FEDERAL COURT OF AUSTRALIA

Xu v Wincopy Pty Ltd [1999] FCA 1335

BANKRUPTCY – bankruptcy notice – whether debtor had a counter-claim, set-off or cross demand

Bankruptcy Act 1966, s 40(1)(g)

Stec v Orfanos [1999] FCA 457, applied

HUMPHREY JIAN XU v WINCOPY PTY LIMITED and VISION WISE HOLDINGS LIMITED

N 7832 OF 1999

IN THE MATTER OF HUMPHREY JIAN XU

THE COURT ORDERS THAT:

1.                  The application is dismissed.

2.                  The applicant pay the respondents’ costs.

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

IN THE MATTER OF HUMPHREY JIAN XU

REASONS FOR JUDGMENT

1                     This is an application to set aside a bankruptcy notice, which was issued on 23 June 1999 at the request of the respondents.  They relied upon a judgment in the sum of $6,001 obtained in the Local Court at the Downing Centre, Sydney on 23 December 1998.  That judgment was for an amount of costs payable as a result of an order of the Supreme Court of New South Wales.  The bankruptcy notice was served on 6 July 1999, and the present application was filed on 27 July 1999 accompanied by an affidavit sworn the same day by the applicant’s solicitor, Mr George Yip.

2                     The sole ground now relied on by the applicant is that he has a counter-claim, set-off or cross demand such as is referred to in par 40(1)(g) of the Bankruptcy Act 1966 (“the Act”).  In his accompanying affidavit, Mr Yip referred to a “claim for compensation for unjust enrichment” against the firstnamed respondent (“Wincopy”) and the secondnamed respondent (“Vision Wise”).  He stated that on 13 July 1999 the applicant had filed notice of a motion for leave to amend his statement of claim in proceedings S 4884 of 1997 in the Supreme Court of New South Wales (“the cross-vested proceedings”).  Mr Yip annexed to his affidavit a document incorporating the amendments sought.

3                     That pleading includes the following allegations:

“Central Plaza

126            In August 1993 Vision Wise purchased a shopping centre known as Central Plaza at 10 Patrick Street, Blacktown (“Central Plaza”).

127            The purchase price for Central Plaza was $1.91 million.  This was paid as follows:

(a)               10% deposit from Diamond Hill; and

(b)               the remainder by Diamond Hill through its Hong Kong bank account.

128            The amount paid from Diamond Hill’s Hong Kong bank account came from part of a loan of US$4.25 million from the Bank of China and US$1 million from Beijing Real Estate Investment.  Part of this money was subsequently used to purchase Dee Why Plaza and La-Galeria Shopping Centre.

129            The plaintiff negotiated and obtained the loans of US$1 million from Beijing Real Estate Investment and $4.25 million from Bank of China.  The loan from Bank of China was supported by personal guarantees from the plaintiff and first defendant.

130            The plaintiff inspected the property and negotiated the purchase with the real estate agent and directly with the vendor.

131            The plaintiff instructed a solicitor to act.

132            The plaintiff instructed an architect to design and renovate Central Plaza.

133            The plaintiff negotiated with Supre Pty Limited to lease Central Plaza, which reduced the vacancy rate from 70% to less than 10% and thereafter meant that the rental income of the property exceeded the outgoings if the property was properly managed.

. . .

Otis Building

135In November 1993 Wincopy purchased a building known as the Otis Building and the adjoining block of land at 43 Bridge Street, Hurstville (“the Otis Building”).

. . .

136The purchase price of $13.9 million for the Otis Building was paid as follows:

(a)               a 30% deposit of $4.47 million from:

(i)                 $3.5 million from Diamond Hill; and

(ii)               $0.97 million from Bank of China; and

(b)               balance of $10.97 million from Bank of China.

137The $3.5 million from Diamond Hill was borrowed from Bank of China secured by a second mortgage on the La-Galeria Shopping Centre and a second mortgage on Dee Why Plaza.

138The plaintiff negotiated the mortgage of $10.7 million from Bank of China and the contribution of $970,000 from Bank of China.

139The plaintiff inspected the property and negotiated the purchase price with the vendor.  The plaintiff used information obtained from his inspection and enquiries about the property to negotiate a lower purchase price.

