is likely to be greater if interest is awarded under the DC Act. 95 I think the appropriate course, in accounting for interest in the claimed 'set-off, counter-claim or cross-demand' is to assume that the appellant would pursue pre-judgment interest in the District Court pursuant to s 39 of the DC Act. The rate payable pursuant to that provision is a rate 'to be fixed by the Court'. I think it would be fair to the appellant in these proceedings to assume that the Court would be guided by the IC Act and regulations in fixing an appropriate interest rate which would be considerably higher than that normally awarded by a State court. 96 A rough method of calculation, but not so rough as to be misleading, would be to allow interest at the rate of 9 per cent on the whole of the sum mentioned in par 87 for half the period over which interest would have accrued. The interest for which the respondent would be liable would not exceed $6,550. 97 The appellant also argued that the policy provided for the waiver of premiums during the period that the policy owner is in receipt of benefits: cl 12. The appellant argued that therefore those sums should be taken into account in a consideration of the respondent's liability to the appellant as at the date these proceedings were brought. 98 In my opinion that proposition should be rejected for two reasons. First, because no claim has been brought against the respondent for those sums in the District Court. Secondly, and more importantly, there is no evidence that the premiums have been paid. The respondent could only be liable to the appellant if during the period the appellant has paid these premiums and the appellant is entitled to them under a restitutionary principle. I think no sum under this head should be taken into account. Even if I am wrong and the premiums had been paid the recoverable amount would not exceed $6,200. The total of the appellant's counter-claim, set-off or cross demand, allowing everything in the appellant's favour, could not at the date of the hearing before the Registrar exceed $72,975 which is less than the judgment sum. That sum does include the sum of $6,200 which, for the reasons given above, I do not think the appellant has proved would be due under any cross-claim, set-off or cross-demand. 99 It follows therefore that the appellant's claim against the respondent, even if successful, would not, at the date of the hearing of the application to set aside the bankruptcy notice, be equal in value to, or exceed the amount of the judgment debt. For those reasons the appeal must be dismissed. 100 The appellant argued that if this Court found the appellant's claim was less than the amount of the judgment debt this Court and indeed the courts below had the power to permit the appellant to pay the difference between the debt and the amount at which this Court quantified the appellant's claim: re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111. That case however concerned the making of a sequestration order. Gibbs J (as he then was) said at 116: 'Where, however, the debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor the position seems to me to be different. As a general rule this Court is not an appropriate forum to decide such a claim and is limited to forming a view as to whether it appears that there is sufficient validity in the debtor's claims to justify a dismissal or adjournment of the petition. I agree in general with what was said in Re Player in relation to this question. Considerable evidence directed to this issue has been given before me and it seems to me that I ought to consider this evidence for the purpose of deciding only whether it is probable that the debtor has against the petitioning creditor a claim which is likely to succeed. If I am satisfied that the debtor has a claim against the petitioning creditor equal to or exceeding the amount of the judgment debt, I should not make a sequestration order. If, however, it appears that the debtor has a claim which is less than the amount of the petitioning creditor's judgment debt, the proper course would seem to be to require the debtor, if he desires to avoid a sequestration order, to pay the difference between the amount of the judgment debt and the amount which it seems probable to me that he will recover in the proceedings against the petitioning creditor. In many cases it would be more convenient, assuming that the debtor showed that he had a real claim to litigate, to adjourn the proceedings to enable his claim to be tried in the ordinary courts [sic], but that course was not taken in the present case, partly because the existence of any valid claim was vigorously denied by the petitioning creditor and partly because the proceedings in the Supreme Court have been somewhat dilatory.' 