Re Neil James John Duckworth Ex Parte: Alan Kevin Lockett and Elizabeth Evelyn Lockett [1987] FCA 34 (12 February 1987)

FEDERAL COURT OF AUSTRALIA

Re: NEIL JAMES JOHN DUCKWORTH
Ex Parte: ALAN KEVIN LOCKETT and ELIZABETH EVELYN LOCKETT
No. P635 OF 1986
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
French J.

CATCHWORDS

Bankruptcy - creditors Petition based on bankruptcy notice - bankruptcy notice demanding payment of judgment debt - application to set aside bankruptcy notice - requirements for affidavit as to counter-claim, set-off or cross demand - prima facie case - mere assertion insufficient - affidavit defective - no statutory extension of time - power of Court to extend time - abortive attempt to set aside judgment - dilatory conduct by debtor - discretion of court to refuse extension of time - consequential dismissal of application to set aside notice - discretion to refuse sequestration order - sequestration order made.

Bankruptcy Act 1966 s.30(1), s.41

Ebert v Union Trustee Co. of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346; Re: Billinghurst; Ex parte Australia and New Zealand Banking Group Limited (1978) 36 FLR 62, Re: Brink Ex parte The Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135; Vogwell v Vogwell (1939) 11 ABC 83; Eastick v Australia and New Zealand Banking Group Ltd (1981) 53 FLR 91; Re: Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125

HEARING

PERTH
12:2:1987

Counsel for the debtor : Mr D.R. Clyne instructed by Malone Dzieciol & Co.

Counsel for the creditors : Mr V.A. Bull instructed by Parker & Parker.

ORDER

The application to extend the time limited for compliance with the bankruptcy notice be dismissed.

Application to set aside the bankruptcy notice dismissed.

NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

DECISION

By their petition filed in this Court on 7 October 1986 the creditors seek a sequestration order against the estate of the debtor arising out of his failure to comply with a bankruptcy notice. The debtor opposes the petition and by an application filed on 4 December 1986 seeks to extend the time for compliance with the bankruptcy notice and an order setting the notice aside.

2. On 20 June 1986 the creditors applied for and obtained the issue by the Registrar in Bankruptcy of a notice pursuant to s.41 of the Bankruptcy Act 1966.

3. By the notice demand was made for payment of the sum of $21,583.12 said to be due by the debtor to the creditors pursuant to a default judgment given in the District Court on 30 April 1986.

4. The time limited by the notice for compliance with its demand was 14 days after service on the debtor.

5. Service was effected on 11 September 1986.

6. On 25 September 1986 the debtor filed an affidavit in relation to the bankruptcy notice.

7. By his affidavit he acknowledged that the creditors had obtained judgment against him in the District Court but contended that he had a counterclaim against them exceeding the amount of the judgment. He said that they had had business dealings over 5 years since 1979. During that time he had made payments on behalf of the creditors to Western Underwriters Limited and Alliance Acceptance Corporation and made a number of loans to them.

8. In paragraph 3 of the affidavit he said:-

"The counterclaim that I have against the Judgement
Creditor is one that could have been set up in the
action in which the Judgement was obtained. However
since early this year, I have been having considerable
problems with one of my companies, namely Westpaper and
Pulp Ltd. The company has had financial difficulties
and all of my time and effort has been focused on
raising funds to keep the company operating, defending
various actions which have been brought against the
company and generally overseeing the companies affairs.
There problems have continued throughout the year, and,
unfortunately, are still continuing." (sic)

9. The affidavit went on to say he had filed an application in the District Court seeking to set aside the judgment but that due to problems with his company he did not have time to assemble all relevant information for an affidavit in support of the application. He said:-

"I am now in the process of getting all of the relevant
information together, and I should have it shortly. The
payments and the loans which are the subject of my
counterclaim were made over a period of some four years.
During that time I have had accounts with a number of
different financial institutions, and I am going through
all my transactions over that period of time. This
process is however taking some time."

10. The affidavit went on to say that he had issued a writ against the creditors to recover the moneys allegedly owing to him.

