counterclaim, set-off or cross demand
34 As mentioned, the applicants filed an affidavit dated 19 September 2016 in support of their application to set aside the bankruptcy notice. One of the grounds on which the applicants rely is that they have a counterclaim, set-off or cross demand against the respondents for the purposes of s 40(1)(g) and s 41(7) of the Bankruptcy Act.
35 Rule 3.02 of the Federal Court (Bankruptcy) Rules 2016 (Cth) provides:
Setting aside bankruptcy notice
(1) An application to set aside a bankruptcy notice under the Bankruptcy Act must be accompanied by an affidavit stating:
(a) the grounds in support of the application; and
(b) the date when the bankruptcy notice was served on the applicant.
(2) A copy of the bankruptcy notice must be attached to the affidavit.
(3) If the application is based on the ground that the debtor has a counter-claim, set-off or cross demand referred to in paragraph 40(1)(g) of the Bankruptcy Act, the affidavit must also state:
(a) the full details of the counter-claim, set-off or cross demand; and
(b) the amount of the counter-claim, set-off or cross demand and the amount by which it exceeds the amount claimed in the bankruptcy notice; and
(c) why the counter-claim, set-off or cross demand was not raised in the proceedings that resulted in the judgments or orders to which the bankruptcy notice relates.
36 Paragraph 4 of the affidavit of Mrs Frigger dated 19 September 2016 was the only paragraph of that affidavit which set out the basis of any counterclaim, set-off or cross demand relied on by the Friggers. That paragraph stated:
My husband and I are directors and members of Computer Accounting & Tax Pty Ltd (in liq) since 1 July 1997. During the period from that date until the date of liquidation being 12 December 2009, the company and my husband and I operated a Running Account for the purposes of the company's business and operations. Attached and marked AF4 is copy [sic] of the entries in that Running Account. Pursuant to s 553C Corporations Act 2001 we are entitled to set off the Judgment against the amount the company owes us, which set-off occurred automatically. In those circumstances, the judgment has already been paid and the respondents were not entitled to obtain the Bankruptcy Notice.
(Original emphasis.)
37 Section 553C(1) of the Corporations Act 2001 (Cth) provides:
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 party 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.
38 Section 553C(2) of the Corporations Act provides:
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.
39 The affidavit evidence adduced by the debtor on an application to set aside a bankruptcy notice by reference to s 40(1)(g) and s 41(7) of the Bankruptcy Act must do more than merely assert the existence of a counterclaim, set-off or cross demand which equals or exceeds the amount of the judgment debt.
40 In Ebert v Union Trustee Company of Australia Limited (1960) 104 CLR 346 (Ebert), in respect of an appellant seeking to set aside a bankruptcy notice on the basis of a counterclaim, set-off or cross demand which equalled or exceeded the amount of the judgment debt, Dixon CJ, McTiernan and Windeyer JJ observed at 350:
The debtor clearly must satisfy the Court that there exists in him a counter-claim, set-off or cross demand. "Cross demand" is the word relied upon here. 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…Perhaps the standard may be expressed by saying that the debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross demand.
41 These observations were approved in Re Brink, Ex parte The Commercial Banking Company of Sydney Limited (1980) 44 FLR 135. At 141, Lockhart J observed:
In my opinion this Court should follow the decision of the High Court in Ebert's case. Hence a debtor must show that he has a prima facie case. However, I do not understand Ebert's case as deciding that this Court must undertake a preliminary trial of the counterclaim, set-off or cross demand; rather, this Court must be satisfied that the debtor has a fair chance of success.
42 In Guss v Johnstone (2000) 171 ALR 598, in relation to an application to set aside a bankruptcy notice under s 40(1)(g) and s 41(7) of the Bankruptcy Act, the High Court observed at [38]-[40]:
The nature of the exercise upon which Sundberg J was engaged 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 40(1)(g), and s 41(7), [of the Bankruptcy Act] 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.
(Footnote omitted.)
43 In my view, the Friggers' claim based on a set-off under s 553C of the Corporations Act does not, for the following reasons, have sufficient legal merit to warrant setting aside the bankruptcy notice to permit their claim to be tried.
44 First, there is no mutuality between the claims made by the Friggers and the debt claimed by the respondents, for the purposes of s 553C of the Corporations Act. This is because the events which gave rise to the Friggers' liability to the respondents, namely, the order of Master Sanderson for delivery up of the confidential affidavit and the consequential costs order, occurred well after the liquidation of CAT had commenced - in other words, after any statutory set-off under s 553C between the Friggers and CAT would have operated.
