FEDERAL COURT OF AUSTRALIA
Coshott v Prentice, in the matter of Coshott (No 2) [2016] FCA 1531
ORDERS
Applicant | ||
AND: | Respondent | |
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. The application to set aside bankruptcy notice number BN 185797 addressed to James Coshott be dismissed with costs.
2. The time for compliance with bankruptcy notice number BN 185797 addressed to James Coshott be extended pursuant to s 41(6A)(b) of the Bankruptcy Act 1966 (Cth) to the date of this judgment.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
NSD 473 of 2016 | ||
IN THE MATTER OF LJILJANA COSHOTT | ||
BETWEEN: | LJILJANA COSHOTT Applicant | |
AND: | MAXWELL WILLIAM PRENTICE Respondent | |
JUDGE: | BROMWICH J |
DATE OF ORDER: | 16 dECEMBER 2016 |
THE COURT ORDERS THAT:
1. The application to set aside bankruptcy notice number BN 187141 addressed to Ljiljana Coshott be dismissed with costs.
2. The time for compliance with bankruptcy notice number BN 187141 addressed to Ljiljana Coshott be extended pursuant to s 41(6A)(b) of the Bankruptcy Act 1966 (Cth) to the date of this judgment.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
BROMWICH J:
1 These are separate applications by each of the applicants to set aside bankruptcy notices caused to be issued by the Official Receiver against each of them by the respondent. The two applications were heard together and the evidence in each was evidence in the other. For the reasons that follow, the applications must be dismissed with costs. Time to comply with each of the bankruptcy notices should be extended to the date of this judgment.
2 There has been extensive litigation over many years between the respondent, Maxwell William Prentice, and various members of the Coshott family and companies associated with them, including the present applicants and a Coshott family company, Fewin Pty Limited. In a number of judgments the Coshott parties have, for ease of reading and without any disrespect, been referred to by their first names. I will adopt that approach in these reasons. For the same reason, I will also refer to Mr Prentice by only his surname.
3 The applicants, Ljiljana Coshott and James Coshott, are mother and son. Robert Coshott is the father of James and the husband of Ljiljana. Another member of the Coshott family having a role in this litigation is Robert’s brother, Ronald Coshott.
4 Prentice was the trustee of the bankrupt estate of Robert until his discharge from bankruptcy. Thereafter Prentice continued to be the trustee of the property of Robert by reason of outstanding issues relating to the trusteeship of the bankrupt estate, including costs and related issues.
5 The bankruptcy notice addressed to James was issued on 30 October 2015 and served on 5 February 2016. He applied to set it aside on 23 February 2016, just prior to the expiry of the time for compliance on 26 February 2016.
6 The bankruptcy notice addressed to Ljiljana was issued on 23 December 2015 and deemed served by substituted service on 24 March 2016. She applied to set it aside on 6 April 2016, just over a week prior to the expiry of the time for compliance on 14 April 2016.
7 The basis for each of the bankruptcy notices was costs orders obtained against each of James and Ljiljana and others, jointly and severally, by Prentice, quantified by certificates of taxation. There is no remaining dispute about the existence or quantum of those costs orders other than how certificates of taxation were issued and served. There are no outstanding appeals by which the costs orders might be displaced, or the quantum of the costs orders as reflected in the certificates of taxation might be reduced.
8 On all of the evidence it is clear that by late 2015 both James and Ljiljana must have been aware of at least the issue of the certificates of taxation, and probably the issue of the bankruptcy notices. The response was to endeavour to create, by way of assignment to them both, the benefit of a “counter-claim, set-off or cross demand” (offsetting claim) equal to or exceeding the amount claimed in each bankruptcy notice, for the purposes of ss 40(1)(g) and 41(7) of the Bankruptcy Act 1966 (Cth), arising from costs orders made against Prentice in favour of Coshott entities so as to stave off the bankruptcy notices. This was sought to be achieved by way of three deeds of assignment dated 30 December 2015, 23 March 2016 and 6 May 2016 (respectively, the 30 December 2015 Deed, the 23 March 2016 Deed and the 6 May 2016 Deed). The second and third deeds were expressed on their face as intending to remedy a deficiency in the 30 December 2015 Deed for bankruptcy purposes.
9 In the applications to set aside the bankruptcy notices and accompanying affidavits the abovementioned offsetting claim was the sole basis for James seeking to set aside his bankruptcy notice and the principal basis for Ljiljana seeking to set aside her bankruptcy notice. Additional grounds were developed subsequently and sought to be relied upon. Prentice objected to both the validity of the applications to enliven the Court’s jurisdiction and to those additional grounds being relied upon even if the applications were valid. Prentice also disputed that the offsetting claims were proven to equal or exceed the bankruptcy debts.
10 The issues required to be determined in each of these applications concern:
(1) the asserted invalidity of each of the applications to set aside the bankruptcy notices on written grounds from Prentice, including as to the scope of the grounds permitted to be advanced in support of those applications if they are otherwise valid;
(2) the asserted invalidity of the bankruptcy notices on written grounds from James and Ljiljana, including but also going beyond those raised in each application to set them aside and the required accompanying affidavit; and
(3) relevant to both of the invalidity arguments, the existence of an effective or valid offsetting claim equal to or exceeding the amount claimed in each bankruptcy notice.
11 Before proceeding to address the above issues by way of six specific questions formulated below, it is convenient to consider:
(1) the legal and jurisdictional requirements for applications to set aside bankruptcy notices in the Bankruptcy Act, the Federal Court (Bankruptcy) Rules 2005 (Cth) (Bankruptcy Rules 2005) and the Federal Court (Bankruptcy) Rules 2016 (Cth) (Bankruptcy Rules 2016);
(2) the bankruptcy notices in this case;
(3) the applications to set aside the bankruptcy notices;
(4) the three deeds of assignment by which offsetting claims were sought to be established;
(5) the specific grounds of objection to the applications advanced by Prentice; and
(6) the specific grounds relied upon by James and Ljiljana to set aside the bankruptcy notices.
The legal and jurisdictional requirements for applications to set aside bankruptcy notices in the Bankruptcy Act and Bankruptcy Rules upon the basis of an offsetting claim
12 The Bankruptcy Rules 2005 applied until 31 March 2016 and therefore applied to James’ application made on 23 February 2016. On 1 April 2016, the Bankruptcy Rules 2016 commenced and therefore applied to Ljiljana’s application made on 6 April 2016. In these reasons, a reference to the Bankruptcy Rules without a year is a reference to both the 2005 and the 2016 versions.
13 The Bankruptcy Rules 2005 and the Bankruptcy Rules 2016 in relation to an application to set aside a bankruptcy notice are substantially the same, but not identical. Rule 2.01(1) in each of the Bankruptcy Rules 2005 and the Bankruptcy Rules 2016 requires an application required or permitted by the Bankruptcy Act to be made to this Court by way of Form 2 and Form B2 respectively, except in circumstances that have no application to these matters. There was also a six-month period of grace in relation to changes in prescribed forms, allowing old forms to be used in applications governed by the new Bankruptcy Rules 2016 provided there was substantial compliance with the requirements of the new forms or only variations which were permissible in the circumstances of the case: Sch 3, item 1 of the Federal Court (Bankruptcy) Repeal Rules 2016 (Cth).
14 Rule 2.01(3) in each of the Bankruptcy Rules provides (with an immaterial difference in punctuation) that an application “must state”:
(a) each section of the Bankruptcy Act, each regulation of the Bankruptcy Regulations or each section of the Cross-Border Insolvency Act under which the proceeding is brought; and
(b) the relief sought.
15 Rule 3.02 in each of the Bankruptcy Rules sets out the specific requirements for an application to set aside a bankruptcy notice. There are some differences in the language between the two, such that it is appropriate to set out separately relevant parts of the text of each as follows:
(1) rule 3.02(1) and (2) of the Bankruptcy Rules 2005 provided:
3.02 Setting aside bankruptcy notice
(1) An application to set aside a bankruptcy notice must be accompanied by:
(a) a copy of the bankruptcy notice; and
(b) an affidavit stating:
(i) the grounds in support of the application; and
(ii) the date when the bankruptcy notice was served on the applicant; and
(c) a copy of any application to set aside the judgment or order in relation to which the bankruptcy notice was issued and any material in support of that application.
(2) If the application is based on the ground that the debtor has a counter-claim, set-off or cross demand mentioned 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 proceeding that resulted in the judgment or order in relation to which the bankruptcy notice was issued.
(2) rule 3.02(1), (2) and (3) of the Bankruptcy Rules 2016 now 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.
16 The grounds of the application required to be in the supporting affidavit by the above Rules are necessarily intended and required to be grounds in respect of the sections or regulations identified in that application. That is, the application is required to identify the sections or regulations sought to be relied upon, and the accompanying affidavit is then required to identify the grounds pertaining to such provisions.
17 Sections 40(1)(g), 41(5), 41(6A), 41(6C) and 41(7) of the Bankruptcy Act provide as follows:
40 Acts of bankruptcy
(1) A debtor commits an act of bankruptcy in each of the following cases:
…
(g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i) where the notice was served in Australia—within the time specified in the notice; or
(ii) where the notice was served elsewhere—within the time fixed for the purpose by the order giving leave to effect the service;
comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;
41 Bankruptcy notices
…
(5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.
…
(6A) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:
(a) proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or
(b) an application has been made to the Court to set aside the bankruptcy notice;
the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.
(6C) Where:
(a) a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and
(b) the Court is of the opinion that the proceedings to set aside the judgment or order:
(i) have not been instituted bona fide; or
(ii) are not being prosecuted with due diligence;
the Court shall not extend the time for compliance with the bankruptcy notice.
…
(7) 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.
18 Any application to set aside a bankruptcy notice other than by reason of an offsetting claim cannot obtain the benefit of an automatic statutory extension of time to comply in s 41(7), but rather must be the subject of a successful application for an extension of time under s 41(6A). If an application relies upon both an offsetting claim and another ground, provided the application is valid (as discussed below) the automatic extension of time, as a matter of practicality, accrues to the benefit of both grounds by allowing time to determine both if they are dealt with at the same time. However, there is a problem if an application based on an offsetting claim is found to be invalid (as opposed to unsuccessful in outcome) as that will entail the time for compliance with the notice expiring and an act of bankruptcy occurring. It will also entail the six-month time limit for the presentation of a creditor’s petition from the date of the act of bankruptcy provided for in s 44(1)(c) of the Bankruptcy Act commencing to run, and expiring if the application is not determined within that time.
19 In the case of a successful application to set aside a bankruptcy notice, the benefit of the automatic extension of the time to comply in s 41(7) accrues to the benefit of the debtor because no act of bankruptcy occurs. For an unsuccessful application, the benefit of the automatic extension of time to comply mainly accrues to the benefit of the creditor because a full six months in which to present a creditor’s petition is preserved. The benefit of the debtor is (apparently deliberately on the part of the legislature), likely to be illusory because, if the application to set aside fails, a debtor has until midnight on the day of judgment to satisfy the bankruptcy notice or otherwise commits an act of bankruptcy. On this reasoning, the purpose of the automatic extension of time when a proper question is raised as to whether in truth there is a net bankruptcy debt is to enable the status quo to be maintained with no act of bankruptcy committed pending resolution of the application, and also to ensure that, if the application to set aside the bankruptcy notice is unsuccessful the time does not run for the next step in the bankruptcy process, being the presentation of a creditor’s petition. With this characterisation in mind, common sense dictates that something more than a mere assertion is required for the debtor to obtain the benefit of the extension of time so as to avoid committing an act of bankruptcy. That common sense interpretation is backed by long-standing authority, discussed below.
20 However, it is also necessary to grapple with the problem that arises when an application is not valid and the time for reaching that conclusion has been more than six months from the date of the act of bankruptcy. The evident legislative purpose of s 41(7) was to protect debtors from an act of bankruptcy only for successful applications, not to put them in a better position than if they had never made an application to set aside the bankruptcy notice and that notice had operated according to its terms. It is difficult to see why a debtor applicant should be better off having made an invalid application that has the practical effect of exhausting the time for presenting a creditor’s petition than they would be if they had made a valid but unsuccessful application, at the least without the Court having available to it a remedy to avoid this injustice.
