FEDERAL COURT OF AUSTRALIA

Williamson (Trustee) v Rumsley, in the matter of Clifford (a Bankrupt) (No 2) [2015] FCA 1246

IN THE MATTER OF THE BANKRUPT ESTATE OF PHILIP GEORGE CLIFFORD

THE COURT ORDERS THAT:

1.    The application for the declaration sought in the originating application be refused.

2.    The applicants pay the costs of the first respondent of the application.

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

IN THE MATTER OF THE BANKRUPT ESTATE OF PHILIP GEORGE CLIFFORD

REASONS FOR JUDGMENT

1    These reasons concern the declaration sought in the originating application that “the Applicant ought to offset the amount claimed in the proof of debt submitted by the second respondent by an amount commensurate with the value of the cost order the subject of the Assignment.”

Background

2    In 2009 Mr Philip George Clifford brought proceedings against the second respondent, Vegas Enterprises Pty Ltd (Vegas) and its directors in matter WAD 28 of 2009 (the Proceedings). Vegas in turn, brought a cross-claim against Clifford which on 15 March 2010 was dismissed by consent. Vegas was ordered to pay the costs of the cross-claim, to be taxed (the cross-claim costs order).

3    The Proceedings were dismissed on 24 August 2010 and Clifford was ordered to pay Vegas’ costs of the Proceedings (the Proceedings’ costs order).

4    Clifford and the first respondent, Mr Alan Phillip Rumsley, his solicitor of record, entered into a Deed of Assignment dated 16 March 2012 by which Clifford purported to assign his right, title and interest in relation to the cross-claim costs order to Rumsley (the Assignment). I say “purported” because the applicants in these proceedings impugn the validity of the Assignment pursuant to s 120 of the Bankruptcy Act 1996 (Cth) (Bankruptcy Act). That issue is yet to be heard and determined.

5    On 25 May 2012, a certificate of taxation was issued to Vegas with respect to the costs of the Proceedings in the sum of $510,790.

6    Clifford, pursuant to s 20 of the Property Law Act 1969 (WA) (PLA), gave written notice dated 29 May 2012 of the Assignment to Vegas.

7    On 26 February 2013, Clifford became a bankrupt by way of a debtor’s petition.

8    On 22 May 2013, the applicants were appointed as trustees of Clifford’s bankrupt estate under s 157 of the Bankruptcy Act.

9    Vegas has filed a proof of debt in Clifford’s bankruptcy claiming the sum of $543,198.11 comprising the amount of the taxed costs and interest to the date of bankruptcy but less the sum of $2,588 under a separate costs order.

10    On 9 January 2015, Rumsley was joined as a party to the Proceedings as an assignee of the cross-claim costs order in order to give him an entitlement to be heard on the taxation of the cross-claim costs.

11    On 2 February 2015, a certificate of taxation was issued to Clifford with respect to the cross-claim costs order in the amount of $110,000.

12    The applicants claim standing to apply for the declaration in circumstances where it has been presented with Vegas’ proof of debt and has knowledge of the cross-claim costs order, and seeks clarification from the Court as to how to deal with Vegas’ proof of debt.

13    If indeed the applicants have standing it is clear enough that, pursuant to s 30 of the Bankruptcy Act, the Court has jurisdiction to entertain this application.

Set-off

Equitable set-off

14    First, the applicants submit that an equitable set-off arose as between Clifford and Vegas from 24 August 2010 when the Proceedings’ costs were awarded and the two asserted unliquidated mutual debts came into existence. Accordingly, they submit that it is open to the Court to find that the cross-claim costs order was extinguished as a result of a set-off against the Proceedings’ costs order, resulting in the Assignment being of no effect as there was nothing to assign to Rumsley.

15    I reject this submission. There is no equity of set-off that can attach to a costs order. Derham, in his text – Derham on the Law of Set-off (4th ed, Oxford University Press, 2010) – stated the position in this way at [2.103]-[2.104]:

In the first place, equitable set-off is a defence to an action to enforce payment of a debt or other monetary obligation, the defence operating in equity as a complete or partial defeasance of the plaintiff’s claim.  A set-off of judgments and orders, on the other hand, is not a defence in that sense.

…

The true basis of the set-off is the court’s inherent jurisdiction.  Its purpose is to prevent absurdity or injustice, and to do that which is fair.

(Footnotes omitted).

16    Further, White J in Australian Beverage Distributors Pty Ltd v Evans & Tate Premium Wines Pty Ltd (2006) 230 ALR 184 stated at [68]:

[S]et-off of judgments for costs in different actions and in different courts has long been allowed, as has the set-off of judgments for costs against judgments for debt or damages. Such set-offs do not depend upon the statutes of set-off, or the general equitable jurisdiction, but on the control a court exercises over its own proceedings.

