Gorczynski v Aitken & Ors (No.2) [2011] FMCA 86 (22 February 2011)

Federal Magistrates Court of Australia

[Index] [Search] [Download] [Help]

---

Gorczynski v Aitken & Ors (No.2) [2011] FMCA 86 (22 February 2011)

Last Updated: 22 February 2011

FEDERAL MAGISTRATES COURT OF AUSTRALIA

GORCZYNSKI v AITKEN & ORS (NO.2)

[2011] FMCA 86

BANKRUPTCY – Application to set aside a bankruptcy notice – whether valid service of bankruptcy notice – whether circumstances such as to go behind judgment/order on which bankruptcy notice based – whether counter-claim asserted by corporation constituted counter-claim of debtor within s.40(1)(g) of the Bankruptcy Act 1966 (Cth) – application dismissed.

Acts Interpretation Act 1901 (Cth), s.25C Bankruptcy Act 1966 (Cth), ss.40, 41, 306 Bankruptcy Regulations 1996 (Cth), reg.4.02 Legal Profession Act 2004 (NSW), ss.363, 368

Adams v Lambert (2006) 228 CLR 409; [2006] HCA 10 Boglari v Coadys (a firm) (2009) 7 ABC(NS) 553; [2009] FCA 1398 Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264; [1997] FCA 151 Chen v Bannerman [2001] FCA 160 Doyle v Hall Chadwick [2007] NSWCA 159 Emerson and Another v Wreckair Pty Ltd [1992] FCA 16; (1992) 33 FCR 581; (1992) 109 ALR 539 Goyan v Motyka [2009] FCA 776 Joossé v Commissioner of Taxation (2004) 137 FCR 576; [2004] FCAFC 245 Kirk v Ashdown [1999] FCA 522 Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71; [1988] HCA 34 Massih v Esber (2008) 250 ALR 648; [2008] FCA 1452 Murdaca v Accounts Control Management Services Pty Ltd (2007) 5 ABC(NS) 251; [2007] FCA 964 Oliveri v Stafford and Others (1989) 24 FCR 413; [1989] FCA 486 Re a Debtor; Ex parte Commissioner of Taxation (1963) 19 ABC 296 Re Boris Ganke Ex Parte: Boris Ganke Peter Andrew Somerset and Paul Mervyn Fordyce Trading As "P A Somerset and Co" [1995] FCA 1183 Re Bruce William Naghten & Anor; Bruce William Naghten & Anor v Commonwealth Bank of Australia [1998] FCA 635 Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers; Re Tresidder; Tresidder v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331; [2003] FCA 373 Re Schekeloff; Ex parte Schekeloff v The Hopkins Group Pty Limited (1989) 22 FCR 407; [1989] FCA 91 Scope Data Systems Pty Ltd v Aitken (No. 2) [2010] NSWDC 65 Scope Data Systems Pty Ltd v Aitken (No. 3) [2010] NSWDC 66 Taubert v Eddaglide Pty Ltd [2001] FCA 567 Trustees of the Franciscan Missionaries of Mary v Weir (2000) 98 FCR 447; [2004] FCA 574 Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572; [1995] FCA 1359 Wren v Mahony (1972) 126 CLR 212; [1972] HCA 5

Applicant:

PETER FRANCIS GORCZYNSKI

First Respondent:

ANDREW NAPIER AITKEN

Second Respondent:

PETER DOUGLAS MCLACHLAN

Third Respondent:

ANDREW BRUCE THORPE

File Number:

SYG2550 of 2007

Judgment of:

Barnes FM

Hearing dates:

28 July & 3 September 2010

Date of Last Submission:

1 October 2010

Delivered at:

Sydney

Delivered on:

22 February 2011

REPRESENTATION

Applicant:

In person

Counsel for the Respondents:

Mr A C Casselden

Solicitors for the Respondent:

MacPherson & Kelley Lawyers

ORDERS

(1) The application be dismissed.
(2) The applicant pay the costs of the respondents as agreed and in the absence of agreement taxed in accordance with the Federal Court Rules.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY

SYG2550 of 2007

PETER FRANCIS GORCZYNSKI

Applicant

And

ANDREW NAPIER AITKEN

First Respondent

PETER DOUGLAS MCLACHLAN

Second Respondent

ANDREW BRUCE THORPE

Third Respondent

REASONS FOR JUDGMENT

Background

1. This is an application to set aside Bankruptcy Notice NN438/07. These proceedings have a long history, reflecting the fact that there was a lengthy adjournment by consent until disposition of an application for leave to appeal under the Legal Profession Act 2004 (NSW) in relation to costs assessments which were the basis for the two Local Court judgments relied on in the Bankruptcy Notice.
2. The applicant, Mr Gorczynski, seeks an order setting aside the Bankruptcy Notice primarily on the basis that he has 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) that he could not have set up in the action or proceeding in which the judgment or order that formed the basis for the Bankruptcy Notice was obtained. He also relies on a number of other grounds.
3. Relevantly, between about August 2004 and August 2005 the respondents carried on a business as a firm of solicitors under the name Aitken McLachlan Thorpe Lawyers (AMT). AMT acted for Scope Data Systems Pty Ltd (Scope) a company of which Mr Gorczynski is a director and shareholder.
4. AMT provided legal services in relation to litigation to which Scope was a party pursuant to written retainers and costs agreements dated 27 August 2004 and 20 September 2004 which were addressed to both Mr Gorczynski and Scope. The letter of 20 September 2004 from AMT to Mr Gorczynski confirmed that he would be personally liable for AMT’s legal fees and disbursements. As discussed further below, there is a dispute between the parties as to whether Mr Gorczynski was party to any retainer or costs agreement. AMT maintains that it was always their intention that Mr Gorczynski be personally liable in respect of AMT’s costs and that Mr Gorczynski accepted this. Mr Gorczynski disputes this. He asserts, among other things, that he delivered a letter to AMT on 27 September 2004 in which he amended the costs agreement to remove the reference to any liability on his part. AMT (through a former partner, Mr Thorpe), denies receipt of such a letter.
5. AMT’s legal services were provided in respect of claims brought in the Supreme Court of New South Wales by Scope as plaintiff against Agostini Jarrett Pty Ltd (the Jarrett matter) for alleged professional negligence as well as by Scope against BDO Nelson Parkhill (the BDO matter). AMT’s retainer in relation to the Jarrett matter was terminated in about August 2005. The Jarrett proceedings were discontinued by Scope in about August 2007 in circumstances in which various costs orders were made against Scope.
6. In late 2005 AMT sought assessment of its costs against Scope and Mr Gorczynski incurred in the course of the firm acting in the Jarrett and BDO matters in the Supreme Court under the Legal Profession Act 1987 (NSW) (Assessments 2005/1766 and 2005/1780). Scope also sought a costs assessment against AMT (Assessment 2005/1919).
7. On 3 April 2006, while these matters were before the costs assessor, Scope filed a notice of motion in the Supreme Court of New South Wales against three respondents (a partner and a solicitor in AMT and the costs assessor) seeking that the three costs assessments be stayed pending resolution of issues about costs between the parties and/or that the costs assessor determine the validity of AMT’s costs assessment applications before taking any other step towards assessment of the three applications. It appears that by this motion Scope sought to dispute AMT’s claim that Mr Gorczynski was liable for AMT’s costs and also whether the assessor had jurisdiction to proceed with the assessments in circumstances where Scope had advised the costs assessor of a proposed negligence action against AMT which was said to exceed the claimed costs.
8. The notice of motion was dismissed on 8 May 2006. The Supreme Court gave leave to Scope to start afresh by way of a summons. On 25 May 2006 the Crown Solicitor notified Scope that while the Supreme Court litigation was “current” the costs assessor did not propose to resume the costs assessment. However, Scope did not commence further proceedings at that time. The costs assessor concluded that the assessments should proceed and issued certificates of determination of the costs claimed by Scope and Mr Gorczynski on 25 July 2006.
9. Under s.368(5) of the Legal Profession Act 2004 , on the filing of a certificate of determination of costs in the registry of a court with jurisdiction to order the payment of that amount of money the certificate is “taken to be a judgment of that court for the amount of unpaid costs”. On 25 July 2006 AMT obtained judgments against both Scope and Mr Gorczynski in the Local Court of New South Wales in respect of the certificates of determination of costs made by the costs assessor dated 25 July 2006 in Assessment number 2005/1766 in the amount of $29,599.08 and in Assessment number 2005/1780 in the amount of $2,072.91.
10. In Bankruptcy Notice NN438/07 issued on 7 February 2007 AMT claimed that Mr Gorczynski was indebted to it for a total amount of $33,226.10 (including interest) based on these judgments, copies of which were annexed to the Bankruptcy Notice.
11. According to AMT, the Bankruptcy Notice was served on Mr Gorczynski pursuant to an order for substituted service made by a Registrar of this court on 6 July 2007.
12. On 17 August 2007 Mr Gorczynski filed this application. It is not in dispute that the application was filed within the time fixed for compliance with the Bankruptcy Notice.
13. It was not until 27 August 2007 (after these proceedings were commenced) that Scope initiated an appeal in relation to the costs assessments by way of summons filed in the Supreme Court of New South Wales. Initially the summons sought to set aside the Local Court judgments based on the costs assessments and also alleged professional negligence on the part of AMT.
14. By an amended summons dated 9 October 2007 Scope sought orders setting aside the three determinations of the costs assessor (the appeal proceedings). Mr Gorczynski was also a party to those appeal proceedings.
15. Scope’s professional negligence claim against AMT became the subject of separate proceedings (to which Mr Gorczynski is not a party) commenced on 29 October 2007 by way of statement of claim filed by Scope in the Supreme Court of New South Wales (the professional negligence proceedings).
16. On 18 February 2008, by consent, the Supreme Court ordered a stay of the two Local Court judgments until further order of the court. Orders were made by this court, by consent, standing over the application to set aside the Bankruptcy Notice until after the final disposition of the Supreme Court appeal proceedings. The Supreme Court made orders transferring the appeal proceedings to the District Court pursuant to the Courts and Crimes Legislation Amendment Act 2008 (NSW) on 28 August 2008.
17. On 8 October 2008 the Supreme Court transferred the professional negligence proceedings to the District Court at the request of Scope and AMT.
18. On 25 March 2010 Gibson DCJ dismissed an application by Scope and Mr Gorczynski for an adjournment of the appeal proceedings, dismissed their application for an extension of time to commence those proceedings, dismissed the proceedings and ordered that Scope and Mr Gorczynski pay AMT’s costs of those proceedings (see Scope Data Systems Pty Ltd v Aitken (No 2) [2010] NSWDC 65). On 28 April 2010 the District Court ordered that Scope and Mr Gorczynski pay such costs on an indemnity basis (see Scope Data Systems Pty Ltd v Aitken (No. 3) [2010] NSWDC 66).
19. Thereafter the hearing of the application to set aside the Bankruptcy Notice proceeded.

Grounds relied on by Mr Gorczynski

20. In his affidavit sworn and filed on 17 August 2007 in support of the application to set aside the Bankruptcy Notice, Mr Gorczynski relied on six grounds. However in written submissions dated 16 February 2010 (prepared at a time when Mr Gorczynski had legal representation), the only ground relied on was that there was a counter-claim, set-off or cross demand consisting of the claim for professional negligence the subject of Scope’s professional negligence proceedings against AMT which was said to exceed the amount claimed in the Bankruptcy Notice.
21. When this matter was heard, Mr Gorczynski, who was again self-represented, indicated that he did not press the grounds in his affidavit that asserted that the proceedings were improperly commenced or that the Bankruptcy Notice was not in the correct form but that the other four grounds were maintained. Such grounds are that there was not valid service of the Bankruptcy Notice and/or compliance with the orders for substituted service made on 6 July 2007; that Mr Gorczynski was not personally liable for Scope’s debts; that the “amounts entered in the Local Court judgement (sic) debt [were] incorrect”; and that “Scope has a counterclaim which exceeds the amount in the Bankruptcy Notice”. However counsel for AMT addressed all six grounds. As Mr Gorczynski is self-represented I have also considered each of the grounds raised in his affidavit of 17 August 2007.

