Re Iris Ensley Smith Ex Parte: Murray Adait Chesson [1992] FCA 64; (1992) 106 ALR 359 (26 February 1992)

FEDERAL COURT OF AUSTRALIA

Re: IRIS ENSLEY SMITH
Ex parte: MURRAY ADAIT CHESSON
No. B1985 of 1991
FED No. 59
Bankruptcy
[1992] FCA 64; (1992) 106 ALR 359

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
GENERAL DIVISION
Hill J.(1)

CATCHWORDS

Bankruptcy - Debtor's application for leave to proceed out of time in action under s.20 De Facto Relationships Act 1984 (NSW) dismissed with costs - whether pre-existing common money count a "set-off, cross-claim or cross-demand that he could not have set up" - whether certificate of taxation a final order - effect of s.40(3)(b) discussed.

Bankruptcy Act 1966 (Cth): ss.40(1)(g), 40(3)(b)

Re McGregor; McGregor v Clancy and Triado Pty Ltd (1991) 100 ALR 431

Re Ravasio; Ex parte Leonard Norman Pty Ltd (1965) 5 FLR 373

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

Re A Bankruptcy Notice (1934) Ch 431

Re Black (1932) 4 ABC 157

Re Stokvis (1934) 7 ABC 53

Re Gould; Ex parte Skinner [1983] FCA 68; (1983) 72 FLR 393

HEARING

SYDNEY
26:2:1992

Counsel and Solicitors
for Applicant: Mr L. Ellison instructed by

Patterson Byfield and Bryen

Counsel and Solicitors

for Respondent: Mr J. Dupree instructed by

H.D. Kelly

ORDER

The Debtor has a cross-demand of the type referred to in s.40(1)(g).

The Judgement Creditor to pay the Debtor's costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

Miss Iris Ensley Smith ("the Debtor") was served with a Bankruptcy Notice in or about August of 1991. That notice claimed that Mr Murray Chesson ("the Judgment Creditor") had obtained a judgment, in the sum of $5,674.55 (together with interest totalling in all $6,131.47,) in the Supreme Court of New South Wales on 6 July 1990.

2. Before the time fixed for compliance with the Bankruptcy Notice, there was filed by the Debtor an affidavit to the effect that she had a counter-claim, set off or cross-demand of the kind referred to in s.40(1)(g) of the Bankruptcy Act 1966 (Cth) ("the Act"). The consequence of filing that affidavit was that time for compliance was deemed to have been extended, pursuant to s.41(7), pending the determination before me of the issue which now arises, namely, whether I am satisfied that the Debtor 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 she could not have set up in the action or proceeding in which the judgment or order was obtained.

3. Evidence was adduced from the Debtor and despite some cross-examination, which seemed to be directed at credit, there was at the end of the day little relevant dispute.

4. It would seem that the Debtor and the Judgment Creditor lived together for some time in a de facto relationship. There is dispute between them as to when that relationship ceased. That is not a matter, however, which affects the outcome of the present case. The Debtor gave evidence, and there is some objective evidence in corroboration, that certain amounts were paid by her for the benefit of the Judgment Creditor. Specifically, the Debtor deposed that she made payment under a guarantee to a bank to repay debts of the Judgment Creditor incurred by him in the course of a business conducted by him. The Debtor also deposes that certain items of property of the Debtor were in the possession of the Judgment Creditor and not returned to her, as a result of which she has suffered loss. The amount claimed in a Statement of Claim, issued by the Debtor recently but not yet served, is $13,596.78 exclusive of interest and court costs etc.

5. It is not disputed by the Judgment Creditor that, if the claim in question is appropriately to be classified as a counter-claim, set off or cross-demand within s.40(1)(g), that I should be satisfied on the evidence that the Debtor has demonstrated a prima facie case that she has a counter-claim, set off or cross-demand, which is genuine and substantial, equal to or greater in value than the amount of the Judgment Debt. It is accordingly unnecessary for me to detail the circumstances in which it is asserted that the claim by the Debtor against the Judgment Creditor arose.

