Stec v Orfanos

Judgment (9 paragraphs)

[1]

INTRODUCTION 1 This is an appeal from an order of a Judge of the Court (von Doussa J) dismissing an application by a judgment debtor in respect of a bankruptcy notice. The debtor, Tadeusz Stec, the appellant, applied to the Court to set aside a bankruptcy notice ("the Notice") served upon him in respect of an order for costs made against him in the Supreme Court of South Australia. In the alternative he claimed that he had a counter-claim, set-off or cross demand ("cross demand") of the kind described in s 40(1)(g) of the Bankruptcy Act 1966 (Cth) ("the Act"). His Honour refused to set aside the Notice. Nor was his Honour satisfied of the existence of a cross demand of the requisite kind. The primary Judge having dismissed all of his claims, Mr Stec now appeals to the Full Court from the dismissal. 2 In order to understand the issues that arise on the appeal, it will be necessary to say something of the history of the matter. 3 Mr Stec and Bogdan Leczynski held 56 per cent of the share capital of Electro Research International Pty Ltd ("ERI"). According to the evidence of Mr Stec, ERI was incorporated for the purpose of marketing intellectual property created by Mr Stec relating to the production of electric motors from amorphous magnetic materials. Andrew Conroy, the second respondent, Tadeusz Rybak, the third respondent, and Peter Georgopolos, the fourth respondent, held the remaining 44 per cent of the share capital of ERI. The directors of ERI were Messrs Stec, Conroy, Rybak and Georgopolos. In May and October 1994 Messrs Stec and Leczynski purported to call general meetings of ERI at which it was resolved (1) that Messrs Conroy, Rybak and Georgopolos be removed as directors; and (2) that ERI's registered office be changed. In November 1994 ERI and Messrs Conroy, Rybak and Georgopolos commenced proceedings against Messrs Stec, Leczynski and Mrs Stec in the Supreme Court of South Australia challenging these resolutions. 4 On 29 November 1994 Judge Kelly, sitting as a Master of the Supreme Court, made summary orders which, in their effect, upheld the plaintiffs' challenge. Costs were then reserved. However, on 16 December 1994 Messrs Stec and Leczynski applied to the Supreme Court to set aside the orders made on 29 November 1994. But on 8 February 1995 Judge Kelly dismissed their application and ordered that they pay the defendants' "costs of the action and [of] this order and [of] the order… made on the 29th day of November 1994 on a solicitor/client basis to be taxed". 5 On 17 February 1995 Mr Stec filed an appeal in the Supreme Court against the orders made by Judge Kelly on 8 February 1995. But on 20 April 1995 the plaintiffs' solicitors posted a short form bill to the defendants' solicitors. Rule 101A.02(2) of the Supreme Court Rules requires a person to whom a short form bill is delivered to respond to the bill within twenty one days of its delivery. The sub-rule provides that, in the event that the person to whom the bill is delivered fails to comply with this requirement, the whole of the costs sought shall be deemed to be admitted and payable. Rule 101A.02(4) provides that if at the expiration of the twenty-one day period there is no response to the short form bill the party who delivered it may apply to the Registrar for an allocatur. There was no response to the short form bill posted on 20 April 1995, and upon application to the Registrar under r 101A.02(4) an allocatur, which was attached to the Notice, was issued on 18 May 1995. 6 On 14 August 1995 Perry J made several orders in the appeal, including holding orders, and gave directions for an early final trial of the issues. One of these orders provided: "As to the order made by Master Kelly on 8 February 1995… it is ordered: (a) An order setting aside the said order, including orders for costs…." 7 The issues were then finally tried by Olsson J, who gave reasons for judgment on 19 April 1996: Electro Research International Pty Ltd v Stec (1996) 20 ACSR 320. Orders were made by his Honour in May, July and December 1996. Relevantly, they included an order made on 12 December 1996, par 7 of which was as follows: "That any stay of the order for costs made on the 8th day of February 1995 by Judge Kelly Master of the Supreme Court be set aside and that the said order for costs and (sic) do stand against the defendants Tadeusz Stec and Bogdan Leczynski." 8 In June 1996 Nicholas Orfanos, the first respondent, was appointed Administrator of ERI. In September 1996 ERI entered into a Deed of Arrangement with its creditors.

