//
© 2026 Zoe. All rights reserved.
Zoe is a legal information platform. Always consult the Federal Register of Legislation for authoritative text.
[2005] VSCA 155
Court of Appeal (Vic)
2005-06-07
BUCHANAN and EAMES, JJ.A. and OSBORN, A.J.A.
Original judgment source is linked above.
Practice and procedure - Set-off not an action within the meaning of s.60 of the Bankruptcy Act 1966 (Cth) - Set-off not deemed to have been abandoned by failure of trustee to make election.
1 The respondent and his brother, Michael Loftus, were registered as joint proprietors of a house in East Malvern. Michael Loftus borrowed $150,000 and the respondent agreed to mortgage the property to secure the loan and to guarantee repayment of the loan. The brothers later entered into a contract to sell the property at a price of $271,500. The vendors failed to transfer the land and the purchasers sued for specific performance of the contract. A Master of the Supreme Court made an order for specific performance and ordered that the balance of the price remaining after payment of the purchasers' costs was to be paid into court.
2 The respondent brought proceedings against his brother in the County Court. He alleged that Michael Loftus was responsible for the breach of the contract of sale of the property and was liable to the respondent in damages for the amount of the purchasers' costs. The respondent also claimed that Michael Loftus was indebted to him in the sum of $90,134.81. He sought a declaration that he was entitled to be paid the funds in court, payment of a further sum by Michael Loftus and damages.
3 After the action was commenced, Michael Loftus was declared bankrupt and the appellant was appointed trustee of his estate.
4 The appellant filed and served a defence, set-off and counterclaim. In his counterclaim the appellant alleged that the respondent and his brother entered into a partnership agreement to buy, develop and manage properties, and that on the taking of accounts between the partners an amount in excess of $200,000, the limit of the jurisdiction of the County Court, was due by the respondent to Michael Loftus. The appellant claimed the sum of $200,000. He also alleged:
"By reason of the matters set out in the counterclaim herein the second-named defendant, in his capacity as trustee in the bankruptcy of Michael Loftus, claims a set-off against any judgment this Court might otherwise make in favour of the plaintiff."
In the course of an application by the respondent for summary judgment, a judge in the County Court made an order declaring that "... by reason of the operation of s.60 of the Bankruptcy Act, there is no counterclaim or set-off in these proceedings."
Section 60 provides, so far as is presently relevant:
"(2) An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action
(3) If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action,
he or she shall be deemed to have abandoned the action.
(5) In this section, action means any civil proceeding, whether at law or in equity."
5 The County Court judge did not deliver written reasons, and any oral reasons she may have given have not been transcribed. It would appear that her Honour accepted the argument of the respondent that, pursuant to s.60(3) of the Bankruptcy Act, the counterclaim was deemed to have been abandoned, and the deemed abandonment eradicated the appellant's claim arising from the alleged partnership for all purposes, so that the set-off, founded upon the same facts, fell with it.
6 In my opinion a set-off raised by a defendant is not a civil proceeding within the meaning of the Act. An action or civil proceeding is a court process by one person claiming relief from another or possibly in rem. A set-off raised by a defendant, on the other hand, is a defence to an action or civil proceeding commenced by another. It may be assumed for present purposes that a counterclaim is a civil proceeding. The same facts may found a set-off and a counterclaim. Nevertheless, set-offs and counterclaims have independent existence and may suffer different fates. A counterclaim constitutes a procedural device by which the court may entertain independent cross-actions in the same proceedings[1], whereas a set-off is dependent upon the plaintiff's action in that it operates as a defence to the claim brought in the action.
7 The evident purpose of s.60 of the Bankruptcy Act is to bar independent actions by bankrupts unless the bankrupt's trustee elects to prosecute the action. No such bar applies to defences to actions brought against bankrupts. I do not see how the policy of the legislation is furthered by applying s.60(3) to a defence which is called a set-off.
8 Counsel for the respondent submitted that a set-off is based upon a claim for the recovery of a debt or damages. If that claim is pleaded as a counterclaim and the counterclaim has been deemed to have been abandoned pursuant to s.60(3), the claim is no longer held by or in the possession of the defendant and cannot be resurrected as a set-off.
9 In my view s.60(3) does not have such a far-reaching effect. It does not obliterate the cause of action founding both the counterclaim and set-off, but merely operates to bar prosecution of a civil proceeding constituted by the counterclaim. Counsel for the respondent conceded that, if the appellant had pleaded originally only a set-off, it would have survived even if the trustee had not elected to prosecute it. In my view it is illogical that the fate of a set-off should depend upon the fact that it was also pleaded as a counterclaim. The result fortifies me in the view that the deemed abandonment of the counterclaim does not affect the set-off.
10 Counsel for the respondent submitted that Rule 13.14 did not permit a defendant to set-off a claim for debt or damages where the plaintiff has sought a declaration. The Rule provides:
"Where a defendant has a claim against a plaintiff for the recovery of a debt or damages, the claim may be relied upon as a defence to the whole or part of the claim made by the plaintiff for the recovery of the debt or damages that may be included in the defence and set off against the plaintiff's claim, whether or not the defendant also counterclaims for that debt or damages."
In the present case the respondent's claim embraces both recovery of a debt and damages as well as a declaration. I need not stay to consider whether the appellant could have set-off his claim against the claim for a declaration if that had stood alone.
11 Finally, on behalf of the respondent, it was contended that the set-off was futile, for even if it was established, the money would remain in court. Apart from the money in court, the set-off, if established, will operate as a defence to the respondent's claims in debt and in damages. In any event, if the appellant's claim is made out, the appellant can take steps later to retrieve the money in court.
12 For the foregoing reasons I would allow the appeal and set aside paragraph 1 of the orders made by her Honour Judge Jenkins on 23 December 2003.
1. Appeal allowed with costs;
2. Paragraph 1 of the order made by her Honour Judge
Jenkins on 23 December 2003 is set aside.
16 We recite in other matters that a certificate has been granted for the respondent pursuant to the provisions of s.4 of the Appeal Costs Act 1998.
I certify that this and the preceding three pages are a true copy of the reasons for judgment of Buchanan, J.A., Eames, J.A. and Osborn, A.J.A. of the Court of Appeal of the Supreme Court of Victoria delivered on 7 June 2005.
[1] Winterfield v. Bradnum (1878) 3 Q.B.D. 324 AT 325 per Brett, L.J.
Clark
Loftus [2005] VSCA 155