21 In the last part of this judgment I give consideration as to whether there is a general power to extend the time for compliance with the bankruptcy notices in this case, and if so whether I should exercise such a power so that a creditor is not worse off by having to meet an invalid application to set aside the bankruptcy notice than meeting a valid but unsuccessful application to do so. For the reasons there set out, I am of the view that the power to extend the time for compliance with the bankruptcy notice under s 41(6A) of the Bankruptcy Act is triggered by an application to set it aside being filed within the time for compliance even if the application is not determined within that time. In my opinion, the s 41(6A) power is triggered by the fact of such an application being made and does not require the application to be found to be valid.
22 The meaning of the three terms in s 40(1)(g) and s 41(7) of the Bankruptcy Act “counter-claim, set-off or cross demand” was considered in the much cited case of Re Judd; Ex parte Pike (1924) 24 SR (NSW) 537 at 539-540 (emphasis added to the portion directly relevant to the deeds of assignment in this case):
There is no authority of which I am aware deciding what limits (if any) ought to be placed on the words “counter-claim, set-off or cross-demand”. I think that the Legislature by the word “counter-claim” probably referred to those claims which might be the subject of a counter-claim in equity and by the word “set-off” to those claims which might be the subject of a set-off at common law. The other term “cross-demand”, however, is not a technical term and must in my opinion refer to claims other than those which would be comprised in the two expressions “counter-claim” and “set-off”.
Taking the ordinary meaning of the word itself, I can see no reason why “cross-demand” should not be held to include a claim for unliquidated damages for a tort. The case of Re Griffin; Ex parte Soutar (1 B.C. 29) shows that “cross-demand” includes a claim for unliquidated damages for breach of contract. In the case of Re Smyth; Ex parte North (3 B.C. 17) a common law action of Smyth v. North is referred to as constituting a cross-demand. I have sent for and perused the papers in this case and here again it appears that the cause of action was a claim for unliquidated damages for breach of contract. Two recent cases in England—In re G.E.B. ([1903] 2 K.B. 340) and In re A Debtor ([1914] 3 K.B. 726)—show that the cross-demand need not have any connection with the cause of action out of which the judgment debt arose—so much so, that a judgment debtor may even buy up a claim against the judgment creditor in order to have a “cross-demand”. These cases are all in favour of an unrestricted meaning being given to the word.
23 A key aspect of the phase “counter-claim, set-off or cross demand” is that the bankruptcy debt and the offsetting claim sought to be relied upon must be “mutual and due in the same right”. As was stated by the Full Court in Stec v Orfanos [1999] FCA 457 at [24]:
… 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. …
24 It follows that the particular offsetting claim relied upon by James and Ljiljana may best be characterised as a “cross demand”, although nothing turns on this. These reasons will therefore continue to use the generic term “offsetting claim” as the relevant principles do not change according to the particular type of ss 40(1)(g) and 41(7) claim relied upon.
25 The effect of s 41(7) of the Bankruptcy Act, when it is engaged, is that, if the application to set aside the bankruptcy notice has not been heard and determined prior to the time for compliance with it, that time is deemed to have been extended immediately before the date for compliance until and including the day upon which the Court determines whether it is satisfied that the debtor has established an offsetting claim equal to or exceeding the debt upon which the bankruptcy notice is based.
26 A challenged application to set aside a bankruptcy notice may give rise to several issues before its merits are considered, although the nature and apparent strength of the underlying case may be relevant. Those possible issues in this case include:
(1) whether a competent application has been filed so as to engage the jurisdiction of the Court in the first place; and
(2) if the application is competent, the extent to which such a valid application may be enlarged by subsequent grounds, arguments or evidence.
27 The jurisdictional requirement of a competent application has been expressed in a variety of ways in the authorities, but substantially to the same end.
28 In Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135; (1980) 30 ALR 433 at 439.6 it was acknowledged that if a valid application to set aside a bankruptcy notice has been brought, this Court plainly has power to permit the debtor to supplement the case brought with additional evidence. However, that was predicated upon there being a valid application in the first place. While courts should adopt “a benevolent construction to the initial affidavit”, being the affidavit accompanying the application which brings s 41(7) “into play”, especially having regard to the tight timeframe within which an application must be brought to set aside a bankruptcy notice and the practical difficulties in providing more than a mere outline of the case to be brought, nonetheless this will not be enough to overcome an inherent defect: see 440-1. In Re Brink, the inherent and fatal defect was a failure to indicate that the offsetting claim could not have been set up in the prior proceedings. In those circumstances, the original affidavit did not answer the description of the affidavit required for the purposes of s 41(7), so was not valid.
29 In Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (1993) 46 FCR 183, Hill J observed at 188-9:
… The affidavit of which s 41(7) speaks 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; cf Lukin J in Re Vogwell; Ex parte Vogwell (1939) 11 ABC 75 at 77, affirmed on appeal by the High Court in Vogwell v Vogwell (1939) 11 ABC 83 at 85; Ebert v Union Trustee Co of Australia Ltd (No 2) (1960) 104 CLR 346 at 350 Re McKechnie; Ex parte Weir (1991) 27 FCR 515 at 519–20 per Foster J. This is so because the affidavit in question is required to “show” a relevant counter-claim, set-off or cross-demand. An insufficient affidavit does not bring the provisions of s 41(7) into operation.
Although the debtors filed out of time an affidavit setting out the facts upon which they would rely to show a relevant cross-claim, cross-demand or cross-action, that affidavit, while it might be read to expand matters in an affidavit otherwise complying with s 41(7) filed in time, cannot be used to supplement any deficiency where no sufficient affidavit has been filed within the terms of s 41(7).
30 In Re Donkin; Ex parte AGC Advances Limited (1994) 52 FCR 271 the test was expressed somewhat differently, although ultimately not disagreeing with Re James. At 277D-G it was said:
In Re Cocciolone (unreported, Federal Court, Cooper J, 30 May 1994), his Honour reviewed the authorities, including Re Brink, and held that in order to determine whether an affidavit is sufficient for the purposes of s 41(7) (at p 5):
“The requisite approach is one that requires a determination of whether there is a bona fide reliance on section 41(7) of the Act and whether there is identified a cause or causes of action which arise out of an outline of facts relied upon by the judgment debtor.”
Like Cooper J in Re Cocciolone, I do not regard the comments of Hill J in Re James; Ex parte Carter Holt Harver Roofing (Australia) Pty Ltd (1993) 46 FCR 183 as supporting the proposition that explicit proof of each element of the cause of action said to give rise to the cross-demand is required in the affidavit relied on to bring the subsection into operation.
An outline of the cause of action relied on by the debtor to constitute the cross-demand, with sufficient accompanying detail to show that the debtor is bona fide in his contention that he has such a cross-demand, is all that is required of the initial affidavit. For the reasons I have already given, I think the applicant’s affidavit of 16 June 1994 is sufficient to enliven s 41(7).
It is unnecessary to express any final view on the extent to which a debtor can properly rely on material supplementary to the material filed within the time allowed by the bankruptcy notice for compliance with the demand there made, when the matter comes before the Court and the debtor is seeking to satisfy the Court that he has the requisite cross-demand. However, it is at least permissible for a debtor then to rely on “evidence supplementing the earlier affidavit for the purpose of explication without going beyond its scope”: Re Laybutt; Ex parte Robinson (unreported, Federal Court, Beaumont J, 26 June 1985) and on material which expands on matters in the affidavit filed within time, although the debtor cannot supplement any deficiency in that material where no sufficient affidavit has been filed within the time allowed by s 41(7) and the relevant bankruptcy notice: Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (supra).
31 In Webb v Hunter (1995) 59 FCR 24, the Full Court endorsed the conclusion expressed in a number of single judge decisions, including the above-mentioned cases of Re Brink and Re James, as well as the prior Full Court decision in James v Abrahams (1981) 51 FLR 16, to the effect that an accompanying affidavit which, when considered benevolently, plainly does not fall within the description contained within s 41(7) of the Bankruptcy Act means the application is invalid. The affidavit in that case was found not to comply, and was therefore invalid, because (at 30.5) “[i]t contains no evidence which goes to establish that there is any real or effective cross-claim. Nor does it “show” on its face any relevant counterclaim, set-off or cross-demand.”
32 In Foyster v ANZ Banking Group Ltd [1999] FCA 1032 it was said at [7]:
If there had been no affidavit filed, which satisfied the requirements of section 41(7), there would have been no automatic extension of time under that provision. However, once the statutory stay provided for in section 41(7) comes into play, there does not appear to me to be any reason in principle why the Debtor should not be entitled to satisfy the Court as to any matter within section 40(1)(g). In Re Brink; ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135, which was cited with approval by the Full Court in Eastick v Australia and New Zealand Banking Group Ltd (1981) 53 FLR 91, Lockhart J indicated that, upon the hearing of a matter under section 41(7), the Court has before it the initial affidavit which brings section 41(7) into play. There may, of course, be no other evidence. On the other hand, there may be a great deal of evidence. That will depend upon the circumstances of each case. The Court has power to permit the debtor to supplement his case by additional evidence.
33 Although not entirely clear, Foyster suggests that a valid set aside application based on an offsetting claim within the scope of ss 40(1)(g) and 41(7) and made within the time for compliance with the bankruptcy notice may be enlarged or added to. But Foyster does not suggest that should extend to types of grounds not raised (as required) in the affidavit accompanying the original application to set aside a bankruptcy notice. That makes sense because the regime for an automatic extension of time to comply with the bankruptcy notice only applies to offsetting claims. Any other separate claim, such as a pending application to set aside the judgment upon which the bankruptcy notice was based, requires an application for and the granting of an extension of time.
34 There is no suggestion in the authorities discussed that enlarging an application would, or could, extend to an asserted offsetting claim that did not exist at all at the time that the application was made. That would be contrary to the clear and express present tense language in s 41(7) of the Bankruptcy Act: “… 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…”. That interpretation is supported by authority that indicates that the offsetting claim must in fact exist, as well as be of some evident substance. In Cirillo v Consolidated Press Property Pty Ltd [2007] FCA 139; (2007) 5 ABC(NS) 225, it was noted at 231 [23]:
It is well accepted that in proceedings under s 41(7) the affidavit material in support of an application must do more than merely assert the existence of a counter-claim etc. It must contain evidence which establishes that there is an effective and bona fide claim which is real. …
35 To like effect as Cirillo, in O’Meara v Deputy Commissioner of Taxation [2009] FCA 1575 it was observed at [10]:
Although the application was filed before the expiration of the time fixed for compliance with the Bankruptcy Notice, no affidavit satisfying the requirements of either para (b) of sub-rule 3.02(1) or sub-rule 3.02(2) was filed by Mr O’Meara before the expiration of that time. It follows that whether Mr O’Meara relies on para 40(1)(g) (when sub-rule 3.02(2) would be relevant) or some other ground (when para (b) of sub-rule 3.01 would be relevant) to set aside the Bankruptcy Notice, his application is not competent. It is as if no application to set aside the Bankruptcy Notice was ever filed. Moreover, because the deemed extension of time under s 41(7) is not triggered and in the absence of an actual extension of time for compliance with the Bankruptcy Notice, Mr O’Meara committed an act of bankruptcy on the expiration of the time prescribed in the Bankruptcy Notice for compliance with its requirements.
36 The reference in O’Meara above to “[i]t is as if no application to set aside the Bankruptcy Notice was ever filed” does not deny the fact of an application being filed, but rather its legal effectiveness to trigger an automatic extension of the time for compliance with the bankruptcy notice.
37 A number of decisions of the former Federal Magistrates Court of Australia, now the Federal Circuit Court of Australia, which is now the primary forum for bankruptcy disputes, have applied similar reasoning: see for example Swarbrick v Burge [2009] FMCA 985; (2009) 236 FLR 311 at 323 [49], 324 [54]; and Spottiswood v Equititrust Ltd [2010] FMCA 819; (2010) 245 FLR 395 at 399-400 [13]-[16].
38 Some additional guidance or support for the reasoning above may be gleaned from the parallel jurisdiction of statutory demands under the Corporations Act 2001 (Cth), paying due regard to the important statutory differences between the two regimes. In Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 70 FCR 452 at 459, a distinction was drawn between the sufficiency of a supporting affidavit to enliven jurisdiction for an application to set aside a statutory demand and the evidence that might be relied upon to make good the case at the hearing of application. The former requirement was regarded as being more in the nature of pleadings and went to the competency of the application in the first place by meeting minimum requirements. The latter went to its ultimate success once validity, if questioned, was established.
