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Axarlis v Pets Paradise Franchising (SA) Pty Ltd [2010] FCA 319 (1 April 2010)

Last Updated: 8 April 2010

FEDERAL COURT OF AUSTRALIA


Axarlis v Pets Paradise Franchising (SA) Pty Ltd [2010] FCA 319


Citation:
Axarlis v Pets Paradise Franchising (SA) Pty Ltd [2010] FCA 319


Appeal from:
Axarlis & Anor v Pets Paradise Franchising Pty Ltd [2009] FMCA 1216


Parties:
SUSAN AXARLIS and FIONA MILLER v PETS PARADISE FRANCHISING (SA) PTY LTD (ACN 069 620 391)


File number(s):
VID 001 of 2010


Judges:
DODDS-STREETON J


Date of judgment:
1 April 2010


Catchwords:
BANKRUPTCY – Bankruptcy notice - Whether debtors’ cross claim constitutes prima facie case equal to or exceeding judgment debt – whether cross claim could have been set up in proceeding which judgment obtained –whether Re Ling; Ex parte Ling v Commonwealth [1995] FCA 1410; (1995) 58 FCR 129 should be followed – Bankruptcy Act 1966 (Cth), s40(1)(g).


Legislation:


Cases cited:
Commonwealth Bank of Australia v Conley [2006] FCA 1011
Ebert v The Union Trustee Co of Australia Limited [1960] HCA 50; (1960) 104 CLR 346
Escanda Finance Corp Ltd v Smart [1999] FCA 1209
Guss v Johnstone [2000] HCA 26; (2000) 171 ALR 598
Harding v Deputy Commissioner of Taxation (no 2) [2008] FCA 1985
Lau v Accord Pacific Properties Pty Ltd [2003] FCA 795
Massih v Esber [2008] FCA 1452
Nath v Clipway [1999] FCA 149
Nath v Clipway Pty Ltd [1999] FCA 625
Olivieri v Stafford (1989) 24 FCR 413
Re A Debtor (1958) 1 Ch 81
Re Ling; Ex parte Ling v Commonwealth [1995] FCA 1410; (1995) 58 FCR 129
Re Glew; Glew v Horrowell of Hunt & Hunt Lawyers [2003] FCA 373; (2003) 198 ALR 331
Smart v Escanda Finance Corp Ltd [2000] FCA 235
Tsavara v Nufero Pty Ltd [2003] FCA 1152
Van Leeuwen v Bank of Western Australia [2001] FCA 1826
Whiley Investments (Qld) Pty Ltd v Pets Paradise Franchising (Qld) Pty Ltd [2009] VSC 144
Wilkinson v Osborne [1915] HCA 92; (1915) 21 CLR 89


Date of hearing:
24 March 2010


Place:
Melbourne


Division:
GENERAL DIVISION


Category:
Catchwords


Number of paragraphs:
91


Counsel for the Appellants:
Mr M Gronow (Pro Bono Referral)


Counsel for the Respondent:
Mr P Crennan


Solicitor for the Respondent:
In-house Counsel

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 001 of 2010

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

BETWEEN:
SUSAN AXARLIS
First Appellant

FIONA MILLER
Second Appellant

AND:
PETS PARADISE FRANCHISING (SA) PTY LTD (ACN 069 620 391)
Respondent

JUDGE:
DODDS-STREETON J
DATE OF ORDER:
1 APRIL 2010
WHERE MADE:
MELBOURNE

THE COURT ORDERS THAT:


  1. The appeal be dismissed.
  2. The appellants pay the respondent’s costs of the appeal.
  3. The time for compliance with the bankruptcy notice number VN789/2009 be extended until 4pm on 22 April 2010.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.


IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 001 of 2010

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

BETWEEN:
SUSAN AXARLIS
First Appellant

FIONA MILLER
Second Appellant

AND:
PETS PARADISE FRANCHISING (SA) PTY LTD (ACN 069 620 391)
Respondent

JUDGE:
DODDS-STREETON J
DATE:
1 APRIL 2010
PLACE:
MELBOURNE

REASONS FOR JUDGMENT

  1. The principal issues in this appeal are:

(a) whether Re Ling; Ex parte Ling v Commonwealth [1995] FCA 1410; (1995) 58 FCR 129 (‘Re Ling’) wrongly held that for the purposes of s 40(1)(g) of the Bankruptcy Act 1966 (Cth) (“the Act”) a debtor’s cross claim can be set up in the proceeding in which a judgment the subject of a bankruptcy notice was obtained, notwithstanding that such a course would require transfer or cross-vesting of the proceeding and/or a favourable exercise of relevant discretions; and

(b) whether (if Re Ling be correct) it was legally possible, through cross-vesting and related legislation, to set up the appellants’ claims under s 47(6) of the Trade Practices Act 1974 (Cth) (“Trade Practices Act”) in the proceeding in which the respondent obtained judgment against them for breach of contract.

The Bankruptcy Legislation

  1. Section 40(1) of the Act relevantly provides:
A debtor commits an act of bankruptcy in each of the following cases:

...

(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 specified in the notice; 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 or she 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 he or she could not have set up in the action or proceeding in which the judgment or order was obtained
  1. Section 41(7) of the Act states:
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.

