Royal v Nazloomian, in the matter of Royal

The bankruptcy notice 6 Bankruptcy notice BN 225976 was issued on 17 July 2018 on the application of Mr Nazloomian as a creditor of the Royals. The total debt reflected in the notice is $11,679.37. Underpinning the notice is an order of the Local Court of New South Wales entered on 13 July 2018 against the Royals in favour of Mr Nazloomian in that sum. That order was entered under Rule 36.11 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) following the filing of a cost assessor's certificate under UCPR 36.10 which, from the date of filing, is taken to be a judgment of the court under the relevant legal costs legislation. The costs certificate arose in the following way. 7 In 2010, the Royals commenced proceeding 2010/52671 in the Supreme Court of New South Wales against one Nathan El Ali and Easychoice in respect of a debt said by the Royals to be unrelated to Mr Royal's former employment with Easychoice. In that proceeding, on 29 July 2010 consent orders were entered granting the Royals leave to discontinue the proceedings against Easychoice and ordering that the Royals pay Easychoice's costs of the proceeding. 8 Nearly four years later, in May 2014, Easychoice was wound-up and a liquidator was appointed. On or about 27 October 2016, the liquidator and Mr Nazloomian concluded a deed by which Easychoice as assignor assigned to Mr Nazloomian as assignee "all of the Assignor's right, title and interest in the Assignor's Claims (if any)". The "Assignor's Claims" were expressed as follows: The potential causes of action relating to the Assignor are: (i) costs incurred by the Assignor in Supreme Court proceedings 2010/52671; (ii) monies paid to or for the benefit of the Royals and which have not been repaid or accounted for to the Assignor; (iii) the transfer of Mercedes Benz Registration OOC200 from the Assignor to Peter Royal; and (iv) the potential causes of action that the Assignor has or may have that arise out of the facts, matters or circumstances relating to the employment of Peter Royal by the Assignor. 9 The costs claimed by Easychoice in the Supreme Court proceeding were subsequently assessed. By a certificate dated 16 March 2018, the costs assessor assessed that the costs payable by the Royals in that proceeding amount to $11,679.37. Judgment for that amount based on the certificate was then entered by the Local Court.

The Applicants' claims 10 The Royals rely on two claims that they say are relevant to their second and third grounds of attack on the bankruptcy notice.

Unpaid wages claim 11 The first claim asserted by the Royals is a claim that only Mr Royal is said to have had against Easychoice in liquidation. It is said to be a claim for underpayment of wages during the time that Mr Royal was employed by Easychoice. That was between July 2002 and February 2010. It is said to be supported by the outcome of an investigation by the Fair Work Ombudsman (FWO), which was notified to Mr Royal by letter dated 14 October 2010. The FWO estimated that Easychoice had underpaid Mr Royal the sum of $9,011.63 when he was an employee of Easychoice. I shall refer to this claim as Mr Royal's wages claim. 12 The FWO stated in the letter that no further enforcement action would be instituted against Easychoice "as it is not in the public interest to pursue this matter in court". Although it is not stated, I infer that that assessment arose from the relatively modest size of the claim. 13 In a report to creditors dated 4 September 2015, the liquidator made the following statements relevant to Mr Royal's wages claim: [3.4.2.2] … I estimate claims by employees to be $28,804.55 comprised of: Employee entitlements Amount $ Wages 20,142.11 Annual leave 8,662.55 Total 28,804.55 … [4.2] … Furthermore, I have been notified that Mr Royal also has a claim for unpaid wages and leave entitlements to 31 December 2010 ($28,804.55). Mr Royal would seek to set this claim off against any claim for costs. I have not been provided with any employee records to enable me to undertake an assessment of the merits of the employee entitlements claim by Mr Royal. I have however received a copy of a determination by the FWO together with Company communications which would indicate that as of 15 July 2009 the Company's records indicated that Mr Royal was owed $19,847 for unpaid wages. 14 It is apparent from the fact that the employee claims in paragraphs [3.4.2.2] and [4.2] of the report to creditors are in the same amount that the claim referred in the former paragraph is Mr Royal's claim. 15 Mr Royal submitted a proof of debt dated 21 September 2015 in the sum of $28,804.55. The minutes of an adjourned meeting of creditors of the company held on 6 October 2015 record that a proof of debt by Mr Royal in that amount had been received. 16 The Royals rely on the statements in the report to creditors as an acknowledgement by the liquidator of Easychoice's liability to Mr Royal for the wages claim before the assignment to Mr Nazloomian. Although the liquidator acknowledged having received a claim in a larger amount, the Royals rely only on the wages claim amount as determined by the FWO. 17 The first amount that the Royals accordingly seek to set-off is the sum of $9,011.63, which is a claim that only Mr Royal has. I will come to how it is said that that claim against the company in liquidation can be raised against Mr Nazloomian. 18 Although only Mr Royal has the claim, Mrs Royal can also avail herself of it in defence of Mr Nazloomian's claim. That is because if joint and several debtors are sued together, judgment for a set-off in favour of one of the debtors to that extent discharges the debt, and therefore the judgment against the other debtor would also be reduced accordingly: Equitrust Ltd v Franks [2009] NSWCA 128; 258 ALR 388 at [48].

The Royals' costs claim 19 The second claim arises from a previous bankruptcy notice issued on the application of Mr Nazloomian on 9 May 2018. That bankruptcy notice was set aside by order of District Registrar Wall of this Court on 27 June 2018 with the following costs order: The Respondent pay 75% of the Applicants' costs up to 25 June 2018 on a party-party basis, and after 25 June 2018, each party bear their own costs. 20 Those costs have not yet been assessed. The Royals have, however, presented evidence that they estimate their total (i.e. solicitor-client) costs in those proceedings to be $7,555.00. Applying what they say is a conservative proportion of 65% to arrive at their party-party costs, this amounts to $4,910.75. 75% of that amount, as ordered by the District Registrar, would amount to $3,683.06. That is the second amount that they seek to set-off. 21 I shall refer to this claim as the Royals' costs claim.

