Re Robert Lachlan Mckechnie Ex Parte: Reginald Witworth Weir [1991] FCA 2; 1 Bankruptcy 99 ALR 99 27 FCR 515 (14 January 1991)

FEDERAL COURT OF AUSTRALIA

Re: ROBERT LACHLAN McKECHNIE
Ex parte: REGINALD WITWORTH WEIR
No. BN 38 of 1990
FED No. 1
Bankruptcy
99 ALR 99
27 FCR 515

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE NORTHERN TERRITORY OF AUSTRALIA
Foster J.(1)

CATCHWORDS

Bankruptcy - Bankruptcy notice - affidavit in reply - Registrar's refusal to fix date for hearing - whether affidavit answered required description in Act and Rules - Review of Registrar's decision.

Bankruptcy Act 1966 s 14(5), 41(7), paragraph 40(1)(g), Rule 10

Re Derrick Gordon Powell and Edwina Jane Powell; Ex parte Norman Arthur Dorsett (unreported) 10 August 1990

Re Brink [1980] FCA 78; (1980) 30 ALR 433

Re Robert John Laybutt and Anor; Ex parte George Robinson and Anor (unreported) 26 June 1985

Re Greenhill (1983) ALR 295

In Re a Debtor (1935) 1 Ch. 347

HEARING

DARWIN
14:1:1991

Counsel for the creditor: Mr S. Southwood

Instructed by: Ward Keller

Counsel for the debtor: Mrs S. Gearin

Instructed by: Elston and Gilchrist

ORDER

The appeal be upheld.

The Registrar's decision be set aside.

The proceedings be remitted to the Registrar with a direction that he fix a date for hearing by the Court.

Costs of this application be costs of the proceedings.

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

DECISION

These proceedings are an application to review "an order...or an act done" by Registrar Liddle on 29 October 1990. The application is made pursuant to s 14(5) of the Bankruptcy Act 1966 ("the Act"). The nature of the order and act done will appear hereunder.

2. On 14 August 1990 the judgment creditor ("Weir") served on the debtor ("McKechnie") a fourteen day bankruptcy notice founded on a judgment obtained by Weir against McKechnie in the Supreme Court of the Northern Territory of Australia in the sum of $22,467.93. Within the time limited by the notice, McKechnie did not pay the sum claimed, nor did he secure the payment or compound it as required by the notice. However, within that time, he filed and served an affidavit in purported compliance with s 41(7) of the Act and Rule 10 made under the Act.

3. Section 41(7) reads as follows:-

"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."

4. The counter-claim, set-off or cross demand referred to in paragraph 40(1)(g) of the Act is one that is "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 any action or proceeding in which the judgment or order was obtained". Rule 10 provides as follows:-

"Where a debtor on whom a bankruptcy notice has
been served files an affidavit to the effect that
he has a counter-claim, set-off or cross demand of
a kind referred to in paragraph 40(1)(g) of the
Act, and giving details of the counter-claim, set-off
or cross demand, as the case requires, and the
reasons why he was unable to set up the counter-claim
set-off or cross demand, the Registrar -
(a) shall fix a date, time and place at
which the debtor may appear before the Court for
the purpose of satisfying the Court that he has
the counter-claim, set-off or cross demand
referred to in the affidavit, and;
(b) shall serve notice of the date, time and
place so fixed on the solicitor for the debtor and
the solicitor for the judgment creditor specified
in the notice, respectively."

5. It is clear, of course, that the purpose of the rule is to provide the necessary machinery for giving effect to the provisions of s 41(7). The obligation is cast upon the Registrar, upon the filing of the affidavit contemplated by the section and the rule, to fix the matter for hearing before the Court in the way prescribed in the rule. It had been held, however, in decisions of this Court, founded upon earlier decisions relating to the Bankruptcy legislation in England, that the Registrar has the additional obligation of forming a judgment as to the sufficiency of the affidavit of the debtor to activate the rule. The Registrar pursuant to that obligation considered the affidavit filed by McKechnie, rejected it as being inadequate to bring the rule into operation, and endorsed it with the words "Affidavit not sufficient. No case raised".