6. It seems that in or about January 1990, the Debtor wished to apply under s.20 of the De Facto Relationships Act 1984 for an adjustment of property interests between the Judgment Creditor and herself. However, such an application was out of time and accordingly the Debtor, by summons, sought an extension of time pursuant to s.18(2) of the De Facto Relationships Act 1984 in which to commence proceedings. That application came before Master Windeyer who, on 5 July 1990, dismissed the Debtor's claim against the Judgment Creditor, with costs. The court order giving effect to that decision is dated 6 July 1990. Pursuant to this order, the costs were in due course taxed and the resultant figure shown in the Bankruptcy Notice represents the cost order made.

7. The Bankruptcy Notice, it will be recalled, relied upon the order made on 6 July 1990, prior to the taxation of costs. No separate order was taken out after the certificate of taxation was obtained, cf Part 52 r.9(2) of the Rules of Court of the Supreme Court of New South Wales. The effect of an order dismissing a proceeding with costs under Part 52 Rule 9(2) of the Rules of Court of the Supreme Court of New South Wales and the relationship of that rule to Part 52 Rule 63 were considered in T A Field Pty Ltd v Frigmobile of Australia Pty Ltd (1978) 2 NSWLR 488 at 492.

8. The question whether the notice was, in these circumstances, invalid, was reserved by me for further consideration should it become necessary having regard to comments made by Enfield J. in Re McGregor; McGregor v Clancy and Triado Pty Limited (1991) 100 ALR 431 (the appeal in which was apparently dismissed without proceeding to argument); and the decision of Beaumont J. in Wilmot v Buckley [1984] FCA 327; (1984) 2 FCR 540. Accordingly, for the purpose of the present proceedings, it may be assumed that the Bankruptcy Notice was valid.

9. I should however say that as presently advised I have difficulty in accepting some of the comments made by Einfeld J. in Re McGregor. This is not, however, to suggest that the result in that case was wrong.

10. It was long ago decided that an order for costs could be a final order: see eg Re McAlister (1936) 8 ABC 283. The problem that arose for decision in Wilmot v Buckley was whether the certificate of taxation, which was referred to in the bankruptcy notice, was itself a final order, no formal judgment either for the entry of the judgment dismissing the action with costs or as a separate judgment for the taxed costs having been taken out. It was held that it was not. However, his Honour referred to s.40(3)(b) as altering the effect of some of the earlier authorities, including Re Ravasio; Ex parte Leonard Norman Pty Ltd (1965) 5 FLR 373. His Honour then continued (at 544):

"The benefit of this provision may have been available to
the respondents in certain circumstances. Thus, if the
respondent had caused a formal judgment expressing the
orders made by Rath J. on 2 July 1982 to be drawn up, sealed
and entered, then, subject to filing an affidavit under Pt
44, r7, they could have levied execution against the
applicant... That would have enabled the respondents to rely
upon s40(3)(b) of the Act upon the footing that the order
for costs should be treated as if it were a separate
judgment. It would have been deemed to be a final judgment
and thus available to be relied upon as such provided first,
the judgment of 19 July 1982 had been entered; secondly the
costs had been taxed; and thirdly, as Cartwright's case
shows, the notice accurately described the source of the
applicant's liability...".

11. A perusal of the judgment makes it clear that the reference in the above passage to 2 July 1982 is a misprint, and that it should be 19 July 1982. Prima facie that passage would cover the facts of the present case, because the initial judgment corresponding to that of Rath J. on 19 July 1982 was in fact entered, the costs had been taxed and the judgment referred to in the Bankruptcy Notice was not the certificate of taxation, but the judgment that had been taken out and entered. As presently advised, I am of the opinion that the requirement that a judgment will only be final if, inter alia, the judgment is one in which the defendant has had the opportunity of setting up a counter-claim, set-off, or cross-demand, is not to be carried forward into the provisions of s40(3)(b), and that the decision in Re Ravasio, correct although it was having regard to the legislation as then existing, and the facts of the particular case, should now be treated with some caution.