Background and Evidence

  1. By a notice of appeal dated 4 January 2010, the appellants, Susan Axarlis and Fiona Miller, appeal from those parts of the judgment of Riley FM ([2009] FMCA 1216) given on 15 December 2009 whereby her Honour dismissed their application to set aside or extend time for compliance with a bankruptcy notice issued on 15 May 2009 (“the bankruptcy notice”) on the application of the respondent, Pets Paradise Franchising (SA) Pty Ltd (“Pets Paradise”).
  2. The bankruptcy notice was based on a judgment debt of $151,110.92 obtained by Pets Paradise on 18 March 2009 in the County Court of Victoria (see [2009] VCC 0168).
  3. Pets Paradise, a franchisor of retail pet and pet accessory businesses under that name, issued a proceeding in the County Court of Victoria against the appellants, claiming payment under guarantees they had given of the obligations of Krescendo Pty Ltd (“Krescendo”). Krescendo as franchisee and Pets Paradise as franchisor were party to a franchise agreement dated 21 June 2005. The appellants, as directors of Krescendo, guaranteed to Pets Paradise Krescendo’s obligations under the franchise agreement by guarantees given on 29 May 2006. Krescendo subsequently defaulted, went into liquidation and was deregistered.
  4. At the hearing of the County Court proceeding, Mr Axarlis (the son of the first appellant) although not legally qualified, was granted leave to appear on behalf of the appellants. Mr Axarlis sought an adjournment on grounds including the appellants’ wish to raise further defences.
  5. On the following day, Judge Anderson struck out various paragraphs of the defence, including those based on s 47 of the Trade Practices Act. His Honour stated ([2009] VCC 0169 at [7]):
As a consequence of that discussion I made orders striking out paragraphs 4.4, 4.5, 5.2, 5.3, and the schedule to the defence. In summary, my reasons for doing so were as follows:
  1. The principal assertion by the defendants was that the plaintiff had required the first defendant to deal exclusively with Global Pet Products Pty Ltd in obtaining supplies for the business, and that this was in contravention of the exclusive dealing provisions in s.47 of the Trade Practices Act 1974.
  2. Section 47 is not within one of the parts of the Act in respect of which state courts are invested with federal jurisdiction. Accordingly, that matter was not justicible (sic) in this court.
  1. This same issue was raised in different guises in other paragraphs of the particulars in the schedule, and also in the defence itself, including the following:
    1. In paragraph (4)(b)(i), the allegation that the agreement was unenforceable “as an unreasonable restraint of trade” depended upon an argument that clause 9 of the franchise agreement, relating to “stock”, required the first defendant to exclusively deal with the plaintiff or its nominated supplier.
    2. In paragraph (4)(b)(iii), the alleged contravention of the provisions of the Trade Practices Act relating to unconscionable conduct arose from the plaintiff’s failure to “disclose its intention to oversupply and overcharge for product and computing services” and raised a similar allegation.
    3. The allegation in paragraph 4.4 of the defence largely related to matters concerning alleged exclusive dealings.
  1. Judge Anderson observed that there was little chance that the appellants could adequately plead a coherent set-off or counterclaim without legal assistance, which they were unlikely to obtain in the near future.
  2. The appellants did not appeal from the County Court judgment, but applied to the Federal Court to stay it. The application was refused for want of jurisdiction and a referral for legal assistance was made under Order 80 of the Federal Court Rules.

The Appellants’ Federal Court Proceeding

  1. By an amended statement of claim dated 28 August 2009 in VID 418 of 2009 issued in the Federal Court the appellants as applicants allege that Pets Paradise (“the first respondent) is owned and controlled by the fourth respondent, Gary Diamond, who also controls the second respondent, Global Pet Products Pty Ltd (“Global”) and has an interest in the third respondent IT Visions Pty Ltd (“IT Visions”).
  2. The amended statement of claim alleges, inter alia, that the appellants, as directors of Krescendo, guaranteed its obligations under the franchise agreement to Pets Paradise on 29 May 2006. Ms Miller also guaranteed the obligations of another company, Fimill Holdings Pty Ltd (“Fimill”) under a separate franchise agreement.
  3. The applicants allege, inter alia, that the disclosure document provided to them on 29 May 2006 contained representations that were misleading and deceptive, as follows:
31. Pets Paradise SA represented to Krescendo in the Krescendo Disclosure Statement that Krescendo did not have to accept goods or services from Pets Paradise SA or Global Products (“the Krescendo Goods Representation”).
Particulars
The Krescendo Goods Representation was in writing on page 9 of the Disclosure Statement and stated:

‘(a) The Franchisee is required to maintain an adequate level of inventory. The level may vary from store to store and from time to time. Product ranges may also vary from store to store and from time to time.

(b) The Franchisee is provided with an ‘Approved Supplier List’ and must only purchase goods from this list. The Franchisee may apply to the Franchisor in writing to purchase goods from suppliers not contained within this approved list. The Franchisor may, but is not required to, allow purchase from any such additional suppliers.

The Franchisee is also provided with an ‘Approved Sock list’ [sic] and must only purchase goods from this list. The Franchisee may apply to the Franchisor in writing to purchase other goods not contained within this approved list. The Franchisor may, but is not required to, allow purchase of any such additional goods.

(c) Global Pet Products Pty Ltd is one of the Approved Suppliers. This company is owned by Gary Diamond. The Franchisees are not required to purchase goods from this company.

(d) There is no obligation on the Franchisee to accept goods or serves [sic] from the Franchisor.’
  1. The amended statement of claim alleges that in fact:
32. The Krescendo Goods Representation was misleading or deceptive in that:

  1. under the terms of the Krescendo Franchise Agreement, Krescendo was required to purchase goods from approved suppliers and to maintain the minimum quantities and mix of stock prescribed by Pets Paradise SA; and
  2. during the period Krescendo operated the franchise business, Pets Paradise SA only approved Global as the supplier for a large number of stock items;
  1. Global was the only supplier of stock approved by Global Pet Products for bird treats and seeds, bird cages, bird cage accessories, small animal foods and hutches, cat toys, cat carriers, cat litter and related products, cat food, dog toys and dog food, pet grooming products, bowls and treats and medications and treats.
  1. during the period Krescendo operated the franchise business, Pets Paradise SA only approved IT Visions as the only supplier of an IT point of sale system.
  1. The amended statement of claim further alleges:
37. Prior to entry into the Krescendo Franchise Agreement, in or about May 2005, Pets Paradise SA offered to grant Krescendo with the right to establish a Pets Paradise franchise.
Particulars
Letter dated 23 May 2006 to Fiona Miller and Susan Axarlis from Nabil El-Hissi, Corporate Counsel, Pets Paradise Franchising (SA) Pty Ltd.

