FEDERAL COURT OF AUSTRALIA

Blair v The Owners - Strata Plan No. 71656 [2016] FCA 1522

ORDERS

THE COURT ORDERS THAT:

1.    The Application filed 30 March 2016 be dismissed.

2.    The Applicant to pay the Respondent’s costs.

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

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 41 of the Bankruptcy Act 1966 (Cth) Bankruptcy Notice BN 192410 issued on 4 July 2016 and served on the Applicant on 26 July 2016 be set aside.

2.    The Respondent to pay the Applicant's costs.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    Tracy Gay Blair is the owner of lots 1 and 2 (the Premises) located at 23 Nelson Street Annandale (the Property) in the Owners-Strata Plan No 71656 (the Owners SP 71656) which comprises three lots in total and is a registered strata scheme pursuant to the Strata Schemes Management Act 1966 (NSW). The Property is compulsorily managed by Progressive Strata Services Pty Limited (Progressive).

2    Ms Blair was served with two bankruptcy notices both issued at the request of the Owners SP 71656: the first is BN 188939 issued on 9 March 2016 and served on 10 March 2016 (the First Bankruptcy Notice) and the second is BN 192410 issued on 4 July 2016 and served on 26 July 2016 (the Second Bankruptcy Notice).

3    The First Bankruptcy Notice sought payment of $76,634.93 for the amount owing at the time pursuant to a judgment obtained in the Local Court of New South Wales including interest and the Second Bankruptcy Notice sought payment of $19,911.50 for the amount owing pursuant to a costs judgment obtained in the Local Court of New South Wales.

4    Ms Blair seeks to set aside the First Bankruptcy Notice and the Second Bankruptcy Notice on the grounds set out in ss 40(1)(g) and 41(7) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) because she has a counter-claim, set-off or cross demand against the Owners SP 71656 equal to or exceeding the amounts in the bankruptcy notices which she could not have set up in the proceedings in which the judgment debts forming the basis of the First Bankruptcy Notice and the Second Bankruptcy Notice were obtained. Those applications are made in two separate proceedings which were heard together.

relevant facts

5    The judgment which is the subject of the First Bankruptcy Notice was obtained by the Owners SP 71656 on 1 September 2015 in a proceeding commenced by it in the Local Court of New South Wales (Local Court) for unpaid strata levies (the Local Court Proceeding). The judgment obtained in the Local Court Proceeding is for those unpaid levies and interest totalling $103,403.95 (the Local Court Judgment). The judgment which was the subject of the Second Bankruptcy Notice was obtained by the Owners SP 71656 in enforcing the costs order made in its favour in the Local Court Proceeding (the Costs Proceeding) and is for $19,911.50 (the Costs Judgment).

6    Since about 14 September 2015 Ms Blair has made various applications to the Local Court to pay the Local Court Judgment by instalments. Three of those applications, made on 30 September 2015, 22 October 2015 and 15 December 2015, were successful. In each case the instalment orders made were subsequently discharged by the Local Court on application of the Owners SP 71656. The third order obtained by Ms Blair was discharged on 7 March 2016. The First Bankruptcy Notice was served on Ms Blair on 10 March 2016.

7    A fourth application to pay the Local Court Judgment by instalments was granted by the Local Court on 21 March 2016 but was later on that same day refused, it seems on the Court’s own motion, by another Magistrate of the Local Court.

8    On 30 March 2016 Ms Blair commenced proceeding NSD 435 of 2016 in this Court seeking to set aside the First Bankruptcy Notice. On that day the Court made an order pursuant to s 41(6A) of the Bankruptcy Act extending the time for compliance with the First Bankruptcy Notice up to 13 April 2016.

9    In her affidavit sworn on 24 March 2016 and filed on 30 March 2016 (Ms Blair’s First Affidavit) in support of her application to set aside the First Bankruptcy Notice Ms Blair refers to various orders she obtained in the Local Court for payment of the Local Court Judgment by instalments and, in the case of the first two orders, refers to the subsequent discharge of those orders. In relation to the instalment order obtained by her on 15 December 2015, which was discharged on 7 March 2016, Ms Blair says that she understood that the basis for discharge of that order was because the Local Court accepted the Owners SP 71656’s evidence that certain building work needed to be done urgently on the Property. But Ms Blair, relying on a report prepared by Brett Meadows of Strata Engineering Solutions dated 17 March 2016 (the SES Report) annexed to her affidavit, says that was not the case.

10    In the SES Report Mr Meadows says that he inspected the Property on 11 February 2016 to report on “water ingress issues and the water damage on the ceiling as well as the condition of the roof gutters”. Mr Meadows sets out his observations and comments in relation to various rooms in the Premises. Under the heading “Discussion on cause of damage” he reports in relation to “Ground Floor Level Water Stains and Mould” that:

The majority of the water stains and mould was observed on the southwest side of the building. Upon inspection of the roof, the blockage of eaves due to tree debris would result in stormwater overflowing and water would be able to ingress underneath the roof sheathing. In our opinion, this is the main cause of the water damage on the west face of the building and correlates with the water damage and mould on the ground floor ceiling. The interior water stains are most likely due to water ingress through the punctured polycarbonate roof sheathing and inadequate roof screws. The holes for fixings in polycarbonate sheets are oversized to allow for thermal movement. These oversize holes need to be protected with a rubber washer which comes integral with the appropriate roofing screws. The tree debris that manages to flow down the eaves to the box gutter would cause the box gutter and downspout to clog and result in the stains that were observed.

11    On 13 April 2016 and 25 May 2016 further orders were made pursuant to s 41(6A) of the Bankruptcy Act extending the time for compliance with the First Bankruptcy Notice up to 25 May 2016 and 22 June 2016, respectively.

12    In the meantime, on 19 May 2016 the Local Court made orders by consent between the Owners SP 71656 and Ms Blair that included an order that pursuant to s 61 of the Civil Procedure Act 2005 (NSW) and r 2.1 of the Uniform Civil Procedure Rules 2005 (NSW) Ms Blair be restrained from filing and/or bringing any further applications to pay the Local Court Judgment by instalments without the leave of the Local Court.

13    Ms Blair’s solicitor, Mr Miller, has sworn four affidavits which were filed in proceeding NSD 435 of 2016. In the first affidavit sworn on 15 June 2016 and filed on 22 June 2016 (First Miller Affidavit) Mr Miller annexes a report prepared by Anthony Fowler, a civil and structural engineer, of Acumen Australia Consulting Engineers Pty Ltd (Acumen) dated 9 May 2016 in relation to the Property and the Premises which is more fully described in [17] below. Mr Miller also gives evidence of payments made by Ms Blair and that he was instructed that Ms Blair had paid $45,500.

