FEDERAL COURT OF AUSTRALIA

Prentice v Fewin Pty Limited, in the matter of Prentice [2017] FCA 490

ORDERS

THE COURT ORDERS THAT:

1.    Bankruptcy notice no. BN 208109 issued on 28 October 2016 and served on the applicant on 9 September 2016 be set aside.

2.    The respondent pay the applicant’s costs of and incidental to the application.

3.    Leave be granted to the applicant to seek a lump sum costs order by filing and serving written submissions of no more than 5 pages in length and any affidavit evidence in support within 7 days or such longer period as the Court allows.

4.    If any application is made by the applicant for a lump sum costs order, the respondent be permitted to file and serve written submissions of no more than 5 pages in length and any affidavit evidence in support within 7 days of service of the applicant’s evidence and submissions.

5.    Any such application for a lump sum costs orders be determined on the papers.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BROMWICH J:

Introduction

1    The applicant, Maxwell William Prentice, is a former trustee in bankruptcy for the bankrupt estate of Robert Gilbert Coshott. Following Mr Coshott’s discharge from bankruptcy, Mr Prentice has continued to act as a trustee of the property of Mr Coshott by reason of ongoing issues as to costs and other matters arising out of the administration of the bankrupt estate.

2    There has been extensive litigation over many years between Mr Prentice, various members of the Coshott family, and the present respondent, Fewin Pty Ltd, a Coshott family company. Sometimes Mr Prentice has succeeded and obtained costs orders in his favour. Sometimes a Coshott entity has succeeded and obtained a costs order against Mr Prentice. Both Mr Prentice and Coshott entities have sought to enforce costs orders by insolvency or bankruptcy processes. This application concerns the latest such attempt, this time by Fewin using a bankruptcy notice.

The bankruptcy notice

3    As detailed further below, Fewin is subject to a final quantified order of this Court to pay Mr Prentice’s costs of $25,000. Mr Prentice is subject to a final quantified order of the Supreme Court of New South Wales to pay Fewin costs of $16,500. The $16,500 costs order was incurred in an unsuccessful attempt by way of a failed creditor’s statutory demand by Mr Prentice that Fewin pay him the $25,000.

4    On 28 October 2016, Fewin caused a bankruptcy notice to be issued against Mr Prentice, being Bankruptcy Notice BN 208109, based on the costs order in its favour for $16,500. This is an application by Mr Prentice to set aside that bankruptcy notice. Mr Prentice’s primary case is that he has a set-off against the judgment debt founding the bankruptcy notice, arising by reason of the $25,000 costs order in his favour, as taxed pursuant to a certificate of taxation issued by a Registrar of this Court on 8 September 2016. Three related grounds are advanced:

(1)    the certificate of taxation gives rise to an offsetting claim within the meaning of ss 40(1)(g) and 41(7) of the Bankruptcy Act 1966 (Cth) which exceeds the debt specified in the bankruptcy notice;

(2)    the bankruptcy notice is misstated for the purposes of s 41(6) because Fewin has failed to apply the set-off; and

(3)    in the circumstances, the deployment of the bankruptcy notice constitutes an abuse of process.

5    A key issue in these proceedings is whether Mr Prentice’s offsetting claim meets the requirement of “mutuality” as derived from ss 40(1)(g) and 41(7) of the Bankruptcy Act; namely, that the bankruptcy notice debt and offsetting claim must be claimed by the parties in the same right. Fewin submits that the required “mutuality” does not exist, because the costs order on which the bankruptcy notice is based imposes a personal obligation on Mr Prentice, while his set-off is claimed in his capacity as a trustee in bankruptcy. Notwithstanding this distinction, Mr Prentice submits that the bankruptcy court should recognise an equitable right of set-off, having regard to the indemnity from trust Mr Prentice may claim in meeting his personal obligation to Fewin. Alternatively, Mr Prentice asserts that the use of a bankruptcy notice in all the circumstances is designed to force him to pay Fewin despite it owing more than it is owed, either constituting an abuse of process, or a proper basis for the Court to intervene in the interests of justice.

Key events and evidence

6    The bankruptcy notice was issued on 28 October 2016 and served by email on Mr Prentice on 9 November 2016. The present application was filed within time on 22 November 2016.

7    The judgment debt the subject of the bankruptcy notice is an order of 1 September 2016 by Brereton J of the Supreme Court of New South Wales that Mr Prentice pay Fewin’s fixed costs of $16,500, Fewin having succeeded in applying to set aside a creditor’s statutory demand served by Mr Prentice on the company. By service of his statutory demand on 12 April 2016, Mr Prentice had sought payment of his costs as ordered by Perry J on 14 November 2015 and assessed to be $25,000 pursuant to a certificate of taxation issued by a Registrar of this Court on 20 January 2016. Although Brereton J has not yet published his ex tempore reasons for his decision, it is understood by the parties that the statutory demand was set aside on the basis of his Honour’s finding that the certificate of taxation issued was not signed by the Registrar in accordance with r 40.32 of the Federal Court Rules 2011 (Cth) and was therefore defective.

