The First Bankruptcy Notice
31 The Owners SP 71656 submitted that, because in proceeding NSD 435 of 2016 the Court had extended the time for compliance with the First Bankruptcy Notice until 22 June 2016, Ms Blair had until that date to file an affidavit or affidavits capable of satisfying the Court as to the existence of a claim of the required type. They further submitted that if the evidence served within that time did not discharge the onus then no deemed extension of time for compliance would arise under s 41(7) of the Bankruptcy Act and the effect would be that the debtor had committed an act of bankruptcy. The Owners SP 71656 contended that this could not be remedied by the production of further evidence after the act of bankruptcy had been committed because the Court will not set aside a bankruptcy notice which has led to the commission of an act of bankruptcy.
32 The Owners SP 71656 submitted that, whatever might be the strength of Ms Blair's case against it, none of the material provided prior to 22 June 2016 provides any basis for a conclusion that the claim was of an amount exceeding the Local Court Judgment and that the evidence served after the commission of an act of bankruptcy cannot be relied on to salvage the application from that defect.
33 Ms Blair submitted that nothing in s 41(7) prevented the Court from having regard to the evidence she served after 22 June 2016 and that the deemed extension under s 41(7) of the Bankruptcy Act was engaged as soon as she "applied to the Court for an order setting aside the bankruptcy notice on the ground [that she has such] a counter-claim, set-off or cross demand as is referred to in paragraph 40(1)(g)". Ms Blair further submitted that does not require any assessment by the Court of the adequacy or cogency of the evidence served in support of such a counter-claim, set-off or cross demand before the extension of time is engaged. She contended that such a construction would defeat the evident object of s 41(7), which can be divined from its terms and which is to provide a deemed extension of time for compliance with a bankruptcy notice for the purpose of affording an applicant a fair opportunity to collate such evidence until such time as the Court has "determined whether it is satisfied that the debtor has such a counter-claim, set-off or cross demand".
34 Ms Blair submitted that the cases decided prior to the 1996 amendments do not assist the Court and that those cases decided after the enactment of s 41(7) in its current form did not address the submission she now puts that the change in language in s 41(7) makes a difference to the way in which the section operates.
35 Ms Blair referred to the judgment in Thomas at [14] where Lindgren J acknowledged that s 41(7) had not always been in the same form, noted that it was not submitted by the applicant in that case that "this makes any difference" and observed that the requirement for an affidavit, which had previously been found in the Bankruptcy Act was at the time found in the Federal Court Rules 1979 (Cth) (the Former Federal Court Rules). She also noted his Honour's conclusion that he did not think that s 41(7) was activated by "nothing more than the filing of an application which meets the literal terms of the subsection". Ms Blair submitted that Lindgren J's reasoning in reaching that conclusion is not exposed, a matter which she contended was not surprising given that his Honour was not addressing the submission she now puts, namely that the amendment to s 41(7) affects the operation of the section.
36 Section 41 of the Bankruptcy Act is concerned with bankruptcy notices. It addresses when they can be issued, the form they must take, the effect of an overstatement of the amount due by a debtor in a bankruptcy notice and relevantly the circumstances in which the time for compliance with a bankruptcy notice will be extended: subs 41(6A) and (7).
37 There are two avenues for obtaining an extension of time to comply with a bankruptcy notice. Both require positive steps to be taken by a debtor. In order to invoke subs (6A), by which the Court can extend the time for compliance, the debtor must, relevantly, file an application to set aside the bankruptcy notice and in order to have the benefit of the deemed extension under subs (7) an applicant must file an application of the kind specified in that subsection. Rule 3.02 of the Bankruptcy Rules prescribes that an affidavit must accompany an application to set aside a bankruptcy notice and what must be included in that affidavit.
