Re Allan Lawrence Mcgregor v Clancy and Triado Pty [1991] FCA 51; 51 Bankruptcy 100 ALR 431 (28 February 1991)

FEDERAL COURT OF AUSTRALIA

Re: ALLAN LAWRENCE MCGREGOR
And: CLANCY and TRIADO PTY
No. B 2488 of 1990
FED No. 51
Bankruptcy
100 ALR 431

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
BANKRUPTCY DIVISION
Einfeld J.(1)

CATCHWORDS

Bankruptcy - bankruptcy notice served by solicitor against former client for unpaid costs - whether a certificate of taxation of Registrar of the Family Court is a final judgment or final order within Bankruptcy Act - counter claim against creditor for negligence in conduct of Family Law proceedings

Bankruptcy Act - section 40(1)(g), 40(3)(b)

Family Law Act - section 123(1)(g)

Family Law Rules - Order 32 rule 42(1) and (3)

Re Borg (1965) Arg LR 926

Re Ravasio ex parte Leonard Norman P/L (1965) 6 FLR 373

Wilmot v Buckley and Ors [1984] FCA 327; (1984) 56 ALR 589

Re Cartwright ex parte Cartwright v Barker (1975) WLR 573

Clyne v Deputy Commissioner of Taxation [1982] FCA 162; (1982) 42 ALR 703

Re Abrahamson ex parte Crisp and Gunn Limited 22 ALR 749

Slaminka v Varshavsky Morling J unreported 18/04/85

Re Laybutt ex parte Robinson and Robinson Beaumont J unreported 26/06/85

James v Abrahams [1981] FCA 46; (1981) 34 ALR 657

Re GEB a Debtor (1903) 2 KB 340

Giannarelli and Ors v Wraith and Ors (1988) 165 CLR 543

HEARING

MELBOURNE
28:2:1991

Council for the creditor: Mr R. Berglund

Solicitor for the petitioning debtor: Mr T. Irlicht

ORDER

Set aside bankruptcy notice.

Creditor to pay debtor's costs.

NOTE: Settlement and entry of orders are dealt within accordance with with Rule 124 of the Bankruptcy Rules.

DECISION

This proceeding arises out of the service of a bankruptcy notice by a firm of solicitors Clancy and Triado Pty (the creditor) against a former client Allan Lawrence McGregor, himself a solicitor (the debtor). The debt alleged in the bankruptcy notice is $5,762.55 which was the amount certified by a Deputy Registrar of the Family Court of Australia as being the balance of costs payable by Mr McGregor to his former solicitors following upon a taxation of solicitor and client costs incurred in Family Court proceedings which concluded in 1989. The taxation of costs took place on 25 July 1990 and the certificate of taxation was issued on 2 August 1990 (the certificate). The costs allowed by the Deputy Registrar were $12,759.55 of which all but the amount certified for payment was already held by the solicitors in their trust account prior to the taxation. The debtor asks the Court to set aside the bankruptcy notice.

2. The challenge to the notice has two bases, both of which raise unusual and interesting points of law. The first ground is based upon section 40(1)(g) which provides that an act of bankruptcy is committed -

(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 that he could not have set up in the
action or proceeding in which the judgment or order
was obtained.

3. The bankruptcy notice in this case refers to the debtor and creditor respectively as the "judgment debtor" and "judgment creditor". It requires the debtor to pay or secure the payment of the sum of $5,762.55 due under "a final judgment or final order obtained ... in the Family Court at Melbourne on the 2nd day of August 1990". It is conceded that this is the certificate. The argument raised in this connection is that the certificate is not "a final judgment or final order" within the meaning of section 40(1)(g). Therefore failure to comply with a bankruptcy notice which relies on it cannot be an act of bankruptcy. Although the matter appears to be arguable, neither party suggested that an application to set aside a bankruptcy notice was an inappropriate vehicle for the raising of this argument.

4. The certificate appears on what is described as a Form 58 and its terms provide that it is issued pursuant to order 38 rule 42(1) of the Family Law Rules. (A reference on the document to the fact that Form 58 is issued under order 58 rule 42 appears to be a typographical error.) Order 38 rule 42(1) provides as follows:

42(1) Where a taxing officer has made a decision referred to
in sub-rule 40(1) and -
(a) no application under that sub-rule has
been made within the period referred to in
sub-rule 40(3); or
(b) after the making of such an application,
the taxing officer has reconsidered the
decision,
the taxing officer shall issue a certificate of
taxation in accordance with Form 58 and serve a
sealed copy of the certificate on each party to
the taxation proceedings.

