Rixon v Bryett, in the matter of Rixon

REASONS FOR JUDGMENT 1 This is an application by Mr Geoffrey Alfred Rixon ("the judgment debtor") to set aside a bankruptcy notice issued under s 41 of the Bankruptcy Act 1966 (Cth) ("the Act"). I repeat a description of the background found in an earlier judgment concerning whether time for compliance with the bankruptcy notice should be extended pending the determination of the application to set it aside: see [2001] FCA 433. 2 The judgment creditor who caused the bankruptcy notice to issue was Mr Christopher Gary Bryett, a solicitor. The judgment debtor 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. 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 the bankruptcy notice. 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 (ss 30 and 41(6A) of the Act) 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. A further notice of motion was filed in the District Court on 3 April 2001 purportedly seeking to set aside the judgment on which the bankruptcy notice was based. That application was dismissed on 6 April 2001. 5 Yet another application to set aside the judgment was filed in the District Court on 11 April 2001. The application raised, as the sole ground, the failure of the judgment creditor to serve a notice of rights on the judgment debtor, as required by the Family Law Rules, before commencing the proceedings in that Court. I should mention that it appears that at least the legal advisers to the judgment debtor knew that the rules had not been complied with when the consent judgment was entered in the District Court. I use the word "appears" because the fact was asserted by the judgment creditor from the bar table and not contradicted, though not proved by admissible evidence. This application to set aside the judgment was dismissed by Judge Twigg on 20 April 2001. I do not have the benefit of the transcript of his Honour's reasons though it was common ground in these proceedings that his Honour said that he was not bound by the Family Law Rules. If this was, in fact, what his Honour said and was the basis on which he declined to set aside the judgment, I do not understand what his Honour meant. However in the absence of the transcript, it is inappropriate that I comment on the basis upon which this last application to set aside the judgment debt was dismissed. It is sufficient to note that the judgment remains in force. 6 It is necessary to explain what a notice of rights is and to refer to other provisions of the Family Law Rules. Those rules have been made pursuant to s 123 of the Family Law Act 1975 (Cth) which empowers the Judges of the Family Court of Australia to make rules of Court. 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. Another aspect of the scheme is that a solicitor and his or her client may enter an agreement concerning costs: see O 38 r28 . Relevantly, such an agreement has to be signed by the client: see O 38 r28(3)(b). The agreement can be in terms which permit the solicitor to charge fees in excess of the scale prescribed under the Family Law Rules. If there is no such agreement then the solicitor must, at least prima facie, charge in accordance with the scale: see O 28 r5. 7 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 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). 8 Order 38 r 39 provides: "(1) This rule is subject to rule 46. (2) A solicitor must not commence proceedings to recover costs from a person (except a legal aid body) unless: (a) the solicitor has served on the person an account for the costs, and a notice of rights; and (b) at least 28 days have elapsed after the later of: (i) the day on which the account was served; and (ii) the day on which the notice was served. (3) A solicitor must not commence proceedings to recover costs from a legal aid body unless: (a) the solicitor has served an account for the costs on the legal aid body; and (b) at least 28 days have elapsed after the day on which the account was served." Rule 46 presently has no relevance. I should also mention that it is common ground that there was no costs agreement signed by the judgment debtor and that the fees charged by the judgment creditor were in excess of the prescribed scale. It was also not in issue that the judgment creditor swore an affidavit in the District Court on 20 June 2000, in opposing the first application to set aside the judgment, in which he said "he held a cost agreement approved and signed by the client". This was false at least in the sense that no such agreement had been signed by the judgment debtor. It appears that the costs sought to be recovered in the District Court included 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, should not have been instituted. 