11. Exhibited to the affidavit was a copy of a writ issued out of the District Court on 23 September 1986 with an Indorsement of Claim in the following terms:-

"The plaintiff's claim is for

(a) The sum of $23,000.00 being monies paid by the
Plaintiff on behalf of the Defendants to various
creditors by way of repayments on loans taken out
by the Defendants and further monies owing to the
Plaintiff by way of loans advanced by the Plaintiff
to the Defendants and which monies are due and
owing to the Plaintiff.

(b) Interest on the said sum of $23,000.00 pursuant to
Section 32 of the Supreme Court Act."

12. The time limited by the bankruptcy notice for compliance with its terms has long expired. However a preliminary question arises whether the debtor has by filing his affidavit obtained the benefit of a statutory extension of time within which to comply with the notice.

13. The issue arises in this way. Paragraph 40(1)(g) of the Bankruptcy Act provides:-

"A debtor commits an act of bankruptcy in each of the
following cases:-

.

.

.

(g) if a creditor who has obtained against the 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 fixed by the Registrar
by whom the notice was issued; 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 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
could not have set up in the action or proceeding
in which the judgment or order was obtained."

14. The above paragraph has to be read together with sub-s. 41(7) which provides:-

"Where, before the expiration of the time fixed for
compliance with the requirements of a bankruptcy notice,
the debtor has filed with the Registrar an affidavit to
the effect that he 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."

15. In relation to the application of these provisions the creditors make the following submissions:-

1. The affidavit is not an affidavit to the effect
that the debtor has a counter-claim, set-off or
cross demand of the kind referred to in paragraph
40(1)(g).

2. The conditions for the statutory extension of time
under sub-section 41(7) of the Bankruptcy Act have
not been met.

3. The time for compliance having expired the Court
has no power to extend it.

16. In order to escape the consequences of non-compliance with a bankruptcy notice para. 40(1)(g) of the Act requires the debtor to satisfy the Court that:-

(i) He has a counter-claim, set-off or cross demand
equal to or exceeding the amount of the judgment
debt.

(ii) He could not have set up such counter-claim,
set-off or cross demand in the action in which the
judgment or order was obtained.

17. To satisfy the Court of the existence of the relevant counter-claim, set-off or cross demand, it is not necessary that the debtor establish its validity to the hilt.

"The debtor must show that he has a prima facie case
even if then and there he does not adduce the admissible
evidence which would make out a prima facie case before
a Court trying the issues that are involved in the
counterclaim, set-off or cross demand."
- See Ebert v Union Trustee Co. of Australia Ltd [1960] HCA 50; (1960)
104 CLR 346 at 350; Re: Billinghurst; Ex Parte Australia
and New Zealand Banking Group Limited (1978) 36 FLR 62,
Re: Brink Ex parte The Commercial Banking Company of
Sydney Ltd (1980) 44 FLR 135.

18. In Vogwell v Vogwell (1939) 11 ABC 83, a decision of the High Court concerned with s.52(j) of the Bankruptcy Act 1924, Latham CJ with whom Starke and McTiernan JJ agreed, said at 85:-

"The words of the section are that the debtor must
satisfy the Court that he has "a counterclaim, set-off
or cross demand which equals or exceeds the amount of
the judgment debt". In the first place it is
accordingly clear that the counterclaim, set-off or
cross demand must be something sounding in money. It is
also obvious that the section does not apply or refer to
an already established right. If there were an already
established set-off, for example, the judgment debt
would have been reduced pro tanto and if there had been
a counterclaim or cross demand which had already been
applied as against the amount of the judgment the
position would have been entirely different. What the
section contemplates is a claim to the enforcement of a
right sounding in money. It must be a real claim; it is
insufficient that the debtor believes that he has a
claim, and the authorities show that the matter to which
the Court looks is this, - whether it is just that the
claim should be determined before the bankruptcy
proceedings are allowed to continue; in other words,
whether it is a claim which it is proper and reasonable
to litigate. That is the effect of the decisions in Re
Rivett; Ex parte Edward Faye Ltd ((1932) 5 ABC 182) and
Re Duncan; Ex parte Modlin ((1917) 17 SR (NSW) 152).
Therefore there must appear to be some substance in the
counterclaim, set-off or cross demand which is relied
upon."

19. In Re: Brink (supra) Lockhart J. said that the affidavit filed under sub-s.41(7) could not merely contain an assertion that the debtor has a counterclaim, set-off or cross demand which he could not have set up in the action in which the judgment or order was obtained.