38 In Crimmins v Glenview Home Units [1999] FCA 515 (Crimmins) Branson J considered s 41(7) of the Bankruptcy Act in its present form. Her Honour noted the change in the requirements of that subsection as a result of the 1996 amendments. She continued at [5] as follows:
The applicant contends that a consequence of the amendment of s 41(7) of the Act is that the section is now enlivened by the mere filing of an application in the Court. If this contention is correct, the previous practice of looking at an application of this kind in two stages will no longer be appropriate. The first stage under the previous practice was for the Court to determine whether the affidavit material filed within the time limited by the bankruptcy notice for compliance with the demand therein met the requirements of s 41(7) so as to lead to an automatic extension of the time for compliance. The second stage was for the Court to determine on the basis of all of the material before it whether it was satisfied that the debtor did have a cross-claim, set-off or cross demand of the kind referred to in s 40(1)(g) of the Act.
39 In my opinion the contention put by the applicant in Crimmins raises the issue put by Ms Blair. The applicant in Crimmins put that the amendment to s 41(7) meant that the section was enlivened by the mere filing of an application. That is, the effect of the submission put to me. In considering that issue, her Honour observed that the applicant's contention paid no regard to the terms of O 77 r 13 of the Former Federal Court Rules which was concerned with the requirements of an application to set aside and extend time of a bankruptcy notice. The requirements in O 77 r 13 are now found in r 3.02 of the Bankruptcy Rules. At [7] her Honour said:
I understand the applicant to have submitted that the Federal Court Rules are not part of the law to be applied by this Court and it is sufficient in the present case for the applicant to comply with the requirements of the Act. This submission must be rejected.
40 A similar submission was made before me in that Ms Blair contended that r 3.02 of the Bankruptcy Rules does not inform the proper construction of s 41(7) because the Bankruptcy Rules are not part of the Bankruptcy Act.
41 As was the case in Crimmins in relation to O 77 r 13 of the Former Federal Court Rules, the Bankruptcy Rules are made pursuant to s 59(1) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) which provides that:
The Judges of the Court or a majority of them may make Rules of Court, not inconsistent with this Act, making provision for or in relation to the practice and procedure to be followed in the Court (including the practice and procedure to be followed in Registries of the Court) and for or in relation to all matters and things incidental to any such practice or procedure, or necessary or convenient to be prescribed for the conduct of any business of the Court.
Section 59(3) provides:
Rules of Court under this Act have effect subject to any provision made by another Act, or by rules or regulations under another Act, with respect to the practice and procedure in particular matters.
42 In Crimmins Branson J, after referring to s 59 of the Federal Court Act, noted the following at [10]-[11]:
10 Section 48 of the Acts Interpretation Act 1901 (Cth), which requires, amongst other things, that regulations made under an Act must be notified in the Gazette and laid before each House of the Parliament, applies to Rules of Court made under s 59(1) of the Federal Court Act as if references in s 48 to regulations were references to Rules of Court (s 59(4) of the Federal Court Act). It is plain that the Federal Court Rules are a category of delegated legislation.
11 While the substantive law of bankruptcy is to be found in the Act, the procedural aspects of the law of bankruptcy are now largely to be found in O 77 of the Federal Court Rules. Unless the Court in any case exercises the discretion given to it by O 1 r 8 of the Federal Court Rules to dispense with compliance with any of the requirements of the Rules, parties to litigation before the Court are bound by the Federal Court Rules.
43 In its current form s 59(4) of the Federal Court Act provides that the Legislation Act 2003 (Cth) (Legislation Act) applies in relation to rules of Court made by the Court under the Federal Court Act or another Act relevantly, as if a reference to a legislative instrument were a reference to a rule of Court. Following the repeal of s 48 of the Acts Interpretation Act 1901 (Cth) on 1 January 2005, the requirements that a legislative instrument made under an Act be notified in the Gazette and laid before each House of Parliament is now found, in slightly altered form, in ss 38 and 56 of the Legislation Act. It is apparent that the Bankruptcy Rules as rules of Court under the Federal Court Act are a species of delegated legislation: s 59(3) and (4) Federal Court Act; see also Pearce DC and Argument S, Delegated Legislation in Australia (4th ed, LexisNexis, 2012) at [1.25].
