BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA

Bankruptcy Notice - counter-claim under s.40(1)(g) - effect of s.41(7) - reference to a counter-claim that the debtors "could not have set up" in the action in which the judgment was obtained - creditor had applied for summary judgment in the Supreme Court - Rules of Court required debtors to obtain leave before filing a defence and counter-claim - the need to obtain leave does not mean that the debtors "could not have set up" their counter-claim.

It is not satisfied that the debtors have a counter-claim, set-off or cross demand of the type referred to in s.40(1)(g).

NOTE: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

The questions for determination in these proceedings are first, whether the Court is satisfied that the debtors, Alan Leslie Willats and Barry James Willats, have a counter-claim, set-off or cross demand ("a counter-claim") against Nissan Finance Corporation Limited ("Nissan"), their judgment creditor, which equals or exceeds the amount of the judgment debt and, secondly, (if they do have such a counter-claim) whether it was one that the debtors could not have set up in the action in which Nissan obtained its judgment: see sub-s.41(7) and para.40(1)(g) of the Bankruptcy Act 1966 (Cth) ("the Act").

"40(1). A debtor commits an act of bankruptcy in each of

the following cases:-

(a) - (f) ...

(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 fixed by

the Registrar by whom the notice was

issued; 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 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

could not have set up in the action or

proceeding in which the judgment or order was

obtained."

"41(7) Where, before the expiration of the time fixed for

compliance with the requirements of a bankruptcy notice, the

debtor has filed with the Registrar an affidavit to the effect

that he 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."

3. In May 1989, Grass Ridge Pty. Ltd. ("Grass Ridge") a company in which and of which the debtors were employees, directors and shareholders, executed in favour of Nissan a debenture that secured to Nissan the repayment of all moneys that may from time to time be owing by Grass Ridge to Nissan. Grass Ridge was then carrying on, or about to commence carrying on, business as a new and used car dealer under the name of "Willats Nissan" on land at South Road, Morphett Vale. The debtors guaranteed to Nissan the due payment of all moneys secured under the debenture.

4. Nissan claimed that Grass Ridge defaulted in its obligations under the debenture. As the debenture provided that, in such circumstances, the principal sum (as defined therein) became immediately due, Nissan, on 7 March 1990, served upon Grass Ridge a Notice of Demand and appointed a Receiver and Manager over the affairs of the company. Neither Grass Ridge nor the debtors, as guarantors, have met the demand that was made by Nissan. On 8 June 1990, Nissan commenced proceedings in the Supreme Court of South Australia against Grass Ridge and the debtors. It alleged that the debt that was owing to it by Grass Ridge was $810,600.34; it sought summary judgment for that amount with interest against the company as its primary debtor and against the debtors as guarantors.

5. Nissan's application for summary judgment was based on the provisions of Rule 25 of the Rules of the Supreme Court of South Australia ("the SCR"). Sub-rule 25.01 is in the following terms:-

"Where a plaintiff wishes to obtain an order to dispose of

the action, or any part thereof, summarily he may:

(a) endorse a statement to that effect on the

summons prior to its issue; and

(b) at the time of issuing his summons file an

affidavit setting out in detail the particulars

of the plaintiff's claim; and

(c) inform the defendant that unless within the time

specified in the summons for filing an

appearance the defendant files an affidavit that

he has a good defence to the action on the

merits specifying the grounds of such defence

the plaintiff may apply to enter judgment

summarily on the claim without further notice to

the defendant."

6. The debtors opposed Nissan's application and filed an affidavit in purported compliance with the provisions of paragraph (c) of the sub-rule. Notwithstanding the contents of that affidavit, Master Anderson concluded that Nissan had met the onus of establishing that there was a "lack of any credible defence in the sense of a real issue to be tried..." (c.f. Settlement Wine Co. Pty. Ltd. v National and General Insurance Co. Ltd. (1988) 146 LSJS 150 at p 153 per King CJ). Nissan therefore succeeded in its application for summary judgment: an appeal by the debtors against the Master's decision was dismissed by consent on 8 April 1991.