6. The propriety of a Registrar taking such a course was considered by French J in Re Derrick Gordon Powell and Edwina Jane Powell; Ex parte Norman Arthur Dorsett (unreported 10 August 1990). His Honour expounded the relevant principles in the following passage which I respectfully adopt.

"The Registrar's obligation to fix a date and
serve notice only arises where there is an
affidavit that answers the description in r.10,
i.e. an affidavit to the effect that the debtor
has a counter-claim, set-off or cross demand of a
kind referred to in para 40(1)(g) and which gives
details thereof and the reasons why it could not
have been set up in the action in which the
judgment debt was incurred. Where the affidavit
does not answer that description the Registrar may
decline to act under the rule. That does not mean
that the Registrar makes a decision on the merits
of any counter-claim, set-off or cross demand.
However a judgment is necessary whether on the
face of it the affidavit raises a cross-action and
whether it gives the required details and reasons
for inability to set it up in the action.
Analogous provisions of the English Bankruptcy
Rules 1915 were considered by the Court of Appeal
in Re A Debtor (1935) 1 Ch 347 where Slesser LJ
(Romer LJ agreeing) said at 352:
`It is, therefore, necessary that the affidavit in
question should, on the face of it, show a
counter-claim, set-off or cross demand which
equals or exceeds the amount of the judgment debt,
and which the debtor could not have set up in the
action in which the judgment or order was
obtained.'
If, as was held in that case, the subject matter
of the affidavit did not come within the rule at
all, then there was no matter for the Registrar to
consider. The origin of the endorsement used by
the Registrar in the present proceedings appears
from the judgment of Lord Hanworth MR in that case
at 351:
`It is quite obvious that the learned Registrar
did think that the affidavit was one which did not
comply with r.140, and, if so, I think he ought to
have said: Affidavit not sufficient. No case
raised, and not have purported to comply with one
part of r.141 (similar to r.10(a) and (b)) and not
with the other, the truth being that in the view
that he took, r.141 had not come into play at
all.'"

7. It is to be observed that neither the section nor the rule in question contemplate by their terms a hearing before the Registrar as to the sufficiency or otherwise of the debtor's affidavit. If the matter were free from authority I would be strongly inclined to the view that, providing an affidavit directed to the question was filed, then the matter should be fixed for hearing before the Court, which should itself determine the sufficiency of the affidavit in all the circumstances and whether or not a deemed extension of time for compliance has occurred. This is, in fact, what occurred in Re Brink [1980] FCA 78; (1980) 30 ALR 433, where Lockhart J upheld as a "preliminary point" the submission that no deemed extension of time had occurred because of the lack of compliance by the debtor's affidavit with the section and the rule. It must be accepted, however, that this preliminary point can be decided by the Registrar without any formal requirement as to a hearing (although natural justice may require one), with the result that an act of bankruptcy may be committed because an anticipated deemed extension of time for compliance has not occurred. Moreover, the Registrar's decision on this point is amenable to review under s 14(5). There are problems, to which I shall make reference later, as to what materials can properly be considered by the Court on the review. The decision of a single judge on review is, doubtless, a final order, at least if it results in an act of bankruptcy having been committed. There would then be an appeal to a Full Court of the Court. I merely note that the potential multiplicity of procedures would appear to be regrettable.

