"If the Registrar is satisfied that an application:
(a) raises a counter-claim, set-off or cross demand; and
(b) gives sufficient particulars of the counter-claim, set-off or cross demand and of the reasons why the debtor was unable to set up that counter-claim, set-off or cross demand;
he or she must:
(c) fix a date, time and place at which the debtor may appear before the Court to satisfy the Court that he or she has the counter-claim, set-off or cross demand referred to in the application; and
(d) endorse a copy of the application with that date, time and place and return it to the debtor."
The Registrar did issue a notice fixing a date, time and place for the hearing, as required by r 10(4)(c). The matter came on for hearing on the date fixed, namely 3 February 1997. The notice was sent to Mr Boylan, and he attended on that date and time. It is clearly of no substantive disadvantage to him if he did not also receive a copy of his own affidavit endorsed with that date, time and place. In that sense, the complaint is unmeritorious. Had the application made by Mr Boylan complied with r 102 of the Rules, the application would no doubt have been appropriately endorsed. Instead, the endorsement in the circumstances was on a separate document. If that constitutes a non-compliance with the Rules, it does not render the proceeding void: r 195(1). It is too late for Mr Boylan to now seek to have the proceeding declared as irregular: r 195(3). I reject that submission.
I turn to consider whether I am satisfied that Mr Boylan has a counterclaim, set-off or cross-demand equal to or exceeding the amount of the judgment and which he could not have set up in the proceeding in the District Court. I must be satisfied that Mr Boylan has a substantial and bona fide claim which he ought to be permitted to litigate before the bankruptcy proceedings continue: Re James; Ex parte Carter Holt Harvey Roofing (Aust) Pty Ltd (1993) 46 FCR 183.
I have referred at some length above to the course of the proceedings in the District Court. The reasons of Perry J in the Full Court, with which the other members of the Full Court agreed, indicate the nature and outcome of the issues at trial in the District Court and on the appeal. I have considered carefully the material in the two affidavits of Mr Boylan to which he has referred and the other matters to which he referred on this hearing. Mr Boylan sought to demonstrate that he fell within the formulation of s 40(1)(g) in two ways. Generally, he submitted that, despite the decision giving rise to the judgment, he was not indebted to Mr Farthing or Alegna at all, that is that the judgment was wrong. Additionally, he sought to show that he had, or was entitled to, a one-third shareholding in Alegna and that his claim to that interest had not been adjudicated upon and was of substantial value, and was one which he could not pursue in the District Court proceedings. As appears below, those two contentions are inter-related.
There are circumstances in which the Court will inquire into the validity of a judgment debt, but generally only where the judgment has been obtained by fraud or collusion: Corney v Brien (1951) 84 CLR 343; Bourke v Beneficial Finance Corp Ltd (1994) 124 ALR 716. But until the Court does so, the pre-existing obligation of the debtor merges into a new obligation in the form of the judgment debt: Corney, per Fullagar J at 353-354. In Olivieri v Stafford (1989) 24 FCR 413 at 424 Beaumont J said:
"As has been said, a court of bankruptcy is concerned to inquire into the "reality" of the matter in hand. Here the "reality" of the matter is that the merits of the respondents' claim have been demonstrated to the satisfaction of one judge of the District Court and another judge of that Court has declined to disturb the judgment. As a matter of substance, it is appropriate, in all the circumstances, for a court of bankruptcy to treat what happened in the two hearings in the District Court as a trial of the merits of the respondents' claim. That is to say, a court of bankruptcy should, I think, accept that a process of adjudication in the District Court has established that the underlying transactions created a true debt which could, in turn, provide a proper foundation for the entry of a judgment in respect of which a bankruptcy notice could properly issue."
Beaumont J added (at 426):
"It is one thing to look behind a judgment obtained in default of the taking by a defendant of a procedural step. In such a case, there has been no adjudication of the merits of the dispute. It is a different thing to ask a bankruptcy court to embark upon an investigation of all the details of the underlying transactions between these parties where the matter has already been the subject of an adjudication in the District Court on two occasions."
In the present case, the judgment was given after a full hearing in the District Court and has been upheld on appeal by the Full Court. The remarks of Beaumont J apply with equal force to the present circumstances.
