Wren v Mahony

IN THE FEDERAL COURT OF AUSTRALIA) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE ) No NN 4261 of 1994 STATE OF NEW SOUTH WALES ) Re: BORIS GANKE Ex parte: BORIS GANKE Applicant/Debtor PETER ANDREW SOMERSET and PAUL MERVYN FORDYCE trading as "P A SOMERSET & CO" Respondents/Creditors CORAM: Lindgren J PLACE: Sydney DATE: 5 April 1995

MINUTE OF ORDERS THE COURT ORDERS THAT: 1. The amended application be dismissed. 2. The Debtor pay the Creditors' costs. NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE ) No NN 4261 of 1994 STATE OF NEW SOUTH WALES ) Re: BORIS GANKE Ex parte: BORIS GANKE Applicant/Debtor PETER ANDREW SOMERSET and PAUL MERVYN FORDYCE trading as "P A SOMERSET & CO" Respondents/Creditors CORAM: Lindgren J PLACE: Sydney DATE: 5 April 1995

REASONS FOR JUDGMENT NATURE OF PROCEEDINGS: By an application filed in the Registry on 23 December 1994, returnable on 7 March 1995, Boris Ganke ("the Debtor") applied for an order setting aside bankruptcy notice No NN 4261/94 issued on 9 December 1994 on the application of Peter Andrew Somerset and Paul Mervyn Fordyce, solicitors, trading as "P A Somerset & Co" ("the Creditors"). The Debtor sought, in the alternative, an extension of the time for compliance with the bankruptcy notice. The bankruptcy notice was served on the Debtor on 9 December 1994. By successive orders, the time for compliance with the notice has been extended up to and including 5 April 1995. The application came before me as Duty Judge on 22 March 1995. In the course of the hearing, over objection, I granted leave to the applicant to file an amended application. The primary relief sought in the amended application was again the setting aside of the bankruptcy notice. The amended application contained different formulations of the period for which the extension of time for compliance was sought. I reserved my decision. BACKGROUND: At all material times, the Creditors practised as solicitors and acted for the Debtor. The bankruptcy notice was based upon a Local Court judgment recovered by the Creditors against the Debtor on 25 November 1994 for $36,650.02 after a contested hearing. The judgment was given in respect of the Debtor's liability to the Creditors arising out of the dishonour of two post-dated cheques which were delivered to the Creditors in early June 1993 in respect of legal fees incurred and to be incurred. The first cheque bore date 5 July 1993 and was for $25,000.00. The second bore date 26 July 1993 and was for $20,000.00. In July 1993, the Debtor stopped payment on both, but gave a bank cheque for $15,000.00 to the Creditors. The Creditors claimed in the Local Court to recover the balance of $30,000.00 plus dishonour fees of $18.00. The difference between the amount of $30,018.00 and the amount of the judgment, is accounted for by the fact that the judgment included interest on the amounts of the two cheques, the fee paid on the issue of the proceedings in the Local Court and professional costs which the learned Magistrate allowed to the Creditors in those proceedings. The ground on which the Debtor relies to have the bankruptcy notice set aside is, to speak generally, that the Creditors are liable to refund to him an amount equal to the difference between the total of the amounts which he paid to them for legal costs and disbursements and whatever amount will prove to be, after taxation of their bill of costs, the amount of their taxed costs and disbursements. However, the precise legal nature of the Debtor's claim and its impact on the bankruptcy notice was not the subject of analysis in the Debtor's submissions. The primary relief sought by the Debtor is the setting aside of the bankruptcy notice. It follows that he asks that I go behind the Local Court judgment. Since the only matter relied on is his claim to be entitled to the refund to which I have referred, I understand the Debtor's submission to be that this gives rise to some right which somehow impeaches the entitlement of the Creditors to their ordinary legal remedy for the dishonour of the two cheques. This is because it is only on some such basis that there would be the beginning of a case for going behind the Local Court judgment. On the circumstances in which the Court will go behind a final judgment or order on which a bankruptcy notice is founded, see Wren v Mahony (1972) 126 CLR 212; Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (No 2) (1992) 37 FCR 234 (FCA/FC); Bourke v Beneficial Finance Corporation Ltd (1993) 47 FCR 264 (FCA/FC). This must be distinguished from an attempt by a debtor to satisfy the Court, in terms of para 40 (1) (g) of the Bankruptcy Act 1966 (Cth) ("the Act"), " ... that he 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 could not have set up in the action or proceeding in which the judgment or order was obtained; ..."