8. In Re Brink, Lockhart J gave consideration to the effect of s 41(7). His Honour said (at p 439-440):-

"Upon the hearing of a matter under sub-s 41(7)
the court has before it the initial affidavit
which brings the sub-section into play. There
may, of course, be no other evidence. On the
other hand there may be a great deal of evidence.
This will depend upon the circumstances of each
case. Plainly this court has power to permit the
debtor to supplement his case by additional
evidence. The initial affidavit filed under s
41(7) operates to extend time for compliance with
the requirements of the bankruptcy notice until
the court determines whether it is satisfied that
the debtor has the requisite counter-claim, set-off
or cross demand. Although the mere filing of
the requisite affidavit brings the statutory
extension automatically into play, the court
thereafter controls the matter. The sub-section
recognizes that the court may not be able to hear
the matter immediately. It may not be convenient
to do so or the case may be complex and require
that directions be given to both parties to define
the issues and as to the giving of evidence. The
filing of the affidavit operates as a statutory
injunction to preserve the status quo until the
court determines the matter, ensuring that, in the
meantime, there is no act of bankruptcy.
The authorities are concerned primarily with the
exercise of the court's power under s 41(7) and
the equivalent provisions in the Bankruptcy Act
1924 (Cth) and the English Bankruptcy legislation;
but they say little as to what the initial
affidavit must in itself contain.
In my opinion the affidavit cannot merely contain
an assertion that the debtor has a counter-claim,
set-off or cross demand which he could not have
set up in the action in which the judgment or
order was obtained. The affidavit must show a
counter-claim, set-off or cross demand which
equals or exceeds the amount of the judgment debt
and which the debtor could not have set up in the
action in which the judgment or order was
obtained: see Vogwell v Vogwell, supra, at 85;
Ebert's case, supra, at 350; Re Debtor (1935) 1 Ch
347, per Slesser LJ at 352.
It is as well to remember that the initial
affidavit has to be filed within the limited time
namely, the number of days after service of the
bankruptcy notice upon the debtor fixed by the
Registrar. These times are fixed by him without
any knowledge in his part of the possibility of a
counter-claim, set-off or cross demand being
propounded by the debtor. In many cases it is
difficult, if not impossible, for the debtor to
present more than a mere outline of his case in
the time available.
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 (1936) 1 WLR
51, per Upjohn LJ at 56.
The fact that it is within the power of the court
to determine when the hearing of a matter under s
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 case, of the initial
affidavit being anything other 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."

9. Although his Honour was dealing with "the initial affidavit" in circumstances where it had not been treated as ineffective by the Registrar, his comments in relation to it are obviously matters to be taken into account by a Registrar when determining whether the filing of such an affidavit requires that he set the matter down for hearing before the Court.

10. The matter has also been considered by Beaumont J in Re Robert John Laybutt and Anor; Ex parte George Robinson and Anor (unreported) 26 June 1985, where his Honour said:

"In my opinion, the Act and the rules provide for
two separate inquiries where a debtor seeks to set
aside a bankruptcy notice in the present
circumstances. In the first instance, the debtor
must in his affidavit provide material which is
sufficient to satisfy the Registrar of the
existence of a bona fide counter-claim or the like
which could not be set up in the earlier
proceedings. At this stage, the Registrar is
essentially concerned to inquire into the bona
fides of the debtor's claim; if it is obviously
demurrable as disclosing no possible cause of
action, the affidavit should be rejected by the
Registrar as raising no case for enquiry (see Re a
Bankruptcy Notice (1900) 16 WN (N.S.W.) 180; In
Re a Debtor; Ex parte Debtor (1935) 1 Ch 347).
At the second stage, the Court enquires into the
matter in order to satisfy itself of the existence
of an appropriate cross-claim or something like
it. At this stage, the judge will require evidence
in proper form to indicate the existence of such a
claim. This is not to say that the affidavit
evidence, including evidence supplementing the
earlier affidavit for the purpose of explication
without going beyond its scope, must be in a form
in which evidence would be required to be given at
a final hearing. But, so that the Court may form
a view as to the bona fides of the debtor's claim,
the affidavit should contain a statement of the
legal basis of the claim and an outline of the
facts relied on (see Re Jocumsen (1929) 1 ABC
82) and reasons why the debtor was unable to set
up the counter-claim or the like (see rule 10)."

