FEDERAL COURT OF AUSTRALIA

Coshott v Prentice [2018] FCAFC 179

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the costs of the appeal.

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

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the costs of the appeal.

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

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the costs of the appeal.

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

REASONS FOR JUDGMENT

THE COURT:

1    These three appeals are made from orders of a single judge of this Court in Coshott v Prentice, in the matter of Coshott (No 2) [2016] FCA 1531 (“2016 judgment”) and Prentice v Fewin Pty Limited, in the matter of Prentice [2017] FCA 490 (“2017 judgment”).

2    James Coshott, the appellant in the first appeal (NSD1/2017), is the son of Robert Coshott and Ljiljana Coshott. Ljiljana Coshott is the appellant in the second appeal (NSD2/2017). Fewin Pty Ltd (“Fewin”), the appellant in the third appeal (NSD788/2017), is described as a “Coshott family company” in the 2017 judgment. At the hearing of the appeals, the three appellants were jointly represented. These reasons refer to James and Ljiljana Coshott as “the Coshotts”.

3    Maxwell Prentice, the respondent to each of the appeals, is a former trustee in bankruptcy for the bankrupt estate of Robert Coshott. Following Robert Coshott’s discharge from bankruptcy, Mr Prentice continued to act as a trustee of the property by reason of ongoing issues as to costs and other matters arising out of the administration of the bankrupt estate.

4    There has been extensive litigation over many years between Mr Prentice and entities including James Coshott, Ljiljana Coshott and Fewin in connection with the bankruptcy of Robert Coshott. As the primary judge noted in his 2017 judgment (at [2]), sometimes Mr Prentice has succeeded and obtained costs orders in his favour, while 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.

5    These appeals concern three bankruptcy notices, issued respectively to James Coshott, Ljiljana Coshott and Maxwell Prentice.

6    In the 2016 judgment, the primary judge dismissed with costs:

(1)    James Coshott’s application to set aside bankruptcy notice BN185797; and

(2)    Ljiljana Coshott’s application to set aside bankruptcy notice BN187141.

7    His Honour also extended the time for compliance with the two bankruptcy notices pursuant to s 41(6A)(b) of the Bankruptcy Act 1966 (Cth) (“Act”) to the date of his Honour’s judgment, that is 16 December 2016.

8    In the 2017 decision, the primary judge, relevantly, set aside bankruptcy notice BN208109 addressed to Mr Prentice.

The Coshotts’ appeals against the 2016 judgment

Background

9    On 23 September 2014, a Full Court of this Court ordered that Ljiljana Coshott and her co-appellant, Schlotzsky’s Nominee Company Pty Ltd, pay 90% of the costs of Mr Prentice in proceeding NSD2016/2013: see Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450. On 15 May 2015, a Registrar of the Court made orders, inter alia, confirming that Mr Prentice’s costs under order 1 of the Full Court made on 23 September 2014 were deemed to be $77,300 and a taxation certificate was to issue accordingly.

10    On 15 May 2015, Mr Prentice’s solicitors electronically lodged a draft taxation certificate. At [96] of his Honour’s reasons, the primary judge found that on 22 May 2015, the taxation certificate was issued electronically by way of a notice of filing document, which became part of the taxation certificate, bearing the seal of the Court and the electronic signature of the Registrar.

11    On 5 June 2015, Ljiljana Coshott, by her solicitors, Martin Place Lawyers, applied for a review of the taxation in proceeding NSD2016/2013, including an order that “the Certificate of Taxation issued herein be set aside”. The application for review was subsequently abandoned.

12    On 20 October 2015, a taxation certificate was issued in favour of Mr Prentice as trustee of the property of Robert Coshott for costs as against Robert, James and Ljiljana Coshott in the sum of $576,018.

13    Bankruptcy notice BN185797 addressed to James Coshott was issued on 30 October 2015. The debt specified in the notice is an amount of $574,018, based on the October 2015 taxation certificate less $2,000 for security for taxation that was forfeited by Mr Prentice.

14    Bankruptcy notice BN187141 addressed to Ljiljana Coshott was issued on 23 December 2015. The debt specified in the notice is an amount of $649,318, based on the October 2015 taxation certificate plus the May 2015 taxation certificate for security for taxation that was forfeited by Mr Prentice.