39 In Fitness First Australia Pty Ltd v Dubow [2011] NSWSC 531; (2011) 251 FLR 241, another statutory demand case, compliance with the so-called “Graywinter principles” was considered. Numerous other authorities were considered and at 271 [122] it was noted that although an applicant may supplement the initial affidavit or affidavits filed within time by leading further evidence, reliance could not be placed on any ground not raised in such an affidavit.
40 It follows from the above authorities that for an application to set aside a bankruptcy notice to be competent and trigger the automatic statutory extension of time for compliance in s 41(7), the offsetting claim must be “effective” or “real” at the time the application is made; it must be bona fide; it must on its face show a relevant offsetting claim. Such a jurisdictional requirement for a competent application cannot be supplemented after the time for compliance has expired because that is too late to engage jurisdiction and trigger an extension of time. The terms of s 41(7) do not contemplate or allow the automatic extension of time to take place unless the application is made within the time for compliance contained in the bankruptcy notice. The application is either competent and thus valid at the time it is made, and triggers the automatic extension of time, or it is not competent and is thus invalid and no such extension of time is triggered.
41 The above ostensibly bright-line test will not always be easy to assess, because it requires a determination as to what is meant by “effective”, “real”, bona fide or showing a relevant offsetting claim. It may also give rise to a live question as to what must be determined at the outset as a question of validity, and what can properly await the final determination of the application on its merits.
42 At the very least, on its face the application must be legally capable of succeeding on the basis of the offsetting claim then identified as existing and relied upon, even if more evidence might be required by the time of the hearing in order for the court to reach the requisite degree of satisfaction for a final determination. It is in the nature of a legal capacity test, rather than a sufficiency of evidence test. It is directed to enabling the application to proceed to a hearing, rather than determining its ultimate success. If the application on its face is not capable of succeeding because of a manifest defect or deficiency, then it will not be valid and nothing can later be done to remedy this.
43 The question of what is necessary for a valid application to set aside a bankruptcy notice based on an offsetting claim to succeed at a final hearing of the application is evaluative in terms of the sufficiency of the case advanced. In Vogwell v Vogwell (1939) 11 ABC 83 at 85, Latham CJ said of the equivalent provision in the Bankruptcy Act 1933 (Cth):
… What the section contemplates is a claim to the enforcement of a right sounding in money. It must be a real claim ; it is insufficient that the debtor believes that he has a claim, and the authorities show that the matter to which the court looks is this,—whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue ; in other words, whether it is a claim which it is proper and reasonable to litigate. …
44 In this case, there is no issue of any outstanding litigation in relation to the existence of the offsetting claims relied upon by James and Ljiljana, other than arguably as to the quantum of the final entitlement to costs able to be enjoyed by the beneficiaries (or lawful assignees) of the costs orders against Prentice, which are mostly still undergoing a process of taxation.
45 The above statement of principle in Vogwell was endorsed in Guss v Johnstone [2000] HCA 26; (2000) 171 ALR 598 at 606 [39]. Their Honours went on to say as to the final determination of an application to set aside a bankruptcy notice (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.
46 In Guss v Johnstone at 607 [43], the High Court recorded the observation before the Full Court of this Court in that case before whom counsel had candidly acknowledged that the offsetting claim had to exist also at the time when the application to set aside the bankruptcy notice is heard. However, consistently with the above analysis, a sufficient claim must first be made at the time the application was lodged for the automatic extension of time to be triggered in the first place.
47 In Ebert v The Union Trustee Company of Australia Limited (1960) 104 CLR 346 it was observed as to the final determination of an application to set aside a bankruptcy notice at 350:
… the debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross demand.
48 The burden of authority as to enlarging grounds does not support any freestanding right or entitlement to litigate later advanced additional grounds in support of an application to set aside a bankruptcy notice, assuming a valid application was made within the time for compliance with that notice. Moreover, there is a public interest in ensuring that the enforcement of debts by way of bankruptcy notices does not become mired in the sort of litigation that often gave rise to a judgment debt in the first place. In part that is because bankruptcy notices are an important part of the means by which civil laws are enforced and the orders of courts are thereby given real substance and meaning. While bankruptcy is a dire consequence of not paying debts arising from enforceable orders of the court, it is a vitally important ultimate remedy that helps to enhance the overall integrity of civil justice.
49 Even if leave may be given to amend an otherwise valid application to set aside a bankruptcy notice and even if leave may be given to supplement the grounds in support of such an amendment such as by way of a further accompanying affidavit, that should be treated in the same manner as final pleadings, with such amendments and supplements not lightly countenanced. The now well-established principles in relation to amending pleadings in Aon Risk Services Australia Limited v Australian National University [2009] HCA 27; (2009) 239 CLR 175 at 211-213 [93]-[98] and since reflected in ss 37M, 37N and 37P of the Federal Court of Australia Act 1976 (Cth) should apply to any power to amend the effective pleadings constituted by the affidavit accompanying an application to set aside a bankruptcy notice. An application for leave to enlarge the grounds upon which a bankruptcy notice is sought to be set aside should be closely scrutinised. Leave, assuming there is power to grant it, should not be given to rely upon additional unmeritorious or otherwise questionable claims, especially if they have the effect of inordinately delaying determination of the application.
50 The focus in considering any permissible application to enlarge the grounds sought to be relied upon in an application to set aside a bankruptcy notice must at all times remain on the dictates of justice and not merely on individualistic ideas of what is fair in a given case, as mandated by Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Limited [2013] HCA 46; (2013) 250 CLR 303 at 323 [57]. At the same time, considerable weight should be given to the modern view of bankruptcy notices, namely that any alleged defects sought to be relied upon to set them aside should truly involve the debtor being misled as to what he or she must do in order to comply with the notice: see Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409, discussed in some detail below. That is not to say that some defects in a bankruptcy notice cannot be so fundamental that it cannot survive even without such a capacity to mislead, but that is now a very narrow category that ordinarily should be apparent if so misleading or fundamental as to be identified at the outset. The reasoning in Adams v Lambert, both in relation to s 306(1) of the Bankruptcy Act and more generally, discourages unduly technical and pedantic objections to bankruptcy notices, and should discourage the exercise of any power by the Court to grant leave to run additional grounds of that nature.
The bankruptcy notices and applications to set them aside
51 Both bankruptcy notices were in the prescribed form. The first page of each form listed Prentice as the creditor in his name, without any express reference to his capacity as a trustee on the face of the bankruptcy notice itself, a point sought to be taken by both James and Ljiljana. Neither notice claimed interest. Apart from the capacity in which Prentice caused the bankruptcy notices to issue, no issue is taken with the form itself or service of the bankruptcy notices, or to do with calculations and the like.
52 As detailed below in the section addressing the applications to set aside the bankruptcy notices, the grounds raised by James and Ljiljana in the required accompanying affidavits concern offsetting claims by both James and Ljiljana said to be sufficient to prevent Prentice relying on the bankruptcy notices, and a collateral ground (initially only raised by Ljiljana) as to whether the trustee capacity in which Prentice obtained the bankruptcy notices was sufficiently clear. Well after the applications were made, additional points were sought to be taken about the formal requirements to be observed in documents attached to the bankruptcy notices. James also sought to add the same trustee capacity ground as Ljiljana did in her original accompanying affidavit in support of her application.
The bankruptcy notice addressed to James and his application to set it aside
53 The bankruptcy notice addressed to James was issued on 30 October 2015 and had annexed to it:
(1) a certificate of taxation in favour of Prentice as trustee of the property of Robert dated 20 October 2015 for costs in the sum of $576,018 in favour of Prentice against Robert, James and Ljiljana, signed and sealed by a Deputy District Registrar of this Court; and
(2) 10 September 2013 and 19 September 2014 orders of Buchanan J by which the costs orders were made and amended respectively in favour of Prentice as trustee of the property of Robert giving rise to the costs liability reflected in the above-mentioned certificate of taxation, and therefore being the source of the obligation quantified by that certificate of taxation.
54 The bankruptcy notice for James therefore relied upon a single costs order debt quantified by a single certificate of taxation, seeking the payment of a total of $574,018 ($576,018 less a credit of $2,000 by reason of security for taxation that was forfeited to Prentice, accounting for the credit given in the bankruptcy notice).
55 James’ 23 February 2016 application to set aside the bankruptcy notice addressed to him was filed within the 21 days allowed for payment. That application on its face expressly relied only on s 41(7) of the Bankruptcy Act – that is, upon nothing more than an offsetting claim. As required, James’ application was accompanied by a copy of the bankruptcy notice, together with the documents annexed to that bankruptcy notice, detailed above.
56 At the time of James’ application to set aside his bankruptcy notice, a statement of the grounds relied upon in support of that application was required to be in an affidavit accompanying the application by r 3.02(1)(b)(i) of the then Bankruptcy Rules 2005. James’ application was accompanied by an affidavit of Robert dated and filed 23 February 2016, which asserted a counter-claim, set-off or cross demand exceeding the amount claimed in the bankruptcy notice, referring to and annexing copies of costs orders made against Prentice in three earlier proceedings and copies of the bills of costs lodged for taxation in those proceedings, together with the 30 December 2015 Deed which is detailed further below. The accompanying affidavit tallied the amounts in the three bills of costs totalling $1,024,022.42. While there was no express statement as to why the offsetting claim was not raised in the bankruptcy notice debt proceedings, that issue is necessarily implicitly addressed by the assignment basis for that claim which took place long after those proceedings concluded. The required accompanying affidavit filed on behalf of James therefore contained a single ground for setting aside the bankruptcy notice, consistently with the reference to s 41(7) in the application, being an offsetting claim arising from the assignment of the benefit of debts owed by Prentice.
The bankruptcy notice addressed to Ljiljana and her application to set it aside
57 The bankruptcy notice addressed to Ljiljana was issued on 23 December 2015 and was served by way of an order for substituted service made in favour of Prentice as trustee of the property of Robert. The notice had annexed to it:
(1) 10 September 2013 orders of Buchanan J in favour of Prentice as trustee of the property of Robert, including costs orders (that is, the same order as annexed to James’ bankruptcy notice);
(2) 20 October 2015 orders of a Registrar of this Court in favour of Prentice as trustee of the property of Robert, inter alia, ordering that a $576,018 certificate of taxation issue;
(3) a certificate of taxation in favour of Prentice as trustee of the property of Robert dated 20 October 2015 for costs in the sum of $576,018 in favour of Prentice against Robert, James and Ljiljana, signed and sealed by a Deputy District Registrar of this Court (that is, the same certificate as annexed to James’ bankruptcy notice);
(4) 23 September 2014 orders of the Full Court in favour of Prentice that Ljiljana and another appellant pay 90% of the costs of an unsuccessful appeal brought against Prentice in his capacity as trustee of the property of Robert (Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450), Prentice having succeeded in that capacity at first instance with costs that were also confirmed on appeal (Coshott v Coshott [2013] FCA 907);
(5) 15 May 2015 orders of a Registrar of this Court in favour of Prentice in relation to the costs orders made by the Full Court on 23 September 2014, inter alia, confirming the appeal costs awarded against Ljiljana were deemed to be $77,300, confirming a certificate of taxation was to issue accordingly, and ordering that $2,000 security for costs of any taxation be paid to Prentice (accounting for the credit given in the bankruptcy notice);
(6) a document entitled “CERTIFICATE OF TAXATION” in favour of Prentice as trustee of the property of Robert in the sum of $77,300, itself undated, unsigned and unsealed, but contained within a single electronic document which included a notice of filing page generated electronically by the Court recording a lodgement date of 15 May 2015 and signifying acceptance for filing on 22 May 2015, with an electronic signature of the Registrar of this Court and with a court seal – a substantial issue is taken by Ljiljana as to the validity of this purported certificate of taxation constituted by this two-page document.
58 The bankruptcy notice for Ljiljana therefore relied upon two costs order debts quantified by two certificates of taxation, seeking the payment of a total of $649,318 ($576,018 plus $77,300, less a credit of $4,000 security for taxation that was forfeited to Prentice). Since 6 May 2003, bankruptcy notices had been permitted to be based on more than one debt: s 41(1)(b), Bankruptcy Act.
59 Ljiljana’s 6 April 2016 application to set aside the bankruptcy notice addressed to her was filed within the 21 days allowed for payment. That application on its face expressly relied upon only s 41(7) of the Bankruptcy Act. As required, Ljiljana’s application annexed a copy of the bankruptcy notice, together with the documents annexed to that bankruptcy notice, detailed above. Therefore, as with James, Ljiljana’s application on its face relied upon nothing more than an offsetting claim.