11. In my opinion these passages all illustrate an underlying acceptance that the role of the Registrar in relation to the operation of s 41(7) and rule 10 is intended to be fairly minimal. It is for the Court to decide at the hearing whether the initial affidavit, which, in most circumstances, will be supplemented by other material, indicates a sufficient prima facie case to prevent the occurrence of an act of bankruptcy. In my view, it is the clear intention of the legislature that the matter should come before the Court for decision, except in circumstances where nothing is shown to warrant the Registrar placing the matter before the Court. It is clear that in very many cases, especially where the quantification of the amount of a cross-claim, set-off or cross demand will require valuation evidence, nothing more can be done in the debtor's initial affidavit than to indicate the existence of the cause of action or causes of action upon which reliance is to be placed, give an outline of their nature, and provide material to base an assertion that their prosecution will produce indebtedness in the judgment creditor in excess of the debtor's debt. The fact that considerably more may, in all probability, be necessary to persuade the Court on the appointed day, that the requisite prima facie case is made out, does not alter this situation. The demonstration of bona fide reliance on the section is the main function of the initial affidavit. It must be born in the mind that the section requires only that the affidavit be "to the effect that" the debtor has the necessary counter-claim etc.

12. The present case has, in addition, some unusual features. Although the decision of the Registrar was ultimately based only upon the appellant's affidavit of 14 September 1990 the matter was not finally considered by the Registrar until 26 October by which time two further affidavits had been filed, one of the judgment creditor dated 10 October 1990 and the other of John Thomas Stewart, the judgment creditor's solicitor dated the 19th day of October 1990. The material in these affidavits was clearly available at the time the Registrar entered upon his determination on 26 October 1990. I am unclear as to whether it was relied upon by either of the litigants. Counsel for the debtor has submitted that whether or not the Registrar took this material into account, it was open to and appropriate for him to have done so and that, in any event, I should take it into account on this review. In addition to this material two further affidavits of McKechnie have been filed since the institution of the appeal together with an affidavit of his solicitor Ian McDonald Morris. Counsel for McKechnie submits that I should take the material in these affidavits into consideration in reviewing the Registrar's decision. Counsel for Weir submits, on the other hand, that neither the Registrar nor this Court can take this material into consideration and that the deliberations of each were and are necessarily confined to the "initial affidavit" of the debtor of 14 September 1990. Counsel for the debtor relies upon Re Greenhill (1983) ALR 295. Counsel for the Creditor submits that the decision is distinguishable.

13. It is clear that the Registrar was aware of the filing of the other affidavits in October as he refers to this fact in his reasons for decision. Indeed he indicates that the matter before him was adjourned "last week" so that the debtor's solicitor Mr Morris could consider the judgment creditor's affidavit of 17 October 1990 and obtain instructions. However, he stated that the issue for determination by him was "whether or not the affidavit of the debtor sworn and filed on 14 September 1990 was in accordance with s 41(7) of the Bankruptcy Act". It is clear that this was the only matter he decided.

14. In the ultimate, I have come to the conclusion that it is unnecessary for me to decide whether the Registrar could or should have had regard to the material in the other affidavits or whether I likewise can or should have regard to it in deciding this review. I have decided, not without some hesitation, that the material in the debtor's affidavit of 14 September 1990 was in fact sufficient to bring into play s 41(7) and rule 10 with the result that a date should have been fixed for the hearing of the matter before the Court. Accordingly, the necessary deemed extension of time for compliance with the bankruptcy notice has occurred.

15. In his reasons, the Registrar said of McKechnie's affidavit of 14 September that the only paragraph which was of any importance was paragraph two. That paragraph said:-

"I have a counter claim, set off and cross claim
against the judgment creditor in excess of the
amount claimed in the bankruptcy notice herein
dated the 14th day of August 1990 particulars of
which appear hereunder."