Ground 1: Abuse of process 22 As I have indicated, the Royals' first ground of attack on the bankruptcy notice is that it constitutes an abuse of process. For the reasons that follow, I have concluded that this ground should succeed and that the bankruptcy notice should accordingly be set aside. I will nevertheless go on to consider the second and third grounds of attack, albeit briefly, in case I am wrong on the abuse of process ground. 23 The Royals submit that the bankruptcy notice procedure is being invoked by Mr Nazloomian for an illegitimate purpose. Mr Nazloomian, through his counsel, denies this allegation. Mr Nazloomian did not adduce any evidence. 24 In support of their allegation that the proceeding is being brought for an illegitimate purpose, the Royals point to evidence which they assert shows that they are solvent as well as evidence of the "course of dealings" between the parties. 25 The Royals submit that the predominate purpose of the bankruptcy notice being issued is to put pressure on them, rather than to invoke the Court's jurisdiction in relation to insolvency: see Brunninghausen v Glavanics [1998] FCA 230 at [15] per Emmett J.

The principles to be applied 26 It is now well established that the Court has an inherent or implied power to set aside a bankruptcy notice as an abuse of process where it is satisfied that it is in the interests of justice to do so: Re Sterling; Ex parte Esanda Ltd [1980] FCA 75; AustLII citation [1980] FCA 61; 30 ALR 77 at 82 per Lockhart J and Seller v Deputy Commissioner of Taxation [2011] FCA 865; 282 ALR 80 at [14]-[20] per Flick J. 27 Mr Nazloomian does not cavil with the inherent power of the Court to set aside a bankruptcy notice as an abuse of process. Aside from any inherent power, s 30(1)(b) of the Bankruptcy Act offers a source of power: 30. General powers of Courts in bankruptcy (1) The Court: … (b) may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter. 28 The circumstances in which the Court may set aside a bankruptcy notice as an abuse of process are varied and "are not governed by rigid rules and do not fall into fixed categories": Clyne v Deputy Commissioner of Taxation (NSW) (No 4) [1982] FCA 166; AustLII citation [1982] FCA 162; 42 ALR 703 at 708 per Lockhart J. However, there are certain categories of abuse of process which are well established. As McHugh J observed in Rogers v R [1994] HCA 42; 181 CLR 251 at 286: abuses of procedure usually fall into one of three categories: (1) the court's procedures are invoked for an illegitimate purpose; (2) the use of the court's procedures is unjustifiably oppressive to one of the parties; or (3) the use of the court's procedures would bring the administration of justice into disrepute. Many, perhaps the majority of, cases of abuse of procedure arise from the institution of proceedings. But any procedural step in the course of proceedings that have been properly instituted is capable of being an abuse of the court's process. In Walton v. Gardiner, Mason C.J., Deane and Dawson JJ. said that the jurisdiction to stay proceedings that are an abuse of process "extends to all those cases in which the processes and procedures of the court, which exist to administer justice with fairness and impartiality, may be converted into instruments of injustice or unfairness". 29 The issuing of a bankruptcy notice is a legitimate mechanism to secure payment of a debt - it is legitimate to issue a notice with the intention that the debt be paid, and in the event of default, to proceed by way of petition for sequestration: Slack v Bottoms English Solicitors [2002] FCA 1445 at [15]-[21] per Spender J; Young v Cooke [2017] FCA 26 at [105] per Gleeson J. 30 The time to judge abuse of process is the time the bankruptcy notice is issued; subsequent events have only slight relevance to the circumstances foreseen at the time of the issue of the notice: Killoran v Duncan, in the matter of Killoran [1999] FCA 1574 at [13] per Gyles J. 31 There is no dispute that the onus of proving the existence of the relevant purpose lies on the debtor: Cavoli v Etl [2007] FCA 1191 at [17] per Heerey J. There are, however, competing authorities as to the level of proof required to establish an abuse of process on the basis of illegitimate purpose. 32 In Rankine v Lord [2011] FCA 478; 121 ALD 258, Marshall J noted as follows: [29] Counsel for the appellants submits that the respondents bear a heavy onus in establishing that the notice was issued for an improper purpose. Counsel referred to the judgment of Heerey J in Reid v Hubbard [2003] FCA 1424 (Reid). Reid dealt with an application by a third party to set aside a bankruptcy notice. At [40], his Honour noted that the case before him "was beset not only with improbability but also internal inconsistency". [30] I can detect nothing in the reasons of Heerey J in Reid which supports the view that a particularly heavy onus is required to be met before a bankruptcy notice will be set aside as an abuse of process. A court considering such an issue will examine that matter objectively having regard to the entire relevant factual matrix and if it forms the view that the issuing of the notice is an abuse of process it ought not feel timid about saying so. 33 In Seller the applicant alleged an abuse of process after the Deputy Commissioner of Taxation issued a bankruptcy notice prior to the determination of the applicant's objection to his taxation assessment. Flick J dismissed the application on the basis that the applicant had not established any abuse of process on the part of the respondent. Flick J cited the test at [30] of Rankine affirmatively, and then added at [17]: But "more than mere assertion would be required to set aside [a] bankruptcy notice … upon the footing that it was an abuse of process": Watts v Adelaide Bank Ltd [2009] FCA 420 at [18] per Buchanan J. 34 Bromwich J recently reviewed the competing authorities in Prentice v Fewin Pty Ltd [2017] FCA 490: [48] In Williams v Spautz [[1992] HCA 34; 174 CLR 509], the High Court held that private prosecutions - instituted by a university lecturer against former colleagues for the purpose of placing pressure on the university in unfair-dismissal proceedings - constituted an abuse of process and ought to be stayed. The majority considered (at 529), that to establish abuse of process, it must be shown that the predominant purpose of the impugned action or proceeding is improper, for which there was a heavy onus. The discharging of such an onus does not necessarily require the calling of evidence. Rather, it may be met by relying upon the circumstances, and perhaps the absence of evidence to provide a rebuttal of inferences otherwise able to be drawn. [49] In Rozenbes v Kronhill [(1956) 95 CLR 407] at 417.5, it was observed that to meet the threshold of extortion sufficient to be a clear ground to set aside a bankruptcy notice, it will not be held to have taken place: … in the absence of mala fides or anything amounting to oppression in fact. There must be a real intention on the part of the creditor to use the process for some other end than its legitimate end, and there must be a real exertion of pressure. 