1st Fleet Pty Ltd (in liquidation) v Kingtex International Pty Ltd

Background 4The plaintiff is a company now in liquidation, which was engaged in business as a private carrier of freight. The defendant is a wholesaler of imported textile goods and products. The plaintiff, in the Statement of Claim, sets out the grounds on which the plaintiff claims that the defendant should pay the plaintiff $63,792.98 in unpaid invoices. 5On the date of hearing, 15 August 2013, the parties provided to the Court their Case Summaries and Statement of Agreed Facts and Issues, which had been previously served but not filed (with the exception of the defendant's case summary which had been filed on 8 August 2013). 6On that date I made a direction that the plaintiff should file a document from the liquidators of the plaintiff evidencing the liquidator's awareness of, and consent to, the current proceedings filed by the plaintiff, including their awareness of the defendant's proposed set-off. That document has now been filed with the Court. 7The Statement of Agreed Facts and Issues details that the plaintiff issued invoices to the defendant, for services rendered between March and May 2012, which remain unpaid. On or about 25 April 2012 voluntary administrators were appointed for the plaintiff and on or about 22 May 2012 the plaintiff was placed in liquidation. On 11 February 2013 the plaintiff commenced recovery proceedings against the defendant. The plaintiff alleges that the invoices were issued pursuant to terms and conditions contained in the standard terms of the quotation and terms of trade, the standard terms and conditions of carriage, and the consignment notes (containing the terms and conditions of contract). The defendant denies any goods were consigned pursuant to the terms and conditions, and denies liability to pay the amount claimed. 8The issues for determination are detailed in the Statement of Agreed Facts and Issues as being: (a)whether the goods the subject of the plaintiff's invoices were consigned pursuant to the terms and conditions; and (b)whether the Defendant is entitled to a set-off. 9In submissions the defendant raises an equitable defence, that of set-off. The plaintiff provided written and oral submissions on 15 August 2013 that the court cannot uphold the set-off claimed by the defendant due to the provisions of the Corporations Act and also on the ground that the defendant's case does not establish the basis for equitable set-off. In oral submissions at the hearing the plaintiff also raised whether the Local Court was possessed of jurisdiction in equity. 10In the defendant's case summary, legal set-off pursuant to s 21 of the Civil Procedure Act 2005 was relied upon, however in written submissions of 15 August 2013 the defendant relied on equitable set-off. Section 21 provides: 21 Defendant's right to set-off (1) If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set off against the plaintiff's claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set-off was filed, whether or not the mutual debts are different in nature. (2) This section extends to civil proceedings in which one or more of the mutual debts is owed by or to a deceased person who is represented by a legal personal representative. (3) This section does not apply to the extent to which the plaintiff and defendant have agreed that debts (whether generally or as to specific debts) may not be set off against each other. (4) This section does not affect any other rights or obligations of a debtor or creditor in respect of mutual debts, whether arising in equity or otherwise. (5) This section is subject to section 120 of the Industrial Relations Act 1996. (6) In this section, "debt" means any liquidated claim. 11Section 21 clearly relates to debts which are liquidated claims. By contrast equitable set-off can encompass unliquidated debts. There is a distinction between cross-claims and set-offs (a cross claim is provided for by s 22 of the Civil Procedure Act). The history of the distinction is outlined in Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514. The distinction between cross-claims and set-off at law did not affect the doctrine of equitable set-off, which in circumstances where the doctrine applied, could operate to extinguish claims. Nor did it affect set-off in insolvency under s 86 of the Bankruptcy Act 1966 (Cth) and s 553C of the Corporations Act. 12I note that in these proceedings the defendant previously filed a cross claim which was withdrawn and dismissed on 17 April 2013.

Detail of the parties' submissions 13The plaintiff submits that the equitable set-off is not permitted in this case due to the provisions of the Corporations Act applicable to proceedings against the plaintiff as a corporation in liquidation. The plaintiff's submissions on this point are further detailed below. 14The plaintiff submits in the alternative that the equitable set-off cannot proceed on two bases: (1)the Local Court does not have equitable jurisdiction; and (2)the equitable set-off does not have a close connection with the plaintiff's claim 15The defendant submits that the Corporations Act does not apply because the defendant has not proved the debt as provided for by that Act. The defendant's submissions on this point are further detailed below. 16The defendant maintains that the Local Court has jurisdiction and relies upon sections 6 and 7 of the Law Reform (Law and Equity) Act 1972. 17The defendant also states that, in the current proceedings, the defendant is not prevented by the Corporations Act from relying on the equitable defence. The defendant further submits that the equitable set-off is closely connected to the plaintiff's claim. 18The parties requested that I consider their affidavit evidence for the purpose of ruling on these issues, although the evidence is not yet tendered in the substantive proceedings. The affidavit evidence consisted of the affidavit of Mitchell Murray (filed for the plaintiff) with annexures; and the affidavit evidence of Ye Zhi Zeng (filed for the defendant) with annexures. 19The detail of the parties' submissions on these issues is referred to below.

