Consideration of the merits of the Application
55 Dr Nugawela's Original Application was based on s 40 and s 41 of the Bankruptcy Act, which relevantly provide:
40 Acts of bankruptcy
(1) A debtor commits an act of bankruptcy in each of the following cases:
…
(g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i) where the notice was served in Australia-within the time specified in the notice; or
(ii) where the notice was served elsewhere-within the time fixed for the purpose by the order giving leave to effect the service;
comply with the requirements of the notice or satisfy the Court that he or she 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, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;
…
41 Bankruptcy notices
…
(3) A bankruptcy notice shall not be issued in relation to a debtor:
(a) except on the application of a creditor who has obtained against the debtor a final judgment or final order within the meaning of paragraph 40(1)(g) or a person who, by virtue of paragraph 40(3)(d), is to be deemed to be such a creditor;
(b) if, at the time of the application for the issue of the bankruptcy notice, execution of a judgment or order to which it relates has been stayed; or
…
(5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.
(6) Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with subsection (5), he or she shall be deemed to have complied with the notice if, within the time allowed for payment, he or she takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it.
(6A) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:
(a) proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or
(b) an application has been made to the Court to set aside the bankruptcy notice;
the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.
(6C) Where:
(a) a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and
(b) the Court is of the opinion that the proceedings to set aside the judgment or order:
(i) have not been instituted bona fide; or
(ii) are not being prosecuted with due diligence;
the Court shall not extend the time for compliance with the bankruptcy notice.
(7) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counter-claim, set-off or cross demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter-claim, set-off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied.
(emphasis added)
56 While s 41(6A)(b) provides a broader discretion to extend the time for compliance with a bankruptcy notice, the criteria in s 41(6C) are not relevant to this matter because no proceedings had been instituted by Dr Nugawela to set aside the summary judgment in respect of which the bankruptcy notice was issued. Belatedly, in late April 2016, an application for leave to appeal the Supreme Court judgment was lodged in the Supreme Court, but this was well after the time of the Original Application and cannot satisfy s 41(6C) or s 41(6A) of the Bankruptcy Act.
57 Section 40(1)(g) of the Bankruptcy Act (which s 41(7) applies) is confined to a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt that an applicant 'could not have set up in the action or proceeding in which the judgment or order was obtained'. There is no plausible evidence to demonstrate this. Dr Nugawela has pointed only to some credit adjustments as to his liability. The only evidence shows substantial remaining unmet liability.
58 Dr Nugawela produced various schedules which were designed to establish that some credits given by the Commissioner and other adjustments necessarily mean that the amounts in respect of which summary judgment were given in the Supreme Court were no longer correct and therefore the bankruptcy notice which turns upon those amounts is said to be incorrect. He argues that, not only is the bankruptcy notice wrong in terms of the amount it claims, but also that it would not have been possible for him to put the correct amounts before the Supreme Court because the adjustments and credits that have been made since the Supreme Court judgment were not then known to him. The difficulty with this argument is that it overlooks the effect of the statutory regime under which the Commissioner is entitled to certify the amount that is outstanding and, absent conscious maladministration, that certification stands as evidence of the amount outstanding. There is no suggestion of relevant conscious maladministration raised.
59 Similarly, the recent decision of Deputy Registrar Hewitt in Wilson goes to material that may be used to set aside a summary judgment application. Once again, the statutory regime is such that the Supreme Court judgment was clearly correct when obtained and at this juncture, absent compelling evidence, it is not appropriate to go behind that judgment. Relevantly, s 41(5) of the Bankruptcy Act provides that a bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement. In Henderson v National Australia Bank Ltd [2012] FMCA 14, Lucev FM (as his Honour then was) summarised the general principles and usage of the subsection, which included (at [10]-[11]):
10. Olivieri v Stafford & Ors (1989) 24 FCR 413 is a judgment of a Full Court of the Federal Court in which the appellant contended that that [sic] the amount of a final judgment in the District Court of New South Wales, being $19,318.93, which was the same amount as the debt said to be owing under the bankruptcy notice, was overstated by an amount of $389, and that the bankruptcy notice was therefore invalid. The appellant had failed in an application to the District Court of New South Wales to set aside the final judgment. The majority in Olivieri upheld the validity of the bankruptcy notice and dismissed the appeal. A number of propositions emerge from the separate majority judgments, including that:
a. a court exercising bankruptcy jurisdiction has power to "go behind" the judgment relied on to found the bankruptcy notice so as to inquire into the existence of the alleged debt, [36] and does so on the basis that a bankruptcy notice which has been "issued for a debt which is liable to be set aside or varied such that the creditor does not have a debt upon which the bankruptcy proceedings can be founded" does not give effect to the provisions of the Bankruptcy Act; Olivieri at 429-430 per Gummow J.