45 The Friggers relied upon the case of Re Parker (1997) 80 FCR 1 (Re Parker) to contend that the debt arising from the costs order could, nevertheless, be set-off under s 553C even if it arose after the commencement of the winding up of CAT.
46 In Re Parker, the liquidators of Barossa Ceramics (SA) Pty Ltd (Barossa Ceramics) sought directions as to whether s 553C of the Corporations Law would operate to set-off any debts due by Barossa Ceramics to its parent company, Amber Ceramics (SA) Pty Ltd (Amber Ceramics), against monies which may become payable to Barossa Ceramics pursuant to claims the liquidators may bring against Amber Ceramics under s 588V and s 588W of the Corporations Law. Those two sections empowered a liquidator to bring an action against the holding company, and recover, as a debt due to an insolvent subsidiary company, losses incurred by creditors of the subsidiary company, in respect of unpaid debts incurred by the subsidiary company whilst that company was insolvent.
47 Amber Ceramics argued that s 553C could not apply to the remedy available under s 588W(1) because that section contemplated a liquidator taking action after the date of the commencement of the liquidation. Mansfield J found that the set-off under s 553C would operate in respect of any monies derived from any successful actions which the liquidators of Barossa Ceramics may bring under s 588V and s 588W against Amber Ceramics. Mansfield J at 12, referred with approval to the following observations in Gye v McIntyre (1991) 171 CLR 609 at 623-624:
The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean that they must be vested, liquidated or enforceable at the decisive date, that is to say, at the time of the sequestration order or special resolution accepting the composition. Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them.
48 Mansfield J then went on to observe:
In my view, to reflect the words of Rich J in Hiley v Peoples Prudential Assurance Co Ltd (In liq) at 487 which were quoted with approval in Gye v McIntyre, the steps which s 588W addresses post the winding up order merely ascertain the rights of Barossa Ceramics by reference to the natural outcome of the earlier transactions. The events which give rise to the claim, both from the perspective of those supplying credit to Barossa Ceramics, and from the perspective of Amber Ceramics as its holding company, occurred before 30 May 1995. The contravention of s 588V, which I am asked to assume, had occurred by the commencement of the winding up of Barossa Ceramics. The natural outcome of those matters was the claim which the applicant now asserts.
49 The case of Re Parker is, therefore, distinguishable because all of the events which gave rise to the making of the costs order, namely, the refusal by Mrs Frigger to deliver up all copies of the confidential affidavit, and the consequential making of the costs order, postdate the commencement of the winding up. The making of the costs order by Master Sanderson was not the "natural outcome" of events which predated the commencement of the liquidation of CAT.
50 Secondly, s 553C(2) does not permit the Friggers to take the benefit of the judgment debt by way of a set-off in respect of a debt due by CAT. This is because at the time that the Friggers incurred their liability under the judgment debt, CAT was to the knowledge of the Friggers insolvent.
51 The Friggers have also contended that they have other claims which comprise counterclaims, set-offs or cross demands for sums greater than the amount claimed in the bankruptcy notice.
52 The Friggers sought to identify those counterclaims, set-offs or cross demands in affidavits, namely, affidavits dated 19 September 2016, 3 October 2016, 7 November 2016 and 2 December 2016.
53 The respondents relied upon the case of Thomas v St George Bank Ltd [1999] FCA 166 to object to the Friggers being able to rely upon any claims other than the claim based on s 553C identified at [36] above. The respondents contended that the affidavit of 19 September 2016 was the only affidavit filed by the Friggers within the time for compliance with the bankruptcy notice, being the period stipulated in s 41(7) of the Bankruptcy Act. The respondents went on to contend that that affidavit did not assert the existence of any counterclaim, set-off or cross demand based on any other grounds.
54 I have some doubt as to the merit of the respondents' argument in light of the authority of Biztole Developments Pty Ltd v McLean (1995) 57 FCR 36, and the fact that interim orders were made by Registrar Trott and Barker J extending the time for compliance with the bankruptcy notice until the date of the hearing of the Friggers' application to set aside the bankruptcy notice.
55 However, it is unnecessary to determine this issue in light of my findings below.
56 I now turn to consider the applicants' affidavits deposing to the counterclaims, set-offs and cross demands relied on by the Friggers.
57 The Friggers identified in the affidavit dated 19 September 2016 a claim of set-off by reference to s 553C of the Corporations Act. I have dealt with that claim above.