(a) Did his Honour err in refusing to set aside the Notice? 12 We will consider in turn the several grounds advanced by Mr Stec. The first complaint relates to the address of "the creditor" given in the notice. It will be recalled that the four parties described as "the creditor" were said to be "of C/‑ Nicholas Orfanos, Deed Administrator Ground Floor, 99 Frome Street Adelaide SA 5000". In par 4 it was said that payment of the debt could be made to ERI "of C/- Nicholas Orfanos, Deed Administrator Ground Floor, 99 Frome Street Adelaide SA 5000". Two defects are asserted. The first is that the Administrator's address was not one at which all the persons named as "the creditor" could be found. It was common ground that the debt sought to be recovered was a debt owed jointly to the persons described as "the creditor". It was necessary, therefore, to give an address where they, or one of them, could be found during the currency of the notice. See James v Federal Commissioner of Taxation (1955) 93 CLR 631 at 639. That is what the notice did. It gave the address of the Administrator of ERI. 13 The second claimed defect is that for want of any document emanating from ERI authorising Mr Orfanos to act on its behalf, his address was not an address where ERI carried on business. Reference was made to the observation of the High Court in James at 642‑643 that "Any address anywhere this company carries on business in Australia" would suffice as its address. There is no substance in this point. The Deed of Company Arrangement is executed by ERI. Clause 9 of the Deed appoints Mr Orfanos "to act as agent for and on behalf of the Company". Section 437B of the Corporations Law is to the same effect as clause 9 of the Deed. For the same reason there is no substance to the contention that Mr Orfanos had no authority to issue the bankruptcy notice on behalf of ER1. Mr Orfanos confirmed by his signature on the bankruptcy notice that he was the authorised agent of the four parties described as "the creditor" in the bankruptcy notice. Nothing has been put forward by Mr Stec which raises any doubt as to the accuracy of this assertion by Mr Orfanos. 14 The next ground of complaint is that the notice is defective because it did not attach Judge Kelly's order of 8 February 1995. Paragraph 2 of the prescribed form requires a copy of the judgment or order relied upon by the creditor to be attached to the notice. Two orders of the Supreme Court of South Australia are attached. The first is the order of Olsson J made on 12 December 1996, par 7 of which we have set out above. The second order is an office copy of the allocatur which we have also set out above. 15 We agree with the primary judge that the operative order which imposed the liability to pay costs was that of Olsson J. Judge Kelly's order ceased to have any effect when it was set aside by Perry J on 14 August 1995. Although Olsson J ordered that Judge Kelly's order "do stand against the defendants Tadeusz Stec and Bogdan Leczynski", it is Olsson J's order which imposes the liability. One can understand why the allocatur, which quantifies the amount payable, refers to Judge Kelly's order, because that was the order which directed that the costs be taxed. Nevertheless, in the events that happened, the source of the obligation to pay those costs was Olsson J's order. 16 The next contention is that par 7 of Olsson J's order of 12 December 1996 had not been pronounced in public. It had thus never been made, and so could not form the basis of the Notice. This contention does not appear to have been put to the primary judge. The transcript of proceedings before Olsson J was not before us. But it was common ground that it contains no reference to what became par 7 of the order. Nevertheless, counsel for the defendants asked the judge to make an order in that form, and such an order was made. As an order of a superior court, it is valid until set aside. It has never been set aside. Mr Stec repeated this submission in another guise, namely that par 7 was not a final order. This contention fails for the same reason. 17 Mr Stec then claims that the Notice was invalid because no certificate of taxed costs was attached to it. The notes to the Schedule to Form 1 in Schedule 1 to the Regulations (ie the prescribed form of Bankruptcy Notice) inform the creditor that if legal costs (item 2 of the Schedule) are being claimed in the Notice, a certificate of taxed or assessed costs in support of the amount claimed must be attached to the Notice. No certificate was attached to the Notice. But there was no need for any such attachment. A certificate is required only if legal costs are claimed in item 2 of the Schedule; that is, legal costs not included in the judgment or order on which the bankruptcy noticed as based. Although the judgment itself is based on an order of the Supreme Court concerning the payment of legal costs, no legal costs not included in the judgment are claimed in the bankruptcy notice. 18 The next claim is that the Notice was invalid because the allocatur was not a final order. An allocatur ("it is allowed") is the certificate of taxation of the allowance of costs by the taxing officer. Mr Stec's submissions do not disclose why he says that the allocatur is not a final judgment or final order. Rule 101.18(1) of the Rules of the Supreme Court of South Australia provides that upon the completion of a taxation of costs a taxing officer or the Registrar may sign an allocatur. Sub‑rule (2) provides that when duly signed in accordance with sub‑rule (1) and sealed by the Court, an allocatur has the effect of, and is enforceable in the same manner as, a judgment of the Court for the amount of the allocatur. The allocatur determined in a final manner Mr Stec's liability for costs. It is thus a final judgment or final order for the purposes of s 41(3) of the Act. 19 The final claim is that Olsson J's order of 12 December 1996 constituted a stay of execution because it prevented Mr Stec from realising his assets to pay his debts. A bankruptcy notice issued in respect of a judgment or order, execution on which has been stayed, is invalid. See ss 40(1)(g) and 41(3)(b) of the Act. Mr Stec relied on the decision of the Full Court in Wiltshire‑Smith v Mellor Olsson (1995) 57 FCR 572. He referred to pars 1 to 3 of Olsson J's order which, in substance, declare that certain patents and intellectual property to which Mr Stec laid claim are beneficially owned by ERI, and direct him to execute assignments to ERI of patents registered in his name. He submitted that they had the effect of removing property from him, thus preventing him paying the costs order. The primary judge said: "This submission misunderstands the notion of a stay, and the decision in Wiltshire‑Smith. In Wiltshire‑Smith the Court held that if the practical effect of a Court order imposed on the property of the debtor were to remove the property from the control of the debtor, thereby preventing the debtor paying a debt which could otherwise have been discharged from the property, the order could amount to a circumstance sufficient to disentitle the judgment creditor from proceeding immediately to execution: see 585-587. Unlike the orders in question in Wiltshire‑Smith, the order of Olsson J declared that the intellectual property was not beneficially owned by Mr Stec. Accordingly, Mr Stec never had a legal right to realise or otherwise use that property to discharge the order for costs. The principles discussed in Wiltshire‑Smith have no application in a situation of that kind." We agree with his Honour's treatment of this issue. It is supported by other authorities. See, for example, Re Solomon; Ex parte Reid (1986) 10 FCR 423 at 426, 428; Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568 at 577‑578; Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 29.