60 At the time of Ljiljana’s application to set aside her bankruptcy notice and continuing now, a statement of the grounds relied upon to set aside a bankruptcy notice is required to be in an affidavit accompanying the application by r 3.02(1)(a) of the Bankruptcy Rules 2016, which as noted above commenced on 1 April 2016, replacing the Bankruptcy Rules 2005. Ljiljana’s application to set aside her bankruptcy notice was accompanied by an affidavit of Robert, dated and filed 6 April 2016, which asserted a counter-claim, set-off or cross demand exceeding the amount claimed in the bankruptcy notice, referring to and annexing copies of the costs orders made against Prentice in the same three prior proceedings referred to above in relation to James’ application and copies of the same bills of costs lodged for taxation in those proceedings, together with the 30 December 2015 Deed (which is detailed further below) and the 23 March 2016 Deed (described as an amended deed of assignment), also detailed further below. That affidavit of Robert also asserted that the debt referred to in the bankruptcy notice, if owed at all, was not owed to Prentice in his capacity as trustee of the property of Robert as a bankrupt, but this ground did not apparently attach to any provision identified in the application. The required accompanying affidavit filed on behalf of Ljiljana therefore provided grounds in support of the offsetting claim under s 41(7) referred to in the application and also raised the separate ground, by way of submission only and without reference to any legislative provision of the Bankruptcy Act, concerning the capacity of Prentice in obtaining the bankruptcy notice.
Overview of the grounds advanced in each application to set aside the bankruptcy notices
61 It follows from the above that:
(1) the sole ground advanced by James in support of his application in the accompanying affidavit was an offsetting claim by reason of the 30 December 2015 Deed; and
(2) the only two grounds advanced by Ljiljana in support of her application in the accompanying affidavit were an offsetting claim by reason of the 30 December 2015 Deed and the 23 March 2016 Deed, and an additional ground about the capacity in which Prentice had caused the bankruptcy notice to be issued.
62 Prentice contends that each was not a valid application:
(1) because the 30 December 2015 Deed did not on its face create the mutual debt required to offset effectively the bankruptcy debts for either application;
(2) in the case of Ljiljana’s first ground, also because the deficiency in the 30 December 2015 Deed was not rectified by the 23 March 2016 Deed such that there still was no mutual debt; and
(3) in the case of Ljiljana’s second ground, also because it was obvious that Prentice caused the bankruptcy notices to issue in his trustee capacity.
63 In the alternative Prentice contended that even if the two applications are valid, James and Ljiljana are required to be, or alternatively should be, confined to the grounds they expressly stated in the accompanying affidavit in support of each application.
64 The three deeds of assignment designed to create offsetting claims were:
(1) the 30 December 2015 Deed, being prior to either bankruptcy notice being served and therefore prior to either application to set either aside;
(2) the 23 March 2016 Deed, being after James’ application to set aside, and prior to Ljiljana’s application to set aside; and
(3) the 6 May 2016 Deed, being comfortably after both applications to set aside were made, after the time for compliance with the bankruptcy notices had expired and on the Friday just before the first hearing date on Monday, 9 May 2016.
65 The effective and thereby enforceable assignment of a legal debt in New South Wales requires service on the creditor of notice of that assignment under s 12 of the Conveyancing Act 1919 (NSW). By at least 6 May 2016, such notices had been served on Prentice by being served on his solicitors in these proceedings in relation to all three deeds, but as the reasoning below indicates, that was too late. None of the three deeds were apparently duty stamped, but no point has been taken by Prentice in relation to that circumstance and any impact it might have.
66 The first attempt at an assignment to James and Ljiljana (and Ronald) of debts owed by Prentice for the evident purpose of defeating the bankruptcy notices was by way of a document entitled “Deed of Assignment” dated 30 December 2015. The 30 December 2015 Deed:
(1) nominated Fewin, Ronald and Ljiljana as the assignors of the benefit of the abovementioned costs orders made against Prentice in the Federal Circuit Court and in this Court; and
(2) nominated Ljiljana, James and Ronald as the assignees of the benefit of those costs orders.
67 The agreement and declaration part of the 30 December 2015 Deed was as follows:
NOW IT IS HEREBY AGREED AND DECLARED:
1. In consideration of the payment by the Assignees to the Assignors of the amount of $1.00, the receipt thereof is hereby acknowledged, the Assignors do hereby assign to the Assignees all their right, title and interest in and to every one of the costs orders referred to Recitals A and B above
2. The Assignors shall enforce each of the respective costs orders in their favour for the benefit of the assignees
68 Recital G to the 30 December 2015 Deed expressly indicated that the assignees wished to take the assignment of the benefit of the costs orders made against Prentice “jointly”. The debts upon which each of the bankruptcy notices were based were plainly joint and several. That difference was significant because of the requirement that offsetting claims be mutual and in the same interest. At some point, James and Ljiljana became aware of this problem and sought to rectify it by way of a further deed.
69 The second attempt at an assignment to James and Ljiljana (and Ronald) of debts owed by Prentice for the purposes of defeating the bankruptcy notices was by way of a document also entitled “Deed of Assignment” dated 23 March 2016. Apart from the date, every part of the 23 March 2016 Deed was the same as the 30 December 2015 Deed, except Recital G had the additional words “and severally”, so that it indicated that the assignees wished to take the benefit of the costs orders made against Prentice “jointly and severally”. The issue with the 23 March 2016 Deed was whether the assignors could effectively assign a debt that they had already assigned.
70 Written submissions for Prentice at least implicitly pointed to a problem with the 23 March 2016 Deed in purporting to assign a benefit that had already been assigned. It would seem, unless independently realised, that this provoked a third attempt at an assignment of the debts owed by Prentice by way of another document also entitled “Deed of Assignment” dated 6 May 2016. The named assignors and the named assignees were the same, in each case being all three of James, Ljiljana and Ronald. The intention was to convert the benefit of the joint debt they had received by the 30 December 2015 Deed into the benefit of a joint and several debt, so that it would be mutual with each of the bankruptcy notice debts. Importantly, as the 6 May 2016 Deed did not come into existence until after both of the applications to set aside the bankruptcy notices had been made and after the time for complying with each bankruptcy notice had expired, the service required on Prentice by s 12 of the Conveyancing Act required for rendering the assignment valid, effective and enforceable could not take place before that time either (noting as observed before that on the evidence, service took place the same day).
71 The 6 May 2016 Deed necessarily relied upon the 30 December 2015 Deed effectively assigning the benefit of the three debts owed by Prentice to James and Ljiljana (and Ronald), albeit only as a joint debt benefit. It is convenient to reproduce at this point the recitals and terms of the 6 May 2016 Deed after the naming of the parties, James, Ljiljana and Ronald, as both assignors and as assignees, in full:
WHEREAS
A. The Assignors entered into a Deed of Assignment on 30 December, 2015 (“the Deed”)
B The Assignors were advised that the Deed of Assignment may not have achieved assignment to them jointly and severally. To achieve the assignment to them jointly and severally a further Deed was entered into on 23 March, 2016.
C. The Assignors have now been advised that the 23 March 2016 Deed may not have
[sic: this line of Recital C is reproduced twice]
C. The Assignors have now been advised that the 23 March 2016 Deed may not have effectively achieved the assignment to them jointly and severally.
D. This Deed is to achieve the assignment of the debts to them jointly and severally.
[sic: no Recital E nor F]
G. The Assignees wish to take the assignment of the benefit of those costs orders (debts) jointly and severally
NOW IT IS HEREBY AGREED AND DECLARED:
1. In consideration of the payment by the Assignees to the Assignors of the amount of $1.00, the receipt thereof is hereby acknowledged, the Assignors do hereby assign to the Assignees all their right, title and interest in and to every one of the costs orders referred to Recitals A and B above jointly and severally.
2. The Assignors shall enforce each of the respective costs orders in their favour for the benefit of the assignees
GOVERNING LAW
3. This Deed is governed by and construed in accordance with the laws of New South Wales and the parties submit to the non-exclusive jurisdiction of its courts
72 Counsel for Prentice did not contend that the 6 May 2016 Deed could not in theory be effective in achieving its assignment purpose in the abstract, but rather relied upon this coming too late and being beyond the scope of the applications to set aside the bankruptcy notices, because it purported to create a new right well after the applications had been made to set them aside and well after the original time for compliance with the bankruptcy notices had expired.
73 Both James and Ljiljana were compelled to be called in both cases and made available for cross-examination pursuant to a request made under s 166 of the Evidence Act 1995 (Cth). However in the result that evidence tended to confirm that the deeds of assignment were genuine and accordingly that evidence does not need to be considered further as I have proceeded upon that basis in the absence of any submission on behalf of Prentice to the contrary. This issue may need to be revisited if any of the three deeds are sought to be relied upon in answer to a creditor’s petition.
The grounds of application and grounds of objection
Prentice’s grounds of objection to the applications
74 In each of the proceedings, Prentice filed a notice under r 2.06 of both versions of the Bankruptcy Rules stating grounds of objection to the applications. The terms of each of those notices are reproduced below, which are directed to the validity of the applications and the absence of a basis for concluding that the offsetting claims equalled or exceeded the bankruptcy debts. A further ground of objection for each application was “There is no evidence of the Applicant to support the Application”. This point was overtaken by events in that both James and Ljiljana were compelled to be and ultimately were cross-examined. Accordingly this ground of opposition will not be considered further.
In the matter of: James Coshott
1. The Registrar extended the time for compliance under Section 41(6A) of the Bankruptcy Act, 1966 without power as the Application is predicated on Section 41(7) of the Bankruptcy Act, 1966.
2. To the extent that the Application is founded under Section 41(7) of the Bankruptcy Act, 1966:
a) There is no identified cross claim, set-off or cross demand between the Applicant and the Respondent which satisfies the requirements of the subsection;
b) The costs the subject of the alleged cross claim, set-off or cross demand having been assigned as alleged, have not been taxed by a Registrar of the appropriate Court and are not capable of being the subject of a claim as asserted;
c) There is no evidence that any liquidated debt sought to be set-off is greater than or exceeds the judgment debt the subject of the Bankruptcy Notice.
d) The costs the subject of the alleged cross claim, set-off or cross demand having been assigned as alleged, have not been the subject of an estimate having been made by a Registrar;
e) The quantum of the costs the subject of costs orders in Federal Circuit Court proceedings SYG 2055/2013 have not been taxed or quantified but is less than the amount due in the Bankruptcy Notice;
f) The quantum of the costs the subject of costs orders in Federal Court proceedings NSD 786/2015 have not been taxed or quantified but is less than the amount due in the Bankruptcy Notice;
g) The costs in NSD 1412/2009 have been the subject of taxation in the sum of $576,018 and this taxation has been the subject of lengthy and detailed objections by the Applicant. The quantum of the matters in paragraphs (d) and (e) have not been finalised, but is likely to be much less than the judgment in the Bankruptcy Notice.
h) The costs the subject of the alleged cross claim, set-off or cross demand having been assigned as alleged, have not been otherwise the subject of an assessment by a Registrar and therefore are not quantified or accepted by the Respondent;
In the matter of: Ljiljana Coshott
1. There is no mutuality of dealings between the parties to the Bankruptcy Notice and the asserted Deeds of Assignment.
2. To the extent that the Application is founded under Section 41(7) of the Bankruptcy Act, 1966:
a) There is no identified cross claim, set-off or cross demand between the Applicant and the Respondent which satisfies the requirements of the subsection;
b) The costs the subject of the alleged cross claim, set-off or cross demand having been assigned as alleged, have not been taxed by a Registrar of the appropriate Court and are not capable of being the subject of a claim as asserted;
c) There is no evidence that any liquidated debt sought to be set-off is greater than or exceeds the judgment debt the subject of the Bankruptcy Notice.
d) The costs the subject of the alleged cross claim, set-off or cross demand having been assigned as alleged, have not been the subject of an estimate having been made by a Registrar;
e) The quantum of the costs the subject of costs orders in Federal Circuit Court proceedings SYG 2055/2013 have not been finally taxed but a preliminary quantification is less than the amount due in the Bankruptcy Notice;
f) The quantum of the costs the subject of costs orders in Federal Court proceedings NSD 786/2015 have not been taxed or quantified but is less than the amount due in the Bankruptcy Notice;
g) The costs in NSD 1412/2009 have been the subject of taxation in the sum of $576,018 and this taxation has been the subject of lengthy and detailed objections by the Applicant. This sum is due and payable by the Applicant. The quantum of the matters in paragraph (d) have not been finalised, but the preliminary quantification is less than the judgment in the Bankruptcy Notice.
h) The costs in NSD 2016/2013 have been the subject of taxation in the sum of $77,300, which is due and payable by the Applicant.
i) The costs the subject of the alleged cross claim, set-off or cross demand having been assigned as alleged, have not been otherwise the subject of an assessment by a Registrar and therefore are not quantified or accepted by the Respondent;
3. The second Amended Deed of Assignment purports to assign the chose in action which had been assigned in the first Deed of Assignment and was therefore not available to form part of the Amended Deed of Assignment.