44 The general rule is that delegated legislation made under an act should not be taken into account for the purposes of interpretation of the Act: see Pearce DC and Geddes RS, Statutory Interpretation in Australia (8th ed, LexisNexis, 2014) at [3.41]. The substantive law of bankruptcy, is as Branson J observed, found in the Bankruptcy Act. To that end s 41(7) specifies that if a debtor files an application of the type envisaged by that section there will be a deemed extension of time in which to comply with the bankruptcy notice. However, as held by Branson J in Crimmins, the Bankruptcy Rules, like the Former Federal Court Rules, are a category of delegated legislation which set out the procedural aspects of the law of bankruptcy. Unless the Court exercises its discretion under r 1.04 of the Bankruptcy Rules to dispense with any of the requirements of those rules, they apply to a proceeding in the Court to which the Bankruptcy Act applies and the parties to the proceeding are bound by them. Thus, in the absence of an order dispensing with compliance with them, the Court must give consideration to the requirements of r 3.02 of the Bankruptcy Rules: Crimmins at [12].
45 When assessed against the requirements of r 3.02 of the Bankruptcy Rules the evidence filed by Ms Blair suffers from a deficiency in that it fails to set out the amount of the counter-claim, set-off or cross-demand. Evidence of quantum was filed on 8 July 2016 and 19 August 2016 that is after 22 June 2016 being the last date for compliance with the bankruptcy notice based on the extension of time granted by the Court. While I am satisfied that as at 22 June 2016 there was sufficient evidence, based on Ms Blair's First Affidavit, the First Miller Affidavit and the Second Miller Affidavit, to establish a prima facie case against the Owners SP 71656 there was no evidence that the quantum of that claim exceeded the amount of the Local Court Judgment upon which the First Bankruptcy Notice was based. Accordingly, as at that date there was not sufficient evidence before the Court to engage the operation of s 41(7) such that there was a deemed extension of time for compliance with the First Bankruptcy Notice. That means that Ms Blair committed an act of bankruptcy at one minute past midnight on 22 June 2016. The Court cannot set aside a bankruptcy notice once the time for compliance with it has expired and no extension has been granted: Re Duckworth; Ex parte Lockett [1987] FCA 55 (per French J) at p 16.
46 Unlike in Crimmins, at the hearing Ms Blair made an application for dispensation with the Bankruptcy Rules. Rule 1.04 of the Bankruptcy Rules provides that:
1.04 Application of these Rules and other Rules of the Court
(1) Unless the Court otherwise orders:
(a) these Rules apply to a proceeding in the Court to which the Bankruptcy Act applies; and
47 That application was made in conjunction with a submission that Ms Blair's affidavit sworn 24 March 2016 meets the test set out at [16] of Thomas and establishes a bona fide assertion of a genuine counter-claim, set-off or cross demand and that nothing in Thomas requires that there be evidence of quantum. Even if I were to accede that application and make such an order, it would not assist Ms Blair. That is because Ms Blair would still need to satisfy the Court not only that she had a prima facie case or genuine counter-claim, set-off or cross demand as at the final date for compliance with the First Bankruptcy Notice, 22 June 2016, but in order to succeed in her application to set aside the Bankruptcy Notice she would also need to establish the two further matters required by s 40(1)(g) of the Bankruptcy Act: that the amount claimed in the District Court Proceeding is equal to or exceeds the amount of the "judgment debt" and that her cross-claim, set-off or cross demand could not have been set up in the Local Court Proceeding. In my opinion she has failed to establish those matters.
48 In the District Court Proceeding Ms Blair particularises her damages based on amounts she has incurred and will be required to incur as a result of the Owners SP 71656's alleged negligence at approximately $150,000. Mr Fowler quantifies the alleged damages in his second and third reports. It is not clear, and counsel for Ms Blair was not able to clarify, whether all of the costs particularised at p 5 of Mr Fowler's third report are included in the District Court Proceeding. Given that I must proceed on the basis of the amount claimed in the District Court proceeding.