14    In the second affidavit sworn by Mr Miller on 22 June 2016 and filed on that day (Second Miller Affidavit) Mr Miller refers to the SES Report annexed to Ms Blair’s First Affidavit and to Mr Fowler’s report annexed to his affidavit sworn 15 June 2016 and says that they are reports dealing generally with water penetration and damage caused by that water penetration to the Premises. Mr Miller also gives the following evidence:

8.    I am instructed by the applicant that:

(i)    recent heavy rains in June 2016 have caused more water penetration and damage to the lots in the Strata Scheme.

(ii)    the applicant proposes to commence proceedings against the respondent and the agent for, generally, negligence for failure to repair the source(s) of the water penetration from at least February 2016 to date, thereby causing loss and damage to the applicant as an owner of two lots in the Strata Scheme.

(iii)    the claim by the applicant against the respondent and the agent will be of an amount exceeding the amount of the judgment debt.

(iv)    the proposed cause of action against the respondent and the agent was not one that the applicant could have set up in the proceedings in which the judgment the respondent now relies upon was obtained, as the proposed cause of action did not exist at the time of that proceeding.

In addition, Mr Miller refers to the finalisation of the drafting and commencement of proceedings against the Owners SP 71656 and Progressive, that he is instructed that Ms Blair continues to pay the Local Court Judgment to the Owners SP 71656 pursuant to a current instalment order of the Local Court at the rate of $1,500 per week and that, since the date of the Local Court Judgment, Ms Blair has paid $48,500.

15    On 26 July 2016 Ms Blair was served with the Second Bankruptcy Notice and on 11 August 2016 she commenced proceeding NSD 1296 of 2016 in this Court seeking to set aside the Second Bankruptcy Notice. On 11 August 2016 and 22 September 2016 respectively orders were made pursuant to s 41(6A) of the Bankruptcy Act extending the time for compliance with the Second Bankruptcy Notice up to 22 September 2016 and 26 October 2016. On 26 October 2016, at the hearing of her application to set aside the Second Bankruptcy Notice, a further order was made extending the time for compliance with the Second Bankruptcy Notice until judgment is delivered in proceeding NSD 1296 of 2016.

16    In her affidavit sworn and filed on 10 August 2016 (Ms Blair’s Second Affidavit) in support of the application to set aside the Second Bankruptcy Notice Ms Blair says that:

(1)    she had paid $60,500 in reduction of the Local Court Judgment;

(2)    she has a counter-claim, set-off or cross demand against the Owners SP 71656 equal to or exceeding the amount claimed in the First Bankruptcy Notice and the Second Bankruptcy Notice and contends that the Owners SP 71656 and Progressive were negligent in their failure to carry out necessary maintenance work and necessary repair work on the common property to prevent water penetration to the Premises; and

(3)    since Mr Fowler inspected the Premises in June 2016 the Premises suffered the following further damage as a result of recent heavy rain which would form part of her proposed counter-claim or set-off :

(a)    the front office ceiling had entirely collapsed;

(b)    the gyprock around the front office windows had collapsed;

(c)    the front office carpet was completely ruined;

(d)    the boardroom ceiling had collapsed further and mould was accumulating;

(e)    the boardroom walls remained wet as did the carpet which was ruined;

(f)    the hallway ceiling had bubbled and was wet, the hallway walls were stained and the carpets were ruined; and

(g)    various light fittings had to be removed.

17    Ms Blair relies on three reports prepared by Mr Fowler of Acumen which relate to the Property:

(1)    the first is dated 9 May 2016. In that report Mr Fowler refers to his instructions to assess and report on the causes of moisture penetration through roofing into the Premises and to propose necessary rectification works. Mr Fowler inspected the Property on three occasions: 22 and 27 April 2016 and 4 May 2016. He annexes photographs taken on 22 April 2016 and 4 May 2016 showing the state of various parts of the Property. Mr Fowler relevantly concludes that:

5.2    We consider that the black polycarbonate sheeting repair was ineffectual due to incorrect installation of the sheeting and that this has led to ongoing moisture penetration into the ceiling space of the premises. We recommend that this area have urgent sheeting replacement to reduce significant moisture penetration into the premises.

5.3    We consider that leaf litter has been causing blockage of gutters and downpipes and has led to moisture penetration into the premises. We recommend that gutters be cleaned every two months.

5.4    We recommend that the lower roof sheeting in full should be removed and replaced due to long term weathering and other defects.

5.5    We recommend that the roof drainage requires modification so that the lower gutter can have reduced moisture flows. This includes two drainage pits at base of rear wall and overflow pipe at lower gutters.

(2)    the second is dated 7 July 2016. In that report Mr Fowler says that since preparing his first report dated 9 May 2016 he has observed that there has been more internal damage to previously repaired items and to new items at the Premises. He also records his instructions from Ms Blair to prepare a costing for rectification of the Premises including costs associated with previous work and loss of rent. At p 2 Mr Fowler sets out the documents he has reviewed in preparing his report which comprise various quotations, tax invoices, levy notices and emails from Ms Blair containing the “supplied invoices, quotations and statements”. With the exception of one invoice from Allen & Newton, they are all dated from 29 February 2016. Mr Fowler sets out the costings at p 5 of his report which total $65,539.44;

(3)    the third is dated 18 August 2016. In that report Mr Fowler records that:

    since his earlier reports he has observed that “more internal damage has occurred to previously repaired items and to new items at the premises”;

    he has been instructed to prepare costings for rectification of the premises including costs associated with previous works and loss of rent and that his report addresses extra costings since the second report;

    he has been “instructed that the vacancy of the units was due to the early termination of the leases due to continued water damage from the ceilings and that this is the cause of loss of rent and associated costs from 9 May 2016”;

    he considers that “the water penetration into the units is a breach of the NCC BCA Health and Habitation requirements and also the Weatherproofing requirements” and “that the premises was (sic) not in reasonable condition for habitation”; and

    the upper front office has “suffered significant more water damage since previous report” and that “additional works are required to rebuild the internal framing at the front of the premises”.

Mr Fowler lists the additional documents that he has reviewed at p 2 of his report, being quotations dated August 2016 and a “mark up of MES roofing tender analysis”. He then sets out total additional costings, including GST, for consultants, proposed rectification works, recent rectification works to date and additional lost income and ancillary costs of $35,466.92 and rectification costs of “roof in whole” of $88,000.