5. It is agreed that the premises of this provision apply in this case and that the certificate was issued under its terms.

6. Order 38 rule 42(3) provides:

42(3) A certificate issued under sub-rule (1) shall be
deemed to be a judgment for debt immediately due and
payable and recoverable in accordance with law.

7. On their face these rules appear to mean that the taxing officer's certificate is deemed to be a judgment ordering the payment of the amount certified on which any legally permissible recovery action is immediately available. However, the debtor argues through his solicitor that a certificate of a Deputy Registrar of the Family Court cannot be, or ought not to be construed as, a "final judgment or final order" under the Bankruptcy Act. His argument is twofold:

8. First. The rule-making power under the Family Law Act relevant to costs, namely section 123(1)(g), merely gives the Family Court judges power to make rules -

prescribing matters relating to the costs of proceedings
(including solicitor and client costs and party costs) and
the assessment or taxation of those costs

9. The argument is that this does not and cannot extend to enabling the judges to constitute a taxation officer as an agency to pronounce what would otherwise require a court to pronounce, namely a judgment enforceable at law. It is further suggested that order 38 rule 42(3) may not only be beyond the rule-making power of the judges but unconstitutional.

10. Second. This is based upon some judicial expressions of opinion. In Re Borg (1965) Arg LR 926, Clyne J held that a provision of the Victorian Crimes Act which provided for a court to award compensation to a victim of a crime and deemed the amount awarded to be a judgment debt due to the victim from the criminal enforceable "in any manner in which a judgment or order of that court for the payment of a civil debt" could be enforced was not a "final judgment or final order" within section 40(1)(g). At 926-7, Clyne J said that the then equivalent section of 40(1)(g)

... assumes a relationship of creditor and debtor. It
refers to a final judgment obtained by a creditor in an
action and to a final order obtained by a creditor in a
proceeding. In such action or proceeding the debtor is
entitled or has a right to satisfy the Court that he has a
counter-claim, set-off or cross-demand which equals or
exceeds the amount of the judgment debt and which he could
not set up in the action or proceeding in which the judgment
or order was obtained. The order relied on was not an order
made in a curial proceeding brought to establish some right
of the petitioning creditor against the debtor. It was not
a final judgment or final order made in an action or
proceeding between a creditor and a debtor and it did not
give the debtor any opportunity to set up any counter-claim,
set-off or cross-demand.

11. In another decision of Justice Clyne, Re Ravasio ex parte Leonard Norman Pty Ltd (1965) 6 FLR 373, it was held that a judgment is only "final" when it determines some question between litigants in an action by which a previously existing liability of a defendant to a plaintiff is established, and in which the defendant has had the opportunity of setting up a counter claim, set off, or cross demand. At 374 Justice Clyne went on to say:

These characteristics of a final judgment are, in my
opinion, the characteristics of a final order.

12. Wilmot v Buckley and Ors [1984] FCA 327; (1984) 56 ALR 589 was a complex case which arose out of an oral judgment given in the Supreme Court of New South Wales, part of which awarded the costs of three defendants to be paid by the plaintiff. The principal proceedings were dismissed without any hearing on the merits but no formal written order was ever taken out or entered. The bankruptcy notice claimed the payment of the costs ordered by a taxing officer to what it called "the judgment creditors".

13. Beaumont J held that the Supreme Court Rules, relevantly similar to the Family Court rules applicable here, should be construed as not requiring a further judgment for costs after taxation and that the certificate itself can be used as the basis for enforcement. Citing a decision of the English Court of Appeal in Re Cartwright ex parte Cartwright v Barker (1975) 1 WLR 573, the applicant submitted to his Honour that the bankruptcy notice was bad in that it did not show under what final judgment or order the sum claimed was due. He argued "that in the case of costs the effective judgment was the order of the court itself, not the certificate quantifying their amount". At 592 his Honour held that a bankruptcy notice describing the respondents as "judgment creditors" was implicitly misleading because it taxation was the source of the applicant's liability and that the certificate was a judgment.

14. Justice Beaumont held alternatively that "even if that impression (i.e. that the certificate was a judgment) is not conveyed by the notice, it is still invalid because it fails to identify the final judgment or order upon which it is based". His Honour said that that was the order of the court that costs were to be paid, not the certificate of the taxing officer. These were of course party/party, and not solicitor/client, costs so that a counter claim would have been available in the earlier proceeding.

15. Justice Beaumont went on to find that in any event the certificate of taxation is not a "final judgment or final order" within section 40(1)(g) of the Bankruptcy Act because there was no "final" adjudication of the claim made in the principal proceedings. His Honour quoted Ravasio but pointed out that it must now be read subject to the provisions of section 40(3)(b) of the Act. This provides:

a judgment or order that is enforceable as, or in the same
manner as, a final judgment obtained in an action shall be
deemed to be a final judgment so obtained and the
proceedings in which, or in consequence of which, the
judgment or order was obtained shall be deemed to be the
action in which was obtained.

16. Inter alia this appears to constitute an order for costs as if it were a separate and distinct final judgment. However, Beaumont J was of the opinion that this did not save the notice in question but that if the original judgment had been drawn up, sealed and entered, it might then have been able to form the basis of the bankruptcy notice.

17. See also Clyne v Deputy Commissioner of Taxation [1982] FCA 162; (1982) 42 ALR 703 and the cases therein referred to.

18. The present matter is certainly a different type of case to Wilmot but appears to be somewhat similar to Borg and Ravasio. Yet it complies with none of the criteria referred to in those cases by Clyne J, one of the most experienced bankruptcy judges in Australian history. Although Wilmot was really decided on other grounds, the implications of Beaumont J's reasons for judgment appear to be generally supportive of the criteria formulated by Clyne J.

19. I cannot see how the taxation of a solicitor and client bill of costs would permit the client to litigate any matter in issue between him and the solicitor as to whether the amount certified should in fact be payable, especially as here an alleged substantial counter claim for negligence in the conduct of the very case where the costs were incurred. If, for example, a client wished to allege a total failure of consideration in that what he undertook to pay for was not in fact delivered, it would seem unjust that he could be subject to enforcement proceedings, including bankruptcy, whilst that claim remained outstanding and undetermined. As in Wilmot where Beaumont J held that the fact that the judgment was given orally and was never taken out in the form of a formal order effectively deprived the creditor of any use of bankruptcy to enforce the order for costs, this is not a case in which the creditor can issue another bankruptcy notice founded upon a true "final judgment".

20. Assuming that order 38 rule 42(3) is a valid exercise of the rule-making power provided for in the Family Law Act and is constitutional, it is difficult to construe it as meaning that the costs as certified must be the subject of further legal proceedings in order to become recoverable. On the other hand, it seems odd that it might be recoverable by other forms of execution but not be recoverable in bankruptcy. To hold that it is not a "final judgment" appears really to confront the words of the rule but I feel that I should in the circumstances defer to Clyne J's opinion (impliedly supported by Beaumont J) and hold that because it does not comply with the criteria he prescribed, the certificate of taxation is not a "final judgment or final order" under section 40(1)(g). It follows that the bankruptcy notice must be declared invalid and dismissed.

21. Strictly speaking, that means that it is not necessary to deal with the second basis upon which the debtor seeks relief. This is that he has a counter claim against the creditor for negligence in the presentation and conduct of his case in the Family Court. However, as the construction of section 40(1)(g) given by Clyne J, to which I have just given support, is open to different views, and as this second limb of the debtor's case was fully argued and the debtor took an important step during its course, I think I should rule on it. Again the parties agree that this is an appropriate stage for the determination of this issue.

22. In the course of argument in the matter, the debtor through his solicitor offered an unsolicited undertaking to the Court to commence proceedings against the creditor for negligence within 21 days of the hearing on 13 February 1991. This undertaking was given whatever the result of these proceedings and I therefore note it, given as it was by one solicitor through another.

23. It seems clear that section 40(1)(g) provides for a package of requirements before an act of bankruptcy is committed. This package includes that the debtor has not satisfied the Court of the existence of a counter claim. The debtor argued that it was sufficient that he establish that he had a counter claim, that it was genuine, that it appeared likely to entitle him to damages in excess of the debt alleged by the creditor, and that he has had no other chance in existing or earlier proceedings to set it up, i.e. make or argue it.

