Raymond Marshall Johnstone v Joseph Guss [1998] FCA 117 (13 February 1998)

Last Updated: 10 March 1998

FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE - Adjournment - Bankruptcy proceedings - Trial Judge not satisfied of counterclaim, set-off etc - Full Court appeal unsuccessful - Special leave application pending - Principles to be applied to granting of adjournment.

Bankruptcy Act 1966 (Cth) ss 40(1)(g) and 41(7).

Ahern v D.C.T. [1987] FCA 312; (1987) 76 ALR 137 (applied)

Ebert v Union Trustee Co of Australia [1961] HCA 29; (1961) 105 CLR 327 (applied)

RAYMOND MARSHALL JOHNSTONE (Applicant) v JOSEPH GUSS (Respondent)

VG 7353 of 1997

FINN J

MELBOURNE

13 FEBRUARY 1998

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 7353 of 1997

BETWEEN:	RAYMOND MARSHALL JOHNSTONE Applicant
AND:	JOSEPH GUSS Respondent
JUDGE:	FINN J
DATE OF ORDER:	13 FEBRUARY 1998
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

The application for an adjournment is refused.

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

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 7353 of 1997

BETWEEN:	RAYMOND MARSHALL JOHNSTONE Applicant
AND:	JOSEPH GUSS Respondent

JUDGE:	FINN J
DATE:	13 FEBRUARY 1998
PLACE:	MELBOURNE

EX TEMPORE REASONS FOR JUDGMENT

On the date fixed for the hearing of the creditor's petition in this matter, the debtor applies to have the hearing adjourned pending the outcome of an application for special leave to the High Court from the judgment of the Full Court of this Court Guss v Johnstone (VG 293 of 1997) given on 13 November 1997.

For the present purposes of chronology and setting I simply incorporate by reference the terms of that judgment as also those of Sundberg J in the same matter of 30 May 1997 and 1 July 1997.

The present creditor's petition is based upon the act of bankruptcy resulting from the debtor's noncompliance with a bankruptcy notice the debtor being unable to satisfy Sundberg J that he had, under s 40(1)(g) of the Bankruptcy Act 1966 , a counter-claim, set-off, or cross demand equal to or exceeding the amount of the judgment debt relied upon in the bankruptcy notice.

I would note that the debtor did not apply for an extension of time for compliance with the bankruptcy notice on the day, or before, Sundberg J gave his decision on 30 May 1997, pending the hearing of an appeal from that decision. Rather a stay of the judge's declaratory orders was sought and refused on 1 July 1997. Whether or not an extension of time pending the hearing of this appeal could have been granted in any event - and I express no opinion on that matter - no such application having been made, then s 41(7) took effect according to its terms.

That section provides:

"41(7) [Counter-claim, set-off or cross demand] Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor 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."

As Sundberg J indicated in his reasons of 1 July 1997

"The effect of the declaration made on 30 May was that the time for compliance with the notice expired on that day, and the demand made by it not having been satisfied, the debtor committed an act of bankruptcy."

The Full Court in its reasons concurred in this:

"At the end of that day the time for compliance with the bankruptcy notice had expired and it was not capable of being further extended or revised by an order of the Court, whether constituted by the learned primary Judge, this Full Court or otherwise. See Re Riordan; Ex parte Riordan v Direct Acceptance Corporation Ltd (1995) 63 FCR 147."

For this reason the Full Court refused to go on to consider whether the trial judge was or was not correct in the findings he made on the alleged set-offs, counter claims etc. It said:

"In the present case, the debtor's application to set aside the bankruptcy notice was determined when the learned primary Judge pronounced that he was not satisfied of the existence of a counter-claim or set-off of the requisite kind. At the end of the same day, therefore, an act of bankruptcy occurred. As a result, there is no utility in this Court's acceding to the appellant's invitation to set aside the declaration made at first instance. It should be remembered that, in determining whether or not it is satisfied in terms of s 40(1)(g), this Court does not determine the validity of the set-off or counter-claim but merely decides whether the debtor has a substantial and bona fide claim which he should fairly be permitted to litigate before bankruptcy proceedings are allowed to continue; see eg Ebert v The Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 at 350 and Re James; Ex parte Carter Holt Harvey Roofing (Aust) Pty Ltd (1993) 46 FCR 183 at 188.

Accordingly, even if this Court were persuaded to take a different view from the learned primary Judge and decide that issue in favour of the debtor, it would not nullify the act of bankruptcy committed at the end of 30 May 1997. Nor would it determine the merits of the counter-claim or set-off which the debtor asserts. It would amount to no more than an expression of an opinion, on necessarily incomplete evidence, which might be taken into account, amongst a multitude of other factors, by the Court differently constituted, in deciding how to exercise its discretion whether or not to make a sequestration order on a petition invoking the ineluctable act of bankruptcy which we have held has been committed. There is high authority to the effect that a court should not grant declaratory relief which is not confirmatory of an existing right or obligation in controversy between the parties or which would otherwise be of little practical value; see eg Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564 at 581-582, Trans Realties Pty Ltd v Grbac [1975] 1 NSWLR 170 at 176 and 183-184, Gregory v Philip Morris Ltd (1988) 80 ALR 455 at 482 and the recent discussion by Kiefel J in Minister for Immigration v Ozmanian (1996) 71 FCR 1, 31-32."