b. if the judgment relied upon to found the bankruptcy notice is a default judgment, the court exercising bankruptcy jurisdiction "will always 'go behind' the judgment if there is what it regards as a bona fide allegation that no real debt 'lay behind' the judgment"; Olivieri at 422 per Beaumont J.
c. the judgment stands as prima facie evidence of a debt until a court exercising bankruptcy jurisdiction goes behind the judgment; Olivieri at 422 per Beaumont J.
d. if a court exercising bankruptcy jurisdiction goes behind the judgment relied upon, the examination of whether there is a bona fide debt "extends to every aspect of the parties dealings", and not merely limited transactions selected by creditor or debtor; Olivieri at 424 per Beaumont J.
e. a bankruptcy notice which accurately states the amount of a judgment, which a court exercising bankruptcy jurisdiction has not gone behind, does not overstate the amount due; Olivieri at 424 per Beaumont J, and citing Re Riviere; Ex parte Original Mont de Piete Ltd (1919) 20 SR(NSW) 77 at 84 per Owen AJ.
f. a court exercising bankruptcy jurisdiction will only reconsider the judgment relied on to found the bankruptcy notice to determine whether the bankruptcy notice should be set aside, and not merely to ascertain if the judgment debt should be reduced, [42] and hence the court should not go behind a judgment where "to do so would leave a substantial sum still due and owing but unpaid". Olivieri at 432 per Beaumont J.
11. In Emerson & Anor v Wreckair Pty Limited (1992) 33 FCR 581 the amount claimed in the bankruptcy notice to be due and unpaid was the amount of the judgment debt, but that amount was overstated by either $750 or $900 on a debt of $29,081.65. [45] On appeal to the Supreme Court of Queensland the judgment debt was reduced by the sum of $5,400. That appeal was determined after the validity of the bankruptcy notice had been argued before the Full Court of the Federal Court, but before judgment was delivered. [46] In Wreckair the Full Court of the Federal Court:
a. citing Walsh said that:
i. the relevant date for the inquiry into whether the amount specified in the bankruptcy notice is excessive, that is whether it exceeds the amount in fact due, is the date of the issue of the bankruptcy notice; and
ii. a payment in reduction of the judgment debt made after the issue of a bankruptcy notice, but before the service of the bankruptcy notice will not invalidate the bankruptcy notice;
b. said that once an act of bankruptcy has been committed, it remains an available act of bankruptcy even though the judgment on which it is based is set aside; [ibid]
c. found that:
i. the amount due by the appellants and the amount for which execution might issue was the amount stated in the judgment (at first instance in the Queensland District Court), and the bankruptcy notice claimed an amount in accordance with that judgment, and was therefore not for an amount exceeding that in fact due; (at 547)
ii. "[t]he circumstance that the amount of the judgment was subsequently reduced is not to the point"; [ibid] and
iii. it was not appropriate that a court exercising jurisdiction in bankruptcy, on an application to set aside a bankruptcy notice, go behind a judgment where the grounds for the application, if accepted, would only support a finding that the amount of the debt be reduced, and would not support a finding that there was in truth no debt at all. [at 588-589]
(my emphasis added)
60 At the time of service of the bankruptcy notice, the sum claimed was correct, being the amount of the Supreme Court judgment, to which interest accrued since the date of the judgment was added.
61 There is not, with respect, the slightest doubt that the Supreme Court was required to proceed as it did and once the Supreme Court judgment was entered, it necessarily provided the correct basis for the bankruptcy notice, especially in this instance when no application had been made to set aside or appeal from the summary judgment (until very recently and well out of time). The belated appeals to the AAT and Supreme Court, months out of time, do not satisfy the requirements of the Bankruptcy Act as being matters the Court can take into account. The act of bankruptcy arises under s 40(1)(g) of the Bankruptcy Act. According to that view, the act of bankruptcy occurred on 15 February 2016, as the Commissioner had obtained against Dr Nugawela a final judgment and had served on Dr Nugawela a bankruptcy notice and Dr Nugawela did not either:
apply to set aside the bankruptcy notice within the time specified in the notice; or
satisfy the Court that he has a counter-claim, set-off or costs demand equal to or exceeding the amount of the judgment debt.