15    Section 40 of the Act provides relevantly:

(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;

16    At [8] of his Honour’s reasons in the 2016 judgment, the primary judge noted that the response of the Coshotts to the bankruptcy notices was:

to endeavour to create, by way of assignment to them both, the benefit of a “counter-claim, set-off or cross demand” (offsetting claim) equal to or exceeding the amount claimed in each bankruptcy notice, for the purposes of ss 40(1)(g) and 41(7) of the Bankruptcy Act 1966 (Cth), arising from costs orders made against Prentice in favour of Coshott entities so as to stave off the bankruptcy notices.

17    This finding was not challenged but, in any event, does no more than explain the context of the applications. The fact that an assignment was taken to defeat a bankruptcy notice does not of itself mean that the assignment was ineffective to create a counter-claim, set-off or cross demand for the purposes of s 40(1)(g) of the Act: ICM Agriculture Pty Ltd v Young [2009] FCA 109 at [4].

18    The primary judge identified three deeds of assignment dated, respectively, 30 December 2015, 23 March 2016 and 6 May 2016. At [8] of his Honour’s reasons, the primary judge noted that “the second and third deeds were expressed on their face as intended to remedy a deficiency in the 30 December 2015 Deed for bankruptcy purposes”.

Primary judge’s reasons

19    At [66] of his Honour’s reasons, the primary judge noted that the 30 December 2015 deed:

(1)    nominated Fewin, Ronald Coshott and Ljiljana Coshott as the assignors of the benefit of costs orders made against Mr Prentice in the Federal Circuit Court and in this Court; and

(2)    nominated Ljiljana, James and Ronald Coshott as the assignees of the benefit of those costs orders.

20    At [70] of his Honour’s reasons, the primary judge described the 6 May 2016 deed as follows:

... The named assignors and the named assignees were the same, in each case being all three of James, Ljiljana and Ronald. The intention was to convert the benefit of the joint debt they had received by the 30 December 2015 Deed into the benefit of a joint and several debt, so that it would be mutual with each of the bankruptcy notice debts. …

(Emphasis in original)

21    At [71], his Honour noted:

The 6 May 2016 Deed necessarily relied upon the 30 December 2015 Deed effectively assigning the benefit of the three debts owed by Prentice to James and Ljiljana (and Ronald), albeit only as a joint debt benefit. ....

(Emphasis in original)

22    The primary judge concluded:

(1)    That the 30 December 2015 deed did not assign debts that were mutual to those relied upon in support of the bankruptcy notices (at [79]).

(2)    That the 23 March 2016 was ineffective because it sought to assign benefits that had already been assigned by the 30 December 2015 deed (at [80]).

(3)    It was unnecessary to determine conclusively the effect of the 6 May 2016 deed because it does not affect the ultimate outcome (at [81]).

(4)    James Coshott’s application to set aside the bankruptcy notice was not a valid application because, at the time of the application, the asserted offsetting claim (based on the 30 December 2015 deed) was not “‘effective’, ‘real’, bona fide or on its face ... a relevant offsetting claim” (at [85]).

(5)    It followed that Ljiljana Coshott’s application was also not a valid application to the extent that it was based on the 30 December 2015 deed. To the extent that was based on the 23 March 2016 deed, that deed did not assist because it was ineffective to cure the problem (because it did not operate as an effective assignment of debts) (at [86]).

23    These findings were sufficient to dismiss the two applications. However, the primary judge considered other matters that were argued before his Honour, and made numerous other findings relevantly including that:

(1)    The Coshotts were not entitled to advance “newly created offsetting claims”, that is, claims which did not exist at the time of the applications to set aside the bankruptcy notices (at [89]).

(2)    As a matter of discretion, his Honour would not grant leave to go beyond the original grounds in the accompanying affidavit in support of each application (at [92]).

(3)    The relevant certificates of taxation were not unenforceable by reason of not being entered as an order (at [106]).

(4)    Assuming in Ljiljana Coshott’s favour that the $77,300 taxation certificate is not enforceable ([107]), the substantive defect is only a misstatement of the amount due and, by s 41(5) of the Act, this is not an invalidating defect unless, within the time allowed for payment, notice is given of invalidity for that reason (at [111]). His Honour found that there was no evidence that any such notice was given (at [111]).

(5)    The $77,300 taxation certificate is not defective (at [115]).

(6)    Even if the $77,300 taxation certificate was defective, and the defect would otherwise invalidate the taxation certificate, s 306(1) operated to relieve against that consequence (at [132]).

(7)    The Coshotts’ argument that service of the certificates of taxation within 14 days of issue is a requirement of validity and enforceability failed (at [137]).

