Declare that the Court is not satisfied that the debtors have a counter-claim, set-off or cross-demand as is referred to in s.40(1)(g) of the Bankruptcy Act 1966.

That the debtors pay the creditor's costs of the application.

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

On 16 January 1990, a bankruptcy notice was issued at the request of GIO Holdings Limited ("GIO") as judgment creditor, addressed to Rodney Seddon Franks and Margaret Lawrie Franks, as judgment debtors. The bankruptcy notice recited that GIO claimed that the sum of $57,829.64, together with interest of $2,295.75, making a total of $60,125.39, was due by Mr and Mrs Franks to GIO under a final judgment ("the judgment debt") obtained in the District Court at Sydney on 1 September 1989. The notice required Mr and Mrs Franks, within 28 days after service of the bankruptcy notice, to pay the sum of $60,125.39 ("the said sum") or to secure or compound the said sum. The bankruptcy notice further stated that, if within the said period of 28 days, Mr and Mrs Franks failed either to comply with the requirements of the notice or to satisfy the Court that they had a counter-claim, set-off or cross-demand that they could not have set up in the action in which judgment was obtained, Mr and Mrs Franks would have committed an act of bankruptcy.

2. On 13 February 1990, there was filed an affidavit sworn by Mr Franks in this matter on 9 February 1990. In his affidavit, Mr Franks claimed that he had a right of counter-claim, set-off or cross-demand equal to or exceeding the said sum. Mr Franks' claim, which was described in only general terms, but was "estimated" to be for not less than $1,200,000, was said to be a claim for unliquidated damages for breach of contract and for misleading and unconscionable conduct said to be engaged in by GIO contrary to the provisions of s.52 and s.52A of the Trade Practices Act 1974.

3. A similar affidavit was sworn by Mrs Franks and filed on 13 February.

4. By application dated 19 April 1990, GIO seeks a declaration that Mr and Mrs Franks "have failed to satisfy the Court that they have a counter-claim, set-off or cross-demand equal to or exceeding the amount of the judgment . . . (debt)." The application arises under s.40(1)(g) of the Bankruptcy Act 1966 ("the Act") which provides for the service of a bankruptcy notice requiring a debtor, within a fixed time, to-

". . . 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. . . , 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." (Emphasis added)

By s.41(7) of the Act, it is provided as follows:

"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."

5. In order to understand the contentions now made by the parties, it is necessary to refer to the history of the proceedings in the District Court, and subsequently, in the Supreme Court.

6. On 22 November 1988, GIO sued Mr and Mrs Franks in the District Court claiming a liquidated sum of $49,399.29, being the balance of principal and interest, alleged to be due in respect of moneys lent by GIO, together with costs. On 12 April 1989, Mr and Mrs Franks filed notice of grounds of defence and notice of cross-claim in terms similar, in essential respects, to the claims now made by Mr Franks in his affidavit sworn on 9 February 1990.

7. On 24 July 1989, GIO filed a notice of motion seeking orders that Mr and Mrs Franks give discovery and supply further particulars of their defence and cross-claim and consequential orders. The notice of motion was returnable on 15 August 1989. Before the notice of motion was dealt with, Mr and Mrs Franks applied to have the proceedings transferred to the Supreme Court.

8. On 14 August 1989, Mr and Mrs Franks filed a summons in the Supreme Court of New South Wales, returnable on 4 September 1989, seeking an order that the proceedings in the District Court be removed to the Supreme Court. The application was made pursuant to s.145 of the District Court Act, 1973 (N.S.W.) which provides:

"145. Proceedings may, upon the application of a

party, be removed into the Supreme Court by order of

the Supreme Court upon such terms as to payment of

costs, giving security for the amount claimed or

costs, or otherwise, as the Supreme Court thinks fit."

9. On 30 October 1989, the debtors applied to the Supreme Court for, and were granted, leave to discontinue their summons.

10. As has been noted, the notice of motion filed on 24 July 1989 was returnable on 15 August 1989. On that day, Mr and Mrs Franks consented to orders that, within 14 days, they give discovery and supply further particulars. They also consented to an order that, if they failed to comply with these orders, their defence and cross-claim "be struck out".