James’ and Ljiljana’s grounds of argument
75 Between the 9 May 2016 and 17 June 2016 hearing dates, each of James and Ljiljana filed grounds of argument which I reproduce below, except the last ground in each which was abandoned and does not need to be repeated or referred to. Certain other grounds initially raised in written submissions were also not pressed by way of written grounds and do not need to be considered further. Oral applications were made on behalf of each of James and Ljiljana to rely upon the first three grounds set out below because these grounds were not referred to in the affidavits accompanying the applications to set aside the bankruptcy notices, nor were any relevant provisions of the Bankruptcy Act identified in the applications themselves in respect of these grounds. The fate of the applications is addressed below.
Grounds of Argument of James Coshott
1. The Certificate of Taxation was not entered.
2. The Certificate of Taxation was not served.
3. The Bankruptcy Notice was confusing in that it was in the name of the Respondent as a creditor in his own right (as appears from the Bankruptcy Notice) rather than as Trustee of the Bankrupt Estate (in which capacity the costs orders were made in his favour).
4. The Applicant has an offsetting claim by virtue of a combination of the three Deeds of Assignment.
Grounds of Argument of Ljiljana Coshott
1. Neither Certificate of Taxation was entered.
2. Neither Certificate of Taxation was served in time.
3. The Certificate of Taxation in NSD2016/2013 was not signed.
4. The Bankruptcy Notice was confusing in that it was in the name of the Respondent as a creditor in his own right (as appears from the Bankruptcy Notice) rather than as trustee of the bankrupt estate (in which capacity the costs orders were made in his favour).
5. The Applicant has an offsetting claim by virtue of a combination of the three Deeds of Assignment.
The six questions arising from the grounds, submissions and arguments
76 It is convenient to address the issues in this case by reference to six specific questions drawn from the above written grounds of objection to the applications relied upon by Prentice, and drawn from the above written grounds of argument relied upon by James and Ljiljana, as both sets of grounds were developed and refined in written and oral submissions and in the course of the hearing over three separate days. Along the way, a number of issues, grounds and arguments were not pressed or otherwise fell away and accordingly will not be addressed at all.
77 The six questions for resolution are as follows:
(1) Whether the debts owed by Prentice were assigned to James and Ljiljana in a manner that was effective for the purposes of creating an offsetting claim for the purposes of ss 40(1)(g) and 41(7) of the Bankruptcy Act (noting that the issue of quantum is addressed in question 6).
(2) Whether the applications to set aside the bankruptcy notices were valid. That is, whether the applications to set aside the bankruptcy notices sufficiently complied with the requirements of ss 40(1)(g) and 41(7) of the Bankruptcy Act, together with:
(a) r 3.02(1)(b)(i) and (2) of the Bankruptcy Rules 2005 applicable to James’ application; or
(b) r 3.02(1)(a) and (3) of the Bankruptcy Rules 2016 applicable to Ljiljana’s application,
so as to engage the jurisdiction of the Court and give rise to the automatic statutory extension of time for compliance with the bankruptcy notices in s 41(7). It should be noted that there was technical non-compliance by Ljiljana with r 3.02(2) in that the bankruptcy notice accompanied the application rather than being attached to the accompanying affidavit, but that is a defect of no moment and if formal dispensing of the Rule in that respect is required it is hereby so directed.
(3) Whether additional grounds to those contained in the accompanying affidavit in support of each application were able to be or should be permitted. That is, if the accompanying affidavits sufficiently complied with the Bankruptcy Act and the applicable version of the Bankruptcy Rules to engage the jurisdiction of the Court, whether the grounds were able to be expanded, as a question of legal capacity or alternatively discretion, to include additional grounds, as opposed merely to allowing additional evidence to be adduced or arguments advanced in support of existing grounds.
(4) Whether the certificates of taxation annexed to the bankruptcy notices were valid and effective in terms of compliance with the requirements for their issue and service (an additional ground sought to be relied upon by both James and Ljiljana).
(5) Whether the capacity in which Prentice obtained the bankruptcy notices was confusing so to as to render them invalid (an original ground for Ljiljana and an additional ground sought to be relied upon by James).
(6) If the debts owed by Prentice were effectively assigned for bankruptcy purposes, whether the Court was satisfied that the debts so assigned were equal to or exceeded the bankruptcy debts for the purposes of ss 40(1)(g) and 41(7) of the Bankruptcy Act.
Question 1: whether the debts owed by Prentice were assigned to James and Ljiljana in a manner that was effective for the purposes of creating an offsetting claim for the purposes of ss 40(1)(g) and 41(7) of the Bankruptcy Act
78 The real dispute between the parties in relation to the offsetting claims relied upon by James and Ljiljana comes down to two issues. The first issue is whether there has been an effective assignment of a mutual debt or debts as required by ss 40(1)(g) and 41(7) of the Bankruptcy Act before the time for compliance with the bankruptcy notice expired. The second issue, addressed in answer to question 6, is whether the debts meet the s 40(1)(g) requirement of equalling or exceeding the bankruptcy notice debts.
79 Despite arguments to the contrary on behalf of both James and Ljiljana, upon reviewing the transcript for the substance of those arguments and upon considering the authorities detailed above, there does not seem to be any serious doubt, following the principle so clearly articulated in the quote from Stec above, that the 30 December 2015 Deed expressly did not assign debts that were mutual to those relied upon in support of the bankruptcy notices. The 30 December 2015 Deed could not of itself thwart either of the bankruptcy notices by reason of the glaring and inescapable mutuality defect. That reality was the express reason for the attempts to address this problem by way of the 23 March 2016 Deed and 6 May 2016 Deed.
80 The problem with the 23 March 2016 Deed is that the benefits sought to be assigned jointly and severally had already been assigned only jointly by the 30 December 2015 Deed, such that the purported assignors had nothing left to assign: Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 26-28. The 23 March 2016 Deed did not even refer to the 30 December 2015 Deed, let alone attempt to “recall” the assignment, assuming that to be possible, which is doubtful: Norman at 29.2. As noted above, a problem with the 23 March 2016 Deed was at least adverted to in written submissions filed by counsel for Prentice. Senior counsel for both James and Ljiljana seemed to accept that there was at least an arguable problem with the 23 March 2016 Deed, although that was not expressly conceded. In my view the problem was not just arguable, but fatal to any reliance by James and Ljiljana on the 23 March 2016 Deed.
81 On its face, the 6 May 2016 Deed does appear to convert the debt that was assigned jointly to James and Ljiljana by way of a further assignment to themselves to create a joint and several debt. However, for the reasons that follow I do not need to determine finally or conclusively whether that is so. That may fall for determination at a later time when it is more fully argued. Rather, for the purposes of these reasons I assume that the 6 May 2016 assignment was effective because it does not affect the ultimate outcome. Thus, subject to timing, which is of critical importance, it would seem that as at 6 May 2016, arguably there was the assignment to James and Ljiljana of a joint and several debt, mutual to the bankruptcy debts.
Question 2: whether the applications to set aside the bankruptcy notices were valid
82 The primary underlying question was whether valid applications to set aside the bankruptcy notices had been made as required by ss 40(1)(g) and 41(7) of the Bankruptcy Act, together with the applicable version of r 3.02 of the Bankruptcy Rules, so as to engage the jurisdiction of the Court and also give rise to the automatic statutory extension of time for compliance with the bankruptcy notice until the end of the day upon which judgment is given.
83 As noted in the above quote from Stec, a critical aspect of the requirement of a “counter-claim, set-off or cross demand” as that phrase is used in ss 40(1)(g) and 41(7) of the Bankruptcy Act is that the bankruptcy debt and the offsetting claim sought to be relied upon must be “mutual and due in the same right”. No issue was raised by Prentice as to the offsetting claim not being in the same right. However he strongly contested the capability of any of the deeds to create an effective offsetting claim for bankruptcy purposes. Prentice asserted that for this reason alone, the applications to set aside the bankruptcy notice did not sufficiently comply with the requirements of ss 40(1)(g) and 41(7) of the Bankruptcy Act and r 3.02 of the applicable version of the Bankruptcy Rules, so as to engage the jurisdiction of the Court.
84 As the analysis shows in relation to question 1 above, the 30 December 2015 Deed was not effective because of a want of mutuality and the 23 March 2016 Deed was wholly ineffective as was virtually conceded by senior counsel for both James and Ljiljana. As also noted above, it is at least arguable that the 6 May 2016 Deed read with the 30 December 2015 Deed was sufficient to create a mutual claim, leaving aside questions of quantum.
85 The conclusion reached as to the 30 December 2015 Deed is fatal to the validity of James’ application. At the time that application was made, the 30 December 2015 Deed relied upon was expressly stated to assign the claimed offsetting debt jointly only, whereas the bankruptcy debt was joint and several. The 30 December 2015 Deed did not create an offsetting claim as relied upon by James’ application that was “effective”, “real”, bona fide or on its face showed a relevant offsetting claim. It expressly only created an assigned joint debt that was ineffective to meet the bankruptcy debt. No later deed brought into existence after the time for complying with the bankruptcy notice could retroactively cure this want of competency, even if the time for compliance with the bankruptcy notice is later extended because the terms of s 41(7) address the point in time at which the application is made. The 23 March 2016 Deed did not do this in any event, and the 6 May 2016 Deed, even if effective to cure the problem, was too late as it was not brought into existence until after the time for compliance with both bankruptcy notices had expired (James’ 21 day period for compliance having expired on 26 February 2016, and Ljiljana’s 21 day period having expired on 14 April 2016).
86 The conclusion reached as to the 30 December 2015 Deed, in combination with the conclusion reached as to the 23 March 2016 Deed is also fatal to the validity of Ljiljana’s application. That is because she has precisely the same problem with the 30 December 2015 Deed as does James: the 23 March 2016 Deed is ineffective to cure the problem; and the 6 May 2016 Deed is too late.
87 Strictly speaking, the adverse answers to the second question are sufficient to dismiss each of the applications to set aside the bankruptcy notices. However, because that conclusion may be challenged, it is appropriate that the remaining questions are addressed.
Question 3: whether additional grounds to those contained in the applications and supporting affidavits were permitted
88 The underlying question was, if, contrary to the findings made above, the applications did sufficiently comply with the Bankruptcy Act and r 3.02 of the relevant version of the Bankruptcy Rules, and were valid, whether the grounds were able to be expanded, as a question of power or discretion, to include additional grounds. It did not appear to be disputed that the Court could allow additional evidence to be adduced or arguments advanced in support of existing grounds already validly raised.
89 As foreshadowed earlier, none of the authorities discussed in detail above suggest that additional grounds not advanced at the time of the original application can be added later as of right. The authorities simply do not go that far. The bankruptcy cases discussed above do suggest that a further offsetting claim may be relied upon going beyond an original valid application, but that does not suggest that this extends to newly created offsetting claims, as opposed to extending reliance to existing claims not previously identified at the time of the application. To find otherwise would be to suggest that an invalid application at the time it was filed could be made valid at a later point of time, after the time for compliance with the bankruptcy notice has expired. I am unable to accept that this could possibly be the correct way in which to interpret s 41(7) as it would entail treating invalidity, and any act of bankruptcy thereby resulting, as being contingent, contrary to the terms of the provision and the authorities discussed above.