Plainly, where a debtor so satisfies the Court before the expiry of the time fixed for compliance with the bankruptcy notice (original or extended), no act of bankruptcy is committed upon that expiry, and it is a misconception to think that the words quoted refer to a ground for the setting aside of a notice: James v Abrahams (1981) 51 FLR 16 (FCA/FC) at 21-22 (Deane and Lockhart JJ); Pollnow v Queensboro Pty Ltd, unreported, FCA/Burchett J, 19 October 1988. The Debtor did not seek relief by reference to para 40 (1) (g), and consistently with this his amended application was not framed by reference to r 10 of the Bankruptcy Rules, which was not complied with (there is one reference to para 40 (1) (g) in the Debtor's written submissions). Paragraph 40 (1) (g)'s notion of a "counter-claim, set-off or cross demand" is broader than that of, for example, an equitable set-off which impeaches a creditor's legal right to recover a debt; cf Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 (FCA/Lockhart J) at 138-139; Re Gould; Ex parte Skinner (1983) 72 FLR 393 (FCA/Fitzgerald J) at 406-407. Notwithstanding the fact that the Debtor's amended application is one to set aside the bankruptcy notice, against the possibility that it might be said that the evidence should have satisfied me that he has met the terms of para 40 (1) (g), I consider the case below under that paragraph too.

FACTS IN OUTLINE: Although the facts appear in more detail below, it is necessary, in order that the legal issues be understood, that some of those facts be mentioned now. The two cheques totalling $45,000.00 were given on account of legal fees incurred and to be incurred by the Debtor to the Creditors. The Debtor cross-claimed in the Local Court. The nature of the cause of action pleaded in the cross-claim is less than clear. It read as follows: "The Defendant cross-claims an amount of $39,000 which was paid by the Defendant into the trust account of P A Somerset & Co and for which no Bills of Costs in taxable form have been received." There followed particulars of eight payments made on and between 22 June 1992 and 8 June 1993 totalling $39,000.00. But as noted earlier, the Debtor also gave to the Creditors in July 1993 the bank cheque for $15,000.00, making, apparently, a total amount paid by him of $54,000.00 (in a judgment of Dunford J to which I refer to later, his Honour referred to the amount paid as being $56,900.00). The Debtor's complaint has been, and is, that the Creditors are entitled only to such amount as represents their costs as taxed. If the Debtor intended to claim the difference between the total paid by him and the amount for which the Creditors' costs might ultimately be taxed, the commencing figure should have been $54,000.00 (or $56,900.00) rather than $39,000.00, and the reference to the fact that payment was made into the Creditors' trust account was an irrelevancy. If, on the other hand, the Debtor was intending to claim all the amounts which he had paid into the Creditors' trust account and which, according to his case, had been transferred to their office account without his authority (see later), the reference to the non-receipt of bills of costs in taxable form was otiose. The learned Magistrate treated the cross-claim as being of the former kind. He said, "since the amount has not been crystallised the cross-claim must be struck out." No doubt the Debtor's case was conducted before him on that basis as it was before me (but see later as to the Debtor's case put to Dunford J in proceedings in the Supreme Court of New South Wales). On 28 December 1994, the Debtor served at the Local Court Civil Claims Registry, a request to the learned Magistrate to state a case. Amongst other grounds was this: "4 The Magistrate erred in not holding that the Defendant had a valid cross-claim exceeding the amount claimed by the Plaintiff."

Since, as appears below, I have reached the conclusion that the Debtor has not satisfied me that he yet has a cross-claim, set-off or cross demand at all, whether his present application is viewed as an application to set aside the bankruptcy notice or as an attempt to avoid the commission of an act of bankruptcy by meeting the terms of para 40 (1) (g) of the Act, it fails. FACTS IN MORE DETAIL: The Creditors acted for the Debtor in connection with two sets of proceedings in the Equity Division of the Supreme Court of New South Wales No 2632 of 1990 and No 1897 of 1993 relating to Southern Cross Exploration NL ("the Equity proceedings"). They so acted for him from 19 June 1992 to 2 August 1993 when he terminated their retainer. On 1 June 1993, the Creditors wrote to the Debtor advising that they had assessed their costs incurred up to and including a mention of the matter before the Court on 31 May 1993, and that at an hourly rate of $320.00 those costs amounted to $37,606.40. By the letter they advised that they estimated their costs yet to be incurred to amount to $19,200.00, making a total of $56,806.40 of which the Debtor had paid on account $6,570.70, leaving a balance of $50,235.70. The letter concluded with the following two paragraphs: "A cheque will accordingly be required today (post dated if need be) in the sum of $50,500 to meet expected costs through to the completion of this matter. These funds will be held in trust. We cannot begin preparation of this matter until those funds are to hand."