18    On 2 September 2016 Ms Blair commenced a proceeding in the District Court of New South Wales against the Owners SP 71656 as the first defendant and Progressive as the second defendant (the District Court Proceeding). The statement of claim filed in the District Court Proceeding, a copy of which is annexed to an affidavit sworn by Mr Miller on 21 October and filed 21 October 2016 in proceeding NSD 435/2016 (the Third Miller Affidavit), seeks damages, interest and costs. In it Ms Blair alleges that:

(1)    at all material times each of SP 71656 and Progressive had the care, control and management of the common property and had an obligation to maintain and repair it pursuant to s 62 of the Strata Schemes Management Act 1996 (NSW) (Strata Schemes Act);

(2)    at all material times each of the Owners SP 71656 and Progressive owed Ms Blair a duty at common law and pursuant to ss 5B and 5C of the Civil Liability Act 2002 (NSW) (Civil Liability Act) to take reasonable care to avoid a reasonably foreseeable risk of loss or damage to Ms Blair or to the Premises, including by water penetration arising from acts or omissions in the management of the common property by the Owners SP 71656 and Progressive;

(3)    in breach of the duty of care alleged in the preceding paragraph, each of the Owners SP 71656 and Progressive negligently caused or permitted water to escape from or through the common property into the Premises;

(4)    each of the Owners SP 71656 and Progressive was negligent and breached their duty of care in that, by themselves, their servants or agents they:

(a)    failed to exercise reasonable care or failed to ensure that reasonable care was taken in the performance of works to repair the common property, being the installation of black polycarbonate sheets over existing metal sheeting on the roof, or caused or permitted those works to be performed in a negligent manner;

(b)    failed to conduct necessary repairs to rectify weathering of roof sheeting, or failed to ensure that such works were performed;

(c)    failed to regularly clean the roof gutters, or failed to ensure the regular cleaning of the roof gutters;

(d)    failed to conduct necessary maintenance works to the upper roof drainage, to reduce water load on the lower gutters, or failed to ensure that such works were performed; and

(e)    failed to conduct necessary maintenance works to reduce blown-in moisture at the top flashing joint of the lower roof sheeting, or failed to ensure that such work was performed;

(5)    as a consequence of the alleged breaches by each of the Owners SP 71656 and Progressive:

(a)    the Premises have been adversely affected by rain water from the common property;

(b)    tenants occupying the Premises terminated their leases early due to continued water damage from the ceilings; and

(c)    it was necessary to employ a property manager to manage the serviceability dispute with the tenants and the rectification dispute with Progressive;

(6)    as a consequence of the alleged breaches of duty and the matters referred to in the preceding subparagraph, Ms Blair:

(a)    has been required to incur and has incurred expenditure particularised as at the date of the statement of claim as consultant costs of $9,140.56, rectification works of $4,041.00 and lost income and ancillary costs of $28,801.88;

(b)    will be required to incur further expenditure particularised as proposed rectification works as at 7 July 2016 of $23,556 and further proposed rectification works following heavy rain in August 2016 of $85,000; and

(c)    has suffered disturbance in her peaceful use and enjoyment of the Premises and will suffer further disturbance during the conduct of the proposed works referred to above;

(7)    the alleged negligence of the Owners SP 71656 and Progressive caused the loss or damage pleaded within the meaning of s 5D of the Civil Liability Act and Ms Blair seeks damages for negligence in the amount necessary to compensate her for the loss and damage pleaded;

(8)    in the alternative Ms Blair alleges that the conduct of each of the Owners SP 71656 and Progressive constituted an unreasonable and unlawful interference with her use or enjoyment of the Premises, was conduct attracting liability in tort for private nuisance, caused the loss or damage set out in the preceding subparagraph and Ms Blair seeks damages for nuisance in the amount necessary to compensate her for the loss and damage she has suffered.

legislative scheme and applicable legal principles

19    Section 40 of the Bankruptcy Act sets out the circumstances in which a debtor will commit an act of bankruptcy. Relevantly, subs (1)(g) provides that a debtor commits an act of bankruptcy if a creditor who has obtained a final judgment or order, the execution of which has not been stayed, has served on the debtor a bankruptcy notice and the debtor does not, within the time specified in the notice, 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, 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.

20    The terms “counter-claim”, “set-off” and “cross demand” in s 40(1)(g) of the Bankruptcy Act are not subject to limits. The word “counter-claim” likely refers to claims in equity and the word “set-off” likely refers to those claims the subject of a set-off at common law while “cross demand” refers to claims other than those encompassed in the expressions “counter-claim” or “set-off” and can include a claim for unliquidated damages for a tort or damages for breach of contract: see Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 (Re Brink) (per Lockhart J) at 138-139.

21    In Re Brink Lockhart J at 139, quoting with approval from Re Judd; Ex parte Pike (1924) 24 SR (NSW) 537 at 539-540, observed that the object of the legislature in providing a machinery for setting aside a bankruptcy notice where a debtor has a cross-demand is to “prevent a judgment creditor from pursuing bankruptcy proceedings when, as between himself and the judgment debtor, the balance of account is in favour of the judgment debtor”. His Honour continued:

The words “that he could not have set up in the action or proceeding in which the judgment or order was obtained” mean “which he could not by law set up in the action”…“I take a counter claim, set off or cross demand which could not be set up as one which from the point of time, or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained … Mere failure to take advantage of the opportunity can hardly be said to be inability”.

(citations omitted)

22    At 141 Lockhart J in considering the issue of what is sufficient to satisfy the court that a debtor has the requisite counter-claim, set-off or cross demand held at 141 that:

In my opinion this Court should follow the decision of the High Court in Ebert’s case. Hence a debtor must show that he has a prima facie case. However, I do not understand Ebert’s case as deciding that this Court must undertake a preliminary trial of the counterclaim, set-off or cross demand; rather this Court must be satisfied that the debtor has a fair chance of success.

And:

Upon the hearing of a matter under s 41(7) the court has before it the initial affidavit which brings the subsection into play. There may, of course, be no other evidence. On the other hand there may be a great deal of evidence. This will depend upon the circumstances of each case. Plainly this Court has power to permit the debtor to supplement his case by additional evidence. The initial affidavit filed under s 41(7) operates to extend time for compliance with the requirements of the bankruptcy notice until the court determines whether it is satisfied that the debtor has the requisite counterclaim, set-off or cross demand.

23    In Glew v Harrowell (2003) 198 ALR 331 (Glew v Harrowell) at [9] Lindgren J identified three interrelated and sometimes overlapping matters that an applicant must establish for the Court to be satisfied that he or she has a counter-claim, set-off or cross demand of the kind referred to in s 40(1)(g) of the Bankruptcy Act namely:

•    that they have a “prima facie case”, even if they do not adduce evidence which would be admissible on a final hearing making out that case: Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 (“Ebert”) at 350; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 (“Brink”) at 141; Gomez v State Bank of New South Wales Ltd [2002] FCAFC 101 at [17], [18];

•    that they have “a fair chance of success” or are “fairly entitled to litigate” the claim: Brink at ALR 438-9; FLR 141; Gould v Day [1999] FCA 1650 at [27], [28]; Re Capsanis; Capsanis v The Owners – Strata Plan 11727 [2000] FCA 1262 at [11]; and

•    that they are advancing a “genuine” or “bona fide” claim: Re Capsanis; Capsanis v The Owners – Strata Plan 11727 [2000] FCA 1262 at [11].

