Re Hercules Michael Theodoros Ex Parte: Ian Black [1990] FCA 159 (23 May 1990)

FEDERAL COURT OF AUSTRALIA

Re: HERCULES MICHAEL THEODOROS
Ex parte: IAN BLACK
No. 1109 of 1989
FED No. 226
Bankruptcy Notice

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Von Doussa J.(1)

CATCHWORDS

Bankruptcy Notice - whether affidavit filed by debtor sufficient to enliven sub.s.41(7) of the Bankruptcy Act 1966 - whether evidence adduced by the debtor satisfied the Court that he had a counter-claim, set-off, or cross demand equal to the judgment debt - no point of principle involved.

HEARING

ADELAIDE
23:5:1990

ORDER

The Court declares that it is not satisfied that the debtor has a counter-claim, set-off, or cross demand equal to or exceeding the amount of the judgment debt.

The debtor pay the costs of the judgment creditor of and incidental to this application.

Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

DECISION

A bankruptcy notice issued on 21 November 1989 was served on the debtor. He thereupon filed an application to set aside the bankruptcy notice, and an affidavit dated 6 December 1989 (the debtor's first affidavit). The affidavit does not disclose any reason to set aside the bankruptcy notice, but it seeks to establish for the purpose of para.40(1)(g) of the Bankruptcy Act 1966 (the Act) that the debtor has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt. The judgment debt on which the bankruptcy notice is based is for $29,559.92.

2. The application was referred for hearing by a judge, and came on before me on 23 April 1990. Counsel for the judgment creditor then indicated that he wished to argue as a preliminary point that affidavits filed by the debtor were insufficient for the purposes of sub.s.41(7) of the Act. By the tacit agreement of counsel, the hearing was extended to cover that question, and also to determine, if the preliminary point failed, whether the Court was satisfied that the debtor had the counter-claim, set-off or cross demand referred to in his first affidavit, as if that question had been referred to the Court pursuant to r.10 of the Bankruptcy Rules. If the Court determines that it is so satisfied the bankruptcy notice is then spent. In those circumstances the Court is not empowered to set aside the bankruptcy notice, and the application seeking an order to that effect is inappropriate: James v. Abrahams [1981] FCA 46; (1981) 34 ALR 657 at 661 per Deane and Lockhart JJ., and Re Laybutt; Ex parte Robinson (unreported decision of Burchett J. 17 July 1985).

3. Pursuant to directions given by the registrar, the judgment creditor responded to the debtor's first affidavit by filing affidavits by himself, a Mr Zarko, and a Mr Shipway; then the debtor filed a further affidavit by himself along with one by his solicitor; the judgment creditor filed another affidavit by himself along with one from a Mr Farmer; and finally these affidavits were answered by yet another by the debtor. The allegations and counter allegations in these affidavits raise some issues which turn on credit and which could only be resolved at a trial on oral evidence.

4. At the commencement of the hearing Mr Patel, counsel for the judgment creditor, argued that the debtor's various affidavits taken together do not meet the requirements of sub.s.41(7) as they do not, when read with the other evidence before the Court, establish a claim by the debtor against the judgment creditor equal to or exceeding the judgment debt. In my view this submission misconstrues sub.s.41(7), and is one which really goes to the second issue, namely whether the debtor has satisfied the Court that he has the set-off, cross-claim or cross demand which he asserts. In my opinion the only affidavit which should be considered when enquiring if the provisions of sub.s.41(7) have been invoked is the debtor's first affidavit, that is the affidavit filed by the debtor before the expiration of the time fixed by the registrar for compliance with the bankruptcy notice. If that affidavit is a sufficient affidavit for the purposes of the sub-section, then the time for compliance with the bankruptcy notice is deemed to be extended until the Court determines whether it is satisfied that the debtor has a set-off, etc. sufficient to comply with the bankruptcy notice for the purpose of para.40(1)(g). In my opinion the debtor's first affidavit in this instance fulfills the requirement of sub.s.41(7). The debtor deposes to a counter-claim greater than the judgment debt, he deposes to details of the counter-claim and the circumstances out of which it arose, and he gives reasons why he was unable to set up the counter-claim in the action in the District Court wherein the judgment creditor obtained his judgment. The substantial issue which falls for decision is whether the material now before the Court establishes to the level of satisfaction required by para.40(1)(g) that the debtor has the counter-claim which he asserts.