(8)    Service of each of the certificates of taxation was effected on both James Coshott and Ljiljana Coshott by service on the solicitor who was retained to act for both of them before the end of 2015, well before either bankruptcy notice was served (at [146]).

(9)    The bankruptcy notices were not misleading (at [151]). If that conclusion was wrong, there was no question of either of the Coshotts being misled about what they had to do; s 306(1) of the Act (which concerns the effect of formal defects) therefore had no application (at [151]).

(10)    If the debts owed by Mr Prentice were effectively assigned, the poor quality of the relevant bills of costs and their uncertain status made it impossible to conclude safely, even at the level of a preliminary assessment at a relatively low threshold that the Coshotts had, by reason of the assigned debts, an offsetting claim equal to or exceeding the amount of their respective bankruptcy debts (at [156]).

24    At [160] of his Honour’s reasons, the primary judge noted that the Coshotts had submitted that there was a general power to extend the time for compliance with a bankruptcy notice contained in s 41(6A) of the Act.

25    At [164], the primary judge concluded that the power in s 41(6A) was able to be deployed whenever properly required in the interests of justice, including in a case when an application under s 40(1)(g) and 41(7) has not been successful. At [165], his Honour further concluded that the general power to extend time for compliance with a bankruptcy notice was not constrained by any need for a valid application to set aside such a bankruptcy notice, for the following reasons:

(1)    The test does not require, and interpretation does not demand, that the application be valid.

(2)    The power is being exercised in respect of the bankruptcy notice, not in respect of the application to set the bankruptcy notice aside.

(3)    The practical implications that would flow from the non-existence of the power in the absence of a valid application support the test and the nature of the power being exercised.

(4)    If such a power exists for the use of the Full Court or the High Court, there is no reason in principle why it should not also exist for this Court at first instance to deploy in an appropriate case.

26    At [167], the primary judge concluded that it was in the interests of justice to extend the time for compliance with the bankruptcy notices to the date of his Honour’s judgment to achieve the same outcome as if the applications had been valid and the automatic extension of time in s 41(7) had been triggered.

James Coshott’s appeal grounds

27    James Coshott argued the following three grounds of appeal, the remaining grounds in his notice of appeal not being pressed at the hearing:

(1)    The primary judge erred in holding that the deeds of assignment were ineffective and that for the purposes of ss 40(1)(g) and 41 of the Act must be legally effective/competent at the time of filing the application to set aside the bankruptcy notice.

(2)    The primary judge erred in holding that the Court could not be satisfied that the three debts so assigned were equal to or exceeded the debts for the purposes of ss 40(1)(g) and 41(7).

(3)    The primary judge erred in ordering that time for compliance with the bankruptcy notice be extended to the time of delivering judgment.

Ljiljana Coshott’s appeal grounds

28    Ljiljana Coshott also did not press all of the grounds of appeal in her notice of appeal. Ultimately, she raised similar grounds of appeal to those argued by James Coshott, in addition to the following two grounds:

(4)    The primary judge erred in holding that the “unsigned, unsealed, undated, unissued, and unentered draft certificate of taxation” for $77,300.00 was a final judgment or final order of this Court.

(5)    The primary judge erred in holding that the certificate was not objectively capable of misleading the debtor as to what to do in order to comply with the bankruptcy notice; and/or that any defects in the bankruptcy notice were merely formal defects capable of being cured by s 306 of the Act.

29    Ljiljana Coshott’s fourth ground of appeal must be dismissed because it is based on the false premise that the primary judge made a finding to the effect stated in that ground.

First ground: efficacy of deeds of assignment

30    This ground of appeal takes issue with the primary judge’s conclusion in relation to the question identified by his Honour as question 1, namely, whether certain debts owed by Mr Prentice were assigned to the Coshotts in a manner that was effective for the purposes of creating an offsetting claim for the purposes of ss 40(1)(g) and 41(7) of the Act. This issue is addressed at [78] to [87] of his Honour’s reasons.

31    At [79], his Honour concluded:

Despite arguments to the contrary on behalf of both James and Ljiljana, upon reviewing the transcript for the substance of those arguments and upon considering the authorities detailed above, there does not seem to be any serious doubt, following the principle so clearly articulated in the quote from Stec above, that the 30 December 2015 Deed expressly did not assign debts that were mutual to those relied upon in support of the bankruptcy notices. The 30 December 2015 Deed could not of itself thwart either of the bankruptcy notices by reason of the glaring and inescapable mutuality defect. That reality was the express reason for the attempts to address this problem by way of the 23 March 2016 Deed and 6 May 2016 Deed.