38. It was a term of the offer described in the previous paragraph that Pets Paradise SA would provide the right to establish and operate a Pets Paradise franchise business, and assistance in running the business, on the terms contained in the Franchise Agreement, on condition that Krescendo acquire goods (an IT Point of sale system) directly from IT Visions.

39. In the premises of paragraphs [28], [32], [37] and [38], Pets Paradise SA supplied services (being the right to establish and operate a Pets Paradise franchise business and assistance in running the business) on the condition that Krescendo would directly acquire goods from Global Products and IT Visions.

40. In the premises of paragraph [39]:

  1. the conduct of Pets Paradise SA amounts to exclusive dealing within the meaning of section 47(6) of the TPA accordingly, Pets Paradise SA has contravened section 47(1) of the TPA; and
  2. IT Visions and Global Products were directly or indirectly, knowingly concerned in, or party to, Pets Paradise SA’s contravention of section 47(1) of the TPA; and
  1. Gary Diamond, who knew all of the elements of Pets Paradise SA’s breach of s 47(1) of the TPA, was directly or indirectly, knowingly concerned in Pets Paradise’s contravention of s 47(1) of the TPA.
  1. The appellants’ claims against Pets Paradise and the other respondents are thus principally based on misleading and deceptive conduct and exclusive dealing in contravention of the Trade Practices Act. They allege that Global was the only approved supplier of stock for many stock items and that IT Visions was the only supplier of an IT point of sale system. They also allege that there were significant undisclosed costs.
  2. By the amended statement of claim, the appellants claimed, inter alia, the following relief:
50. In the premises of paragraphs [45]-[47] herein:
...
  1. the Krescendo Franchise Agreement was contrary to law, is void ab initio, and is liable to be set aside under section 87 of the TPA; and
  1. the Krescendo Guarantee was contrary to law, is void ab initio, and is liable to be set aside under section 87 of the TPA.

Whether bona fide claim under s 47(6) of the Trade Practices Act equal to or exceeding judgment debt

  1. In order to avoid committing an act of bankruptcy, the appellants must either comply with the bankruptcy notice or satisfy the Court that they have a cross demand equal to or exceeding the amount of the judgment that they could not have set up in the proceeding in which the judgment was obtained.
  2. Riley FM on 15 December 2009 rejected the appellants’ submission that their claim against the respondent pursuant to s 47(6) of the Trade Practices Act was equal to or exceeded the judgment debt and could not have been set up in the proceeding in which the judgment was obtained.
  3. The appeal from Riley FM’s decision, which is brought pursuant to s 24(1)(d) and s 27 of the Federal Court of Australia Act 1976 (Cth), is not an appeal stricto sensu, but by way of a rehearing.
  4. In Ebert v The Union Trustee Co of Australia Limited (“Ebert”) (1960) 104 CLR 346, the High Court dismissed a debtor’s appeal from Clyne J’s dismissal of her application to set aside a bankruptcy notice on the ground that she had a valid cross demand.
  5. The High Court (Dixon CJ, McTiernan and Windeyer JJ) stated (at 350):
The appellant cannot satisfy the Court that a cross demand exists by showing no more than that she propounds one and states how she suggests that she can make it out. In Re Duncan; Ex parte Modlin  Street J. said that the debtor need not satisfy the Court that there are reasonable grounds for believing that he will establish his cross action, but only that he has a bona fide claim which he is fairly entitled to litigate. This perhaps is expressed too favourably to the debtor.
  1. The High Court apparently preferred the formulation of Roxburgh J who, in Re A Debtor (1958) 1 Ch 81 stated (at 99):
But not every demand will suffice. A demand made in bad faith would not be good enough. The debtor must satisfy the Court that he has a genuine demand. ... But in my opinion a demand must be more than bona fide. The Court must be satisfied that it had a reasonable probability of success.

  1. The High Court in Ebert concluded (at 350):
Perhaps the standard may be expressed by saying that the debtor must show that he had a prima facie case, even if then and there he does not address the admissible evidence which would make out a prima facie case before a court trying the issues that are included in the counter-claim, set off or cross demand.
  1. In Guss v Johnstone [2000] HCA 26; (2000) 171 ALR 598, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ, in their joint judgment, considered the discretion in relation to a debtor’s counterclaim, set-off or cross demand of the kind referred to in s 40(1)(g). Their Honours stated (at 606):
The nature of the exercise ... is well established by a long line of authority.
In Vogwell v Vogwell, Latham CJ said, in relation to a corresponding provision:
[T]he authorities show that the matter to which the court looks is this, – whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue; in other words, whether it is a claim which it is proper and reasonable to litigate.
The state of satisfaction referred to in s 49(1)(g), and s 41(7) involve weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim
  1. Subsequently, their Honours referred to, but did not cite the principles expressed in, Ebert.
  2. In Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers [2003] FCA 373; (2003) 198 ALR 331 (“Re Glew”), Lindgren J conveniently summarised various articulations of what a debtor must establish in order to avoid committing an act of bankruptcy under s 40(1)(g) of the Act. His Honour stated (at 333-4):
There are authorities suggesting that [the applicants] must satisfy me of the following interrelated and sometimes overlapping matters:

It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at ALR 438–9; FLR 141) the reference to a “prima facie case” in Ebert as a reference to “a fair chance of success”.