35 The "heavy onus" test in Williams v Spautz, in which a stay of proceedings was sought rather than the setting aside of a bankruptcy notice, was also applied by Gordon J in Yarranova Pty Ltd v Shaw (No 2) [2014] FCA 616 at [90] (affirmed in Shaw v Yarranova Pty Ltd [2014] FCAFC 171, although not dealing expressly with the onus question), and it was applied by Gleeson J in Barton v Malcolm Johns Legal Pty Ltd (No 2) [2015] FCA 166 at [84]. See also UBS AG v Tyne [2018] HCA 45; 360 ALR 184 per Gordon J (in dissent) at [136]. 36 In UBS AG, Kiefel CJ and Bell and Keane JJ at [34] stated that the procedural law of the relevant court, including s 37M of the Federal Court Act 1976 (Cth) in the case of this Court, is relevant to the determination of whether the bringing or continuance of a proceeding is an abuse of process. Of further present relevance is the their Honour's statement (at [45]) that courts cannot be expected to indulge parties who engage in tactical manoeuvring that impedes the "just, quick and efficient" resolution of litigation. 37 The point, as I see it, is that an allegation of abuse of process is a "serious" allegation; it is not one that can be made without a sufficient factual foundation. In that sense, I accept that the party alleging that the issuing of a bankruptcy notice constitutes an abuse of process bears a "heavy onus". It is nevertheless not necessary that there be direct evidence of the ulterior purpose; a conclusion as to that purpose can properly be made by way of inference. Moreover, the absence of evidence to provide a rebuttal of inferences that might otherwise be drawn can also be taken into account.

Did the Royals prove their solvency? 38 The Royals' first point in support of their allegation that the proceeding is being brought for an improper purpose is that they are solvent. They rightly state that this is relevant to one of the objects of the Bankruptcy Act which is to ensure that "a debtor, who is unable to pay his debts as and when they fall due, should have his affairs controlled for the benefit of all of his creditors": Rankine (above) at [24]. 39 If it was clear that the Royals were solvent at the time of the issuing of the bankruptcy notice, then there would be good reason to conclude that it would ultimately be ineffective in leading to the sequestration of their estates: Kimber v The Owners Strata Plan No 48216 (No 2) [2018] FCA 406 at [126]. In those circumstances, a bankruptcy notice might be set aside as an abuse of process. 40 However, the evidence of the Royals' solvency is scant. By letter dated 14 November 2018, the Royals' solicitors wrote to Mr Nazloomian's solicitors referring to an earlier letter of 6 November 2018 to which they stated they had not received a response. The earlier letter was not tendered, so I do not know what it said. The later letter then stated as follows: Please see attached a copy of the bank cheque in the sum of $11,679.37, being the sum of the Bankruptcy Notice BN 225976, which we have sought to pay into Court. 41 Attached to the letter is a bank cheque of the same date in the stated sum made payable to the Federal Court of Australia. 42 The affidavit evidence offers no explanation of this correspondence. There is thus no evidence of what became of the bank cheque or what Mr Nazloomian's response was to the letter, if any. 43 In addition to the reliance on that correspondence and the bank cheque, Mr Royal stated the following on affidavit: Apart from the sum of $11,679.37 claimed in the bankruptcy notice in these proceedings, neither my wife nor I owe any debts and we are able to pay our debts as and when they fall due. Our total indebtedness is no more than the cost of our monthly living expenses, which we are able to meet. 44 There is no other evidence relevant to the Royals' solvency. 45 I do not regard the evidence as being sufficient to prove the Royals' solvency. They have not set out their assets, income and liabilities with the result that I am not able to reach any firm conclusion on their ability to pay their debts as and when they fall due. (See Kimber at [130].) Whilst the bank cheque is evidence of their genuineness in disputing the debt against them, without evidence as to the source of the funds or security underlying the cheque it is not evidence of solvency. Put differently, the Royals have not established that the bankruptcy notice is an abuse of process on the basis that sequestration will not follow from it because they are solvent. Course of dealings 46 Apart from the solvency ground, the Royals point to the "course of dealings" between the parties to prove the abuse of process. 47 I make the following findings with regard to the course of dealings between the Royals and Mr Nazloomian. 48 Between about July 2002 and February 2010, Mr Royal was employed by Easychoice. The director, secretary and shareholder of Easychoice was Nathan El Ali. The relationship between Mr Royal, on the one hand, and Easychoice and Mr El Ali led to the Supreme Court proceeding and ultimately to Easychoice's costs claim against Mr Royal which I have dealt with above at paragraph [7]. 49 The Royals tendered the judgment of Associate Justice McCready of 3 June 2011 in Royal v El Ali [2011] NSWSC 602. That is the judgment in the Supreme Court proceeding which was discontinued against Easychoice but continued against El Ali. There was no opposition to the tender of that judgment, and the further judgments which I refer to below, on the basis that it is an official record of what occurred in the proceeding, but it is not evidence of any facts found to have been proved or which were in issue in that proceeding: Evidence Act 1995 (Cth), ss 76(1) and 91. 