9 The original application to set aside the bankruptcy notice raised two grounds. One was that an application to set aside the judgment had been made. That is no longer relevant. The other ground was that the judgment debtor has 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. Allegations were made in these proceedings by the judgment debtor that the judgment creditor had been negligent. It was contended that an application had been made by the judgment creditor on behalf of the judgment debtor in the litigation with his former wife under a provision of the Family Law Act 1975 (Cth) which had no application to the matter in issue. However even if this were so, the evidence does not reveal any basis for concluding that there existed a counter-claim, set-off or cross demand that could not have been set up in the District Court the way contemplated by the Act, or that it equalled or exceeded the debt in question. 10 Notwithstanding the grounds originally identified in the application in this Court, the substantial issue for determination that emerged during the hearing was whether the failure of the judgment creditor to serve a notice of rights as contemplated by the Family Law Rules and an account in the form contemplated by those rules might provide a basis for setting aside the bankruptcy notice. 11 Broadly similar questions have arisen in this Court (concerning provisions of the Legal Profession Act 1987 (NSW) ("Legal Profession Act") and and its equivalent in other states) in proceedings under the Act though at a point when an application had been made for the sequestration of the estate of the judgment debtor. It is convenient to refer to the relevant authorities before returning to the facts in this matter. 12 In Udovenko v Mitchell (1997) 79 FCR 418, three members of the Udovenko family appealed against orders sequestrating their estates on the basis that the primary judge erred in not going behind the judgment of a Local Court to find that there was no debt due or payable by them either immediately or in the future. The judgment creditor, a solicitor, had obtained judgment against the appellants in the Dungog Local Court in the sum of $25,363 for costs and disbursements when representing the appellants in an earlier action in the Supreme Court. The appellants did not appear in the Local Court proceedings. However, almost two years after the judgment was entered the appellants unsuccessfully sought to have it set aside. One of the issues raised by the appellants in their attempt to have the judgment set aside was the fact that they had not been served with a properly itemised bill by the judgment creditor. 13 In resisting sequestration orders in this Court, the appellants argued, inter alia, that the respondent was not entitled to bring his action in the Local Court because, in contravention of s 198 (nows 192)of the Legal Profession Act, he had failed to give a duly itemised bill to the appellants at least one month before instituting the Local Court proceedings. Section 198 at that time provided: "198.(1) Proceedings for the recovery of costs incurred by a solicitor in transacting any business shall not be commenced or maintained against any person unless at least one month has passed since the person has been given a bill of the costs so incurred. ... ... (4) If the regulations so require, a bill of costs shall be in such form, and contain such particulars, as may be prescribed by those regulations." 14 The Full Court decided the primary judge had erred in failing to exercise his discretion to go behind the Local Court judgment. Carr J, with whom Davies and Foster JJ agreed (although Davies J published some additional reasons for judgment) held (at 429-430): "The cases show that a court of bankruptcy needs to be satisfied that the petitioning creditor is owed the money on which the petition is founded before it changes the legal status of a person to that of a bankrupt. In appropriate circumstances, a judgment against that person in favour of the petitioning creditor will not be enough: Corney v Brien (1951) 84 CLR 343; Wren v Mahony (1972) 126 CLR 212. In the present matter, I do not think that the debt upon which Mr Mitchell relied had been sufficiently established and quantified in law to form the foundation of a bankruptcy notice, let alone a sequestration order based upon failure to comply with that bankruptcy notice. Until the procedure referred to in s 198 has been complied with, Parliament has, in mandatory terms ("shall not") prohibited a solicitor from commencing or maintaining proceedings for recovery of costs. Section 44(1)(b) of the Act relevantly provided (and still provides) that a creditor's petition shall not be presented against a debtor unless the debt: '(i) is a liquidated sum due at law or in equity or partly at law and partly in equity; and (ii) is payable either immediately or at a certain future time; ...' In my view, a solicitor claiming his fees in contravention of the section which was s 198 but is now s 192 of the Legal Profession Act cannot be said to have a debt which is "payable either immediately or at a certain future time" within the meaning of that phrase in the above sub-paragraph. He or she must first give to the client a bill of costs and thereafter at least 30 days must have passed." 