In Brink Lockhart J said (at ALR 438–9; FLR 141) that the court is not required to “undertake a preliminary trial of the counter-claim, set-off or cross demand”. But, clearly, the application of the criteria above requires the court to make some kind of preliminary assessment, though obviously not to determine the counter-claim, set-off or cross-demand finally. And in Guss v Johnstone [2000] HCA 26; (2000) 171 ALR 598, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ stated (at 606):

[40]  The state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.

Plainly, in order to “satisfy” the court for the purposes of s 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was being finally determined, but by reference to the question whether the court should be satisfied that the debtor has a claim deserving to be finally determined.

Perhaps little more can usefully be said than that a debtor must satisfy the court that there is sufficient substance to the counter-claim, set-off or cross-demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.

  1. The appellants contended that their claim satisfied the standards expressed in Ebert in that it was a genuine, bona fide demand and constituted a prima facie case. They submitted that (to the extent to which other authorities established a more stringent test) Ebert was correct and, having been approved in Guss v Johnstone, was binding on the court.
  2. The appellants conceded that it was necessary, in that context, to do more than make mere allegations in a pleading. Some evidence, including relevant documents, must be produced, not for the purposes of determining their claim on the merits, but so that the court could determine whether it met the required standard of “one which they are entitled to litigate” (Re Glew [2003] FCA 373; (2003) 198 ALR 331, 342).
  3. The appellants conceded that the claim which must equal or exceed the amount of the judgment was limited to that which could not be set up in the proceeding in which the judgment was obtained (in this case, the exclusive dealing allegations under s 47(6) of the Trade Practices Act). They acknowledged that the court must be satisfied on the discrete issue of quantum to the same standard as applied to the claim as a whole. The court must thus be satisfied that the appellants had a bona fide, genuine claim and prima facie case for damages in the relevant quantum.
  4. Alternatively, the appellants submitted that (if the court were not satisfied to the necessary degree of their damages claim in the required quantum) it should go behind the County Court judgment. It would suffice if the court were satisfied that the franchise agreement contravened the Trade Practices Act, including s 47. The franchise agreement and the guarantees would consequently be invalid and unenforceable and no debt could be owed thereunder.

The Appellants’ Evidence

  1. The first appellant, by her affidavit sworn on 20 November 2009, deposed that the allegations made in the amended statement of claim in the Federal Court proceeding were true and correct, in so far as they concerned her and Krescendo.
  2. The first appellant deposed:
Loss and Damage

  1. As a result of the conduct of the respondent and others complained of in the Federal Court proceeding, in addition to the loss of the Pets Paradise Franchise business formerly conducted by Krescendo, I have suffered substantial loss and damage as follows:
(a) personal liability to the Australia and New Zealand Banking Group Ltd (“ANZ Bank”) for a business loan of $170,000 plus interest, now totalling over $180,000;
(b) personal liability to ANZ Bank for a shop fitting and stock loan for Krescendo now totalling over $89,000;
(c) personal liability to ANZ Bank for $410,000 plus interest, now totalling $450,000, for Krescendo’s purchase of a residential property for which repayments became impossible due to respondent’s conduct and subsequent liquidation of Krescendo; and
(d) the amounts claimed against me by the respondent in the judgments and bankruptcy notices which are the subject of the present proceeding.

  1. In her affidavit dated 7 September 2009, the first appellant exhibited an amended statement of claim filed in the South Australian Registry of the Federal Court in a class action (to which the appellants are not party) against Pets Paradise, which makes allegations similar to those made in the appellants’ Federal Court proceeding.
  2. The second appellant, by an affidavit sworn 20 November 2009, also deposed that the factual allegations made in the amended statement of claim were true and correct so far as they concerned her and, inter alia, Krescendo. The second appellant further deposed:
Loss and damage

  1. As a result of the conduct of the respondent and others complained of in the Federal Court proceeding, in addition to the loss of the Pets Paradise franchise businesses formerly conducted by Krescendo and Fimill, I have suffered substantial loss and damage as follows:
(a) personal liability to the Australia and New Zealand Banking Group Ltd (“ANZ Bank”) for a business loan in excess of $300,000 plus interest;
(b) personal liability to the ANZ Bank for a shop fitting and stock loan for Finmill [sic] and Krescendo, on which I anticipate a short fall of $110,000 or more plus interest; and
(c) the amounts claimed against me by the respondent in the judgments and bankruptcy notices which are the subject of the present proceeding.

