· that the respondent was therefore entitled to recover the sum of $367 500 from the applicant pursuant to reg 17 of the Regulations and counter-claimed accordingly; and
· that the respondent was entitled to set off so much of its counter-claim as was necessary in order to extinguish the applicant's claim to damages in the second action.
· By his reply and answer, the applicant joined issue with the respondent as to the claimed set-off and denied numerous facts alleged in support of the counter-claim. He further alleged that the counter-claim was statute-barred and/or 'extinguished due to the operation of s 82(1) Bankruptcy Act (Commonwealth) 1966' as a result of the first bankruptcy.
· On 16 October 2002, the applicant submitted a petition in bankruptcy. It was accepted on that day and, assuming that he had been discharged from his first bankruptcy, the applicant again became bankrupt on that day (the "second bankruptcy").
2 On 3 February 2005, the respondent applied in the Federal Magistrates Court for:
'1. An order pursuant to s 58(3)(b) of the Bankruptcy Act 1966 ('the Act') that the Applicant have leave to take a fresh step in the [second action].'
3 Section 58(3) provides as follows:
'Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceedings in respect of a provable debt or take any fresh step in such a proceeding.'
4 The term 'provable debt' is defined in s 5(1) as 'a debt or liability that is, under this Act, provable in bankruptcy …'.
5 Pursuant to s 82(1):
'Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.'
6 Prima facie, the respondent's debt is a debt provable in the second bankruptcy. However the applicant has previously suggested that it was extinguished by the first bankruptcy, perhaps upon the basis that it was, at that time, a contingent debt. He now accepts that such debt is a debt provable in his second bankruptcy. It is therefore not necessary for us to determine whether it was extinguished by his first bankruptcy.
7 Subsection 58(3) is in two parts. Paragraph (a) has the effect of preventing enforcement of 'any remedy against the person or the property of the bankrupt in respect of a provable debt'. Paragraph (b) forbids the commencement of any legal proceedings in respect of a provable debt, or the taking of any fresh step in such proceedings, without the leave of the Court. In other words, whilst par (a) creates an absolute bar upon the relevant conduct, par (b) provides that either relevant step may be taken only if leave is granted. The expression 'the property of the bankrupt' means, according to subs 5(1):
'(a) except in subsections 58(3) and (4):
(i) the property divisible among the bankrupt's creditors; and
(ii) any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt; and
(b) in subsections 58(3) and (4):
(i) the property, rights and powers referred to in paragraph (a) of this definition; and
(ii) any other property of the bankrupt … .'
8 The effect of this is that par 58(3)(a) prohibits the enforcement of any remedy against the property of a bankrupt, whether or not such property is divisible amongst the bankrupt's creditors.
9 The question for present purposes is whether par 58(3)(a) or 58(3)(b) applies to the respondent's debt. The applicant asserts that it is barred by par 58(3)(a); the respondent submits that par 58(3)(b) applies, and that as it has leave, it may prosecute its counter-claim in the Supreme Court and also seek to set off the amount thereof against the applicant's claim. If it is successful in so doing, the applicant's claim will be greatly reduced.
10 We should make a number of preliminary points concerning the Act. In Re McMaster; Ex parte McMaster (1991) 33 FCR 70 at 72-73, Hill J said:
'The modern bankruptcy law serves three purposes. The first is to ensure that the assets of the bankrupt are distributed rateably among creditors. The second, which is interrelated with the first, is to ensure that one creditor does not obtain an undue advantage over other creditors. The third is to bring about the discharge of the debtor from future liability for his existing debts, so that the debtor may start afresh … .'
11 Section 58 plays a critical role in giving effect to these policies. Two other sections are also relevantly significant. The first is s 86 which provides:
'(1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy:
(a) an account shall be taken of what is due from one party to the other in respect of those mutual dealings;
(b) the sum due from the one party shall be set off against any sum due from the other party; and
(c) only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be.
(2) 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 person who has become a bankrupt or at the time of receiving credit from that person, he or she had notice of an available act of bankruptcy committed by that person.'
12 It was at least tentatively submitted on behalf of the applicant that s 86 exhaustively defines the right of a creditor to set off a debt owed by a bankrupt against any claim by the bankrupt against the creditor, and that the respondent is therefore barred from pursuing its set-off and counter-claim in the Supreme Court. However the section only regulates the way in which mutual debits and credits are to be taken into account in the administration of the bankrupt estate. It says nothing concerning the respective rights and obligations of creditors and bankrupts outside of such an administration.