50 Associate Justice McCready found that Mr El Ali was considerably indebted to the Royals for repayment of advances made to him as loans. The value of a red Mercedes Benz vehicle, in the sum of $55,000, was credited against the amounts otherwise owing. 51 On or about 16 December 2011, Mr El Ali was made, and remains, bankrupt. 52 During 2013 and 2014, the Royals and the trustee in bankruptcy of Mr El Ali's bankrupt estate commenced proceedings in this Court against, inter alia, Mr Ali and Mr Nazloomian. In the 2013 proceeding (NSD1731/2013) the Royals and the trustee in bankruptcy were the applicants against Mr Ali and others, not including Mr Nazloomian. In the 2014 proceeding (NSD771/2014) the only applicant was the trustee in bankruptcy and Mr Nazloomian was the third respondent. 53 On 5 July 2016, Davies J delivered reasons for judgment in both the 2013 and 2014 proceedings, in which the Royals and the trustee in bankruptcy were successful against Mr Ali and Mr Nazloomian in, amongst other things, setting various transactions aside as void. The reasons for judgment are reported as Royal v El Ali [2016] FCA 782. 54 On 23 September 2016, orders were made in the 2013 and 2014 proceedings to give effect to the 5 July 2016 reasons for judgment. The orders and further reasons for judgment are reported as Royal v El Ali (No 2) [2016] FCA 1156. Subsequently, Davies J made costs orders in both proceedings in favour of the applicants: Royal v El Ali (No 3) [2016] FCA 1573. 55 Mr Nazloomian and others sought stays of and appealed against the orders of Davies J. Their stay applications were dismissed with costs: Royal v El Ali (No 4) [2017] FCA 299. The appeals were heard by the Full Court on 12 and 13 June 2018. At the time of the hearing in the present matter, judgment remained reserved. 56 On 27 October 2016, as detailed in paragraph [8] above, the liquidator of Easychoice assigned various claims against the Royals to Mr Nazloomian, including the costs claim and a claim in relation to "the transfer of Mercedes Benz Registration OOC200 from the Assignor to Peter Royal", which is the same vehicle as the "red Mercedes Benz" referred to in the judgment of Associate Justice McCready. 57 On 15 December 2016, Mr Nazloomian commenced a District Court proceeding against the Royals, claiming $133,944.26 plus interest and costs. That claim included the sum of $55,000 said to be the value of the Mercedes Benz for which Mr El Ali had received credit in the Supreme Court proceeding. 58 On 9 May 2017, the statement of claim in the District Court proceeding was set aside and Mr Nazloomian was ordered to pay the Royals' costs in the sum of $5,000. On 22 June 2017, Mr Nazloomian applied to set aside the orders made on 9 May 2017. On 7 July 2017, that application was dismissed, the $5,000 that had been paid into Court was ordered to be released to the Royals' solicitors in payment of the order for costs, and Mr Nazloomian was ordered to pay the Royals' further costs in the sum of $4,500. The sum of $4,500 was ultimately paid. 59 On 23 August 2017, Mr Nazloomian commenced proceedings against the Royals in the Local Court of New South Wales again claiming $55,000 as the value of the Mercedes Benz. On 5 October 2017, Mr Nazloomian discontinued the Local Court proceedings by consent on the basis that he pay the Royals' costs in the sum of $1,500. This sum was ultimately paid. 60 Also in August 2017, Mr Nazloomian filed an application for the assessment of the costs ordered against the Royals pursuant to the 2010 consent orders in the Supreme Court proceeding. Mr Nazloomian had waited since October the year before when he had taken assignment of that claim before applying for the costs to be assessed. 61 On 16 March 2018, a certificate of determination of costs for the 2010 consent orders was issued against the Royals for $11,679.37 (as explained in paragraph [9] above). On 11 April 2018, the certificate was sent to the parties. 62 On 8 May 2018, judgment was issued in the Local Court of New South Wales in the amount of $16,318.62 against the Royals. The judgment was based on the costs certificate, and it would appear to have erroneously aggregated the amount of the certificate ($11,679.37) and an amount of $4,639.25 that had been assessed as being payable by the applicant for the costs assessment, and not by the Royals. 63 The next day, 9 May 2018, Mr Nazloomian issued and served bankruptcy notice BN 224035 in the amount of $16,318.62 against the Royals. On 25 May 2018, the Royals filed an application to set aside the first bankruptcy notice in this Court. On 27 June 2018, the first bankruptcy notice was set aside by consent and Mr Nazloomian was ordered to pay the Royals' costs. These are the costs dealt with above as the Royals' costs claim (paragraphs [19]-[21]). 64 On 6 July 2018, a letter was sent from the Royals' solicitors to Mr Nazloomian's solicitors stating that any further bankruptcy notice which was issued would result in an application to set aside the bankruptcy notice. On 9 July 2018, a letter was sent from the Royals' solicitors to Mr Nazloomian's estimating total costs in relation to the 27 June 2018 orders to be $7,555.00. 65 Notwithstanding those letters, and apparently no reply to them by him, Mr Nazloomian again applied for a judgment based on the costs assessment. On Friday 13 July 2018, judgment was issued in the Local Court of New South Wales in the amount of $11,679.37 against the Royals (as detailed in paragraph [6] above). 66 On Tuesday 17 July 2018, the bankruptcy notice which is the subject of this proceeding was issued on the application of Mr Nazloomian and served on the Royals. Thereafter, as dealt with at paragraph [40] above, the Royals' solicitor sent the letter with a copy of the bank cheque which I infer they had apparently tried to pay into Court. Reasoning and conclusion on abuse of process 67 There are a number of considerations which lead me to conclude that Mr Nazloomian issued the bankruptcy notice for an improper purpose, namely to pressure, harass or embarrass the Royals, or to bankrupt them for an improper purpose, rather than in a bona fide effort to invoke the insolvency jurisdiction of the Court. 