Arguments about what might be owing now are a different consideration.
62 In Bryant v Commonwealth Bank of Australia (1994) 217 ALR 251 the Full Court (Davies, Foster and O'Loughlin JJ) said (at 256):
Section 41(7) provides for an extension of time for compliance with the bankruptcy notice so as to allow the court time to hear the parties and to consider the debtor's claim that he has a counterclaim or set-off as described in s 40(l)(g). The mere filing of an affidavit which satisfies the terms of the subsection will bring the extension of time, for which the section provides, into operation. As an affidavit is required, it must verify the cross-claim or set-off, it must verify that the cross-claim or set-off equals or exceeds the amount of the judgment debt, and it must verify the fact that the cross claim is one which could not have been set up in the action which the judgment order was obtained. In Re Brink: Ex parte The Commercial Banking Co of Sydney Limited (1980) 44 FLR 135 Lockhart J said (at FLR 142):
In my opinion the affidavit cannot merely contain an assertion that the debtor has a counterclaim, set-off or cross demand which he could not have set up in the action in which the judgment or order was obtained. The affidavit must show a counterclaim, set-off or cross demand which equals or exceeds the amount of the judgment debt and which the debtor could not have set up in the action in which the judgment or order was obtained: see Vogwell v Vogwell (1939) 11 ABC 83, at 85; Ebert's case (1960) 104 CLR 346, at 350; Re A Debtor per Slesser LJ [l935] 1 Ch 347, at 352.
63 As Mr Healy for the Commissioner noted, it is not open now to this Court to take into account the belated notice of appeal, but that does not necessarily mean that Dr Nugawela can never raise issues of quantum, which may well be relevant in the context of the creditor's petition and the sequestration order being sought in the Federal Circuit Court of Australia. But that is not a matter for this Court on this Application.
64 In Patane v Asteron Life Ltd [2004] FCA 232, Lander J said (at [101]) of this section, and distinguishing Re Schmidt; Ex parte Angelwood Pty Ltd (1967) 13 FLR 111 (Gibbs J) which concerned the making of a sequestration order as irrelevant:
An application under s 40(1)(g) raises different issues. The debtor will have committed an act of bankruptcy is [sic] the bankruptcy notice if [sic] not complied with. That entitles the judgment creditor to issue a petition based on that act of bankruptcy. The debtor can still satisfy the Court that he or she is able to pay his or her debts (s 50(2)) at the hearing of the judgment debtor's petition. At that time the course suggested by Gibbs J may for the reasons given by him be appropriate. However in my opinion an applicant under s 40(1)(g) of the Act must satisfy all of the elements of s 40(1)(g) and establish to the requisite level of satisfaction that he or she has a counter-claim set-off or cross demand equal to or exceeding the amount of the judgment debt.
(emphasis added)
65 In Deputy Commissioner of Taxation v Cumins [No 5] [2008] FCA 794, Gilmour J (at [68]) held that a subsequent reduction of a judgment debt does not render a bankruptcy notice invalid because the bankruptcy notice is calculated by reference to the amount of the original judgment.
66 In Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 (per Morling, Neaves and Spender JJ), their Honours said (at 587):
A bankruptcy notice may be invalid if the amount specified in the notice as the amount due to the creditor exceeds the amount in fact due. The date as at which the inquiry whether the amount specified in the notice is excessive is to be made is the date of the issue of the notice: see Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337. A payment in reduction of the judgment debt made after the date of the issue of the notice but before its service on the debtor will not invalidate the notice: see Walsh (supra). In that case, Gibbs CJ, in whose judgment the other members of the court agreed, said (at 340):
"In form the notice speaks as at the date which it bears, that is, the date of its issue, and although service is essential to make non-compliance an act of bankruptcy, and although the time fixed for compliance runs from the date of service, the notice must be understood as speaking as at the date of its issue and the requirement of the notice, for the purposes of s 40(1)(g) of the Bankruptcy Act, must be ascertained in that context. This reinforces the view that the amount which must be correctly stated is the amount of the judgment debt owing at the date of issue."