7. On 17 April 1991 the debtors purportedly filed a counter-claim in the Supreme Court proceedings; they did so notwithstanding the entry of judgment against them. It is apparent that this action was activated by the service upon them of Bankruptcy Notices out of this Court because, on the same day - 17 April - the debtor Alan Leslie Willats filed an affidavit in this Court exhibiting a copy of the aforementioned counter-claim and seeking to invoke the provisions of sub-s.41(7) of the Act. In that affidavit, after reciting the history of the Supreme Court proceedings, the debtor concluded by saying:-

"In the premises, I verily believe that I have a good and

subsisting counterclaim, set-off (or) cross demand equal to

or exceeding the amount of the judgment debt being a

counterclaim set-off or cross demand that I could not have

set up in the proceedings in which the judgment was obtained

as the judgment was obtained on Summary Judgment and all

that was relevant to that hearing was a defence of the

judgment debtor."

8. The Registrar accepted that the debtors had filed an affidavit of the kind required by the combined effect of sub-s.41(7) and para.40(1)(g) of the Act - that is, an affidavit alleging that they had a counter-claim that they could not have set up in the Supreme Court proceedings in which Nissan obtained judgment against them - and referred the matter to a Judge for determination. However, the hearing of the debtors' claim in this Court was deferred from time to time to enable other interlocutory proceedings in the Supreme Court to be concluded. Those proceedings included a successful application by Nissan to have the debtors' counter-claim struck out, and unsuccessful applications by the debtors for a stay of the execution of the summary judgment and for leave to file their counter-claim.

9. As to the last of the applications Master Anderson held, in effect, that the debtors had no right, subsequent to the entry of summary judgment, to place a counter-claim on the file. The Master considered and rejected an argument that there was no machinery within the SCR to allow a counter-claim to come before the Court in circumstances where an application for summary judgment had been made. He was of the opinion that the debtors could have applied for leave to file a counter-claim (notwithstanding the absence of a defence), and that such an application could have been made at any time prior to or at the time of the application for summary judgment. However Master Anderson granted the debtors an interim stay on the execution of the judgment and referred the question of a substantive stay to Acting Master Boehm for full argument. Master Boehm heard that argument on 25 June and published his reserved judgment on 26 July 1991. He noted that on 10 May 1991, proceedings by the debtors against Nissan in the Supreme Court had been instituted seeking the relief which they had previously sought in the counter-claim that had been struck out. After reviewing the contents of the debtors' Statement of Claim in these new proceedings Master Boehm concluded that it was not appropriate to grant the stay that had been sought.

10. In cases dealing with the provisions of sub-s.41(7), the first question that is usually addressed is the sufficiency of the debtor's affidavit. The quality of the affidavit will be "determined on a benevolent construction": Eastick v Australia and New Zealand Banking Group Ltd. [1981] FCA 80; (1981) 53 FLR 91 at p 95 but it is still necessary for it to "show" a counter-claim: Re Brink: Ex parte Commercial Banking Company of Sydney Limited [1980] FCA 78; (1980) 30 ALR 433 at p 439 per Lockhart J. Miss Field, counsel for Nissan, challenged the sufficiency of the affidavit and the efficacy of the counter-claim. But, if that be wrong, and if the debtors have a sustainable counter-claim, then she claimed that it was a counter-claim that could have been set up in the Supreme Court proceedings. In the particular circumstances of this case the parties asked that I first consider the argument advanced by Dr Baxter, counsel for the debtors, that, upon the assumption that the debtors truly had a counter-claim, its proper classification was a counter-claim that could not have been set up in the Supreme Court proceedings.

11. Dr Baxter's proposition was that para.40(1)(g) refers to a counter-claim that could not be set up by a debtor as a matter of right. Contrary to views expressed by Master Anderson, Dr Baxter argued that if a debtor could only file a counter-claim by first obtaining leave, he did not have an unfettered right to file it in Court. If he lacked this unfettered right, then it follows, said Dr Baxter, that his counter-claim was one that could not have been set up in the proceedings in which the judgment was obtained.