68 First, there is a long history of litigation involving Mr Nazloomian and the Royals. Still on foot at the time of the hearing of this case are the appeal proceedings. Some of the claims have been pursued by Mr Nazloomian more than once, including in circumstances where it would appear that they could not validly be pursued. I have in mind his continued pursuit, in three successive proceedings, of the claim in relation to the Mercedes Benz which had previously been dealt with in the Supreme Court proceeding, and the pursuit of the costs claim by way of bankruptcy notice twice. From all of this, I draw the inference that Mr Nazloomian has a propensity to readily resort to court processes for ulterior purposes, and recklessly as to their prospects, including that bankrupting the Royals would give him an advantage in other litigation. 69 Secondly, to the knowledge of Mr Nazloomian the Royals have bona fide set-off claims which, if ultimately found to be good, exceed the debt that he is claiming. These are the unpaid wages claim and the Royals' costs claim. The latter claim, although small, is not only bona fide, it is unassailable. I deal with this further at paragraph [91] below. 70 Thirdly, and related to that, the debt underpinning the bankruptcy notice is relatively small. Given the amount of litigation involving Mr Nazloomian and the Royals, and the subject matter of that litigation, the amount of the bankruptcy notice is insignificant. It is not apparent why Mr Nazloomian would pursue the bankruptcy of the Royals in reliance on such a small sum if all that he genuinely sought to achieve was payment of the claim rather than pressurising and harassing the Royals, or bankrupting them, for some ulterior purpose. 71 Fourthly, the Royals made what would appear to be a bona fide attempt to secure the debt. Mr Nazloomian has not explained his failure to respond to that, and why he would not have been satisfied with such security. See Killoran, above, at [18] referencing Barney's Timber Pty Ltd v Duncan [1999] NSWSC 1039; Brunninghausen (above) at [18]. 72 Fifthly, and most significantly in my consideration, Mr Nazloomian has proceeded to issue bankruptcy notices against the Royals with considerable haste and without apparently even writing a letter to ask them to pay the debt. In that regard, within a few weeks of the costs certificate being issued he had applied for and been issued in his favour a judgment of the Local Court and, on the strength of that judgment, the first bankruptcy notice. 73 Then, shortly after the first bankruptcy notice was set aside he again applied for a judgment from the Local Court and one business day later issued the second bankruptcy notice and served it on the Royals. 74 The inference to be drawn is that he issued the bankruptcy notices with the intention of pressurising and/or harassing the Royals, or possibly also embarrassing them, and he has failed to give any evidence to the contrary. He has also not explained why he did not pursue enforcement of the judgments of the Local Court in the usual course. I therefore draw that inference. 75 Finally, in addition to the matters already identified that Mr Nazloomian has not explained, he has not explained why he sought the assignment of the debts in the first place. The assignment fee was 50% of any damages, money judgment or compensation awarded in respect of the assigned claims less any costs incurred in pursuing the claims, and in the event of the settlement of the assigned claims, $10,000 plus GST. The assignment appears to have been speculative on the part of Mr Nazloomian in respect of uncertain claims for which he would have had to incur significant legal costs to pursue and pay a significant amount in the event that he was successful. These are matters that call for explanation. 76 Moreover, the assignment came at a time when Mr El Ali's company had been liquidated following the Royals' success against Mr El Ali in the Supreme Court proceeding and their pursuit, with Mr El Ali's trustee, of relief against Mr Nazloomian. This raises the possibility that the assignment was taken for the purpose of leverage in that litigation which, as I have said, is still on foot, yet there is no explanation from Mr Nazloomian. 77 A case with analogous factual circumstances to these, Prentice referred to above, was an application to set-aside a bankruptcy notice in circumstances where there was a history of proceedings between the parties with costs orders issued. Both sides had attempted to enforce these orders by insolvency or bankruptcy processes. The evidence showed that the balance of these costs orders was actually against the respondent creditor in that case, but that these debts could not be set-off due to a mutuality problem. It seemed in that case that the respondent creditor was aware that this mutuality problem would be decisive, and so it relied on strict compliance with the Bankruptcy Act as a complete answer to an abuse of process claim. Bromwich J set aside the bankruptcy notice on the abuse of process ground and rejected the respondent's reliance on the requirements of the Bankruptcy Act stating at [54]: The problem with Fewin's response to the submissions made on behalf of Mr Prentice is that they treat compliance with the strict and formal requirements of the Bankruptcy Act as being a complete answer to a claim of abuse of process. The fallacy of that reasoning is that except in flagrant cases, abuse of process claims can properly arise when there is nothing formally wrong with proceedings being brought until examined more closely for a real and improper purpose to be found, inferred or otherwise made apparent, such as by context. 78 Bromwich J went on to find at [55] that the purpose of the bankruptcy notice the subject of that case was to "put pressure on a debtor to pay the debt rather than to genuinely invoke the Court's jurisdiction in relation to insolvency". Bromwich J relied primarily on inferences which could be drawn from the circumstances and the absence of any evidence to provide a rebuttal of such inferences being drawn, alongside the judgment creditor's conduct in those proceedings. Discharging of the onus did not require the calling of concrete evidence of an improper purpose or an overt threat. This decision, with two other related matters, was confirmed on appeal by the Full Court in Coshott v Prentice [2018] FCAFC 179 per Kerr, Farrell and Gleeson JJ.

