FEDERAL COURT OF AUSTRALIA

BANKRUPTCY – validity of bankruptcy notice – whether bankruptcy notice invalid because parties named in Certificate of Judgment in District Court were incorrect – whether bankruptcy notice invalid because of an approximate calculation of interest in District Court judgment – whether defects in form of bankruptcy.

BANKRUPTCY – application under subs 41(6A) of the Bankruptcy Act 1966 (Cth) for extension of time to comply with a bankruptcy notice – whether application for special leave to appeal to High Court is application under s 41(6A) – extent to which Court should consider prospects of obtaining special leave to appeal.

BANKRUPTCY – whether debtor has counterclaim, set-off or cross-demand exceeding amount of judgment - whether  Court will go behind judgment entered after full trial – nature of evidence necessary to satisfy Court of such counterclaim.

Bankruptcy Act 1966 (Cth), ss 40(1)(g), 41(6A), 41(7)

Bankruptcy Rules (Cth), rr 10(4), 102, 195(1), 195(3) (former rules)

Judiciary Act 1903 (Cth), ss 35(2), 35A

High Court Rules, O 69A

District Court Act 1991 (SA), s 39

Supreme Court Rules 1987 (SA), r 101.02(1)

Legal Practitioners Act 1981 (SA)

Richardson v Schultz (1980) 25 SASR 1, applied

White v R (1962) 107 CLR 174, applied

Williams v Spautz (1992) 174 CLR 509, applied

Re Brink; ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135, cited

Webb v Hunter (1995) 59 FCR 24, cited

Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183, applied

Corney v Brien (1951) 84 CLR 343, applied

Bourke v Beneficial Finance Corp Ltd (1994) 124 ALR 716, applied

Olivieri v Stafford (1989) 24 FCR 413, cited

Ebert v Union Trustee Co of Australia Ltd (1968) 104 CLR 346, cited

Re Graves; Ex parte Graves v Seggie (Federal Court, Sackville J, 29 August 1997,

unreported), applied

Bryant v Commonwealth Bank of Australia (Federal Court, Davies, Foster, Kiefel JJ,

11 November 1994, unreported), applied

Re Baker; Ex parte Baker v Staples (Federal Court, Kiefel J, 4 September 1995, unreported),

cited

Re Dittes and Clyde Industries Ltd (Federal Court, Einfeld J, 10 December 1992, unreported),

cited

Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264, applied

Re Geard; Ex parte Reid (Federal Court, 11 February 1994, unreported), applied

Re Smith (Federal Court, 4 May 1994, unreported), applied

Agrillo v Codiposto (Federal Court, 16 December 1994, unreported), cited

McLeod v Falvery (Federal Court, Cooper J, 20 September 1995, unreported), cited

IN THE MATTER OF FRED BOYLAN

FRED BOYLAN v STEPHEN FARTHING and ALEGNA PTY LTD

SN 706 of 1996

MANSFIELD J

ADELAIDE

23 OCTOBER 1998

IN THE MATTER OF:         FRED BOYLAN

THE COURT ORDERS THAT:

1.                  Time for applicant to comply with the bankruptcy notice dated 21 November 1996 be and is hereby extended until 6 November 1998.

2.                  Subject to order made in paragraph 1 hereof, application dismissed.

3.         Applicant pay to respondents costs of the application to be taxed.

Note:  Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF:         FRED BOYLAN

REASONS FOR JUDGMENT

THE APPLICATION BEFORE THE COURT

On 21 November 1996 a bankruptcy notice was issued, and on 26 November 1996 served, upon Fred Boylan (“Mr Boylan”) on the application of Stephen Farthing (“Mr Farthing”) and Alegna Pty Ltd (“Alegna”) in respect of the sum of $105,005.37 (“the bankruptcy notice”).  The bankruptcy notice was expressed to be based upon a final judgment in that amount given in the District Court of South Australia on 1 and 8 November 1996 (“the judgment”).

Within the time specified for compliance with the bankruptcy notice, namely on 10 December 1996, Mr Boylan filed an affidavit asserting that he had a counterclaim, set-off or cross-demand equal to or exceeding the amount of the judgment sum which was the foundation for the bankruptcy notice and one which he could not have set up in the action or proceeding in which the judgment was obtained.  That affidavit was treated by the Registrar as having enlivened s 41(7) of the Bankruptcy Act 1966 (“the Act”).  Thus, until the Court has determined whether Mr Boylan has such a counterclaim, set-off or cross-demand, the time for compliance with the requirements of the bankruptcy notice are deemed to have been extended.

On 14 September 1998, Mr Boylan separately applied to set aside the bankruptcy notice, or to have it declared a nullity, and alternatively for orders that the time for compliance with it be further extended pending his “current appeal” to the High Court.  Thus s 41(6A) is invoked.  There is some overlap between that later application, and the earlier application enlivening s 41(7).

It will however be necessary separately to address the issues as to the validity of the bankruptcy notice, as to whether the Court is satisfied that Mr Boylan has a counterclaim, set-off or cross-demand of the kind referred to in s 40(1)(g) of the Act, and as to whether in any event, the Court should extend the time for compliance with the bankruptcy notice whilst the asserted appeal to the High Court is heard and determined.

THE JUDGMENT ON WHICH THE BANKRUPTCY NOTICE IS FOUNDED

The events leading up to the bankruptcy notice have a long history.  It is unnecessary to detail the factual matters underlying the relevant procedural history, which is set out at length in two judgments of the Full Court of the Supreme Court of South Australia given respectively on 27 April 1995 and on 23 December 1997, and in the judgment of the District Court of South Australia given on 1 and 8 November 1996, in issues between Mr Boylan, Mr Farthing and Alegna.  It is sufficient to note the following.

Mr Farthing is the nephew of Mr Boylan.  For many years he has operated a used car business, and from 1 July 1991 he has done so through Alegna, of which he and his wife are the shareholders and directors.  At all times the business has operated under the name “Farthing Motor Company”.  The business was operated firstly at premises at Reynella and subsequently also at premises at Christies Beach in South Australia.