The Bankruptcy Notice

22. Insofar as it was contended that the “proceedings” were improperly commenced, this appears to refer to the fact that the Bankruptcy Notice was amended. However I accept that, as deposed to by Mr Christopher Michael Martin in his affidavit of 27 August 2007, the Bankruptcy Notice was amended prior to lodgement with ITSA and service upon the applicant, to indicate the correct name of the creditor. The Bankruptcy Notice bears stamps and signatures indicating that these amendments were authorised by the Official Receiver. It is not invalidated by such amendments.
23. The only issue taken with the form of the Bankruptcy Notice was that the numbering of certain paragraphs in the Notice did not correlate with cross-referenced paragraphs referred to therein. This appears to be due to misnumbering of such paragraphs (in particular references to paragraph 3 should have been references to paragraph 2). I note that reg.4.02(1) of the Bankruptcy Regulations 1996 (Cth) provides that “the form of bankruptcy notice set out in Form 1 is prescribed”. However sub-regulation 3 of reg.4.02 provides that the requirement that the bankruptcy notice follow Form 1 in respect of its format “is not to be taken as expressing an intention contrary to section 25C of the Acts Interpretation Act 1901 (Cth)”. Under s.25C “[w]here an Act prescribes a form, then, unless the contrary intention appears, strict compliance with the form is not required and substantial compliance is sufficient”. In this case I am satisfied that there was substantial compliance with the Form.
24. Moreover, having regard to s.306 of the Bankruptcy Act, the failure to comply strictly with the form prescribed under reg.4.02 will not make the Bankruptcy Notice invalid or a nullity. Section 306 can be relied on to cure formal defects or irregularities in a Bankruptcy Notice, including a failure to comply strictly with the form prescribed (see s.41(2), reg.4.02 of the Bankruptcy Regulations, Trustees of the Franciscan Missionaries of Mary v Weir (2000) 98 FCR 447; [2004] FCA 574 and Adams v Lambert (2006) 228 CLR 409; [2006] HCA 10 at [24] – [28]).
25. In this case, consistent with the approach taken in Adams v Lambert the misnumbering of paragraphs in the Bankruptcy Notice is a formal defect which is not such as to have caused substantial injustice. Strict compliance with the form is not made essential by the Bankruptcy Act and when one has regard to the Bankruptcy Notice as a whole, it cannot be said that the misnumbering of the paragraphs “could reasonably mislead a debtor as to what is necessary to comply with the notice” (see Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71; [1988] HCA 34 at [15], and in Adams v Lambert at [31]). In addition, it cannot be suggested that the applicant was misled. He identified the misnumbering in his affidavit. Moreover, he complied with the terms of the Bankruptcy Notice by filing the application to set it aside within the prescribed time.
26. Hence, insofar as reliance may be placed on either of the grounds in paragraphs 3(a) or (b) in Mr Gorczynski’s affidavit of 17 August 2007, such grounds are not made out.

Service of the Bankruptcy Notice

27. It appears that the primary contention in relation to service of the Bankruptcy Notice is that service was not in accordance with orders for substituted service made by this court on 6 July 2007 because those orders provided for documents to be served on the “Judgment Debtor”. It was submitted that such orders required service on Scope, in addition to service on Mr Gorczynski, notwithstanding that Scope is not named in the Bankruptcy Notice.
28. It has not been established that service of the Bankruptcy Notice was deficient. At issue is whether or not a Bankruptcy Notice which relates only to Mr Gorczynski was served on Mr Gorczynski. Whether or not it was served on Scope is irrelevant to such an issue. Moreover I do not accept that service on Scope was specified by the reference to the “Judgment Debtor” in the orders for substituted service as a means of bringing the notice to the attention of Mr Gorczynski. Mr Gorczynski was a judgment debtor under the Local Court judgments which formed the basis for the Bankruptcy Notice. It is clear that the reference to the Judgment Debtor in the order for substituted service made by a Registrar of this court on 6 July 2007 is a reference to Mr Gorczynski as such a Judgment Debtor. The orders related to service of the Bankruptcy Notice addressed to Peter Francis Gorczynski and the manner in which service of that Bankruptcy Notice on Mr Gorczynski may be effected. The fact that there was also another judgment debtor (Scope) named in the Local Court judgments on which the Bankruptcy Notice was based does not mean that the Bankruptcy Notice that did not relate to Scope also had to be served on Scope. This contention does not establish any deficiency in service of the Bankruptcy Notice.
29. In addition, Mr Gorczynski claimed that service was defective because the Bankruptcy Notice had not been “delivered” to him at a specified address in Newport, New South Wales. However the order for substituted service provided for service by methods which included “sending” a copy of the Bankruptcy Notice together with a sealed copy of the order to the Newport address by pre-paid ordinary post addressed to the Judgment Debtor. It did not require personal delivery to Mr Gorczynski (or to anyone else) at that address. It is apparent from the affidavits of service annexed to the affidavit of Mr Martin sworn on 27 August 2007 which are relied on by the respondent in this respect, that this aspect of the orders for substituted service was met by Mr Martin sending a letter by prepaid post addressed to Mr Gorczynski to the Newport address specified in the orders for substituted service on 12 July 2007 attaching the amended application for substituted service, a copy of the orders made and a copy of the Bankruptcy Notice. This contention is not made out.
30. In addition, Mr Gorczynski contended that the sealed envelope that was left in the laundromat at 78 Booth Street, Annandale was not marked to the attention of Scope Data Systems Pty Ltd. This appears to take issue with that part of the orders for substituted service that required personal service “on any person apparently over the age of sixteen (16) years at 78 Booth Street, Annandale” of a copy of the Bankruptcy Notice and the orders for substituted service “in a sealed envelope marked to the attention of the Judgment Debtor”. Again, it is clear that the reference to the Judgment Debtor in the orders for substituted service of the Bankruptcy Notice is a reference to the judgment debtor named in the Bankruptcy Notice – that is Mr Gorczynski. Service was, as attested to in the affidavit of Mr Martin, properly effected on Mr Gorczynski in accordance with the orders for substituted service. There was no requirement that the envelope be marked to the attention of Scope.
31. Insofar as Mr Gorczynski claimed that he did not know when such sealed envelope was served, he also conceded that it was “apparently handed to one of the new casual employees who put it away but did not tell [him] or anyone else”. These circumstances do not establish that service was not properly effected.
32. There can be no doubt that Mr Gorczynski received the Bankruptcy Notice. It is not in dispute that he filed the application seeking to set it aside within the prescribed time. It has not been established that there was not valid service of the Bankruptcy Notice or that there was any failure to comply with the orders for substituted service of the Bankruptcy Notice.