(Emphasis added)

32    The relevant passage of the judgment in Stec v Orfanos [1999] FCA 457 at [24], set out at [23] of the primary judge’s reasons, was:

... 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] NSWStRp 35; (1927) 27 SR (NSW) 296; James v Abrahams [1981] FCA 46; (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.

33    The Coshotts contended that the primary judge erred in holding that an offsetting claim was not available to them, and that his Honour ought to have found:

(1)    There was sufficient mutuality arising out of the 30 December 2015 deed.

(2)    Even if there was not, the affidavit was “sufficient to extend time”.

(3)    The 6 May 2016 deed “cured any defect with mutuality”.

(4)    This was either in respect of the same offsetting claim or a different claim that the Coshotts were entitled to introduce and rely upon.

34    The appellants’ starting proposition was that the debt identified in the October 2015 taxation certificate was a debt owed jointly by the Coshotts to Mr Prentice, with the result that Mr Prentice was entitled to issue a single bankruptcy notice against the Coshotts. The appellants argued that, in that event, they would have been entitled to rely on their joint debt as an offsetting claim.

35    This contention does not advance the applicants’ argument: it simply begs the question of mutuality by describing the debt assigned under the December 2015 deed as the Coshott’s “joint debt”.

36    This submission fails to address the substantive issue, namely, whether there is a want of mutuality between the debts the subject of the October 2015 taxation certificate and the debt assigned to Ronald, James and Ljiljana Coshott jointly by the 30 December 2005 deed.

37    The appellants did not dispute the requirement of mutuality. Rather, they submitted that “[w]hat is prohibited by the requirement of mutuality is a debtor seeking to set off a debt against only one of the joint creditors who issued the bankruptcy notice, which is not the case here”. Orally, Mr Cheshire SC asserted that the “mischief” to which the requirement of mutuality is directed is reliance on a debt owed to only one of multiple creditors.

38    This is an incomplete statement of the requirement of mutuality, and of the rationale for provisions which permit the operation of set-off in bankruptcy. While it may be an overstatement to say that mutuality in beneficial interests must be present in all cases, that is the general principle in the absence of special circumstances. No such special circumstances were identified in this case. Thus, in West Street Properties Pty Ltd v Jamison [1974] 2 NSWLR 435 at 441-442, Jeffrey J stated:

If it be correct that in all cases there must be mutuality in beneficial interest if one debt is to be offset against another, that is, that there must be identity between the person beneficially interested in the claim and the person against whom the cross-claim existed, I would find it in the present case in the circumstance that the debenture-holder is the equitable owner of the debt owed by West Street and is the party for whose ultimate benefit and at whose direction the debt owed to West Street is being incurred. But I am not satisfied that this is a universal requirement. Although the language of the statutes of set-off itself encourages the assertion that for a set-off at law to be raised the debts must be “mutual” —see e.g., 2 Geo. II, c. 22, s. 13— courts of equity have been, it seems, willing to allow a set-off even where mutuality is absent, provided the case was such as otherwise to attract their intervention. Examples are provided in Ex parte Stephens, and Hamp v. Jones; cf. Bechervaise v. Lewis. Lack of mutuality in equity can be a reason for denying a right to set-off at law; cf. Re Whitehouse & Co., but that is not to say that its present is invariably necessary before allowing any right of set-off at all. All that learning is now very old and much of it has been superseded in this State by the passage of the Law Reform (Law and Equity) Act, 1972. In more contemporary terms, if some inequity in denying a set-off is necessary to overcome any supposed want of mutuality, I find that the claims in the present case are such that, to use the language of Morris L.J. in Hanak v. Green, “neither ought to be insisted upon without taking the other into account”.

39    The object of set-off in bankruptcy was explained by the unanimous High Court in Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609 at 618-619 ([13]-[14]), as follows:

It has often been pointed out that the object of set-off in bankruptcy is, in the words of Parke B. in Forster v. Wilson (1843) 12 M and W 191, at p 204 [1843] EngR 1141; (152 ER 1165, at p 1171), “to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate”. Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having one hundred cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt’s debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the “mutual credits” and “mutual debts”, and later “mutual dealings”, provisions were introduced into bankruptcy legislation (see, e.g., In re Daintrey; Ex parte Mant (1900) 1 QB 546, at pp 572-573; Day and Dent Constructions Pty. Ltd. v. North Australian Properties Pty. Ltd. [1982] HCA 20; (1982) 150 CLR 85, at p 95). To the extent necessary to achieve that legislative purpose of “substantial justice” to the parties, it is established by authority that a provision such as s.86 of the Act should be given “the widest possible scope” (see, e.g., per Mason J., Day and Dent Constructions, at p 108, quoting Lord Esher M.R. in Eberle’s Hotels and Restaurant Company v. Jonas (1887) 18 QBD 459, at p 465).