I am not persuaded in any event that, as a matter of reality, sound reasons exist to determine that there is no debt owing as identified in the judgment. Mr Boylan's contentions to the contrary amounted to a critique of the findings and reasons for the District Court decision and of the reasons for the Full Court decision, much as expressed in his summary of argument to be put to the High Court. He complains of findings of fact made in part based upon the trial judge's conclusions as to the reliability of certain evidence in preference to that of Mr Boylan. He refers to selective passages in the evidence at the trial which, he submitted, were not consistent with the overall findings. He sought to tender selected pages of the transcript of the trial to make that point, but did not tender the whole of the transcript. He sought to tender the Australian Securities Commission printout of 14 May 1997 containing Alegna's Annual Return for the year to 30 June 1994 and selected pages from the financial records of Alegna showing in part its balance sheet at 9 January 1994 and 30 June 1993 to mount a challenge to the reliability of one witness at the trial, upon whose evidence the learned trial judge acted. All but the 1994 Annual Report were in evidence at the trial. I indicated I would rule on the admissibility of that material when giving judgment in this matter. I decline to receive it because it is selective only, and clearly from the reasons of the trial judge not reflective of, or representative of, all the evidence on the topics it addresses. Its content, as contended for by Mr Boylan, could not in the circumstances result in this Court on that selective and limited material concluding that in reality there was no debt. The issue as to the reliability of the accounting evidence generally was addressed at some length by the trial judge. The reasons demonstrate that the sort of arguments now put on that topic were put at the trial. The correctness of those findings was unsuccessfully challenged before the Full Court. Similarly with respect to the issue as to the reliability of the evidence of Mr Farthing: it was a matter fully litigated at trial, and selective and limited reference to the transcript of his evidence does not in my view provide any basis for concluding that the trial judge's acceptance of his evidence to the extent he did so was erroneous, or that there is in reality no debt of the nature reflected in the judgment.
The other aspect of Mr Boylan's claim was to assert a counterclaim, set-off or cross-demand, namely his claim to a one-third interest in the shares in Alegna. It is only necessary for Mr Boylan to show that he has "a fair chance of success" on that claim, including as to its quantum, to satisfy the Court that the bankruptcy notice is of no effect: Ebert v Union Trustee Co of Australia Ltd (1968) 104 CLR 346 at 350; Brink (above at 141); Re Graves; Ex parte Graves v Seggie (Federal Court, Sackville J, 29 August 1997, unreported).
The claim is based upon the claimed arrangement from about 1 September 1992 referred to above. In fact, no shares in Alegna were ever issued to Mr Boylan. The matter was specifically raised at the completion of the hearing before the trial judge on 8 November 1996. Counsel appearing for Mr Farthing and Alegna specifically sought an order by way of declaration that Mr Boylan was not a shareholder of Alegna and had no interest in Alegna. That order was refused. As the transcript discloses, the trial judge at the time expressed the view that he had made such determinations as he was required to on the issues litigated between the parties, and that his reasons for judgment would speak for themselves. He said that he had no jurisdiction to make that declaratory order at that point because he had already entered judgment in terms of the judgment. The hearing was a brief one.
The reasons for decision of the trial judge indicate that the claim for a one-third interest in Alegna was pleaded by Mr Boylan. The trial judge's recital of the evidence in his reasons indicates that Mr Farthing's evidence was that that arrangement was conditional upon the purchase of some further land, and that that condition was never fulfilled. There was clearly a factual dispute on the matter, which was part of the context of the arrangement of 17 January 1994 for a parting of the ways and a "one-third/two-third division of 'everything'". Mr Boylan disputed in evidence at the trial the detailed terms of that arrangement. The trial judge found, relevantly for present purposes, that:
"However, bearing in mind all of these matters, it was agreed that as of September 1992, Mr Boylan would be a one-third owner of the company."
and, as to the arrangement of 17 January 1994:
"3. They decided to terminate the above agreement by negotiations on a one-third/two-third's division of "everything".
4. Page 2 of the agreement described how they would run their separate yards and stated that "wholesale stock value to go into FMC Acc No 7790 12872 upon sale. Selling yard to retain profits from 9-1-94". Then "Acc No 7790 12899 to be Steve's account from 9 -1-94".