11. On 1 September 1989, upon the failure of Mr and Mrs Franks to comply with the orders made on 15 August 1989, GIO applied for judgment in accordance with its notice of motion. On 1 September 1989, the District Court adjudged that GIO recover the sum of $57,829.64, including costs.

12. On 12 September 1989, Mr and Mrs Franks filed a notice of motion seeking to set aside the judgment and an order "restoring" their defence and cross-claim. On 13 October 1989, the District Court ordered that the defence and cross-claim be "struck out nunc pro tunc" and dismissed the notice of motion.

13. On 18 June 1990, Mr Franks filed an affidavit sworn by him on 14 June 1990 giving evidence, in primary form, of the circumstances surrounding his entry into the loan transaction the subject of the District Court judgment and of loss he alleges he suffered in that connection.

The contentions of the parties in the present application

14. As has been said, GIO now seeks a declaration that Mr and Mrs Franks "have failed to satisfy the Court that they have a counter-claim, set-off or cross-demand equal to or exceeding the amount of the judgment. . . (debt)". However, as the argument progressed, it emerged that the real issue between the parties was whether the cross-claim alleged by Mr and Mrs Franks was a counter-claim "that (they) could not have set up in the action or proceeding in which the judgment. . . was obtained." GIO contends that the cross-claim could have been so set up, but Mr and Mrs Franks argue that, because their cross-claim exceeded the jurisdiction limits of the District Court, it was not open to them to set up their cross-claim in the District Court action.

Authorities dealing with the construction of s.40(1)(g)

15. The meaning of the condition precedent stated in s.40(1)(g) that the counter-claim, set-off or cross-demand could not have been set up in the action or proceeding in which the judgment was obtained, has been considered in several decided cases. (On the general operation of the provision, see Ebert v. The Union Trustee Company of Australia Limited [1960] HCA 50; (1960) 104 CLR 346 at p 350.) It is convenient to refer first to some of the English cases.

16. In In Re a Debtor (1914) 3 KB 726, the judgment debtor, after service of a bankruptcy notice, obtained an assignment to himself of a debt due from the judgment creditor. It was held that, even assuming that the debtor could have, had he so chosen, obtained the assignment in time to set up the counter-claim in the action, the bankruptcy notice must be set aside inasmuch as the debtor could not, as matters stood at the time the action was proceeding, have set up the counter-claim.

17. In Re a Debtor (1947) LJR 1413, judgment was signed against the debtor in King's Bench on the date on which his alleged counter-claim became enforceable. It appears that it was open to the debtor, before judgment was signed, to apply to the master in the King's Bench action for leave to defend. Lord Greene, M.R., said (at pp 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

counterclaim 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 counterclaim. 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 counterclaim."

18. In Re A Debtor (1981) 1 WLR 1205, the Court of Appeal left open the question whether a set-off, counterclaim or cross-demand which the debtor had contractually agreed not to raise, could be relied on (at p 1211; p 1212).

19. In Re Brink; Ex parte The Commercial Banking Company of Sydney Ltd. [1980] FCA 78; (1980) 44 FLR 135, Lockhart J. said (at p 139):

"The words 'that he could not have set up in the

action or proceeding in which the judgment or order

was obtained' mean 'which he could not by law set up

in the action': see Re Jocumsen; Re A Debtor per

Avory J. and Re Stockvis especially per Lukin J.

where his Honour said: 'I take a counter claim, set

off, or cross demand which could not be set up as

one which, from the 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. . . Mere failure to take advantage of the

opportunity can hardly be said to be inability'."

20. In Re Racheha; Ex parte Antonios [1980] FCA 132; (1980) 49 FLR 423, a decision to which attention was properly drawn by counsel for Mr and Mrs Franks, the creditor commenced proceedings against the debtor in the Court of Petty Sessions. The debtor purported to file a notice of set-off and counterclaim in an amount in excess of the jurisdiction of the Court of Petty Sessions. It was held that, since the debtor could have applied to have "the action" in the Court of Petty Sessions transferred to the District Court and he could then have contested his counterclaim, set-off or cross-demand in "the action", the debtor failed to satisfy the requirements of s.40(1)(g). Lockhart J. said (at pp 428-9):

"It was submitted on behalf of the judgment debtor

that, if he invoked the procedure afforded by

s.12(2), the action in the District Court would have

been a different action from the action in the Court

of Petty Sessions and that, in the result, his

counterclaim, set-off or cross demand propounded in

the District Court would have been one that he could

not have set up in the action in which the judgment

was obtained, namely the action in the Court of

Petty Sessions.