The Local Court judgments

33. Ground 3(d) disputes that Mr Gorczynski is “personally liable for Scope’s debts”. Ground 3(e) is that the “amounts entered in the Local Court judgement (sic) debts are incorrect”. These grounds raise related issues, insofar as both claims involve an assertion that the court should go behind the Local Court judgments on which the Bankruptcy Notice is based.
34. A court will, in general, accept a judgment as conclusive evidence of the existence of a debt relied on in a bankruptcy notice. However in an appropriate case the court may go behind the judgment on which a bankruptcy notice is founded where substantial reasons are given for questioning whether there is in truth and reality a debt due to the creditor (Olivieri v Stafford and Others (1989) 24 FCR 413; [1989] FCA 489). While this may be done on an application to set aside a bankruptcy notice (as well as on the hearing of a creditor’s petition), the court should bear in mind that the consequences of having committed an act of bankruptcy are not as severe as the making of a sequestration order (Byron v Southern Star Group Pty Ltd [1997] FCA 151; (1997) 73 FCR 264 at 270; [1997] FCA 151).
35. Mr Gorczynski does not dispute that the judgments or orders on which the Bankruptcy Notice is based constitute final judgments or final orders as required by s.40(1)(g) of the Bankruptcy Act. Nor is any issue taken with the procedure whereby the costs assessment orders were registered for enforcement in the Local Court of New South Wales. There is no suggestion that there has been a failure to annex copies of the correct judgments or orders to the Bankruptcy Notice. No issue arises about the fact that two judgment debts are included in the same Bankruptcy Notice and there is no suggestion that interest has been miscalculated in the Bankruptcy Notice.
36. Mr Gorczynski’s complaint in relation to the amount of the judgment debt is that the amounts calculated by the costs assessor in matters 2005/1919 and 2005/1766 are incorrect and also different from one another and that, based on the assessor’s figures, the judgment debt entered in the Local Court in relation to matter 2005/1766 could only be either $27,055.35 or $27,344.08 (not $29,599.08).
37. Assessment number 2005/1919 was the assessment made in relation to the application brought by Scope as costs applicant in relation to AMT as the costs respondent. Mr Gorczynski was not a party to that application. That assessment is not relevant in the present proceedings and is not the basis for either Local Court judgment relied on in the Bankruptcy Notice.
38. Cost assessment number 2005/1766 was made on the application by AMT. The costs respondents were both Scope and Mr Gorczynski. According to the certificate of determination the costs respondents (that is Scope and Mr Gorczynski) were to pay the costs applicant (AMT) the sum of $29,599.08. This amount is the amount that appears in the judgments annexed to the Bankruptcy Notice by virtue of which that certificate of determination of costs was registered for enforcement.
39. The other judgment or order on which the Bankruptcy Notice is based relates to costs assessment number 2005/1780 in which the costs applicant was AMT and the costs respondents were Scope and Mr Gorczynski who were ordered to pay $2,243.91 (consisting of costs of $2,071.91 and interest). It appears that the Local Court judgment relates only to the costs component of the costs assessment, being in an amount of $2,072.91.
40. Insofar as Mr Gorczynski takes issue with the amounts stated in the Local Court judgments, the amounts are based on and do not exceed the amounts specified in the relevant certificates of determination of costs. The failure of AMT to obtain judgment for the amount of interest included in the certificate of determination of costs in assessment number 2005/1780 does not invalidate the Bankruptcy Notice which claims the amount of the judgment debts and post-judgment interest pursuant to the Uniform Civil Procedure Rules.
41. In fact it seems that Mr Gorczynski’s concern is a suggested mathematical error in the certificate of determination of costs 2005/1766. He claimed that the total amount of the costs was incorrectly calculated as $29,599.08 and should have been $27,055.35 or $27,344.08. Insofar as Mr Gorczynski takes issue with the assessment of the costs by the costs assessor he in effect asks the court to go behind the judgments on which the Bankruptcy Notice was based.
42. I note that the costs assessor’s calculations included interest on the amount of costs payable and that a difference in calculation in the assessments 2005/1766 and 2005/1919 may reflect the fact that assessment 2005/1766 included the fee for the costs assessment application that had been paid by AMT. However, even if Mr Gorczynski’s claim about mathematical miscalculation of the amount of the costs in costs assessment 2005/1766 was accepted, such that on his figures the calculation should be $27,055.35 or $27,344.08 instead of $29,599.08, such a contention could only support a finding that the amount of the debt should be reduced, rather than that there was no debt at all or no debt sufficient to establish the minimum required to ground a bankruptcy notice (Olivieri v Stafford at 432 and Emerson v Wreckair Pty Limited [1992] FCA 16; (1992) 33 FCR 581 at 586; [1992] FCA 16; (1992) 109 ALR 539). In these circumstances the issues raised are not such as to warrant going behind the Local Court orders or judgments or otherwise such as to establish invalidity of the Bankruptcy Notice or a basis on which it should be set aside.
43. The other issue relevant to the question of whether the court should go behind the Local Court orders or judgments is that Mr Gorczynski disputes that he is personally liable for Scope’s debts. His contention is that the costs assessments were in relation to AMT’s costs of providing legal services to Scope in two separate Supreme Court proceedings to which he was not a party, that no legal services were provided to him personally and that he expressly informed AMT that he would not accept personal liability for any costs incurred by Scope (except to the extent of his liability as a director).
44. The certificates of determination were issued by the costs assessor on 25 July 2006. While prior to that time Scope had taken issue with the validity of AMT’s application (which related to both Scope and Mr Gorczynski), its notice of motion was dismissed in the Supreme Court on 8 May 2006. No further proceedings of this nature were instituted by Scope or by Mr Gorczynski prior to 25 July 2006.
45. Mr Gorczynski wrote to AMT on behalf of Scope on 19 October 2006 advising that an application was to be made for review of the costs assessments. However no such review was sought prior to the issue and service of the Bankruptcy Notice.
46. It was not until 27 August 2007 that Scope instituted proceedings against AMT in the Supreme Court (proceedings number 14381/2007) seeking to have the Local Court judgments set aside and that the costs orders be disallowed. On 7 October 2007 Scope filed an amended summons in those proceedings seeking to appeal from the cost assessor’s determinations. Mr Gorczynski became a plaintiff in those proceedings.