8    Mr Prentice’s asserted offsetting claim is said to arise by reason of the same debt unsuccessfully sought to be paid by way of his statutory demand, being the $25,000 due pursuant to Perry J’s cost order as taxed. That debt is said to have crystallised beyond doubt when, subsequent to Brereton J’s decision, the certificate of taxation for $25,000 was reissued on 8 September 2016 – bearing the Registrar’s signature on its face – and served on the solicitors for Fewin the following day.

9    Further to the 8 September 2016 certificate of taxation for $25,000, Mr Prentice also gave evidence of a number of other debts owed to him by Fewin arising from proceedings in this Court or in the Federal Circuit Court, being:

(1)    an unpaid order for costs in Federal Circuit Court proceeding SYG2055/2013 on 8 December 2015 in the amount of $2,000;

(2)    an unpaid order for costs in Federal Court proceeding NSD917/2014, in respect of which a certificate of taxation was issued on 12 February 2016 in the amount of $12,200; and

(3)    an unpaid order for costs in Federal Court proceeding NSD916/2014, in respect of which a certificate of taxation was issued on 12 February 2016 in the amount of $11,255.

10    It is uncontentious that Mr Prentice was acting in his capacity as trustee in bankruptcy in respect of all relevant proceedings with Fewin.

11    In answer to the further set-offs asserted by Mr Prentice on affidavit, Fewin put into evidence two certificates of taxation issued in respect of costs orders made against Mr Prentice, being:

(1)    a certificate of taxation in Federal Court proceeding NSD786/2015 in the amount of $70,237.50; and

(2)    a certificate of taxation in Federal Circuit Court proceeding SYG2055/2013 in the amount of $102,410.21.

At the hearing of the matter, counsel for Fewin advised that the above two certificates of taxation would not be pressed, conceding that reliance on those costs orders was precluded on the basis that Fewin had given up their benefit by way of deeds of assignment. Those deeds were referred to in my decision in Coshott v Prentice (No 2) [2016] FCA 1531.

The legal framework for the application to set aside the bankruptcy notice

12    No formal issue is taken as to the validity of the form of the application to set aside the bankruptcy notice, or the evidence in the supporting affidavit, or the evidence adduced on the hearing of the application. Accordingly, there is no need to consider the various procedural requirements contained in the Federal Court (Bankruptcy) Rules 2016 (Cth) or in the Bankruptcy Act. Most of the issues outlined and considered below ultimately turn on questions of fundamental principle, some of which are novel.

13    The relevant portions of ss 40(1)(g), 41(5), 41(6A), 41(6C) and 41(7) of the Bankruptcy Act are as follows:

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 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 specified in the notice; or

(ii)    where the notice was served elsewhere—within the time fixed for the purpose 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;

…

41    Bankruptcy notices

…

(5)    A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.

…

(6A)    Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:

(a)    proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or

(b)    an application has been made to the Court to set aside the bankruptcy notice;

the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.

(6C)    Where:

(a)    a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and

(b)    the Court is of the opinion that the proceedings to set aside the judgment or order:

(i)    have not been instituted bona fide; or

(ii)    are not being prosecuted with due diligence;

the Court shall not extend the time for compliance with the bankruptcy notice.

…

(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.

Issues requiring adjudication

14    Mr Prentice’s application depends upon him establishing one or more of the following:

(1)    that the $25,000 costs debt owed to him by Fewin exceeds the $16,500 debt underlying the bankruptcy notice, either:

(a)    by grounding an off-setting claim under ss 40(1)(g) and 41(7) of the Bankruptcy Act; or

(b)    by rendering the bankruptcy notice misstated for the purposes of s 41(5) (the required notice having been served); or

(2)    that procurement and service of the bankruptcy notice constitutes an abuse of process in the circumstances (having regard to this Court’s general discretion and supervisory function).

15    Fewin principally asserts that the application to set aside the bankruptcy notice must fail because Mr Prentice’s asserted off-setting claim does not meet the description in s 40(1)(g) of being a “counter-claim, set-off or cross demand” equal to or exceeding the amount claimed in the bankruptcy notice by reason of a lack of “mutuality”. That is because the bankruptcy notice debt is owed by Mr Prentice in a personal capacity, while the set-off debt due to him is claimed in his capacity as trustee in bankruptcy. The application is therefore said not to engage ss 40(1)(g) and 41(7) of the Bankruptcy Act. This absence of mutuality is likewise asserted to be fatal to Mr Prentice’s claim that the sum specified in the bankruptcy notice is misstated for the purposes of s 41(5) of the Bankruptcy Act by reason of Fewin’s failure to apply the set-off.