20. At the same time his Honour accepted that in many cases it would be difficult in the time available for the debtor to present more than an outline of his case. As his Honour said at page 142 and I respectfully agree:-

"I do not think any good purpose would be served by my
attempting to express a definitive formula as to what
the original affidavit must contain. That must depend
in every case on the particular facts and circumstances:
see Re A Debtor; Ex parte The Debtor v Tossoun per
Upjohn L.J.

The fact that it is within the power of the Court to
determine when the hearing of a matter under section
41(7) will take place, and thus the length of the
extension of time to comply with the requirements of the
bankruptcy notice; and the difficulty if not
impossibility in some cases of the initial affidavit
being anything more than a mere outline of the debtor's
case due to the temporal constraints imposed by the
notice, all point to the conclusion that the Courts
should adopt a benevolent construction to the initial
affidavit."

21. In the event, he held that the affidavit in that case was defective as it did not indicate that any counterclaim, set-off or cross demand available to the applicant could not have been set up in the District Court proceedings.

22. These general observations made by Lockhart J. were approved by the Full Court in Eastick v Australia and New Zealand Banking Group Ltd (1981) 53 FLR 91 at 93.

23. The affidavit filed by the debtor gives a very sketchy outline of an alleged counterclaim said to arise from repayments made by him on behalf of the judgment creditors to Western Underwriters Ltd and Alliance Acceptance Corporation.

24. It is also contended that a number of loans were made by the debtor to the creditors during the relevant period.

25. Adopting a benevolent approach to its construction, the affidavit does not indicate even in outline, the basis upon which the quantum of the counterclaim is said to exceed the judgment debt.

26. At the time of swearing the affidavit, the debtor was evidently still embarked on his voyage of discovery in relation to the amounts and details of payments allegedly forming the basis of his claim against the creditors.

27. This view is reinforced by his evidence in a later affidavit sworn on 4 December 1986 in support of the application to set aside the bankruptcy notice in which he said:-

"I have recently been endeavouring to collate the
evidence necessary to show that I have paid substantial
sums of money on behalf of the Respondents either to
them or to Creditors of theirs and to that end I have
obtained as proof cheque butts totalling in excess of
$9,000.00 and am still endeavouring to obtain further
financial information in that regard. It shall be
necessary for me to search records of a number of
companies including one which is presently in
liquidation and it is for that reason that it is taking
such a lengthy period of time for me to obtain the
evidence."

28. Although not ultimately relevant to the determination of the sufficiency of the affidavit filed on 25 September 1986, the sworn oral testimony of the debtor supports the view that he himself has little concept of the extent of his alleged counterclaim.

29. From that evidence it appeared that many if not all, of the payments allegedly made by him on behalf of the creditors or by way of advance to them were in fact made by cheques drawn on the accounts of companies controlled by the debtor. In one case the company concerned was West Valley Holdings Pty Ltd the trustee of the debtor's family discretionary trust. In his evidence he produced a cheque butt said to show a payment of $5,000 to Western Underwriters Ltd on 12 September 1984. The cheque butt represented a cheque drawn on the account of West Valley Holdings Pty Ltd. The following exchange then took place:-

Q. Well, how would that be a counterclaim or set-off
against his loan to you? --- Well, it is my money,
Sir. I loaned the money; the money is owed by me.
I have a large group of companies - at the moment
there is a bit of turmoil through taxation doing a
similar type of things. The money belongs to me.
I invest it in the companies and offset debts. I
do not have anything personally in my name except
for the trusts and the companies.

Q. Well, when you say the money is yours, you mean
that money that is held by your trustee?

A. By me Sir. I put the money into the company to run
the company.

Q. Yes. Well it came from you but when it was paid to
Western Underwriters on 12 September 1984 it came
out of an account controlled by West Valley
Holdings Pty Ltd?

A. That is right Sir. Instead of me drawing a wage
from the companies or whatever I am allowed to
draw, say, $80,000 a year whatever, and I just use
this money as I require it, never exceeding to
upset (sic) whatever I have to pay out.