58 There is annexed to Mrs Frigger's affidavit of 3 October 2016, a copy of an application which the Friggers have filed in Supreme Court proceeding COR 2 of 2010. This is the proceeding in which Master Sanderson made the order for the delivery of the confidential affidavit and the consequential indemnity costs order which is the basis for the bankruptcy notice. The application in COR 2 of 2010 annexed to the affidavit is entitled "Interlocutory Process for Orders" and it is accompanied by an affidavit of Mrs Frigger in COR 2 of 2010 dated 30 September 2016 in support of that application (the COR 2 of 2010 support affidavit).
59 The Interlocutory Process for Orders seeks 13 different orders.
60 Order 1 of the interlocutory process seeks leave for the applicants to rely upon and refer to the confidential affidavit of Mr Kitay in support of the interlocutory process. This is the confidential affidavit which was the subject of the delivery up orders made in 2014 by Master Sanderson.
61 The other 12 orders sought are not confined to orders which are to be made in respect of COR 2 of 2010. Nor are the orders sought confined to orders of an interlocutory nature. Thus, for example, there are orders seeking declarations and injunctions which affect other Supreme Court proceedings. Those orders include orders which seek to restrain the respondents from enforcing costs orders in Supreme Court proceedings CACV 2765 of 2010 and CACV 120 of 2013, and also a declaration that a named solicitor did not have authority to act for CAT in Supreme Court proceedings CACV 2765 of 2010, CACV 120 of 2013, CACV 62 of 2016 and CACV 80 of 2016.
62 Further, by order 13, the Friggers make a claim against Mr Kitay, the first respondent, for the difference between compound interest at a rate of 8.5% and interest at an undisclosed rate, on sums referred to as "the sale proceeds of the Armadale Property" and "superannuation contribution" made by the applicants to the Frigger Superannuation Fund. In her COR 2 of 2010 support affidavit, the only evidence that Mrs Frigger refers to in support of order 13, is that the Friggers will rely upon the confidential affidavit.
63 As mentioned, the first order sought in the interlocutory process is that the applicants have leave to rely upon and refer to the confidential affidavit.
64 On 28 April 2017, in the Supreme Court, Martino J dismissed the Friggers' application for the relief sought in order 1 (Frigger v Mervyn Jonathon Kitay in his capacity as liquidator of Computer Accounting & Tax Pty Ltd (in liq) [No 14] [2017] WASC 120).
65 I also observe that there is annexed to the 3 October 2016 affidavit of Mrs Frigger a list of what the Friggers allege are contraventions by Mr Kitay of the Superannuation Industry (Supervision) Act 1993 (Cth).
66 In an affidavit dated 7 November 2016 at para 7, Mrs Frigger says that the applicants have sought summary judgment in a case which the Supreme Court has refused to hear and that "the applicants are confident they will be awarded the following judgments to be paid by the first respondent", namely, Mr Kitay:
(a) Interest on Filing Fee from 1 November 2010 until present $5,760;
(b) Interest on St George Term Deposit from November 2010 until present $30,600;
(c) Interest on sale proceeds of Armadale Property from 11 February 2016 until present $80,422.68;
(d) Interest on sale proceeds of service station business from 11 February 2016 until present $99,824.69;
(e) Legal costs of approximately $230,000;
(f) Loss on sale price of $430,000 of Armadale Property to United Fuel Pty Ltd in December 2013 plus interest of $109,650;
(g) Total $986,257 counter claim
(Original emphasis.)
67 Further, Mrs Frigger also states in para 13 of that affidavit that the state of the loan account between CAT and the applicants is that the applicants are owed $1,998,976.64 plus accrued interest of $1,701,023.00.
68 In a further affidavit dated 2 December 2016, Mrs Frigger at para 41(a) says:
41. I confirm the following in relation to the set off counterclaims and cross demands we have against the respondents.
(a) In COR2/2010 we have a claim for damages against BOTH respondents:
(ii) Interest withdrawn by the respondents from the St George Term Deposit:
2/01/2010 1,082.96
12/05/2010 394.52
2/7/2012 1,853.37
1/10/2013 3,720.00
Total $7,050.85
plus interest @ 6% pa from November 2010 until 12 December 2016 on $87,050.00 being $31,338;
Total claim re St George Term Deposit $38,388.85 plus term deposit of $80,000 and all accrued interest.
(iii) Interest on filing fee $16,000 from November 2010 until 12 December 2016 of $5,760 (the filing fee will be refunded by the Supreme Court to me, which has already approved the refund in November 2010).