(b) Did his Honour err in holding that there was no cross demand? 20 Mr Stec's cross demand for fees payable to him as a director ($225,000) was asserted against both the company and Messrs Conroy, Rybak and Georgopolos. The primary judge was not satisfied that Mr Stec had a prima facie or bona fide claim against ERI in respect of remuneration for any amount, let alone the $225,000 claimed. His Honour said the appellant had failed to show that he had a fair chance of success. Cf Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 and Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346. His Honour pointed out that Mr Rybak had denied that it had even been agreed that directors' fees would be $100,000 per annum, and Mr Orfanos had produced evidence which showed that Mr Stec had made inconsistent allegations in the past regarding the alleged entitlement. On one occasion, for example, he had asserted that the agreed amount was $50,000 per annum. Before his Honour Mr Stec had relied on a handwritten note apparently made by ERI's accountant at a meeting on 17 March 1994. The note contains the words "Employment contracts ‑ $100,000 pa for directors A.L.". His Honour said that the note was ambiguous and fell far short of evidence that remuneration at the rate of $100,000 per annum had been agreed for each director. He observed that such an agreement was unlikely to have been made by a company that was just commencing business. He also pointed out that even if there had been some agreement at the outset that directors' fees would be paid, the assertion that Mr Stec was entitled to fees for a period of over two years from March 1994 to June 1996 could not be supported having regard to the findings made in the Supreme Court litigation regarding his conduct and status. He had been enjoined from even holding himself out as a director from 29 November 1994. See the order of Master Kelly of 29 November 1994. 21 In the light of all those matters it was clearly open to the primary judge to conclude that Mr Stec did not have a fair chance of succeeding in the remuneration claim against ERI. That conclusion is reinforced by a matter to which his Honour did not directly refer. The handwritten note also records decisions on seven other matters. The minutes of the meeting record those seven decisions, but are silent on directors' remuneration. Instead, they record a decision that employment contracts would be drawn up for the directors and the accountant. The accountant is the "A.L." referred to in the handwritten note. 22 The primary judge rejected Mr Stec's alternative claim to recover the $225,000 remuneration from Messrs Conroy, Rybak and Georgopolos. For this claim Mr Stec relied on the provisions of Div 4 of Pt 5.7B of the Corporations Law. His Honour gave a number of reasons for rejecting this claim. The first was that, for the reasons he had already given, Mr Stec had failed to establish a prima facie case of entitlement to remuneration from ERI. The second was that there was no evidence that ERI was insolvent when the agreement was alleged to have been made. The third was that even if the insolvent trading provisions could apply to directors' fees, s 588M, which provides for the recovery of compensation for loss resulting from insolvent trading, applies only where the company is being wound up. ERI was not being wound up. His Honour rightly rejected this alternative claim. It was not even remotely tenable. 23 The primary judge then dealt with two other claims Mr Stec asserted against ERI - one for $38,133 for the design of a stator and the other for $47,000 for the cost of obtaining a patent. His Honour held that these claims had been adjudicated upon by Olsson J in his reasons published on 19 April 1996. The primary judge treated Olsson J as having held that the amounts claimed formed part of the value of the intellectual property Mr Stec had transferred to ERI as consideration for an allotment of shares. He concluded that far from establishing a prima facie case against ERI, the material before the Court showed that Mr Stec's claims had been resolved adversely to him in the Supreme Court. His Honour rightly rejected the second of these cross demands, and on the assumption upon which he proceeded, he rightly rejected the first. However, before us Mr Stec asserted that the stator was not part of the intellectual property he had transferred to ERI. He does not appear to have made this claim before the primary judge, who proceeded on the basis that the stator was covered by par 4 of Olsson J's order. In any event, Mr Stec relied on mere assertion, and did not direct us to any material which established that he had a fair chance of success in any claim in relation to the stator. 24 The primary judge then said that there was a more general answer to all the alleged cross demands. This was that in answer to a bankruptcy notice issued by several joint creditors, the debtor may not raise a debt owed by one or some of them individually. Mr Stec's claims were not against all those described in the notice as "the creditor". His Honour relied on James at 643 and on an earlier decision of his own, Emanuele v Grey (unreported 17 December 1997), which also relied on the passage in James. Where a debtor seeks to set aside a bankruptcy notice on the ground that the debtor has a cross demand which equals or exceeds the amount of the judgment or order on which the bankruptcy notice is founded, the judgment on the one hand and the cross demand on the other must be mutual and due in the same right: Re Anderson; Ex parte Alexander (1927) 27 SR (NSW) 296; James v Abrahams (1981) 51 FLR 16 at 27. The requirement that the two claims be "in the same right" is directed to the capacities in which the claimants claim. Thus a claim by a judgment creditor personally cannot be answered by a claim against the creditor as a member of a partnership or as an executor or trustee. See Re Wedd; Ex parte Wedd (1961) 19 ABC 36; Re Molesworth (1907) 51 Sol J 653; Vogwell v Vogwell (1939) 11 ABC 83 at 89. But the requirement relevant to the present case is that the claims be mutual; that is that they be of the same kind or nature. Thus joint debts cannot be set off against several debts: Middleton v Pollock (1875) LR 20 Eq 515 at 518. Here three of Mr Stec's claims were against ERI alone. There is thus no mutuality in relation to these claims. His other claim was against Messrs Conroy, Rybak and Georgopolos. Again there is no mutuality because one of the joint creditors, ERI, is not the subject of the cross claim. 25 We agree with the primary judge's observations in Emanuele and in the present case that a debtor may only raise as an answer to a bankruptcy notice issued by several joint creditors a cross demand against those creditors jointly. However, we do not think that James provides any authority for this proposition.

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Judgment (9 paragraphs)

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