Q. Yes. And that is true of all the payments?

A. All the payments and all the companies operate the
same way.

Q. All the payments that you would rely upon as a
counter claim or set off were made by the
companies?

A. The companies, yes, sir. It is as if I was using
my own money. I do not have my own cheque books as
such and I do not have my own money as such. I set
off all debts of my own - personal - through the
companies - yes, about the same way.

.

.

.

Q. So were those debts paid at your direction - those
amounts paid at your direction?

A. Yes, absolutely.

Q. And are there loan accounts, and so on, in the
companies?

A. Yes.

Q. In the trust?

A. Yes

Q. And are these amounts debited against your loan
accounts, and so on?

A. Yes. My books are a long way behind because of
other things. You personally know what the problem
is with my accountants. A full investigation would
reveal that it belongs to myself."

30. Quite apart from the difficulties faced by the debtor in establishing the existence of a counterclaim of the required amount, there is a fatal flaw in his initial affidavit so far as the requirements of sub-s.41(7) are concerned.

31. For para. 3 of the affidavit positively asserts that the counterclaim could have been set up in the action in which judgment was obtained. It then goes on to excuse the failure to set it up by reference to pressure on the debtor to attend to the affairs of one of his companies.

32. In an affidavit which made no express statement that a counterclaim, set-off or cross demand could not have been set up in the action or proceeding in which judgment was obtained, the Court might by consideration of the nature of the claim infer that it could not.

33. The present is not such a case and the affidavit expressly asserts the contrary.

34. In my opinion the affidavit was not of the kind contemplated by s.41(7) and the statutory extension of time did not operate. Thus as at 26 September 1986 the debtor had failed to comply with the bankruptcy notice.

35. Nevertheless by an application filed 4 December 1986 he seeks from the Court an order setting aside the bankruptcy notice and asks that the Court extend time for compliance with it pending the determination of the application.

36. Counsel for the creditors contends that these applications having been lodged after the time for compliance has expired, there is no power in the Court to grant any extension.

37. The power of the Court to extend the time for compliance with a bankruptcy notice is conferred by sub-s.41(6A). This must be read together with sub-s.41(6c).

38. Subsection 41(6A) provides:-

"41(6A) Where, before the expiration of the time fixed
by the Court or the Registrar 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 to set aside the bankruptcy
notice has been filed with the Registrar,

the Court may, subject to sub-section (6c), extend
the time for compliance with the bankruptcy
notice."

39. Sub-section 41(6c) provides:-

"41(6C) Where -

(a) a debtor applies to the Court or the Registrar
for an extension of the time for complying
with a bankruptcy notice on the ground that
proceedings to set aside the judgment or order
in respect of which the bankruptcy notice was
issued have been instituted by the debtor; and

(b) the Court or the Registrar, as the case may
be, is of the opinion that the proceedings to
set aside the judgment or order -

(i) have not been instituted bona fide; or

(ii) are not being prosecuted with due
diligence,

the Court or the Registrar, as the case may be,
shall not extend the time for compliance with the
bankruptcy notice."

40. The power is conditioned on one or other of two events which must have occurred before the expiry of the time limited for compliance with the requirements of the notice:-

(i) Proceedings to set aside the judgment or order in
respect of which the bankruptcy notice was issued
have been instituted by the debtor.

(ii) an application to set aside the bankruptcy notice
has been filed with the registrar.

41. The debtor's evidence was that he attempted to set aside the judgment by filing an application but did not have time to get together all relevant information for an affidavit in support of the application.

42. In an affidavit sworn by a law clerk employed by the solicitors for the creditors, a chronological account of proceedings in the District Court was given.

43. It appears that the creditors issued their writ on 15 April 1986 and that it was served on the debtor on 23 April. He did not enter an appearance to the writ and accordingly default judgment was entered on 30 April 1986. On 9 May 1986 a writ of fieri facias was issued. By a report dated 27 May 1986 the bailiff advised that he had seized a quantity of goods from the debtor's residence in Applecross but that the debtor claimed that all items seized were the property of a company, Nowra Holdings Pty Ltd.

44. On 3 July 1986 the debtor issued a chamber summons seeking orders that the default judgment be set aside and that he have leave to defend the claim. On 18 July 1986 the solicitors for the creditors wrote to the debtor's solicitors in the following terms:-

"We acknowledge receipt of your letter of 4 July 1986
enclosing the summons to set aside our clients'
judgment. Is it your intention to serve on us an
affidavit in support of the application?