(iv) Interest at 9% pa on sale proceeds of service station business at a daily rate of $360.74 from 11 February 2016 until 12 December 2016 total $110,386.44
(v) Interest at 9% pa on sale proceeds of Armadale Property at a daily rate of $290.52 from 11 February 2016 until 12 December 2016 total $88,898.36
(Original emphasis.)
69 Mrs Frigger then goes on in para 42 and para 43 to identify and quantify further claims.
70 The following sequence of events is instructive in considering the applicants' claims which were identified in Mrs Frigger's affidavits referred to above.
71 On 8 November 2016, the Friggers filed submissions in support of their claim that the bankruptcy notice should be set aside on the basis of the existence of a counterclaim, set-off or cross demand. The Friggers, relying on Mrs Frigger's affidavit of 7 November 2016, submitted that the Friggers had a set-off against the second respondent, CAT, arising from the amounts due to them under the loan account. They also submitted that the applicants had a claim for damages against the first respondent and relied for that submission on the 7 November 2016 affidavit.
72 On 21 November 2016, the respondents filed submissions in which they observed that the Friggers had in their submissions of 8 November 2016 identified claims against each of the respondents severally. The respondents went on to submit that the judgment debt was a debt which was owed to the respondents jointly. The respondents submitted that a several debt could not be relied upon as a valid counterclaim, set-off or cross demand for the purposes of s 40(1)(g) of the Bankruptcy Act in respect of a debt owed to persons jointly. The respondents relied upon Dudzinski v Kellow [2002] FCA 665 (Dudzinski).
73 After the respondents' submissions were filed, the applicants filed Mrs Frigger's affidavit of 2 December 2016 which deposes for the first time that the debts which Mrs Frigger had previously deposed were owed by Mr Kitay only, were now owed by "both respondents". (See [66] and [68] above.)
74 No explanation is given in Mrs Frigger's affidavit of 2 December 2016, as to why the amounts which she previously deposed as being owed by Mr Kitay in his individual capacity, were now said to be owed by "both respondents".
75 In the case of Dudzinski, Mr Dudzinski brought an application in the Federal Court against 10 respondents. On 8 April 1999, Drummond J struck out a number of Mr Dudzinski's claims, declined him liberty to replead and ordered that the remaining actions in the proceeding be permanently stayed. Mr Dudzinski sought leave to appeal from the order of Drummond J. That application was dismissed by the Full Court and Mr Dudzinski was ordered to pay the respondents' costs. A certificate of taxation was issued which allowed the respondents' bill of costs at $17,700. Mr Dudzinski did not pay the costs and on 20 January 2002, the 10 respondents issued a bankruptcy notice to Mr Dudzinski.
76 Mr Dudzinski brought an application to set aside the bankruptcy notice and to extend time for compliance with the bankruptcy notice. One of the grounds Mr Dudzinski relied upon to set aside the bankruptcy notice was that he had a counterclaim, set-off or cross demand, equal to, or exceeding, the amount of the judgment debt.
77 Spender J held that all the claims on which Mr Dudzinski sought to rely lacked mutuality between the alleged cross demand and the debt on which the 10 respondents to the application relied. Spender J observed at [11]:
A debtor may only raise, as an answer to a bankruptcy notice issued by ten joint creditors, as here, a cross-demand against those ten creditors jointly.
78 It follows that, on the authority of Dudzinski, it is necessary for the Friggers to demonstrate that they have a claim against the two respondents jointly to support their contention that the bankruptcy notice be set aside on the grounds that they have a counterclaim, set-off or cross demand which equals or exceeds the amount of the judgment debt.
79 The affidavit material which is relied upon by the applicants does not carry the probative weight necessary to satisfy the onus on them pursuant to s 40(1)(g) and s 41(7) of the Bankruptcy Act to satisfy the Court that there is sufficient legal and factual merit in the claim that the respondents are jointly liable to the applicants such as to warrant the claims being tried and the bankruptcy notice being set aside. It is apparent that the content of Mrs Frigger's affidavits comprise no more than assertions. This is particularly the case when no explanation is given for deposing in November 2016 that only Mr Kitay was liable to the Friggers for the same amounts which a month later Mrs Frigger deposed were owed by both respondents.
80 In any event, the affidavits relied on by the Friggers suffer from the same deficiency in probative weight to warrant setting aside the bankruptcy notice in respect of all the claims deposed to by Mrs Frigger, regardless as to the alleged debtor.
81 It follows that this ground does not comprise a basis on which to set aside the bankruptcy notice.