Ground 2: Section 40(1)(g) of the Bankruptcy Act 79 The relevant provisions of the Bankruptcy Act are in the following terms: 40 Acts of bankruptcy (1) A debtor commits an act of bankruptcy in each of the following cases: … (g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia … a bankruptcy notice under this Act and the debtor does not: (i) where the notice was served in Australia - within the time specified in the notice; or (ii) …; comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained; … 41 Bankruptcy notices … (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. 80 There was no issue in the proceeding with regard to the time within which the Royals filed their application. The bankruptcy notice required compliance with its terms within 21 days of service which was on 22 July 2018, i.e. by 13 August 2018. The application to set it aside was filed on 8 August 2018 which was accordingly within the time allowed. Section 41(7) has the effect of automatically extending time for compliance with the bankruptcy notice to when the relevant court determines that application. 81 Returning to s 40(1)(g), to succeed in setting aside the bankruptcy notice the Royals must establish that they have "a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that [they] could not have set up in the action or proceeding in which the judgment or order was obtained". 82 The terms "counter-claim", "set-off" and "cross demand" in s 40(1)(g) are said to be not subject to limits. The word "counter-claim" is likely to refer to claims in equity and the word "set-off" is likely to refer to those claims the subject of a set-off at common law while "cross demand" refers to claims other than those encompassed in the expressions "counter-claim" or "set-off" and can include a claim for unliquidated damages for a tort or damages for breach of contract: Blair v The Owners - Strata Plan No 71656 [2016] FCA 1522 at [20] per Markovic J citing Re Brink; Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 93; AustLII citation [1980] FCA 78; 30 ALR 433 at 436 per Lockhart J. 83 The Royals are required to establish their "counter-claim, set-off or cross demand" only on a prima facie basis, i.e. even if they do not produce admissible evidence which would make out a case before a court trying the issues involved in determining the counter-claim etc: Ebert v The Union Trustee Company of Australia Ltd [1960] HCA 50; 104 CLR 346 at 350 per Dixon CJ and McTiernan and Windeyer JJ.x 84 In Guss v Johnstone [2000] HCA 26; 171 ALR 598 at [40], Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ held that "the state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim". 85 The principal issue debated between the parties in their submissions is whether the wages claim that Mr Royal had against Easychoice is a claim that can be asserted against Mr Nazloomian. In that regard, the Royals submitted that the assignment of Easychoice's costs claim to Mr Nazloomian was "subject to all equities" under s 12 of the Conveyancing Act 1919 (NSW) which included any defence, set-off or counter claim that was available to Mr Royal to have raised against Easychoice. The Royals submitted that the wages claim would have been able to have been raised as a set-off or counter claim against Easychoice and it can therefore be raised against Mr Nazloomian under s 40(1)(g) of the Bankruptcy Act. 86 It will be recalled that the wages claim is asserted in the sum of $9,011.63, which is less than the sum specified in the bankruptcy notice. In order to make up the difference, the Royals must rely on their costs claim. 87 Therefore, before considering the wages claim, I will consider whether the costs claim is available to be set-off against the judgment debt.

Is the Royals' costs claim inchoate or contingent? 88 The word "has" in s 40(1)(g) is not satisfied by proof that a debtor has "an inchoate set-off which may at some future time ripen, but an effective set-off existing as at the date of the application to set aside the bankruptcy notice": Ganke; Ex parte Ganke v Somerset [1995] FCA 195 per Lindgren J at [32] quoting from Re A Debtor; Ex parte Commissioner of Taxation (1963) 19 ABC 296. See also Guss v Johnstone (above) at [43]-[47]. 89 In Ganke, Lindgren J held that the debtor had not established a counter claim, set-off or cross-demand to the applicable standard where he was unable to show that he would be entitled to a refund from the creditors, his erstwhile solicitors, until their bill of costs had been taxed. That is a different situation from the present where the Royals have by the costs award in their favour a clear entitlement to the costs; nothing more is required to establish the entitlement. All that they do not know is the exact sum to which they are entitled and they have instead conservatively estimated that sum as being $3,683.06 which has not been challenged. 90 In my view, a costs claim of that nature is for present purposes akin to a claim for unliquidated damages. See Watkins Ltd v Ranger Uranium Mines Pty Ltd (1985) 35 NTR 27 at 42 per Nader J. Such a claim can properly be the subject of a s 40(1)(g) cross-claim etc. on the authorities I have referred to above. 91 The result is that in my view the costs claim can be taken into account as a set-off under s 40(1)(g) and it is established to the requisite standard at least to the sum of $3,683.06. However, the Royals' set-off claims have to be "equal to or exceeding the amount of the judgment debt or sum" if they are to succeed on this ground, so they must rely also on Mr Royal's wages claim which I will now consider.

Mr Royal's wages claim 92 The FWO determination records, as the outcome of the investigation, that the FWO has "determined" that certain contraventions of the Workplace Relations Act 1996 (Cth) had occurred and that "[b]ased on the spreadsheet of monies owed to Peter Royal and correspondence provided by Vivian Tam", Mr Royal is owed $9,011.63. It is not identified who Vivian Tam is, and the spreadsheet referred to was not put into evidence before me. 93 The Office of the Fair Work Ombudsman in October 2010 was governed by Part 5.2 of the Fair Work Act 2009 (Cth), as it still is. The functions of the FWO were (and still are) set out in s 682(1). Paragraph (c) sets out the function to inquire into, and investigate, any act or practice that may be contrary to the Fair Work Act, a fair work instrument or a safety net contractual entitlement, and paragraph (d) sets out the function to commence proceedings in a court, or to make applications to Fair Work Australia, to enforce the Fair Work Act, fair work instruments and safety net contractual entitlements. None of the listed functions seems to envisage the making of enforceable determinations. 94 Although the FWO was given powers of inspection including to enter premises (s 708) and to require the production of records or documents (s 712), and powers to accept enforceable undertakings (s 715) and issue compliance notices (s 716), there was no power for the FWO to issue enforceable determinations. Indeed, it is apparent from the FWO determination in this case that it did not purport to be enforceable. That arises from it being made explicit that the FWO would not be instituting further enforcement action and that Mr Royal had the options of pursuing his own enforcement action through the small claims court process or the ordinary court process under Part 4.1 of the Fair Work Act. 95 In the circumstances, the FWO determination does not itself give rise to a liability. However, insofar as establishing the claim at a prima facie level is concerned, it is evidence of the existence of evidence in support of the claim at least up to the sum of $9,011.63. The report to creditors referred to above, whilst expressly recording that the liquidator was not able to undertake an assessment of the merits of the employee entitlements claim by Mr Royal, acknowledged that the FWO determination together with the company's records indicated that as at 15 July 2009 Mr Royal was owed $19,847 for unpaid wages. Mr Royal's proof of debt, which he submitted to the liquidator and which he confirmed in his affidavit evidence in the present proceeding, also supports the claim. 