Commonwealth Constitution (Cth): ss56, 77(i), 78(i)

Judiciary Act 1903 (Cth): ss39(2), 44, 78B

Federal Court of Australia Act (1976): s32

Bankruptcy Act 1966 (Cth): ss40(1), 41(7)

Federal Court Rules: O29 r5

Bankruptcy Act 1883 (UK): s4(1)

Breavington v Godleman [1988] HCA 40; (1987-8) 169 CLR 41; applied

Johnstone v The Commonwealth [1979] HCA 13; (1979) 143 CLR 398; applied

Phillip Morris Inc v Adam Brown Male Fashions Pty Ltd (1981) 148 CLR 457;

Commonwealth of Australia v Ling (1993) 44 FCR 397; referred to

Unilan Holdings Pty v Ltd v Kerin [1993] FCA 420; (1993) 44 FCR 481; referred to

Re Brink; Ex parte The Commercial Banking Company of Sydney (1979-80) 44 FLR

Re James; Ex parte Holt Harvey Roofing (Aust) Pty Ltd (1993) 46 FCR 183; referred to

Scott v Beneficial Finance Ltd (Einfeld J, unreported 4 October 1994); referred to

Re Martinovic (Kiefel J, unreported 23 June 1995)

Cameron v McBain [1948] VicLawRp 41; (1948) VLR 245; referred to

Bolwell Fibreglass Pty Ltd v Foley [1984] VicRp 8; (1984) VR 97; not followed

In Re a Debtor (1914) 3 KB 726; approved

Re Stokvis (1934) 7 ABC 53; followed

Re a Debtor (1947) LJR 1413; followed

Re Racheha; Ex parte Antonios [1980] FCA 132; (1980) 49 FLR 423; applied

Re Franks; Ex parte GIO Holdings Ltd (1989) 101 ALR 504; referred to

Re Willats; Ex parte Nissan Finance Corp Ltd [1991] FCA 407; (1991) 31 FCR 206; referred to

Obacelo Pty Ltd v Taveraft Pty Ltd (1985) 5 FCR 210; distinguished

Counsel and Solicitors G Bigmore QC with M Aldridge

for Debtor/Applicant: instructed by Smith and Emmerton

Counsel and Solicitors S Gageler instructed by the

(1) The questions for determination be answered as follows:

A. Could the Applicant's claim for damages for

negligent misrepresentation have been set up in

matter No G182 of 1992?

Answer: Yes

B. Could the Applicant's claim for damages for

defamation have been set up in matter No G182 of

1992?

Answer: Yes

(2) Stand the matter over to a date to be agreed with counsel for

directions.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

HILL J Before the Court for determination is a notice of motion posing two questions which were ordered to be determined separately before any hearing in the proceedings. Those questions were framed as follows:

"A. Could the Applicant's claim for damages for negligent

misrepresentation have been set up in matter No G182 of 1992?

B. Could the Applicant's claim for damages for defamation have been

set up in matter No G182 of 1992?"

2. The background to the formulation of these questions can be shortly stated.

3. On 3 September 1993, Beaumont J entered, in matter No NG182 of 1992, judgment against the debtor in the sum of $7,990,535.86 in favour of the Commonwealth of Australia, the respondent in the present application. His Honour's judgment is reported as Commonwealth of Australia v Ling (1993) 44 FCR 397. That judgment was subsequently affirmed on appeal by a Full Court of this Court on 10 June 1994. An application for special leave to appeal to the High Court from the decision of the Full Court was dismissed on 9 December 1994. Henceforth I shall refer to matter No NG182 as "the Commonwealth proceeding".

4. Following judgment being entered and an application to stay it being refused, the Commonwealth procured the issue of a Bankruptcy Notice on 12 September 1994. It was subsequently served. Before the expiration of the time fixed for compliance with that notice, the debtor filed with the Registrar, pursuant to s41(7) of the Bankruptcy Act 1966 ("the Act") an affidavit to the effect that he had a counter-claim, set-off or cross demand equal to or exceeding the amount of the Commonwealth's judgment debt which he could not have set up in the proceeding in which the judgment was obtained. Application was then made to the Court by the debtor that it should be satisfied of the existence of such a counter-claim, set-off or cross demand.