90 A related issue raised is whether r 3.02 of either version of the Bankruptcy Rules, in dictating that grounds must be set out in an accompanying affidavit, precludes an applicant seeking to set aside a bankruptcy notice from raising any new or additional grounds in a subsequent affidavit or otherwise. The primary argument made on behalf of James and Ljiljana was that there was no such limitation, but the alternative argument was to refer to the power of the Court to dispense with the effect of the rules of Court to allow an additional claim to be brought, presumably by leave. It was suggested by the applicants that the proper approach to any limitation to be found within r 3.02 is to have regard to the attainment of justice. It was also argued on behalf of both James and Ljiljana that by the time the matter came on for the final hearing Prentice had ample opportunity to understand the case brought in support of the setting aside of the bankruptcy notices and that there would be significant prejudice to each applicant in not allowing the additional grounds to be run. The difficulty with this argument is that while it may be tenable in some cases, it is not in this case because it is not just leave or dispensation in relation to non-compliance with the Rules in relation to the accompanying affidavit that has to be granted, but disregarding the terms of s 41(7), which is beyond the power to dispense with compliance with rules.
91 In my view, even if there is a capacity to enlarge the grounds for an application to set aside a bankruptcy notice beyond an existing offsetting claim, which I doubt except perhaps some enlargement as to an existing offsetting claim per Foyster, it would be a very unhappy precedent to allow additional technical arguments to be run in relation to asserted defects in a bankruptcy notice unless they are shown to be of real substance, in part measured by the grounds ultimately being capable of succeeding. That is very familiar reasoning when it comes to the grant of leave in a wide range of circumstances.
92 It follows that whilst these reasons consider each of the additional grounds advanced for both James and Ljiljana in relation to question 4 and for James only in relation to question 5 and each fails, that is done for the purposes of completeness and considering whether leave should be granted to rely upon them. For that reason, even if I am wrong about the applications not being valid, I would not grant leave to go beyond the original grounds advanced in the accompanying affidavit in support of each application to set aside the respective bankruptcy notices addressed to James and to Ljiljana.
Question 4: whether the certificates of taxation annexed to the bankruptcy notices were valid and effective in terms of compliance with the requirements for their issue and service
93 This question arises upon the assumption that I am wrong in concluding, contrary to submissions made on behalf of James and Ljiljana, that they did not raise these grounds in their applications and accompanying affidavits, by reason, so it was argued, of the asserted defect and therefore the ground to which it relates being readily apparent on the face of the impugned certificates of taxation. In my opinion, the requirement to state grounds as set out in each version of r 3.02 of the Bankruptcy Rules is clear and cannot be met in such a vague and unsatisfactory way. That does not meet the obvious purpose of those Rules.
94 Prentice relied upon an affidavit of Christie Lonnon sworn 6 May 2016 and read in both applications, which detailed the process by which the costs orders the subject of the two bankruptcy notices (leading to the one certificate of taxation for James and the two certificates of taxation for Ljiljana) went through a process of review leading up to the ultimate issue of the certificates of taxation and service of them upon the solicitors for Ljiljana and James for that taxation. The information in Ms Lonnon’s affidavit comes from a series of documents annexed thereto and is best described chronologically as follows.
The certificate of taxation for $77,300 – only Ljiljana
95 On 5 June 2015, Ljiljana, by her solicitors, Martin Place Lawyers (also the solicitors for James), applied to the Court for a review of the taxation and any consequential orders, in proceedings in the Federal Court (Full Court) NSD 2016/2013. These were the appeal proceedings in which, on 23 September 2014, the Full Court ordered that Ljiljana and her co-appellant, Schlotzsky’s Nominee Company Pty Limited, pay 90% of the costs of Prentice. It was that costs order which resulted in a Registrar of the Court on 15 May 2015 making orders, inter alia, confirming that Prentice’s costs under order 1 of the Full Court made on 23 September 2014 were deemed to be $77,300 and a certificate of taxation was to issue accordingly, and a consequential order that the security for taxation of $2,000 paid by Ljiljana on 29 December 2014 be paid to Prentice by payment to his solicitor.
96 In furtherance of the 15 May 2015 order of the Registrar that a certificate of taxation issue, the solicitors for Prentice electronically lodged a draft certificate of taxation on 15 May 2015. On 22 May 2015 the certificate of taxation was issued electronically by way of a notice of filing document, which became part of the certificate of taxation, bearing the seal of the Court and the electronic signature of the Registrar. It was that certificate of taxation which was therefore the subject of Ljiljana’s application for review which challenged all items and sought orders that “the Certificate of Taxation issued herein be set aside” and in its place a certificate of taxation issue that Prentice had a nil entitlement to costs, that Prentice pay the costs of the taxation and that the $2,000 paid by Ljiljana be paid out to her forthwith. The inescapable inference is that the certificate of taxation issued on 22 May 2015 had to have been served on Ljiljana within 14 days of its issue, via service on her solicitor, because her solicitor signed the notice to review it on 5 June 2015, and the orders sought in that application both referred to the certificate of taxation and sought a stay of its execution. That application for review was subsequently abandoned.
The certificate of taxation for $576,018 – James and Ljiljana
97 On 12 June 2015, the solicitors for James and Ljiljana signed a notice of objection to the $576,018 estimate of costs in matter NSD 1412/2009 pursuant to r 40.21(1) of the Federal Court Rules 2011 (Cth), which was then filed on 16 June 2015. From that point onwards, if not before, unless and until advised to the contrary, the solicitors for Prentice were entitled to deal with James and Ljiljana’s solicitors as their legal representatives and to effect service upon them by service upon their solicitors in relation to those costs. Indeed, ethical obligations would ordinarily require that to take place rather than direct service upon James and Ljiljana in respect of that costs dispute.
98 On 16 June 2015, the solicitors for Prentice sent to the solicitors for Ljiljana an amended notice of appearance in respect of Federal Circuit Court proceedings number SYG 1846/2014 (the details of which are not relevant for present purposes). That amended notice of appearance referred to and enclosed:
(1) the abovementioned order from the Registrar dated 15 May 2015 in relation to, inter alia, the confirmation of costs of $77,300 and a certificate of taxation to issue;
(2) the order of the Full Court of 23 September 2014 giving rise to the liability for costs on the part of Ljiljana;
(3) a letter from a Deputy District Registrar of this Court dated 28 May 2015 which gave notice of the estimate of the approximate total of costs of $576,018 in Federal Court proceedings NSD 1412/2009, and that a certificate of taxation would likely issue in that amount; and
(4) a copy of orders made by Buchanan J on 10 September 2013 and 19 September 2014.
99 On 2 October 2015, the solicitors for James and Ljiljana signed a notice of objection to the bill of costs in matter NSD 1412/2009 pursuant to r 40.25(1) of the Federal Court Rules.
100 On 20 October 2015, a taxation hearing in respect of costs orders in proceedings NSD 1412/2009 took place before a Registrar with counsel appearing for Ljiljana and James. At the conclusion of that hearing the Registrar delivered an ex tempore judgment for the taxation in the amount of $576,018. The taxation decision was reflected in an order made by the Registrar that day that a certificate of taxation be issued in those proceedings in that amount. A draft certificate of taxation was prepared by the solicitors for Prentice, and sent by them to the solicitors for James and Ljiljana two days later on 22 October 2015 under cover of a letter to the trustees for sale in proceedings NSD 1412/2009. It follows that although a sealed copy of the certificate of taxation (subject to the legal argument about the sufficiency of that process detailed below) was not provided until a little later, there is no doubt that through their counsel, both James and Ljiljana were, on the day that the taxation determination was made and an order that a certificate of taxation issue was made, on notice of both that fact and the amount involved.
101 On 10 November 2015, the solicitors for Stephen Barry and Martin Board in related proceedings in the Federal Circuit Court (SYG 1846/2014), who happen to be the same solicitors representing Prentice in these proceedings, sent two substantially identical letters to the solicitors for Ljiljana, who happened to be the same as the solicitors for James and Ljiljana in the $576,018 costs dispute, enclosing a copy of the certificate of taxation, signed, dated 20 October 2015 and sealed in proceedings NSD 1412/2009 in the sum of $576,018, and a copy of the certificate of taxation in Full Court proceedings NSD 2016/2013 in the sum of $77,300. The latter is in a form which is disputed and dealt with below.
Arguments for invalidity of the certificates of taxation
102 Both James and Ljiljana contend that the certificates of taxation upon which the bankruptcy notices are based do not comply with the Federal Court Rules and therefore cannot be regarded as being enforceable orders of this Court. As each of the senior counsel for James and Ljiljana essentially adopted the submissions of the other, there is only a limited need to identify the source of any particular argument except at any relevant point of difference.
103 The arguments relied upon by senior counsel for Ljiljana and substantially adopted by senior counsel for James may be summarised as follows:
(1) the bankruptcy notice addressed to her has attached to it two certificates of taxation;
(2) while the $576,018 certificate of taxation on its face complies with the requirements of r 40.32(1) as it is dated, signed by a Registrar (who is in turn a taxing officer) and sealed, it has not been separately entered as an order, said to be required by r 39.31 as detailed further below – this is also the sole certificate of taxation upon which the bankruptcy notice issued to James relies;
(3) the $77,300 certificate of taxation (in relation to Ljiljana’s application only), although preceded by an order of a taxing officer that Prentice’s costs are deemed to be that amount and a certificate of taxation is to issue accordingly, itself appears as a document headed “CERTIFICATE OF TAXATION” that is undated other than “2015”, not signed and not sealed and therefore does not comply with the requirements of r 40.32(1), in addition to not being entered separately as an order as required by r 39.31;
(4) where a costs order is made but depends for its enforceability on the fulfilment of further preconditions, such as compliance with Court rules, it is not a final order and cannot found a bankruptcy notice, although the particular effect, if any, of a certificate or order depends on the specific rules of the court and “the particular regime in force in the relevant jurisdiction for the assessment and recovery of legal costs”: Franks v Warringah Council [2003] FCA 1047; (2003) 131 FCR 287 at 294 [17];
(5) while the original order for costs is the ultimate source of the obligation on the debtor to pay those costs, it is the formal document that issues which determines finally the debt due and which is enforceable as a judgment: Franks at 294 [19];
(6) in Franks it was also observed at 295 [24]:
… the status of an order or certificate of an officer of a court, or other person, authorised to assess the amount payable under an order of a court which requires the payment of unquantified legal costs is dependent on the terms of the statutory instrument governing the relevant order or certificate.
(7) in Re Williams; Ex parte Alberton Electrical Service Pty Ltd (1982) 43 ALR 552 at 558 it was said:
… I am setting aside the bankruptcy notice on two grounds, both of which are highly technical, and in circumstances where there is no evidence that the debtor was in fact misled. However, the practice of the courts exercising jurisdiction in bankruptcy is, for good reason, to construe bankruptcy notices strictly and to require strict compliance with the provisions of the relevant Acts and Rules of Court … [C]reditors who avail themselves of proceedings of this nature to enforce payment of debts must be prepared to adhere to the requirements of the Acts and Rules, however technical they may appear to be …
(8) Re Williams was endorsed in subsequent cases; see also Re Wimborne; Ex parte The Debtor (1979) 24 ALR 494 at 498.7 to like effect;
(9) the views expressed in the cases referred to in the preceding subparagraphs have been endorsed in The Australian Steel Company (Operations) Pty Ltd v Lewis [2000] FCA 1915; (2000) 109 FCR 33 (a decision of the Full Court) at 41-2 [23] quoting Wimborne, and in other cases to like effect;
(10) rule 40.32(1) requires a certificate of taxation to be served on the parties responsible for payment of the costs within 14 days after the date of issue by the party who filed the bill;
(11) rule 40.32(2) deems a certificate of taxation to have the force and effect of an order of the Court;
(12) rule 39.31(1)(a) and (b) require an order to be entered if it is to be served or enforced, and it is reasonable to assume that a certificate of taxation is an order given that such certificates:
(a) are “customarily entered into the system”;
(b) can be enforced given that they are deemed to have the force and effect of an order of the Court; and
(c) must be served on the parties named therein as per r 40.32(1);
(13) rule 39.35(1) provides that an order is authenticated if it is signed and the court seal or stamp of a District Registry is affixed by the Court, a person at the direction of the Court or a Registrar;
(14) section 37 of the Federal Court Act requires all “process” to be sealed, and signed by the Registrar, a District Registrar, or anyone acting with authority of the Registrar or a District Registrar, which includes the electronic signature; and
(15) “obviously” the second certificate of taxation does not comply with the above requirements because it is neither signed nor sealed, nor was it served by Prentice on Ljiljana within 14 days of it being issued. The Rules envisage that for a certificate of taxation to have effect it must be signed, sealed and served, and until those steps are taken no valid certificate of taxation is issued; that is, until perfected and authenticated by being signed, sealed and served, the purported certificate of taxation is of no effect: see by analogy Jensen v Queensland Law Society Inc [2006] FCA 1206; (2006) 154 FCR 525 at [8].