On 1 June or shortly afterwards, the Debtor gave to the creditors the two post-dated cheques referred to earlier. Over a period from 22 June 1992 to 8 June 1993, the Debtor apparently paid to the Creditors' trust account amounts totalling $39,000.00 for legal fees and disbursements. In July 1993, the Debtor stopped payment on the two post-dated cheques and gave a bank cheque to the Creditors for $15,000.00. Apparently that amount was paid into the office account rather than the trust account. After terminating the Creditors' retainer in August 1993 the Debtor requested provision of a bill of costs in taxable form, but this was never provided. On 3 November 1993 the Creditors commenced Local Court proceedings No 16535 of 1993 seeking to recover the amounts of the two dishonoured cheques plus dishonour fees, less the amount of the bank cheque for $15,000.00. On 31 January 1994, the Debtor filed the cross-claim referred to above seeking to recover $39,000.00. On 18 March 1994 the Debtor commenced proceedings No 10712 of 1994 in the Common Law Division of the Supreme Court of New South Wales against the Creditors ("the Common Law proceedings") seeking, inter alia, an order that the Creditors provide him with a bill of costs in taxable form for the period from 17 June 1992 to 3 August 1993 inclusive in respect of the Equity proceedings. Dunford J heard the Common Law proceedings and on 23 June 1994 reserved his decision. Having obtained judgment on 25 November 1994 in the Local Court, and while Dunford J's judgment was awaited, the Creditors, on 9 December 1994, procured the issue of the bankruptcy notice and served it on the Debtor. The Debtor applied in the Common Law proceedings for a stay of execution on the Local Court judgment, and on 20 December 1994 Dunford J ordered, on the Debtor's giving the usual undertakings as to damages, that execution be stayed until further order. On 23 December 1994 the Debtor filed in the Registry of this Court the present application to set aside the bankruptcy notice. On the same day, a Deputy Registrar, purportedly pursuant to sub-s 41 (6B) of the Act, extended the time for compliance to 7 March 1995 and there have been subsequent successive extensions. On 28 December 1994, the Debtor served at the Local Court Civil Claims Registry his request for a stated case. On 2 March 1995, Dunford J delivered judgment in the Common Law proceedings. His Honour said that the dispute between the parties related to these three issues: "1. Whether the Debtor was entitled to a bill of costs in detailed or taxable forms; 2. whether moneys paid by the Debtor to the Creditors have been properly transferred by them from their trust account to their general account, and if not, the consequences thereof; 3. the Local Court proceedings." In relation to the first of these issues, his Honour was satisfied that he should order the Creditors to give to the Debtor a bill of costs in taxable form for the whole of the period the subject of the Equity proceedings. In relation to the second issue, he expressed himself as being satisfied that the Debtor did impliedly authorise the transfer of the moneys from the Creditors' trust account. In relation to the third issue, the one most relevant for present purposes, Dunford J held that the Debtor's claim for a stay of execution of the judgment in the Local Court proceedings failed. His Honour's reasons contained the following passages of importance for present purposes: "Finally the plaintiff sought a stay of the proceedings in the Local Court and, since judgment has been given in the Local Court, seeks a stay of execution on that judgment. The basis of this claim is that the action in the Local Court is an action brought by the solicitors for their costs and that no bill of costs as required by s 198 Legal Profession Act was delivered and a month allowed to elapse before the commencement of the Local Court proceedings. If successful in obtaining this stay and the defendants deliver a bill of costs either as a preliminary to commencing or continuing their action, or as a consequence of the order I will make under s 208, the plaintiff would require the bill to be taxed before the Local Court judgment was enforced, and if the judgment exceeded the amount of the taxed bill of costs, he would I expect apply to have the judgment set aside or varied. However, the cause of action relied on in the Local Court was not for the solicitors' costs, it was not an action for work and labour done or professional services, but was an action on the dishonoured cheques brought pursuant to s 71 Cheques and Payment Orders Act 1986. That section gives an independent cause of action to the drawee of a cheque which is not met on presentation, separate and apart from the consideration for which the cheque was given: Ahoe and Bickley v Baulch [1951] QWN 14, Weaver and Craigie: Law of Banker and Customer at para 9.780 and A R Coleman: Cheques and Payment Orders Act 1986 at 105." (Judgment transcript at 16) On 9 March 1995, Dunford J made formal orders. Before his Honour made the orders, there was some debate. Mr M Ryckmans, solicitor, who appeared for the Creditors, submitted that his Honour's Judgment did not address the question of the basis on which the bill of costs was to be prepared. Dunford J said that the only issue which had been litigated before him was whether a bill should be delivered. Mr Ryckmans requested his Honour to make a determination as to whether an agreement had been reached between the Debtor and Mr P A Somerset of the Creditors for a charge-out rate, but his Honour said that this was not practicable, firstly, because he had already dealt with the matter the subject of the summons, and secondly because he would not have time to deal with it. The transcript then records that his Honour said that for the reasons set out in his judgment, Mr Ryckmans' clients had to deliver a bill of costs and that if they claimed that they were entitled to charge on a time basis, they should deliver a bill of costs which set this out. His Honour then ordered that on or before 9 May 1995, the Creditors provide the Debtor with a bill of costs in taxable form for the period from 17 June 1992 to 3 August 1993 inclusive in the Equity proceedings and that his earlier stay of execution on the Local Court judgment be lifted forthwith.