13 The other relevant section is s 116 which deals with property divisible amongst creditors in a bankruptcy. Subsection 116(2)(g) effectively excludes from such property any right of the bankrupt to recover damages for personal injury and any damages or compensation recovered by the bankrupt in respect of such an injury. The applicant submits that the policy which underlies such exclusion favours a construction of subs 58(3) which bars reduction of any award of damages in favour of the applicant by set off of the respondent's debt.
14 The matter was argued on a narrow basis, a number of concessions having been made. Firstly, the applicant conceded that the respondent's claim could, according to the general law, constitute a set-off. We have not considered the correctness of that concession. Secondly, the parties agree that should par 58(3)(a) not relevantly apply, then par 58(3)(b) requires that the respondent obtain leave before prosecuting any set off or counter claim. We are unsure as to the correctness of that proposition. To plead a set off is to raise a defence. See Stooke v Taylor (1880) 5 QBD 569 and Sovereign Life Assurance Co v Dodd [1892] 2 QB 573. See also Victorian Workcover Authority v Esso Australia Limited (2001) 207 CLR 520 at [30]. It seems odd that the applicant should be at liberty to pursue a claim against the respondent whilst the latter cannot raise a relevant defence without the leave of another court. However it is not necessary to consider that matter. Thirdly, the applicant accepts that if par 58(3)(a) does not apply, then no error attended the magistrate's decision to grant leave pursuant to par 58(3)(b).
15 The narrowness of the applicant's proposed ground of appeal appears from par 5.11 of his outline of submissions as follows:
'In summary, the applicant submits that while a Court may grant leave to commence or continue a proceeding in respect of a provable debt under section 58(3)(b), it has no power to permit a creditor to enforce a remedy in respect of a provable debt under section 58(3)(a). The two arms of section 58(3) should be interpreted as separate and not overlapping. Any further step in the Supreme Court action towards setting off the respondent's claim which resulted from the 1993 accident is the enforcement of a remedy against the property of the bankrupt.'
16 In effect the applicant submits that to seek to set off a debt provable in bankruptcy against his claim for damages for personal injuries is to seek to enforce a remedy against his property in respect of the provable debt. As we have observed, set off is generally pleaded as a defence. For present purposes the only question is whether, in seeking to establish such a defence, the respondent is seeking to enforce a remedy for the purposes of par 58(3)(a).
17 In Re White (1960) 20 ABC 11, Clyne J said, concerning a similar provision in earlier legislation (at 12-13):
'It was well established that when a person is made bankrupt his property becomes vested in the official receiver of his estate and the remedies which his creditors had against his property can no longer be enforced. In substitution for these remedies the creditors acquire a right to share equally and proportionately in the distribution of the bankrupt's estate. See In re Thomas; Ex parte The Commissioners of Woods and Forests (1888), 21 Q.B.D. 380, at p. 383.
This is clearly the effect of s.60(1) of the Bankruptcy Act. When White became bankrupt on 23rd March, 1959, Slater's remedy against White or his property ceased to exist, and he had then merely a right of proof against White's bankrupt estate. It was contended that the words in s.60(2) of the Act, "any remedy against the property or person of the bankrupt in respect of the debt", i.e., a debt provable in bankruptcy, must mean a remedy in the way of enforcing payment of the debt, not by way of bringing action or suit, but a proceeding such as a proceeding under an Act dealing with the imprisonment of fraudulent debtors. This contention, in my opinion, cannot be accepted. The word "remedy" has a well defined meaning and this meaning cannot be restricted in the manner suggested by counsel for Slater.'
18 Of this passage, Gibbs CJ, Murphy, Brennan and Dawson JJ observed in Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 595:
'The judgment of Clyne J in In Re White in part rested on the view that the word "remedy" in section 62(2) of the Bankruptcy Act 1924 (Cth), as amended, (which in substance corresponded with s 58(3) of the present Act), includes a remedy by way of an action or suit - a construction which is open to doubt having regard to the express mention in the sub-section of a legal proceeding. However the true ground of the decisions is that the earlier bankruptcy had converted the creditor's right to be paid by the debtor into a right of proof, and the debt was not still "owing" within the meaning of the statute.'
19 The requirement that the debt be owing appears to have been in connection with the petitioning creditor's right to present the petition.