It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at 141) the reference to a “prima facie case” in Ebert as a reference to “a fair chance of success”.

24    At [10] Lindgren J observed that the Court was not required to undertake a preliminary trial of the counter-claim, set-off or cross demand but, by the application of the criteria he had set out, the Court was required to make some kind of preliminary assessment of the claim and that as the High Court said in Guss v Johnstone (2000) 171 ALR 598 at [40]:

The state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.

25    His Honour continued at [11]-[12]:

11    Plainly, in order to “satisfy” the Court for the purposes of par 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was being finally determined, but by reference to the question whether the Court should be satisfied that the debtor has a claim deserving to be finally determined.

12    Perhaps little more can usefully be said than that a debtor must satisfy the court that there is sufficient substance to the counter-claim, set-off or cross demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.

26    Section 41 of the Bankruptcy Act relates to bankruptcy notices. Subsection (7) 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.

27    Rule 3.02 of the Federal Court (Bankruptcy) Rules 2016 (Bankruptcy Rules) relevantly provides:

3.02    Setting aside bankruptcy notice

(1)    An application to set aside a bankruptcy notice under the Bankruptcy Act must be accompanied by an affidavit stating:

(a)    the grounds in support of the application; and

(b)    the date when the bankruptcy notice was served on the applicant.

(2)    A copy of the bankruptcy notice must be attached to the affidavit.

(3)    If the application is based on the ground that the debtor has a counter‑claim, set‑off or cross demand referred to in paragraph 40(1)(g) of the Bankruptcy Act, the affidavit must also state:

(a)    the full details of the counter‑claim, set‑off or cross demand; and

(b)    the amount of the counter‑claim, set‑off or cross demand and the amount by which it exceeds the amount claimed in the bankruptcy notice; and

(c)    why the counter‑claim, set‑off or cross demand was not raised in the proceedings that resulted in the judgments or orders to which the bankruptcy notice relates.

28    Section 41(7) of the Bankruptcy Act was amended in 1996 to the form in which it now exists. Prior to 1996 it provided for an extension of the time for compliance with a bankruptcy notice where, before the expiration of the time for such compliance, an affidavit had been filed to the effect that the debtor had a counter-claim, set-off or cross demand as referred to in para 40(1)(g) and the Court had not, before the expiration of that time, determined whether it was satisfied that the debtor had such a counter-claim, set-off or cross demand. The deemed extension provided for in s 41(7) was until and including the day on which the Court determined that it was so satisfied.

29    In Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183 Hill J, in considering the requirements of an affidavit filed for the purposes of s 41(7) of the Bankruptcy Act in the form in which it existed prior to the 1996 amendments, said at 188 that such an affidavit “must do more than merely assert the existence of a cross-claim etc of the relevant value. It must contain evidence which establishes that there is an effective cross-claim, a claim that is real”.

30    In Thomas v St George Bank Ltd [1999] FCA 166 (Thomas) Lindgren J considered the requirements of s 41(7) in its current form. In doing so his Honour observed:

13    Cases decided under predecessor provisions make it clear that in order for those provisions to be activated, the application must be supported by an affidavit which, while it need not actually establish the entitlement of the debtor, must show that the debtor does have a genuine counter-claim, set-off or cross demand which is made in good faith. …

14    The relevant provision has not always been in the same form as the current one, although it was not submitted for Mr Thomas that this makes any difference. Moreover, the cases to which I have referred above were followed by Finn J in Johnstone v Guss [1998] FCA 117, a decision under the present subs 41(7). The requirement of a supporting affidavit which previously appeared in the statute is now found in the Federal Court Rules, O 77 subrr 13(2) and (3) which are as follows:

…

16    I do not think that subs 41(7) is activated by nothing more than the filing of an application which meets the literal terms of the subsection. There must at the very least be a bona fide assertion of a genuine counter-claim, set-off or cross demand. Counsel for Mr Thomas concedes that if his client’s application to set aside the bankruptcy notice were to be heard now, it would fail on the existing evidence. In substance, he submits that notwithstanding this, his client should be allowed a chance to make out a case. But the onus is upon a debtor, in order to avoid the ordinary effect of a bankruptcy notice, to satisfy the Court that a bona fide claim is being made.

(emphasis in original)

consideration

The First Bankruptcy Notice

31    The Owners SP 71656 submitted that, because in proceeding NSD 435 of 2016 the Court had extended the time for compliance with the First Bankruptcy Notice until 22 June 2016, Ms Blair had until that date to file an affidavit or affidavits capable of satisfying the Court as to the existence of a claim of the required type. They further submitted that if the evidence served within that time did not discharge the onus then no deemed extension of time for compliance would arise under s 41(7) of the Bankruptcy Act and the effect would be that the debtor had committed an act of bankruptcy. The Owners SP 71656 contended that this could not be remedied by the production of further evidence after the act of bankruptcy had been committed because the Court will not set aside a bankruptcy notice which has led to the commission of an act of bankruptcy.

32    The Owners SP 71656 submitted that, whatever might be the strength of Ms Blair’s case against it, none of the material provided prior to 22 June 2016 provides any basis for a conclusion that the claim was of an amount exceeding the Local Court Judgment and that the evidence served after the commission of an act of bankruptcy cannot be relied on to salvage the application from that defect.

33    Ms Blair submitted that nothing in s 41(7) prevented the Court from having regard to the evidence she served after 22 June 2016 and that the deemed extension under s 41(7) of the Bankruptcy Act was engaged as soon as she “applied to the Court for an order setting aside the bankruptcy notice on the ground [that she has such] a counter-claim, set-off or cross demand as is referred to in paragraph 40(1)(g)”. Ms Blair further submitted that does not require any assessment by the Court of the adequacy or cogency of the evidence served in support of such a counter-claim, set-off or cross demand before the extension of time is engaged. She contended that such a construction would defeat the evident object of s 41(7), which can be divined from its terms and which is to provide a deemed extension of time for compliance with a bankruptcy notice for the purpose of affording an applicant a fair opportunity to collate such evidence until such time as the Court has “determined whether it is satisfied that the debtor has such a counter-claim, set-off or cross demand”.

34    Ms Blair submitted that the cases decided prior to the 1996 amendments do not assist the Court and that those cases decided after the enactment of s 41(7) in its current form did not address the submission she now puts that the change in language in s 41(7) makes a difference to the way in which the section operates.

35    Ms Blair referred to the judgment in Thomas at [14] where Lindgren J acknowledged that s 41(7) had not always been in the same form, noted that it was not submitted by the applicant in that case that “this makes any difference” and observed that the requirement for an affidavit, which had previously been found in the Bankruptcy Act was at the time found in the Federal Court Rules 1979 (Cth) (the Former Federal Court Rules). She also noted his Honour’s conclusion that he did not think that s 41(7) was activated by “nothing more than the filing of an application which meets the literal terms of the subsection”. Ms Blair submitted that Lindgren J’s reasoning in reaching that conclusion is not exposed, a matter which she contended was not surprising given that his Honour was not addressing the submission she now puts, namely that the amendment to s 41(7) affects the operation of the section.