Upon a defendant invoking the procedures afforded by

s.12(2), the Registrar of the Court of Petty

Sessions is required to order that 'the action' be

transferred to the District Court; and when that

order is made the Registrar of the Court of Petty

Sessions is required to transmit the whole record of

'the action' to the Registrar of the District Court:

s.12(3).

After 'the action' has been transferred to the

District Court, all proceedings 'therein' shall be

taken in the District Court 'as if the action had

been commenced therein on the date on which the

plaint commencing the action was filed': s.12(4).

It is plain that it is the same action that is

transferred from the Court of Petty Sessions to the

District Court, pursuant to s.12, and continued in

the District Court. The very notion of 'transfer'

suggests this, as does the language of s.12 itself.

Indeed, any other construction would lead to curious

and anomalous results. One example suffices. A

plaintiff may file a plaint in a Court of Petty

Sessions one month before the expiration of the time

limited by the relevant limitation of actions

legislation; yet, because he sues for more than

$1,250 he may find himself, say, three months later,

necessarily in the District Court if the defendant

calls in aid s.12. If his action in the District

Court is a fresh action, the defendant may plead the

Statute of Limitations and defeat the plaintiff's

claim. That would be a conclusion which I would be

loath to draw in the absence of the plainest

language.

Section 123 is couched in language that clearly

assumes the continuance in the District Court of the

same action that was commenced in the Court of Petty

Sessions. All that has happened is that the action

is to be continued in the District Court because of

the amount of money involved.

If s.40(1)(g) had used the words 'being a

counterclaim, set-off or cross demand that he could

not have set up in the court in which the judgment

or order was obtained' probably the result would be

different; but this is not the language of par (g)

The relevant provisions of the District Court Act and the District Court Rules

21. The relevant jurisdictional limits of the District Court are dealt with by the following provisions. By s.44(1)(a) of the District Court Act, the District Court has jurisdiction to hear and dispose of any personal action at law where the amount claimed does not exceed $100,000, whether on Balance of account or after an admitted set-off or otherwise. By s.50, a plaintiff who has a cause of action for more than the amount for which an action may be brought on that cause of action may abandon the excess. (A similar provision is found in the District Court Rules dealing with cross-claims: see Part 20 r.2.) By s.51(2), where the Court would not have jurisdiction to hear and dispose of an action or cross-claim by reason only of the fact that the amount claimed exceeds $100,000, the Court shall have jurisdiction to hear and dispose of that action or cross-claim if a party to the action filed a memorandum of consent in respect of the action or cross-claim.

22. Section 145 of the District Court Act provides for the transfer of proceedings to the Supreme Court in the terms previously stated. Removal depends upon the exercise of the Supreme Court's discretion, but it has been said that the discretion appears to be "extremely wide" (see O'Grady, District Court Practice at p 229).

Were the debtors "unable" to set up their cross-claim in the action in which judgment was obtained

23. In my opinion, it cannot be said that Mr and Mrs Franks were "unable" to set up their cross-claim in the proceeding in the District Court. It was clearly open to them to pursue their application under s.145 of the District Court Act to transfer the proceeding to the Supreme Court. They elected not to do so, but there is no reason to suppose that the discretion to transfer would not have been exercised in their favour if they had requested the transfer. That being so, the present case falls squarely within the observations of Lord Greene previously cited. This result is also consistent with the reasoning of Lockhart J. in Re Racheha above.

24. I propose to grant appropriate relief to GIO, with costs. I will make the following orders:

1. Declare that the Court is not satisfied that

the debtors have a counter-claim, set-off or

cross-demand as is referred to in s.40(1)(g) of

the Bankruptcy Act 1966.

2. Order that the debtors pay the creditor's costs of

the application.