104 The above arguments are superficially attractive. However in my opinion closer examination reveals them to be misconceived. It is convenient to deal with these issues under a series of headings identifying the topics being addressed.
Non-entry of certificates of taxation – r 39.31
105 It is erroneous to conclude that the certificate of taxation provisions in r 40.32 of the Federal Court Rules are subject to the order entry requirements in r 39.31 or the order authentication requirements in r 39.35, or indeed any of the requirements or other provisions in Division 39.4. A plain reading of r 40.32 makes it tolerably clear that is not so. The scheme for certificates of taxation is plainly designed to dispense with a requirement of separate entry of certificates of taxation as orders, removing a layer of needless cost and delay. Were that not so there would be no purpose in r 40.32(2) providing “A certificate of taxation has the force and effect of an order of the Court”. There is no apparent reason why, when a certificate of taxation has issued in accordance with r 40.32, it is necessary to go through a separate and duplicate process of entry as an order in accordance with r 39.31, or a duplicate process of dating, signing and sealing as an order in accordance with r 39.35. On the argument expressly advanced by senior counsel for Ljiljana, such a certificate of taxation would be required to be signed twice, dated twice and sealed twice. There is no apparent reason for having that duplication; senior counsel could provide none. In my opinion, rr 39.31 and 39.35 have no application to certificates of taxation.
106 This conclusion resolves adversely to both James and Ljiljana the suggestion that either certificate of taxation was unenforceable by reason of not being entered as an order.
$77,300 certificate of taxation invalidates Ljiljana’s bankruptcy notice because it was not enforceable
107 It was submitted on Ljiljana’s behalf that any finding of validity as to the larger $576,018 certificate of taxation would not overcome the invalidating effect of the $77,300 certificate of taxation due to it not being enforceable, such that the entire bankruptcy notice was still liable to be set aside. For the purposes of this argument, I have assumed in Ljiljana’s favour that the $77,300 certificate of taxation is not enforceable, and have factually addressed this question later.
108 Reliance was placed on a Federal Circuit Court decision of Broadbent v Medical Board of Australia [2014] FCCA 1406 at [57]-[58], but that decision was reversed on appeal: [2015] FCA 717; (2015) 241 FCR 419. It is therefore safer to go to the authority to which the learned Federal Circuit Court judge referred in those paragraphs.
109 The first of those authorities was Hudson v Donald [1997] FCA 852 (appeal dismissed by the Full Court on 11 March 1998: [1998] FCA 227) at pp 6-7 in which Lindgren J held that s 41(5) of the Bankruptcy Act did not apply only to the total sum in a bankruptcy notice, but to each of its constituent parts, such that its protective effect could apply to individual debts, not just to the total debt. This interpretation given to s 41(5) was adopted by Gilmour J in Deputy Commissioner of Taxation v Cumins (No 5) [2008] FCA 794; (2008) 72 ATR 398 at 406 [33] in which his Honour also applied the reasoning and observations of the Full Court in Seovic Civil Engineering Pty Ltd v Groeneveld [1999] FCA 255; (1999) 87 FCR 120 at 128-9 as to the requirement of notice of the particular misstatement relied upon so as to trigger a valid objection to the validity of the bankruptcy notice. Their Honours in Seovic, in the following passage at 129 [37], observed that the object of a notice under s 41(5) is to inform the creditor that the debtor disputes the bankruptcy notice and does so on the ground of a misstatement contained in that notice to give the creditor the opportunity to consider whether the bankruptcy notice should be withdrawn and a fresh notice, correcting the misstatement, issued. That policy consideration may have some bearing on the issue of costs in the event that bankruptcy notices are set aside on a ground that was not originally raised in a supporting affidavit or affidavits filed within time.
110 The submissions for Ljiljana appear to overlook the import of the above decision of the Full Court in Seovic, which makes it clear that if a misstatement is due to an amount being included that should not have been included for whatever reason (such as an unenforceable certificate of taxation), it is the identification of that reason that gives rise to the right to object to validity upon that ground. Such an objection does not take it into a different category, but rather is the basis upon which the objection is raised. It is therefore incorrect to characterise the complaint made about the $77,300 certificate of taxation as being a separate ground to one made under s 41(5), but rather is in fact a component of a s 41(5) objection.
111 In relation to Ljiljana, the failure of this argument also means that the great bulk of the amount sought by the bankruptcy notice against her is unaffected. That means the substantive defect is only a misstatement of the amount due. By the operation of s 41(5) of the Bankruptcy Act, that is not an invalidating defect unless, within the time allowed for payment, notice is given of invalidity for that reason. There is no evidence of any such notice having been given. Strictly speaking, this conclusion means that the other defects relied upon by Ljiljana, even if upheld, will not result in this ground causing the bankruptcy notice to be required to be set aside. However for completeness, and in case I am wrong in my conclusion as to the effect of s 41(5), it is appropriate to address the remaining arguments on this point.
$77,300 certificate of taxation not enforceable because it was not signed and sealed
112 Ljiljana contends that the purported second certificate of taxation for $77,300 does not comply with the requirement that it be signed and sealed, relying on the authority referred to in the summary of submissions made on her behalf above requiring strict adherence to all formal requirements. The soundness of arguments based on the historically highly technical approach to bankruptcy notices in a long line of authority culminating in the Full Court decision in Lewis must be approached with considerable caution. Lewis was overruled by the High Court in Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409 at 412 [5], finding it was wrongly decided. All bankruptcy notice cases now need to be considered through the prism of Adams v Lambert. There is no point in citing or relying on pre-2006 authority if it is not compatible with the High Court’s focus on substance rather than form in the application of s 306 of the Bankruptcy Act: see Adams v Lambert at 421-2 [34].
113 Section 306(1) of the Bankruptcy Act provides:
306 Formal defect not to invalidate proceedings
(1) Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.
114 What emerges from Adams v Lambert is that when an error in a bankruptcy notice is proven, the issue is not merely whether a debtor could be misled, but whether a debtor could be misled as to what they had to do to satisfy the bankruptcy notice. The latter is a defect that s 306 cannot cure. In Adams v Lambert there was no doubt the debtor had to pay a sum which included post-judgment interest. The fact that a mistake had been made in referring to the wrong provision of the District Court Act 1973 (NSW) was held to be covered by s 306 of the Bankruptcy Act 1966. The bankruptcy notice was misleading in form but not in substance, nor in what the debtor had to do, namely pay the judgment debt which included pre-judgment interest plus post-judgment interest.
115 The first question, before considering s 306(1), is whether the second certificate of taxation was defective. In my opinion it was not. That is because the above arguments overlook the effect of the electronic notice of filing that accompanies and is a part of the certificate of taxation. That notice of filing bears the date of 22 May 2015, the electronic signature of the Registrar of the Court and the seal of the Court. The second question raised by s 306(1) is whether, assuming that I am wrong and the form of the second certificate of taxation for $77,300 was defective, that is in all the circumstances only a formal defect, or whether it is a substantive defect. This question needs to be answered by a careful consideration of the applicable Rules against what has been done. Both questions are considered further below.
116 Sections 36 and 37 of the Federal Court Act provides:
36 Seal of Court
(1) The Court shall have a seal, the design of which shall be determined by the Attorney-General.
(2) The seal of the Court shall be kept at the Principal Registry in such custody as the Chief Justice directs.
(3) The Registrar shall have in his or her custody a stamp the design of which shall, as nearly as practicable, be the same as the design of the seal of the Court, with the addition of the words “Principal Registry”.
(4) The District Registrar in respect of each District Registry shall have in his or her custody a stamp the design of which shall, as nearly as practicable, be the same as the design of the seal of the Court, with the addition of such words as the Chief Justice directs for the purpose of relating the stamp to that District Registry.
(5) A document or a copy of a document marked with a stamp referred to in subsection (3) or (4) is as valid and effectual as if it had been sealed with the seal of the Court.
(6) The seal of the Court and the stamps referred to in this section shall be affixed to documents as provided by this or any other Act or by the Rules of Court.
37 Writs etc.
(1) All writs, commissions and process issued from the Court shall be:
(a) under the seal of the Court; and
(b) signed (including by way of electronic signature) by the Registrar, a District Registrar or an officer acting with the authority of the Registrar or a District Registrar.
(2) For the purposes of paragraph (1)(b), a document is taken to be signed by the Registrar if the electronic signature of the Registrar is applied to the document by an officer acting with the authority of the Registrar.
(3) In this section:
electronic signature of a person means the person’s unique identification in an electronic form that is approved by the Registrar.
117 I note for completeness that from 1 July 2016, references to “Registrar” are replaced with “Chief Executive Officer”: Courts Administration Legislation Amendment Act 2016 (Cth), No. 24, 2016.
118 It is therefore clear that the Federal Court Act, in requiring process issued from the Court be sealed and signed expressly, contemplates and facilitates that taking place electronically. It also provides that the Federal Court Rules or any other Act is to determine how seals and stamps of the Court may be applied.
119 There is nothing in the Federal Court Act or Federal Court Rules that suggests that a document issued by the Court must be drafted internally. To the contrary, r 39.33 provides, for example, that “If a party wants to have an order entered, the party may lodge with the Registrar a draft of the order” (emphasis added). Moreover, the certificate of taxation form (Form 132) is freely available on the Federal Court website for parties to download and complete the relevant fields, and r 40.32(1) puts the onus on the party who filed the bill of costs (i.e. the party seeking to enforce the amount identified in the certificate of taxation) to serve the certificate of taxation on the party responsible for the payment of costs within 14 days of the certificate being issued. Accordingly, there was nothing preventing the second certificate of taxation being drafted by Prentice’s solicitors and being filed with the Court in order that it could be issued. It is apparent that upon a Registrar (taxing officer), on 15 May 2015, ordering that a certificate of taxation issue for the sum of $77,300, on the same day Prentice’s solicitors filed a draft certificate of taxation and electronically lodged it for the Court to issue it.
120 Once it was filed, it is plain that the certificate did not automatically issue. Rather, one week later on 22 May 2015, the draft certificate of taxation was accepted for filing and it was then issued electronically with a page entitled “NOTICE OF FILING”. That document states on its face that, as required by the Court’s Rules, the “notice of filing” page had been inserted as the first page of the document which had been accepted for filing and was to be taken to be part of that document.
121 Division 2.3 of the Federal Court Rules deals with lodging and filing documents as follows:
(1) Rule 2.21(1)(d) provides that a document may be lodged with the Court by being sent by electronic communication to a Registry, in accordance with r 2.23.
(2) Rule 2.21(4) provides that, subject to rr 2.22 and 2.23, a document that is required to be sealed, stamped or signed by the Court must be accompanied by the required number of copies for sealing, stamping or signing. That is, any requirement to lodge a paper copy of the document for sealing, stamping or signing is qualified by the option of using a fax, as provided by r 2.22, or by sending a document by electronic communication, as provided by r 2.23.
(3) It follows that the Rules expressly contemplate that the traditional method of lodging a document for issue by the Court in paper form may be done instead by electronic means.
(4) Rule 2.23 provides the means by which a document can be sent by electronic communication, including a need for substantial compliance in accordance with r 2.12 (compliance with approved forms) and r 2.13 (the requirements for appropriate titles).
(5) Rule 2.24(1) provides that if a document sent to a Registry by electronic communication in accordance with r 2.23 is accepted at the Registry and is a document that must be signed or stamped, the Registrar will, for documents other than those required to be endorsed with a date for hearing, insert a notice of filing as the first page of the document. Rule 2.24(2) provides that if a notice of filing has been inserted as the first page in accordance with subrule (1), the notice is taken to be part of the document for the purposes of the Federal Court Act and the Federal Court Rules.
122 It follows that for any document lodged with the Registry for the purpose of having it issued by sealing, stamping or signing or some combination of the three, the effect of the combination of rr 2.21, 2.23 and 2.24 is that those formal requirements are able to be affixed via the notice of filing and treated as though those particular features appeared on the face of the document so issued.