5. The alleged counter-claim, set-off or cross demand (henceforth these words will be all taken as being comprehended in the word "cross-claim") was a claim against the Commonwealth for negligent misstatement or alternatively for defamation. The debtor alleges that the Commonwealth made various representations concerning the facilitation of English language intensive courses for overseas students (ELICOS). These representations were, inter alia, to be found in addresses made by two Ministers of the Crown and by a Mr Howard Spicer. Relying on these representations the debtor says that he established businesses accredited to teach ELICOS courses especially to students from the People's Republic of China. However the representations were, it is alleged, negligently made and in breach of a duty of care owed by the Commonwealth to the debtor. In the result the debtor suffered loss, which loss included the amount which the debtor was liable to pay the Commonwealth.

6. The case in defamation alleges that the Commonwealth published in a cablegram circulated to employees of Australian embassies in Canberra and abroad matter said to be defamatory. It is said that as a result of the publication the number of enrolments in the debtor's establishments fell significantly and loss and damage was suffered by the debtor. The loss is said to include the same loss as was suffered as a result of the negligence claim.

7. For the purposes of the determination of the separate questions, I am asked to assume that Mr Ling does have a prima facie case, or one with a fair chance of success being of the requisite value, capable of falling within s41(7) of the Act, provided that he could not, within the language of s40(1)(g) of the Act, have set that claim up as a cross claim in the action or proceedings brought against him by the Commonwealth. The substance of the separate questions for determination is thus whether the debtor could have set up the cross claims in the Commonwealth proceedings.

8. In the affidavit filed for the purposes of s41(7) of the Act, the debtor expressed two reasons why he could not have set up his claims for negligence and defamation against the Commonwealth as cross claims in the Commonwealth proceeding. The first raises jurisdictional questions to which I shall return; the second raises what may be said to be a practical reason why the claims were not brought as cross claims in the Commonwealth proceeding. The debtor deposes:

"I was not advised by my solicitors in the

proceedings in which the judgment was obtained

that I had a claim against the Commonwealth of

Australia except for the defamation claim. My

current solicitors have advised me that I do

have a claim against the Commonwealth of

Australia exceeding the judgment debt in favour

of the Commonwealth."

9. From the bar table it was said that it was not until the decision of the Full Court of this Court in Unilan Holdings Pty Ltd v Kerin [1993] FCA 420; (1993) 44 FCR 481 that the possibility of suing the Commonwealth in tort became clear. Before that case, it was said, so to do would have been at the "cutting edge" of the law. It is not clear to me that Unilan was in this respect a watershed of legal development. On one view of the matter what was said by the Full Court in Unilan (at 483-4) might not be thought encouraging to the debtor. However, it is unnecessary to explore that question.

10. What emerges here is that the practical reason why no action was taken against the Commonwealth, whether by the institution of a cross claim or otherwise, is that the debtor was not advised that he could do so. But that does not suffice to make the claim one which the debtor could not have set up in the Commonwealth proceedings. That is not a question to be determined by reference to practicalities; it is a question to be answered by reference to legal considerations: Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd [1980] FCA 78; (1979-80) 44 FLR 135; Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183; Walton v National Mutual Life Association of Australasia Ltd [1994] FCA 1114; (1994) 49 FCR 406 at 408; Scott v Beneficial Finance Ltd (Einfeld J, unreported, 4 October 1994); Re Martinovic (Kiefel J, unreported 23 June 1995). Thus the mere fact that there was an excuse as to why the cross claim was not brought will not avail a debtor seeking to come within s41(7) of the Act, if a cross claim could legally have been brought.