16    Collaterally, Fewin also asserts that the absence of substance in Mr Prentice’s case means that the Court-ordered extension of time to comply with the bankruptcy notice under s 41(6A) and the automatic extension of time in s 41(7) were of no effect because no valid application to set aside the bankruptcy notice had been made. Further, it is said that, in any event, the certificate of taxation for $25,000 relied upon by Mr Prentice was not formally entered as an order of this Court, and cannot be relied upon.

17    For all of these reasons, Fewin contends that the bankruptcy notice does not and cannot constitute an abuse of process, and the application must fail. No separate evidence, submission or argument was advanced on the case for the applicant on abuse of process or the residual discretion, despite it being clear that the overall circumstances were relied upon, beyond mutuality, for having the bankruptcy notice set aside. I infer that was a position taken by counsel on instructions.

18    The issues requiring adjudication may be summarised as follows:

(1)    whether there is “mutuality” between the bankruptcy notice debt and Mr Prentice’s offsetting claim;

(2)    whether the prima facie absence of “mutuality” can be resolved by establishment of an equitable right of set-off;

(3)    whether s 41(5) operates differently to ss 40(1)(g) and 41(7), and might otherwise recognise an equitable set-off;

(4)    whether the certificate of taxation relied upon by Mr Prentice was required to be entered as an order of the Court; and

(5)    whether the bankruptcy notice constitutes an abuse of process or should otherwise be set aside in the interests of justice.

Whether there is “mutuality” between the bankruptcy notice debt and the debt owed by the creditor – ss 40(1)(g) and 41(7), Bankruptcy Act

19    In order for Mr Prentice to establish a “counter-claim, set-off or cross demand” (offsetting claim) as that phrase appears in ss 40(1)(g) and 41(7) of the Bankruptcy Act, the debt upon which the bankruptcy notice is based and the offsetting claim sought to be relied upon must be “mutual and due in the same right”. As was stated by the Full Court in Stec v Orfanos [1999] FCA 457 at [24] (emphasis added):

… 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. …

20    Prima facie, the competing debts in the present case are not claims “in the same right”. Although arising from proceedings in which Mr Prentice was acting in a trustee capacity, the $16,500 debt that he owes to Fewin is owed by him personally. In Adsett v Berlouis (1992) 37 FCR 201, in the context of a dispute about the entitlement of a bankruptcy trustee to recover the costs of litigation alleged to have been recklessly instituted or precipitated, it was stated at 210.7:

Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate.

21    It is therefore clear, and was not disputed by the parties, that the $16,500 debt the subject of the bankruptcy notice is owed by Mr Prentice personally, subject to an indemnity from the trust estate with limited exceptions, as outlined in Adsett at 211.

22    By contrast, it was not in dispute that the $25,000 debt that Fewin owes Mr Prentice pursuant to the certificate of taxation dated 8 September 2016 is claimed by him in his capacity as trustee, not in any personal capacity. Mr Prentice does not have any beneficial interest in that debt.

23    Applying the reasoning in Stec, it follows that, prima facie, the required mutuality between the two debts is absent.

Whether prima facie absence of mutuality can be resolved by equitable set-off

24    In a novel and somewhat ingenious argument, counsel for Mr Prentice argued that the prima facie absence of mutuality is not to be maintained upon closer examination. It was submitted that, in circumstances where any payment of Fewin’s debt is to be paid into trust funds held by Mr Prentice, being the same fund from which he may claim an indemnity in meeting the debt he owes to Fewin, equity would recognise a right of set-off as an answer to Fewin’s claim. Such an equitable set off was said to be either:

(1)    a set-off of the type contemplated by ss 40(1)(g) and 41(7) of the Bankruptcy Act;

(2)    or alternatively, a counter-claim in equity; or

(3)    or alternatively, a cross demand.

25    The reason for the alternative characterisations is that a “set-off” in the bankruptcy setting has been regarded as referring to claims that might be the subject of set-off at common law, a “counter-claim” as referring to claims that might be the subject of a counter-claim in equity, and a “cross demand” as referring to claims other than those two categories: see Re Judd; Ex parte Pike (1924) 24 SR (NSW) 537 at 539-540.