101 An application under s 40(1)(g) raises different issues. The debtor will have committed an act of bankruptcy is the bankruptcy notice if not complied with. That entitles the judgment creditor to issue a petition based on that act of bankruptcy. The debtor can still satisfy the Court that he or she is able to pay his or her debts (s 50(2)) at the hearing of the judgment debtor's petition. At that time the course suggested by Gibbs J may for the reasons given by him be appropriate. However in my opinion an applicant under s 40(1)(g) of the Act must satisfy all of the elements of s 40(1)(g) and establish to the requisite level of satisfaction that he or she has a counter-claim set-off or cross demand equal to or exceeding the amount of the judgment debt. 102 I should mention two other arguments advanced by the respondent which I do not need to resolve in view of my opinion that, as a matter of fact, the appellant's case fails. 103 Clause 16 of the contract of insurance provides: 'Suspension of Benefits The Company shall not be liable under this Policy if the Person Insured ceases to be engaged in a gainful occupation for more than two months in any period of consecutive months unless it agrees otherwise in writing. Prior to such agreement, the Company may require variation of the terms of this Policy.' 104 The respondent argued that there was evidence in an exhibit to an affidavit of the appellant's former solicitor which would suggest that during the 12 month period prior to 1 July 2000 the appellant was unemployed and receiving unemployment benefits. It followed, so the respondent argued, the appellant had not been in gainful occupation for more than two months in a period of consecutive months without the agreement of the respondent and therefore the respondent was relieved of liability. 105 That affidavit was not before me in the Appeal Book and I have not analysed the evidence in the exhibit to that affidavit, nor was I asked to. 106 Upon the evidence before me on the appeal, I am not able to reach any conclusion as to whether the evidence would support a finding which might allow the respondent to argue that it has no liability whatsoever under the contract of insurance. 107 I do note, however, the respondent's defence in the second action has not raised this matter as a defence to the appellant's action. 108 The respondent also argued that the appeal was incompetent or alternatively the appellant required an extension of time within which to appeal. I have not needed to resolve that argument because I have decided the matter on its merits. 109 However, it was the respondent's argument that when the registrar made her order dismissing the appellant's application, the provisions of s 41(7) ceased to operate at the expiration of that day. The respondent argued that the appellant had not sought any other extension of time and, in those circumstances, by operation of s 40, the debtor had committed an act of bankruptcy at the expiration of 16 January 2003. It was the respondent's argument that on 16 January 2003 the appellant should have sought an extension of time under s 41(6A) of the Act to keep the respondent's initial application alive. 110 In the appellant's notice of appeal no order was sought seeking any extension of time. In a separate notice of motion the appellant sought an order extending time for compliance with the bankruptcy notice pursuant to s 41(6A) of the Act or in the alternative a stay of the bankruptcy notice pending the determination of the appeal against the Magistrate's decision. 111 The appellant argued that he was entitled to an extension of time under s 41(6A) which reads: '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.' 112 Section 41(6C) is not relevant. 113 The respondent argued that s 41(6A) was spent on 16 January 2003 because it only operated before the expiration of the time fixed for compliance with the requirements of the bankruptcy notice. Upon the expiration of the day on which the registrar made her order time expired for compliance with the bankruptcy notice. 114 In Guss v Johnstone (supra) the High Court (Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ) said at [51] – [55]: 'By reason of s 27 of the Bankruptcy Act, the reference in ss 40 and 41 to "the Court" is, relevantly, a reference to the Federal Court. Section 14(1) of the Federal Court of Australia Act provides that the Court may be constituted by a single judge or as a Full Court. Sundberg J was exercising the jurisdiction of the Federal Court. On 30 May 1997, he declared that the Court was not satisfied that the judgment debtor, the appellant, possessed a counter-claim, set-off or cross demand of the type referred to in s 40(1)(g). The effect of s 41(7) was to extend time for compliance with the requirements of the bankruptcy notice (which involved either paying the debt of $4,989.40, or securing its payment to the satisfaction of the Federal Court or of the respondent, or compounding the sum to the satisfaction of the