11. However there is somewhat more difficulty for the Commonwealth in the alternative argument for the debtor. The submission is that the debtor could not as a matter of law have raised either the negligence or the defamation claims in this Court, at least directly. It is said that this Court has not had vested in it by the Commonwealth Parliament jurisdiction to hear and determine matters in which the Commonwealth or a person suing or being sued on behalf of the Commonwealth is a party (cf s77(i) of the Commonwealth Constitution). Thus the only way the matter could be commenced directly in this Court would be if there was before the Court an "associated" matter (cf s32 of the Federal Court of Australia Act 1976) or the intended proceedings came within the Court's accrued jurisdiction. This it was said was not the case. It was submitted that while the proceedings could have been commenced in the High Court and from there have, on order of that Court (pursuant to s44 of the Judiciary Act 1903 (Cth)) been transferred to this Court, or perhaps commenced in the Supreme Court and then cross-vested in this Court, it would still have been necessary to obtain an order to consolidate the transferred proceedings with the Commonwealth proceedings before the situation would arise that the claims became cross claims in the Commonwealth proceedings. But it was said there would have been no proper basis for consolidation. In any event, it is said that the difficulties of such an indirect procedure should demonstrate that the claims could not have been set up in the Commonwealth proceedings.

12. It was further submitted for the debtor that once it was accepted that this Court lacked original jurisdiction in respect of the cross claims, the Commonwealth could not have submitted itself to the jurisdiction of the Federal Court having regard to s78 of the Constitution. To the extent that Breavington v Godleman [1988] HCA 40; (1987-8) 169 CLR 41 at 68-9 decided otherwise, that case was, it was submitted, wrongly decided. However, the case was said to be distinguishable. Because this further submission raised a constitutional issue, notices were served upon the Attorney-Generals of the Commonwealth and the States pursuant to s78B of the Judiciary Act.

13. This further submission may be simply dealt with. Breavington v Godleman was a decision of the Full High Court. It held, relevantly, that the Supreme Court of Victoria had jurisdiction to entertain and determine a claim in tort for relief against the Commonwealth, notwithstanding s56 of the Constitution, in circumstances where the Commonwealth raised no objection or consented to the exercise of that jurisdiction. The case is clearly binding upon me and any submission that it was wrongly decided must await the granting of leave in the High Court to appeal and to argue its correctness.

14. Breavington v Godleman is, perhaps, distinguishable. In that case, but for s56, the Supreme Court of Victoria would have had jurisdiction, that jurisdiction having been conferred upon it by s39(2) of the Judiciary Act. On the facts of the present case the Federal Court would not have had jurisdiction to hear a claim in tort against the Commonwealth. No jurisdiction has been conferred upon it to hear matters in the original jurisdiction of the High Court through s78(i) of the Constitution. There is a suggestion, in the joint judgment of Wilson and Gaudron JJ, that there is a distinction to be drawn when determining the ability of a party to consent to the exercise of jurisdiction between a case where no jurisdiction exists and a case where there has been a failure to observe conditions attaching to the exercise of jurisdiction (at 104-5). But it must be said that no such distinction is drawn by the other members of the Court, all of whom express the principle that the sovereign may submit to jurisdiction in quite absolute terms: per Mason CJ at 69, per Brennan J at 118, per Deane J at 140, per Dawson J at 152 and per Toohey J at 168-9.

15. It is however unnecessary to pursue the matter further, for the resolution of the present case lies elsewhere.

16. I am prepared to accept for present purposes that the debtor could not have brought the claims in tort directly as cross claims in the Commonwealth proceedings. I am prepared also to accept that the debtor could not have commenced proceedings in a Supreme Court and then have obtained an order cross-vesting those proceedings to this Court. In so saying, I should not be taken as conceding the correctness of either of these propositions. But on any view of the matter it was open to the debtor to have commenced proceedings in tort against the Commonwealth in the High Court and to apply to have those proceedings remitted to this Court pursuant to s44 of the Judiciary Act. It has long been accepted that the act of remitter operates to confer jurisdiction upon the Court to which the matter is remitted to hear and determine the matter: Johnstone v The Commonwealth [1979] HCA 13; (1979) 143 CLR 398.