5. The agreement then provided for a final accounting by way of "arbitration"."
The trial Judge found that Mr Boylan, by his conduct, had repudiated the basis of that agreement. His Honour proceeded to determine the respective rights and liabilities of the parties on the basis that the relationship between them was at an end. He thus made ultimate findings as to their respective entitlements up to January 1994 resulting in the judgment. He was at pains to stress that he had provided Mr Boylan with the opportunity of contesting the accounting evidence presented by Mr Farthing and Alegna on that score. In the Full Court, Perry J after addressing those findings, observed:
"But if the agreement was to be regarded as repudiated by Mr Boylan and the repudiation was accepted by the appellant, the basis upon which any final accounting between the parties should proceed, and the associated question of damages between them for damage of contract, would become problematic.
But the trial did not go forward on that basis. Instead, it was accepted by both sides that there should be an accounting drawn up on the footing of the application of the agreement of 17 January 1997.
There was some dispute as to the construction of the agreement. But at the end of the day, it was common ground that the agreement was to govern the final accounting between the parties.
…
The argument on appeal confirms what I have indicated. It was at no time suggested by the appellant on the appeal that the case involved other than an ascertainment of what he suggested to be a true construction of the agreement of 17 January 1994 and its application to the state of affairs between the parties, as an instrument to determine what balance was due by way of a final adjustment between them."
In my judgment, those matters demonstrate that the trial leading to the District Court decision, and the appeal before the Full Court, proceeded on the basis that, whatever arrangement was made for Mr Boylan to obtain an interest in Alegna in September 1992, by virtue of the later arrangement of 17 January 1994 any earlier entitlement to an interest in Alegna was no longer pursued. The relationship between the parties was at an end. The issue remained, and was determined, as to how a proper accounting should be made between them for and during the period of their relationship.
I am not satisfied that Mr Boylan has a counterclaim, set-off or cross-demand of an amount exceeding the amount of the judgment debt, and one which he could not have set up in the action or proceeding in which the judgment or order was obtained. On the contrary, in my judgment, all the issues now raised by him were ventilated and adjudicated upon in the District Court decision. I am also not satisfied that any such claim, even if available, is of an amount exceeding the judgment debt. The evidence as to the real balance sheet position of Alegna as presented to me is sparse, but it does not in my view disclose a foundation for Mr Boylan to be able to show that it was, or is, sufficient for the value of his claimed one-third interest in Alegna to be of the order of the judgment or any amount approximating that amount. Mr Boylan also deposed to having a claim for unliquidated damages which "flow to me from the actions of the defendants, together with the lack of fiduciary care and responsibility exhibited by the directors." There is no other cogent evidence adduced as to the nature and quantum of those claims. They do not emerge in the affidavit which enlivened s 41(7). In my judgment, those assertions as to further claims do not constitute qualifying claims under s 41(7): Brink (above, at 142); James (above, at 188-189).
As a matter of substance, it was put also that the Court should go behind the judgment and that it is apparent that in fact no debt is owed by Mr Boylan to Mr Farthing. It is said that any debt which exists is owed by Mr Boylan to Alegna. This argument is an alternative to Mr Boylan's principal contention in respect of the application under s 41(7) that there is no amount owing which, in terms of s 40(1)(g), can found the bankruptcy notice. I am not of the view that I should do so. As the reasons both of the trial judge and of the Full Court disclose, Mr Farthing's and Alegna's affairs were closely intertwined and at least for a period Mr Boylan's arrangement was with Mr Farthing and then, after Alegna's introduction, still in part with Mr Farthing as Mr Farthing and Mr Boylan each had to make contributions towards the ongoing operation of the business at the two car yards through Alegna. Furthermore, it does not appear that the fact that the judgment was in favour of both Mr Farthing and Alegna was a matter the subject of complaint before the Full Court. If it were the case that Mr Farthing was in the circumstances not in reality entitled to any judgment upon the basis on which the trial judge proceeded, the Full Court was the appropriate forum to pursue the matter. I am not persuaded that I should make such a determination, and certainly not without the benefit of all the evidence before the trial judge. I reject the submission. I do not therefore need to address the question of whether, even if correct, it would be of any significance where Alegna in any event is one of the applicants for the bankruptcy notice and on this scenario has in its favour a judgment for $105,005.37.
There remains therefore the question of whether under s 41(6A) I should nevertheless in effect grant a stay of the operation of the bankruptcy notice, by extending the time for compliance with it by a further indefinite period, whilst Mr Boylan's application for special leave to appeal to the High Court falls to be determined.
Section 41(6A) and (6C) provide:
"(6A) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:
(a) proceedings to set aside the 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 the 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."