140The plaintiff instructed a solicitor to act.”

. . .

Restitution and Unjust Enrichment

162A   In relation to and after the incorporation of each of the third, fourth and fifth defendants the plaintiff effectively occupied the post of managing director of each of the third, fourth and fifth defendants and undertook substantial work for the benefit of each company over each [sic] substantial period of time.

162B    The work included all matters relating to the purchase, development and tenancy of substantial assets which were continued for a substantial period of time.

(a)               in respect of Diamond Hill the plaintiff repeats paragraphs 102 to 124 of the statement of claim.

(b)               in respect of Vision Wise the plaintiff repeats paragraphs 125 and 133 of the statement of claim.

(c)                in respect of Wincopy the plaintiff repeats paragraphs 135 to 140 of the statement of claim.

(d)               further in relation to Diamond Hill the plaintiff selected and oversaw the leasing of a commercial office for Diamond Hill in Sydney together with the fit-out and modification of the commercial office for Diamond Hill.

(e)                further to the particulars the plaintiff undertook the work of managing director for all three companies including on-going work in the management of the assets of the companies including the securing of tenants to produce rental income.

162C   During the period of the said work the plaintiff received a nominal cash and partial cash remuneration for his services which was completely inadequate for his services and which was never intended as between himself, Helen Liu and the third, fourth or fifth cross [sic] defendants to recompense the plaintiff for his services.

162D   The work and services done by the plaintiff for and for the benefit of the third, fourth and fifth defendants have resulted in the generation of substantial work and income for the third, fourth and fifth defendants.

162E   By reason of the said generation of substantial wealth and income for the third, fourth and fifth defendants the first defendant has received substantial benefits by way of capital income.

162F   In the events which have happened by reason of the said generation of substantial wealth and income for the third, fourth and fifth defendants the second defendants have received substantial benefits by way of capital and income.

162G   In the events which have happened the first, second, third, fourth and fifth defendants have been unjustly enriched at the expense of the plaintiff and the plaintiff’s deserving of restitution and compensation.

162H   Further and in the alternative, as between the plaintiff and the first defendant retains 60% of the shareholding in Diamond Hill and Wincopy and 49,500 shares in Vision Wise together with the other benefits she has obtained from such companies, the first defendant will be unjustly enriched at the expense of the plaintiff.”

Vision Wise and Wincopy are respectively the fourth and fifth defendants referred to in the pleading.  The applicant also seeks to amend so as to claim “[as] against the first, second, third, fourth and fifth defendants restitution and compensation for unjust enrichment”.

4                     On the hearing of the present application parts of a further affidavit made by Mr Yip and of an affidavit made by the applicant were read and admitted in evidence.  Both deponents were also cross-examined.  A valuation of the Central Plaza shopping centre as at 22 March 1995, which was annexed to Mr Yip’s further affidavit, was also received in evidence on the basis that the valuer was available for cross-examination (although he was not required).

5                     The applicant verified the allegations in his proposed statement of claim in the cross-vested proceedings.  He said that he spent a total of at least 1040 hours between June 1993 and August 1994 doing the things set out in paragraphs 126-133 of the pleading, and a total of at least 880 hours between October 1993 and August 1994 doing the things set out in paragraphs 135-140 of the pleading.  The applicant also said that, after the purchase of the adjoining block of land at Hurstville referred to in paragraph 135 of the pleading, he oversaw its subdivision and that, between the purchase of the Otis Building in 1993 and its sale in December 1998, there was a substantial positive cash flow from rentals amounting to approximately $2.5 million per annum collected from that building.  In cross-examination, the applicant agreed that he also worked for Diamond Hill on the transactions alleged in the pleading, that he could not separate the time spent working for each company, and that he was not paid a salary by Wincopy or Vision Wise.

6                     The respondents tendered without objection a recent judgment of Master Macready in the cross-vested proceedings.  This judgment records the extremely dilatory prosecution of those proceedings which were commenced by the applicant in this Court in 1997.  That history was confirmed in cross-examination by Mr Yip.  In particular, the applicant has so persistently failed to comply with directions requiring him to file affidavits of his witnesses in chief that the Master indicted he “would be minded” to stay the proceedings until he did file such material.