On the other hand, “substantial justice” requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same or where, after bankruptcy or notice of an act of bankruptcy, a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness (see, e.g., Day and Dent Constructions, at p 95). Thus, it is established by the cases that set-off under a provision such as s.86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and debits do not correspond (see, e.g., In re City Life Assurance Co. (1926) Ch 191, at pp 216-217; Hiley v. Peoples Prudential Assurance Co. Ltd. [1938] HCA 40; (1938) 60 CLR 468, at p 497).

40    The primary judge was correct to observe that the want of mutuality between the debts in the bankruptcy notices and the debts assigned by the December 2015 deed was “glaring” (at [79]). The debt that was assigned to the Coshotts by that deed was assigned to them jointly with Ronald Coshott. The right to enforce those debts vested in them jointly with Ronald Coshott and not severally: cf. Australian Workers Union v Bowen [1946] HCA 24; (1946) 72 CLR 575 at 590. Accordingly, it was no answer to a debt due by them apart from Ronald Coshott. Put another way, allowance of a set-off to the Coshotts could not discharge Mr Prentice’s debt vis-à-vis the Coshotts and Ronald Coshott: cf. Equitrust Ltd & Anor v Franks [2009] NSWCA; (2009) 258 ALR 388 at [49].

41    The appellants next argued that “the fact of the assignment was sufficiently raised in time such that time for compliance was extended pursuant to s 41(7)”. The argument involved the following propositions:

(1)    The Court needed only to be satisfied, after assessing the legal and factual issues, that there was a real or bona fide claim such that bankruptcy proceedings should await the determination of that claim. The primary judge should have reached this degree of satisfaction.

(2)    Once time was extended under s 41(7) of the Act, the 6 May 2016 deed operated to the Coshotts’ benefit. There is nothing in the test of s 41 or otherwise that prevented further evidence being introduced as to a different set-off (see Foyster v ANZ Banking Group Ltd [1999] FCA 1032) but, in any event the 6 May 2016 deed went to the same set-off, namely “an assignment of the same costs orders”.

42    Section 41(7) of the Act provides:

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.

43    It is implicit in the appellants’ first proposition that the Coshotts properly accepted the requirement of a bona fide claim to obtain the benefit of s 41(7) of the Act: see Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183 at 188-189; Re Donkin; Ex parte AGC Advances Limited [1994] FCA 1285; (1994) 52 FCR 271 at 277; and Webb v Hunter [1995] FCA 1443; (1995) 59 FCR 24.

44    The primary judge was correct to conclude that there was no real or bona fide claim based on the December 2015 deed (in the case of James Coshott) or the December 2015 deed and the March 2016 deed (in the case of Ljiljana Coshott) for the reasons set out above. As explained above, there was no arguable basis for the existence of an offsetting claim by reference to either of those deeds.

45    Accordingly, the second proposition raised by the appellants does not arise and nor do questions as to whether the 6 May 2016 deed “cured any defect with mutuality”.

46    Even so, we note our view that Foyster is not authority for the proposition that a debtor may raise an offsetting claim that did not exist at the time of the application to set aside the bankruptcy notice, at least where there is no stay pursuant to s 41(7) of the Act.

47    In Foyster, Emmett J stated relevantly at [7]:

If there had been no affidavit filed, which satisfied the requirements of section 41(7), there would have been no automatic extension of time under that provision. However, once the statutory stay provided for in section 41(7) comes into play, there does not appear to me to be any reason in principle why the Debtor should not be entitled to satisfy the Court as to any matter within section 40(1)(g). In Re Brink; ex parte Commercial Banking Company of Sydney Ltd [1980] FCA 78; (1980) 44 FLR 135, which was cited with approval by the Full Court in Eastick v Australia and New Zealand Banking Group Ltd [1981] FCA 80; (1981) 53 FLR 91, Lockhart J indicated that, upon the hearing of a matter under section 41(7), the Court has before it the initial affidavit which brings section 41(7) into play. There may, of course, be no other evidence. On the other hand, there may be a great deal of evidence. That will depend upon the circumstances of each case. The Court has power to permit the debtor to supplement his case by additional evidence.