Mr Farthing and Alegna accepted that the application filed on 14 September 1994 comprised in part an application made under s 41(6A) at a time when it was competent to do so. The institution of an appeal against the judgment may constitute an application to set aside the judgment under s 41(6A)(a): Bryant v Commonwealth Bank of Australia (Federal Court, Davies, Foster and O'Loughlin JJ, 11 November 1994, unreported); Re Baker, Ex parte Baker v Staples (Federal Court, Kiefel J, 4 September 1995, unreported); Re Dittes and Clyde Industries Ltd (Federal Court, Einfeld J, 10 December 1992, unreported). I am satisfied therefore that the Court has power to extend time for compliance with the bankruptcy notice under that subsection.
The power under s 41(6A) is discretionary, but that general discretion is subject to s 41(6C). It was not contended that the application is not a bona fide. Having heard Mr Boylan's submissions, I accept that he is acting bona fide in pursuing the application for special leave to appeal to the High Court. He clearly has a strong belief that the adverse outcome of the District Court decision is erroneous. Mr Farthing and Alegna also did not contend that Mr Boylan was not prosecuting that application with due diligence, and I have not formed the opinion that Mr Boylan is not prosecuting that application with due diligence. Accordingly, the application is to be determined in the Court's general discretion.
In Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264, Lehane J at 269 quoted with approval a passage from the reasons for decision of Sheppard J in Re Geard; Ex parte Reid (Federal Court, 11 February 1994, unreported) in which Sheppard J said:
"The critical question then is how that discretion should be exercised. As earlier stated, the parties have made, both orally and in writing, detailed submissions concerning the issues which will arise for determination on the appeal and have invited the Court in effect to express a view, provisional though it may be, on the likely outcome of the appeal. To a degree I have felt obliged to look at the matter for myself, but I think it most undesirable that a judge of this Court should in effect undertake some provisional review to determine the correctness or otherwise of the judgment of another court especially when that judgment is under appeal to the Court of Appeal which has jurisdiction to hear appeals in the normal course. I prefer to approach the matter in a different way.
The debtor has not made any application for a stay of proceedings pending the outcome of the appeal. Why he has not done so is not clear to me but the judgment which has been recovered against him is a final judgment and execution upon it has not been stayed it would seem to me to require quite special circumstances before a court exercising jurisdiction in bankruptcy would, in effect, do what has not been done in the court in which the judgment has been obtained by extending the time for compliance with the bankruptcy notice when no application to stay the judgment has been made. If one were to contemplate the taking of such a course, one would usually require evidence of the means of the debtor and would wish to consider whether or not it were appropriate to order that security for the amount of the judgment should be provided. Those are matters which a court exercising jurisdiction to stay the execution of a judgment would wish to consider.
A further factor is that this is an application to extend time for compliance with a bankruptcy notice; it is not the hearing of a bankruptcy petition. The refusal of the application will not affect the status of the debtor but it will mean that he, in all probability, will commit an act of bankruptcy. That act of bankruptcy will be available to the petitioning creditors or to any other creditor upon which to base a bankruptcy petition at any time in the period of six months after the act of bankruptcy has been committed. Otherwise the debtor's position will remain unaffected by what the Court does.
If the appeal is ultimately dismissed and the judgment stands with the consequence that the bankruptcy proceedings go on, it may be quite important to the petitioning creditor, whoever he or she may be, to the general body of creditors and to the trustee in bankruptcy, that there be, for the purposes of the administration of the bankrupt estate, an act of bankruptcy committed at an earlier time than would be the case if this application were acceded to."
That approach has been followed also by Whitlam J in Re Smith (Federal Court, 4 May 1994, unreported) and by Sackville J in Agrillo v Codiposto (Federal Court, 16 December 1994, unreported). Lehane J observed at 270 that, applying that process of reasoning, the commission of an act of bankruptcy is of a different order of gravity from the making of a sequestration order, and that it is also relevant to have regard to the interest of both the judgment creditor and other creditors of the judgment debtor in ensuring that, if ultimately a sequestration order is made, the relevant act of bankruptcy occurs at an earlier rather than a later time.