47. On 29 October 2007 Scope commenced separate proceedings (20380/2007) in the Supreme Court against AMT alleging professional negligence in substantially the same terms as the earlier notice of motion which Scope had filed on 4 April 2006 during the assessment process. Mr Gorczynski is not a party to those proceedings or to any other proceedings against AMT relevant to these proceedings.
48. As indicated, both the appeal proceedings and the negligence proceedings were transferred from the Supreme Court to the District Court. Scope sought to have its negligence proceedings heard before the appeal proceedings. That application was dismissed by Gibson DCJ on 25 March 2010.
49. Gibson DCJ also dismissed the application of Scope and Mr Gorczynski for leave to appeal against the costs assessments (see Scope Data Systems Pty Ltd v Aitken (No 2)). Leave was necessary as the application had been filed almost a year after the 28 day appeal period for costs assessments had expired. According to Gibson DCJ, it was not in dispute that the appeal periods in relation to the assessments had expired on 31 August 2006 and 13 September 2006. Her Honour found (at [20]) that there had been substantial delay that was not satisfactorily explained by Mr Gorczynski (who claimed that he was “busy and stressed”).
50. According to Gibson DCJ the summons filed by Scope on 27 August 2007 in the Supreme Court did not amount to an appeal under ss.208L or 208M of the Legal Profession Act 1987 (NSW) or the applicable provisions of the Legal Profession Act 2004 (NSW), as the plaintiff had sought relief of a different nature (at [7]). The amended summons filed on 9 October 2007 in which Mr Gorczynski was joined as a plaintiff contained the grounds of appeal considered by Gibson DCJ.
51. After a consideration of relevant principles in relation to whether leave to commence proceedings out of time should be granted in the face of a delay, Gibson DCJ refused to grant an extension of time to the plaintiffs. Her Honour was of the view (at [7]) that there had been a delay of a “substantial nature”. Importantly, in the course of making this determination, her Honour addressed (at [25]) a contention that the plaintiffs (Scope and Mr Gorczynski) had “very strong prospects of success” on the grounds on which they challenged the costs assessments in the appeal proceedings. Those grounds included asserted mathematical errors and in particular, a challenge to whether or not Mr Gorczynski was a party to the retainers with AMT. In that respect Gibson DCJ noted that leave to appeal in relation to factual issues was required independently of the application for leave to appeal out of time. In addition, her Honour had regard to the fact that as “serious allegations” were made, the burden of proof may have to be established in accordance with s.140(2) of the Evidence Act 1995 (NSW) (at [28]). Her Honour also saw real difficulties in making out grounds which asserted a failure of the assessor to give proper reasons “having had regard to the long and careful analysis of the relevant issues in the cost assessors judgment” (at [28]).
52. The main ground of appeal was said to rely on the principle that where there was a real dispute as to whether costs were payable, the costs assessor should not complete the assessment unless satisfied the costs were payable, because a certificate could be filed to take effect as a judgment (see Doyle v Hall Chadwick [2007] NSWCA 159 at [61]). However Gibson DCJ found (at [27]) that the case for Scope and Mr Gorczynski bringing such an argument was dependent on the other grounds (which included Mr Gorczynski’s present argument that he was not a party to the retainer with AMT and hence not liable for the debt) and that it was only if such grounds were so strong as to be unarguable that such an argument could be mounted.
53. Gibson DCJ concluded (at [29]):
    • ...there is no stand-out legal issue of any kind of the kind that would put the court on notice that there are issues in favour of the plaintiffs of the kind that would make a court reluctant to visit the injustice upon a party of not having the issues in a summons for appeal being heard in the proper way, namely in full and at a contested hearing.
54. Her Honour was “fortified in this regard by the history of the matter”, including a degree of delay described as “of an unfortunate kind” relevant to whether fine detail could be recollected so long after the events in question (which occurred in 2004) (at [29]).
55. Gibson DCJ also found that AMT could point to substantial and serious prejudice by reason of the commencement of these bankruptcy proceedings on the understanding that there was no appeal to be lodged, as well as by reason of difficulties caused by the winding up of the law firm’s partnership and the forensic prejudice occasioned by the difficulty of remembering events after such a time had passed in circumstances where Scope and Mr Gorczynski were said to “have some real problems in relation to most, if not all, of the grounds of appeal” (at [31]).
56. The extension of time to appeal was refused. The plaintiffs were ordered to pay the defendant’s costs.
57. On 28 April 2010 Gibson DCJ ordered that Scope and Mr Gorczynski pay AMT’s costs on an indemnity basis (see Scope Data Systems Pty Ltd v Aitken (No 3)). In the course of that judgment Gibson DCJ again referred to the unlikelihood of success of the appeal proceedings (at [11]) in the context of considering a contention by AMT that the appeal proceedings had been commenced and carried on for an ulterior purpose (to forestall or delay the bankruptcy proceedings).
58. Her Honour found (at [13]):
    • The purpose of the 28-day appeal period is to ensure that there is finality in litigation. In addition, regard must be had to the provisions of ss56-62 Civil Procedure Act 2005 (NSW) that the resolution of proceedings should be “just, quick and cheap”. In addition, the significant concern expressed by the High Court in AON Risk Services Australia Ltd v Australian National University concerning the impact of delay in legal proceedings means that the days when parties can come before the courts with late and inadequate explanations for commencing proceedings where the chronology of events must lead to an inference that the proceedings were commenced for some ulterior purpose are now over.
59. There has been no appeal from either of the judgments of Gibson DCJ and there is no evidence of any application for leave to appeal.