20 In Fraser v Commissioner of Taxation (1996) 69 FCR 99, Beaumont J said at 111-112 (Black CJ and Tamberlin J concurring):
'As the High Court observed in Clyne at 595 a distinction should be drawn, for the purposes of s 58(3), between the "enforcement" of a remedy against the property of the bankrupt, on the one hand, and the commencement or the taking of a fresh step in a "legal proceeding", on the other. An obvious example of the former would be to levy execution against the lands or goods of the bankrupt. In this connection, the words "enforcement" of a "remedy" should, I think, be interpreted as having their settled meaning. In R v Bates (1982) 2 NSWLR 894, Samuels JA said, of "enforce" (at 895):
"… I would harbour considerable doubt, as a matter of grammar or syntax, whether the word 'enforced' extends to cover the institution of proceedings for breach of a provision of the statute. The relevant meaning assigned in The Shorter Oxford Dictionary is that to enforce means 'to compel observance of'. That is, I think, its ordinary meaning …"
With respect, I agree. Moreover, it will be recalled that the notion of "enforcement" was not used in s 62(2) when considered by Clyne J in White. This may be a basis for distinguishing White. But, in any event, the doubts cast in Clyne upon the approach taken in White, when considered in the context of the settled meaning of the phrase "enforce a remedy", lead, in my opinion, to the conclusion that the absolute bar imposed by s 58(3)(a) should be construed so as to apply only to the enforcement of remedies, including extra-curial remedies, as distinct from the institution of legal proceedings and their maintenance up to the point of recovery of judgment. The institution and maintenance of such proceedings will, of course, be subject to the different constraints imposed by s 58(3)(b), unless leave be granted under that provision.'
21 The decision in Fraser is directly contrary to the applicant's present submission. We do not understand the applicant to challenge the correctness of the decision, and we see no reason to doubt such correctness. In our view that is a sufficient basis for disposing of this application.
22 However the applicant seeks to avoid the decision in Fraser by reference to the decision of the Full Court of the Supreme Court of South Australia in Gertig v Davies (2003) 85 SASR 226. On 23 August 2001, Davies recovered a judgment against Gertig for damages for personal injuries and interest, but the judgment was not entered. On 28 August 2001 the trial judge ordered that Davies recover from Gertig costs incurred up to fourteen days after 14 December 2000 (the date of filing of an offer pursuant to the rules of court) and that Gertig recover from Davies costs incurred thereafter. His Honour also ordered that the lesser amount of costs be set off against the greater and that there be a stay of execution of the judgment for damages. It was anticipated that such a set off would result in a substantial balance owing to Gertig. Gertig sought an order under the rules of court that such balance be set off against the damages recovered by Davies. The likely effect of this was that nothing would be payable to Davies on account of damages. The judge deferred his decision on that matter. Davies then filed his own petition in bankruptcy and became bankrupt with effect from 23 January 2002. The Official Receiver indicated that he had no interest in the damages payable to Davies. At least in the Full Court, both sides accepted that Gertig's debt was a debt provable in Davies' bankruptcy.
23 At first instance the trial judge held that par 58(3)(a) of the Act prevented him from ordering that the balance of costs payable by Davies be set off against the damages payable to him. In the Full Court Doyle CJ (with whom the other members of the Court, on this aspect, agreed) said at [37]-[38]:
'37. However, in my opinion the making of an order that costs be set off against damages is not the enforcement of a remedy against the property of Mr Davies. It may be a remedy, but it is not a remedy against property. In my view the making of the order sought is a step in the process of determining whether an enforceable judgment will be entered in favour of Mr Davies, and if so for what amount. The process of determining whether or not a set-off should be ordered is not the enforcement of a remedy against property of Mr Davies, but a process of reconciling or adjusting mutual claims as between Mr Davies and Mr Gertig arising out of the proceedings brought by Mr Davies. As I have said, the court is determining whether an enforceable judgment will be entered in favour of Mr Davies, and if so for what amount. It does not seem to me to be accurate to call that a process of enforcing a remedy against property of Mr Davies, the property being the damages that the court has determined are recoverable by him.
38. In other words, in my view the focus should be on the scope of the concept of a remedy against property of the bankrupt, rather than on the scope of the concept of a remedy as such.'