Mr Boylan submitted, perhaps to his detriment, that I should however follow the approach of Kiefel J in Baker (above) in that I should consider at least whether it is "arguable" that his application for special leave to appeal and, if granted, his appeal to the High Court will succeed. That view also seems to be reflected in the decision of the Full Court in Bryant (above). In that case, one ground of appeal raised the question whether it was correct to have regard to the prospects of success of an appeal in determining whether or not to exercise the discretion under s 41(6A) of the Act to extend the time for compliance with the bankruptcy notice. The Full Court observed that the trial judge "was obliged to form some view of the prospects of success", and that it was correct to have taken into account the assessment that those prospects were "slight". Similarly, in McLeod v Falvery (Federal Court, Cooper J, 20 September 1995, unreported) Cooper J said:
"… it is not inappropriate for the Court to seek to form a view as to whether or not there is prima facie any reasonable prospect of success having regard to the arguments contended for by the appellant or which will be contended for by the appellant on the appeal."
His Honour then formed the opinion that the prospects of success were not good. His Honour then proceeded, as he was obliged to do, to take into account any other relevant circumstances going to the exercise of the discretion. That included the potential disadvantage to other creditors of the applicant for the extension of time by delaying the time of any act of bankruptcy. In that case, his Honour was offered, and accepted, an undertaking by the judgment creditors not to proceed to bankruptcy on any petition filed by them pending the hearing and determination of the appeal. No such undertaking has been offered here.
I do not need to determine for myself which is the better or more correct approach to the exercise of the discretion under s 41(6A). That is because, on any view of the matter, I do not think it appropriate to make the order sought. In Byron (above), Lehane J in fact was confronted with similar considerations. His Honour said on that score (at 271):
"… as a consideration reinforcing the Court's reluctance to extend time in the absence of a stay, that an appeal has already been dismissed and the proceeding in question is (as here) an application for special leave to make a further appeal."
It seems to me that, consistently with his Honour's approach, it may be appropriate to consider the grounds upon which special leave to appeal to the High Court is sought to determine whether there are more than slight prospects of obtaining special leave to appeal. Although the High Court often declines to grant special leave to appeal because the decision from which the leave is sought is not attended with sufficient doubt, there are as indicated above matters which the High Court may address which do not of themselves involve any assessment of the correctness of the decision from which leave is sought but focus on the nature of the issues to be raised and the context in which they arise. To consider such matters would not attract the concern expressed by Sheppard J about reviewing the correctness of another court's decision.
On the material before me, Mr Boylan has made no application for a stay of the decision of the Full Court. No explanation has been proffered for having not pursued that course. There is no evidence that he has assets to meet the judgment, nor any proposal to provide security in respect of it. The refusal of this application will not affect his status, although he will as a result probably commit an act of bankruptcy. I know nothing of any other creditors. Although the order sought would delay the commission of any act of bankruptcy, and so delay the time from which the six months period relating to that may run, Mr Farthing and Alegna have not put anything to indicate any particular significance by reason of that matter. Their apparent delay in having the matter relisted following the Full Court decision does not indicate any critical timing considerations on their part.
On balance, however, I do not think it appropriate to exercise my discretion in the manner sought by Mr Boylan. The balancing of the considerations does not lead me to do so. There are no special circumstances identified by Mr Boylan which warrant the exercise of that discretion.
I am confirmed in that conclusion by my consideration of the prospects of Mr Boylan obtaining special leave to appeal to the High Court. I have carefully considered the application for special leave itself, and the summary of argument apparently filed in support of that application containing amongst other things the proposed notice of appeal. In my view Mr Boylan has little prospect of succeeding on that application. There is no particular matter of public importance identified. What is apparent is that the District Court decision and the Full Court decision involve a careful and detailed analysis of a complicated series of arrangements between Mr Boylan and Mr Farthing and Alegna over a period of some two years, and the determination of facts as to the nature of those arrangements from time to time and the consequences of them. The decision is very much a decision on the facts of the particular case. There is no issue of general application to which the decision would apply. Furthermore, the decision of questions of fact, to large measure turned upon issues as to credit as between Mr Boylan on the one hand and Mr Farthing on the other.
Accordingly, at present I refuse the order sought under s 41(6A). I propose however to extend the time for Mr Boylan to comply with the bankruptcy notice for a period of fourteen days from today. That will give him a further opportunity to comply with it. I fix that period having regard to the time which has elapsed since the Full Court decision and to the fact that Mr Farthing and Alegna did not demonstrate any apparent urgency in having the bankruptcy notice re-activated following the Full Court decision.
In my view Mr Boylan should pay to Mr Farthing and Alegna the costs of this application. I so order.
I certify that this and the preceding twenty-three (23) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield