Ground 2
56 Section 40(1)(g) provides:
(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 or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i) where the notice was served in Australia - within the time fixed for compliance with the notice; or
(ii) where the notice was served elsewhere - within the time specified by the order giving leave to effect the service;
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.
57 Ms Smith relied upon her proceeding in NCAT. Ms Smith submitted that her "cross-claim, set-off or cross demand" could not have been "set up" in the same proceeding in which Achieve Homes' judgment was obtained, because Achieve Homes used an adjudication certificate "to obtain default judgment [in the Local Court] against" Ms Smith. Ms Smith observed that her NCAT claim against Achieve Homes exceeded the Local Court judgment debt.
58 This submission raises at least two issues. The first is the proper identification of the "proceeding" and the second is whether Ms Smith has a "cross-claim, set-off or cross demand" which she could not have "set up" in the adjudication proceeding.
59 As to the first issue, s 40(3)(b) of the Bankruptcy Act provides:
For the purposes of paragraph (1)(g):
(b) a judgment or order that is enforceable as, or in the same manner as, a final judgment obtained in an action shall be deemed to be a final judgment so obtained and the proceedings in which, or in consequence of which, the judgment or order was obtained shall be deemed to be the action in which it was obtained;
60 Section 25(1) of the SOP Act provides that "[a]n adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly".
61 The adjudication certificate was filed in the Local Court as a judgment for a debt - see: s 133 of the Civil Procedure Act 2005 (NSW). The judgment was entered - see: r 36.11 of the Uniform Civil Procedure Rules 2005 (NSW).
62 The proceeding "in which the judgment or order was obtained" within the meaning of s 40(1)(g) of the Bankruptcy Act included the adjudication determination conducted under the SOP Act - see, by analogy: Chen v Bannerman [2001] FCA 160 at [4]. The adjudication process falls within the ordinary meaning of the term "proceeding". Although it is not determinative, it is relevant to note that the SOP Act itself refers to the non-curial statutory adjudication process under which the adjudication determination is made as "proceedings" - see, for example: s 21(4) of the SOP Act.
63 The entering of the judgment in the Local Court constituted the finalisation of the "proceeding", subject to any legal right to apply in the Local Court to have the judgment set aside. The lodgement and entering of the judgment did not require prior notice to Ms Smith.
64 The second issue raised by Ms Smith's submission is whether Ms Smith has identified a "counter-claim, set-off or cross demand", being one which she could not have "set up" in the proceeding. As noted, Ms Smith relies on the issues raised in the NCAT proceeding.
65 Ms Smith provided the adjudicator with a detailed adjudication response and submissions in support of her position. Ms Smith's submissions included that:
practical completion had not occurred under the contract and further works were required to reach practical completion;
there were several outstanding defects; and
the hot water system and oven were removed from the property without her consent.
66 The adjudicator, after considering both parties' submissions, found that the adjudicated amount of $35,136.58, being the whole progress payment claimed, was payable by Ms Smith. In his reasons, the adjudicator:
(a) found that the building works had reached practical completion and that there were, accordingly, no additional costs required to bring the building works to a state of practical completion: reasons at [30] and [31];
(b) rejected the entitlement on the part of Ms Smith to deduct amounts for outstanding claimed defects: reasons at [53];
(c) recorded that Ms Smith did not appear to have made a claim for a set-off or deduction in relation to the hot water system and oven. The adjudicator considered that this issue had been raised "for information only": reasons at [56].
67 The issues raised by Ms Smith in the NCAT proceeding are each matters the substance of which Ms Smith raised before the adjudicator in the adjudication proceeding. The matters were raised as reasons why the adjudicator should determine that the progress payment should not be made. The adjudicator was bound to consider the matters raised by Ms Smith in adjudicating the builder's claim against Ms Smith: s 22(2)(d) of the SOP Act.
68 The question of present relevance, though, is whether Ms Smith "has a counter - claim, set - off or cross demand equal to or exceeding the amount of the judgment debt … being a counter - claim, set - off or cross demand that … she could not have set up in the [adjudication] proceeding".
69 In determining that question, it would be wrong to construe the Commonwealth Bankruptcy Act by reference to the policy behind NSW's SOP Act.
70 First, the policy objectives of State legislation cannot limit the operation of Commonwealth legislation unless it can be said that the State legislation was a part of the relevant context for the Commonwealth legislation - see: Demir at [20].
71 Secondly, the two pieces of legislation are concerned with different topics and have different objectives. The SOP Act is designed with a view to maintaining a builder's cashflow by providing for early recovery of progress claims, including by creating legally enforceable judgment debts, with preservation of the legal rights and liabilities of the parties for later determination if necessary. The Bankruptcy Act is not concerned with debt recovery as such. The Bankruptcy Act is directed to persons in financial crisis with unmanageable debts and, amongst other things, provides for the discharge of certain debts (with a view to economic rehabilitation) whilst providing for realisation of assets for distribution to affected creditors. An evident policy behind s 40(1)(g) is that a judgment debtor who has a genuine claim against a creditor should not be made bankrupt if, although the creditor has obtained a judgment and is owed the judgment debt, the judgment debtor has not had the opportunity to "set up" a genuine counter-claim, set-off or cross demand if there is one. Such a person is not properly regarded as having unmanageable debt and should not be visited with the consequences of bankruptcy.
72 Thirdly, in any event, there are many mechanisms for recovery of legally enforceable debts outside of attempting recovery by serving a bankruptcy notice. A creditor with a judgment debt under the SOP Act has the full range of remedies available to any judgment creditor.
73 Ms Smith could not "set up" a "counter-claim, set-off or cross demand" in the adjudication proceeding. Ms Smith had no legal right to bring a "counter-claim, set-off or cross demand" in the adjudication process. The words "that he could not have set up in the action or proceeding in which the judgment or order was obtained" mean "which he could not by law set up in the action" - see: Re Jocumsen (1929) 1 ABC 82 at 85; Re A Debtor (1914) 3 KB 726 at 730; Re Brink [1980] FCA 78; 44 FLR 135 at 139 (Lockhart J); Re Vicini; Ex parte EA Sealey & Co [1982] FCA 156; 64 FLR 323 at 326 (Fisher J). Not only could Ms Smith not bring a counter-claim, set-off or cross demand against the builder, the adjudicator had no jurisdiction to award a "counter-claim, set-off or cross demand". The SOP Act only permits claims for progress payments by builders. It does not permit a counter-claim against the builder bringing the claim for a progress payment. The adjudicator could not have made an award in Ms Smith's favour whether or not the adjudicator had considered that Ms Smith had good claims and whether or not those claims exceeded the amount of the progress payment claimed by Achieve Homes. In this context, it should be observed that a "set-off" is more than a defence; a "set-off" only arises by establishing a countervailing claim which can be set off from the relevant debt: Re Dalco [1986] FCA 357; 67 ALR 605 at [611].
74 The adjudicator was required to make his determination by considering "only" the five matters set out in s 22(2) of the SOP Act, as mandatory considerations. One of those considerations was the "provisions of the Act" which includes the express object of the Act and the objects of the Act as evident from its language and structure. The object of the SOP Act is to permit those carrying out construction work to be able to recover progress payments quickly via a non-curial statutory adjudication, largely on written material. The legal liability of the parties to the adjudication is otherwise preserved for later determination by a court or tribunal where necessary - see: ss 3 and 32. The SOP Act preserves claims against the builder, such as counter-claims. The SOP Act permits facts and argument - which might support a counter-claim, set-off or cross demand - to be raised as a reason not to make a determination in the builder's favour and requires matters so raised to be considered: s 22(2)(d). It does so in a statutory scheme the object of which is to permit early recovery of progress payments by the builder with the legal rights of the parties being preserved for determination, where necessary, later.
75 Ms Smith could (and did) raise the issues she wanted to raise as a form of defensive argument against the adjudicator determining that the progress payment should be made. The adjudicator was bound to take her arguments into account in determining the builder's claim: s 22(2)(d). That is not the same as setting up a counter-claim within the contemplation of s 40(1)(g) of the Bankruptcy Act.
76 Achieve Homes, in its submissions filed after the hearing, submitted:
The focus of [s 40(1)(g)] is [on] whether there is a legal preclusion stopping the Owner from raising the issues. The answer on the simple wording of s 40(1)(g) is that the Owner did set up her counter-claim and set-off. There is no question that the adjudicator acted within his jurisdiction to dismiss those issues and order payment in favour of the Builder.
77 This submission should be rejected. First, I do not accept that the focus of s 40(1)(g) is on the ability to "raise issues". The focus of s 40(1)(g) is on whether Ms Smith could have "set up" a "counter-claim, set-off or cross demand". Ms Smith could not bring a counter-claim in the adjudication proceeding and her legal right to bring a counter-claim was expressly preserved.
78 Secondly, with respect to the submission that "the adjudicator acted within his jurisdiction to dismiss [the] issues raised by Ms Smith", it may be accepted that the adjudicator had jurisdiction (and was obliged to) consider what Ms Smith raised in her response and submissions. The adjudicator had to consider those issues together with each of the five matters in s 22(2) of the SOP Act. The adjudicator had jurisdiction to conclude that the matters raised by Ms Smith were not a sufficient reason not to make a determination in favour of the builder. This does not amount to a determination of a counter-claim brought by Ms Smith.
79 At the hearing, Achieve Homes relied on two decisions of the Federal Magistrates' Court of Australia in which it was assumed or conceded that matters which could have been raised in response to an adjudication claim made under the SOP Act were matters which fell within the concept of "counter-claim, set-off or cross demand" in s 40(1)(g) which could have been "set up" in the adjudication process: Cavanah v Advance Earthmoving & Haulage Pty Ltd [2008] FMCA 427 at [100] and Bailey v MCH Building Pty Ltd [2011] FMCA 124 at [16] to [19].
80 Those decisions did not provide any clear reasoning for the implicit conclusion that - because the facts relevant to a counter-claim could be raised for consideration as a form of defensive submission against a determination under the SOP Act in the builder's favour - a "counter-claim, set-off or cross demand" could be "set up" for the purposes of s 40(1)(g) of the Bankruptcy Act.
81 This concern was raised at the hearing and, it not having clearly been advanced in any submission made on behalf of Ms Smith, Achieve Homes was provided an opportunity to make further submissions and provide references to cases in which the issue had been directly addressed.
82 In submissions filed after the hearing, Achieve Homes referred to the decision in Grave v Blazevich Holdings Pty Ltd [2010] FMCA 386. That decision also did not expressly address the issue. Dr Grave's argument was described in the following way (at [7]):
The applicant's argument that he falls within s 40(1)(g) is that his claim that the respondent has brought proceedings against the wrong party is a defence which by the operation of s 32 of the [SOP] Act is converted into a right to a restitutionary claim to recover the money to be paid under the judgment. He argues that by virtue of the provisions of [the SOP] Act … [he] had no right to bring this claim in the original proceedings and so is not a cross demand that could have been set up in the proceeding in which the judgment or order was obtained …
83 The respondent's response was described in the following way (at [7]):
The respondent argues the situation that is before the applicant is one of his own making. He could have and should have filed a payment schedule stating that he owed no money to the builder because he was not a party to the contract and that this type of proceeding does not fall within s 40(1)(g).
84 The Court concluded at [22] that "the applicant could have raised his defence that he was not the proper party in the process whereby the amount due was determined" and that his failure to do so was entirely his fault. The Court concluded that "the restitutionary right which only came into existence because of the applicant's own failure to have the issue determined under the [SOP] Act does not constitute a cross demand that could not have been set up in the proceedings in which the judgment was obtained": at [22].
85 Dr Grave's argument is difficult to understand. It is a nonsense to speak of "a defence which by the operation of s 32 of the [SOP] Act is converted into a right to a restitutionary claim to recover the money to be paid under the judgment". A claim for restitution can only arise in respect of a payment which has in fact been made. Dr Grave did not have a "counter-claim, set-off or cross demand" and s 40(1)(g) could not have applied. The case does not address the issue which presently arises.
86 Achieve Homes also referred, in its submissions filed after the hearing, to the decision in Bobos v Deputy Commissioner of Taxation [2019] FCA 1910. The case does not concern s 40(1)(g) of the Bankruptcy Act or the question presently raised.
87 Section 40(1)(g) identifies a situation comprising an act of bankruptcy (in summary, non-compliance with a bankruptcy notice based on a final judgment). It contains a qualification or exception. The exception is that an act of bankruptcy does not occur if the debtor, against whom a final judgment has been obtained, satisfies the Court that the debtor has a legal right to make a "counter-claim, set-off or cross demand" which the person "could not have set up" in the action giving rise to the judgment debt. The fact that leave of the Court might be required in order to bring a counter-claim would be insufficient to engage the exception in s 40(1)(g): Re Willats [1991] FCA 541 at [14] to [21]; 31 FCR 206 at 210 to 212. The exception might perhaps also not be engaged simply because the debtor might need to seek to transfer the proceedings to a different court - see the discussion in Axarlis v Pets Paradise Franchising (SA) Pty Ltd [2010] FCA 319; 183 FCR 521. However, the exception does apply where there is no legal right - with leave or otherwise - to make a counter-claim, set-off or cross demand in the proceeding giving rise to the final judgment: Re Stokvis (1934) 7 ABC 53 at 57. As Lukin J there stated, in a passage approved by O'Loughlin J in Re Willats at [14] and [21], situations in which it could be said that a counter-claim could not be "set up" would include the situation in which a counter-claim could not be brought at all because of "an absence of empowering provisions". This reflects the present situation. The right afforded by the SOP Act to respond in writing in a non-curial setting to a progress payment claim made by a builder is not a right to "set up" a "counter-claim, set-off or cross demand" against the builder making the progress claim.
88 The argument that this conclusion deprives the SOP Act of force or - to adopt the language of Achieve Homes, that the conclusion "runs the risk of perverting the object of the SOP Act" - can be put to one side. That argument is deployed in support of an erroneous process of statutory construction and is, in any event, overstated for the reasons given earlier. Whilst it can be imputed to the NSW State legislature, in enacting the SOP Act, that it was intended that a judgment debt in respect of a progress claim could be legally enforced notwithstanding that the full competing legal claims of the parties to the dispute had yet to be finally determined according to law, it cannot be imputed to the Commonwealth legislature, in enacting s 40(1)(g) of the Bankruptcy Act, that a judgment debtor whose legal right to make a counter-claim had been unaffected and preserved, could be bankrupted on the basis of a judgment debt arising from a statutory non-curial informal adjudication procedure in which the counter-claim could not have been brought.
89 Nor could Ms Smith have "set up" her claims in the Local Court: s 25(4) of the SOP Act.
90 I accept that Ms Smith's counter-claim is genuine. The evidence establishes a prima facie case in the sense that there is sufficient evidence admissible on an application such as this which, if put forward in a form admissible in NCAT, and accepted, would establish both that the progress claim is not owed under the contract and that Achieve Homes is liable for defects and losses.
91 I should not be understood as expressing a view on the merits of the underlying dispute except to conclude that the claim is genuine and that the outcome just mentioned is a possibility sufficient for a bankruptcy court to be satisfied for the purposes of s 40(1)(g) that Ms Smith has a "cross-claim, set-off or cross demand" which is at least as much as the judgment debt. In other words, Ms Smith "has a claim deserving to be finally determined" - see: Glew v Harrowell [2003] FCA 373; 198 ALR 331 at [11]-[12].
92 Ground 2 should be allowed on this basis.