26    In support of Mr Prentice’s argument, reliance was placed on a decision of the Chancery Division of the High Court of England and Wales in Re V P Developments Ltd; Penwith District Council v V P Developments Ltd [2005] EWHC 259 (Ch); [2005] BCLC 607. In that case, a company under a “company voluntary arrangement” (CVA) sought to rely upon a cross-claim arising under continuing arbitration to offset a debt owed to the petitioning council. Counsel for the petitioning council argued that the competing debts were not mutual, because the petition debts were owed by the company on its own behalf in favour of the petitioner, whereas the asserted cross-claim debt (if any) was held by the company as trustee for the creditors of the CVA, the company having no beneficial interest in that debt.

27    In striking out the creditor’s winding up petition, Laddie J rejected the argument that the debts were not mutual. His Lordship held that the relevant question was whether the cross-claim was closely related to the petition debt. If so, the insolvency court would recognise the equitable set-off. In reaching this conclusion, his Lordship relied upon a textbook, Derham on the Law of Set-Off by Rory Derham (3rd Edition), at [17.90] and [17.93] (the author practices at the New South Wales Bar). Counsel for Mr Prentice furnished copies of the equivalent updated passages from the 4th Edition of Derham, being [17.122] and [17.125] respectively.

28    The passage at [17.90] of the 3rd Edition of Derham (and substantially repeated at [17.122] of the 4th Edition) cited the New South Wales Supreme Court Equity Division decision in Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439 and the Victorian Court of Appeal decision in Doherty v Murphy [1996] 2 VR 553. In the passage quoted below from Penwith, it was said of those cases that an equitable set-off was justified “on the ground that the beneficiaries of a trust should not have the benefit of the transaction without also bearing the burden of the trustee’s conduct”. Laddie J quoted from Murphy v Zamonex at 465 as follows:

Equitable set-off is available where the defendant establishes an equitable ground for being protected from the plaintiff’s claim. That has been expressed in language to the effect that the defendant’s set-off goes to the root of or impeaches the title of the plaintiff’s claim, but also in language to the effect that the counter-claim is so directly connected with the claim that it would be unjust to allow the plaintiff to recover without taking into account the defendant’s counter-claim. It is sufficient to refer to AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705, James v Commonwealth Bank of Australia (1992) 37 FCR 445 sub nom Re Just Juice Corporation Pty Ltd; James v Commonwealth Bank of Australia (1992) 109 ALR 334 and the discussion in Meagher, Gummow and Lehane, paras 3709-3710 at 817-823 without going into whether the latter approach is an illicit departure from principle and authority. Accordingly, if a court of equity will restrain A in his capacity as trustee from recovering his claim against B without allowing for B’s counter-claim against A in A’s capacity as trustee there will be set-off in equity. That B could not have levied execution against the trust property may be relevant to whether the court will intervene, but why should it necessarily prevent set-off? Depending on the circumstances, it may not be right for the beneficiaries to have the fruits of A’s activity as their trustee without bearing the burden of A’s conduct in so acting.

29    The passage from Derham at [17.93] grounded the “mutuality in equity” upon the existence of the trustee’s entitlement to indemnity. The later version of that passage at [17.125] of the 4th Edition is reproduced in part is as follows (footnotes omitted; emphasis added):

A trustee who properly incurs a debt in the execution of the trust is entitled to be indemnified from the trust assets, and for the purpose of giving effect to the indemnity the trustee has an interest which has been described as a first charge or a lien over the assets. This is not a mere right of retainer, but rather it confers an equitable proprietary interest in those assets which has priority over the interests of the interests of the beneficiaries. In an appropriate case the court may order a sale of trust property in order to satisfy the trustee’s claim. The trustee’s first charge should extend to a trust asset in the form of a debt owing to the trustee in his or her capacity as such. Furthermore, it is not necessary that the trustee should first have paid the debt before claiming against the trust assets. If the trustee has not paid the debt from his or her personal assets, the trustee is entitled to apply the trust property in discharging it, in other words the trustee has a right to exoneration, and he or she has a charge on the trust property in that circumstance as well.

Accordingly, when a trustee is sued by a third party for payment of a debt properly incurred in the execution of the trust, and at the same time the trustee, as a result of a consequent right of indemnity, has a charge on a debt owing to the estate by the third party, there is much to be said for the view that the trustee’s interest may suffice to bring about mutuality in equity for the purpose of equity acting by analogy with the Statutes. This should also be relevant to insolvency set-off. It assumes, however, that the trustee has a right of indemnity …

30    The concepts advanced in the above passage appear to fall within the category of what has been described in Meagher, Gummow & Lehane’s Equity Doctrines and Remedies (5th Edition) (MGL) at 1104 [39-055 (d)] as the “fourth kind of equitable set-off”. The learned authors refer to Rawson v Samuel (1841) 41 ER 451 at 458 in support of this being a kind of equity that is recognised when “the party seeking the benefit of it can show some equitable ground for being protected against his adversary’s demand”. It is also described as “true equitable set-off”, because the other three types are in the nature of acknowledgment by equity of other rights rather than true equities, being recognition of common law set-off, recognition of set-off by analogy with legal-set off – e.g. by imitation of statutory rights – and recognition of equitable set-off created by agreement between the parties.