60. In this case the Bankruptcy Notice accurately followed the judgments of the Local Court in relation to the amounts specified. Such a Bankruptcy Notice can be valid notwithstanding that the judgment overstates the amount due, in the absence of reasons to go behind the judgment (see Olivieri v Stafford; Emerson v Wreckair Pty Limited). The obligation is to comply with the judgment debt as representing the amount in fact due at the date of issue of the Bankruptcy Notice and in respect of which the creditor is entitled to issue execution. That is so even if there are grounds for having the court which issued the judgment vary it, or if the amount of the judgment is subsequently varied on appeal. As indicated, even if Mr Gorczynski’s contentions in relation to the calculations within the costs assessment were correct, that is not such as to constitute substantial reasons for questioning whether there is a debt due, because such contentions would at best support a finding that the amount of the judgment debt should be reduced, but not to an amount less than the minimum on which a bankruptcy notice should be based and not to establish that there was no debt at all (see Olivieri v Stafford and Emerson v Wreckair). This is not a sufficient basis to warrant going behind a judgment. The contentions about mathematical miscalculations do not establish substantial reasons for questioning whether there is in truth and reality a debt due from Mr Gorczynski to AMT and the issue that Mr Gorczynski takes in relation to the amount of the judgment debts (ground 3(e)) is not a basis for the setting aside the Bankruptcy Notice.
61. More generally, insofar as Mr Gorczynski sought that this court go behind the judgments of the Local Court by way of revisiting the costs assessments (as he had sought to do in the application for leave to appeal from the costs assessments), in an appropriate case the court has the power to go behind a judgment debt to determine whether there is in truth consideration for a judgment debt on an application to set aside a bankruptcy notice, as well as on the hearing of a creditor’s petition. However substantial reasons must be given for questioning whether there is, in truth and reality, a debt due to the creditor (see Olivieri v Stafford; Goyan v Motyka [2009] FCA 776; and Boglari v Coadys (a firm) (2009) 7 ABC(NS) 553; [2009] FCA 1398).
62. As indicated above, the principal basis on which Mr Gorczynski asks the court to go behind the judgment debts is that he claims that he was not personally a party to the Supreme Court proceedings in which AMT provided legal services to Scope, that AMT did not provide any legal services to him personally and, critically, that he informed AMT that he would not accept personal liability for any costs incurred by Scope except to the extent to which a company director would normally be liable. This is disputed by AMT. The retainers and costs agreements relied on before the costs assessor referred to Mr Gorczynski as well as to Scope.
63. Resolution of this issue would require determination of disputed matters of fact about events in 2004, in particular, in relation to what occurred in communications and correspondence between Mr Gorczynski and AMT (including communications with a former employee of AMT). This claim by Mr Gorczynski was raised in the course of the costs assessment. It was put to the assessor that there should not be any assessment of AMT’s costs until a court determined the disputed issues. However, as noted above, the notice of motion which was filed on 4 April 2006 was dismissed and no summons was issued in the Supreme Court until over a year after the costs assessments were issued in July 2006.
64. The costs assessments are not in the nature of default judgments. Detailed reasons were given by the assessor. The evidence before the court is not such as to establish fraud or collusion or a reason to doubt that the assessments were founded on a real debt or real consideration (see Wren v Mahony (1972) 126 CLR 212; [1972] HCA 5). Nor is there any suggestion of new evidence in the sense considered in Kirk v Ashdown [1999] FCA 522.
65. Mr Gorczynski had the opportunity to appeal from the costs assessment. He did not do so within time. When he ultimately sought leave to do so, over a year out of time and after service of the Bankruptcy Notice, his application for leave to appeal was heard at a time at which he had legal representation. As set out above, that application was dismissed by Gibson DCJ in circumstances where her Honour had regard to Mr Gorczynski’s lack of prospects of success in relation to this claim.
66. Mr Gorczynski seeks to re-agitate the matter that he was not granted leave to have dealt with by the District Court.
67. Having regard to the issues in question, the history of this matter, the nature of the assessor’s decision and the opportunity that Mr Gorczynski had to raise these issues on appeal, I am not persuaded on the evidence before the court that substantial reasons have been established for questioning whether there is in truth and reality a debt due from Mr Gorczynski to AMT such that I should exercise my discretion to go behind the judgment in proceedings of the nature presently before the court.
68. I note that the parties consented to a lengthy adjournment of the hearing of the application to set aside the Bankruptcy Notice until determination of the application for leave to appeal from the costs assessor’s determination. That matter has now been determined. The application was dismissed and Mr Gorczynski and Scope were ordered to pay AMT’s costs on an indemnity basis. In Olivieri v Stafford at [18], the court pointed out that “a court of bankruptcy is concerned to inquire into the “reality” of the matter in hand”. In this case, the reality of the matter is that the merits of Mr Gorczynski’s claim were not demonstrated to the satisfaction of the costs assessor or pursued promptly after the notice of motion was dismissed and a judge of the District Court has declined to grant an application for an extension of time for leave to appeal. It is notable that Gibson DCJ was of the view (at [29]) that there was no “stand-out legal issue” and regarded the plaintiff’s prospects of success as unlikely. These are not circumstances akin to a judgment obtained on default (cf Boglari v Coadys).
69. Moreover, while there is a dispute between the parties as to precisely what occurred in the communications between Mr Gorczynski and AMT at the time of the proceedings in which Scope was involved, as pointed out by Gibson DCJ a considerable period of time has elapsed since the events that are in dispute.
70. It is important to bear in mind that the commission of an act of bankruptcy is a different order of gravity to the change in status brought about by the making of a sequestration order, (as discussed by Lehane J in Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264; [1997] FCA 151). The consequences of having committed an act of bankruptcy are not as severe as the making of a sequestration order (see Byron v Southern Star and Taubert v Eddaglide Pty Ltd [2001] FCA 567). Further, as Lehane J pointed out in Byron v Southern Star the interests of the judgment creditor and other creditors of the judgment debtor are also to be taken into account in ensuring that, if ultimately a sequestration order is made, the relevant act of bankruptcy occurs earlier rather than later (Byron v Southern Star at 270).
71. In all the circumstances, I am not satisfied that the discretion to go behind the judgment discussed in Joossé v Commissioner of Taxation (2004) 137 FCR 576; [2004] FCAFC 245, ought to be exercised, as I am not satisfied that substantial reasons have been given for questioning whether, behind the Local Court judgments, there was in truth and reality a debt due to the AMT in the sense considered by Barwick CJ in Wren v Mahony at 224 – 225. I am not persuaded that the Bankruptcy Notice should be set aside on either of the bases contended for in paragraphs 3(d) or (e) of the affidavit in support of the application.