49 The Owners SP 71656 submitted that there were a number of deficiencies in the evidence of quantum and that the Court would not be satisfied that Ms Blair's cross-claim exceeded the amount claimed in the First Bankruptcy Notice. They submitted that:
(1) in relation to Mr Fowler's second report in which he sets out four categories of cost and expense:
(a) insofar as the rectification costs include $4,210 for repair of the roof, which is common property, Ms Blair's proper remedy is to seek an injunction requiring such repair and that, relying on the decisions in Seiwa Pty Ltd v Owners Strata Plan 35042 [2006] NSWSC 1157 (Seiwa) and Owners - Strata Plan 32735 v Heather Lesley-Swan [2012] NSWSC 383 (Swan), there is an issue as to whether a lot owner would have a claim for damages for breach by an owners corporation of its statutory duty. They further submitted that, even if the claim is available, the basis for the claim for damages is incorrect as it could not be said that a lot owner has suffered loss by reference to the quantum of a claim for rectification of the whole of the common property. In relation to the balance of the rectification costs the Owners SP 71656 submitted that there was no evidence that the relevant damage to which these costs relate occurred in June or July 2016 being the dates of the invoices or quotes substantiating the costs; and
(b) in relation to the category for lost income and ancillary costs there is no evidence from Ms Blair concerning the status of the tenancies. The only evidence is that contained at [1.4]-[1.5] of Mr Fowler's report which is not evidence of a claim and is no more than a mere assertion of a claim;
(2) in relation to Mr Fowler's third report in which he sets out five categories of cost and expense:
(a) the fourth category includes a further claim of $14,761 for lost rent. The Owners SP 71656 submitted that amount would be excluded in any calculation of the quantum of Ms Blair's cross-claim, set-off or cross demand for the same reasons as set out at [49(1)(b)] concerning the same costs included in Mr Fowler's second report; and
(b) the fifth category is for rectification costs of the roof in whole "part obtained from MES tender summary". The Owners SP 71656 submitted that those costs are for rectification of the common property rather than the cost that Ms Blair will incur as a result of water damage to her property. They also submitted that there is evidence that the Owners SP 71656 obtained quotes for the cost of repair of the roof in 2014, which MES summarised, and that Mr Fowler has costed the same work, relying on the MES summary, but restating it at present value. The Owners SP 71656 contended that the Property was damaged and required rectification in 2014 when the Local Court Proceeding was on foot. On that basis the Court would not, in assessing the value of the cross-claim, set-off or cross demand, take into account the sum of $88,000 included in Mr Fowler's third report for repair of the whole roof.
50 In my opinion Ms Blair is not precluded from claiming the costs of rectification of common property in this application based on the decisions in Seiwa and Swan. In Swan Hall J said at [191] that:
In determining whether a lot owner has a claim for damages for breach by the owners corporation of its statutory duty under s 62, it is necessary to determine what as a matter of causal nexus or linkage, may be considered as being the consequences of the breach. In that respect the decision in Seiwa and the cases therein establish:
(a) In some circumstances a breach of duty may support a claim in damages for diminution in the value of a property in circumstances that are analogous to a nuisance.
(b) Reasonably foreseeable consequences are also recoverable. This would include, for example, loss of custom in the case of an interruption of a business.
(c) The cost of restoring an owner's property to its previous condition may be recoverable by the owner. However that does not extend to performance of works on the property of another to eliminate a nuisance. The costs of abating a nuisance are not recoverable unless, as a reasonable cost and even then probably not if they involve going on to the land of the other party: Proprietors SP14198 v Cowell (1989) NSWLR 478.
And at [195]-[196] his Honour continued:
195. Brereton J in Seiwa referred to an analogy with abatement of a nuisance. However, the fundamental point being made here by his Honour concerned the principles relating to the law of nuisance. His Honour was not directing his observation merely to the facts, or to a factual analogy due to the fact of water penetration being sufficient to amount to constitute a nuisance.
196. The relevant principle in that respect, as discussed above, does not permit the recovery of damages for work performed on the property of another. Whilst in Seiwa it was held that the plaintiff could recover damages for the cost of undertaking repair work on the plaintiff's own property it was held that it was not entitled to undertake work on common property and then recover as damages the expenses incurred in so.