REASONS: Has the Debtor satisfied the Court in terms of para 40 (1) (g) of the Act? Under para 40 (1) (g) a debtor must show that he has a prima facie case in the sense of a reasonable probability of a fair chance of success, and it is not enough to show that the debtor propounds a cross-claim, set-off or cross demand and how the debtor hopes to make it out; Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346 at 350 (Dixon CJ, McTiernan and Windeyer JJ); Re Brink, supra, at 140-141; Johnson v AGC (Advances) Ltd, unreported, FCA/Lockhart J, 21 May 1992 at 2-4. The word "has" in para 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": Re A Debtor; Ex parte Commissioner of Taxation (1963) 19 ABC 296 (Qld/Mack J). The evidence on which the Debtor here relied, to establish a cross-claim, set-off or counter claim comprised the letter dated 1 June 1993 from the Creditors to the Debtor and Dunford J's order that the Creditors provide to the Debtor a bill of costs in taxable form by 9 May 1995. As well, the Debtor referred me to Schedule G to the Supreme Court Act 1970 (NSW). The letter shows that in respect of work already done by them from 16 April 1993 to 1 June 1993 the Creditors were claiming a right to be paid at the rate of $320.00 per hour. It also shows that in respect of a further three full days of preparation and three full days of hearing (ten hours per day), they were looking for payment calculated at the same rate. The evidence did not otherwise show, and the solicitor for the Debtor did not otherwise explain, how the amount allegedly paid of $54,000.00 (or $56,900.00) was made up. Nor was it explained why Schedule G to the Supreme Court Act should compel a conclusion that for all work done throughout the period 17 June 1992 to 3 August 1993, the Creditors were entitled to claim no more than $140.00 per hour. It was simply asserted that the Creditors had charged at an hourly rate of $320.00 and that the maximum hourly rate which would be allowed on a taxation of costs was only $140.00. I was asked to conclude that the Debtor would, following taxation, be entitled to a refund of $180.00 per hour. The Debtor submitted that since he was being charged $320.00 per hour, the fact that he paid $54,000.00 indicates that he was charged for 168.75 hours of work, with the result that upon taxation he will become entitled to a refund of that number of hours multiplied by $180.00, that is, $30,375.00. Alternatively, it was submitted that on the basis that the Debtor paid to the Creditors $56,900.00 (this is the amount referred to in Dunford J's judgment), the total number of hours represented was 177.81 and this would give an entitlement to a refund of $32,005.80. There was no reference to disbursements. Depending on the amount of these, the number of hours accounting for solicitors' fees could be substantially less than those indicated above. Most importantly, the Debtor did not contend that if an agreement to pay $320.00 per hour was established, he would nonetheless not be liable to pay at that rate; cf Emeritus Pty Ltd v Mobbs, unreported, NSW/Studdert J, 27 June 1991, and the discussion in Riley, New South Wales Solicitors' Manual, loose-leaf, at paras [2035]-[2075]. Until the taxation of the Creditors' bill of costs is completed, it cannot be known whether there will be a liability on the part of the Creditors to make any refund and if so in what amount. The position is akin to that dealt with by Lockhart J in Johnson v AGC (Advances) Limited, unreported 21 May 1992 in which his Honour had to deal with a counter-claim or cross demand against a mortgagee of a property which it was alleged had been sold by the mortgagee in breach of a duty of care to obtain the best possible price. Lockhart J said this: "Even if the respondent owed the duties asserted by the applicant and breached them, it is impossible to say on the evidence before me that they are quantifiable to any figure, even a broad and inexact one. It is also impossible to say that any counter-claim or cross demand he may have equals or exceeds the sum of $13,262,658.36. If there was a fair case adduced by the applicant in this proceeding that could enable a finding to be made of a quantified loss of the kind which he must establish, I would so hold and then the Supreme Court could sort the matter out in the current common law proceeding before it. But I cannot make this finding. There are so many variables that may come in to the question of quantification of loss once liquidators and receivers are appointed to a company, no permissible finding of the kind contended for by the applicant could be made by the Court.