The Corporations Act issue 20The plaintiff submits that the plaintiff cannot raise set-off because of the provisions of the Corporations Act, in particular s 553C. Neither party was able to refer me to specific authority on the issue, although I was referred to relevant authorities. The defendant concedes that the defendant would need the permission of the Supreme Court to commence proceedings against the plaintiff including a cross-claim. The defendant has decided not to pursue that action. The defendant has also not sought to prove the debt against the plaintiff under the Corporations Act. 21The Corporations Act provides: 500 Execution and civil proceedings (1) Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void. (2) After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes. (3) The Court may require any contributory, trustee, receiver, banker, agent, officer or employee of the company to pay, deliver, convey, surrender or transfer forthwith or within such time as the Court directs to the liquidator any money, property of the company or books in his, her or its hands to which the company is prima facie entitled. 553 Debts or claims that are provable in winding up (1) Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company. (1A) Even though the circumstances giving rise to a debt payable by the company, or a claim against the company, occur on or after the relevant date, the debt or claim is admissible to proof against the company in the winding up if: (a) the circumstances occur at a time when the company is under a deed of company arrangement; and (b) the company is under the deed immediately before the resolution or court order that the company be wound up. This subsection has effect subject to the other sections in this Division. 553C Insolvent companies-mutual credit and set-off (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent. 553D Debts or claims may be proved formally or informally (1) A debt or claim must be proved formally if the liquidator, in accordance with the regulations, requires it to be proved formally. (2) A debt or claim that is not required to be proved formally: (a) may be proved formally; or (b) may be proved in some other way, subject to compliance with the requirements of the regulations (if any) relating to the informal proof of debts and claims. (3) A debt or claim is proved formally if it satisfies the requirements of the regulations relating to the formal proof of debts and claims. 22The plaintiff submits that there is a jurisdictional issue for me to determine, being whether the defendant can proceed with the equitable set-off in these proceedings. 23It is agreed by the parties that the defendant has not sought to prove a debt in the winding up against the plaintiff. 24In written submissions the plaintiff provided detail in support of the plaintiff's argument that the provisions of the Corporations Act prevent the defendant from pursuing equitable set-off in this matter. The plaintiff submits that in doing so the defendant has failed to avail itself of the proper procedure for set-off when a company is in liquidation. Regulation 5.6.39 of the Corporations Regulations 2001 (Cth) provides that a creditor claiming out of the company's estate proves the debts by lodging a proof of debt with the liquidator and having it admitted by the liquidator. The case of Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 339 is cited in relation to a description of the liquidator's role: the description of the liquidator's function reflects the duty to distribute the assets in his hands or under his control among the persons truly entitled, and the law is the same whether the winding up is voluntary or by the court, whether the company is solvent or insolvent, and an additional purpose of the winding up is to secure that creditors who have enforceable claims will be treated equally, subject only to the priorities for which the statute provides. The plaintiff notes the provisions of section 553 of the Corporations Act which provides that all debts payable by, and all claims against, the company, the circumstances giving rise to which occurred before the "relevant date", are admissible to proof. The relevant date is defined as the day on which the administration began. It is submitted that set-off in liquidation is determined by special statutory rules established by companies legislation rather than general statutory set-off or equitable set-off which apply in other situations. It is said that in this respect, the governing provision is section 553C(1). 25The plaintiff submits that in order to satisfy subsection 553C(1) of the Corporations Act all requirements must be satisfied, and subsection 553C(2) provides a further limitation on set-off when the company is in liquidation. The plaintiff refers to the authority of JLF Bakeries Proprietary Limited (in liquidation) v Baker's Delight Holdings Ltd [2007] NSWSC 894 at [41]: ... the purpose of section 553C(2) is to exclude a right of set-off where the creditor, in his dealings with the company, had notice of insolvency, or where the debtor manipulates the right of set-off, after notice of insolvency, to avoid payment (Gye v McIntyre at 619; Law v James [1972] 2 NSWLR at 577). 26The plaintiff submits that if the liquidator, in performing his or her function in considering the admissibility of proof of debt, decides to reject a proof of debt, the ordinary remedy is an appeal pursuant to subsection 1321(1) of the Corporations Act. It is noted that the appeal is to a court, and the definition of Court in the Corporations Act does not include the Local Court. 27The plaintiff submits, therefore, that the NSW Local Court does not have jurisdiction to consider the defendant's assertion that it is entitled to a set-off for undelivered goods and late delivery. 28The defendant submits that the Local Court does have jurisdiction to consider its claim for equitable set-off and that this is not excluded by the provisions of the Corporations Act. The defendant states that in dealings between the plaintiff and the defendant, the plaintiff collected goods from the defendant which were retained by the plaintiff and not delivered under the contract. The defendant states that it may rely on a defence of equitable set-off whether or not the set-off is mutual, as required by the statutory right in section 21 of the Civil Procedure Act, and irrespective of whether or not the amounts involved liquidated demands. The right of set-off in equity depends on the more general proposition that the contrary liabilities are sufficiently closely connected that it would be inequitable for the plaintiff to be permitted to proceed with its claim without making allowance for the defendant's claim against it. In support of this proposition the defendant cites as authority Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd (1997) 42 NSWLR 462. This case is further discussed below. The defendant also cites the case of Westmex Operations Pty Ltd v Westmex Ltd (in liquidation) (1992) 8 ACSR 146 at 153 as authority for the proposition that a claim for damages for breach of contract may be set-off against a claim for an amount due under the contract.

