Bankruptcy Act 1966, ss. 40(1)(g), 41(7)

Chesson v. Smith (1992) 35 FCR 594

Re Brink; Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433

Solicitors for the Respondent: Messrs Cutler Hughes and Harris

JENKINSON, BURCHETT AND WHITLAM JJ This is an appeal from the dismissal of an application made by a debtor, under ss. 40(1)(g) and 41(7) of the Bankruptcy Act 1966, in respect of a bankruptcy notice served on the appellant at the instance of the respondent. In pursuance of his application, the appellant had sought (in terms of s. 40(1)(g)) to

"satisfy the Court that he has a counter-claim, set-off or

cross demand equal to or exceeding the amount of the

judgment debt or sum payable under the final order (that

founded the bankruptcy notice) ... being a counter-claim,

set-off or cross demand that he could not have set up in the

action or proceeding in which the judgment or order was

obtained".

He failed because the learned judge who heard his application considered that the alleged counter-claim, set-off or cross demand was not one that could not have been set up in the relevant proceeding.

2. The bankruptcy notice is based on a judgment of the Supreme Court of New South Wales, in its Commercial Division, in the sum of $112,550.07. That sum was due by the appellant to the respondent under the terms of the appellant's engagement as an agent to sell life insurance on behalf of the respondent, a life insurance company. By those terms, the appellant was entitled to commission in respect of insurance written, but was required to make a refund in certain circumstances involving early termination of policies arranged through his agency. The amounts required to be refunded were called "commission reversals", a large number of which added up to the total sum of the judgment. The alleged counter-claim, set-off or cross demand is said to have arisen out of the same contractual relationship of agent and life insurance company, the appellant claiming that the company was negligent, that it was in breach of fiduciary duties, and that it contravened the Trade Practices Act 1974 either in relation to the agency agreement itself or in relation to the dealings out of which the judgment debt arose.

3. The difficulty confronted by the appellant's case is that which formed the basis of the judgment below. How can it be said that he could not have set up the claims he makes now by a counter-claim or cross demand in the proceedings in the Supreme Court? Upon the hearing of the appeal, a number of matters were raised in an attempt to overcome this problem. They really come down to three points.

4. By what was admittedly a new argument, the appellant contended that only a cross-demand strictly amounting to a defence to the claim reflected in the judgment could be said to be one that he could have set up in the action or proceeding in which the judgment was obtained. This argument was based on an expression used by Burchett J in Pollnow v. Queensboro Pty Ltd (unreported, 19 October 1988) and by a Full Court in Chesson v. Smith (1992) 35 FCR 594 at 596. (See also Re Pollnow (1994) 12 ACLC 88 at 95.) Each of these cases was concerned with a bankruptcy notice founded on a costs order made in an interlocutory application, and in each the debtor relied on the claim made by him in the principal proceeding as a cross demand that could not have been set up in the interlocutory proceeding. When accepting the debtor's argument, both Burchett J and the Full Court (to quote the language of that Court in its joint judgment) pointed out that the claimed cross demand "could not have been set up in answer to the appellant's application for a costs order made in the interlocutory application". It went without saying that if it could not have been so set up, it could not have been set up at all in a proceeding of that kind. The proceeding was a mere interlocutory application made in relation to the very action in which the claim in question was made.

5. However, the language of judgments of the Court must not be treated as if it were found in a statute to be construed as the definitive dictate of the legislature. What has to be construed is s. 40(1)(g). This provision plainly contemplates that, in addition to counter-claims and set-offs which might strictly provide defences to particular actions, cross demands, which might not, must, if they are to provide an answer to a bankruptcy notice, be such as could not have been set up in the proceeding in which the judgment founding the bankruptcy notice was obtained. That test is not limited, in its application, to claims which might "answer" the judgment creditor's claim, in the sense of providing a defence to it. It was specifically held in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433 at 436-437 that "cross demand" is not a technical term, and it was made clear that the expression has a wide meaning, extending beyond what could be pleaded as a defence.

6. At the hearing of the appeal, it was also suggested that the appellant may have been unable to set up a cross demand because of his solicitor's negligence. No authority was cited to support the proposition that such a case can be maintained; and it is sufficient for us to say that the negligent failure of a solicitor in fact to set up a cross demand would not make the cross demand one which the debtor "could not have set up" within the meaning of s. 40(1)(g).

7. The appellant presented a further argument, designed to cut back the breadth of the statutory language. Counsel referred to Port of Melbourne Authority v. Anshun Proprietary Limited [1981] HCA 45; (1981) 147 CLR 589, submitting that the legislature must be taken to have intended, by the exclusion of counter-claims, set-offs and cross demands that could have been set up in the proceeding in which the judgment was obtained, to exclude those counter-claims, set-offs and cross demands which the debtor would be prevented from relying upon by virtue of the principle of Anshun. This was actually the contention relied upon below. But we can see no warrant, either in the terms of the statute itself or in anything said by the judges who decided Anshun, for putting an artificial and restricted construction upon the unqualified terms of s. 40(1)(g).

8. For these reasons, the Court did, at the hearing of the appeal, order that it be dismissed with costs.