(emphasis added)
51 I accept Ms Blair's submission that her claim against the Owners SP 71656 is not for breach of statutory duty but is for breach of a duty of care owed in tort and that no independent claim is made for damages for breach of s 62 of the Strata Schemes Act. Arguably the decisions in Seiwa and Swan would in those circumstances have no application. The availability of the claim and the question of whether damages are available is not an issue that should be determined in the context of this application but is a matter for the District Court which will hear Ms Blair's claim. While there is some doubt about whether Ms Blair would be entitled to the whole or any part of the rectification cost of common property, assuming she can prove that the Owners SP 71656 breached their duty, particularly where that cost has not been incurred by her, the resolution of the issue of the amount of damages to which she would be entitled should also be left to the District Court as it is connected to the question of availability of the claim. On that basis I would allow the claim for costs of repair of part of the roof in Mr Fowler's second and third reports.
52 The costs for rectification of the whole roof included in Mr Fowler's third report are in a different category. They are taken in part from the MES tender summary which Mr Fowler has annexed to his report and which compares tenders received from three contractors for fixing the roof at the Property. The items which were costed and included in the MES tender summary were:
relocation of air-con condenser and dispose of another north side;
removal and disposal of existing roofing and ancillaries;
move top plate and install lateral support;
manufacture, supply and install gutter;
supply and install sisalation;
install roofing and flashing;
contingency.
53 The evidence filed by the Owners SP 71656 shows that these costs, which were collated by MES, were the subject of tenders provided in November and December 2014. In preparing his costing of the rectification of the whole of the roof Mr Fowler has costed a number of the same items included in the MES tender summary namely "removal and disposal of A/C unit, north side"; "full removal of existing roofing and ancillaries", "gutter replacement"; "sisalation installing", "roofing and flashing" and "contingency". To those items Mr Fowler has then added the cost of two additional items being "modify downpipes" and "install 2 sumps and reconnect drainage".
54 Based on the MES tender summary and invoices included in the Owners SP 71656's evidence, the replacement of the roof was clearly an issue in 2014 when the quotes were obtained and collated by MES. I would infer that the damage to the roof was evident as at that date and that, putting to one side the issue of Ms Blair's entitlement to claim the costs of repair to common property, any claim for damages for replacement of the whole of the roof was available in 2014 at a time when the Local Court Proceeding was on foot. Thus the amount attributed to that item should be excluded from an assessment of the quantum of the claim.
55 The next issue concerns the lost rental income. Ms Blair submitted that there is evidence to support that claim in the form of the affidavit verifying the District Court Proceeding in which she says that she believes the allegations of fact contained therein are true. This includes a claim that, as a result of the alleged breach of duty and the consequent damage to the Premises, the tenants occupying the Premises terminated their leases early and as at the time of filing of the statement of claim she had lost income and ancillary costs of $28,801,88. She also relies on the statement at [1.4] of Mr Fowler's third report in which he said that "the water penetration into the units is a breach of the NCC BCA Heath and Habitation requirements and also the Weatherproofing requirements" and that he considers "that the premises was (sic) not in reasonable condition for habitation". In my opinion that evidence is sufficient, on this application, to establish her claim that the tenants terminated their leases early due to the water damage. Ms Blair's affidavit verifying the District Court Proceeding was not challenged. She asserts as true the claim that the leases were terminated early due to the water damage. Nor was Mr Fowler cross examined. Thus his expert opinion that the Premises were not habitable would be accepted. Accordingly, I would not exclude the claim for loss of rental and ancillary costs in Mr Fowler's second and third reports.
56 As a result, upon excluding the amount of $88,000, the net amount of Ms Blair's cross-claim, set-off or cross demand is approximately $62,000 which does not exceed the amount claimed in the First Bankruptcy Notice.
57 Turning to the issue of whether Ms Blair's cross-claim, set-off or cross demand could not have been set up in the Local Court Proceeding, Ms Blair submitted that there are two reasons why that was so. The first is that the losses occurred after the date of the Local Court Judgment and the second is that the amount of the cross-claim exceeds the jurisdictional limit of the Local Court. That question is to be determined by considering whether the cross-claim, set-off or cross demand could have been set up as a matter of law in the Local Court Proceeding: Re Brink at 139; Jensen v Queensland Law Society Incorporated [2004] FCA 1630 at [10] (per Kiefel J).