12. Dr Baxter first pointed to R 46.01(2) of the SCR which, effectively, denies to a defendant the right to file a defence in proceedings in which summary judgment is sought. The combined effect of R 25.01 and R 46.02 is that the defendant must file an affidavit deposing to the fact that he has a good defence to the action on the merits and specifying the grounds of that defence; in such circumstances the Court may, on the hearing of the summons, give the defendant leave to defend. Next, Dr Baxter referred to R 48, which deals with counter-claims. Sub-rule 48.02 states that:-

"The counter-claim shall be added to the defence."

13. Taking that statement literally, Dr Baxter claimed that if, as was the case here, the debtors did not have a defence to Nissan's claim, R 48.02 meant that there was nothing to which a counter-claim could be "added". It is true that in an application for summary judgment, a defendant does not have an unfettered discretion to file a defence or to file a counter-claim; the Rules, to which earlier reference has been made, make it clear that the leave of the Court is necessary. Thus, concluded Dr Baxter, in all proceedings in which summary judgment is sought, no defendant has, as a matter of right, the ability to file a counter-claim. If this argument is correct, it would mean that in all matters in which summary judgment has been sought and obtained, it will be open to a debtor, who is served with a Bankruptcy Notice that is based on that judgment, to raise in this Court, for the first time, the subject of a counter-claim. He would do so claiming that he had not been able to raise the question of the counter-claim - as a matter of right - in the Supreme Court proceedings in which summary judgment had been obtained.

14. I can not accept that such a interpretation would be correct. Take, for instance, the circumstances that existed is Re Stokvis (1934) 7 ABC 53. The debtor in the Bankruptcy Court proceedings had issued a writ in a Civil Court but had taken no action thereafter. The party named as defendant in that writ ("the judgment creditor") instituted separate proceedings against the debtor and obtained a judgment. Apparently, the relevant Rules of Court prevented the debtor from pleading, by way of cross-action, a matter that remained the subject of a pending action by him against the judgment creditor; to file such a counter-claim it would have been first necessary for the debtor to discontinue his own action. Lukin J., at p 56, concluded that the debtor had the option of making an election, commenting that he could "have withdrawn his own writ and got leave from the Court to set up a counterclaim by way of cross action". (Emphasis added). Lukin J. went on to consider what would amount to a counter-claim which could not be set up. He explained that it would be one:-

"... which, from point of time, or from its nature, or from

absence of empowering provisions, or from positive

inhibition so to do, could not be set up in the particular

case in which judgment was obtained." (p 57)

Governed by that definition, his Honour went on to comment that the debtor could have set up his counter-claim if he had wished to do so, concluding with the observation:-

"Mere failure to take advantage of the opportunity can

hardly be said to be inability."

15. Thus in Pollnow v Queensboro Pty. Ltd. (unreported: judgment delivered 19 October 1988) the debt which founded the bankruptcy notice arose upon an order for costs; that order had been made against the debtor in interlocutory proceedings in an equity suit in which the debtor was the plaintiff. The debtor's claim that he had a counter-claim, namely, his claim in the substantive proceedings was acknowledged by Burchett J. as one which he could not have set up on the taxation of costs. Another example of a counter-claim that could not have been set up is to be found in In Re A Debtor (1914) 3 KB 726. Subsequent to the creditor obtaining a judgment, the debtor took an assignment of a debt that was owing by the creditor to a third party. The debtor successfully relied on the existence of the assigned debt as being a counter-claim that he could not have set up in the original proceedings.

16. On the other hand, Re Vicini; Ex parte E.A. Sealey and Co. (1982) 64 FLR 323 is an example of an unsuccessful attempt to establish the existence of a counter-claim that could not have been set up. In that case the debtor claimed that despite his best endeavours, he could not "obtain factual and expert evidence from the Reunion Islands to establish" his counter-claim, pleading that he was "therefore unable to set up the counter-claim" (p 325). Fisher J., after reviewing the authorities concluded:-

"In my opinion these statements of principle, which I

respectfully adopt, determine the matter against the debtor.

There was no reason in law why he could not set up his

counterclaim in the creditor's proceedings." (p 326)

(Emphasis added)

17. The remarks of Lukin J. in Re Stokvis supra, were approved and followed by Lockhart J. in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd. (supra) at p 437. At the same page his Honour also approved of the passage from the judgment of Henchman J. in Re Jocumsen (1929) 1 ABC 82 at p 85 where the learned Judge said that the words "that he could not have set up" meant "which he could not by law set up in the action." (Emphasis added). These authorities have been quoted with approval in New Zealand in their application to similar legislation: See Clark v UDC Finance Ltd. (1985) 2 NZLR 636 at pp 639-640 per Casey J.

18. I am grateful to Dr Baxter for drawing to my attention the decision of the Court of Appeal in Re A Debtor (1947) LJR 1413; as he acknowledged it is an authority that weighs heavily against his arguments. The judgement of the Court was delivered by Lord Greene M.R. with whom Cohen and Asquith LJJ. agreed. The Master of the Rolls said:-

"It is perfectly true he (the debtor) could only set it up

if the master exercised in his favour his discretionary

power. But he fails to satisfy the Court in my judgment

that the counter-claim could not be set up, that he was

unable to set it up, because not only does he fail to show

that he could not have obtained leave from the master to set

it up, but he even fails to show that he ever tried to ask

the master to exercise his discretion." (pp 1415-6)

19. Dr Baxter's primary complaint was that I should not "second guess" how a Master of the Supreme Court might have exercised his discretionary power if indeed he had received an application from the debtors for leave to file a counter-claim. I do not believe that it is a question of second guessing. Rather, it is sufficient to say that it would be expected that the Master would have exercised his discretionary power judicially. As Lord Greene M.R. said, at p 1414, it is "extremely improbable that the master would not have acceded to the application if he was satisfied" that there was a counter-claim for a greater amount than that sued for.

20. Dr Baxter acknowledged the force of the decision of the Court of Appeal in Re A Debtor but asked me not to follow it. He reminded me that it was not binding authority. I have concluded that I should follow the decision. Far from thinking it incorrect, I respectfully accept the accuracy of the decision.

21. If the particular circumstances of a case require a debtor to seek and obtain leave to file a defence and/or a counter-claim, and he seeks and obtains that leave, then his counter-claim is one which, in my opinion, he could have set up in the relevant action - and this will be so whether he does or does not file his counter-claim. If, on the other hand, he either fails to seek leave or, having sought leave, fails to obtain it, it cannot be said that the counter-claim thereby becomes one which he could not have set up. His failure to act or his failure to obtain leave can never be the exclusive test. One must look at the substance of the counter-claim and determine whether it comes within the definition of Lukin J. in Stokvis' case.

22. The reference in para.40(1)(g) of the Act to a counter-claim that could not have been set up in the proceedings exists for the protection of the debtor. Notwithstanding that his creditor may have obtained a judgment against him, that judgment cannot be used to found a bankruptcy notice if there is - outside the spectrum of those legal proceedings - a counter-claim of equal or greater size. But the Act intends a debtor, at the earliest opportunity, to raise against his creditor such counter- claim, if any, as he may have and which can be properly raised in the creditor's proceedings; if he does not he cannot complain (by way of raising that counter-claim) when the creditor applies to this Court to issue a Bankruptcy Notice.

23. In terms of the language used in sub-s.41(7) of the Act, I have determined that I am not satisfied that the debtors have such a counter- claim, set-off or cross demand as is referred to in para.40(1)(g) of the Act; there will be a declaration accordingly. The debtors must pay the judgment creditor's costs of and incidental to these proceedings.