It is also well established that, once an act of bankruptcy has been committed by the debtor's failure within the time specified to comply with the requirements of a bankruptcy notice or to satisfy the court that he has a counterclaim, set -off or cross-demand of the requisite kind, it remains an available act of bankruptcy even though subsequently the judgment on which it is based is set aside…
(emphasis added)
67 Dr Nugawela's rights are not concluded at this point. The petitioning creditor will have to verify the amount due at the time of petitioning. At that stage, as Flick J in Russell v Polites Investments Pty Ltd [2012] FCA 11 said (at [23]), citing Gilmour J in Cumins:
23 Upon proof of the matters set forth in s 52(1) a petitioning creditor has been said to have a "prima facie right" to the making of a sequestration order: Deputy Commissioner of Taxation v Cumins [2008] FCA 353 at [14]. Gilmour J there helpfully summarised the general principles to be applied as follows:
[14] On proof of the matters mentioned in s 52(1) of the Bankruptcy Act 1966 (Cth) (the Act) a petitioning creditor has a prima facie right to the making of a sequestration order and the court will proceed to make a sequestration order unless the court is satisfied that for other sufficient cause a sequestration order should not be made: s 52(2)(b) of the Act; Cain v Whyte (1933) 48 CLR 639 at 646. The onus is on the respondent debtor to demonstrate "sufficient cause": Commissioner of Taxation v Bayeh (1999) 100 FCR 144; [1999] FCA 1223 at [12].
[15] Section 52(2)(b) of the Act is wide enough to entitle the court, in a proper case, to adjourn or dismiss a petition in the exercise of its discretion, where the debtor demonstrates a genuine dispute as to the liability to pay the debt: Re Verma; Ex Parte Deputy Commissioner of Taxation (1984) 4 FCR 181 at 185 and 187. This power is discretionary: Clyne v Deputy Commissioner of Taxation (1982) 45 ALR 323 at 328.
[16] The court is entitled to inquire whether a judgment is founded on a real debt. In general, a court exercising jurisdiction should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings, provided that the appeal is based on genuine and arguable grounds: Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148; Bayne v Baillieu (1907) 5 CLR 64, [1907] HCA 39.
[17] The mere fact that an appeal has been lodged does not without more, give rise to a duty to postpone the hearing of the petition: in Re Flatau; Ex Parte Scotch Whisky Distillers (1882) 22 QBD 83 (CA) at 84-85; nor will the court as a matter of course inquire into the validity of a judgment debt: Wren v Mahony (1972) 126 CLR 212 at 222-223, [1972] ALR 307 at 312-314.
[18] The test to be applied has been described variously. The judgment debtor must point to grounds having "a real chance of success on appeal": Re Lewin; Ex Parte Milner (1986) 11 FCR 312 at 318; or ensure "that substantial reasons are given for questioning" whether there was in truth a debt: Wren at 225. It is not enough to rely upon mere assertion. The onus is on the applicant for a stay to show the existence of a genuine dispute by adducing evidence establishing the substantial nature of the grounds of challenge: Re Verma and Re Virendra Kumar Verma; Ex Parte Deputy Commissioner of Taxation (FCA, Beaumont J, 14 November 1984, unreported) referred to with approval in Re Verma at 187: [[2008] FCA 353].
In Re Dolman; Ex parte Elder Smith Goldsbrough Mort Ltd (1967) 10 FLR 384 at 391 Gibbs J also referred to a creditor who had proved the existence of a debt and an act of bankruptcy having "what may be called a prima facie right to a sequestration order". See also: Burgess v Permanent Custodians Ltd [2010] FCA 986 at [37].
68 As to other issues, apart from quantum (that is, flooding etc), not only has Dr Nugawela not proven that it was not open to him as a matter of law to raise the matters which he now wishes to rely upon to set aside the bankruptcy notice, but, in fact, he wishes to raise precisely the same issues. It may be that the relevant debts have been varied, but the complaints raised and the defences offered in relation to the non-compliance with meeting tax obligations are the same issues which were raised in the Supreme Court, and (with respect) quite properly there rejected given the statutory assumptions on which the Commissioner and the Court proceeded.
69 The absence of any prospects of demonstrating that he has a valid counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt under s 40(1)(g) precludes reliance upon s 40(1)(g) of the Bankruptcy Act and would also necessarily strongly militate against any application for leave being granted to extend the time for compliance with the bankruptcy notice, even if the Original Application were lodged within time.