96 I am satisfied that the evidence identified in the preceding paragraph establishes the claim against Easychoice on at least a prima facie basis up to the sum of $9,011.63. That is because there is evidence which if accepted at a trail in due course would so establish the claim. 97 The question then is whether that claim can be asserted against Mr Nazloomian as assignee of the Supreme Court costs claim. That turns on whether the claim is an 'equity' to which the assigned Supreme Court costs claim was subject. 98 Mr Nazloomian relies on the following extract from Greg Tolhurst's The Assignment of Contractual Rights (2nd ed, Hart, 2016): [8.85] … in Bank of Boston Connecticut v European Green and Shipping Ltd [[1989] 1 AC 1056] Lord Brandon approved a test for set-off that was earlier formulated by the Privy Council in Government of Newfoundland v Newfoundland Railway Co [(1888) 13 App Cas 199], to the effect that the defendant's cross-claim must flow out of and be inseparably connected with the dealings and transactions which also give rise to the claim. (Emphasis added, citations omitted.) 99 He submits that Mr Royal's wages claim does not arise out of and is not inseparably connected with the dealings and transactions that give rise to the assigned claim, namely the Supreme Court costs claim. On that basis he submits that the wages claim is not available against him. In that regard, he relies on the statement by the Royals that the Supreme Court proceedings which gave rise to his costs claim underpinning the bankruptcy notice were "in respect of a debt unrelated to my [Mr Royal's] employment with Easychoice". 100 The difficulty with that is that Mr Nazloomian seeks to apply the wrong test. In the same text that he relies on, the author at [8.91] says that Lord Brandon's speech "does not govern the law in Australia and there has been some dissent from it". The author references James v Commonwealth Bank of Australia [1992] FCA 420; 37 FCR 445 at 461-2 per Gummow J and McDonnell & East Ltd v McGregor [1936] HCA 28; 56 CLR 50 at 60 per Dixon J. 101 In James, Gummow J at 461 said that the difficulty with accepting Newfoundland with regard to the test of "flow out of and being irreparably connected with" is the analysis of it by the High Court in McDonnell. His Honour also reasoned, with reference to inter alia McDonnell (at 60-61), that the procedural changes introduced by the Judicature system do not alter substantive rights and thus do not change the doctrine of equitable set-off. 102 The Royals draw attention to what was stated by Ward CJ in Bendigo and Adelaide Bank Ltd v Williamson; In the matter of Great Southern Finance Pty Ltd [2017] NSWSC 939 stated as follows: [85] It is well-established that an equitable assignee of a legal chose in action takes the assigned property subject to equities. In Mangles v Dixon (1852) 10 ER 278 at 290; (1852) 3 HL Cas 702 it was said that '[i]f there is one rule more perfectly established in a court of equity than another, it is, that whoever takes an assignment of a chose in action … takes it subject to all the equities of the person who made the assignment'. [86] The position is the same where there has been a legal (statutory) assignment of a chose in action. Section 12 of the Conveyancing Act 1919 (NSW) provides that: … [87] The meaning of 'equities', in the context of an assignee taking 'subject to equities', is usefully summarised by the learned authors of [Heydon JD, Leeming MJ and Turner PG] Meagher, Gummow & Lehane's Equity: Doctrines and Remedies (5th ed, LexisNexis, 2015) (at [6-500]) as follows: A chose in action is the benefit of an obligation. 'Equity' means in this context a defence, set-off or counterclaim which the person subject to the obligation is entitled to oppose to the claim of the person entitled to the benefit. The effect of the rule is that the defence, set-off or counterclaim is equally available against the assignee… … [T]his rule applies whether the 'equity' of the person subject to the obligation assigned is liquidated or unliquidated. Equities on which the person bound can rely as against the assignee are: (a) those on which he or she could have relied as against the assignor at the time he or she received notice of the assignment; and (b) those arising as against the assignor, after the person bound receives notice of the assignment, and which are 'flowing out of and inseparably connected with' [Tooth v Brisbane City Council [1928] HCA 20; 41 CLR 212 at 223-224] the obligation the benefit of which is assigned. (Emphasis added.) 103 As the authors of Meagher, Gummow & Lehane point out in the extract cited by Ward CJ and quoted above, which is properly founded in the judgment of Isaacs J in Tooth v Brisbane as cited, the requirement that the counter-claim flow out of and be irreparably connected with the assigned claim applies only when that claim arose after the obligor (here, Mr Royal) received notice of the assignment. When, as in this case, the counter-claim arose before the assignment, and thus before the Royals received notice of the assignment, the "flowing out of and irreparably connected with" requirement does not apply. What is required is that the counter-claim could have been relied on by Mr Royal against the assignor, Easychoice, at the time when he received notice of the assignment. Clearly he could have. 104 In those circumstances, I consider that the assignment of the Supreme Court costs claim by the company to Mr Nazloomian was subject to Mr Royal's wages claim against the company. 105 However, Mr Nazloomian submits that in the event that I reach that conclusion, the wages claim cannot in any event be set-off because it is time-barred by operation of s 544 of the Fair Work Act. That section provides that a person may apply for an order under Division 2 of Part 4-1 of that Act only if the application is made within 6 years after the day on which the relevant contravention giving rise to the claim occurred. Mr Nazloomian accepted that the applicable date in the present case is the date upon which Mr Royal's employment by Easychoice ended, namely February 2010. 106 It will be recalled that Easychoice was wound up a little over four years later in May 2014. If Mr Royal's wages claim is accepted by the liquidator or otherwise proved, the company's claim against him - which is the claim that Mr Nazloomian now asserts as assignee - was automatically and as a matter of law set-off against the wages claim under s 553C of the Corporations Act as dealt with further below. Looked at from that perspective it can be seen that the question of limitation does not properly arise in relation to Mr Royal's wages claim: if it is a good claim then, for the reasons dealt with below, it was by operation of law set-off against the company's claim against Mr Royal for costs with the result that the assignment of the latter claim to Mr Nazloomian, which only took place thereafter, was reduced by that extent. Conclusion on s 40(1)(g) 107 It is not controversial that the Royals could not have set up their set-off claims in the proceeding in which the judgment was obtained as referred to in s 40(1)(g). That is because the relevant proceeding is the certification proceeding in the Local Court by which the costs certificate was made a judgment. The Royals could not have set up, as a matter of law, any set-off or cross-claim in that proceeding. As to the relevant test, see Messih v Esber [2008] FCA 1452; 250 ALR 648 at [28] per Flick J. 108 In view of what I would find, as set out above, with regard to the Royals' costs claim and Mr Royal's wages claim meeting the requirements of s 40(1)(g), I would set aside the bankruptcy notice on that basis too.