Please note we shall oppose any application for
adjournment for the purpose of filing and serving such
an affidavit? (sic)"

45. On the return of the chamber summons on 31 July 1986 the debtor had not filed any affidavit in support of it and the application was dismissed by the Registrar of the District Court.

46. On 4 August 1986 the debtor issued a further chamber summons seeking the same orders as before. On the return of that summons on 20 August 1986 no affidavit had been filed in support of the application and again the Registrar dismissed the chamber summons with costs.

47. As has already been noted the debtor thereafter on 23 September 1986 issued a writ out of the District Court claiming the sum of $23,000 from the creditors. A memorandum of appearance was entered to that writ on 15 October 1986 but as at 5 December 1986 no statement of claim had been served.

48. It is apparent from this evidence that no real attempt has been made to pursue any application to set aside the judgment obtained against the debtor.

49. Whether or not the conditions which, under sub-s.41(6C) negate the power of the Court to exercise any discretion to extend time have been satisfied, I would in any event in the exercise of my discretion under sub-s.41(6A), refuse the extension having regard to the debtor's conduct in relation to the District Court proceedings and having regard to its implications for the substance of his alleged counterclaim.

50. In the circumstances the application to extend time for compliance with the bankruptcy notice will be dismissed.

51. The logical question then arises whether a refusal to extend time for compliance with the bankruptcy notice is fatal to the application to set aside the notice.

52. As was observed by Lockhart J. in Re Sterling Ex parte Esanda Ltd (1980) 44 FLR 125 there is nowhere in the Act that the Court is expressly empowered to set aside bankruptcy notices.

53. However, I respectfully agree with his Honour's view that a source of the power is to be found in sub-s.30(1) which provides:-

"30(1) The Court -

(a) has full power to decide all questions,
whether of law or of fact, in any case of
bankruptcy or any matter under Part X or Part
XI coming within the cognizance of the Court;
and

(b) may make such orders (including declaratory
orders and orders granting injunctions or
other equitable remedies) as the Court
considers necessary for the purposes of
carrying out or giving effect to this Act in
any such case or matter."

54. Whether that is the only source of the power or whether there is another source as suggested by his Honour is not necessary for me to decide.

55. Suffice to say the scheme of the Bankruptcy Act is quite inconsistent with the existence of a power to set aside a bankruptcy notice after the time for compliance with it has expired and no extension has been granted.

56. It follows as a consequence of my decision to dismiss the application to extend the time limited for compliance with the bankruptcy notice that the application to set aside the notice must also be dismissed.

57. As a last line of defence counsel for the debtor submitted that even if I were to arrive at decisions adverse to his client on the application to extend time and to set aside the notice, I should nevertheless decline to make a sequestration order.

58. He called in aid s.44(1)(a) of the Bankruptcy Act which provides:-

"A creditor's petition shall not be presented against a
debtor unless -

(a) there is owing by the debtor to the petitioning
creditor a debt that amounts to $1,500.00 or two or
more debts that amount in the aggregate to
$1,500.00, or, where two or more creditors join in
the petition, there is owing by the debtor to the
several petitioning creditors debts that amount in
the aggregate to $1,500.00;

.

.

."

59. He then referred to the following passage at para. 244 of the 5th Edition of McDonald Henry & Meeks Australian Bankruptcy Law and Practice:-

"If a debtor has a right to set off, cross claim, mutual
credit or the like so that on a balance of account less
than the amount prescribed by section 44(1)(a) is owed
by the debtor, it may well be that the debtor can use it
as an answer to the petition in order to induce the
Court, in the exercise of its discretion to refuse to
make a sequestration order:"

60. Even accepting for the sake of argument that the debtor may be able to make out a substantial counterclaim, he has not made it out and his conduct in that respect has been so dilatory as in my opinion to disentitle him to any exercise of the discretion to refuse the making of a sequestration order.

61. The petition being in order, I am prepared, subject to an affidavit of continuing debt and an affidavit of search of the indicices, to make the order sought by the creditors in this case. I will hear the parties as to the appropriate costs orders.