  1. The second appellant deposed that she took out the business loan to fund the acquisition and operation of the Krescendo franchise and another franchise acquired by, Fimill; would not have taken out the loan and guarantee but for the misleading and deceptive and other conduct by the respondent and others; and that (as a result of the conduct complained of in the amended statement of claim, including breaches of s 47 and other provisions of the Trade Practices Act) the franchise businesses failed and she completely lost the benefit of the loan money and interest. Further, she deposed that the shop fitting and stock loan was taken out by Fimill and Krescendo and guaranteed by her in reliance on the respondent’s conduct.
  2. The second appellant deposed that over $500,000 was owed to the ANZ Bank in respect of the shop fitting and stock purchase loan and it was hoped that some of the debt would be repaid from the proceeds of sale of her residence, which was mortgaged to the ANZ Bank.
  3. The total of the amounts deposed to by the appellants clearly exceeds the judgment debt on which the bankruptcy notice was based. The losses claimed, are, however, not asserted to be due only to the respondent’s s 47(6) conduct, but due to conduct by the respondent and others, including misleading and deceptive conduct as well as breaches of s 47(6). Further, the asserted losses include the amount of the judgment. The sum of $450,000 apparently relates to Krescendo’s purchase of a residential property which is subject to a mortgagee’s sale on which a shortfall is anticipated. It is alleged that it was impossible to make repayments, due to the respondent’s conduct.
  4. There may be no significant difference between the tests expressed in the authorities discussed in Re Glew. As Lindgren J contemplated, a prima facie case may be equivalent to a “fair chance of success”.[1] In my opinion, however, even on the arguably less stringent articulation of the test in Ebert, the material advanced by the appellants does not establish to the requisite standard their claim to a quantum of damages based on the s 47(6) conduct which, in their submission, could not be set up in the proceeding in which the judgment was obtained.
  5. The appellants deposed to the truth of the assertions in the amended statement of claim, which their affidavits amplified. While the material may constitute a prima facie case of breach of the Trade Practices Act, the claim to damages for breach of s 47(6) equal to or exceeding the judgment debt does not amount to a prima facie case. No quantum was specified in the amended statement of claim. Some amounts specified in the appellants’ affidavits were misconceived (such as the amount of the unsatisfied judgment against them) or were vague, speculative and without a clear relationship to the alleged breaches (such as the value of the residential property).
  6. Further, each amount was alleged to be loss caused by the misleading and deceptive and s 47(6) conduct of the respondent and others. The amounts claimed were not related with particularity to the respondent’s alleged s 47(6) conduct. The second respondent’s alleged losses related to both the Krescendo and Fimill franchise agreements and there was no basis on which to identify those related only to the Krescendo transactions.
  7. The present application does not require admissible evidence of the completeness or quality required for a determination of the appellants’ claim on its merits. Nevertheless, significant matters, such as the loss claimed in relation to the residence, remain opaque. The claim of loss is global, undifferentiated and unparticularised. The level of detail falls short, for example, of the evidence discussed by Lindgren J in Re Glew. Given the nature of the appellants’ claim, a more coherent detailed narrative and specificity were necessary, especially in identifying the ways in which the s 47(6) conduct allegedly caused the particular heads and amounts of loss and in relating the relevant claims to particular parties.
  8. Further, any contravention of s 47(6), if established, would relate only to the respondent’s conduct up to 31 December 2006 (that is, a six month period) as, due to an amendment which came into force from 1 January 2007, s 47(1) does not apply to tying arrangements between related bodies corporate, as alleged by the appellants. As the respondent submitted, the limited duration of the alleged contravention could be expected to confine the damages.
  9. I am not satisfied, on the basis of the material adduced, that the appellants have a prima facie case, a claim of sufficient substance or a fair chance of success to recover an amount equal to, or exceeding the judgment debt, such that they should be entitled to litigate rather than to comply with the bankruptcy notice.
  10. Nor can I be satisfied to the requisite standard that the franchise agreements and guarantees are void, illegal and unenforceable so that, despite the judgment, the court should proceed on the basis that no debt may be owed.
  11. As the respondent contended, the franchise agreement did not, in terms, contravene s 47, but simply required the purchase of approved products potentially from more than one person. The alleged contraventions of s 47 would involve an investigation of the respondent’s conduct. Further, if the appellants’ oath that there were only the two approved suppliers be tantamount to establishing a contractual condition in contravention of s 47 on the face of the franchise agreement, it would not be ipso facto rendered void. Avoidance of the agreement would be only one of a number of remedies available under s 87 of the Trade Practices Act. The material did not, in my view, establish to the requisite standard a claim to avoid the franchise agreement.
  12. In summary, the appellants have not established a claim of breach of s 47(6) sounding in damages of a quantum equal to or exceeding the judgment debt such that they should be entitled to litigate, rather than comply with the bankruptcy notice. Nor have they established a sufficient case of contravention of s 47(6), illegality or breach of public policy to warrant going behind the judgment and treating the franchise agreement and guarantees as void.
  13. Given the above finding, the appellants cannot satisfy the requirements of s 40(1)(g) of the Act even if they establish that their cross claim could not have been set up in the proceeding in which the judgment was obtained (either because Re Ling was wrongly decided or because no path of transfer or cross-vesting was available). For completeness, however, I consider the authority of Re Ling and whether the appellants could have set up their cross claim by transfer and cross-vesting in the proceeding in which judgment was obtained.

Should Re Ling be followed?

  1. The appellants submitted that, in so far as Re Ling construed “the proceeding in which the judgment was obtained” to include a proceeding which had been transferred to another court and perhaps consolidated pursuant to an exercise of discretion, Re Ling was wrongly decided and should not be followed.
  2. The appellants submitted that their Trade Practices Act s 47(6) claim could not have been brought in the County Court proceeding, which alone constituted the “proceeding in which the judgment...was obtained”.
  3. It was not disputed that the claims under s 52 and s 51(a) of the Trade Practices Act could have been directly set up in the County Court proceeding. It was also common ground that the claims under s 47(6) of the Trade Practices Act could not have been directly set up in the County Court proceeding as, pursuant to s 86 of the Trade Practices Act, the County Court lacks jurisdiction in Part IV claims.
  4. The s 47(6) claims could have been set up in the proceeding in which the judgment was obtained only (if at all) in the extended sense of a cross-vested or transferred proceeding used in Re Ling and subsequent authorities.
  5. In my view, Re Ling correctly decided that a cross claim can be set up in the same proceeding in which the judgment was obtained notwithstanding that it requires the transfer of a proceeding to another court or the favourable exercise of discretion to, for example, consolidate the proceeding.
  6. The appellants submitted that the transferred and cross-vested proceeding which would result from such a procedure could not sensibly be described as “the proceeding in which the judgment was obtained”.
  7. In my view, Hill J answered that contention persuasively in Re Ling, where he stated (at 134):
In case it may be thought that the effect of consolidation would have resulted in the consolidated proceeding being a new and different proceeding from that commenced by the Commonwealth against the debtor, that is of no consequence for the Commonwealth would then have obtained judgment in the new proceeding against the debtor, that is to say, the cross claims would have been set up in the same proceeding as that in which the judgment was obtained.
  1. In Re Ling, the Commonwealth obtained judgment against the debtor in Federal Court proceedings, on which a bankruptcy notice was based. The debtor submitted that he had a cross claim in defamation and negligence which could not have been set up in the proceeding in which the judgment was obtained. The debtor alleged that his then solicitor had not advised him that he had a cross claim equivalent to or exceeding the judgment debt. Hill J held that the debtor (even if he could not have set up the tort claims directly in the proceeding in which judgment was obtained) could have commenced the tort proceedings against the Commonwealth in the High Court and applied for their remitter to the Federal Court pursuant to s 44 of the Judiciary Act 1903 (Cth). Remitter would have probably been ordered, as would consolidation in the Federal Court.
  2. Hill J discussed relevant authority and concluded (at 137):
These cases, it seems to me, establish that a cross-claim will be one which could be set up in the action, notwithstanding that to do so the debtor may need to transfer the proceedings first to another court, or may need to obtain in his or her favour the exercise of a discretion before doing so. The onus of showing that the claim is not one that could have been set up in the creditor's proceedings lies upon the debtor. That onus will not be satisfied merely by showing that some indirect course may need be followed (that course being in the discretion of the debtor) nor by showing that there existed a discretion which could have been exercised against the setting up of the claim as a cross-claim. To satisfy that onus the debtor must show that, as a matter of law and in the circumstances prevailing, he or she could not have set up the cross-claim. That the debtor has not done in the present case.

  1. In my opinion, Hill J’s conclusions in Re Ling were based on a reasoned analysis of long-standing authority and the evident objective of s 40(1)(g). In any event, Re Ling has been frequently applied or approved, including by the Full Federal Court, and may be regarded as binding.
  2. In Nath v Clipway [1999] FCA 149, Drummond J, dismissed an application to set aside a bankruptcy notice founded on a judgment debt. His Honour considered the “long line of settled authority” on the test as to whether a claim could have been set up and stated: (at [6]-[7]):
There is a long line of authority which establishes, in the context of s40(1)(g) the Bankruptcy Act 1966 (Cth), that considerations personal to a debtor which prevent him, as a matter of practical reality, from pursuing a cross-claim in proceedings in which judgment is given on which a bankruptcy notice is founded, do not constitute circumstances which entitle the debtor to characterise such a cross-claim as one which he could not have set up in the action or proceeding in which the judgment was obtained. See Re Vicini (1982) 64 FLR 323 and the cases there cited and Re Ling; Ex Parte Ling v The Commonwealth [1995] FCA 1410; (1995) 58 FCR 129 at 132. The applicant seeks to avoid the inevitable application of this long line of authority, which would require dismissal of the present application, by referring me to a reference in the unreported decision of Johnstone v Guss by Sundberg J on 30 May 1997 to an old New South Wales case, Re Brown; Ex Parte Peisley Brothers (1892) 3 BC (NSW) 13. Manning J, in Brown at 14, said of the words "could not set up" in the New South Wales Bankruptcy Act similar to the present bankruptcy legislation:
... I think I ought to construe the words "could not set up" in the sub-section to mean, "could not set up and enable full justice to be done between the parties". The words of the section must not be narrowed; all that it means is that the debtor is not to lie by with his cross demand, but must prosecute it with due diligence.
That approach on the reading which the applicant urges on me is quite inconsistent with the long line of settled authority to which I have referred.
(emphasis added)
  1. The Full Federal Court ([1999] FCA 625), (Spender J, with whom Kiefel and Hely JJ agreed) approved Hill J’s approach in Re Ling and dismissed the appeal.
  2. In light of the Full Court’s approval of Hill J’s observations, in Lau v Accord Pacific Properties Pty Ltd [2003] FCA 795 Branson J considered them to be binding (at [10]).
  3. In Esanda Finance Corp Ltd v Smart [1999] FCA 1209, Merkel J stated that there “is a substantial body of authority that "could not have been set up" as used in the sub-section means, "could not by law have been set up in the action". His Honour cited Re Ling and the “other cases referred to in the notes to s40(1)(g) in the annotated Bankruptcy Act at para 80,910.15” (at [9]). On appeal, the Full Federal Court (Lee, Goldburg and Kenny JJ) [2000] FCA 235, affirmed Hill J’s test. Their Honours stated (at [17]):
The question whether the cross demand "could not have been set up" in the proceeding in which the judgment was obtained for the purposes of s40(1)(g) of the Act is a question "to be answered by reference to legal considerations"
  1. In Van Leeuwen v Bank of Western Australia [2001] FCA 1826, French J cited Re Ling. His Honour stated that the “key question” whether the applicant, whose claim exceeded the amount of the judgment debt, could not have set up a counter-claim, set off or cross-demand in the proceedings “has to be answered by reference to legal considerations rather than practicalities” (at [16]),
  2. Re Ling has also been cited with approval and applied by Jacobson J in Tsavara v Nufero Pty Ltd [2003] FCA 1152 at [35]; by Rares J in Commonwealth Bank of Australia v Conley [2006] FCA 1011 at [16]; and by Flick J in Harding v Deputy Commissioner of Taxation (no 2) [2008] FCA 1985 at [65] and Massih v Esber [2008] FCA 1452 at [29].
  3. The appellants contended that, contrary to Hill J’s conclusions in Re Ling, the legislature could not have intended a debtor to be required to go through such “a complex time consuming and expensive procedure” of transfer and cross-vesting in order to avoid an act of bankruptcy.
  4. Implicitly, the appellants’ construction appeared to impose a test of what was reasonably practicable. The appellants disavowed such a test, submitting that they merely relied on a narrower construction of the “same proceeding” appropriate to the relevant statutory context, which necessarily excluded a proceeding achieved only by transfer or cross-vesting. In my opinion, however, the distinction was not persuasive.
  5. If the test depended on simplicity, practicability, brevity and low cost, rather than legally possibility, it would always be relative and a question of degree. Setting up the cross claim may be involved and costly independently of any need for transfer or cross-vesting. In contrast, some transfers or cross-vestings may be relatively straight forward or essentially administrative.
  6. Ultimately, as Hill J stated (at 137), the evident policy of s 40(1)(g) of the Act is that a “debtor having a claim against his or her creditor can not just stand by while judgment is obtained and later seek to use that claim to set aside a bankruptcy notice founded upon that judgment. If machinery is available for that claim to be agitated as a cross-claim in the proceedings, even if application must be made in a timely way to another court or leave must be obtained, that application should be made or that leave sought. Otherwise the debtor will be bound by his or her conduct”. The effective pursuit of that policy requires, as his Honour recognised, a test of what is legally possible, rather than what is practically or conveniently available.
  7. In the present case, the appellants were litigants in person whose defences based on s 46(7) of the Trade Practices Act were struck out for want of jurisdiction by the County Court judge. His Honour did not grant an adjournment, apparently because he thought it would be futile. Nor did his Honour inform the appellants of the course they could have taken. He was evidently concerned that they should be able to bring the s 47(6) claims in an appropriate forum unimpeded by Anshun estoppel, and doubtless, did not foresee the present developments.
  8. The vulnerable position of self-represented litigants invites concern, but in substance, the position of the debtor in Re Ling, (who was legally represented, but whose solicitors failed to advise him that he had a claim) was comparable. It constituted a practical reason or excuse for why no action was taken. Nevertheless, as Hill J stated (at 132):
[T]he debtor was not advised he could do so. But that does not suffice to make the claim one which the debtor could not have set up in the Commonwealth proceedings. That is not a question to be determined by reference to practicalities. It is a question to be considered by reference to legal considerations.
Thus, the mere fact that there was an excuse as to why the cross claim was not brought will not avail a debtor seeking to come within s 41(7) of the Act, if a cross claim would legally have been brought.

Could the s 47(6) claims have been set up in the proceeding in which the judgment was obtained?

  1. The appellants bear the burden of demonstrating that they could not have set the cross claim up in the proceeding in which the judgment debt was obtained.
  2. In my opinion, they have failed to discharge that onus.
  3. In the present case, the appellants have not excluded a path by which their s 47(6) claim could have been brought as a cross claim in the proceeding in which the judgment against them was obtained.
  4. The respondent submitted that such a situation could have been brought about by successively invoking s 17 of the Courts (Case Transfer) Act 1991 (Vic) (“Case Transfer Act”) and s 6 of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth) (“Cross-Vesting Act”). By those means, the respondent’s County Court contract proceeding in which the appellants raised the s 47(6) claim could have been transferred first to the Supreme Court and then to the Federal Court, which would have had jurisdiction to determine all the claims.
  5. Section 17 of the Case Transfer Act provides:
(1) A judicial or administrative officer of the court in which a proceeding is pending (including the designated judicial officer of that court), or a party to a proceeding, who is of the opinion that the proceeding is or may be suitable for transfer to another court under this Part may refer the matter to the designated judicial officer of the court in which it is pending.

(2) That designated judicial officer must, in accordance with the case transfer rules, give the parties to the proceeding a reasonable opportunity to make written submissions on the matter.

(3) That designated judicial officer and his or her counterpart in the possible transferee court must consider the proceeding and any written submissions made in respect of it and determine whether it should be transferred.

(4) The designated judicial officers may adjourn their consideration of a proceeding-

(a) to such times and places; and

(b) for such purposes-

as they consider necessary or just in the circumstances.

(5) If the designated judicial officers cannot agree about whether a particular proceeding should be transferred or not, the opinion of the officer of the higher court is to be taken to be the determination of both.

(6) The designated judicial officers may require an undertaking as to costs to be given by-

(a) a party who supports the transfer as a condition of determining that a
proceeding should be transferred; or

(b) a party who opposes the transfer as a condition of determining that a
proceeding should not be transferred.

(7) The designated judicial officers must not require an undertaking from a party without giving the party a reasonable opportunity to be heard by them.