Discussion and Findings on application of the Corporations Act 29It is clear that the Corporations Act provides for the process for proving a debt against a company in winding up, and is the vehicle for recovering such debts. Section 553C also provides for set-off (as was the case also under the former s 86 of the Bankruptcy Act). It is clear from the provisions of s 500 of the Corporations Act (set out above) that a debtor cannot commence litigation to recover debts by other means without the leave of the Supreme Court. Section 500(2) specifically provides that no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Supreme Court. In this matter the defendant has not sought leave of the Supreme Court to commence any court proceedings or litigation against the plaintiff in relation to any debt. 30The plaintiff argues that the Corporations Act sets up an exclusive jurisdiction for proof of debts against a company in winding up, and therefore the defendant cannot raise equitable set-off against the plaintiff's Statement of Claim in the Local Court. 31The defendant relies on Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd as authority for the proposition that a litigant can pursue equitable set-off where legal proceedings are instigated by the insolvent company. 32That case involved very complex facts involving questions of contract law, rescission of contract, cross claims and set-off. The parties were also complex - essentially the case involved a dispute between the supply company (supplying videos discs and cassettes) and the distribution company, the contract between the parties being for exclusive distribution of the supplied product. A receiver and manager was appointed for the supply company, and the volume of supplied product declined substantially, so the distribution company began to withhold monthly distribution fees against the accruing liability for the guaranteed minimum distribution fee. Notice was given to the distributor, by the receiver, of default under the contract for payment of overdue fees. The case was further complicated by the subsequent sale of the supply company by the receiver, the distribution company claimed rescission of contract and the receiver of the supply company sent a formal notice of termination of the contract for non-compliance with the notice of default. The Court made a number of findings about the contract (one of which was that the contract was terminated by the sale of the supply company and its assets, and the distribution company's right under the contract to sole distribution rights was a continuing benefit which could not be defeated by sale of the supply company). For the purposes of the present matter it is not relevant to detail all the findings in relation to the contract between the parties in that case. 33Relevantly, the Court held that the conduct of the distribution company in asserting and exercising a right to withhold payment of monies otherwise due to the supply company was justified by its right of equitable set-off. The Court held that unliquidated damages may be set-off in equity, not only between the original parties, but as against an assignee, where arising out of and inseparably connected with the dealings and transactions giving rise to the assignment. The Court also found that equitable set-off is available against a receiver. 34The Court noted (at 481) that equitable set-off may be set up not merely as a means of preventing judgment or at any rate execution, but also as an immediate answer to liability to pay. This is because an equitable set-off impeaches the title of the other party to the legal demand against which it is asserted. When the circumstances which support an equitable set-off exist, it is unconscionable for the creditor to regard the debtor as being indebted. 35The Court stated on the facts of that case (at 483) that : The appellant is therefore prima facie entitled to set-off its claims against the debts on which it was sued to judgement. However, these proceedings were brought by the receivers.... and it is necessary to consider whether this makes any difference. 36 In reviewing the authorities the Court noted the following: "I find it impossible to see how an assignee can take the benefit of the contract without at the same time accepting the liabilities arising thereunder. He could not be in any better position .... than the company itself" [The Court was quoting from George Barker (Transport) Ltd v Eynon [1974] 1 WLR 462.] 37The issue also is whether it is established on the evidence that the equitable set-off is claimed against sums owed under the original contract, and not a new contract with the receiver (at 484). The Court also found that in principal equitable set-off was available for liquidated cross-demands which are not payable when the proceedings are commenced, just as it is available for unliquidated cross-demands before they have been liquidated by verdict or judgement (at 488). The Court noted (at 489) that the respondents would recover a significant sum after allowance of the equitable set-offs upheld by the Court, but its claims were never in dispute; it was a dispute mainly related to the equitable set-off (in respect of which the Court found in favour of the party asserting the set-off). 38I consider that this case is authority for the proposition that in proceedings commenced for recovery of losses arising from a contract between the parties, the fact that the plaintiff is a company is in liquidation does not prevent the claim of equitable set-off by a defendant as defence to the cause of action. However, in so finding I have been mindful of the complex facts of the case (Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd) and that the decision was one of the Supreme Court which is a court of law and equity. I do consider that the conclusions of the Court, as set out above, are of relevance, and useful in determining this matter. 