On about 1 May 1992 an arrangement was come to whereby that part of the business conducted at the Reynella premises would be operated in some way as a form of joint venture between Mr Boylan and Mr Farthing and Alegna.  From 1 September 1992, or thereabouts, it was also agreed that that part of the business conducted at the Christies Beach premises also would somehow become a joint operation of Mr Boylan and Alegna.  One significant issue between the parties was whether, at the time of that latter arrangement, it involved Mr Boylan becoming a one-third shareholder of Alegna.  Whatever that arrangement, no shares were ever issued to him.  Disputes arose in relation to the conduct of the business during 1993.  On 17 January 1994, a meeting took place as a result of which Heads of Agreement were written up and signed both by Mr Boylan and Mr Farthing, effectively to disassociate themselves each from the other broadly speaking on a one-third two-thirds basis, with Mr Boylan to have and conduct that part of the business being conducted from the Christies Beach premises, and Mr Farthing through Alegna to have and conduct the business being conducted from the Reynella premises.  Terms were agreed upon for the splitting of stock, accounting for it, and generally accounting in relation to that arrangement.  In late February 1994, it appeared that that arrangement was somehow not being implemented in accordance with its terms.  For present purposes it is not necessary to refer to the detail.  One issue which emerged was whether the arrangement made on 17 January 1994 had been repudiated, either by Mr Boylan or by Mr Farthing and Alegna, and if so whether any such repudiation had been accepted so that the arrangement of 17 January 1994 was no longer in place.

The dispute led to the institution of proceedings in the District Court of South Australia on 2 March 1994.  Judgment was delivered in those proceedings on 26 July 1994.  By that time Mr Boylan was maintaining a claim against both Mr Farthing and Alegna, and Mr Farthing and Alegna for their part were maintaining a counterclaim for considerably larger sums against Mr Boylan.  The judgment then given was the subject of an appeal.  On 8 March 1995 the Full Court of the Supreme Court of South Australia set aside that judgment, and ordered that the matter be retried.  Following the retrial, on 21 August 1996 the District Court delivered interim findings, effectively pronouncing final judgment, and on 1 November 1996 published reasons for that decision and formally gave the judgment and made the orders which gave rise to the bankruptcy notice.  The judgment led to an award to Mr Boylan of $2,000 on his claim, and an award in the favour of Mr Farthing and Alegna on their counterclaim for $92,005.37.  Those two amounts were offset.  Judgment was entered in favour of Mr Farthing and Alegna against Mr Boylan in the net sum of $90,005.37, plus interest fixed on 8 November 1996 of $15,000, making the total of the judgment $105,005.37.  I shall call that decision “the District Court decision” and the learned trial judge in that decision as “the trial judge”.

Mr Boylan again appealed from that decision.  On 23 December 1997 the Full Court of the Supreme Court of South Australia dismissed that appeal.  I shall call that decision “the Full Court decision” and the Full Court as then constituted as “the Full Court”.  Perry J, with whom Debelle and Bleby JJ agreed, recognised that an important issue was whether the agreement of 17 January 1994 had been repudiated by Mr Boylan, and if so whether that repudiation was accepted by Mr Farthing and Alegna.  His Honour observed that it was accepted by both sides that there should be an accounting between them on the basis of the agreement of 17 January 1997, and that the retrial and the appeal from the judgment were each conducted on that basis.  Perry J recorded that Mr Boylan acknowledged that the arrangement of 17 January 1994 was still on foot.  In the Full Court decision, it was strongly argued by Mr Boylan that the trial judge had erred in accepting the evidence of an accountant as to how the agreement of 17 January 1994 applied in practical accounting terms between Mr Boylan on the one hand and Mr Farthing and Alegna on the other. There were other issues:  whether Mr Boylan could adduce fresh evidence on the appeal; the propriety of the findings as to credit; whether there had been improper use made of evidence given at the first trial; whether Mr Boylan had had proper access to accounting records and to the accountants report; an issue as to one particular payment; whether there was error in the accounting evidence generally and in the trial judge’s acceptance of that evidence as the foundation for the judgment; and as to the proper findings as to damages for conversion on Mr Boylan’s claim.

It is convenient to note in a little detail one of those topics at this point, as it was also argued on this application.  That issue is whether the judge on the retrial in the District Court improperly used evidence given at the first trial.  The Full Court noted that the learned trial judge on the retrial in the District Court decision perused evidence given at the first trial with the concurrence of Mr Boylan, and that certain evidence given by one witness at the first trial was specifically put at some length to Mr Boylan during the course of his cross-examination during the retrial.  After making some general observations as to the appropriate procedure to be adopted n such circumstances, Perry J concluded:

“In this case it seems clear enough that the learned trial Judge simply took the earlier evidence into account as part of the general body of evidence before him without, on the face of it, giving it undue weight.  It seems clear from his reasons for judgment that the critical issues were resolved by the learned trial Judge by reference to the evidence called before him …

… I am not persuaded that in having regard to that evidence, the learned trial Judge either acted contrary to the understanding reached with counsel, or made improper use of it.”

Nothing was put on this application to demonstrate that the understanding of, or the approach of, the Full Court was erroneous.  In my judgment, for the reasons given by the Full Court, any complaint on this score must fail.

Mr Boylan did not leave the matter at the stage of the Full Court decision.

Under s 35(2) of the Judiciary Act 1903 (Cth), an appeal may not be brought from the Full Court decision without special leave of the High Court.  Order 69A of the High Court Rules requires an application for special leave to appeal to be brought in the manner prescribed by r 2 of that Order, and, under r 3, within twenty-eight days.  There is power to make such an application out of time.  On 16 June 1998, considerably outside the twenty-eight day period permitted, Mr Boylan applied for special leave to appeal from the decision of the Full Court.  It did not comply with O 69A r 2 as it was not accompanied by the appropriate documents.  It appears to include an application under r 3(2) for dispensation from the time requirement imposed by r 3(1), although the number references in the application may not be correct.  The application asserts the reason for seeking that dispensation as follows:

“The Applicant was admitted to hospital on the 7/01/97 and for continuing health grounds has been unable to deal with the application within the prescribed limits.