7                     Counsel for the applicant submits that there is substantial evidence of a bona fide claim against each of Wincopy and Vision Wise in an amount substantially exceeding the judgment debt.  However, he concedes that the applicant does not have a claim against the respondents jointly.  At the threshold, therefore, counsel for the respondents submits that, in answer to a bankruptcy notice issued by several joint creditors, the debtor may not raise claims against those creditors individually.  He relies for this submission on the authorities gathered and the statements of principle in the following passage from the judgment of the Full Court of this Court in Stec v Orfanos [1999] FCA 457 at 24 and 25:

            “. . . Where a debtor seeks to set aside a bankruptcy notice on the ground that the debtor has a cross demand which equals or exceeds the amount of the judgment or order on which the bankruptcy notice is founded, the judgment on the one hand and the cross demand on the other must be mutual and due in the same right: Re Anderson; Ex parte Alexander (1927) 27 SR (NSW) 296; James v Abrahams (1981) 51 FLR 16 at 27.  The requirement that the two claims be “in the same right” is directed to the capacities in which the claimants claim.  Thus a claim by a judgment creditor personally cannot be answered by a claim against the creditor as a member of a partnership or as an executor or trustee.  See Re Wedd; Ex parte Wedd (1961) 19 ABC 36; Re Molesworth (1907) 51 Sol J 653; Vogwell v Vogwell (1939) 11 ABC 83 at 89.  But the requirement relevant to the present case is that the claims be mutual; that is that they be of the same kind or nature.  Thus joint debts cannot be set off against several debts: Middleton v Pollock (1875) LR 20 Eq 515 at 518.     . . . 

                        We agree with the primary judge’s observation in Emanuele [v Grey (unreported, von Doussa J, 17 December 1997] and in the present case that a debtor may only raise as an answer to a bankruptcy notice issued by several joint creditors a cross demand against those creditors jointly.”

8                     An attempt was made by counsel for the applicant to distinguish Stec on the basis that in that case the cross demand was asserted in the first place against one of four joint creditors and only in the alternative against the three other joint creditors.  In my opinion, the ratio of Stec was not relevantly confined by that fact.  The requirement for mutuality is clearly expressed as being of general application and governs the present case.  The respondents are entitled to have the application dismissed for this reason alone.

9                     Counsel for the respondents submits that Mr Yip’s first affidavit does not comply with r 13(3) of the Bankruptcy Rules and that, unless those provisions are dispensed with, the applicant has not made a valid application of the kind referred to in s 41(7) of the Act: Crimmins v Glenview Home Units Pty Ltd [1999] FCA 515.  Be that as it may (and there is no doubt that that affidavit does not comply with par (c) of r 13(3)), even when regard is had to the additional evidence, the applicant has not satisfied me that he has prima facie or bona fide claims against the respondents.  He has failed to satisfy the Court that he has a fair chance of success with his cross demands: Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 and Ebert v Union Trustee Company of Australia Ltd (1960) 104 CLR 346.

10                  Paragraph 162D of the proposed statement of claim alleges “the generation of substantial work and income” for three parties, including Wincopy and Vision Wise.  Beyond the applicant’s statement of the annual rentals for the Otis Building at Hurstville, there is simply no evidence before me touching upon these topics.  The pleading does not allege that the respondents or either of them received any benefits.  Counsel for the applicant did not explain how unjust enrichment was to be elevated to the status of an independent source of legal obligation.  In David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 Mason CJ, Deane, Toohey, Gaudron and McHugh JJ said (at 379), in the context of restitution, that recovery depends upon the existence of a qualifying or vitiating factor such as mistake, duress or illegality.  Whatever may be the scope for such a category of case in the present state of the development of the law in Australia, it is obvious that the applicant has not come remotely near showing that he has any such kind of a case at all.

11                  It may be just possible to perceive inchoate actions for quantum meruit lurking in the applicant’s evidence about the hours he estimates that he spent working on the purchase of the properties at Blacktown and Hurstville.  But that is not the kind of claim he seeks to plead against the respondents in the cross-vested proceedings.

12                  The application will be dismissed with costs.

Associate:

Dated:              24 September 1999