17. There can be little doubt that had an order for remitter been sought, the order would have been granted. The High Court has not expressed a desire to hear matters in its original jurisdiction. Given that there was another matter before this Court in which issues between the parties were being litigated, it can be accepted that it would be likely that an order would be made remitting the matter to this Court. The question then arises, once the claims in tort were properly in this Court, whether an order for consolidation could have been made pursuant to which the claims in tort might have become cross claims in a consolidated proceeding incorporating the Commonwealth proceedings. A further issue which may arise is whether it could be shown in the present circumstances that it was unlikely that a consolidation would not be ordered.

18. Consolidation is provided for in the Federal Court Rules in O29 r5. As the terms of the rule make clear, an order for consolidation is not limited to the circumstances expressed in subrr5(a) and (b). It suffices that it is desirable that an order for consolidation be made. The rule confers upon the Court a broad discretion to make orders for consolidation where it is in the interests of justice so to do. Relevant to the exercise of discretion would be the desirability of avoiding multiple actions, the saving of time and expense and whether the parties would be prejudiced by such a course: Cameron v McBain [1948] VicLawRp 41; (1948) VLR 245 at 247. There is no reason to interpret the rule so that consolidation is to be confined to cases where there are several actions brought which could have been joined in the one writ, as the debtor submitted by reference to Bolwell Fibreglass Pty Ltd v Foley [1984] VicRp 8; (1984) VR 97.

19. Whether an order for consolidation would have been made had such an order been sought, or whether the Court might have merely made an order that the two separate proceedings be heard together, is difficult to assess hypothetically. The matter would lie in the discretion of the Judge before whom such an application for consolidation was brought, in the light of the attitudes of the parties and all circumstances put before that Judge. It could certainly not be said in the present case that it would have been unlikely that such an order would have been made. On the contrary, it is likely that such an order would have been made if requested.

20. In short, it may be said that by a somewhat tortuous path and with the aid of discretions exercised in his favour, the debtor was legally capable of bringing about the situation where the claims in tort could have become cross claims in the Commonwealth proceedings. In case it may be thought that the effect of consolidation would have resulted in the consolidated proceedings being a new and different proceeding from that commenced by the Commonwealth against the debtor, that is of no consequence for the Commonwealth would then have obtained judgment in the new proceeding against the debtor; that is to say, the cross claims would have been set up in the same proceeding as that in which the judgment was obtained.

21. The question is whether the possibility of this tortuous route and the existence of the discretions which would be encountered on the way (both of the High Court to remit and of this Court to order consolidation) permit the debtor to argue that the claims in tort were such that they could not have been set up in the Commonwealth proceedings.

22. The provisions of s40(1)(g) can be traced back at least to s4(1)(g) of the Bankruptcy Act 1883 (UK). Discussing that section Avory J, with whom Horridge J agreed, in In re A Debtor (1914) 3 KB 726 at 730 said:

"I think that upon the true interpretation of

the section a debtor is entitled to set up in

answer to a bankruptcy notice a counter-claim

which rebus sic stantibus he could not in law

have set up in the action in which the judgment

was obtained...".

23. The policy inherent in the section would seem to be that a debtor should be allowed to challenge a bankruptcy notice based upon a judgment obtained, so long as the debtor had prima facie a counter-claim etc of a value at least as great as the judgment obtained which he could bring against the judgment creditor. Conversely, however, the debtor could not challenge the bankruptcy notice if the debtor could have brought the counter-claim in a timely way at the same time as the proceedings brought against him, but failed to do so. The section could on its face have no application if the debtor had brought the counter-claim in the proceedings and was either successful or unsuccessful with that counter-claim.