Medical evidence will be made available to the Court, to substantiate the relief sought under sub rule (2) if requested by the court.”

No such evidence has been adduced before me on this application.  However, as I can determine it without reference to Mr Boylan’s prospects of having O 69A r 3(1) dispensed with, I do not need to address that question further.

Section 35A of the Judiciary Act 1903 (Cth) identifies matters to which the High Court is obliged to have regard in determining whether to grant special leave to appeal.  Those matters include whether the proceedings in which the judgment to which the application relates was pronounced involve a question of law that is of public importance, or is one in respect of which there are differences of opinion between different courts or within the one court as to the state of the law, and whether the interests of the administration of justice, either generally or in the particular case, require consideration by the High Court of the judgment.  Generally speaking, special leave to appeal will not be given unless the case involves some point of law of general application and, therefore, of importance:  White v R (1962) 107 CLR 174 at 176.

The application for special leave to appeal identifies a number of matters on which special leave to appeal is sought.  They are as follows:

“1.     Having found that (THE PRECISE STATUS OF ALEGNA WITH RESPECT TO THE PARTNERSHIP DOES NOT APPEAR TO HAVE BEEN ESTABLISHED BY THE EVIDENCE) the Full Court erred in upholding findings of the trial Judge based on such evidence, including the determination of the relationship between all the parties.

2.     The appellent [sic] was denied natural justice whereby

a)         Having called for the final submissions of Counsel, which were not before the Court as part of the appeal documents, the Full Court erred by its failure to warn the appellant that such sumissions [sic] would be used to make adverse findings against the appellant in the Judgement, to which the appellant was unable to reply, and by which the appellant was taken by surprise.

b)                  Having called for the transcript from the first trial the Full Court erred by failing to address the inconsistencies in the evidence of the first defendent [sic] in the first trial, and between the first and second trials.  The Court erred by failing to properly consider the findings of the Full Court on the first appeal in this and other matters.

3.              The Full Court erred by failing to find that the trial Judge made improper use of the evidence from the first trial.

4.              Having identified that the trial Judge made incorrect findings of fact, the Court erred in failing to give adequate weight to such findings.  The Full Court made errors on findings of fact, and upheld findings made by the trial Judge that are inconsistant [sic] with facts established by the evidence.

5.              The Full Court erred in Law by including the appellants [sic] wife PATRICIA BARBARA BOYLAN AS THE THIRD PARTY to the proceedings.

5.1               The Full Court erred in accepting evidence from the respondants [sic] that was not put properly before it.

6.       The Full Court erred by failing to appreciate that the trial Judge failed to make any proper findings resolving matters between the parties upon which an accounting was to be based, and did not make a proper assessment of the merit of the accounting evidence.

7.       The Full Court erred in refusing to accept new evidence adduced by the appellant, and relegated to the margins, important grounds of appeal raised by the appellant.

8.       The full Court erred by failing to recognise that the trial Judge misinterpreted aspects of the pleadings and failed to give weight to concessions made by the defendants.  The Full Court failed to give adequate weight to concessions made by the respondants [sic].”

Mr Boylan has filed a summary of argument in support of that application.  A response or reply to that summary of argument has been filed on behalf of Mr Farthing and Alegna.  I have read those documents carefully.

THE BANKRUPTCY PROCEEDINGS

The first hearing prompted by the activation of s 41(7) took place on 3 February 1997.  By that time Judge Kelly, Master of the Supreme Court, had ordered a stay of execution of the District Court decision until the hearing and determination of the appeal by the Full Court.  Accordingly, the application in its then form was simply adjourned out of the list, with liberty to apply to restore it.

As noted, the Full Court decision dismissing the appeal from the District Court decision was given on 23 December 1997.

Nothing appears to have been done until 20 July 1998, when Mr Farthing and Alegna applied to have the application invoking s 41(7) of the Act relisted for hearing.  There is no evidence as to the reason for the application being revived at that time.  On 10 August 1998, the Registrar gave directions that Mr Farthing and Alegna file and serve by 17 August 1998 an affidavit setting out the present state of the Supreme Court proceedings, and that Mr Boylan file any additional affidavit material proposed to be relied upon by 10 September 1998.  The matter was referred to me for hearing on 14 September 1998.

Mr Farthing and Alegna did not strictly comply with the times specified by that direction.  On 18 August 1998 an affidavit was sworn on behalf of Mr Farthing and Alegna covering the topic the subject of the direction.  The affidavit was served upon Mr Boylan, as he told me in the course of submissions, within a few days.  It was not filed until 14 September 1998.  In the meantime, Mr Boylan on 14 September 1998 instituted the further application referred to.  His affidavit in support exhibited much of the same material.  Mr Boylan, notwithstanding those matters, asserted on 14 September 1998 that he had not filed all the material which he wished to file in support of his application because he had checked the Registry to find Mr Farthing and Alegna had not complied with the directions given on 10 August 1998 by the filing within the time specified of the affidavit referred to.  He indicated that he wished further to respond to it.  In those circumstances, I allowed a further adjournment for him to do so and fixed a further hearing date.  To the extent necessary, I now extend the time for Mr Farthing and Alegna to comply with the direction given on 10 August 1998 to accommodate the filing and service of the affidavit sworn on 18 August 1998 to the times when that filing and service occurred.

THE ISSUES ON THE APPLICATION

No grounds are specified in the application of 14 September 1998 for why the bankruptcy notice is said to be invalid.  The affidavit filed with that application asserts the following:

“a.     It is based on a judgement that was entered irregularly and is misleading.

b.         Stephen Farthing is not a judgement creditor as detailed in the notice, the computation of interest is misleading.

c.          The Certificate of Judgement was not served on me.”

The submissions as to the invalidity of the bankruptcy notice emerged more clearly during argument and from the affidavits of Mr Boylan.  I shall deal with them in turn.  I shall also address in turn the issues arising under s 41(7) and s 41(6A) of the Act.