respondent) until 30 May 1997. No application was made under s 41(6A) for any other extension, and no attempt was made to secure payment of the sum, pending the resolution of any other dispute between the parties, to the satisfaction of the court. On 30 May 1997 the court determined that it was not satisfied of the matter referred to in s 41(7). By the end of 30 May 1997 the appellant had not, within the time referred to in s 40(1)(g), as extended by s 41(7), either complied with the requirements of the notice or satisfied the Federal Court that he had a counter-claim, set-off or cross demand of the relevant kind. Consequently, by virtue of s 40, he committed an act of bankruptcy. When on 1 July 1997, on the hearing of an application made by notice of motion filed on 23 June 1997, Sundberg J refused to stay the order of 30 May 1997 by which he declared that the Court was not satisfied of the matters referred to in s 40(1)(g), Sundberg J rightly pointed out that a grant of stay on 1 July would not cancel the act of bankruptcy which had already been committed. In James v Abrahams, Deane and Lockhart JJ held that the language of s 41(6A), including its express stipulations as to time, makes it impossible to imply any general power in the Federal Court to extend the time for compliance with a bankruptcy notice in a case which does not fall within s 41(6A). In any event, no application was made to Sundberg J to do anything other than stay his previous orders. The only order he had relevantly made was a declaration, and, by force of the statute, that had already resulted in certain consequences. The Full Court was right to dismiss the appeal against the decision of Sundberg J of 1 July 1997.' (footnotes omitted) 115 I think the respondent's argument is correct. I think that the applicant needed to obtain an order under s 41(6A) on 16 January 2003. Because the applicant did not obtain that order by the end of that day the act of bankruptcy was committed. If that is so not only was the appeal to this Court incompetent but so also was the application for review to the magistrate. 116 However the High Court also said in Guss v Johnstone (supra) at [62] – [63]: 'There are examples of cases where appellate courts have considered, on their merits, appeals against decisions under provisions corresponding to ss 40(1)(g) and 41(7). It is true that there is no statutory grant of power to annul an act of bankruptcy, or to extend the time for compliance with a bankruptcy notice other than in a case where the conditions of s 41(6A) have been satisfied. Suppose, however, that it had been demonstrated to the Full Court that the decision at first instance was based upon an error of law, perhaps involving a misapprehension as to the test to be applied in considering whether the judge was satisfied within the terms of the statute. In such a case, the Full Court may well have set aside the declaration. We are unable to accept that whenever, in a proceeding under s 40(1)(g) and s 41(7), a judge at first instance has determined that he or she is not satisfied of the matter referred to in s 41(7), and has declined to interfere with the process initiated by a creditor, no appellate reversal of that decision, whether by the Full Court or by this court, can alter the consequences of the decision. In a proper case it would have been within the power of the Full Court to set aside the declaration made by Sundberg J. The consequences for proceedings and events that had occurred in the meantime would vary with the circumstances, but they could include the same consequences as flowed with the order in Streimer v Tamas, where the statutory power to extend time for compliance with a bankruptcy notice, given by s 41(6A), was exercised after an act of bankruptcy had been committed.' (footnotes omitted) 117 There would appear therefore to be a residual power in the Court, at least where sitting as an appellate court (the magistrate was sitting on review), to reverse a decision dismissing an application by a debtor under s 40(1)(g) even where no application has been made under s 41(6A) before the act of bankruptcy has been committed. 118 However, I do not have to determine whether there is power or the power should be exercised because in my opinion the appeal should be dismissed for other reasons. 119 I have recorded the argument in case the matter needs to be reconsidered elsewhere. 120 In my opinion the appeal should be dismissed. I certify that the preceding one hundred and twenty (120) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander. Associate: Dated: 16 March 2004 Counsel for the Applicant: Mr S Tilmouth QC with Mr A Richards Solicitor for the Applicant: Lipson Street Chambers Counsel for the Respondent: Mr M J O'Donnell with Mr S Lipp Solicitor for the Respondent: Thomson Playford Date of Hearing: 16 September 2003 and 19 December 2003 Date of Judgment: 16 March 2004