5. When considering the issues which arise under para.40(1)(g) 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 his counter-claim: Ebert v. Union Trustee Co. of Australia Limited [1960] HCA 50; (1960-1961) 104 CLR 346 at 350. As Lockhart J. observed in Re Brink; Ex parte Commercial Banking Co. of Sydney Limited [1980] FCA 78; (1979-1980) 30 ALR 433 at 439, this Court is not required to undertake a preliminary trial of the counter-claim. Rather the Court must be satisfied that the debtor has a fair chance of success. In this instance, as is usually the case, the debtor has commenced proceedings in a court of competent jurisdiction (the District Court of Adelaide) against the judgment creditor to establish his counter-claim, and that is the court which should finally hear and determine it. In light of the many allegations and counter allegations made in the affidavits the statement of principle by Lathan C.J. in Vogwell v. Vogwell (1939-1940) 11 ABC 83 at 85 as to the obligation resting on a debtor who files an affidavit to the effect that he has a counter-claim are particularly apposite:
"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
Fay Limited ((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 counter-claim, set-off or cross demand
which is relied upon."

6. The judgment debt arises from a loan made by the judgment creditor to the debtor on 3 May 1989 which was repayable on 19 May 1989. The debtor defaulted in repayment, but has since paid $12,500 and now asserts by his first affidavit that he has a cross-claim that equals or exceeds the balance owing to the judgment creditor. The debtor at relevant times was a finance consultant. In his first affidavit he deposes that he was approached in November 1987 by the judgment creditor to act as a consultant in relation to the acquisition of two shopping centres, one each at Deception Bay and Brown's Plains, Queensland. His affidavit continues:

"6. Between the months of November, 1987 and
September, 1988 I consulted extensively with
the creditor and liaised with interstate
parties on his behalf. I also assisted in
the preparation of finance presentations. In
addition I incurred substantial telephone
disbursements on behalf of the creditor in the
order of $2,780.00. The creditor was
successful in the Deception Bay project and my
certain knowledge made a substantial profit
from the same.
7. There was no express agreement as to the
consideration which I was to receive for my
services. I believe however that a
reasonable rate for my work would be in the
range of $60.00 to $70.00 per hour. I have
an extensive file on the consultancy which
shows approximately 480 hour spent working on
the creditor's behalf. I believe that a fair
and reasonable payment for my services would in
the order of $33,600.00 together with disbursements
of $2,780.00, in all a total of $36,380.00."

7. From the affidavits it is possible to deduce, without ranging on to ground that is disputed by one side or the other, that the following temporal phases occurred during the period from November 1987 to September 1988:

(a) The period from November 1987 to February 1988 when the
role of the debtor in relation to the two shopping
centres was to raise finance for companies which it was
intended would become the purchasers. If the debtor
succeeded he was to receive a commission. If he did
not succeed he was not to receive anything from anybody.
The debtor did not succeed. The proposed contract for
each of the shopping centres was cancelled. The debtor
in his second affidavit sworn on 21 February 1990
concedes his failure and his non-entitlement to
remuneration for work done during this period.
(b) A period commencing in or about April 1988 when the
debtor alleges that the judgment creditor instructed him
to perform consultancy services in connection with the
acquisition and financing of the Deception Bay shopping
centre by the judgment creditor personally. At this
time the debtor carried on business alone under the
business name "Finance Plus". It is common ground that
by contract dated 27 June 1988 the judgment creditor
agreed to purchase the Deception Bay shopping centre for
$5,085,000.
(c) A period that began on a date which is in dispute when
the debtor commenced to carry on business in some form
of relationship with Mr Zarko. The nature of the
relationship up until 14 December 1988 is in dispute.
Mr Zarko says he and the debtor operated the debtor's
former finance consultancy business under the name of
"Finance Plus Pty Ltd" from early in June 1988, yet the
Corporate Affairs Commission's records show that the
debtor and Mr Zarko did not become shareholders and
directors of the company, then called Manning and
Associates Pty Ltd, until 8 August 1988, and that the
company did not change its name to Finance Plus Pty Ltd
until 14 December 1988. Documents exhibited to Mr
Zarko's affidavit show that in late June 1988 he and the
debtor were working in some form of relationship -
perhaps a joint venture or partnership - until they
became shareholders and directors of Manning and
Associates Pty Ltd in August 1988.