It was contended that the judgment was irregularly entered and was misleading because the parties named in the Certificate of Judgment issued by the District Court are incorrect.  That is because Mr Boylan’s wife Patricia Barbara Boylan (“Mrs Boylan”) is said to appear as a third party on that certificate.  The circumstances appear to be as follows:  following the publication by the trial judge of his interim findings on 21 August 1998, on 28 October 1996, application was made for a Mareva injunction against Mr Boylan and Mrs Boylan.  That application was refused.  Documents filed then included in the title to the proceedings Mrs Boylan as a third party.  The trial judge pointed out at the time that Mrs Boylan was not a party to the proceedings.  The Certificate of Judgment upon which the bankruptcy notice was issued has a back sheet describing Mrs Boylan as a third party.  However, within its body, it identifies Mr Boylan as plaintiff and Mr Farthing and Alegna as defendants.  It makes no reference to Mrs Boylan.  It identifies Mr Farthing and Alegna as the parties in whose favour judgment has been given, and Mr Boylan as the party against whom money has been ordered to be paid by the judgment.  An inappropriate addition to the back sheet to the Certificate of Judgment by the additional description of Mrs Boylan as a third party does not, in my view, affect the validity of the Certificate of Judgment itself.  Nor, more importantly, does it affect the fact that a judgment was entered against Mr Boylan and in favour of Mr Farthing and Alegna in the terms to which I have already referred.  I accordingly reject that submission.

Next, it was contended that Mr Farthing, who is shown as creditor on the Certificate of Judgment, was a person in whose favour no order was made.  That contention can also be dealt with shortly.  The reasons for decision of the trial judge indicate that the counterclaim upon which the District Court decision was given was brought by Mr Farthing and Alegna.  The judgment on the counterclaim was in favour of “the defendants”, that is both Mr Farthing and Alegna.  They were named as respondents in Mr Boylan’s appeal to the Full Court.  In the Full Court, the nature of the judgment was recorded by Perry J as follows:

“The trial Judge awarded the appellant damages amounting to $2,000, but found in favour of the respondents’ counterclaim, as to which he awarded the respondents $92,005.37.  Off-setting one against the other, he entered a judgment in favour of the respondents against the appellant in the net sum of $90,005.37.  It is against that judgment that the appeal is brought to this Court.”

In my view that accurately describes the judgment.  No point is addressed in the reasons of the Full Court on the appeal that there was an error in the judgment by reason of it being in favour of both Mr Farthing and Alegna.  In my judgment, therefore, it is not correct to assert that no judgment was entered in favour of Mr Farthing.  Nor is it correct to say that the bankruptcy notice is itself misleading (cp Mahmut & Anor v Inghams Enterprises Pty Ltd, Federal Court, von Doussa J, 25 May 1994, unreported).  It clearly and accurately reflects the amounts specified in the judgment and in the Certificate of Judgment.

It was also put that the judgment is “grossly misleading” and therefore irregular because the lump sum allowed for interest of $15,000 cannot be reconciled with an interest calculation at 8% from the date the proceedings in the District Court were first instituted until the District Court decision and which would not exceed $12,384.72.  In my judgment, that matter does not affect the validity of the judgment, or of the bankruptcy notice on which it is based.  The interest was fixed as a lump sum at $15,000 by the trial judge in his discretion.  He was entitled to do so:  s 39(3), District Court Act 1991 (SA).  The fact that the lump sum for interest so fixed exceeds, as a matter of calculation, interest precisely calculated at 8% does not per se demonstrate any reviewable error in the exercise of that decision.  The trial judge said the lump sum for interest was fixed on a rate of interest “more like 8%”.  In any event, 8% is not a rate of interest prescribed by the Court for the awarding of interest under s 39.  Even if a precise calculation of interest is to be made, under s 39(2), it is at a rate then fixed by the Court, and that rate may reflect commercial interest rates applicable over the period for which interest is awarded:  Richardson v Schultz (1980) 25 SASR 1.  There is nothing before me which establishes that 8% was the only available rate properly to be used for such a calculation.  The lump sum for interest was fixed when Mr Boylan was present by his counsel.  So far as it appears, that process of fixing a lump sum for interest was not attacked upon appeal to the Full Court.

It was next submitted that the judgment is irregular because the Certificate of Judgment upon which the bankruptcy notice was issued wrongly included the costs of the District Court proceedings.  I do not think it does so, and accordingly reject that submission.  As noted above, there is no element of costs in the amount of the judgment, upon which the application for the bankruptcy notice was made, or the bankruptcy notice issued.  It was for the amount of $90,005.37 and interest expressly awarded of $15,000, making the total $105,005.37.  The sealed Certificate of Judgment includes the following items:

The reasons for decision of the trial judge of 1 November 1996 do not refer to the costs of the trial and the submissions on 8 November 1996 do not address that topic.  Accordingly, the costs of the District Court decision will follow the event unless otherwise ordered:  r 101.02(1), Supreme Court Rules 1987 (SA).  Those rules generally apply to the District Court.  In my judgment, the Certificate of Judgment is not therefore irregular in the manner contended for.

It was next submitted that the Certificate of Judgment was not served upon Mr Boylan and that, somehow, as a result the bankruptcy notice is invalid.  It is not disputed that Mr Boylan was aware of the terms of the judgment.  There is nothing to indicate that s 41 was not formally complied with.  It requires the existence of a final judgment or final order which satisfies s 40(1)(g) and is at least in the sum of $2,000.  The execution of the judgment was not stayed at the time the application for issue of the bankruptcy notice was made; the stay order was made on 17 January 1997.  No other legislative obligation requiring the separate service of the Certificate of Judgment was identified.  In my judgment, this point must also fail.