(Emphasis added)

48    The second sentence, on which the Coshotts relied, is explicitly predicated on a circumstance in which s 41(7) “comes into play”, adopting the language of Lockhart J in Re Brink. In Eastick v Australia and New Zealand Banking Group Ltd [1981] FCA 77; (1981) 53 FLR 91, Deane, Fisher and Sheppard JJ said, relevantly at 92-93:

One further matter remains for consideration. That matter is a finding by Lockhart J. that the affidavit of 11 December, 1980, was not an affidavit of the kind referred to in s.41(7) of the Act, that is to say, that it was not an affidavit “to the effect that” the appellant had “such a counter-claim, set-off or cross demand as is referred to in para. 40(1)(g)”. Since that affidavit was the only affidavit filed before the expiration of the time fixed for compliance with the bankruptcy notice, the result of the finding would be that the time for such compliance was not extended. The question is not merely academic: it is relevant to determining the date of any act of bankruptcy constituted by a failure by the appellant to comply with the requirements of the bankruptcy notice.

The filing of an affidavit pursuant to the provisions of s.41(7) of the Act is the accepted method of setting in motion an application, for the purposes of s.40(1)(g), to satisfy the Court that a judgment debtor, who has been served with a bankruptcy notice, has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt being a counter-claim, set-off or cross demand that the judgment debtor could not have set up in the action or proceedings in which the judgment was obtained. In Re Brink; Ex parte Commercial Banking Company of Sydney Limited ((1980) [1980] FCA 78; 30 A.L.R. 433), Lockhart J. examined the requirements which an affidavit must satisfy if it is to be an affidavit of the kind specified in s.41(7). His Honour pointed out that, in many cases, debtors attempt to take advantage of the provisions of s.41(7) without the benefit of legal advice and made (ibid, p. 440) the following general comments with which we agree:

“It is as well to remember that the initial affidavit has to be filed within a limited time namely, the number of days after service of the bankruptcy notice upon the debtor fixed by the Registrar. These times are fixed by him without any knowledge on his part of the possibility of a counter-claim, set-off or cross demand being propounded by the debtor. In many cases it is difficult, if not impossible, for the debtor to present more than a mere outline of his case in the time available.

I do not think any good purpose would be served by my attempting to express a definitive formula as to what the original affidavit must contain. That must depend in every case on the particular facts and circumstances: see Re a Debtor (1963) 1 WLR 51, per Upjohn LJ at 56.

The fact that it is within the power of the court to determine when the hearing of a matter under s41(7) will take place, and thus the length of the extension of time to comply with the requirements of the bankruptcy notice; and the difficulty, if not impossibility in some cases, of the initial affidavit being anything other than a mere outline of the debtor’s case due to the temporal constraints imposed by the notice, all points to the conclusion that the courts should adopt a benevolent construction to the initial affidavit”.

49    If there was otherwise any doubt, it is plain from these authorities that Emmett J was not countenancing reliance on an offsetting claim in circumstances where s 41(7) had not been invoked.1

50    It follows that the first ground of appeal must fail.

Second ground: quantum of offsetting claims

51    As we have concluded that the primary judge did not err in concluding that there was no relevant offsetting claim, the second ground does not arise.

Third ground: power to extend time for compliance with notices under s 41(6A)

52    The primary judge’s reasons in relation to the third ground are summarised at [22] to [24] above.

53    The appellants contended that, in circumstances where Mr Prentice asserted that there was no valid application so as to extend time under s 41(7) of the Act and yet made no application for an extension of time under s 41(6A), the primary judge ought not to have extended time for Mr Prentice’s benefit, citing Derek George Shephard v Chiquita Brands South Pacific Limited [2004] FCAFC 76. In that case, the Court found that the power had been spent.

54    Section 41(6A) provides:

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.

55    Section 41(6C) states:

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.

56    Contrary to the appellants’ contention, there is nothing to suggest that the power conferred by s 41(6A) may only be exercised on the application of a party. At the hearing of the appeal, Mr Cheshire SC acknowledged that the primary judge had power to extend time under s 41(6A). Accordingly, the appellants were required to demonstrate an error of the kind referred to in House v the King [1936] HCA 40; (1936) 55 CLR 499 at 504-505.