Counter-claim

72. The final ground relied on is that Scope (sic) has a counterclaim which exceeds the amount in the Bankruptcy Notice.
73. Mr Gorczynski contended that such a counter-claim arose by virtue of circumstances which led to the notice of motion filed by Scope on 3 April 2006 in Supreme Court proceedings No.12191 of 2004 seeking orders against AMT. That motion was dismissed on 8 May 2006, but Scope was given leave to start afresh by way of a summons. At the time of the issue of the Bankruptcy Notice there had been no such fresh proceedings. On 29 October 2007 Scope filed a statement of claim in the Supreme Court which made claims of professional negligence against AMT. Mr Gorczynski was not a party to those proceedings (which were transferred to the District Court). Scope’s application that the negligence proceedings be heard before the appeal proceedings was refused by the District Court on 25 March 2010. It appears that those proceedings have not yet been determined.
74. The principles applicable to determine what a debtor is required to do to satisfy the court that he has a counter-claim, set-off or cross demand of the kind referred to in s.40(1)(g) of the Bankruptcy Act were considered by Lindgren J in Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers; Re Tresidder; Tresidder v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331; [2003] FCA 373. The difficulty that faces Mr Gorczynski is that, however that test is formulated, in this case the claim that he relies on is not a claim which he asserts that he has against AMT, but rather a claim which Scope is said to have against AMT. Scope is not a debtor in the Bankruptcy Notice. Mr Gorczynski not only denies any liability to AMT for the costs of those proceedings, but also is not a party to the negligence proceedings brought by Scope against AMT. The claim that Mr Gorczynski asserts on the part of Scope is not a claim on his part. He did not assert that he had any claim against AMT, let alone any claim that gave rise to a prima facie case or was such that he had a fair chance of success, was fairly entitled to litigate, or that was genuine and bona fide in the sense considered in Glew v Harrowell. The proceedings commenced by Scope against AMT are for damages Scope alleges it suffered, primarily in respect of legal costs paid by Scope pursuant to its retainer with AMT, or ordered against Scope in proceedings against Jarrett, proceedings to which Mr Gorczynski was not a party.
75. Mr Gorczynski conceded that his assertion was in fact an assertion that Scope had a counter-claim. He has not established that Scope’s claim means that he has a counter-claim, set-off or cross demand against AMT within s.40(1)(g) of the Bankruptcy Act.
76. Under s.40(1)(g) of the Act the debtor must satisfy the court that he “has” at the time of the hearing of the application to set aside the bankruptcy notice a counter-claim, set-off or cross demand. This requirement “is not satisfied by proof that a debtor has “an inchoate set-off which may at some future time ripen” (Re a Debtor; Ex parte Commissioner of Taxation (1963) 19 ABC 296, as discussed in Re Boris Ganke Ex Parte: Boris Ganke Peter Andrew Somerset and Paul Mervyn Fordyce Trading As "P A Somerset and Co" [1995] FCA 1183 by Lindgren J). Mr Gorczynski’s general assertions that if Scope were to succeed against AMT he would have an entitlement to funds obtained by it, is not such as to establish that he (as distinct from Scope) has any counter-claim, set-off or cross demand. Hence this contention does not establish a counter-claim, set-off or cross demand of the kind referred to in s.40(1)(g) of the Bankruptcy Act.
77. That suffices to dispose of this claim, but in any event, even if Scope’s claim was such as to give Mr Gorczynski a counter-claim, set-off or cross demand, the evidence before the court is that AMT made two applications for costs assessments against Scope and Mr Gorczynski, and Scope made one application. The costs assessor invited each party to make written submissions in relation to each application, being required under the Legal Profession Act 2004 to have regard to a set of prescribed criteria (see s.363 of the Legal Profession Act 2004, as in force at 25 July 2006), including whether the work was carried out in a reasonable manner, the costs agreement, the lawyer’s skill, labour and responsibility, the retainer and whether the work was done within the scope of the retainer, the quality of the work done, and any other relevant matter.
78. It has not been established that Mr Gorczynski (and indeed Scope) did not have the opportunity to raise the basis of the alleged claim in the costs assessment proceedings. In fact Mr Gorczynski made extensive written submissions in each of the costs assessment applications in which he raised the alleged claim against AMT, including those matters that are now said to found an off-setting counter-claim, set-off or cross demand. The costs assessor wrote to the parties on 27 March 2006 undertaking to “consider all material” before him when he considered the matters raised in respect of each application.
79. While the costs assessment was carried out by a costs assessor, and not a court, and the costs assessor could not determine a cross-claim for damages based on an allegation of negligence on the part of solicitors that went beyond the costs of the work performed and included moneys payable to another entity, the claim was brought to the assessor’s attention in the context of Scope’s submission that the assessor did not have jurisdiction to determine that issue and that he should at least defer any determination until the real issues in dispute had been considered and decided by a court. However, as set out above, no summons was filed prior to determination of the matter by the issue of the costs assessment after dismissal of the notice of motion filed on 4 April 2006. The negligence proceedings were not commenced until after the issue and service of the Bankruptcy Notice.
80. Even if it could be said that a claim asserted by a corporation against a creditor could constitute a counter-claim, set-off or cross demand by an individual (and I was not referred to any authorities in support of such a proposition) and even if strictly speaking, the alleged counter-claim, set-off or cross demand could not have been set up in the action or proceedings in which the judgment or order was obtained due to its nature (compare Chen v Bannerman [2001] FCA 160 and Massih v Esber (2008) 250 ALR 648; [2008] FCA 1452), the circumstances, including the delay in pursuing such claim, are relevant to the assessment of whether there is a viable case, or whether an apparently weak or borderline case is bona fide (see Re Bruce William Naghten & Anor; Bruce William Naghten & Anor v Commonwealth Bank of Australia [1998] FCA 635). Having regard, insofar as possible on the material before the court, to the nature of the asserted case (which involves disputed factual allegations) and the significant delay in the commencement of any negligence proceedings, it has not been established that there is a reasonable probability of success in any such claim against AMT such that in justice this ought to be determined before bankruptcy proceedings in relation to Mr Gorczynski are allowed to continue (Glew v Harrowell).