24. Re Stokvis (1934) 7 ABC 53, a case relied upon by the Commonwealth, concerned a debtor who in fact had commenced proceedings in the Supreme Court of New South Wales prior to the proceedings being commenced against him by the creditor. Under the then pleading rules in that Court he could not plead a cross action in the latter proceedings without discontinuing his own proceedings. He thus had a choice. He could have proceeded with his own writ or have withdrawn it and with leave of the Court set up the cross claim in the creditor's action. Possibly he could have had the actions consolidated. He did nothing. It was held that his claim was one he could have set up in the creditor's proceedings. Lukin J said (at 57):

"I take a counter claim, set off, or cross

demand which could not be set up as 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. Here from the point of view of time,

from its nature, and from the empowering

provisions of the Act and rules, the counter

claim might have been set up if Stokvis had

wished, or chosen, to do so. Mere failure to

take advantage of the opportunity can hardly be

said to be inability."

25. It will have been noted that the possibility of consolidation was involved in that case also, and that leave of the Court would have been necessary, either for the consolidation or for the withdrawal of the debtor's claim and alternative pleading as a cross claim. Neither matter appears to have led to the conclusion that the cross claim could not have been set up in the creditor's proceedings.

26. Subsequently in Re a Debtor (1947) LJR 1413, a judgment was signed against the debtor on the same day as his alleged counter-claim became enforceable. It was open to the debtor to have sought leave to defend. It was held that the counter-claim was one which could have been brought in the creditor's proceeding, notwithstanding that leave would have been required. Lord Greene MR said (at 1415-6):

"It seems to me what he has to do - and the

burden of proof is on the debtor under the

paragraph - is to satisfy the court that he

could not set up the counter claim in the

action, and that really means that he was unable

to set it up. It is perfectly true he 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.

He therefore fails, in my judgment, on the true

construction of this paragraph to satisfy the

court that he could not set up that counter

claim. His power to set it up depended on the

exercise of a discretionary power which the

master undoubtedly had; but he cannot satisfy

the language of the section to my mind - and it

seems to me clear - either that in fact or in

law was it impossible to set this up in the

action. In my judgment he fails to do that,

because there was a means by which he could make

an application which the master not only could

have entertained but, in my judgment in all

probability, indeed almost certainly, would have

entertained in order to do justice if he was

satisfied that there was substance in the

counter claim."

27. Both Re Stokvis and In re a Debtor were cited by Lockhart J in Re Brink; Ex parte Commercial Banking Co of Sydney [1980] FCA 78; (1980) 30 ALR 433 at 437. In Re Racheha; Ex parte Antonios [1980] FCA 132; (1980) 49 FLR 423 the creditor had commenced proceedings against the debtor in the Court of Petty Sessions. The amount sued for exceeded the jurisdiction of that Court but the debtor had failed to object to the jurisdiction prior to judgment being obtained against him. Had he done so the action would have been transferred to the District Court. The debtor had, however, sent to the Registrar of the Court of Petty Sessions a notice of set-off and counter-claim, but it had been rejected on the basis that it exceeded the jurisdictional limit of that Court. The debtor had a choice of abandoning the excess or commencing separate proceedings in the District Court, or of objecting to the jurisdiction of the Court to hear the plaintiff's claim and having that transferred to the District Court where there was no relevant jurisdictional limit that would have precluded him setting up his cross claim. Lockhart J held that in these circumstances the debtor had a cross claim etc which could have been set up in the District Court had the debtor either elected to abandon the excess or have the matter moved to the District Court.

28. While Re Racheha was not a case where there was a need to have a favourable exercise of a Court's discretion before the cross claim could have been set up in the main proceeding, it does stand as authority for the proposition that the fact that steps would need be taken by the debtor to have the cross claim raised in the creditor's action where it could not be raised directly does not bring about the result that the debtor could not have raised the cross claim in the creditor's proceeding.

29. Re Racheha was followed by Beaumont J in Re Franks; Ex parte GIO Holdings Ltd (1989) 101 ALR 504 in somewhat analogous circumstances. In so doing his Honour quoted with approval the passage cited earlier from Lord Greene in Re a Debtor.

