Rixon v Bryett, in the matter of Rixon

REASONS FOR JUDGMENT 1 This judgment concerns whether time for compliance with a bankruptcy notice should be extended under s 41(6A) of the Bankruptcy Act 1966 (Cth) ("the Act"). The issue arises in the following context. 2 The judgment creditor, Mr Christopher Gary Bryett, is a solicitor. The judgment debtor, Mr Geoffrey Alfred Rixon, had been his client. On 14 March 2000 the judgment creditor commenced proceedings in the District Court of New South Wales to recover fees allegedly owing from the judgment debtor. They were, at least in part, fees for professional services provided by the judgment creditor to the judgment debtor in relation to proceedings in the Family Court of Australia. On 4 May 2000 the judgment debtor obtained default judgment but on 25 May 2000 the judgment debtor moved to have the judgment set aside. After several adjourned hearings, the motion to set aside the default judgment was dismissed on 25 August 2000 when the judgment debtor did not appear. On 30 August 2000 a further application was made by the judgment debtor to set aside the default judgment. However on 8 September 2000 agreement was reached between the parties compromising the judgment creditor's claim on terms. Consent judgment was entered. While is not entirely clear from the material before me what the terms of the arrangement were, it appears the judgment debtor defaulted on the agreement with the result that the amount owing under the judgment was $65,528.88. 3 On 18 December 2000 the judgment debtor was served with a bankruptcy notice issued at the instance of the judgment creditor. The notice demanded payment of the $65,528.88 plus interest (a total of $67,277.70) within 21 days. On 5 January 2001 the judgment debtor made application in this Court to set aside the bankruptcy notice on two grounds. The first was that proceedings to set aside the original judgment had been instituted (s 30 and s 41(6A)) and the other was that the judgment debtor had a counter claim, set off or cross demand that could not be set out in the original action and is equal to or exceeding the amount claimed in the bankruptcy notice (s 41(7)). Accompanying the application was an affidavit which revealed nothing about the nature of the cross-claim other than the asserted fact that it exceeded the amount in the bankruptcy notice and that it could not have been set up because documents were not available to the judgment debtor's solicitors. 4 Also on 5 January 2001, the judgment debtor filed an application in the District Court seeking to set aside the consent judgment. That application was dismissed on 16 March 2001 by Judge Gibb when there was no appearance for the judgment debtor. In the meantime the application to set aside the bankruptcy notice had been before a Registrar of this Court on two occasions. It again came before a Registrar of the Court on 20 March 2001 and yet again on 3 April 2001 when the matter was referred to me. 5 On the morning of 3 April 2001 I gave directions about the hearing of the application to set aside the bankruptcy notice and fixed the application for hearing on 25 June 2001. An issue arose about whether time for compliance with the bankruptcy notice should, in the interim, be extended. The judgment creditor raised several issues including that there was no application to set aside the judgment on foot. He said the application of that character had been dismissed on 16 March 2001. I adjourned the matter to 4:00pm in the afternoon of 3 April 2001. The judgment debtor did not appear at the appointed time and I commenced to give judgment. Before pronouncing orders the judgment debtor appeared and produced a sealed copy of a notice of motion that had been filed in the District Court that day purportedly seeking to set aside the judgment on which the bankruptcy notice was based. The judgment debtor assured me the application to the District Court would be heard that Friday, 6 April 2001. On the application of the judgment debtor, which was opposed, I adjourned the matter in this Court to 9.00am on 11 April 2001. At that time I was informed that the application to the District Court had been dismissed the previous Friday and I was invited by the judgment creditor to deal with the application for the extension of time to comply with the bankruptcy notice. The judgment debtor indicated he wished to secure legal assistance and, to that end, applied for the matter to be stood down to later that day. I acceded to that application though it was opposed. In the afternoon of 11 April 2001 a pro bono solicitor appeared for the judgment debtor. The judgment debtor was not then in Court but after a short period he appeared and gave to his solicitor a sealed copy of a further notice of motion filed in the District Court which was tendered. 6 It is against this background that it is necessary to determine whether time for compliance with the bankruptcy notice should be further extended. The relevant provisions are s 41(6A),(6C) and (7) of the Act which 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. (7) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor 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." 