24. His allegations here are that his solicitor failed to call or arrange the calling of certain witnesses at the hearing of the Family Law proceedings, that certain arguments or claims that should have been put or made to the Family Court were not put or made, that he gave incorrect advice about the prospects of appeal, and that his general representation of the debtor was grossly inadequate. No evidence was presented to me about the Family Court proceedings themselves other than to say that they concerned "a property settlement". There is no evidence of the result of the proceedings or of the loss alleged to have been sustained from the alleged negligence. There is no evidence of a causal connection between any negligence able to be proved and any loss sustained. In other words, even if negligence could be proved, there is no way of my even guessing what effect non-negligent conduct would have had on the decision of the Family Court.

25. The affidavit of the debtor in this connection alleged that all this negligence was committed by the member of the firm who was handling the case but I learn from this solicitor's affidavit in response that in fact the litigation was conducted by counsel whom he described as, and the debtor did not deny was, "experienced and competent". Whilst some of the allegations made by the debtor might have some particular significance in relation to an instructing solicitor, most of them relate to the conduct in and in relation to court of the case by the barrister.

26. In Re Abrahamson ex parte Crisp and Gunn Limited (1978) 22 ALR 749, Neasey J in the Supreme Court of Tasmania held that it is for the creditor to prove that the debtor has failed to satisfy the Court that he has a set off or counter claim. With respect, I am not sure that this is absolutely correct. What presumably is required is that the debtor show that he has such a counter claim, etc. as justifies the non-payment of the debt. To be satisfied that such a claim exists, it seems to me that the Court should not be required to determine the validity of the claim. What must be demonstrated is that the debtor has a genuine, real and bona fide claim which he ought to be allowed to litigate before bankruptcy proceedings continue: Slaminka v Varshavsky, Morling J unreported 18 April 1985 and Re Laybutt ex parte Robinson and Robinson, Beaumont J unreported 26 June 1985. Several other cases are mentioned in McDonald, Henry and Meek's Bankruptcy Practice. These cases in sum establish that in order to succeed in defeating a bankruptcy notice on the basis that he has a counter claim, a debtor must at least establish by evidence a legal basis for the claim, the facts relied upon and the reasons why the counter claim could not have been set up previously. It must, if ultimately established, result in an order for the payment of a sum of money by the creditor to the debtor (or possibly the immediate delivery of a specific chattel of ascertainable value): James v Abrahams [1981] FCA 46; (1981) 34 ALR 657 per Deane and Lockhart JJ at 664, and must be capable of being enforced or quantified at the time of the attack on the bankruptcy notice: Re GEB a Debtor (1903) 2 KB 340.

27. It is true, as the debtor alleges, that the solicitor concerned has made no effective answer in his affidavit to the allegations of negligence but the debtor's allegations are themselves very general and vague. Even if established, they would not lead to a conclusion that the solicitor owes the debtor any money or even that the negligence led to a result which could and would have been avoided.

28. The question of professional negligence by lawyers in the conduct of court proceedings has been the subject of much consideration in recent years in the cases, of which Giannarelli and Ors v Wraith and Ors (1988) 165 CLR 543 is the most recent definitive pronouncement by the High Court. That case essentially deals with the actions and inactions of advocates in and in connection with court proceedings and does not deal with the activities of instructing solicitors, but I am quite unable to see how the debtor's allegations of negligence here could overcome the strong views of the High Court in that case on the matter, both because of the principles and philosophies which dictated the decision, as well as the particular facts upon which the decision was based. The decision on this counter claim would have to be made on similar principles if it went to trial.

29. For those reasons, I am of the opinion that, whilst the claim of negligence could not have been set up earlier in any proceeding defined by section 40(1)(g) of the Bankruptcy Act, the debtor is unable to satisfy the court that he has a counter claim, set off or cross demand at all, let alone one which is equal to or exceeds the amount contained in the certificate of the Deputy Registrar of the Family Court. Thus if I am wrong in my conclusion that that certificate does not represent a "final judgment or final order" and that the amount referred to in the certificate is in fact a "sum payable under (a) final order", in my opinion the bankruptcy notice is able to proceed as a basis for the recovery of that sum.