24 At [42]-[44] Doyle CJ continued:
'42. In Fraser v Commissioner of Taxation (1996) 69 FCR 99, the court considered the application of s 58(3) of the Act to an application made by the Commissioner under the Family Law Act 1975 (Cth) for the setting aside of an order made under that Act for the transfer to a woman of property in which her husband, later bankrupted, had an interest. (The way in which that interest arose does not matter.) The court held that the making of the application was a legal proceeding for the purposes of s 58(3)(b) but was not the enforcement of a remedy for the purposes of s 58(3)(a). At 111 Beaumont J said that an obvious example of the enforcement of a remedy against the property of a bankrupt would be "to levy execution against the lands or goods of the bankrupt". He said that the words "enforcement" of a "remedy" should be "interpreted as having their settled meaning". He took the view that the "absolute bar" imposed by s 58(3)(a) should not be read too widely, as I understand him. I acknowledge the force of the point he makes, but am cautious about accepting the view that s 58(3)(a) is limited to traditional forms of execution. However, his reasons were agreed in by the other two members of the court, and the decision is one which this Court should follow.
43. A point that may be made in support of his view is that Parliament has not chosen words apt to embrace any means at all of obtaining payment of a provable debt, but has chosen to use an expression with a limited reach and which, at least in its core area, clearly does refer to traditional forms of execution.
44. I do not treat this decision as determining the issue, because it is not clear that Beaumont J meant to hold that the provision can only apply to traditional forms of execution. My impression is that what he meant was, as he said, that such a thing was an "obvious example" of the enforcement of a remedy, without necessarily being the only thing that would fall within s 58(3)(a). Nevertheless, this decision does support the view that I favour.'
25 We understand Doyle CJ to have meant by this that the decision in Fraser did not directly resolve the question in Gertig v Davies, namely whether par 58(3) applied to a claim to set off an award of costs, made after pronouncement of an award of damages, against the amount of those damages. The distinction drawn in Fraser was between the 'institution of legal proceedings and their maintenance up to the point of recovery of judgment' as opposed to 'the enforcement of remedies, including extra-curial remedies'. The decision in Fraser established that par 58(3)(a) applied to the latter, but not the former. In Gertig v Davies the cross claim arose after damages had been awarded. That situation may arguably not have fitted into the dichotomous model adopted in Fraser. However the present case fits perfectly. Gertig v Davies does not qualify the decision in Fraser in any relevant way and is in no sense inconsistent with that decision. The applicant seeks to distinguish Gertig v Davies for present purposes, but in view of the direct application of the decision in Fraser, that attempt is a mere distraction from the true issue. Nonetheless we will briefly discuss the submission.
26 The applicant asserts in par 5.12 of his written submissions that:
'5.12 To set off the debt arising from the 1993 accident is not to make an adjustment prior to giving judgment, as happened in Gertig's case. To set off in the Supreme Court action requires the Court to determine what judgment would be given, which upon judgment becomes a debt payable to [the applicant], and thereafter the Court will be asked to determine whether it will allow at its discretion the set off of a debt.
5.13 The learned Federal Magistrate was confused by the terminology used in the South Australian Supreme Court Rules in that the Rule referred to set-off, whereas the type of set-off by the respondent in [the applicant's] case is a set-off of debts, and therefore is an enforcement of a remedy against the property of [the applicant].'
27 This argument reflects a misunderstanding of the decision in Gertig v Davies. As we understand it, nothing turned upon the precise wording of the set off rule or upon the fact that set off was authorized by the rule. The point made by Doyle CJ at [37] was simply that consideration of set off was part of the process by which the Court determined the eventual outcome of the case. In that sense, it was a step leading up to judgment rather than an attempt to enforce a remedy against property. That conclusion in no way detracts from the decision in Fraser or the relevance of that decision to the present case.
28 Subsection 58(3) may operate differently, depending upon whether a claim is pursued by way of set off or as a counter-claim. Set off and counter-claim are not merely alternative ways of framing a claim. As we have observed, a set off operates by way of defence. A counter-claim does not; it is a separate claim.
29 Generally, any cross-claim may be raised by counter-claim. However the permissible subject matter of a set off has historically been more limited so that a cross-claiming party might be permitted to counter-claim, but not to claim a set off. That distinction might be significant in the application of subs 58(3). To the extent that a set off goes in reduction of the bankrupt's claim, no question of enforcement will arise upon which par 58(3)(a) can operate. That paragraph may operate to bar enforcement of any excess of the amount recovered on the claim grounding the set off over the amount recovered on the bankrupt's claim. Similarly, par 58(3)(a) would bar the enforcement of any judgment on a counter-claim if the subject matter of the counter-claim were not also the basis for a claim of set off. However, in the present case, rule 173 of the Uniform Civil Procedure Rules (1999) (Qld) seems to allow any claim to be raised by way of set off.
30 The applicant has no arguable ground of appeal. In those circumstances no good point would be served by giving leave to appeal. The application should be dismissed with costs.