(8) A step or further step must not be taken under this section with respect to a proceeding if the court in which it is pending (constituted by a judge or magistrate, as the case requires) has by order declared that it is not in the interests of justice that the proceeding be transferred having regard to the stage to which it has progressed.
  1. Section 39 of the County Court Act 1958 (Vic) provides:
Whether proceedings within jurisdictional limit
(2) If a civil proceeding is wholly or partly beyond the jurisdiction of the
court, the court may-
(a) amend the originating process for the purpose of bringing the
proceeding within jurisdiction; or
(b) order that the proceeding be stayed pending the making of an
application under Part 3 of the Courts (Case Transfer) Act 1991; or
(c) order that the proceeding be struck out and award costs as if the
court had jurisdiction and the proceeding were dismissed.
(3) If-
(a) under subsection (2)(b) the court orders that a civil proceeding be
stayed pending the making of an application under Part 3 of the
Courts (Case Transfer) Act 1991; and
(b) within a reasonable time after the making of that order the proceeding
has not been transferred to the Supreme Court-
the court may exercise the power conferred by subsection (2)(c).
  1. In Whiley Investments (Qld) Pty Ltd v Pets Paradise Franchising (Qld) Pty Ltd (“Whiley”) [2009] VSC 144 (‘Wiley’) the defendant commenced four debt recovery proceedings in the Magistrates’ Court. The plaintiffs raised defences and counterclaims based on s 47 of the Trade Practices Act. Davies J held that the debt proceedings could be referred to the designated judicial officer of the Magistrates’ Court under s 17(1) of the Case Transfer Act, in order to invoke a process of transfer to the Supreme Court of Victoria. While the Supreme Court did not have jurisdiction for special federal matters [s 3(1) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth)] such as s 47(6) claims, Davies J reasoned that it could nevertheless transfer the proceeding to the Federal Court pursuant to s 6(1) of the Jurisdiction of Courts (Cross-Vesting) Act 1987.
  2. Upon transfer to the Federal Court (where a group action by many of the plaintiffs against the defendant was pending) both the claims of the plaintiffs and the defendant could be heard and appropriate relief granted.
  3. Davies J held that the Magistrate below erroneously refused to refer the Magistrate Court proceedings to the designated judicial officer and to stay the proceedings because, inter alia, he wrongly considered that such a reference required the transferee court to have jurisdiction to hear and determine the entirety of the claims involved in the relevant proceeding.
  4. Davies J held that s 16 of the Case Transfer Act did not require the transferee court to have the authority to determine all the matters involved in the proceeding.
  5. Davies J’s conclusion was based on her broad construction, based on settled authority, of the term “proceeding” as an action, cause or matter, Her Honour concluded (at [23]):
Plainly the debt recovery actions are within the jurisdiction of the Supreme Court. In my view, it is an irrelevant consideration, under s 16(1)(b), that the defences and counterclaims in those actions involve matters under s 47 of the TPA that are outside the jurisdiction of the Supreme Court.
  1. Alternatively, Davies J noted s 8(1)(b)(ii) of the Cross-Vesting Act, which provides:
(1) Where—
...
(b) it appears to the Supreme Court that—
...
(ii) an order should be made under this subsection in relation to the relevant proceeding so that consideration can be given to whether the relevant proceeding should be transferred to another court—
the Supreme Court may, on the application of a party to the relevant proceeding or of its own motion, make an order removing the relevant proceeding to the Supreme Court.
  1. The provision would permit the Supreme Court, either of its own motion or an application of a party, to make an order removing the County Court proceeding to the Supreme Court, so that consideration could be given to whether the proceeding should be transferred to another court.
  2. The appellants contended that the pathway of transfer or cross-vesting first to the Supreme Court and then to the Federal Court was not available, because the Federal Court itself did not have jurisdiction to hear the primary contract claims of the respondent, which were not within ss 75 and 76 of the Commonwealth of Australia Constitution. The appellants did not dispute that a proceeding which included both a claim under Part IV of the Trade Practices Act and a contract claim could be commenced in the Federal Court, which could determine the contract claim in its accrued jurisdiction. They submitted, however, that in Whiley, Davies J erred in holding that it was unnecessary for the transferee court to have jurisdiction in the very claim which caused the proceeding to be transferred.
  3. In my view, Davies J’s analysis persuasively gave effective operation to facultative legislation and permitted both the original contract claims and a special federal matter raised in an inferior State court to be heard together. Further, as the respondent contended, the Cross-Vesting Act confers a qualified jurisdiction on the Supreme Court to determine a special federal matter or to transfer it. (See s 6(3) and (4), and for example, Computershare Ltd v Perpetual Registrars Ltd and Others (No 3) [2000] VSC 286; (2000) 176 ALR 277 at 300-1 and the cases cited therein).
  4. Therefore, the appellants have failed to establish that it was not legally possible for the their Trade Practices Act cross claim (including the s 47(6) claims) to be set up in the proceeding in which the respondent obtained judgment on its contract claim.

Going behind the judgment

  1. The appellants, in reliance on Olivieri v Stafford (1989) 24 FCR 413, submitted that in the circumstances of this case, the court should go behind the judgment. In Oliveri v Stafford, the debtor, having unsuccessfully applied to set aside a judgment, contended that the bankruptcy notice overstated the amount due.
  2. The Full Federal Court (Sweeney ACJ, Beaumont and Gummow JJ) dismissed the debtor’s appeal but recognised that a bankruptcy court was empowered to investigate the foundation of a judgment in order to impugn a bankruptcy notice. Gummow J stated (at 429):
What is crucial to the present appeal is an understanding of the basis of the jurisdiction of this Court to set aside bankruptcy notices. In my view, the Court permits the debtor to go behind the judgment so as to have the bankruptcy notice set aside, on the footing that the Act is not given effect to or not carried out if a bankruptcy notice has been issued for a debt which is liable to be set aside or varied such that the creditor does not have a debt upon which bankruptcy proceedings can be founded.

  1. His Honour referred to Wilkinson v Osborne (1915) 21 CLR 89, in which the High Court set aside a bankruptcy notice based on a judgment held to be contrary to public policy and void. His Honour observed (at 432) that Wilkinson v Osborne “was a case where no debt at all would remain behind the judgment.”
  2. The appellants have not appealed from the judgment and, as discussed above, the material adduced to date does not constitute a prima facie case of contravention of the Trade Practices Act justifying avoidance of the relevant agreements or damages equal to or exceeding the judgment debt.

Conclusion

  1. In my opinion, the appeal should be dismissed.
I certify that the preceding ninety-one (91) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dodds-Streeton.

Associate:


Dated: 1 April 2010


[1] See Re Brink Ex parte Commercial Banking Company of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433 at 438-9 (Lockhart J).

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