It was also contended that the revival of this proceeding by having it relisted on 10 August 1998 amounted to malicious prosecution of the bankruptcy notice because, on 26 June 1998, Mr Boylan had made a complaint to the Director of the Legal Practitioners Conduct Board under the Legal Practitioners Act 1981 (SA) of unprofessional conduct on the part of those acting for Mr Farthing and Alegna:  cp Williams v Spautz (1992) 174 CLR 509.  I reject that submission for two reasons.  Firstly, as a matter of fact, I am not of the view that a reason for Mr Farthing and Alegna seeking to reactivate this proceeding is for the ulterior purpose of frustrating that complaint, or for some other unidentified improper purpose.  Whatever the outcome of this application, the Legal Practitioners Conduct Board will be able to consider the complaint.  No ulterior purpose beyond the achievement of a result in this proceeding on the part of Mr Farthing or Alegna has been identified, even if such a purpose were a relevant matter.  Secondly, the objective of procuring Mr Boylan’s bankruptcy demonstrated by the bankruptcy notice in November 1996 is a proper one and no material has been identified to suggest that Mr Farthing and Alegna do not still pursue that objective for the same reasons, namely the proper vindication of their legal rights.  That purpose is to bring about a result for which the law provides in the event that a sequestration order over Mr Boylan’s estate is made:  see Williams at 526, 535.

Mr Boylan also complains that his “application” in reply to the bankruptcy notice was not endorsed by the Registrar and returned to him, and that the notice issued on 10 December 1996 by the Registrar does not show Mr Farthing as a creditor.  Thus, he submits, that documentation is “bad and misleading”, and “no proceedings should flow” from it.  Following service of the bankruptcy notice on him, Mr Boylan’s response was the filing of his affidavit of 10 December 1996.  The Court should adopt a benevolent construction of that affidavit:  Re Brink; ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 at 142; Webb v Hunter (1995) 59 FCR 24 at 30.  That document was regarded by the Registrar as constituting an application under s 41(7) sufficient to enliven r 10(4) of the Bankruptcy Rules (Cth) that were then (but are no longer) applicable (“the Rules”).  Rule 10(4) then provided:

“If the Registrar is satisfied that an application:

(a)      raises a counter-claim, set-off or cross demand; and

(b)      gives sufficient particulars of the counter-claim, set-off or cross demand and of the reasons why the debtor was unable to set up that counter-claim, set-off or cross demand;

he or she must:

(c)       fix a date, time and place at which the debtor may appear before the Court to satisfy the Court that he or she has the counter-claim, set-off or cross demand referred to in the application; and

(d)      endorse a copy of the application with that date, time and place and return it to the debtor.”

The Registrar did issue a notice fixing a date, time and place for the hearing, as required by r 10(4)(c).  The matter came on for hearing on the date fixed, namely 3 February 1997.  The notice was sent to Mr Boylan, and he attended on that date and time.  It is clearly of no substantive disadvantage to him if he did not also receive a copy of his own affidavit endorsed with that date, time and place.  In that sense, the complaint is unmeritorious.  Had the application made by Mr Boylan complied with r 102 of the Rules, the application would no doubt have been appropriately endorsed.  Instead, the endorsement in the circumstances was on a separate document.  If that constitutes a non-compliance with the Rules, it does not render the proceeding void:  r 195(1).  It is too late for Mr Boylan to now seek to have the proceeding declared as irregular:  r 195(3).  I reject that submission.

I turn to consider whether I am satisfied that Mr Boylan has a counterclaim, set-off or cross-demand equal to or exceeding the amount of the judgment and which he could not have set up in the proceeding in the District Court.  I must be satisfied that Mr Boylan has a substantial and bona fide claim which he ought to be permitted to litigate before the bankruptcy proceedings continue:  Re James; Ex parte Carter Holt Harvey Roofing (Aust) Pty Ltd (1993) 46 FCR 183.

I have referred at some length above to the course of the proceedings in the District Court.  The reasons of Perry J in the Full Court, with which the other members of the Full Court agreed, indicate the nature and outcome of the issues at trial in the District Court and on the appeal.  I have considered carefully the material in the two affidavits of Mr Boylan to which he has referred and the other matters to which he referred on this hearing.  Mr Boylan sought to demonstrate that he fell within the formulation of s 40(1)(g) in two ways.  Generally, he submitted that, despite the decision giving rise to the judgment, he was not indebted to Mr Farthing or Alegna at all, that is that the judgment was wrong.  Additionally, he sought to show that he had, or was entitled to, a one-third shareholding in Alegna and that his claim to that interest had not been adjudicated upon and was of substantial value, and was one which he could not pursue in the District Court proceedings.  As appears below, those two contentions are inter-related.

There are circumstances in which the Court will inquire into the validity of a judgment debt, but generally only where the judgment has been obtained by fraud or collusion:  Corney v Brien (1951) 84 CLR 343; Bourke v Beneficial Finance Corp Ltd (1994) 124 ALR 716.  But until the Court does so, the pre-existing obligation of the debtor merges into a new obligation in the form of the judgment debt:  Corney, per Fullagar J at 353-354.  In Olivieri v Stafford (1989) 24 FCR 413 at 424 Beaumont J said:

“As has been said, a court of bankruptcy is concerned to inquire into the “reality” of the matter in hand.  Here the “reality” of the matter is that the merits of the respondents’ claim have been demonstrated to the satisfaction of one judge of the District Court and another judge of that Court has declined to disturb the judgment.  As a matter of substance, it is appropriate, in all the circumstances, for a court of bankruptcy to treat what happened in the two hearings in the District Court as a trial of the merits of the respondents’ claim.  That is to say, a court of bankruptcy should, I think, accept that a process of adjudication in the District Court has established that the underlying transactions created a true debt which could, in turn, provide a proper foundation for the entry of a judgment in respect of which a bankruptcy notice could properly issue.”

Beaumont J added (at 426):

“It is one thing to look behind a judgment obtained in default of the taking by a defendant of a procedural step.  In such a case, there has been no adjudication of the merits of the dispute.  It is a different thing to ask a bankruptcy court to embark upon an investigation of all the details of the underlying transactions between these parties where the matter has already been the subject of an adjudication in the District Court on two occasions.”

In the present case, the judgment was given after a full hearing in the District Court and has been upheld on appeal by the Full Court.  The remarks of Beaumont J apply with equal force to the present circumstances.

I am not persuaded in any event that, as a matter of reality, sound reasons exist to determine that there is no debt owing as identified in the judgment.  Mr Boylan’s contentions to the contrary amounted to a critique of the findings and reasons for the District Court decision and of the reasons for the Full Court decision, much as expressed in his summary of argument to be put to the High Court.  He complains of findings of fact made in part based upon the trial judge’s conclusions as to the reliability of certain evidence in preference to that of Mr Boylan.  He refers to selective passages in the evidence at the trial which, he submitted, were not consistent with the overall findings.  He sought to tender selected pages of the transcript of the trial to make that point, but did not tender the whole of the transcript.  He sought to tender the Australian Securities Commission printout of 14 May 1997 containing Alegna’s Annual Return for the year to 30 June 1994 and selected pages from the financial records of Alegna showing in part its balance sheet at 9 January 1994 and 30 June 1993 to mount a challenge to the reliability of one witness at the trial, upon whose evidence the learned trial judge acted.  All but the 1994 Annual Report were in evidence at the trial.  I indicated I would rule on the admissibility of that material when giving judgment in this matter.  I decline to receive it because it is selective only, and clearly from the reasons of the trial judge not reflective of, or representative of, all the evidence on the topics it addresses.  Its content, as contended for by Mr Boylan, could not in the circumstances result in this Court on that selective and limited material concluding that in reality there was no debt.  The issue as to the reliability of the accounting evidence generally was addressed at some length by the trial judge.  The reasons demonstrate that the sort of arguments now put on that topic were put at the trial.  The correctness of those findings was unsuccessfully challenged before the Full Court.  Similarly with respect to the issue as to the reliability of the evidence of Mr Farthing:  it was a matter fully litigated at trial, and selective and limited reference to the transcript of his evidence does not in my view provide any basis for concluding that the trial judge’s acceptance of his evidence to the extent he did so was erroneous, or that there is in reality no debt of the nature reflected in the judgment.

The other aspect of Mr Boylan’s claim was to assert a counterclaim, set-off or cross-demand, namely his claim to a one-third interest in the shares in Alegna.  It is only necessary for Mr Boylan to show that he has “a fair chance of success” on that claim, including as to its quantum, to satisfy the Court that the bankruptcy notice is of no effect:  Ebert v Union Trustee Co of Australia Ltd (1968) 104 CLR 346 at 350; Brink (above at 141); Re Graves; Ex parte Graves v Seggie (Federal Court, Sackville J, 29 August 1997, unreported).

The claim is based upon the claimed arrangement from about 1 September 1992 referred to above.  In fact, no shares in Alegna were ever issued to Mr Boylan.  The matter was specifically raised at the completion of the hearing before the trial judge on 8 November 1996.  Counsel appearing for Mr Farthing and Alegna specifically sought an order by way of declaration that Mr Boylan was not a shareholder of Alegna and had no interest in Alegna.  That order was refused.  As the transcript discloses, the trial judge at the time expressed the view that he had made such determinations as he was required to on the issues litigated between the parties, and that his reasons for judgment would speak for themselves.  He said that he had no jurisdiction to make that declaratory order at that point because he had already entered judgment in terms of the judgment.  The hearing was a brief one.

The reasons for decision of the trial judge indicate that the claim for a one-third interest in Alegna was pleaded by Mr Boylan.  The trial judge’s recital of the evidence in his reasons indicates that Mr Farthing’s evidence was that that arrangement was conditional upon the purchase of some further land, and that that condition was never fulfilled.  There was clearly a factual dispute on the matter, which was part of the context of the arrangement of 17 January 1994 for a parting of the ways and a “one-third/two-third division of ‘everything’”.  Mr Boylan disputed in evidence at the trial the detailed terms of that arrangement.  The trial judge found, relevantly for present purposes, that:

“However, bearing in mind all of these matters, it was agreed that as of September 1992, Mr Boylan would be a one-third owner of the company.”

and, as to the arrangement of 17 January 1994:

“3.     They decided to terminate the above agreement by negotiations on a one-third/two-third’s division of “everything”.

4.     Page 2 of the agreement described how they would run their separate yards and stated that “wholesale stock value to go into FMC Acc No 7790 12872 upon sale.  Selling yard to retain profits from 9-1-94”.  Then “Acc No 7790 12899 to be Steve’s account from 9 -1-94”.

5.     The agreement then provided for a final accounting by way of “arbitration”.”

The trial Judge found that Mr Boylan, by his conduct, had repudiated the basis of that agreement.  His Honour proceeded to determine the respective rights and liabilities of the parties on the basis that the relationship between them was at an end.  He thus made ultimate findings as to their respective entitlements up to January 1994 resulting in the judgment.  He was at pains to stress that he had provided Mr Boylan with the opportunity of contesting the accounting evidence presented by Mr Farthing and Alegna on that score.  In the Full Court, Perry J after addressing those findings, observed:

“But if the agreement was to be regarded as repudiated by Mr Boylan and the repudiation was accepted by the appellant, the basis upon which any final accounting between the parties should proceed, and the associated question of damages between them for damage of contract, would become problematic.

But the trial did not go forward on that basis.  Instead, it was accepted by both sides that there should be an accounting drawn up on the footing of the application of the agreement of 17 January 1997.

There was some dispute as to the construction of the agreement.  But at the end of the day, it was common ground that the agreement was to govern the final accounting between the parties.

…

The argument on appeal confirms what I have indicated.  It was at no time suggested by the appellant on the appeal that the case involved other than an ascertainment of what he suggested to be a true construction of the agreement of 17 January 1994 and its application to the state of affairs between the parties, as an instrument to determine what balance was due by way of a final adjustment between them.”

In my judgment, those matters demonstrate that the trial leading to the District Court decision, and the appeal before the Full Court, proceeded on the basis that, whatever arrangement was made for Mr Boylan to obtain an interest in Alegna in September 1992, by virtue of the later arrangement of 17 January 1994 any earlier entitlement to an interest in Alegna was no longer pursued.  The relationship between the parties was at an end.  The issue remained, and was determined, as to how a proper accounting should be made between them for and during the period of their relationship.

I am not satisfied that Mr Boylan has a counterclaim, set-off or cross-demand of an amount exceeding the amount of the judgment debt, and one which he could not have set up in the action or proceeding in which the judgment or order was obtained.  On the contrary, in my judgment, all the issues now raised by him were ventilated and adjudicated upon in the District Court decision.  I am also not satisfied that any such claim, even if available, is of an amount exceeding the judgment debt.  The evidence as to the real balance sheet position of Alegna as presented to me is sparse, but it does not in my view disclose a foundation for Mr Boylan to be able to show that it was, or is, sufficient for the value of his claimed one-third interest in Alegna to be of the order of the judgment or any amount approximating that amount.  Mr Boylan also deposed to having a claim for unliquidated damages which “flow to me from the actions of the defendants, together with the lack of fiduciary care and responsibility exhibited by the directors.”  There is no other cogent evidence adduced as to the nature and quantum of those claims.  They do not emerge in the affidavit which enlivened s 41(7).  In my judgment, those assertions as to further claims do not constitute qualifying claims under s 41(7):  Brink (above, at 142); James (above, at 188-189).

As a matter of substance, it was put also that the Court should go behind the judgment and that it is apparent that in fact no debt is owed by Mr Boylan to Mr Farthing.  It is said that any debt which exists is owed by Mr Boylan to Alegna.  This argument is an alternative to Mr Boylan’s principal contention in respect of the application under s 41(7) that there is no amount owing which, in terms of s 40(1)(g), can found the bankruptcy notice.  I am not of the view that I should do so.  As the reasons both of the trial judge and of the Full Court disclose, Mr Farthing’s and Alegna’s affairs were closely intertwined and at least for a period Mr Boylan’s arrangement was with Mr Farthing and then, after Alegna’s introduction, still in part with Mr Farthing as Mr Farthing and Mr Boylan each had to make contributions towards the ongoing operation of the business at the two car yards through Alegna.  Furthermore, it does not appear that the fact that the judgment was in favour of both Mr Farthing and Alegna was a matter the subject of complaint before the Full Court.  If it were the case that Mr Farthing was in the circumstances not in reality entitled to any judgment upon the basis on which the trial judge proceeded, the Full Court was the appropriate forum to pursue the matter.  I am not persuaded that I should make such a determination, and certainly not without the benefit of all the evidence before the trial judge.  I reject the submission.  I do not therefore need to address the question of whether, even if correct, it would be of any significance where Alegna in any event is one of the applicants for the bankruptcy notice and on this scenario has in its favour a judgment for $105,005.37.

There remains therefore the question of whether under s 41(6A) I should nevertheless in effect grant a stay of the operation of the bankruptcy notice, by extending the time for compliance with it by a further indefinite period, whilst Mr Boylan’s application for special leave to appeal to the High Court falls to be determined.

Section 41(6A) and (6C) provide:

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

(a)       proceedings to set aside the 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 the 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.”

Mr Farthing and Alegna accepted that the application filed on 14 September 1994 comprised in part an application made under s 41(6A) at a time when it was competent to do so.  The institution of an appeal against the judgment may constitute an application to set aside the judgment under s 41(6A)(a):  Bryant v Commonwealth Bank of Australia (Federal Court, Davies, Foster and O’Loughlin JJ, 11 November 1994, unreported); Re Baker, Ex parte Baker v Staples (Federal Court, Kiefel J, 4 September 1995, unreported); Re Dittes and Clyde Industries Ltd (Federal Court, Einfeld J, 10 December 1992, unreported).  I am satisfied therefore that the Court has power to extend time for compliance with the bankruptcy notice under that subsection.

The power under s 41(6A) is discretionary, but that general discretion is subject to s 41(6C).  It was not contended that the application is not a bona fide.  Having heard Mr Boylan’s submissions, I accept that he is acting bona fide in pursuing the application for special leave to appeal to the High Court.  He clearly has a strong belief that the adverse outcome of the District Court decision is erroneous.  Mr Farthing and Alegna also did not contend that Mr Boylan was not prosecuting that application with due diligence, and I have not formed the opinion that Mr Boylan is not prosecuting that application with due diligence.  Accordingly, the application is to be determined in the Court’s general discretion.

In Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264, Lehane J at 269 quoted with approval a passage from the reasons for decision of Sheppard J in Re Geard; Ex parte Reid (Federal Court, 11 February 1994, unreported) in which Sheppard J said:

“The critical question then is how that discretion should be exercised.  As earlier stated, the parties have made, both orally and in writing, detailed submissions concerning the issues which will arise for determination on the appeal and have invited the Court in effect to express a view, provisional though it may be, on the likely outcome of the appeal.  To a degree I have felt obliged to look at the matter for myself, but I think it most undesirable that a judge of this Court should in effect undertake some provisional review to determine the correctness or otherwise of the judgment of another court especially when that judgment is under appeal to the Court of Appeal which has jurisdiction to hear appeals in the normal course.  I prefer to approach the matter in a different way.

The debtor has not made any application for a stay of proceedings pending the outcome of the appeal.  Why he has not done so is not clear to me but the judgment which has been recovered against him is a final judgment and execution upon it has not been stayed it would seem to me to require quite special circumstances before a court exercising jurisdiction in bankruptcy would, in effect, do what has not been done in the court in which the judgment has been obtained by extending the time for compliance with the bankruptcy notice when no application to stay the judgment has been made.  If one were to contemplate the taking of such a course, one would usually require evidence of the means of the debtor and would wish to consider whether or not it were appropriate to order that security for the amount of the judgment should be provided.  Those are matters which a court exercising jurisdiction to stay the execution of a judgment would wish to consider.

A further factor is that this is an application to extend time for compliance with a bankruptcy notice; it is not the hearing of a bankruptcy petition.  The refusal of the application will not affect the status of the debtor but it will mean that he, in all probability, will commit an act of bankruptcy.  That act of bankruptcy will be available to the petitioning creditors or to any other creditor upon which to base a bankruptcy petition at any time in the period of six months after the act of bankruptcy has been committed.  Otherwise the debtor’s position will remain unaffected by what the Court does.