7 It can be seen that the power of the Court to extend time for compliance with a bankruptcy notice can arise in one of two situations. Both situations involve the recipient of the notice taking specified action before the time for compliance with the notice has expired. The action can be either to make application to this Court to set aside the bankruptcy notice or to institute proceedings to set aside the judgment or order founding the bankruptcy notice. The nature of proceedings of the latter type have recently been discussed by a Full Court in Conway v Jackson [2001] FCA 230. It is at least implicit in s 41(6C) that an application can be made to the Court to extend time on the ground that proceedings to set aside the judgment have been instituted. There is no express requirement that such an application be made as an adjunct to an application to set aside the bankruptcy notice itself. This appears to be recognised in the Federal Court Rules. Order 77 r 13 makes provision for an application to set aside a bankruptcy notice as well as and in the alternative to an application for an extension of time. That is not to say, of course, that the recipient of a notice might not apply to set aside the bankruptcy notice and also apply for an extension of time to comply with it. It is to be remembered that an act of bankruptcy can be committed by non-compliance with a bankruptcy notice even if the judgment on which it was founded was later set aside: see Guss v Johnstone [2000] HCA 26, (2000) 171 ALR 598 at par [58]. 8 If the application to set aside the bankruptcy notice is made on the ground that the judgment debtor had a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt which could not been set up in the action in which the judgment was obtained then it is not necessary for the judgment debtor to apply for an extension of time in which the comply with the bankruptcy notice. That is because time is automatically extended by s 41(7) though it remains necessary for the affidavit accompanying the application to set aside the bankruptcy notice to provide adequate particulars of this specific ground: see Thomas v St George Bank Ltd [1999] FCA 166. In this case s 41(7) was not enlivened having regard to the transparently deficient affidavit filed on 5 January 2001. 9 However the Court has a wide power to set aside a bankruptcy notice. As Neaves J said in Re Lentini; ex parte Lentini v CSR Ltd (1991) 29 FCR 363: "It must be accepted that the court has a wide discretion to set aside a bankruptcy notice where it is satisfied that the interests of justice require it to do so: see Re Taylor; Ex parte Deputy Commissioner of Taxation (Cth) (1983) 74 FLR 377 at 379. The discretion may be exercised so as to set a notice aside where it is shown that the judgment upon which the notice is based has itself been set aside in proceedings of the kind to which s 41(6A)(a) refers. It may also be so exercised where the judgment on which the notice is based has been shown, on appeal, not to be correct. Another situation in which a notice may be set aside is where, notwithstanding the existence of the judgment on which the notice is based, the court is satisfied that there is a dispute genuinely based on substantial grounds as to the correctness of that judgment. It must also be accepted that, pending the hearing and determination of an application to set aside a bankruptcy notice, the court may, provided the requirements of s 41(6A) have been satisfied, extend the time for compliance with the requirements of the notice. As has been said on a number of occasions in this Court, the power to extend the time for compliance with the requirements of a bankruptcy notice is a power conferred in aid of the power to set aside the notice itself: see, for example, Re Sterling; Ex parte Esanda Ltd (at 129-130, 131-132); Re Briggs; Ex parte Briggs v Deputy Commissioner of Taxation (WA) (1986) 12 FCR 310 at 315. Unless the time has been extended, the setting aside of the notice will not affect an act of bankruptcy already committed by reason of the non-compliance with its requirements: see Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378 at 381: Re Hayes; Ex parte Thomas Borthwick & Sons (Australasia) Ltd (1970) 18 FLR 216; Clyne v Deputy Commissioner of Taxation (1983) 57 ALJR 673; Re Vella; Ex parte Seymour (1983) 67 FLR 287. The time for compliance with the requirements of a bankruptcy notice may be extended after the expiration of the time limited by the notice for compliance provided an application to set aside the notice is made within the time so limited: see Streimer v Tamas (1981) 54 FLR 253; Thurgood v National Bank of Australasia Ltd (1981) 53 FLR 51." 10 For reasons which I discuss shortly, the width of the Court's power to set aside a bankruptcy notice assumes some significance in the present proceedings. However it is necessary to consider the operation of s 41(6C) in the present context. The power to extend time conferred by s 41(6A) is enlivened if either of the conditions precedent identified in pars (a) or (b) is satisfied: see Re Carter; ex parte National Mutual Trustees Ltd (1995) 57 FCR 185. In that matter, Gummow J decided he had power to extend time even though the application to extend time and the application to set aside the bankruptcy notice were filed several months after the time for compliance with the bankruptcy notice had passed. That was because at the expiration of the time for compliance with the bankruptcy notice, there were proceedings on foot in the District Court (the Court in which the judgment founding the bankruptcy notice had been obtained) to set aside the judgment. In the present case the proceedings to set aside the judgment were instituted before the expiration of the time for compliance with the notice. If the existence of those proceedings was the only source of jurisdiction to extend time (because the only condition precedent to jurisdiction was that identified in par (a)) then the judgment debtor would confront formidable difficulties. I say that because by the time I came to consider the question of whether time should be extended, the proceedings instituted to set aside the judgment had already been dismissed. It appears to me to be strongly arguable that it is those proceedings that must be considered when applying s 41(6C) and, if so, the Court would probably be compelled to form the opinion that the proceedings were not being prosecuted with due diligence if they had been dismissed. If so, the power to extend time could not be exercised. 