57    The appellants did not identify any such error. In particular, Mr Cheshire did not attempt to explain why it was not in the interests of justice to grant an extension of time in the circumstances where, it appears, Mr Prentice may otherwise have been deprived of his rights arising from the bankruptcy notices as a result of the unsuccessful applications to set them aside.

58    Accordingly, this ground of appeal must also fail.

Fifth ground: defective taxation certificate

59    As previously noted, the bankruptcy certificate issued to Ljiljana Coshott was based on the May 2015 taxation certificate (in the sum of $77,300) and the October 2015 taxation certificate.

60    Ljiljana Coshott contended that the primary judge erred in holding that the May 2015 certificate was not objectively capable of misleading the debtor as to what to do in order to comply with the bankruptcy notice; and/or that any defects in the bankruptcy notice were merely formal defects capable of being cured by s 306 of the Act.

61    Section 306(1) of the Act provides:

Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.

62    The primary judge addressed these issues on the assumption, favourable to Ljiljana Coshott, that she was entitled to raise them although no relevant ground in support of the application to set aside the bankruptcy notice was stated in the supporting affidavit, as required by r 3.02 of the Federal Court (Bankruptcy) Rules 2016.

63    In her submissions, Ljiljana Coshott sought to challenge the primary judge’s conclusion “that the certificate of taxation for $77,000.00 was a final order of the Court and thus enforceable, even though it was undated, unsigned and unsealed”. However, as we have previously noted in connection with Ljiljana Coshott’s stated grounds of appeal, the primary judge made no such finding. Rather, at [105] of his Honour’s reasons, the primary judge concluded that the scheme for certifications of taxation dispensed with the requirement of separate entry of certificates or taxation as orders. His Honour noted that this was the purpose of r 40.32(2) of the Federal Court Rules 2011, which provides: “A certificate of taxation has the force and effect of an order of the Court”.

64    Ljiljana Coshott sought to rely on the reasoning of Brereton J in Re Fewin Pty Ltd [2016] NSWSC 1945. At [14], Brereton J concluded that no certificate of taxation was issued by the affixing of an electronic signature of the Principal Registrar on the cover sheet of a certificate of taxation filed on behalf of Mr Prentice.

65    That conclusion is arguably at odds with the finding at [96] of the primary judge’s reasons that the May 2015 taxation certificate “was issued electronically by way of a notice of filing document, which became part of the certificate of taxation bearing the seal of the Court and the electronic signature of the Registrar”. However, this finding was not challenged on the appeal. Mr Cheshire SC did not refer to the finding in his oral submissions. This may be explained by the fact that, as noted at [11] above, Ljiljana Coshott had acknowledged that the certificate of taxation was issued by an application for review, subsequently abandoned.

66    Accordingly, Ljiljana Coshott’s reliance on Brereton J’s decision goes nowhere.

67    Ljiljana Coshott next referred to the primary judge’s finding that, at [131] of his Honour’s reasons, even if there was a relevant defect, it was “of a most formal kind”. The submission was:

It is difficult to see, however, how this could be correct in the case of a bankruptcy notice relying upon a non-existent judgment; and it is submitted that if it is correct that there was no final order of the Court, then the bankruptcy notice served upon Ljiljana was defective to such an extent as to constitute a nullity.

68    The reference to a “non-existent judgment” appears to be a reference to the May 2015 taxation certificate. However, it is not clear in what sense that is an appropriate characterisation. As earlier noted, the certificate was preceded by an order, dated 15 May 2015, confirming that Mr Prentice’s costs under an order of the Full Court made on 23 September 2014 were deemed to be $77,300 and a taxation certificate was to issue accordingly.

69    Accordingly, it is not correct to say that there was no final order of the Court in relation to the May 2015 taxation certificate.

70    Ljiljana Coshott next argued, in the alternative, that “the resultant error in the total figure claimed arising from the inclusion of a non-existent final order, which was significant and overstated the total owing, applying a broad interpretation of s 41(5)”.

71    Section 41(5) of the Act provides:

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.

72    Having regard to the conclusions expressed above, there was no “resultant error” in the amount of the bankruptcy statement.

73    Accordingly, this ground of appeal also fails.

Fewin’s appeal against the 2017 judgment

Background

74    On 28 October 2016, Fewin caused bankruptcy notice BN208109 to be issued against Mr Prentice, based on a costs order in its favour for $16,500. The costs order was incurred by Mr Prentice when Fewin obtained an order from a judge of the Supreme Court of New South Wales setting aside a creditor’s statutory demand issued by Mr Prentice.