8. The judgment creditor points out that it is now conceded that the debtor could have no cross-claim against him for work done in the period up to the end of February 1988. The cross-claim must therefore be based on work done from about April 1988 when the debtor says the judgment creditor personally instructed the debtor. I should stress that the judgment creditor disputes that the debtor was ever instructed to do any work save on the clear understanding that he would receive a success fee if he raised finance (an event which never happened), but the contest between the parties on that issue turns on credit which I cannot resolve at this stage or on affidavits alone.

9. The next step in the judgment creditor's argument is to say that a counter-claim for the purpose of para.40(1)(g) must arise between the parties in the same right as the claim which lies behind the judgment: see Re Wedd: Ex parte Wedd; Parker respondent (1961) 19 ABC 36. It is contended that from late June 1988 whatever consultancy work was performed by the debtor, was performed on behalf of the joint venture between the debtor and Mr Zarko, and later on behalf of the company Manning and Associates Pty Ltd. Therefore the only period during which services could have been rendered for which the debtor could personally make claim against the judgment creditor would be in the period from April to June 1988, a period of about two months. It is tolerably clear from the affidavit evidence of the debtor that by the end of February 1988 the debtor must have done a considerable amount of work in relation to the two shopping centres. For that work he is entitled to no remuneration. By April 1988 he had background knowledge about the shopping centres. It is beyond reasonable comprehension, so the argument goes, that in about two months the debtor could be engaged for 480 hours in consultancy work. The conclusion should therefore be drawn that even if the debtor did 480 hours of work in all as he has deposed, much of it must have been performed before February 1988, and after June 1988, that is during periods when he either had no right to claim, or could not claim in his own right from the judgment creditor. It is submitted that the Court should conclude that whatever might be due on the debtor's case by the judgment creditor, that sum would be much less than the judgment debt. The Court should therefore declare that it is not satisfied that the counter-claim which the debtor asserts meets the requirements of para.40(1)(g).

10. Further, it is contended that the alleged counter-claim is now so uncertain that it cannot be characterised as a claim measurable in a money amount. This last submission can be dismissed shortly. A claim may be measurable in a money amount even though the measurement is not then possible without further information. The principle that the cross-claim, set-off or cross demand must be measurable in an amount of money is to exclude claims for such reliefs as rectification or rescission, or for the return of a specific chattel which, if ultimately established, will not become an order for the payment of a sum of money by the judgment creditor to the judgment debtor: James v. Abrahams, supra, at pp 663-664. The counter-claim asserted by the debtor is for an amount of money, and even if the quantum of that claim is now uncertain the claim still meets the requirement that it is a claim of the kind that can be measured in an amount of money.

11. The premise in the judgment creditor's argument that the debtor could have no claim for work done after June 1988 cannot, in my view, be sustained. I consider counsel for the debtor is correct when he says that this result could only follow if there were a novation of the contract of engagement between the judgment creditor and the debtor. There is no evidence of any new contract, and the weight of the evidence is in favour of the view that the same engagement between the judgment creditor and the debtor continued through to September 1988, at which time it seems that activity in which the debtor could have been involved over the judgment creditor's acquisition of the Deception Bay shopping centre was at an end. There will be a novation where the evidence establishes that the old contract has come to an end with the consent of both parties, and a new contract has arisen, in this case between the judgment creditor on the one hand, and the debtor and Mr Zarko on the other hand: see Rohrlach v. Christianos (1981) 26 SASR 161. Here the evidence does not suggest either of these events. Whatever private arrangement the debtor may have come to with Mr Zarko about their future relationship in June 1988, if the original engagement between the judgment creditor and the debtor continued on foot, the private arrangement with Mr Zarko would not affect the debtor's right to sue the judgment creditor for remuneration in respect of work done by him under that engagement.