15 Carr J went on to discuss the judgment of Hill J in Re Devy; Ex parte BBC Hardware Ltd (1996) 67 FCR 355. In that case, Hill J refused an application to substitute a solicitor, Ms Gurnsy, as the petitioning creditor on the basis that a solicitor to whom fees are owed by a client but who has not issued a bill in proper form, (in that case a bill in conformity with s 22 of the Costs Act 1867 (Qld)), cannot qualify as a petitioning creditor who has a liquidated debt within the meaning of s 44(1) of the Bankruptcy Act 1966 (Cth). That was because there was not a liquidated debt payable either immediately or at a certain future time. 16 Also relevant are the decisions of Northrop J in Re King; Ex parte Gallagher Ryan & Malloney (1994) 54 FCR 493 and Sackville J in Burrell v Connell (1998) 84 FCR 383. 17 Re King; Ex parte Gallagher Ryan & Malloney involved a creditor's petition made by a firm of solicitors against a former client. Northrop J found that the solicitors had not complied with s 61 of the Supreme Court Act 1986 (Vic) when they issued the bill on which the judgment debt was based. That section prohibited a solicitor from commencing proceedings to recover costs unless prescribed steps had been taken to draw and serve a bill of costs. However, his Honour held (at 496-497): "Authorities of both the Federal Court of Bankruptcy and the Federal Court of Australia, support the proposition that a provision such as s 61 of the Supreme Court Act does not prevent a petition being granted provided the debt is in fact in existence. The first authority is that of Re Ferguson; Ex parte F.N. Thorne and Co Pty Limited (in Liq) (1969) 14 FLR 311, a decision of Gibbs J sitting in the Federal Court of Bankruptcy. In that case money was being sought under an agreement which by a statute was illegal, not merely unenforceable. At 320 Gibbs J referred to this aspect of the matter that even if illegality prevented the company from recovering money lent, nevertheless the judgment was in existence and the debt was owing and therefore could be used as the basis for the making of a sequestration order. I incorporate that passage: ..... The other authority referred to is Re Skaff; Ex parte Farrow Mortgage Services Pty Limited (1993) 41 FCR 331 and, in particular, per Drummond J at 235 where his Honour expressed the view that provided the debt is there and is owed, that is sufficient and the Court should not rely upon any procedural defects that might have arisen in the proceedings in the court in which the judgment was given. In these circumstances, in my opinion, the non compliance by the judgment creditor with the provisions of s 61 of the Supreme Court Act does not affect the validity of the judgment. The debt is owed. There is evidence of its existence. It is sufficient to support the bankruptcy notice and the making of the sequestration order. In those circumstances, the ground of opposition as stated on behalf of the judgment debtor is refused." Importantly, his Honour was satisfied, on the evidence, that the amount claimed was owed. 18 Burrell v Connell involved a solicitor seeking a sequestration order against Mr Connell. The petition was based on a failure to comply with a bankruptcy notice founded on a judgment obtained in Kogarah Local Court. The Local Court judgment was based on invoices issued by the solicitor to Mr Connell for professional services and disbursements in respect of proceedings in the Land and Environment Court and a later development application. Mr Connell did not appear at the Local Court and the matter was heard in his absence. On three occasions Mr Connell sought to have the judgment set aside but on each occasion his application was dismissed. In the hearing of the creditor's petition Mr Connell submitted, and it was conceded by the solicitor, that the Local Court proceedings had been instituted in contravention of s 192 of the Legal Profession Act. 19 In his reasons, Sackville J first considered the general principles relating to the power of the Court when exercising the bankruptcy jurisdiction to go behind a judgment debt. His Honour set out at length an extract from his earlier judgment in Re Haddad; Ex parte R W Jordan Pty Ltd (unreported, Federal Court, Sackville J, 20 August 1997) where he held (at 9): "The existence of the judgment is prima facie evidence of the debt and a court will not go behind the judgment as a matter of course: Wolff v Donovan, at 486. A court will, however, more readily go behind a judgment obtained by default, than one obtained following a hearing on the merits: Corney v Brien, at 347, 356-357; Wolff v Donovan at 486; J L Goldring, "Going Behind a Judgment" (1973) 47 ALJ 377, at 378-379. The fact that a debtor has unsuccessfully applied to set aside the judgment, does not necessarily mean that a Court hearing the creditor's petition should not go behind the judgment, particularly where the refusal does not follow an investigation of the merits: Re Johnson; Ex parte Greendale Engineering and Cables Ltd (1967) 11 FLR 335 (Fed Ct of Bkpcy/Gibbs J), at 341. In Corney v Brien, Fullagar J said (at 358) that, where the judgment is by default, the Court will always go behind the judgment if there is what it regards as a bona fide allegation that no real debt lay behind the judgment. This may perhaps state the principle somewhat too strongly, but it emphasises that, if the merits of the case have not been considered, the Court exercising bankruptcy jurisdiction will be more willing to address whether the underlying debt exists." 