39The plaintiff did refer me to other authorities (some of which I have referred to in the outline of the plaintiff's submissions above), but none were specifically on this point. Some dealt with the issue of when an equitable set-off could be considered sufficiently connected to the claim (for example, AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705). The case of Equititrust Ltd v Franks [2009] NSWCA 128 found on the facts of that case that equitable set-off was not available because the debts were distinct and separate, and the claimed set-off did not impeach the plaintiff's title - a necessary element of an equitable set-off. Other authorities examined set-off in bankruptcy, or under the Corporations Act (for example the case of Mine & Quarry Equipment International Ltd v Macintosh (as liquidator of Mine & Quarry Equipment Pty Ltd (in liq)) [2005] QCA 186. In the case of Day & Dent Constructions Pty Ltd (in liquidation) v North Australian Properties Pty Ltd (Provisional Liquidator Appointed) (1981) 34 ALR 595, the Federal Court dealt with issues of set-off and the right to set-off under the Bankruptcy Act, s 86. In that case the respondent had lodged proof of debt in the winding up of the appellant company, so the case dealt with the availability of set-off in the context where the respondent had lodged a proof of debt. This is different to the current situation, where no proof of debt has been lodged under the Corporations Act by the defendant. 40For the reasons detailed above I consider that there is authority for the proposition that a defendant in legal proceedings, other than a claim based on proof of debt under the Corporations Act, in answer to a claim for monies owed under a contract between the parties, may raise the equitable defence, of equitable set-off. This is so even when the plaintiff is a company in liquidation. Such a result is in my view in the interests of justice, is consistent with the authorities set out above, and assists in avoiding duplication of legal claims thereby reducing costs to the parties and the courts, and assists in speedy disposition of proceedings, with the aim of finalising all matters in dispute between the parties. As such it is consistent also with the provisions of the Civil Procedure Act 2005 (refer s 56). 41It is for the defendant to make out the grounds of such equitable defence and if successful it may be set-off against the plaintiff's claim.

Issue of the Local Court's jurisdiction to consider equitable defences - discussion and findings 42It is useful to firstly consider in a general sense the jurisdiction of the Local Court. The current proceedings are commenced in the General Division of the Local Court, pursuant to the Local Court Act 2007 which provides: 30 Conferral of jurisdiction (1) Subject to this Part, the Court sitting in its General Division has jurisdiction to hear and determine: (a) proceedings on any money claim, so long as the amount claimed, whether on a balance of account or after an admitted set-off or otherwise, does not exceed the jurisdictional limit of the Court when sitting in that Division, and (b) proceedings to recover detained goods, or to recover the assessed value of detained goods, so long as the value of the goods, together with the amount of any consequential damages claimed for their detention, does not exceed the jurisdictional limit of the Court when sitting in that Division, and (b1) proceedings involving company title home unit disputes under section 34A, and (c) proceedings that, pursuant to any other Act, are required to be dealt with by the Court sitting in that Division. (2) Subject to this Part, the Court sitting in its Small Claims Division has jurisdiction to hear and determine: (a) proceedings on any money claim, so long as the amount claimed, whether on a balance of account or after an admitted set-off or otherwise, does not exceed the jurisdictional limit of the Court when sitting in that Division, and (b) proceedings to recover detained goods, or to recover the assessed value of detained goods, so long as the value of the goods, together with the amount of any consequential damages claimed for their detention, does not exceed the jurisdictional limit of the Court when sitting in that Division, and (c) proceedings involving company title home unit disputes under section 34A. (3) Nothing in subsection (2) prevents proceedings under that subsection from being heard and determined by the Court sitting in its General Division. (4) In determining an amount for the purposes of subsection (1) or (2), any interest up to judgment under section 100 of the Civil Procedure Act 2005 is to be disregarded. (5) If: (a) the jurisdictional limit of a Division is increased, and (b) proceedings in which an amount of money is claimed are pending in the Court when that increase takes effect, the Court may, on the application of a plaintiff, make an order altering the amount specified in the claim to an amount not exceeding the new jurisdictional limit. (6) In this section, "admitted set-off", in relation to proceedings, means set-off admitted by the plaintiff in the originating process in the proceedings. Section 33 of the Local Court Act specifically excludes jurisdiction: 33 Certain jurisdiction excluded (1) The Court does not have jurisdiction under this Part to hear or determine any of the following kinds of proceedings: (a) proceedings in which the validity or effect of any devise, bequest or limitation under any will or settlement, or under any document in the nature of a settlement, is disputed, (b) proceedings for passing-off, wrongful arrest, false imprisonment, malicious prosecution or defamation, (c) proceedings for infringement of letters patent or copyright, (d) proceedings for detention of goods: (i) where the goods are the subject of a hire-purchase agreement, or (ii) where the goods are detained by their owner or by some other person acting on the owner's behalf, (e) proceedings in which the title to land is in question (other than proceedings on a claim in respect of which the question of the title to land is merely incidental). (2) The judgment of the Court in proceedings on a claim in respect of which the question of the title to land is merely incidental, as referred to in subsection (1) (e), is not admissible as evidence of the title to the land in any other legal proceedings. 