12. However, as the matter was not fully debated before me I need not reach a final conclusion on it.

13. The real issue between the parties in the present case was whether the Debtor's acknowledged claim against the Judgment Creditor can properly be described as a counter-claim, set off or cross-demand and, if that be right, whether it was capable of being set up in the relevant action or proceeding to which s.40(1)(g) of the Act refers.

14. For the Debtor, it was submitted that when s.40(1)(g) refers to "the action or proceeding in which the judgment or order was obtained", that could either be the initial proceeding commenced by the Debtor against the Judgment Creditor under the De Facto Relationships Act 1984, or the cost proceedings which more proximately gave rise to a Bill of Costs being taxed. It was submitted that if the latter was the correct analysis, it was quite clear that the Debtor's claim against the Judgment Creditor could not have been set up in the proceedings whereby costs were taxed. This was, of course, acknowledged.

15. Alternatively, it was submitted by the Debtor that if the relevant proceedings to be considered were those brought initially by the respondent, those proceedings were proceedings commenced by way of summons seeking an extension of time for commencing the action under the De Facto Relationships Act, and the Debtor's claim for moneys owing to her by the respondent could not have legally been brought in those proceedings. A final submission was that when the legislation refers to counter-claim, set off or cross-demand which might have been set up in the action or proceeding in which the judgment or order was obtained, it refers only to a counter-claim, set off or cross-demand capable of being raised after proceedings had been initiated by the Judgment Creditor and by way of answer to those proceedings. Hence, even if it were the case that the Debtor could have initiated proceedings as plaintiff conjointly with the initiation of the De Facto Relationship application, those potential proceedings, not being by way of defence, fell outside the words "counter-claim, set-off or cross-demand" as used in s.40(1)(g).

16. The history of s.40(1)(g) is discussed at length in the judgment of Riley J. in Re Pannowitz; Ex parte Wilson (1975) 6 ALR 287, itself a case warranting a footnote in history as being apparently the precipitating cause of the amendment to the Act inserting s.40(3)(e) (Act No. 12 of 1980, s.23). Suffice it to say here, that the concept of an act of bankruptcy constituted by the non-compliance with a Bankruptcy Notice was introduced into bankruptcy law by s.4 of the Bankruptcy Act 1883 (UK) in substitution for the prior concept of non-payment after service of a Debtor's summons. The language of s.4(1) was, for present purposes, identical to the present s.40(1)(g) and was adopted, with only minor differences, in s.52(j) of the Commonwealth Act of 1924 and finally in the present legislation. The provisions of s.40(3)(b) were introduced with the evident purpose of extending the category of orders and judgments falling within the scope of final orders and final judgments.

17. The policy behind the exclusion from the category of acts of bankruptcy, of those cases where the Debtor has a counter-claim etc which could not have been set up in the action or proceeding in which the judgment debt upon which the bankruptcy notice is based is clear. It was spelled out in relation to the Bankruptcy Act 1898 (NSW) by Maugham A.J. in Re Judd (1924) 24 SR (NSW) 537 at 540, in a passage cited with approval by Lockhart J. in Re Brink [1980] FCA 78; (1980) 30 ALR 433 at 437:

"The object of the Legislature in providing machinery for
the setting aside of a bankruptcy notice where a judgment
debtor has a cross-demand is obviously to prevent a
judgment creditor from pursuing bankruptcy proceedings when,
as between himself and the judgment debtor, the balance of
account is in favour of the judgment debtor..."

18. This statement must, in relation to the present legislation, be qualified in two minor respects. First, the relief granted by the Statute to the Debtor is conditional upon the Debtor acting in a timely fashion; in practical terms this means that the affidavit as to the existence of the cross-claim etc must be filed prior to the expiration of the period limited in the Bankruptcy Notice for compliance. Second, as has been pointed out in various judgments under the present legislation, the bankruptcy notice is not set aside, it is merely spent: James v Abrahams [1981] FCA 46; (1981) 34 ALR 657 at 661 per Deane and Lockhart JJ.

19. A similar view of the policy in relation to the English Bankruptcy legislation was expressed in Re A Bankruptcy Notice (1934) Ch 431 at 440:

"If a creditor has a final judgment against a
debtor and the debtor can satisfy the Court that
he has an answer to the claim of the creditor,
it is quite clear that ought not to be treated
as an act of bankruptcy."