Stay on Local Court judgments

81. A further matter raised by Mr Gorczynski in submissions was that the Local Court judgments on which the Bankruptcy Notice was based were stayed on 18 February 2008 by order of the Supreme Court until further order of the court, that no such further order had been made by the Supreme Court to remove the stay and nor had the respondent sought such an order. It was submitted generally that the District Court’s dismissal of the amended summons did not mean that the Supreme Court stay had been set aside and that the District Court had no jurisdiction to set aside orders made by the Supreme Court.
82. Mr Gorczynski contended that the Supreme Court stay remains in effect. He also queried whether the Supreme Court had jurisdiction to make the transfer to the District Court on the basis that Schedule 14 to the Courts and Crimes Legislation Amendment Act 2008 did not commence until 1 September 2008 and the Supreme Court orders were said to have been made on 28 August 2008.
83. AMT submitted that the proceedings which had been transferred from the Supreme Court had now been finally determined by Gibson DCJ and that this put an end to any suggestion that there was any current stay in respect of the Local Court judgments, notwithstanding that there had not been an order specifically setting aside the stay, as there had been an order disposing of the proceedings.
84. It appears that Mr Gorczynski’s argument may be that the requirements of s.40(1)(g) of the Bankruptcy Act are not met because, while AMT had obtained a final judgment or final order against him, it was a judgment or order that had been stayed, and that as there had been no order made by the Supreme Court lifting the stay, there could not be an act of bankruptcy committed by him under s.40(1)(g) of the Bankruptcy Act. However what is in issue in these proceedings is whether there is a basis on which the Bankruptcy Notice should be set aside. What is relevant in that context is that there is no suggestion that there was a stay in force at the time of the issue or service of the Bankruptcy Notice. The Supreme Court order was not made until February 2008. Hence it cannot be said that AMT was not in a position to issue immediate execution on the judgment or order of the Local Court at the time of the application for the issue of the Bankruptcy Notice (see Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572; [1995] FCA 1359). The later stay orders are not a basis to set aside the Bankruptcy Notice.
85. As pointed out in Wiltshire-Smith, generally speaking the relevant time for the existence or non-existence of a stay is the date of the application for the issue of a bankruptcy notice (see s.41(3)(b) of the Bankruptcy Act). Insofar as the concept “the execution of which has not been stayed” also relates to the time at which the Bankruptcy Notice was served, there was no stay of execution or stay on the orders in force at the time of service of the notice and there is authority to suggest that a bankruptcy notice is not stayed, or set aside, by reason of orders made for payment of a judgment debt by instalments and a stay of execution made after service of the bankruptcy notice (see Re Schekeloff; Ex parte Schekeloff v The Hopkins Group Pty Limited (1989) 22 FCR 407; [1989] FCA 91, but cf Murdaca v Accounts Control Management Services Pty Ltd (2007) 5 ABC(NS) 251; [2007] FCA 964 at [15]).
86. Insofar as Mr Gorczynski seeks to raise an issue about the validity of the transfer of the appeal proceedings to the District Court that is a matter that ought not to be for this court to determine. Any issues in that respect could have been raised in those proceedings. In any event, the contentions in that respect are not such as to establish a basis on which the Bankruptcy Notice should be set aside.
87. I am not satisfied that Mr Gorczynski’s contentions, individually or cumulatively, are such as to warrant the setting aside of the Bankruptcy Notice in the circumstances of this case. The application should be dismissed, with costs.

I certify that the preceding eighty-seven (87) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate:

Date: 22 February 2011