75    The creditor’s statutory demand sought to rely on a costs order in Fewin’s favour against Mr Prentice, made by another judge of this Court on 14 November 2015. On 20 January 2016, a Registrar of this Court issued a taxation certificate in which the costs were assessed in the sum of $25,000.

76    Although reasons had not been published for the Supreme Court’s orders when the primary judge delivered the 2017 judgment under appeal, his Honour recorded (at [7] of his Honour’s reasons) the parties’ understanding that the statutory demand was set aside on the basis of a finding that the taxation certificate issued was not signed by the Registrar in accordance with r 40.32 of the Federal Court Rules and was therefore defective.

77    Subsequent to the Supreme Court decision, the taxation certificate for $25,000 was reissued on 8 September 2016, bearing the Registrar’s signature on its face, and served on Fewin’s solicitors the following day.

Primary judge’s reasons for setting aside bankruptcy notice addressed to Mr Prentice

78    At [41] of his Honour’s reasons, the primary judge rejected Mr Prentice’s contention that the 8 September 2016 taxation certificate gave rise to an offsetting claim within the meaning of ss 41(1)(g) and 41(7) of the Act, which exceeded the debt specified in the bankruptcy notice. At [43], his Honour further concluded that Mr Prentice was unable to establish that the amount of the debt specified in the bankruptcy notice was misstated for the purposes of s 41(5) of the Act.

79    However, the primary judge accepted Mr Prentice’s argument that the bankruptcy notice was an abuse of process. At [51] to [57], his Honour gave the following reasons:

[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…

[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] FCA 162; (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.

80    The primary judge also concluded that the Court should set aside the bankruptcy notice in the exercise of its power to make such orders as considered necessary, contained in s 30(1)(b) of the Act, for the following reasons (at [59] and [60]):

[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 outlined 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 … [T]he 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.

Fewin’s argument on the appeal

81    Although Fewin’s notice of appeal set out four grounds of appeal, its submissions addressed only the primary judge’s findings that the bankruptcy notice was an abuse of process.

82    Fewin argued:

(1)    It was not an abuse of process to resist the setting off of the two debts in the absence of mutuality: Fewin’s obligation was to pay money to Mr Prentice in his capacity as a trustee, such that those monies would then be available to the trust as a whole, whereas Mr Prentice’s obligation was to pay Fewin personally. Although Mr Prentice would ordinarily have a right of indemnity from the trust assets, that is not an unqualified right and might be challenged by the beneficiaries of the trust; and in the event of an insolvency, the right would be qualified by the available assets. It was thus not an abuse to serve a bankruptcy notice for as long as the debt owing to Fewin remained unpaid.

(2)    The argument as to an abuse rested upon there being an enforceable debt owing by Fewin to Mr Prentice. The certificate was not enforceable until it had been entered and issued.

Consideration

83    Fewin did not contend that the primary judge had made any error as to the relevant legal principles. Nor did Fewin challenge the primary judge’s factual findings that:

(1)    The $16,500 debt would be recoverable from the trust funds (at [51]).

(2)    Mr Prentice could not be insolvent in respect of the debt he owed Fewin personally (at [52]).

(3)    The purpose of issuing the bankruptcy notice was to put pressure on Mr Prentice to pay the debt rather than to genuinely invoke the Court’s jurisdiction in relation to insolvency (at [55]).

84    In the absence of any challenge to the correctness of those findings, Fewin’s arguments must fail.

85    As to the first argument, the mere absence of mutuality does not cast doubt upon the primary judge’s conclusion that there was an abuse of process arising from Fewin’s improper purpose in issuing the bankruptcy notice. Further, the primary judge’s findings do not support an argument based on qualifications to the right of indemnity. It was not suggested that the evidence before the primary judge required factual findings about matters which might qualify Mr Prentice’s right of indemnity.

86    As to the second argument, any possible lack of enforceability of the taxation certificate does not detract from the improper purpose finding.

Conclusion

87    Fewin’s challenge to the 2017 judgment fails. The primary judge was correct to conclude that the bankruptcy notice was an abuse of process, and that it was otherwise in the interests of justice to set aside the notice, for the reasons given by his Honour.

Conclusions on all appeals

88    Each of the three appeals must be dismissed.

89    Costs should follow the event.

Associate:

Dated:    19 October 2018