20. In the last mentioned case, the Court of Appeal considered the meaning of the words "counter-claim, set off or cross-demand". In summary, a set off provides a defence, for it diminishes the amount claimed. A counter-claim is a claim which the Debtor might have had against a plaintiff and that can be heard in the action started by the plaintiff against him. In substance, therefore, a counter-claim will likewise act as a defence, not to the claim of the Judgment Creditor, but it is a claim which, if established, will result in relief being available in favour of the Debtor against the creditor claiming against him.

21. The concept of "cross-demand" appears, however, to be the widest of the three expressions used. Of it Lord Hanworth MR said (at 438):

"If a cross-demand is only to be interpreted as
meaning something which could have been
introduced into the action by way of
counter-claim, it adds nothing to the word
`counter-claim'. `Cross-demand' seems to me to
be a word introduced in order to give a wider
ambit to the meaning of these claims, something
that would not be described, certainly, as a
set-off, something that could not have been
brought in the action, something that still lies
outside a counter-claim, but is of a nature which
can be specified and which is of such a nature
that it equals or exceeds the amount of the
judgment debt. I do not desire to say what
`cross-demand' may include, but it is not
difficult to say that it does not include a
claim of such uncertain nature as appears in
these Chancery proceedings."

22. A similar view was expressed by Maugham A.J. in Re Judd (supra at 539-40), where his Honour said that the word "cross-demand" encompassed a claim for unliquidated damages in tort and that a cross-demand under the section need have no connection with the cause of action out of which the judgment debt arose. As his Honour observed, after discussing the case law:

"These cases are all in favour of an
unrestricted meaning being given to the word".

23. I think, in the present case, that the claim which the Debtor has against the Judgment Creditor can aptly enough be termed a cross-demand. It is a claim, sounding in money; it is admittedly a real claim and one which it is reasonable to litigate. However, the Judgment Creditor submits that it is one that the Debtor could have set up in the action or proceeding in which the order for costs was made.

24. Accordingly, it becomes necessary to examine more carefully what is meant by the words "action" or "proceeding" as used in s.40(1)(g).

25. In Re Black (1932) 4 ABC 157 Lukin J., considering s.52(j) of the Bankruptcy Act 1924 (Cth), said (at 160):

"It will be noted that s52(j)... contemplates a
final order not only in an action but also in a
proceeding. A proceeding may mean something as
distinct from an action or any step thereunder
in which final orders are made for the payment
of money. It may also mean a step in an action,
in which proceeding a final order is made for
the payment of money. Sec.52(j) does not of
itself impose any restricted meaning on the word
`proceeding' in the amendment, and there appears
to be no reason for doing so."

26. On the facts of the present case the only litigation, to use a neutral word, between the parties prior to the recent issue by the Debtor of a statement of claim, was a summons issued by the Debtor seeking an extension of time in which to commence proceedings. That summons initiated proceedings between the parties to it, which would, if successful, have permitted the Debtor to have commenced an action against the Judgment Creditor. Prima facie, the technical meaning of action is the evoking of the jurisdiction of a court by writ; whereas a proceeding is commenced by a process other than a writ: Berry (Herbert) Associates v IRC (1977) 1 WLR 143. However, a proceeding may be a step in an action, cf Smalley v Robey and Co Ltd (1962) 1 QB 577. It is not necessary, in the present case, to consider whether the words are used in a technical sense, for there would seem little doubt that both the process commenced by the Debtor by way of summons and the step in that process, whereby the Judgment Creditor proceeded to obtain a certificate of taxation may be capable of being comprehended within the expression proceeding.