20 There were four factors which led Sackville J, (at 392) to go behind the judgment debt. First, the solicitor's admission that the Local Court proceedings had been instituted in contravention of the Legal Profession Act. Second, the judgment was obtained in the absence of Mr Connell. Third, Mr Connell had attempted to have the judgment set aside on three occasions and on the final occasion had raised the apparent contravention of the Legal Profession Act. There was no evidence that the Local Court had considered the merits of that claim. Finally, Mr Connell had been unable to obtain a costs assessment because the costs assessor ruled that any entitlement to an assessment had merged in the Local Court judgment. 21 Having decided to go behind the judgment debt, Sackville J was satisfied, on the evidence before him, that the debt on which the petition was based was one which existed at the date of the relevant act of bankruptcy. As for the relevance of the solicitor's contravention of s 192 of the Legal Profession Act, Sackville J noted that the facts differed from those in Udovenko and Re Devy in that the solicitor had issued a bill in the proper form with adequate particulars and itemisation and that he had only contravened the Legal Profession Act by instituting proceedings before the statutory period of 30 days had elapsed from the issue of the bill. His Honour held, (at 398): "It seems to me that this factual difference distinguishes both Udovenko v Mitchell and Re Devy from the present case. Any barrier created by the Legal Profession Act to the enforcement of the Solicitor's right to recover his fees had been removed by mid-July 1995. From that time on, unlike the solicitors in each of the earlier cases, the Solicitor in this case had both a right to payment of his fees and a right to recover them. I do not think that the fact that an irregularly obtained Local Court judgment was in place detracts from this conclusion." 22 While these authorities concerned the failure of a solicitor to comply with statutory requirements associated with rendering accounts to a client, also relevant can be the conduct of the client. That is because the client may have waived any right to rely on the failure of the solicitor to comply with the statutory requirements. The issue of waiver arose in Udovenko where the Full Court found that, although a client my elect to waive his or her rights under the Legal Profession Act, it had not been demonstrated on the facts of that case that the Udovenkos had done so. Davies J held (at 422): "Before the trial Judge and in this Court, the issue of waiver was raised. Counsel for the creditor relied upon the decision of Yeldham J in Dodd v Gillis where his Honour, after examining the relevant authorities, held that a client may expressly waive the protection given to him by such a provision, in that case s 21 of the Legal Practitioners Act 1898 (NSW). In Dodd v Gillis, the submission of waiver was upheld in the circumstance where a detailed statement of account in relation to each of the critical amounts sued for had been provided and the defendant had acknowledged his indebtedness and had agreed to pay the amounts in question. There are no such facts in the present case. The principal matter relied upon by way of waiver is an affidavit by Wolodymyr Udovenko, but that affidavit was sworn and filed after the judgment had been given in the Local Court, after the bankruptcy notice had been served and after the petition had been filed. It does not and could not constitute a relevant waiver. The only other matter relied upon by way of waiver is that no defence relying upon s 198 of the Legal Profession Act was taken in the Local Court proceedings and, indeed, the point was first raised in an affidavit filed in this Court on 20 September 1996. It has not been shown that Wolodymyr or his parents were aware of the provision whilst the proceedings in the Local Court were on foot. The creditor was the solicitor. It was his duty to know the law and to protect his client by complying with it." 23 Carr J, who agreed that there had been no waiver held, (at 429), "(i)t is trite law that there can be no waiver without full knowledge of the circumstances." In the case of Dodd v Gillis (1989) 16 NSWLR 623, referred to by Davies J, Yeldham J decided that the client in that case had waived his rights under the Legal Profession Act. Some of the relevant findings on whichthat decision was based were: · The client had the accounts and could see each item. · The client at no time sought clarification of any of the items, or queried any of the amounts, notwithstanding having had the accounts for approximately a year. · The client accepted the charges as reasonable and said that he would pay them. · The client accepted that he was liable to pay the amounts claimed. · The client agreed that the solicitors should not be involved in further delay and expense in giving more detail. · A substantial part at least of the amounts claimed was fairly charged and properly payable. · The client had no bona fide doubt about the propriety of any of the individual items in the accounts. 