31    Two key features of this true equity are that it does not insist upon mutuality and is more fully substantive than legal set-off, which is more procedural in nature: MGL at 1107 [39-060 (e) and (f)]. Equity, however, imposes limits which are absent from common law set-off and its statutory cousins. For example, the party relying on the set-off must show that it in some way impeaches the title of the other party’s claim, a requirement absent at common law: MGL at 1108 [39-060(g)] and the cases there cited.

32    Critically, some equitable right to be protected from the other party’s claim must be established. In Hill v Ziymack (1908) 7 CLR 352, execution to enforce the recovery of damages for conversion was not restrained by reason of unsettled accounts between the parties. In that case, Griffiths CJ at 360-2, quoting and relying upon the passage from Rawson v Samuel referred to above, held that the existence of unliquidated countervailing claims was not sufficient to give rise an equitable set-off because no right to be protected from the plaintiff’s claim was established.

33    Applied to the present case, the $16,500 claim of Fewin against Mr Prentice in person can properly be regarded as being able to be the subject of an equitable set-off by (at least) the $25,000 debt owed by Fewin to him in his capacity as trustee when due and proper regard is had to the impact of his right of indemnity, there being no argument advanced that the indemnity would not apply. Had that argument been advanced, in the nature of, for example an assertion that the statutory notice was not properly served, it likely would have received short shrift by reason of the following paragraph indicating that the outcome unsuccessfully argued for before Brereton J was at least tenable and, based on my contrary conclusion, in substance arguably correct. The absence of formal mutuality between the competing claims is met by the substantive reality that equity is able to recognise rights in ways that common law claims cannot. In an equitable sense, Fewin’s claim is matched – and exceeded – by Mr Prentice’s claim.

34    A hint or suggestion was made on behalf of Fewin that some kind of res judicata or issue estoppel arose as a result of Brereton J’s decision to set aside Mr Prentice’s statutory demand by reason of a defect that his Honour found in the underpinning certificate of taxation. While this point was not developed, it should be addressed for completeness and for the benefit of any further litigation on this bankruptcy notice. There are several barriers to this argument. The first and most obvious is that the defect found by his Honour has been remedied by obtaining a fresh certificate of taxation without the problem identified. Accordingly the “res” is not the same and the prior issue no longer exists.

35    Secondly, his Honour’s decision was reached in an ex tempore judgment, as yet not published, following a very brief hearing. I came to a different view following a much lengthier hearing in a detailed reserved judgment.

36    Thirdly, the hearing before his Honour and the ex tempore decision took place after I had reserved. No attempt was made to relist that matter and seek to persuade me to follow that bare outcome without the benefit of reasons, rather than to properly adjudicate upon the issue for myself in the absence of such reasons. It seems that the decision was reached on the basis that the impugned certificate of taxation did not have on its face the signature of a registrar, yet as I have concluded at [132] in Coshott v Prentice (No 2) [2016] FCA 153, regard was also required to be had to the document as a whole, including the notice of filing, which was relevantly affixed with the seal of the Court and the principal registrar’s electronic signature. It should be noted that my decision is under appeal. I am not aware whether this is an issue in that appeal. But even if I am wrong and overturned, it has no bearing on this case by reason of the fresh certificate of taxation now relied upon (a challenge to which was mentioned but not pressed or argued).

37    If I had a free hand, I would have been inclined to apply reasoning similar to the cases detailed above and recognise an equitable right of set-off sufficient to ground an offsetting claim for the purposes of ss 40(1)(g) and 41(7) of the Bankruptcy Act. Derham 4th Edition at [17.125] points out in footnote 627, that such reasoning may account for the decision in Re Last; Ex parte Butterell (1994) 124 ALR 219. In Re Last, a family trust company indebted to the bankrupt with a cross-claim against him for an indemnity consequent upon a payment under a guarantee was permitted a set-off in the bankruptcy in relation to the cross-claims notwithstanding that it was the trustee of a family trust. The suggested interpretation of Re Last in Derham is perhaps somewhat stretched. The mutuality distinction here seems especially artificial and no less meritorious than in Re Last.

38    The bankruptcy debt arises out of a costs order of $16,500 made against Mr Prentice from a failed statutory demand. That statutory demand was based on costs ordered to be paid by Fewin to Mr Prentice. There is no issue as to the fact of the costs order in favour of Mr Prentice or its quantum of $25,000. The only issue giving rise to the failure of the statutory demand was a purported defect in the certificate of taxation, since remedied (and in my view, not a defect at all upon closer analysis: see Coshott v Prentice (No 2) at [132]). Mr Prentice seeks to rely on the same $25,000 debt to offset the costs order debt of $16,500, albeit by a fresh certificate of taxation. The competing debts are therefore very closely associated.