27. However, once it is appreciated that the Debtor had never got to the stage of commencing the action under the De Facto Relationship Act, it becomes clear that what must be asked is whether, in the proceedings commenced by summons before Master Windeyer seeking an extension of time, the Debtor could have set up her claim for the moneys owing to her. The words "that he could not have set up in the action or proceeding in which the judgment or order was obtained" mean "could not by law set up in the action": Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd (supra at 437). As Lukin J. said in Re Stokvis (1934) 7 ABC 53 at 57 (cited with approval by Lockhart J.):

"I take as a counter-claim, set off, or cross-demand which
could not be set up as one which, from point of time, or
from its nature, or from absence of empowering provisions,
or from positive inhibition so to do, could not be set up in
the particular case in which judgment was obtained... Mere
failure to take advantage of the opportunity can hardly be
said to be inability."

28. The answer in the present case is self-evident. By its nature, an application for leave to commence an action or proceeding out of time is not a proceeding in which there can be litigated the question whether the Judgment Creditor owes moneys to the Debtor. It is true that the provisions of s.63 of the Supreme Court Act 1970 (NSW) express a policy (also reflected in Part 8 r.1) that all matters in controversy between parties to litigation initiated in the Supreme Court should, as far as possible, be litigated in the one proceeding. But while these provisions might procedurally permit an action in debt to be commenced at the same time as, and pursuant to the same originating process as the application for extension of time to bring proceedings under the De Facto Relationships Act (a matter in respect of which I express no opinion), for present purposes each should be regarded as a separate proceeding. This becomes even clearer once the provisions of s.40(3)(b) are examined.

29. Even more self-evident is the proposition that if the relevant proceeding is to be taken as the taxation of costs, the Debtor's claim could not have been set up in those proceedings. I should say that, as the order relied upon preceded the taxation of costs and was not made pursuant to Part 52 r.9(2) of the Rules of Court of the Supreme Court of New South Wales, it is difficult to see how the taxation of cost proceedings could be relevant.

30. The above discussion assumes that the cost order is, in the sense in which the words are used in the Act, a "final judgment" or a "final order" without the necessity to invoke s.40(3)(b). If it be necessary to invoke, in the present case, s.40(3)(b), that section operates to define the relevant proceeding. Section 40(3)(b) provides as follows:

"(3) For the purposes of paragraph (1)(g)-
...
(b) 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 it was obtained."

31. The effect of s.40(3)(b) was described by Fitzgerald J. in Re Gould; Ex parte Skinner [1983] FCA 68; (1983) 72 FLR 393 at 408 as follows:

"For the purposes of s.40(1)(g), the statutory
fiction effected by the deeming is extended to
convert the `proceedings' in which the order was
in fact obtained into the `action' in which the
notional `final judgment' was obtained."

32. In Re Gould, the order upon which the relevant Bankruptcy Notice was based was an order for costs against the Debtor in an unsuccessful interlocutory application for an injunction. The alleged cross-demand was for damages for breach of an obligation as encumbrancee to exercise reasonable care with respect to a sale of the property. In these circumstances, the deemed proceeding was not the proceedings for final relief, in which proceedings the interlocutory steps were taken, but the application for the interlocutory injunction. It may be noted that the proceedings were not defined by Fitzgerald J. as being the taxation of costs, although this would not have changed the result, which his Honour thought to be self-evident. In the interlocutory proceeding, no other claim would have been possible. Applying the same reasoning, the relevant deemed proceedings here would be the proceedings in which the cost order against the Debtor was made, namely the unsuccessful application for leave proceedings. It is clear that the cross-demand could not have been brought in these deemed proceedings.

33. Accordingly, it becomes unnecessary to determine whether a cross-demand, which could have been set up by way of initiating proceedings or amendment to the statement of claim in proceedings already established, is capable of satisfying s.40(1)(g). However, the decision of the Hight Court in Vogwell v Vogwell (1939) 11 ABC 83 does suggest that in an appropriate case a cross-demand could be seen as a claim which could have been set up in the relevant proceedings where the debtor originated proceedings based on another cause of action which resulted in a judgement for costs against him.

34. The appropriate order in these circumstances is a declaration that I am satisfied that the Debtor has a cross-demand of the type referred to in s.40(1)(g). As indicated earlier in this judgment, the effect of that declaration will be that the Debtor's failure to comply with the terms of the Bankruptcy Notice will not constitute an act of bankruptcy and the Bankruptcy Notice will be spent. The Judgment Creditor must pay the Debtor's costs.