24 In the present matter, the judgment in the in the District Court was by consent. I referred earlier to the assertions concerning the state of the knowledge of the legal representatives of the judgment debtor when that consent was given. While there is no direct evidence of either the state of knowledge of the legal representatives or the judgment debtor himself, it would not be a large or unreasonable step to infer either that the representatives and the judgment debtor knew when consenting to the judgment that the judgment creditor had not complied with the procedural requirements or were indifferent to whether he had. In any event there is evidence that the judgment debtor acknowledged the debt to the judgment creditor in a conversation on 19 June 2000 and, on one view of other evidence, acknowledged the debt by taking steps to borrow money to pay the judgment creditor the fees he claimed. These matters might, in an application for a sequestration order based on a creditor's petition, tend to establish the existence of a debt even if the failure of the judgment creditor to follow the procedural steps contemplated by the Family Law Rules would warrant the Court going behind the judgment. 25 But in this matter, the question of non-compliance with the procedural steps arises at an earlier stage and when there has been no act of bankruptcy (at least on the evidence) committed by the judgment debtor. Moreover even if the judgment debtor waived a right to rely on the failure of the judgment creditor to follow the procedural steps in the proceedings in the District Court, it is not obvious that he has done so in the context of the operation of the Act. The issue of a bankruptcy notice is a proceeding under the Act: see Trustees of the Franciscan Missionaries of Mary v Weir (2000) 98 FCR 447 at 455. Moreover it is palpably clear that the bankruptcy notice was issued at the behest of the judgment creditor as a step in inducing the judgment debtor to pay the judgment debt. In my opinion, the step taken by the judgment creditor which caused the bankruptcy notice to issue is comprehended by the expression "proceedings to recover costs" within the meaning of O 39 r39 of the Family Law Rules. It is a step that the judgment creditor was precluded from taking by O 39 r39. 26 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." 27 In my opinion, this Court should not permit a solicitor to engage in conduct which is prohibited. That is, allow a solicitor to take a proscribed step to recover fees when the solicitor has failed to follow clear procedures established for an apparent public purpose by the rules of another superior court of record. The authorities referred to in pars 13 to 21 reveal that additional considerations can arise when the judgment debtor has committed an act of bankruptcy. At that stage broader questions involving the interests of creditors generally can have relevance. 28 An order should be made, in my opinion, setting aside the bankruptcy notice. That is not to say that the judgment creditor cannot take steps to enforce the judgment which he has now secured by the means provided in the District Court Act 1973 (NSW) and/or associated state legislation. In addition, the judgment creditor has applied to the Family Court of Australia for what I understand to be an order waiving compliance with those provisions in the Family Law Rules which he did not comply with when he rendered the accounts on which the judgment in the District Court was, at least in part, based. If such an order is made, then the basis on which I have decided that the bankruptcy notice should be set aside, will no longer exist. That is because the Court whose rules were not complied with has decided that compliance was, in the circumstances, unnecessary. However that is not presently the position. 29 I propose to order that the bankruptcy notice be set aside. I do not propose to make any order as to costs. Generally the judgment debtor has not been represented and he has incurred no professional legal expenses and court fees have been waived. Indeed there is arguably a basis for making an order that the judgment creditor be paid some of his costs having regard to the conduct of the judgment debtor in the proceedings in this Court assuming it was appropriate to make a costs order for the benefit of a solicitor who appeared for himself: see Cachia v Hanes (1994) 179 CLR 403 and Dobree v Hoffman (1995) 14 WAR 408, but cf Re Theo; Ex parte Official Trustee in Bankruptcy (1997) 73 FCR 564 at 566 and Cashman & Partners v Secretary, Department of Human Services and Health (1995) 61 FCR 301 at 313. However I have decided, on balance, that no such order should be made given that these proceedings arose because the judgment creditor took a step he was prohibited from taking. In making the order I have, I am intending to dispose of the judgment debtor's application and all interlocutory applications (whether competent or not) that have been filed by him in this Court since 5 January 2001, including the notice of motion filed on 16 July 2001. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.