39    As a matter of applying first principle reasoning, I would be attracted to the notion that equitable doctrines can be applied to overcome prima facie problems of mutuality in a narrow and confined class of cases in order to avoid absurd and unfair outcomes, especially having regard to the public interest in making the difficult task of acting as a trustee in bankruptcy (including any subsequent trusteeship as in this case) more workable. The concept of mutuality would then align with reality, in circumstances where Mr Prentice would otherwise account to the trust for what he recovers from Fewin and look to indemnity from the trust for what is obtained or sought from him in person by Fewin.

40    However, the problem is that the reasoning in Penwith does not answer the fundamental legal requirement of mutuality for the purposes of the Bankruptcy Act as expressed in Stec at [24], which is directed to the “capacities in which the claimants claim”. Stec at [24] is binding and inescapable. There is no room for a finding that the conclusions reached were arrived at per incuriam by reason of the Full Court overlooking the possibility that difference in capacities in which competing claims are made or received could be overcome by resort to equitable set-off. Even if it might be concluded that such a principle had been in some way overlooked per incuriam so as to render the conclusion reached distinguishable because of the absence of consideration of such equitable principles, it is not open to a single judge to disregard a prior Full Court decision upon that ground. The ambit of the decision of Stec cannot be sidestepped in that way. I cannot improve upon what was said on this topic by the Full Court in Algama v Minister for Immigration and Multicultural Affairs [2001] FCA 1884; (2001) 115 FCR 253 at 261:

[39]    In Foster v Northern Territory [1999] FCA 1235 at [32] (French, Tamberlin and Sackville JJ, 31 August 1999, unreported), a Full Court of this Court exercising original jurisdiction described submissions made by the applicants before it that a particular decision of the High Court of Australia did not bind the Full Court as “an invitation to revisit the decision on the basis that not all materials or arguments that could have been put before the Court were put before it”. The Full Court continued, “The applicants' submissions amount to an invitation to find that the decision of the High Court was made per incuriam”. In rejecting that invitation, the Full Court quoted approvingly what Moffitt P had said in Proctor v Jetway Aviation Pty Ltd [1984] 1 NSWLR 166 at 177:

“The per incuriam rule is not available to a court in relation to a decision of a court superior in the hierarchy. It is a rule which applies only to a review by a court of its own decision. An equivalent result cannot be achieved by regarding a binding decision of the superior court as distinguishable on the basis that it did not decide the question which it did by making the order that it did, but that it only decided the question apparently argued before it or on the basis that its reasons were its decision.”

The Full Court in Foster also, without quoting it, invited attention to what Lord Diplock had said in Cassell & Co Ltd v Broome [1972] AC l027 at 1131. Lord Diplock’s remarks, which had been quoted by Moffitt P in Proctor at 179, had foreshadowed those later made by Moffitt P in Proctor.

[40]    In addition to what had been said by Moffitt P in Proctor and by Lord Diplock in Cassell, we note that a majority of the Judicial Committee of the Privy Council (Lords Diplock, Simon of Glaisdale and Cross of Chelsea and Sir Thaddeus McCarthy), relying on Cassell, had expressed a similar view about the operation of the per incuriam rule in Baker v The Queen [1975] AC 774 at 788 (as had the sole dissentient, Lord Salmon, at 795). The majority had pointed out that to permit the use of the per incuriam rule by a court inferior to the court the precedential effect of whose decision was in issue “would open the door to disregard of precedent by the court of inferior jurisdiction by the simple device of holding that decisions of superior courts with which it disagreed must have been given per incuriam”.

[41]    We agree with the approach to the per incuriam rule taken by the courts (including a Full Court of this Court) to which, and the judges to whom, we have referred above …

41    It follows that I am, regrettably, bound to reject the argument that an equitable right of set-off might resolve a prima facie absence of mutuality. Mr Prentice has therefore failed to establish an offsetting claim for the purposes of ss 40(1)(g) and 41(7).

Whether s 41(5) operates differently to ss 40(1)(g) and 41(7), and might otherwise recognise an equitable set-off

42    There does not appear to be any proper basis for excluding or applying a different requirement for mutuality when considering whether a bankruptcy notice is misstated for the purposes of s 41(5) by reason of a failure to apply a set-off. It does not follow that the existence of a set-off in a different capacity might be permitted for the purposes of s 41(5), but not for the purposes of ss 40(1)(g) and 41(7). The rules of mutuality are not so inconsistent or so easily evaded. Accordingly, the existence of a misstatement by reason of a failure to have regard to set-off (where proper notice under s 41(5) is given), can only arise if that set-off is claimed in the same right. To conclude otherwise would be to fail to give that part of the Bankruptcy Act a consistent and coherent operation.