30. More recently O'Loughlin J was called upon in Re Willats; Ex parte Nissan Finance Corporation Ltd [1991] FCA 407; (1991) 31 FCR 206 to consider whether a counter-claim was one which could have been set up in the creditor's proceedings where leave would have been required to do so, there having been an application for summary judgment. His Honour held that it could have been, citing the cases already discussed above and commenting that failure to seek leave could never be the exclusive test.

31. These cases, it seems to me, establish that a cross claim will be one which could be set up in the action, notwithstanding that to do so the debtor may need to transfer the proceedings first to another court, or may need to obtain in his or her favour the exercise of a discretion before doing so. The onus of showing that the claim is not one that could have been set up in the creditor's proceedings lies upon the debtor. That onus will not be satisfied merely by showing that some indirect course may need be followed (that course being in the discretion of the debtor) nor by showing that there existed a discretion which could have been exercised against the setting up of the claim as a cross claim. To satisfy that onus the debtor must show that, as a matter of law and in the circumstances prevailing, he or she could not have set up the cross claim. That the debtor has not done in the present case.

32. I do not find the result strange having regard to the evident policy underlying s40(1)(g) to which I have earlier referred. A debtor having a claim against his or her creditor can not just stand by while judgment is obtained and later seek to use that claim to set aside a bankruptcy notice founded upon that judgment. If machinery is available for that claim to be agitated as a cross claim in the proceedings, even if application must be made in a timely way to another court or leave must be obtained, that application should be made or that leave sought. Otherwise the debtor will be bound by his or her conduct.

33. I do not need to decide and in fact do not decide what the situation would be if, although a discretion were in the way of a debtor setting up a claim as a cross claim, it were shown by the debtor to be unlikely on the balance of probabilities that that discretion would be exercised in favour of the debtor. That is a question for another day.

34. I thus conclude that the claims in tort against the Commonwealth which the debtor alleges are such that they could have been raised in the Commonwealth proceedings as cross claims and accordingly may not now be advanced by the debtor as a ground to set aside the bankruptcy notice.

35. There may well have been other ways which the debtor could have brought about the result that the tortious claims became cross claims. I am inclined to think that the tortious claims, or at least that claim based upon alleged negligence on the part of the Commonwealth could, but for O5 r1 of the Federal Court Rules, have been raised as a matter falling within the associated jurisdiction of the Court under s32 of the Federal Court of Australia Act being associated with matters in which the jurisdiction of the Court is invoked and in respect of which s77(i) of the Constitution permitted jurisdiction to be conferred upon this Court: cf Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd (1981) 148 CLR 457 at 494-5 per Gibbs J, at 516 per Mason J, at 538 per Aickin J and at 547 per Wilson J. Little assistance, however, is to be obtained from this case as to the extent of "association" required for a matter to fall within s32.

36. Order 5 r1 of the Federal Court Rules requires that a cross claim must be such as the respondent would be entitled to against the applicant:

"if the applicant were a respondent in a

separate proceeding commenced in the Court by

the respondent for that purpose."

37. It was held in Obacelo Pty Ltd v Taveraft Pty Ltd (1985) 5 FCR 210 that the Court had, as the law then stood, no jurisdiction in relation to a cross claim which, having regard to its nature and the relief sought, could not have been brought in the Federal Court as a separate proceeding. While no doubt the particular facts of that case would be decided differently today having regard to the cross-vesting legislation, it would clearly be the case that this Court would have no jurisdiction (absent the consent at least of the Commonwealth) to hear and decide a case involving a claim in tort against the Commonwealth in a separate proceeding. Whether this rule may be in conflict with s32 of the Federal Court Act is not a matter which need now be decided.

38. I would accordingly answer each of the questions separately reserved in the affirmative. In consequence I will, if requested, make a declaration to the effect that the debtor does not have a set-off or cross demand which satisfies the requirement of s40(1)(g) of the Bankruptcy Act 1966, dismiss the application brought by the debtor and order the debtor to pay the costs of the Commonwealth.