12. If the issues between the parties were confined to the questions of whether the debtor was engaged by the judgment creditor to undertake consultancy work, whether the duration of that consultancy work extended from April to a date beyond June 1988, and whether a reasonable rate of remuneration was in the order of $60 to $70 per hour, even though the assertions of the debtor in favour of these propositions are denied by the judgment creditor's affidavits, I would be disposed to hold that the debtor has demonstrated a fair chance of success with his counter-claim. If his evidence were accepted, he would succeed, at least substantially, and the issues between the parties would properly be left to be decided at the trial in the District Court proceedings which the debtor has commenced. However there remains the further question raised by the judgment creditor, namely whether the debtor has advanced any reasonably credible case that his counter-claim, if it can otherwise be established, would equal or exceed the judgment debt. This question as to the amount of the asserted counter-claim was not clearly identified in the affidavits as an issue in dispute until counsel for the judgment creditor made his submissions. When it was identified, counsel for the debtor sought the opportunity to advance additional information in support of the quantum of the proposed counter-claim and I gave him leave to do so. The debtor gave oral evidence and identified the file to which he had made reference in paragraph 7 of his first affidavit. In his oral evidence he expressed his belief that he had worked in excess of 250 hours during the months of April, May and June 1988 in consultancy work relating to the negotiation of the purchase price of the Deception Bay shopping centre. He then explained that another 230 hours of work had been performed on behalf of the judgment creditor which related to other projects. Oblique reference had been made to one of these projects in the judgment debtor's second affidavit, but there had been no reference in the affidavits to the main additional project which concerned consultancy over a bowling alley at Port Pirie in which the judgment creditor had an indirect interest. The debtor said that he made at least five return car trips to Port Pirie from Adelaide in the course of that consultancy work which would have occupied him for some 70 hours, and the balance of 230 hours involved mainly discussions with the judgment creditor over the appointment of a new manager.

13. The evidence of the debtor was devoid of detail. A perusal of the file produced by him does not reveal any record of time spent by him on different tasks, and it is difficult to conceive from the papers in that file (most of which were produced by other people) that the debtor was occupied on matters to which those papers relate for the time he alleged. The file contains no information as to times and dates on which conferences or consultations occurred, or other work was performed. There is virtually no information in the file regarding the judgment creditor's interest in the bowling alley at Port Pirie. In cross-examination the debtor acknowledged that he had never sent an account to the judgment creditor or to anyone else regarding the Port Pirie work. Further, the judgment creditor's interest in the bowling alley was as a shareholder of a company, Expoline Pty Ltd which owned the bowling alley. The debtor conceded that from the outset he knew that Expoline Pty Ltd was the owner. If the debtor had a brief in relation to Port Pirie (a fact which is not confirmed by any document in his file) it would appear more probable than not that the brief was to act for Expoline Pty Ltd and not for the judgment creditor.

14. In relation to the Deception Bay shopping centre, the third affidavit of the debtor sworn on 16 March 1990, together with his diary and telephone message book which comprise part of his file, suggests that his involvement was greater than has been deposed to in the affidavits of Messrs Farmer, Shipway, Zarko, and the judgment creditor himself. However the evidence falls far short of satisfying me that from April 1988 onwards the debtor was engaged for a period anywhere near as long as 250 hours on that project.

15. Whilst the debtor has, I think, demonstrated a fair chance of success with a claim against the judgment creditor for remuneration at a reasonable rate for consultancy work, he has failed to establish that such a claim, even on the most optimistic view, would equal or exceed the judgment debt.

16. In my view the Court should declare that it is not satisfied that the debtor has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt. The application to set aside the bankruptcy notice should also be dismissed, and the judgment creditor should be awarded his costs of the application.