11 However in the present case the Court's jurisdiction to extend time has been enlivened by both the institution of proceedings to set aside the judgment and also the application to set aside the bankruptcy notice. It is necessary, at this point, to say a little more about the grounds on which the judgment debtor now seeks to impugn the judgment on which the notice is based. They were only revealed in this Court on the afternoon of 11 April 2001. Section 123 of the Family Law Act 1975 (Cth) empowers the Judges of the Family Court of Australia to make rules of Court. The rules presently in force, the Family Law Rules, deal with a range of matters including the manner in which the accounts of legal practitioners for costs associated with proceedings under the Family Law Act 1975 (Cth) are to be prepared. Order 38 deals generally with the question of costs. Order 38 r38 requires a solicitor to serve on a person liable to pay costs a document called a notice of rights. One of the matters that the notice must contain is a statement that if the account of the solicitor was not in the form of a bill, the person liable could request a bill. Order 38 r42 requires a bill to be in a particular form including that each item of work is distinctively numbered and provides sufficient detail to enable the bill to be taxed. Order 38 r39 directs that a solicitor must not commence proceedings to recover costs unless, relevantly, the solicitor has served on the person a notice of rights. The rules appear to create a scheme that prevents a solicitor suing for his costs unless the person liable has been given a notice which tells the person they can seek an itemised bill. 12 The significance of these provisions in the Family Law Rules in the present matter is that it was common ground that the judgment creditor did not serve on the judgment debtor a notice of rights and that the account given to the judgment debtor did not contain numbered items of work done. In those circumstances it presently appears O 38 r39 prevented the judgment creditor from doing what he did, namely commence proceedings in the District Court to recover costs for professional legal work performed in relation to proceedings under the Family Law Act 1975 (Cth). The conduct of the judgment debtor in this Court (and probably also the District Court) has not been acceptable even allowing for the fact that he has, from time to time, been representing himself. For example he assured me on 3 April 2001 that the notice of motion he had filed that day in the District Court would be heard on Friday 6 April 2001 yet, on that Friday, he applied for the adjournment of the notice of motion. He has also apparently failed to comply with directions given by this Court. Nonetheless the point he now raises about non-compliance with the Family Law Rules itself raises questions of broader public importance concerning the administration of justice. 13 Even accepting, as I was informed by the judgment creditor, that the legal advisers to the judgment debtor and the judgment debtor knew that the rules had not been complied with when the consent judgment was entered in the District Court, that does not alter the fact that the judgment creditor may well have acted in contravention of the Family Law Rules in commencing the proceedings in the first place. While this issue has been obscured by the advocacy of the judgment debtor: see Neil v Nott (1994) 121 ALR 148 at 150, and his failure to prosecute with any competence or diligence the applications to set aside the judgment, the institution of the proceedings in the District Court by the judgment creditor in apparent contravention of the Family Law Rules is a matter that may have a material bearing on the question of whether the bankruptcy notice should be set aside. 14 At at least one point during the various hearings, and more clearly in the supplementary written submissions, the judgment creditor has made the point that the costs sought to be recovered in the District Court include professional legal costs for matters which did not concern proceedings under the Family Law Act 1975 (Cth). These other costs apparently amount to $10,126. Even accepting this is so, it does not alter the fact that as to at least part of the judgment amount (and probably most of it), judgment was obtained in proceedings that, as to that part, arguably should not have been instituted. 15 In the present circumstances, I do not view the broad power to extend time conferred by s 41(6A) as constrained by s 41(6C) because the application to set aside the bankruptcy notice appears to raise issues that do not arise in the usual situation where there is, on foot, no more than a bare application to set aside the judgment. That is, a situation where the ultimate issue is likely to be whether the notice should be set aside because the underlying judgment has been set aside. In this case the proceedings in which the judgment was obtained should, it presently appears, never have been commenced. A bankruptcy notice can be set aside because the judgment upon which it was founded was tainted by illegality: see Wilkinson v Osborne (1915) 21 CLR 89 and Makhoul v Barnes (1995) 60 FCR 572 at 580. In my opinion there is an arguable ground raised obliquely be the judgment debtor for setting aside the bankruptcy notice that does not depend on the success or failure of the application in the District Court to set aside the judgment or, indeed, the extension of such an application. Accordingly, I am not confronting a situation where the existence of an application to set aside the judgment constituted the only basis on which time might be extended. If I was then s 41(6C) would operate in the way earlier discussed and deny the power to extend time. 16 I order that the time for compliance with the bankruptcy notice be extended till the application to set aside the bankruptcy notice has been heard and determined. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.