43In contrast there is explicit grant of equitable jurisdiction to the Supreme Court in the Supreme Court Act 1970, which provides: 58 Equities of plaintiff Where a plaintiff claims to be entitled to any equitable estate or right or to relief upon any equitable ground against any deed, instrument or contract, or against any right, title or claim whatsoever asserted by any defendant in the proceedings, or to any relief founded upon a legal right which formerly could only have been given by a court of equity, the Court shall give to the plaintiff the same relief as ought formerly to have been given by a court of equity in proceedings for the like purpose. 59 Equitable defences Where a defendant claims to be entitled to any equitable estate or right, or to relief upon any equitable ground against any deed, instrument or contract or against any right, title or claim asserted by any plaintiff in the proceedings, or alleges any ground of equitable defence to any claim of the plaintiff, the Court shall give to every equitable estate, right or ground of relief so claimed, and every equitable defence so alleged, the same effect by way of defence against the claim of the plaintiff as a court of equity ought formerly to have given if the like matters had been relied on by way of defence in any proceedings instituted for the like purpose. 60 Incidental equities The Court shall recognise and take notice of all equitable estates, titles and rights, and all equitable duties and liabilities appearing incidentally in the course of any proceedings, in the manner in which a court of equity would have recognised and taken notice of those matters in any proceedings instituted therein. 44The Supreme Court Act clearly refers to a court of equity and provides for the Supreme Court, in relation to every equitable defence so alleged, the same effect by way of defence against the claim of the plaintiff as a court of equity ought formerly have given if the matters had been relied upon by way of defence in any proceedings. 45The Local Court is not a court of equity. The Local Court is a court of statute. Does the Supreme Court Act thereby indicate that, there being no similar provision in the Local Court Act in relation to equitable defences and a court of equity, that the Local Court has no jurisdiction to consider equitable defences? 46For assistance in determining this question I have looked at the jurisdiction of the District Court, which is also a court of statute. Generally speaking the District Court has no powers beyond those conferred by statute (the District Court Act 1973). The District Court also has such jurisdiction as is conferred on it by other statutes, for example the District Court has jurisdiction to grant relief under the Contracts Review Act 1980 which is informed by equitable principles. The District Court also has power to grant some statutory applications involving property claims arising from relationships or deceased estates, again pursuant to statute - the Property (Relationships) Act 1984 and the Family Provision Act 1982. 47It is said also that the District Court has such power as is necessarily implied from any specific grant of power: Grassby v The Queen (1989) 168 CLR 1. This is not from any inherent jurisdiction of the Court but only to the statutory grant of power (and things that may be necessary to give proper effect to the grant). Implied powers are confined to those reasonably required or legally ancillary to the exercise of a specific power: Attorney-General v Walker (1849) 154 ER 833 at 838-839 applied in Pelechowski v Registrar, Court of Appeal [1999] HCA 19; (1999) 198 CLR 435. Section 134(i)(h) was included in the District Court Act which was noted to be for wide reforming purpose: Commonwealth Bank of Australia v Hadfield (2001) 53 NSWLR 614 at [68]. 48There is jurisdiction clearly given to the District Court by section 134 of the District Court Act. 134 Jurisdiction in equity proceedings (1)The Court shall have the same jurisdiction as the Supreme Court, and may exercise all the powers and authority of the Supreme Court, in proceedings for: (a) the foreclosure or redemption of a mortgage or the enforcing of any charge or lien where the amount owing in respect of the mortgage, charge or lien does not exceed $20,000, as determined by the Court, (b) the specific performance, rectification, delivery up or cancellation of any agreement for: (i) the sale or purchase of any property at a price not exceeding $20,000, or (ii) the lease of any property the value of which does not exceed $20,000, as determined by the Court, (c) an order under section 3 of the Testator's Family Maintenance and Guardianship of Infants Act 1916 (as in force immediately before that Act was amended by the Succession Amendment (Intestacy) Act 2009) or a family provision order under Chapter 3 of the Succession Act 2006, (d) relief against fraud or mistake where the damage sustained or the estate or fund in respect of which relief is sought does not exceed $20,000 in amount or value, as determined by the Court, (e) the execution of a trust or a declaration that a trust subsists, where the estate or fund subject or alleged to be subject to the trust does not exceed $20,000 in amount or value, as determined by the Court, or (f) the administration of the estate of a deceased person, where the estate does not exceed $20,000 in amount or value, as determined by the Court, or (g) any application under the Property (Relationships) Act 1984, or (h) any equitable claim or demand for recovery of money or damages, whether liquidated or unliquidated (not being a claim or demand of a kind to which any other paragraph of this subsection applies), in an amount not exceeding the Court's jurisdictional limit. (2) In any proceedings pursuant to subsection (1) (c), the Court shall not have power to make an order for provision under the Testator's Family Maintenance and Guardianship of Infants Act 1916 (as in force immediately before that Act was amended by the Succession Amendment (Intestacy) Act 2009) or Chapter 3 of the Succession Act 2006 that will or may result in the amount of provision so made exceeding $250,000. (3) In any proceedings pursuant to subsection (1) (g), the Court has no power to make an order for financial adjustment under Part 3 of the Property (Relationships) Act 1984 that will or may result in the amount of the adjustment so made exceeding $250,000. 