If the appeal is ultimately dismissed and the judgment stands with the consequence that the bankruptcy proceedings go on, it may be quite important to the petitioning creditor, whoever he or she may be, to the general body of creditors and to the trustee in bankruptcy, that there be, for the purposes of the administration of the bankrupt estate, an act of bankruptcy committed at an earlier time than would be the case if this application were acceded to.”

That approach has been followed also by Whitlam J in Re Smith (Federal Court, 4 May 1994, unreported) and by Sackville J in Agrillo v Codiposto (Federal Court, 16 December 1994, unreported).  Lehane J observed at 270 that, applying that process of reasoning, the commission of an act of bankruptcy is of a different order of gravity from the making of a sequestration order, and that it is also relevant to have regard to the interest of both the judgment creditor and other creditors of the judgment debtor in ensuring that, if ultimately a sequestration order is made, the relevant act of bankruptcy occurs at an earlier rather than a later time.

Mr Boylan submitted, perhaps to his detriment, that I should however follow the approach of Kiefel J in Baker (above) in that I should consider at least whether it is “arguable” that his application for special leave to appeal and, if granted, his appeal to the High Court will succeed.  That view also seems to be reflected in the decision of the Full Court in Bryant (above).  In that case, one ground of appeal raised the question whether it was correct to have regard to the prospects of success of an appeal in determining whether or not to exercise the discretion under s 41(6A) of the Act to extend the time for compliance with the bankruptcy notice.  The Full Court observed that the trial judge “was obliged to form some view of the prospects of success”, and that it was correct to have taken into account the assessment that those prospects were “slight”.  Similarly, in McLeod v Falvery (Federal Court, Cooper J, 20 September 1995, unreported) Cooper J said:

“… it is not inappropriate for the Court to seek to form a view as to whether or not there is prima facie any reasonable prospect of success having regard to the arguments contended for by the appellant or which will be contended for by the appellant on the appeal.”

His Honour then formed the opinion that the prospects of success were not good.  His Honour then proceeded, as he was obliged to do, to take into account any other relevant circumstances going to the exercise of the discretion.  That included the potential disadvantage to other creditors of the applicant for the extension of time by delaying the time of any act of bankruptcy.  In that case, his Honour was offered, and accepted, an undertaking by the judgment creditors not to proceed to bankruptcy on any petition filed by them pending the hearing and determination of the appeal.  No such undertaking has been offered here.

I do not need to determine for myself which is the better or more correct approach to the exercise of the discretion under s 41(6A).  That is because, on any view of the matter, I do not think it appropriate to make the order sought.  In Byron (above), Lehane J in fact was confronted with similar considerations.  His Honour said on that score (at 271):

“… as a consideration reinforcing the Court’s reluctance to extend time in the absence of a stay, that an appeal has already been dismissed and the proceeding in question is (as here) an application for special leave to make a further appeal.”

It seems to me that, consistently with his Honour’s approach, it may be appropriate to consider the grounds upon which special leave to appeal to the High Court is sought to determine whether there are more than slight prospects of obtaining special leave to appeal.  Although the High Court often declines to grant special leave to appeal because the decision from which the leave is sought is not attended with sufficient doubt, there are as indicated above matters which the High Court may address which do not of themselves involve any assessment of the correctness of the decision from which leave is sought but focus on the nature of the issues to be raised and the context in which they arise.  To consider such matters would not attract the concern expressed by Sheppard J about reviewing the correctness of another court’s decision.

On the material before me, Mr Boylan has made no application for a stay of the decision of the Full Court.  No explanation has been proffered for having not pursued that course.  There is no evidence that he has assets to meet the judgment, nor any proposal to provide security in respect of it.  The refusal of this application will not affect his status, although he will as a result probably commit an act of bankruptcy.  I know nothing of any other creditors.  Although the order sought would delay the commission of any act of bankruptcy, and so delay the time from which the six months period relating to that may run, Mr Farthing and Alegna have not put anything to indicate any particular significance by reason of that matter.  Their apparent delay in having the matter relisted following the Full Court decision does not indicate any critical timing considerations on their part.

On balance, however, I do not think it appropriate to exercise my discretion in the manner sought by Mr Boylan.  The balancing of the considerations does not lead me to do so.  There are no special circumstances identified by Mr Boylan which warrant the exercise of that discretion.

I am confirmed in that conclusion by my consideration of the prospects of Mr Boylan obtaining special leave to appeal to the High Court.  I have carefully considered the application for special leave itself, and the summary of argument apparently filed in support of that application containing amongst other things the proposed notice of appeal.  In my view Mr Boylan has little prospect of succeeding on that application.  There is no particular matter of public importance identified.  What is apparent is that the District Court decision and the Full Court decision involve a careful and detailed analysis of a complicated series of arrangements between Mr Boylan and Mr Farthing and Alegna over a period of some two years, and the determination of facts as to the nature of those arrangements from time to time and the consequences of them.  The decision is very much a decision on the facts of the particular case.  There is no issue of general application to which the decision would apply.  Furthermore, the decision of questions of fact, to large measure turned upon issues as to credit as between Mr Boylan on the one hand and Mr Farthing on the other.

Accordingly, at present I refuse the order sought under s 41(6A).  I propose however to extend the time for Mr Boylan to comply with the bankruptcy notice for a period of fourteen days from today.  That will give him a further opportunity to comply with it.  I fix that period having regard to the time which has elapsed since the Full Court decision and to the fact that Mr Farthing and Alegna did not demonstrate any apparent urgency in having the bankruptcy notice re-activated following the Full Court decision.

In my view Mr Boylan should pay to Mr Farthing and Alegna the costs of this application.  I so order.

Associate:

Dated:              23 October 1998

Applicant appears in person

Counsel for the Respondents:                                        Mr J Oks

Solicitors for the Respondents:                          Jaak Oks

Date of Hearing:                                                           22 September 1998

Date of Judgment:                                                         23 October 1998