43    For these reasons, Mr Prentice is unable to establish that the amount of the debt specified in the bankruptcy notice is misstated for the purposes of s 41(5).

Whether the certificate of taxation relied upon by Mr Prentice was required to be filed as an order of the court before it could be relied upon

44    At no stage that I am aware of was the replacement certificate of taxation of 8 September 2016 for the $25,000 costs order relied upon by Mr Prentice to support a bankruptcy notice or to bring a proceeding. It was relied upon to establish that there was a debt owed by Fewin to Mr Prentice, albeit in his capacity as trustee, so as either to produce an offsetting claim, or to demonstrate that the bankruptcy notice was an abuse of process, or otherwise to persuade this Court to set aside Fewin’s bankruptcy notice. In those circumstances, even if a certificate of taxation was required to be entered as an order before it was enforceable, that was not necessary for the purposes to which it was being put.

45    In any event, there was no requirement for a certificate of taxation, once issued in accordance with r 40.32 to also be entered as an order under r 39.31, or meet the order authentication requirements in r 39.35, or indeed any of the requirements or other provisions in Division 39.4 for the reasons discussed in Coshott v Prentice (No 2) at [105].

Whether the bankruptcy notice as a proceeding is an abuse of process or should otherwise be set aside in the interests of justice

46    It is well established that the Court has the power to set aside a bankruptcy notice as an abuse of process. It was submitted on behalf of Mr Prentice that in the present case, the procuring and service of the bankruptcy notice constituted an abuse of process, because there were known offsetting claims more than sufficient to satisfy the underlying judgment debt. In this regard, Mr Prentice placed reliance not only on the $25,000 claim arising under the 8 September 2016 certificate of taxation, but also on the further debts set out at [9] above, which themselves totalled a further $25,455. In support of this ground, counsel for Mr Prentice referred to St George Wholesale Finance Pty Ltd v Spalla (2000) 181 ALR 682, in which Heerey J dismissed a creditor’s petition as an abuse of the procedures of the Bankruptcy Act, on the basis that those procedures were not intended to be used for the determination of complex accounting issues as between the creditor and debtor.

47    It was also submitted that procuring the issue and service of the bankruptcy notice involved an attempt to gain some collateral advantage or bring improper pressure to bear upon Mr Prentice when in fact there was no net amount due upon a balancing of the amounts owed by Fewin, relying upon Williams v Spautz (1991) 174 CLR 509 and Rozenbes v Kronhill (1956) 95 CLR 407.

48    In Williams v Spautz, 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 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.

50    There was no evidence of any overt threat being made on behalf of Fewin. However, its solicitors pressed the bankruptcy notice despite being well aware of the countervailing debts, albeit owed in a different capacity. Not all threats have to be overt. Although ordinarily a threat would need to have that character, in some circumstances it can be contextual.

51    There was no evidence adduced on behalf of Fewin as to why it was pursuing recovery of the $16,500 debt from Mr Prentice via a bankruptcy notice, when that sum would be recoverable from the trust funds and it indisputably owed him $25,000 as trustee, which upon recovery would have to be paid into trust funds. This was at all times a live issue. Counsel for Fewin had no instructions to enlighten the Court in answer to that direct question being asked. While this should have been clear well before the hearing, that question put Fewin on notice that this was troubling the Court. There is no explanation as to why bankruptcy was to be relied upon to recover a debt less than the debts owed by Fewin to the same person, albeit in a different legal capacity.

52    In the circumstances and on the state of the evidence, I infer that those constituting Fewin’s mind for the purposes of giving instructions considered it enough that the different legal capacity in which Mr Prentice was owed money by Fewin and his inability to make good the technical requirements of mutuality, a prediction that these reasons make good, emboldened the Bankruptcy Act proceedings being commenced and continued. Thus, despite the fact that Mr Prentice could not be insolvent in respect of the debt he owed Fewin personally, but subject to indemnity, as a practical matter he would be forced to pay or risk bankruptcy. Fewin in the meantime could continue not to pay its debt owed to Mr Prentice in his trustee capacity.

53    I was not left to bare inference to reach that conclusion. It was supported by Fewin’s conduct and submissions in these proceedings. The response on behalf of Fewin was that there was no abuse of process purely because there was no valid set-off in the established bankruptcy sense and no overstatement for the same reason. Counsel for Fewin initially pointed out that Mr Prentice had previously served a statutory demand against Fewin when there were set-offs against him, but that point was not maintained once it was realised that the two costs debts in favour of Fewin were first assigned on 30 December 2015 (the deed of assignment being in evidence before me and not being disputed as taking effect according to its terms by either party), and the statutory demand served several months later on 12 April 2016.