58 In relation to the first issue clearly some of the damage occurred after the date of the Local Court Judgment as is evident form Mr Fowler's reports:
(1) in preparing his first report, Mr Fowler had before him the SES Report which he refers to throughout his report. In considering the internal parts of the Premises Mr Fowler observed that in the office meeting room "mould had developed to the ceiling which had been painted and cleaned since the SES Report" evidencing recent damage, occurring after October 2015, at least in the case of the office meeting room;
(2) in his second report Mr Fowler says that since his first report he has observed that "more internal damage has occurred to previously repaired items and to new items at the premises"; and
(3) in his third report Mr Fowler again refers to having observed that "more internal damage has occurred to previously repaired items and to new items" and that the "upper front office has suffered significant more water damage since previous report" and "[a]dditional works are required to rebuild the internal framing at the front of the premises".
59 However, as set out at [54] above, the damage to the roof occurred at least as at November 2014 when tenders were sought for its repair. This was during the currency of the Local Court Proceeding. There is no evidence as to when the balance of the alleged damage set out in Mr Fowler's reports occurred. There is no explanation given by Ms Blair as to why she could not set up her claim arising from the alleged negligence of the Owners SP 71656 and Progressive in relation to at least the alleged damage to the roof in the Local Court Proceeding. Given the defects in the roof had clearly been identified at that early stage and given an order had been made on 20 February 2015 in the Local Court Proceeding for the filing by Ms Blair of any cross-claim by 20 March 2015 the overwhelming conclusion to be drawn is that she could have done so.
60 Nor do I accept Ms Blair's submission that she could not have set up her cross-claim, set-off or cross demand in the Local Court Proceeding because it exceeds the jurisdictional limit of the Local Court. In Lau v Accord Pacific Properties Pty Ltd, in the matter of Lau [2003] FCA 795 Branson J considered an argument that an applicant could not set up a cross-claim, set-off or cross demand in the proceeding in which the judgment grounding the bankruptcy notice was obtained because the amount of the cross-claim, set-off or cross demand exceeded the jurisdictional limit of that court.
61 Her Honour observed that the question of whether a debtor has a cross-claim, set-off or cross demand is to be determined by reference to legal considerations. In the circumstances of that case, her Honour was satisfied, on the basis of a concession subsequently made, that the claim upon which the applicant relied did not exceed the relevant jurisdictional limit. Branson J continued at [6] and [8]-[9]:
6 Even if I were satisfied that the cross‑claim upon which the applicant relies exceeds the jurisdictional limit of the District Court, that would not entitle the applicant to the relief which he seeks.
…
8 It is not necessary to determine whether, as the respondent contended, the view expressed by Sackville J in Re Grave is inconsistent with a well‑established line of authorities. I accept that in the circumstances of this case, s 145(1) of the District Court Act 1973 (NSW) would have allowed the applicant to apply to have the proceeding in the District Court removed to the Supreme Court. That is, I am not satisfied that this is a case in which the applicant would only have been able to prosecute his claim in the earlier proceeding by abandoning part of his claim.
9 In Nath v Clipway Pty Ltd [1999] FCA 625 (FC) Spender J, with whom Kiefel and Hely JJ agreed, noted with approval the approach adopted by Hill J in Re Ling. In Re Ling Hill J at 137, after referring to a number of authorities, said:
'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.'
62 In the event that the quantum claimed in a proposed cross-claim exceeded the jurisdictional limit of the District Court it was open to Ms Blair to have the proceeding transferred to the District Court as permitted by s 140 of the Civil Procedure Act 2005 (NSW). Ms Blair was not precluded, as a matter of law, from setting up her cross-claim in the proceeding in which the judgment on which the First Bankruptcy Notice was based. Nor, given the ability to transfer the proceeding to the District Court could it be suggested that she would have been required to abandon any part of her cross-claim.
63 In light of the above and the fact that Ms Blair cannot satisfy the Court of all of the requirements of s 40(1)(g) of the Bankruptcy Act, the application to set aside the First Bankruptcy Notice fails.