It is impossible to quantify any counter-claim or cross demand, let alone reach the conclusion that it is equal to or exceeds the $13,262,658.36." (at 16-17)

Similarly, in Re A Debtor; Ex parte Commissioner of Taxation, supra, the debtor unsuccessfully responded to a bankruptcy notice served by the Commissioner of Taxation by asserting a set-off in respect of a prospective entitlement to a refund of provisional tax paid by him which would arise once the assessment of his income tax liability was made. The case before me is similar. Until the question of the existence of a costs agreement is determined and the Creditors' bill of costs is taxed it cannot be known whether the Creditors will be liable to make a refund and if so in what amount.

The case for going behind the Local Court judgment What I have already said resolves against the Debtor the question whether the matters on which he relies should cause me to go behind the Local Court judgment. That judgment was based on the dishonour of the two cheques. It was not an action to recover legal fees. It was not disputed before me that the Debtor drew the two cheques or that they were dishonoured. The matters asserted by the Debtor do not impeach the Creditors' entitlement to sue on the dishonoured cheques or the existence of a real debt equal to the amounts of the cheques underlying the Local Court judgment: see Cheques and Payment Orders Act 1986, ss 70, 71, 76. It was not submitted that the mere fact of the service on 28 December 1994 of a request for a stated case had the effect of staying execution of the Local Court judgment, and Dunford J who, on 20 December 1994, granted such a stay temporarily, lifted it on 9 March 1995. In any event, a stay of execution subsequent to the issue, or at the latest the service, of a bankruptcy notice has no effect on its validity: Re Schekeloff; Ex parte Schekeloff v The Hopkins Group Pty Ltd (1989) 22 FCR 407 (FCA/Burchett J), Re Roberts; Ex parte Bower (1994) 48 FCR 350 (FCA/Einfeld J); Re Sgambellone; Ex parte Jacques (1994) 126 ALR 71 (FCA/Drummond J).

CONCLUSION: For the foregoing reasons, the Debtor's amended application to set aside the bankruptcy notice should be dismissed. Since extensions of time for compliance are in aid of applications to set aside (Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125 (FCA/Lockhart J) at 130-131; Re Briggs; Ex parte Briggs v Deputy Commissioner of Taxation (WA) (1986) 12 FCR 310 at 315 (FCA/Toohey J); Re Lentini; Ex parte Lentini v CSR Ltd (1991) 29 FCR 363 (FCA/Neaves J) at 372; McLean v Australia and New Zealand Banking Group Ltd (1993), 42 FCR 300 (FCA/Ryan J)) and there is no power other than power given by the Act to extend the time for compliance (cf para 33 (1) (c) and sub-ss 41 (6A), (6B) (6C) and (7) of the Act and James v Abrahams, supra, at 22 (Deane and Lockhart JJ)), the amended application should also be dismissed in so far as it seeks an extension for time for compliance with the bankruptcy notice. The Debtor should be ordered to pay the Creditors' costs of the proceedings. I note that the Creditors made several other submissions as to why the amended application should be dismissed, but I have not found it necessary to deal with them.

I certify that this and the preceding 17 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren. Associate: Dated: 5 April 1995 Heard: 22 March 1995 Place: Sydney Decision: 5 April 1995 Appearances: Mr W Chaffey, solicitor of Glynn Chaffey, solicitors, appeared for the applicant. Mr N G Rein of counsel instructed by P A Somerset & Co appeared for the respondents.