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.

55    The principles in relation to abuse of process were succinctly considered by Flick J in Seller v Deputy Commissioner of Taxation [2011] FCA 865; (2011) 282 ALR 80 at 84-6 [14]-[20]. A number of key points emerge from the distillation of authority by his Honour. First, this Court must be able to supervise bankruptcy notices at all stages of their existence, as was held by Lockhart J in Clyne v Deputy Commissioner of Taxation (NSW) (No 4) (1982) 42 ALR 703 at 708. This Court has a "wide discretion to set aside a bankruptcy notice where it is satisfied that the interests of justice require it to do so", citing Lentini; Ex parte Lentini v CSR Ltd (1991) 29 FCR 363 at 372, along with other authority. Relying on Lentini, Flick J isolated at [16] one instance of abuse of process, being where the purpose of issuing the bankruptcy notice is to put pressure on a debtor to pay the debt rather than to genuinely invoke the Court's jurisdiction in relation to insolvency. In all the circumstances, this is also such a case.

56    It is open to infer that the real reason for deployment of the bankruptcy notice is that, as a practical matter, Mr Prentice will be forced to pay the debt upon which the bankruptcy notice relies. The consequences of even an act of bankruptcy, let alone bankruptcy itself, on his professional standing will require him to do that. That is so despite him being owed more than he owes, and in circumstances where the right of indemnity overcomes, except in the strict application of mutuality for off-setting claims, any practical want of mutuality. It is not an outcome that equity would tolerate.

57    I am satisfied that the onus of showing an improper purpose has been discharged. In all the circumstances an abuse of process. The bankruptcy notice must be set aside.

58    It was argued further that this Court has the power to make such orders as considered necessary, and thereby to give effect to equitable remedies, by the terms of s 30(1)(b) of the Bankruptcy Act, which provides as follows:

(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.

…

59    In case I am wrong about the conclusion I have reached as to abuse of process, I am also satisfied that this case falls within the general rubric of the Court’s concern with protecting the interests of justice, as outline in [55] above. The circumstances of the case are troubling, and counsel for Fewin made no attempt to address them, apparently having no instructions to do so. While Penwith does not give a sufficient basis to depart from Stec, the distinction based on mutuality in the particular circumstances of this case is artificial in the extreme. A right of equitable set-off would most likely exist outside of a bankruptcy context. This is not merely a matter of unfairness to the debtor, which alone will not suffice to set the bankruptcy notice aside: Re Briggs; Ex parte Briggs v Deputy Commissioner of Taxation (WA) (1986) 12 FCR 310 at 312. It is contrary to the interests of justice that the proceedings constituted by the bankruptcy notice should continue.

60    This Court should not allow bankruptcy proceedings to continue as an abuse of process or to be misused below that threshold and thereby be a vehicle for injustice. The competing debts should be reconciled as to the net amount owing, having regard to the legal capacity of Mr Prentice as debtor and the indemnity he is entitled to. In those circumstances, allowing the bankruptcy notice to proceed would allow the metes and bounds of the proper use of the bankruptcy process to be exceeded. Having regard to the interests of justice, it would therefore also have been appropriate to exercise the Court’s discretion to set aside the bankruptcy notice.

Valid extension of time in which to comply with the bankruptcy notice, either by orders of the court made under s 41(6A) or by the automatic operation of s 41(7)

61    The proper engagement of the automatic extension by operation of s 41(7) depended upon the advancement of a sufficiently arguable case at the time of filing the application and supporting affidavit. Having regard to the unusual circumstances of the case, I am satisfied that the application had sufficient merit in respect of the asserted offsetting claim to properly engage s 41(7) and thereby give Mr Prentice the benefit of the automatic extension. That conclusion is open even though that aspect of the application failed.

62    In relation to the Court-ordered extension of time to comply with the bankruptcy notice, being a succession of orders made pursuant to s 41(6A), there can be no issue as to the validity of the application because it has been successful and was in any event sufficient for s 41(6A).

63    Either way, there was a valid and effective extension of time for compliance with the bankruptcy notice up to the date of this judgment.

Conclusion

64    The bankruptcy notice must be set aside with costs. As I am concerned that the costs of this application are already excessive relative to the amounts involved, Mr Prentice has leave to seek a lump sum costs order according to a timetable given with these reasons. If that is sought, the application and any response on behalf of Fewin will be dealt with on the papers as provided in response to that timetable.

Associate:

Dated:    11 May 2017