36    Section 41 of the Bankruptcy Act is concerned with bankruptcy notices. It addresses when they can be issued, the form they must take, the effect of an overstatement of the amount due by a debtor in a bankruptcy notice and relevantly the circumstances in which the time for compliance with a bankruptcy notice will be extended: subs 41(6A) and (7).

37    There are two avenues for obtaining an extension of time to comply with a bankruptcy notice. Both require positive steps to be taken by a debtor. In order to invoke subs (6A), by which the Court can extend the time for compliance, the debtor must, relevantly, file an application to set aside the bankruptcy notice and in order to have the benefit of the deemed extension under subs (7) an applicant must file an application of the kind specified in that subsection. Rule 3.02 of the Bankruptcy Rules prescribes that an affidavit must accompany an application to set aside a bankruptcy notice and what must be included in that affidavit.

38    In Crimmins v Glenview Home Units [1999] FCA 515 (Crimmins) Branson J considered s 41(7) of the Bankruptcy Act in its present form. Her Honour noted the change in the requirements of that subsection as a result of the 1996 amendments. She continued at [5] as follows:

The applicant contends that a consequence of the amendment of s 41(7) of the Act is that the section is now enlivened by the mere filing of an application in the Court. If this contention is correct, the previous practice of looking at an application of this kind in two stages will no longer be appropriate. The first stage under the previous practice was for the Court to determine whether the affidavit material filed within the time limited by the bankruptcy notice for compliance with the demand therein met the requirements of s 41(7) so as to lead to an automatic extension of the time for compliance. The second stage was for the Court to determine on the basis of all of the material before it whether it was satisfied that the debtor did have a cross-claim, set-off or cross demand of the kind referred to in s 40(1)(g) of the Act.

39    In my opinion the contention put by the applicant in Crimmins raises the issue put by Ms Blair. The applicant in Crimmins put that the amendment to s 41(7) meant that the section was enlivened by the mere filing of an application. That is, the effect of the submission put to me. In considering that issue, her Honour observed that the applicant’s contention paid no regard to the terms of O 77 r 13 of the Former Federal Court Rules which was concerned with the requirements of an application to set aside and extend time of a bankruptcy notice. The requirements in O 77 r 13 are now found in r 3.02 of the Bankruptcy Rules. At [7] her Honour said:

I understand the applicant to have submitted that the Federal Court Rules are not part of the law to be applied by this Court and it is sufficient in the present case for the applicant to comply with the requirements of the Act. This submission must be rejected.

40    A similar submission was made before me in that Ms Blair contended that r 3.02 of the Bankruptcy Rules does not inform the proper construction of s 41(7) because the Bankruptcy Rules are not part of the Bankruptcy Act.

41    As was the case in Crimmins in relation to O 77 r 13 of the Former Federal Court Rules, the Bankruptcy Rules are made pursuant to s 59(1) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) which provides that:

The Judges of the Court or a majority of them may make Rules of Court, not inconsistent with this Act, making provision for or in relation to the practice and procedure to be followed in the Court (including the practice and procedure to be followed in Registries of the Court) and for or in relation to all matters and things incidental to any such practice or procedure, or necessary or convenient to be prescribed for the conduct of any business of the Court.

Section 59(3) provides:

Rules of Court under this Act have effect subject to any provision made by another Act, or by rules or regulations under another Act, with respect to the practice and procedure in particular matters.

42    In Crimmins Branson J, after referring to s 59 of the Federal Court Act, noted the following at [10]-[11]:

10    Section 48 of the Acts Interpretation Act 1901 (Cth), which requires, amongst other things, that regulations made under an Act must be notified in the Gazette and laid before each House of the Parliament, applies to Rules of Court made under s 59(1) of the Federal Court Act as if references in s 48 to regulations were references to Rules of Court (s 59(4) of the Federal Court Act). It is plain that the Federal Court Rules are a category of delegated legislation.

11    While the substantive law of bankruptcy is to be found in the Act, the procedural aspects of the law of bankruptcy are now largely to be found in O 77 of the Federal Court Rules. Unless the Court in any case exercises the discretion given to it by O 1 r 8 of the Federal Court Rules to dispense with compliance with any of the requirements of the Rules, parties to litigation before the Court are bound by the Federal Court Rules.

43    In its current form s 59(4) of the Federal Court Act provides that the Legislation Act 2003 (Cth) (Legislation Act) applies in relation to rules of Court made by the Court under the Federal Court Act or another Act relevantly, as if a reference to a legislative instrument were a reference to a rule of Court. Following the repeal of s 48 of the Acts Interpretation Act 1901 (Cth) on 1 January 2005, the requirements that a legislative instrument made under an Act be notified in the Gazette and laid before each House of Parliament is now found, in slightly altered form, in ss 38 and 56 of the Legislation Act. It is apparent that the Bankruptcy Rules as rules of Court under the Federal Court Act are a species of delegated legislation: s 59(3) and (4) Federal Court Act; see also Pearce DC and Argument S, Delegated Legislation in Australia (4th ed, LexisNexis, 2012) at [1.25].

44    The general rule is that delegated legislation made under an act should not be taken into account for the purposes of interpretation of the Act: see Pearce DC and Geddes RS, Statutory Interpretation in Australia (8th ed, LexisNexis, 2014) at [3.41]. The substantive law of bankruptcy, is as Branson J observed, found in the Bankruptcy Act. To that end s 41(7) specifies that if a debtor files an application of the type envisaged by that section there will be a deemed extension of time in which to comply with the bankruptcy notice. However, as held by Branson J in Crimmins, the Bankruptcy Rules, like the Former Federal Court Rules, are a category of delegated legislation which set out the procedural aspects of the law of bankruptcy. Unless the Court exercises its discretion under r 1.04 of the Bankruptcy Rules to dispense with any of the requirements of those rules, they apply to a proceeding in the Court to which the Bankruptcy Act applies and the parties to the proceeding are bound by them. Thus, in the absence of an order dispensing with compliance with them, the Court must give consideration to the requirements of r 3.02 of the Bankruptcy Rules: Crimmins at [12].

45    When assessed against the requirements of r 3.02 of the Bankruptcy Rules the evidence filed by Ms Blair suffers from a deficiency in that it fails to set out the amount of the counter-claim, set-off or cross-demand. Evidence of quantum was filed on 8 July 2016 and 19 August 2016 that is after 22 June 2016 being the last date for compliance with the bankruptcy notice based on the extension of time granted by the Court. While I am satisfied that as at 22 June 2016 there was sufficient evidence, based on Ms Blair’s First Affidavit, the First Miller Affidavit and the Second Miller Affidavit, to establish a prima facie case against the Owners SP 71656 there was no evidence that the quantum of that claim exceeded the amount of the Local Court Judgment upon which the First Bankruptcy Notice was based. Accordingly, as at that date there was not sufficient evidence before the Court to engage the operation of s 41(7) such that there was a deemed extension of time for compliance with the First Bankruptcy Notice. That means that Ms Blair committed an act of bankruptcy at one minute past midnight on 22 June 2016. The Court cannot set aside a bankruptcy notice once the time for compliance with it has expired and no extension has been granted: Re Duckworth; Ex parte Lockett [1987] FCA 55 (per French J) at p 16.