16. The Registrar went on to say that, "this assertion is not supported by any factual information contained elsewhere in the affidavit. The question for me to decide is whether I am bound by this bald assertion to treat this affidavit as one which satisfies the requirements of s 41(7) of the Bankruptcy Act". He rejected the affidavit.

17. There is, however, other material in the affidavit which, in my view, exiguous though it is, lends sufficient support to the "bald assertion" to bring the affidavit within the section.

18. By paragraph three of the affidavit, McKechnie indicates that the judgment debt, the basis of the bankruptcy notice, was in respect of "solicitor's fees in action number 325 of 1986" in the Supreme Court of the Australian Northern Territory. The nature of those proceedings is briefly, poorly, but in my view, sufficiently described in paragraphs four, five, six and seven of the affidavit. Those paragraphs indicate that McKechnie had unsuccessfully brought an action in which he claimed to be a co-owner of certain real estate in Darwin being Lot 2614 Francis Street Milner. He claimed that he had conducted on this property the business of a caravan park in partnership with one Robert Weir Squires until the death of the latter in 1984. Thereafter he carried on that business in partnership with the judgment creditor Weir who was the sole beneficiary of Mr Squires' estate. The terms of this arrangement were set out in a letter form the Public Trustee for the Northern Territory to McKechnie. A copy of the letter is annexure "A" to McKechnie's affidavit. The letter makes no reference to the partnership involving co-ownership of the real estate upon which the business was conducted. I infer that McKechnie unsuccessfully claimed to be a co-owner in action number 325 of 1986 and thereby incurred the cost order, the subject of the judgment debt.

19. The remaining paragraphs of the affidavit appear, sufficiently, to deal with a related but distinct dispute as to the assets of the partnership. Reference is made to action number 359 of 1987 in the Supreme Court of the Northern Territory and to an order that was made on 7 December 1987 "that certain partnership assets be sold by auction and the proceeds of sale deposited in a bank account (the joint names of the solicitors for me and the judgment creditor)". I infer that the action in question was one for dissolution of the partnership and consequential orders, whereas the previous action was based on some claim in equity or by statute in respect of the land. I am, prima facie, satisfied that the outstanding claims to which reference is made in the affidavit, resulting from the dissolution of the partnership could not appropriately have been raised as counter-claims etc in the action which resulted in the judgment debt.

20. In the balance of the affidavit McKechnie makes a number of claims which are quantified and which arise from the auction of the chattels under the order of the Court and other matters relating to the dissolution of the partnership. The amounts that are quantified do not, in total, exceed the amount of the judgment debt. However, the affidavit refers to the sale of assets by the judgment creditor other than at the auction. McKechnie deposes to a belief that "the property includes a solar electric panel, substantial stock of glass louvres, approximately twelve refrigerators and a substantial quantity of building materials". He states that he does not know "the price attained for or assigned to those chattels". He further states that he has received no payment in respect of them. The thrust of his affidavit in this regard is that he is still entitled to receive quantified sums of money from the judgment creditor Weir together with an unquantified sum which, having regard to the amount and apparent value of the chattels sold, would be sufficient to provide him with a counter-claim exceeding the amount of the judgment debt. This is not a case, such as In Re A Debtor (1935) 1 Ch 347 where the amount claimed and quantified by the judgment debtor as the basis of his cross-claim or set-off was on the face of it less than the amount of the judgment debt. Here the debtor asserts that his counter-claims exceed the amount of the judgment debt and points to the nature of these claims and the grounds upon which he asserts the relevant excess. I consider that the material deposed to in the affidavit is sufficient, by a small margin, to bring s 41(7) and Rule 10 into operation.

21. Accordingly, I set aside the order previously made by the Registrar and remit this matter to him so that he may, in accordance with Rule 10, fix the matter for hearing before the Court.

22. I consider that the costs of this review should be costs in the proceedings.