Court’s inherent jurisdiction to set-off

17    The applicants alternatively rely upon the Court’s inherent jurisdiction to set-off the cross-claim costs order as against the Proceedings’ costs and it is on this basis that they submit, it seems, that this Court ought set-off against Vegas’ proof of debt the value of the cross-claim costs order. The applicants have no standing to seek such an order from the Court.

18    The benefit of the cross-claims costs order was assigned to Rumsley. The applicants have no interest – legal, equitable or otherwise – in the cross-claim costs order.

19    Clifford could have applied to the Court for an order for set-off prior to assigning the benefit of the cross-claim costs order but he did not do so. Accordingly, I reject the applicants’ submissions.

Section 20 of the PLA

20    The applicants also rely upon s 20 of the PLA, which provides that an assignment is taken “subject to equities having priority over the right of the assignee”. Accordingly, they submit that Rumsley, as assignee, took the Assignment, assuming it to be valid, subject to any equitable set-off arising in respect to the two costs orders. For reasons which I have explained no such equity arose.

21    The application for declaratory relief is, in my opinion, misconceived. Assuming, for present purposes, that the Assignment is valid and enforceable, the applicants have no further interest in the cross-claim costs order which is the subject matter of the Assignment. Those rights at law have been transferred to Rumsley under the statutory assignment effected by Clifford.

22    Any title which a trustee enjoys is only as good as that which the bankrupt would have enjoyed if their estate had not been sequestrated: Official Trustee in Bankruptcy v Turner (1999) 94 FCR 512 at [15]-[16]; Corke v Corke (1994) 48 FCR 359 at 365 citing Whyte v Williams (1903) 29 VR 69 at 81.

23    Although the applicants impugn the validity of the Assignment, for the present I must treat it as valid and enforceable. Any entitlement to seek an order to set-off the cross-claim costs order against the Proceedings’ costs order lies not with the applicants but with Vegas. Indeed, Rumsley took steps to recover the cross-claim costs from Vegas in the course of which, in correspondence, Vegas asserted an entitlement to set-off of these costs against the Proceedings’ costs order in its favour. This more correctly is an entitlement to apply to the Court for an order setting off those costs. No issue of equitable set-off arises or could arise as between Vegas and the applicants in respect to Vegas’ proof of debt. At present it has sought to prove for the full amount of the Proceedings’ costs in Clifford’s bankruptcy. Nor could any set-off arise pursuant to s 86 of the Bankruptcy Act.

24    The applicants have no entitlement to set off against Vegas’ proof of debt the amount of the cross-claim costs order on either basis.

25    The decision of Hall v Moloney (2013) 264 FLR 299 relied upon the by the applicants does not assist them. It concerned the equivalent New South Wales provision to s 20 of the PLA – the Conveyancing Act 1919 (NSW) s 12. As the headnote to that case explains:

The applicants failed to pay the respondents a debt owed by the applicants, which had been assigned to the respondent by Mr and Mrs Coppola. The respondent issued and served a bankrupt notice on the three applicants.

The assigned debt had arisen by a costs order against the applicants in favour of the Coppolas from legal proceedings in which those parties had been engaged. As a result of separate legal proceedings, the applicants had a judgment debt enforceable against Mrs Coppola (but not against Mr Coppola). The judgment debt against Mrs Coppola exceeded the amount owing to Mr and Mrs Coppola under the costs order.

26    The applicants there succeeded in setting aside the bankruptcy notice on the grounds that they were entitled to a set-off against the amount claimed by Moloney, as assignee, the amount owed to them by Mrs Coppola, one of the assignors of the judgment debt. The judgment does not determine the nature of the set-off although it refers to both equitable set-off and set-off as to costs in the course of the reasons. I would be inclined to doubt for reasons I have given that any set-off (as opposed to a right to seek orders setting off the two sets of costs orders) existed when the application was before his Honour.

27    These were however cross-demands in existence which would have led to the same outcome.

28    However that is not this case. Here, there is neither an existing order for set-off nor is there a basis for any set-off under the provisions of s 86 of the Bankruptcy Act. There are no ‘mutual debts’. The cross-claim costs are not owed to the applicants as trustees of Clifford’s bankrupt estate. They are owed to Rumsley.

29    Of course, if the applicants in this proceeding are successful in due course in obtaining a declaration of invalidity in respect of the Assignment under the provisions of s 120 of the Bankruptcy Act then the legal landscape would alter dramatically. In that event, the applicants would be entitled to set-off, at law, the taxed amount of the cross-claim costs as against Vegas’ proof of debt presently submitted based, as it is, on the taxed amount of the Proceedings’ costs order.

30    The claim for declaratory relief will be refused. I will hear the interested parties on the question of costs.

Associate:    

Dated:    17 November 2015