46    Unlike in Crimmins, at the hearing Ms Blair made an application for dispensation with the Bankruptcy Rules. Rule 1.04 of the Bankruptcy Rules provides that:

1.04     Application of these Rules and other Rules of the Court

(1)     Unless the Court otherwise orders:

(a)     these Rules apply to a proceeding in the Court to which the Bankruptcy Act applies; and

47    That application was made in conjunction with a submission that Ms Blair’s affidavit sworn 24 March 2016 meets the test set out at [16] of Thomas and establishes a bona fide assertion of a genuine counter-claim, set-off or cross demand and that nothing in Thomas requires that there be evidence of quantum. Even if I were to accede that application and make such an order, it would not assist Ms Blair. That is because Ms Blair would still need to satisfy the Court not only that she had a prima facie case or genuine counter-claim, set-off or cross demand as at the final date for compliance with the First Bankruptcy Notice, 22 June 2016, but in order to succeed in her application to set aside the Bankruptcy Notice she would also need to establish the two further matters required by s 40(1)(g) of the Bankruptcy Act: that the amount claimed in the District Court Proceeding is equal to or exceeds the amount of the “judgment debt” and that her cross-claim, set-off or cross demand could not have been set up in the Local Court Proceeding. In my opinion she has failed to establish those matters.

48    In the District Court Proceeding Ms Blair particularises her damages based on amounts she has incurred and will be required to incur as a result of the Owners SP 71656’s alleged negligence at approximately $150,000. Mr Fowler quantifies the alleged damages in his second and third reports. It is not clear, and counsel for Ms Blair was not able to clarify, whether all of the costs particularised at p 5 of Mr Fowler’s third report are included in the District Court Proceeding. Given that I must proceed on the basis of the amount claimed in the District Court proceeding.

49    The Owners SP 71656 submitted that there were a number of deficiencies in the evidence of quantum and that the Court would not be satisfied that Ms Blair’s cross-claim exceeded the amount claimed in the First Bankruptcy Notice. They submitted that:

(1)    in relation to Mr Fowler’s second report in which he sets out four categories of cost and expense:

(a)    insofar as the rectification costs include $4,210 for repair of the roof, which is common property, Ms Blair’s proper remedy is to seek an injunction requiring such repair and that, relying on the decisions in Seiwa Pty Ltd v Owners Strata Plan 35042 [2006] NSWSC 1157 (Seiwa) and Owners – Strata Plan 32735 v Heather Lesley-Swan [2012] NSWSC 383 (Swan), there is an issue as to whether a lot owner would have a claim for damages for breach by an owners corporation of its statutory duty. They further submitted that, even if the claim is available, the basis for the claim for damages is incorrect as it could not be said that a lot owner has suffered loss by reference to the quantum of a claim for rectification of the whole of the common property. In relation to the balance of the rectification costs the Owners SP 71656 submitted that there was no evidence that the relevant damage to which these costs relate occurred in June or July 2016 being the dates of the invoices or quotes substantiating the costs; and

(b)    in relation to the category for lost income and ancillary costs there is no evidence from Ms Blair concerning the status of the tenancies. The only evidence is that contained at [1.4]-[1.5] of Mr Fowler’s report which is not evidence of a claim and is no more than a mere assertion of a claim;

(2)    in relation to Mr Fowler’s third report in which he sets out five categories of cost and expense:

(a)    the fourth category includes a further claim of $14,761 for lost rent. The Owners SP 71656 submitted that amount would be excluded in any calculation of the quantum of Ms Blair’s cross-claim, set-off or cross demand for the same reasons as set out at [49(1)(b)] concerning the same costs included in Mr Fowler’s second report; and

(b)    the fifth category is for rectification costs of the roof in whole “part obtained from MES tender summary”. The Owners SP 71656 submitted that those costs are for rectification of the common property rather than the cost that Ms Blair will incur as a result of water damage to her property. They also submitted that there is evidence that the Owners SP 71656 obtained quotes for the cost of repair of the roof in 2014, which MES summarised, and that Mr Fowler has costed the same work, relying on the MES summary, but restating it at present value. The Owners SP 71656 contended that the Property was damaged and required rectification in 2014 when the Local Court Proceeding was on foot. On that basis the Court would not, in assessing the value of the cross-claim, set-off or cross demand, take into account the sum of $88,000 included in Mr Fowler’s third report for repair of the whole roof.

50    In my opinion Ms Blair is not precluded from claiming the costs of rectification of common property in this application based on the decisions in Seiwa and Swan. In Swan Hall J said at [191] that:

In determining whether a lot owner has a claim for damages for breach by the owners corporation of its statutory duty under s 62, it is necessary to determine what as a matter of causal nexus or linkage, may be considered as being the consequences of the breach. In that respect the decision in Seiwa and the cases therein establish:

(a)    In some circumstances a breach of duty may support a claim in damages for diminution in the value of a property in circumstances that are analogous to a nuisance.

(b)     Reasonably foreseeable consequences are also recoverable. This would include, for example, loss of custom in the case of an interruption of a business.

(c)     The cost of restoring an owner's property to its previous condition may be recoverable by the owner. However that does not extend to performance of works on the property of another to eliminate a nuisance. The costs of abating a nuisance are not recoverable unless, as a reasonable cost and even then probably not if they involve going on to the land of the other party: Proprietors SP14198 v Cowell (1989) NSWLR 478.

And at [195]-[196] his Honour continued:

195.    Brereton J in Seiwa referred to an analogy with abatement of a nuisance. However, the fundamental point being made here by his Honour concerned the principles relating to the law of nuisance. His Honour was not directing his observation merely to the facts, or to a factual analogy due to the fact of water penetration being sufficient to amount to constitute a nuisance.

196.    The relevant principle in that respect, as discussed above, does not permit the recovery of damages for work performed on the property of another. Whilst in Seiwa it was held that the plaintiff could recover damages for the cost of undertaking repair work on the plaintiff's own property it was held that it was not entitled to undertake work on common property and then recover as damages the expenses incurred in so.

    (emphasis added)

51    I accept Ms Blair’s submission that her claim against the Owners SP 71656 is not for breach of statutory duty but is for breach of a duty of care owed in tort and that no independent claim is made for damages for breach of s 62 of the Strata Schemes Act. Arguably the decisions in Seiwa and Swan would in those circumstances have no application. The availability of the claim and the question of whether damages are available is not an issue that should be determined in the context of this application but is a matter for the District Court which will hear Ms Blair’s claim. While there is some doubt about whether Ms Blair would be entitled to the whole or any part of the rectification cost of common property, assuming she can prove that the Owners SP 71656 breached their duty, particularly where that cost has not been incurred by her, the resolution of the issue of the amount of damages to which she would be entitled should also be left to the District Court as it is connected to the question of availability of the claim. On that basis I would allow the claim for costs of repair of part of the roof in Mr Fowler’s second and third reports.

52    The costs for rectification of the whole roof included in Mr Fowler’s third report are in a different category. They are taken in part from the MES tender summary which Mr Fowler has annexed to his report and which compares tenders received from three contractors for fixing the roof at the Property. The items which were costed and included in the MES tender summary were:

    relocation of air-con condenser and dispose of another north side;

    removal and disposal of existing roofing and ancillaries;

    move top plate and install lateral support;

    manufacture, supply and install gutter;

    supply and install sisalation;

    install roofing and flashing;

    contingency.

53    The evidence filed by the Owners SP 71656 shows that these costs, which were collated by MES, were the subject of tenders provided in November and December 2014. In preparing his costing of the rectification of the whole of the roof Mr Fowler has costed a number of the same items included in the MES tender summary namely “removal and disposal of A/C unit, north side”; “full removal of existing roofing and ancillaries”, “gutter replacement”; “sisalation installing”, “roofing and flashing” and “contingency”. To those items Mr Fowler has then added the cost of two additional items being “modify downpipes” and “install 2 sumps and reconnect drainage”.

54    Based on the MES tender summary and invoices included in the Owners SP 71656’s evidence, the replacement of the roof was clearly an issue in 2014 when the quotes were obtained and collated by MES. I would infer that the damage to the roof was evident as at that date and that, putting to one side the issue of Ms Blair’s entitlement to claim the costs of repair to common property, any claim for damages for replacement of the whole of the roof was available in 2014 at a time when the Local Court Proceeding was on foot. Thus the amount attributed to that item should be excluded from an assessment of the quantum of the claim.

55    The next issue concerns the lost rental income. Ms Blair submitted that there is evidence to support that claim in the form of the affidavit verifying the District Court Proceeding in which she says that she believes the allegations of fact contained therein are true. This includes a claim that, as a result of the alleged breach of duty and the consequent damage to the Premises, the tenants occupying the Premises terminated their leases early and as at the time of filing of the statement of claim she had lost income and ancillary costs of $28,801,88. She also relies on the statement at [1.4] of Mr Fowler’s third report in which he said that “the water penetration into the units is a breach of the NCC BCA Heath and Habitation requirements and also the Weatherproofing requirements” and that he considers “that the premises was (sic) not in reasonable condition for habitation”. In my opinion that evidence is sufficient, on this application, to establish her claim that the tenants terminated their leases early due to the water damage. Ms Blair’s affidavit verifying the District Court Proceeding was not challenged. She asserts as true the claim that the leases were terminated early due to the water damage. Nor was Mr Fowler cross examined. Thus his expert opinion that the Premises were not habitable would be accepted. Accordingly, I would not exclude the claim for loss of rental and ancillary costs in Mr Fowler’s second and third reports.

56    As a result, upon excluding the amount of $88,000, the net amount of Ms Blair’s cross-claim, set-off or cross demand is approximately $62,000 which does not exceed the amount claimed in the First Bankruptcy Notice.

57    Turning to the issue of whether Ms Blair’s cross-claim, set-off or cross demand could not have been set up in the Local Court Proceeding, Ms Blair submitted that there are two reasons why that was so. The first is that the losses occurred after the date of the Local Court Judgment and the second is that the amount of the cross-claim exceeds the jurisdictional limit of the Local Court. That question is to be determined by considering whether the cross-claim, set-off or cross demand could have been set up as a matter of law in the Local Court Proceeding: Re Brink at 139; Jensen v Queensland Law Society Incorporated [2004] FCA 1630 at [10] (per Kiefel J).

58    In relation to the first issue clearly some of the damage occurred after the date of the Local Court Judgment as is evident form Mr Fowler’s reports:

(1)    in preparing his first report, Mr Fowler had before him the SES Report which he refers to throughout his report. In considering the internal parts of the Premises Mr Fowler observed that in the office meeting room “mould had developed to the ceiling which had been painted and cleaned since the SES Report” evidencing recent damage, occurring after October 2015, at least in the case of the office meeting room;

(2)    in his second report Mr Fowler says that since his first report he has observed that “more internal damage has occurred to previously repaired items and to new items at the premises”; and

(3)    in his third report Mr Fowler again refers to having observed that “more internal damage has occurred to previously repaired items and to new items” and that the “upper front office has suffered significant more water damage since previous report” and “[a]dditional works are required to rebuild the internal framing at the front of the premises”.

59    However, as set out at [54] above, the damage to the roof occurred at least as at November 2014 when tenders were sought for its repair. This was during the currency of the Local Court Proceeding. There is no evidence as to when the balance of the alleged damage set out in Mr Fowler’s reports occurred. There is no explanation given by Ms Blair as to why she could not set up her claim arising from the alleged negligence of the Owners SP 71656 and Progressive in relation to at least the alleged damage to the roof in the Local Court Proceeding. Given the defects in the roof had clearly been identified at that early stage and given an order had been made on 20 February 2015 in the Local Court Proceeding for the filing by Ms Blair of any cross-claim by 20 March 2015 the overwhelming conclusion to be drawn is that she could have done so.

60    Nor do I accept Ms Blair’s submission that she could not have set up her cross-claim, set-off or cross demand in the Local Court Proceeding because it exceeds the jurisdictional limit of the Local Court. In Lau v Accord Pacific Properties Pty Ltd, in the matter of Lau [2003] FCA 795 Branson J considered an argument that an applicant could not set up a cross-claim, set-off or cross demand in the proceeding in which the judgment grounding the bankruptcy notice was obtained because the amount of the cross-claim, set-off or cross demand exceeded the jurisdictional limit of that court.

61    Her Honour observed that the question of whether a debtor has a cross-claim, set-off or cross demand is to be determined by reference to legal considerations. In the circumstances of that case, her Honour was satisfied, on the basis of a concession subsequently made, that the claim upon which the applicant relied did not exceed the relevant jurisdictional limit. Branson J continued at [6] and [8]-[9]:

6    Even if I were satisfied that the cross‑claim upon which the applicant relies exceeds the jurisdictional limit of the District Court, that would not entitle the applicant to the relief which he seeks.