It is from this decision that the debtor seeks special leave.

Before turning to the grounds of special leave I should note that I was taken to the decisions of the Full Court of this court on the somewhat analogous question of how a court should deal with the hearing of a creditor's petition when an appeal was instituted against the judgment on which the bankruptcy proceedings were founded.

I refer to Ahern v D.C.T. [1987] FCA 312; (1987) 76 ALR 137 where at 148 the Court said:

"It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds.

These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi-penal consequences."

This view was reiterated in Adamopoulos v Olympic Airways SA (1990) 95 ALR 525.

Turning now to the special leave application. The basis of the errors assigned to the Full Court's decision are captured sufficiently, for present purposes in paras 15-17 of the applicant's summary of argument:

"PART III - APPLICANT'S ARGUMENT

15. The Full Court of the Federal Court of Australia erred by failing and/or declining to decide whether or not the counterclaim, set-off or cross-demand which the Court had previously found could have been a counterclaim, set-off or cross-demand within the meaning of Section 40(1)(g) of the Act was of the type referred to in Section 40(1)(g) of the Act on the basis that there was no declaratory or other relief of any utility that could be granted in favour of the Judgment Debtor as the time for compliance with the bankruptcy notice had expired at the end of the day upon which the learned primary judge pronounced that he was not satisfied of the existence of such a counterclaim, set-off or cross-demand and it was not capable of being further extended or revised.

16. Pursuant to Section 28 of the Federal Court of Australia Act 1976 the Full Court of the Federal Court of Australia had jurisdiction to vary or reverse the judgment of the learned primary judge and find that the Court was satisfied that the debtor had a counterclaim, set-off or cross-demand within the meaning of Section 40(1)(g) of the Act.

17. Further or alternatively, the decision of the Full Court of the Federal Court of Australia would be the determination of the Court for the purposes of Section 41(7) of the Act."

Put shortly, but in reverse order it is said (i) that the act of bankruptcy would not occur until the Full Court itself gave its decision; (ii) the Full Court had jurisdiction to vary or reverse Sundberg J's decision; and (iii) it erred in refusing to decide the question whether or not there was a s 40(1)(g) set off etc.

Bearing in mind the principles applied in the related setting of appeals against the judgment on which a bankruptcy proceeding is founded, I would have to say that in relation to the first of these matters no arguable ground of appeal has been advanced. I merely have the assertion of the ground itself.

In the unanimous decision of the High Court in Ebert v Union Trustee Co of Australia [1961] HCA 29; (1961) 105 CLR 327 on the predecessor to s 41(7) the court said (332-3):

"The provision deals with the case of a debtor by affidavit setting up a counter-claim set-off or cross demand. In effect the sub-section operates to extend the time limited in the bankruptcy notice until the day when the Bankruptcy Court determines whether it is satisfied that the debtor has such a counter-claim, set-off or cross demand. It is obvious that this refers to the decision of the Bankruptcy Court and cannot on any principle be understood as operating with respect, not to the date of that decision, but to the decision of this Court on appeal from the decision of the Bankruptcy Court. The objection therefore fails."

I have previously set out the terms of s 41(7). In the absence of any indication as to why the presently accepted view of the sub-section is arguably incorrect - no canon of construction, no reason of principle or of policy was referred to - I am unable to accept there is an arguable ground here: the more so because in 1966 the provision was re-enacted presumably in the knowledge of the High Court's earlier decision. Counsel for the debtor appeared to concede as much.

As to the remaining two grounds, given that there is by force of s 41(7) an available act of bankruptcy, I am unable to discern what bearing the special leave application has on the present matter even if leave there was granted, and a prima facie case of set-off, etc was found. I say a prima facie case because (in the words of McDonald Henry and Meek at [40.1.340]):

"the degree to which the Court should be satisfied that a debtor has a counter-claim, set-off or cross demand of the required amount may be expressed by saying that the debtor must show that he or she has a prima facie case, even if then and there he or she 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, set-off or cross demand."

It thus would fall to me in any event on the hearing of the petition to determine, if the matter was raised by the debtor, whether there was a set off etc, as also what would be the significance of that in the circumstances.

As I do not consider the special leave application to have such an immediate bearing on the present matter as to warrant adjournment of it, I refuse the application for the reasons I have given.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn

Associate:

Dated: 18 February 1998

Counsel for the Applicant:	Mr Cook
Solicitor for the Applicant:	Morlen and Naughton
Counsel for the Respondent:	Mr Hayes
Solicitor for the Respondent:	Mr Guss
Date of Hearing:	13 February 1998
Date of Judgment:	13 February 1998