Ground 3: Section 553C of the Corporations Act 109 By paragraph 2 of their amended application, the Royals seek orders setting-off an amount in the sum of $12,694.69 pursuant to s 86(1) of the Bankruptcy Act and/or s 553C of the Corporations Act. By their argument, such a set-off would have operated as a matter of law at the time that Easychoice was liquidated, which was prior to the bankruptcy notice, with the effect that the notice is invalid as being based on a non-existent debt. 110 During the course of submissions, the Royals accepted that it could only be s 553C of the Corporations Act that is applicable because the set-off was said to operate in relation to the liquidation of Easychoice, a corporation, and not in relation to any personal bankruptcy. 111 Section 553C of the Corporations Act is in the following terms: 553C Insolvent companies - mutual credit and set off (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent. 112 Section 86 of the Bankruptcy Act is the analogue provision to section 553C of the Corporations Act applying to personal insolvency. In those circumstances, authorities on the one provision are generally equally applicable to the other provision. 113 In Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609 at 618 per Mason CJ and Brennan, Dean, Dawson, Toohey, Gaudron and McHugh JJ, in relation to s 86 of the Bankruptcy Act, it was explained that the object of set-off in bankruptcy is "to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate". 114 Their Honours at 618-619 further explained as follows: Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the 'mutual credits' and 'mutual debts', and later 'mutual dealings', provisions were introduced into bankruptcy legislation … To the extent necessary to achieve that legislative purpose of "substantial justice" to the parties, it is established by authority that a provision such as s 86 of the Act should be given "the widest possible scope" … On the other hand, "substantial justice" requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same or where, after bankruptcy or notice of an act of bankruptcy, a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness:… Thus, it is established by the cases that set-off under a provision such as s.86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and debits do not correspond. (Citations omitted.) 115 Their Honours also explained at 622 that the operation of the set-off is mandatory and automatic at the time the bankruptcy takes effect. 116 Whether or not a set-off operated at the time of the liquidation of Easychoice depends on whether Mr Royal's wages claim was a "mutual credit, mutual debt or other mutual dealing" between him and the company. Mr Nazloomian submits that it does not. 117 In the ordinary course, the s 553C set-off operates only in respect of debts that are proved in the insolvency, in particular because, in the words of the provision, it only operates in favour of "a person who wants to have a debt or claim admitted against the company". For the position in England, which operates in favour of "any creditor of the company proving or claiming to prove a debt in the liquidation", see In re Norman Holding Co Ltd [1990] 3 All ER 757; [1991] 1 WLR 10 at 13-15. 118 Mr Royal has submitted a proof of debt in the winding-up of Easychoice, so he must be taken to have chosen to have a claim admitted against the company. Although I have not been referred to any authority on point, it seems to me that for Mr Royal to be entitled at this stage to an order that his wages claim is to be regarded as having been set-off, with effect from the time of liquidation against the company's costs claim against him, he must establish that his wages claim is truly enforceable against the company on a balance of probabilities: Evidence Act 1995 (Cth), s 140(1). In this respect, consideration of the operation of s 553C of the Corporations Act in the way in which the Royals rely on it is quite different to the operation of s 40(1)(g) of the Bankruptcy Act. 119 In respect of the latter provision, as indicated above, the authorities are clear that proof at a prima facie level will be sufficient. At least one reason for that lower standard of proof being sufficient might be that all that is at stake there is the validity of a bankruptcy notice, and not, with final effect, the balance of the level of indebtedness between the creditor and the insolvent company. To the extent that a bankruptcy notice debtor asserts a set-off, as here, that is taken into account, insofar as the bankruptcy notice is concerned, under s 40(1)(g). It is quite a different matter to seek an order that set-off has occurred, in particular because that is in the nature of final relief that will affect the company and its creditors. 120 As I have discussed above, whilst the evidence of Mr Royal's wages claim is sufficient to establish the prima facie standard applicable under s 40(1)(g), it does not satisfy a balance of probabilities standard. In that regard, the FWO determination has no statutory foundation or effect, and amounts to no more than an opinion by the FWO. Further, Mr Royal has not set out to prove his wages claim by identifying how it arises and how it is quantified. In those circumstances, the Royals are not entitled to the order they seek with regard to the set-off. 121 It follows that although it may be that in due course Mr Royal's claim is proved in the liquidation, whether by court process or acceptance by the liquidator, it has not been proved in this proceeding and therefore I cannot make an order that the claim against him and Mrs Royal is set-off to that extent. Conclusion 122 It follows from the above reasons that the bankruptcy notice falls to be set aside as an abuse of process and, if I am wrong on that, in reliance on s 40(1)(g) of the Bankruptcy Act. 123 As the Royals have been successful in the principal relief that they seek, it seems to me that they should have their costs. However, costs were not the subject of submissions before me. I will therefore give the parties the opportunity to make submissions to me to vary my provisional cost order in favour of the applicants by filing and serving short written submissions on costs within 14 days. If a party avails itself of that opportunity, then the other parties should file and serve short submissions in response within seven days thereafter. I certify that the preceding one hundred and twenty-three (123) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stewart.