…

8    It is not necessary to determine whether, as the respondent contended, the view expressed by Sackville J in Re Grave is inconsistent with a well‑established line of authorities. I accept that in the circumstances of this case, s 145(1) of the District Court Act 1973 (NSW) would have allowed the applicant to apply to have the proceeding in the District Court removed to the Supreme Court. That is, I am not satisfied that this is a case in which the applicant would only have been able to prosecute his claim in the earlier proceeding by abandoning part of his claim.

9    In Nath v Clipway Pty Ltd [1999] FCA 625 (FC) Spender J, with whom Kiefel and Hely JJ agreed, noted with approval the approach adopted by Hill J in Re Ling. In Re Ling Hill J at 137, after referring to a number of authorities, said:

‘These cases, it seems to me, establish that a cross claim will be one which could be set up in the action, notwithstanding that to do so the debtor may need to transfer the proceedings first to another court, or may need to obtain in his or her favour the exercise of a discretion before doing so. The onus of showing that the claim is not one that could have been set up in the creditor's proceedings lies upon the debtor. That onus will not be satisfied merely by showing that some indirect course may need be followed (that course being in the discretion of the debtor) nor by showing that there existed a discretion which could have been exercised against the setting up of the claim as a cross claim. To satisfy that onus the debtor must show that, as a matter of law and in the circumstances prevailing, he or she could not have set up the cross claim.’

62    In the event that the quantum claimed in a proposed cross-claim exceeded the jurisdictional limit of the District Court it was open to Ms Blair to have the proceeding transferred to the District Court as permitted by s 140 of the Civil Procedure Act 2005 (NSW). Ms Blair was not precluded, as a matter of law, from setting up her cross-claim in the proceeding in which the judgment on which the First Bankruptcy Notice was based. Nor, given the ability to transfer the proceeding to the District Court could it be suggested that she would have been required to abandon any part of her cross-claim.

63    In light of the above and the fact that Ms Blair cannot satisfy the Court of all of the requirements of s 40(1)(g) of the Bankruptcy Act, the application to set aside the First Bankruptcy Notice fails.

The Second Bankruptcy Notice

64    The application to set aside the Second Bankruptcy Notice does not have the same outcome. In her affidavit sworn 10 August 2016 filed in support of that application Ms Blair:

    refers to the First Bankruptcy Notice and proceeding NSD 435 of 2016;

    annexes the Second Bankruptcy Notice;

    says that she had made payments in reduction of the Local Court Judgment and that it had been reduced to $43,403.95 as at 10 August 2016; and

    says that she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the First Bankruptcy Notice and the Second Bankruptcy Notice and sets out the nature of that counter-claim, set-off or cross demand including the nature of the damage since June 2016.

65    The time for compliance with the Second Bankruptcy Notice has been extended on a number of occasions pursuant to s 41(6A) of the Bankruptcy Act and most recently at the hearing it was extended until the date the Court delivers its judgment in proceeding NSD 1296 of 2016.

66    In proceeding NSD 1296 of 2016 Ms Blair relies on the affidavits filed in proceeding NSD 435 of 2016. That includes the three reports prepared by Mr Fowler and the Third Miller Affidavit annexing the statement of claim filed in the District Court in which Ms Blair claims damages from two parties, including the Owners SP71656, for breach of duty owed by it to take reasonable care to avoid a reasonably foreseeable risk of loss or damage to Ms Blair or the Premises arising from acts or omissions in the Owners SP 71656’s management of the common property and, in the alternative, relying on the same conduct for liability in tort for private nuisance.

67    As I have already indicated, in my opinion, Ms Blair’s claim in the District Court Proceeding constitutes a prima face case. That view was based on the evidence filed as at 22 June 2016. When one considers the evidence filed after that date, that view is reinforced. There is evidence that Ms Blair has commenced the District Court Proceeding which is a counter-claim, set-off or cross demand of the nature described in Re Brink.

68    Mr Fowler’s reports are relied on by Ms Blair to support the District Court Proceeding. The subject matter of and conclusions reached by Mr Fowler are set out at [17] above. In summary Mr Fowler was of the view that:

    the black polycarbonate sheeting repair was ineffectual because of incorrect installation and that this led to ongoing moisture penetration into the ceiling space and needed to be replaced urgently;

    leaf litter had caused gutters to be blocked and that the gutters should be cleaned every two months;

    the lower roof sheeting needed to be replaced due to long term weathering and defects;

    the roof drainage required modification to reduce moisture flows into the lower gutter;

    the ceiling in the Premises would require repair following completion of the roofing works; and

    as at the date of his third report, 18 August 2016, he had observed further internal damage to the Premises as well as damage to new items.

69    Mr Fowler’s evidence is not contradicted and should be accepted as establishing that there is at least a prima facie case in the sense described in Ebert v The Union Trustee Company of Australia Limited (1960) 104 CLR 346 at 350. Mr Fowler’s evidence establishes that the counter-claim, set-off or cross demand has, at least, a fair chance of success and demonstrates that Ms Blair is entitled to litigate her claim.

70    The Owners SP 71656 submitted that the Second Bankruptcy Notice will not be set aside unless Ms Blair is able to establish that her counter-claim is for an amount in excess of the Costs Judgment and that Ms Blair has not attempted to explain, and the evidence does not otherwise show, how that conclusion can be drawn in circumstances where she relies on the same damages claim to defeat both the First Bankruptcy Notice and the Second Bankruptcy Notice and where the evidence of quantum suffers from a number of deficiencies as set out at [48] to [49] above.

71    My findings in relation to the issue of quantum at [50] to [56] apply equally here. However, even taking those findings into account the cross-claim, set-off or cross demand is for an amount in excess of the Costs Judgment which is the amount claimed in the Second Bankruptcy Notice. In circumstances where Ms Blair has not established her entitlement to have the First Bankruptcy Notice set aside no issue arises about the combined totals of the amounts claimed in the First Bankruptcy Notice and the Second Bankruptcy Notice and whether the resulting quantum of her claim, taking into account my findings, exceeds that combined total. The quantum of the cross-claim is such that it exceeds the quantum of the Second Bankruptcy Notice.

72    The final issue is whether Ms Blair could have set up her cross-claim, set-off or cross demand in the proceeding in which the judgment on which the Second Bankruptcy Notice was based was obtained. The Owners SP 71656 concede that Ms Blair could not have done so. The judgment on which the Second Bankruptcy Notice was based was obtained in a proceeding for the assessment of costs. It would not have been possible, as a matter of law, for Ms Blair to set up her cross-claim, set-off or cross demand for breach of duty in the maintenance of the Property against the Owners SP 71656 in that proceeding.

costs

73    In my opinion costs should follow the event so that Ms Blair should pay the costs in relation to her application to set aside the First Bankruptcy Notice in which she has been unsuccessful and the Owners SP 71656 should pay the costs of Ms Blair’s application to set aside the Second Bankruptcy Notice in which she has been successful

DISPOSITION

74    I will make orders accordingly.

Associate:

Dated:    16 December 2016