49The District Court Act does not specifically provide for jurisdiction for equitable defences in s 134, however the jurisdiction to entertain equitable defences is given by sections 6 and 7, Law Reform (Law and Equity) Act 1972: 5 Rules of equity to prevail In all matters in which there was immediately before the commencement of this Act or is any conflict or variance between the rules of equity and the rules of common law relating to the same matter, the rules of equity shall prevail. 6 Defence in inferior courts Every inferior court shall in every proceeding before it give such and the like effect to every ground of defence, equitable or legal, in as full and ample a manner as might and ought to be done in the like case by the Supreme Court under the Supreme Court Act 1970. 7 Jurisdiction as to relief not enlarged This Act does not enlarge the jurisdiction of any court as regards the nature or extent of the relief available in that court, but any court may, for the purpose of giving effect to sections 5 and 6, postpone the grant of any relief, or grant relief subject to such terms and conditions as the nature of the case requires. 50In Pelechowski v Registrar, Court of Appeal per Gaudron, Gummow and Callinan JJ the High Court observed (footnotes omitted): 25....[The appellant's] latter submission raised questions as to the extent of the power of the District Court to grant relief of an equitable nature, whether in aid of legal or equitable rights. To these aspects of the appeal we now turn. The District Court 26. Section 8(2) of the District Court Act establishes that Court as a court of record. Section 9 states: "(1) The Court shall have a civil jurisdiction, consisting of: (a) its jurisdiction conferred by Part 3, and (b) the jurisdiction conferred by or under any other Act or law on the Court, not being its jurisdiction referred to in subsection (2)....... .......Part 3 comprises ss 25-161 and is headed "The civil jurisdiction of the Court". Part 4 (ss 165-175) is headed "The criminal jurisdiction of the Court". 27. In United Telecasters Sydney Ltd v Hardy, Samuels AP (with whom Clarke and Meagher JJA agreed), in giving the judgment of the Court of Appeal, applied to the District Court the principle which, in Attorney-General for New South Wales v Mayas Pty Ltd, McHugh JA had explained as follows: "If an inferior tribunal exercising judicial power has no authority to make an order of the kind in question, the failure to obey it cannot be a contempt. Such an order is a nullity. Any person may disregard it. Different considerations arise, however, if the order is of a kind within the tribunal's power but which was improperly made. In that class of case, the order is good until it is set aside by a superior tribunal. While it exists it must be obeyed." 28. In United Telecasters, the Court of Appeal held that the District Court did not have power to order the prior restraint of a threatened contempt by a television station in broadcasting material which might identify the accused in a trial before that Court. The Court of Appeal also held that the District Court did not have power to accept undertakings in the same terms. In the latter connection, the Court referred to the decision of this Court in Thomson Australian Holdings Pty Ltd v Trade Practices Commission. It followed, as Samuels AP put it, that the order in question "was a complete nullity and bound no-one" and could not found a proceeding for contempt. Further, his Honour held that: "[s]ince [the District Court] had no power to issue an injunction in those terms, it can have no power to accept an undertaking in the same terms. Since the undertaking was clearly unenforceable I would dismiss the claim for a declaration that [United Telecasters] was guilty of a contempt for breaching an undertaking to the court." 29. It is upon those propositions that Mr Pelechowski founds his present appeal to this Court. The question then becomes whether the District Court did have the power to make the order the subject of the successful contempt proceedings. The appeal thus turns upon the statutory or other authority which supports the making of such an asset preservation order. 30. The Registrar referred, in particular, to the conferral upon the District Court of the power to grant equitable remedies, particularly injunctions. 31. The interpretation of the particular provisions upon which this appeal turns are best approached with an understanding of the pre-1973 legislation which the District Court Act replaced. This was the District Courts Act (NSW) ("the 1912 Act"). 32. Section 74 of the 1912 Act stated: "(1) The defendant or the plaintiff in replevin in any action in which, if judgment were obtained, he would be entitled to relief against such judgment on equitable grounds, may rely upon the facts which entitled him to such relief by way of defence. (2) Notice of such facts, with the words 'for defence on equitable grounds,' shall be given as hereinafter provided, and the plaintiff or defendant (as the case may be) may reply to any such plea facts which avoid the same on equitable grounds." Provision to like effect was made with respect to actions at common law in the Supreme Court of New South Wales by s 95 of the Common Law Procedure Act 1899 (NSW). Before it was supplemented in 1957 with a new provision, s 95 was interpreted as accepting the position whereby, on the trial of an action at common law, a verdict was found for or against the plaintiff and there was no provision for acceptance of a defence subject to the imposition of conditions upon the defendant. The result was that the section did not apply unless the equitable defence which the defendant sought to raise would, if successful, entitle the defendant to a perpetual and unconditional injunction. 33. Section 74 of the 1912 Act was repealed by s 3(1) of the Law Reform (Law and Equity) Act 1972 (NSW) ("the Law and Equity Act"). This statute commenced on 1 July 1972. Section 5 of the Law and Equity Act provides for the rules of equity to prevail in any conflict or variance with the rules of common law relating to the same matter and s 6 requires every inferior court to give effect to every ground of defence, equitable or legal, in as full and ample a manner as might and ought be done in the like case by the Supreme Court under the Supreme Court Act. The Supreme Court Act also came into force on 1 July 1972. 34. In its terms, s 74 of the 1912 Act did not confer upon the District Court jurisdiction to institute proceedings which otherwise might properly be commenced only in the equity jurisdiction of the Supreme Court. Nor does the Law and Equity Act. Section 7 thereof states that that statute does not "enlarge the jurisdiction of any court as regards the nature or extent of the relief available in that court". In United Telecasters, Samuels AP pointed out that the result was that, although all inferior courts could now entertain every ground of defence, equitable or legal, there had been no enlargement of the jurisdiction of any inferior court as regards the nature and extent of the relief available in that court 51I consider that Pelechowski v Registrar, Court of Appeal is authority for the proposition that the Law Reform (Law and Equity) Act provides for inferior courts, including the Local Court, to consider equitable defences which are raised in proceedings in which the relevant court has jurisdiction. The plaintiff's statement of claim initiated proceedings, being a claim for payment of money by the defendant, in respect of which the Local Court has jurisdiction (refer Local Court Act set out above). The Local Court, for reasons just stated, has jurisdiction to consider equitable defences. The Law Reform (Law and Equity) Act did not enlarge the jurisdiction of the Local Court to consider equitable causes of action, or to grant equitable relief, but does allow consideration of equitable defences. 52The case of Andrew Hennessey v Architectus Group Holdings Pty Ltd [2010] NSWDC 61, a judgment of the District Court, per Cogswell SC DCJ, indicates that I must be satisfied that what the defendant is relying on is an equitable defence and not equitable relief. In that case it was stated: 8. ... [Architectus] relies, so far as the claim for rectification in the defence is concerned, on s 6 of the Law Reform (Law and Equity) Act 1972. Section 6 of the Law Reform (Law and Equity) Act provides as follows: "6. Every inferior court shall in every proceeding before it give such and the like effect to every ground of defence, equitable or legal in as full and ample a manner as might and ought to be done in the like case by the Supreme Court under the Supreme Court Act 1970." 9. Mr Berwick on behalf of Mr Hennessey argues that Architectus is asking the court to rectify the contract between Mr Hennessey and Architectus and this does not amount to a "ground of defence" so that s 6 of that Act is not available to Architectus. Mr Berwick argues that para 25 of the defence is a claim for rectification and not a "ground of defence". Mr Berwick relies upon a passage in the fourth edition of Meagher, Gummow and Lehane's Equity Doctrines And Remedies (2002) as well as on the decision of the New South Wales Court of Appeal in United Telecasters Sydney Limited v Hardy (1991) 23 NSWLR 323. 10. In that case the late Samuels JA, then Acting President of the Court of Appeal and with whom Clarke and Meagher JJA agreed, referred to with apparent approval, over 332-333, a passage from the second edition of Equity Doctrines And Remedies by Meagher, Gummow and Lehane (1984). That passage did not vary in the relevant substance from the corresponding passage in the fourth edition of the same publication relied upon by Mr Berwick. The Court of Appeal emphasised in its judgment the distinction between equitable relief being sought and an equitable defence being relied upon. 11. The learned authors in the fourth edition confirm the view expressed by them in the earlier edition that the term "equitable ground of defence" is "referable to an equity such as unclean hands or laches, which was developed in equity as a disentitlement of the plaintiff from relief in that jurisdiction." The authors then refer to what they call an equitable "defence" of another kind, which "is essentially a claim asserted by the defendant to independent relief which must be made out before he can defend the action of the plaintiff in the current proceedings." 12. The authors rely upon other arguments for their view that the reference in s 6 of the Law Reform (Law and Equity) Act to an equitable defence should be construed narrowly rather than having a wider operation. They refer to the fact that the section extends beyond the District Court to other inferior courts which have otherwise no equitable jurisdiction. They also refer to s 7 of the same Act which provides that the Act does not "enlarge the jurisdiction of any court as regards the nature or extent of the relief available in that court." Effectively it is those passages and arguments which, to my mind, appear to attract the approval of the Court of Appeal in United Telecasters v Hardy . 13. Mr Foster, on behalf of Architectus, points to the examination of the argument advanced by Meagher, Gummow and Lehane by Master Allen, as his Honour then was, in Yahl v Bridgeport Customs Pty Ltd (NSWSC, unreported, 31.7.84), a case in which the Master compared those arguments with a broader interpretation given to the corresponding provision in the English legislation by the Court of Appeal in England. As Mr Foster pointed out, Master Allen pointed to room for doubt as to which of the constructions is to be preferred. However Master Allen's judgment was delivered in 1984 and preceded by nearly seven years the judgment of the Court of Appeal in United Telecasters Sydney. 14. In my opinion Mr Berwick's submissions are right. It seems to me that the relief sought by Architectus in para 25(a) and (b) are infected by the same jurisdictional problem. Both clauses seek a form of equitable relief, the first a declaration and the second rectification of the contract. Adopting what was said in the fourth edition of Meagher Gummow and Lehane regarding another kind of equitable defence, in my opinion the forms of relief sought by Architectus amount to "essentially a claim asserted by the defendant to independent relief which must be made out before he can defend the action of the plaintiff in the current proceedings." 15. Architectus also argues that essentially Architectus by pleading the defence of mistake, which is one of the defences it relies upon, is relying upon matters in the nature of unclean hands. It refers to an allegation made by it in its defence that Mr Hennessey knew or ought to have known that the employment deed was mistakenly entered into by Architectus. Alternatively Architectus relies upon what it says is an unconscionable reliance by Mr Hennessey on what he says is a common mistake. 16. Neither of those in my opinion amounts to an equitable defence. It may be in a sense that Architectus is relying upon "unclean hands" but this has nothing to do with a resistance to any equitable relief being sought by the plaintiff. The plaintiff is seeking a straightforward form of relief at common law under what it claims to be a contract. The defendant resists that by relying upon the doctrine of mistake but the relief which it seeks is clearly in my opinion equitable. 53I am satisfied that equitable set-off is an equitable defence as it goes to impeach the plaintiff's title. At paragraph [37-005] of the text by the learned authors Meagher, Gummow and Lehane, 'Equity: Doctrines and Remedies', it is stated that: A set-off is said to exist when a defendant, in answer to a plaintiff's claim, is able to plead successfully that a countervailing claim which he has against the plaintiff absolves him, wholly or partially, from liability to the plaintiff. It is to be distinguished from a counter claim, in that a counter claim is never a defence to the plaintiff's claim but an entirely different action brought by a defendant against a plaintiff although in the same proceedings. 54Therefore, a claim of equitable set-off is an equitable defence. Of course it is for the defendant to establish on the evidence that the claim or defence is made out. 55For the above reasons I am satisfied that I have jurisdiction to consider an equitable set-off if such is raised by the defendant in the current proceedings. 56The parties also referred me to the case of Concrete Equipment Australia (Trading) Pty Ltd v Bonfiglioli Transmission (Aust) Pty Ltd [2010] NSWSC 393. That was a decision by the Supreme Court on appeal from a decision of the Local Court. The case may be authority for the proposition that the Local Court has jurisdiction in equitable set-off as a defence to a plaintiff's claim. The Supreme Court did not specifically consider whether the Local Court had such jurisdiction. However the Supreme Court found that the Local Court made an error of law in not considering equitable set-off on the facts of that case (the Local Court had only considered set-off pursuant to s 21 of the Civil Procedure Act 2005). The Supreme Court noted that it was unclear whether equitable set-off was pursued in the Local Court. It found at [26] that, however the case was pleaded, Concrete Equipment had raised a claim for set-off of the cost, or perhaps value, of some water coolers, and evidence supported the claim: In my opinion Her Honour erred in law in regarding the claim as only available within the confines of s21. 57However, the Supreme Court did not deal with whether the Local Court had power to make orders pursuant to the equitable defence. The Supreme Court made orders varying the terms of the Local Court judgement by reducing the judgement debt by the amount of that claim (of equitable set-off).

Findings 58Having regard to judicial interpretation of the Law Reform (Law and Equity) Act, discussed above, I am satisfied that inferior courts, while not courts of equity, do possess jurisdiction to consider an equitable defence raised by a defendant in proceedings instituted by a plaintiff where the court has jurisdiction in terms of the plaintiff's proceedings. In this matter the court has jurisdiction, as noted above, in respect of the plaintiff's claim for payment of money by the defendant. The court has jurisdiction to consider the defendant's equitable set-off in determining the plaintiff's claim. 59The next issue is whether the defendant's claimed equitable set-off is sufficiently connected to the plaintiff's claim to constitute equitable set-off. As this requires me to make determination of facts, I am not prepared to determine this question as a preliminary issue and consider it inappropriate to do so. The determination of this issue is properly to be made after hearing evidence in the proceedings. 60Accordingly I make the following orders: (1)The Local Court has jurisdiction to consider the defendant's equitable set-off in the current proceedings; and (2)The hearing is to be adjourned, part-heard, for further hearing, and the parties are to approach the Registry to obtain a suitable date. Magistrate C Huntsman Downing Centre Local Court 13 September 2013

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