123 An essential part of the argument for Ljiljana is that certificates of taxation are in a different category to any other sort of document issued by the Court. I am unable to see any logic or reason behind that proposition. While certificates of taxation may be seen to be somewhat different to other documents insofar as the Federal Court Act, Federal Court Rules or any other relevant legislative regimes make different provisions for them, nonetheless that Act and those Rules do not constrain the Court’s use of electronic communications or stamping, singing and sealing for certificates of taxation in the manner suggested by counsel for Ljiljana.
124 As long ago as 1998, when the current electronic age was still in its relative infancy, Hill J in St George Bank Ltd v Klintworth (1998) 86 FCR 240 was dealing with the terms of reg 4.01(1) of the Bankruptcy Regulations 1996 (Cth) which then provided (as in substance it still does) that in order to apply for the issue of a bankruptcy notice, a person had to lodge with the Official Receiver a duly completed draft bankruptcy notice together with one of a list of documents in respect of the final judgment or final order specified by the person on the approved form, one of which was “a copy of the entry of the judgment or order certified as a true copy of that entry and sealed by the court or signed by an officer of the court”.
125 What in fact happened in Klintworth was that there was annexed to the bankruptcy notice in question a computer-generated document from the District Court of New South Wales entitled “Notice of Entry of Default Judgment” which was sealed but which was not certified as a true copy. Hill J reasoned that this would not constitute a defect (although his Honour also considered that if it were a defect it may be cured by s 306 because it obviously was not a case where it could be said that any reasonably debtor might be confused, misled or otherwise led into error). His Honour considered at 242E that there was no need to give the word “copy” a narrow interpretation and that a computer-generated document which contained particulars of the judgment amounted, “having regard to modern technology”, to an appropriate copy of the order or judgment such that the relevant provisions had been complied with.
126 I consider that the departure from what was expressly required and yet not considered to be a defect by Hill J in Klintworth was more substantial than what has occurred here. What has occurred here is expressly contemplated by the Federal Court Rules. I can see no reason why the Rules referred to above should not apply according to their terms and that the date, Registrar’s signature and seal of the Court affixed to the notice of filing which forms part of the second certificate of taxation should not be treated as part of a single document which has been endorsed as required. It would be an extraordinarily technical view, contrary to the approach of Hill J in Klintworth and, more importantly, contrary to the burden of the reasoning in Adams v Lambert, culminating at 421-2 [34], to allow form to triumph over substance to such a marked extent.
127 In case I am wrong in the conclusion that I have reached about there being no defect in the way in which the $77,300 certificate of taxation was issued, consideration must be given to the application of s 306(1) of the Bankruptcy Act. The application of s 306(1) is governed by the characterisation to be given to a defect found to exist. If the defect is characterised as merely formal, then provided there is no substantial injustice caused, s 306(1) operates to protect the proceeding by way of a bankruptcy notice from invalidity. There was no suggestion of any injustice being caused in this case by the form of the second purported certification of taxation.
128 Senior counsel for Ljiljana placed reliance on Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 at 79-80 to the effect that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Bankruptcy Act or if it could reasonably mislead a debtor as to what is necessary to comply with the notice. However those principles need to be read in light of the subsequent decision in Adams v Lambert. In Kleinwort Benson, a miscalculation and thereby understatement of interest on judgment of some $23,000 was treated by the High Court as a formal defect or irregularity within s 306(1) and was held not to have invalidated the notice. In Adams v Lambert at 420-1 [31], it was observed that the decision in Kleinwort Benson shows that an error may be covered by s 306 even though it involves a substantial misstatement of the amount of money, and noted the conclusion that it was not the legislative purpose that a substantial understatement [or for that matter, overstatement] should necessarily invalidate the bankruptcy notice. Following Adams v Lambert, a key consideration in determining whether a defect is only formal is whether it has the capacity to mislead the debtor as to what must be done. Extrapolating that concept, it might also be said that a debtor should not be materially misled as to the foundation for what they are required to do.
129 The written submissions made on behalf of Ljiljana suggest that:
… [t]he bankruptcy notice, containing as it does an unsigned and unsealed certificate of taxation, leaves the debtor scratching their head over the provenance and effect of the document (Is it real? Is it authentic? What made it? Is this the final considered and reasoned conclusion of the Court? Is it an order of the Court? Is the order enforceable?). With such doubts over the origin of the document, the debtor is inevitably placed in the position of questioning whether to give effect to the second order, and possibly also the first order, which underpins the bankruptcy notice itself.
130 With the greatest of respect for senior counsel for Ljiljana, those arguments and the rhetorical questions posed have a marked departure from reality. Even if there was a formal defect in the issuing of the certificate of taxation because the seal, Registrar’s signature and date appeared on the document to which the certificate of taxation was attached instead of on the face of the document itself, it is quite impossible to suggest seriously that Ljiljana could possibly have been materially misled by that. The certificate of taxation, whatever its formal defects as addressed below, was accompanied by an order of a Registrar, stamped, sealed and not objected to in any way whatsoever, which confirmed that Prentice’s costs under order 1 of the orders made by the Full Court on 23 September 2014 were deemed to be $77,300 and a certificate of taxation was to issue accordingly. The date of that order was 15 May 2015, the date upon which the certificate of taxation was lodged was 15 May 2015, and the date upon which the certificate of taxation issued (with whatever defects it may ultimately be found to contain) a week later on 22 May 2015. The notion that Ljiljana could have been misled in any way is not accepted, noting that Ljiljana’s solicitors lodged an objection to that certificate of taxation on 5 June 2015, apparently fully understanding its effect.
131 In rejecting the submissions on this topic of Ljiljana being at risk of being misled, it is also important to understand the purpose behind the issuing of a certification of taxation. Because such a certificate has the force and effect of an order of the Court, the document issued is required to convey to the recipient that it is a solemn and serious requirement of the Court, not merely an item of correspondence. Even if there is a formal defect by reason of the necessary signing, sealing and dating not appearing on the face of the document that issued, but instead appearing on the face of the filing document which itself states that it forms part of the same document, there is no serious capacity for any recipient not to understand what they have received or what they are required to do. If there is a defect in this approach to issuing a certificate of taxation (contrary to what I have already decided), then it is a defect of a most formal kind. As I have already observed, it is a less significant defect, if it be so, than that which was considered by Hill J in Klintworth. It is important in that regard to observe that the line of authority that Hill J cited as arriving at a different conclusion which his Honour did not follow falls within the range of authority which was overruled by the High Court in Adams v Lambert.
132 In substance, the certificate of taxation comprises the combination of the document itself and the notice of filing. The two pages should be read together as a single document, and as part of a bankruptcy notice, given that it is beyond question that a bankruptcy notice is not just the notice itself, but all of the documents annexed to it: Adams v Lambert at 417 [22]. To do otherwise is to fall into the error made in Lewis of attributing to the legislature an overwhelming preference for form over substance: Adams v Lambert at 421-2 [34]. Section 306(1) relieves against the invalidating consequences of some mistakes in the preparation of bankruptcy notices, and if this was such a mistake, and would otherwise invalidate the certificate of taxation, it falls within the terms of that provision to avoid it having that effect.
Neither certificate of taxation served in time; neither certificate of taxation served at all
133 The arguments put by James and Ljiljana in relation to service of the certificates of taxation were put in two ways. It was argued that the certificates of taxation were not served at all and in the alternative it was argued that the certificates of taxation were not served in time and therefore were not valid and enforceable.
134 It is convenient to deal with the issue of an essential condition of a certificate of taxation that has been issued and is otherwise valid being rendered invalid and unenforceable by reason of not being served within 14 days. Both James and Ljiljana contend that service of a certificate of taxation within 14 days of its issue in accordance with r 40.32(1) is a precondition to its validity and enforceability. The immediate consequence of failing to serve a certificate of taxation within 14 days of issue is that interest does not begin to accrue until service has taken place: r 40.32(3). That provision provides an incentive for the creditor to serve the bankruptcy notice on time. However a failure to serve a certificate of taxation within 14 days does not have the additional dire consequence of invalidity or unenforceability, especially when regard is had to the myriad of reasons why service may not be able to be effected within that time from issue.
135 It was also suggested that service must be take place within the 14 days in order to give substance to the right of review contained in r 40.34. However that second argument is misconceived. Rule 40.34 gives a right to apply for a review of a taxation only to a person who has attended that taxation. The only time limit in filing such a review is 28 days from when a certificate of taxation is issued, with service forming no part of that time running. Ordinarily the certificate would expect to issue not long after the taxation, but if that process takes any additional time, the person who wishes to review the taxation will have longer to make the application. Of course, as the note to r 40.34 indicates, as part of such a review the certificate of taxation may be altered or an item may be remitted for further taxation, but that has nothing to do with service.
136 The obligation in r 40.32(1) to serve the certificate of taxation within 14 days does not go to validity, but rather to liability to pay interest, having regard to r 40.32(3). It is important to note in this regard that no interest is sought in Ljiljana’s bankruptcy notice. In my opinion, that interpretation accords with the principles in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 at 390-1 [93] because I am unable to accept that a proper construction of the words and purpose of r 40.32 is that failing to effect service within 14 days would have the consequence of retrospectively rendering invalid or unenforceable an otherwise valid certificate of taxation.
137 The argument that service of the certificates of taxation within 14 days of issue is a requirement of validity and enforceability fails.
138 In relation to the argument that the certificates of taxation were not served at all, by reason of the general history of the issue of the certificate of taxation outlined above, for the following reasons I am satisfied that service of the certificates of taxation did take place well before the service of the bankruptcy notices, even if it was not within 14 days of their issue. Rule 10.31(e) of the Federal Court Rules provides that a document that is not required to be served personally may be served, inter alia, at a party’s lawyer’s email address if the party is represented by a lawyer and the lawyer has filed a notice of address that conforms with r 11.01, which in turn, refers to the need for information mentioned in r 2.16 (being a footer containing the name and role of the party on whose behalf the document is filed, the name of the person or lawyer responsible for preparation of the document, if the party is represented by a lawyer that lawyer’s telephone number, fax number and email address, and the address for service of the party). Rule 11.01(4) further provides that if the party is represented by a lawyer, the party agrees for the party’s lawyer to receive documents at the lawyer’s email address.
139 In relation to proceedings NSD 2016/2013 (giving rise to the $77,300 costs order) to which Ljiljana was a party, on 30 April 2015, the records of the Court for this matter discloses that a notice of acting – appointment of lawyer form dated 28 April 2015 was filed by Mr Bruce Hocking on behalf of Ljiljana, being a document that contained all the required service information. That included the email address for Mr Hocking. As noted above, Mr Hocking filed an application for a review of the taxation for Ljiljana in this proceeding on 5 June 2015.
140 In relation to proceedings NSD 1412/2009 (giving rise to the $576,018 costs order), on 2 October 2015 a notice of acting was filed by Mr Hocking dated 28 September 2015 in respect of Ljiljana which also contained all the required information, including his email address (noting that Mr Hocking was also the solicitor on record for Ljiljana between 10 September 2014 and 17 July 2015). On 26 November 2015, Mr Hocking filed a notice of acting for James dated 24 November 2015 containing all the required information, including his email address.
141 In respect of proceedings NSD 2016/2013 (the $77,300 certificate of taxation) from 30 April 2015 for Ljiljana, and in respect of proceedings NSD 1412/2009 from 2 October 2015 for Ljiljana and from 26 November 2015 for James, unless and until Mr Hocking or his firm ceased to act for James and Ljiljana, service could be effected upon them by sending any document to that email address, even if it was outside the required 14 days in respect of the larger certificate of taxation, which I have already decided was not a condition of validity.
142 On 10 November 2015, both certificates of taxation were sent to Mr Hocking’s email address, albeit under cover of a letter in related Federal Circuit Court proceedings SYG 1846/2014 between Stephen Barry and Martin Board and Ljiljana Coshott. In my view, strictly applying the terms of r 10.31(e), that was effective service of the two certificates of taxation on Ljiljana because it was sent to her lawyer’s email address and the rule required no more.
143 On 3 December 2015, essentially the same letter as that sent on 10 November 2015 was emailed to the same email address, by which time Mr Hocking was acting for James. Accordingly, the certificate of taxation in proceedings NSD 1412/2009 upon which the bankruptcy notice issued against James was based, was served in accordance with r 10.31(e). It follows that if service of the certificates of taxation, subject to the other arguments as to the validity and effectiveness of those certificates of taxation, was required to take place prior to service of the two bankruptcy notices, which took place in 2016, that was achieved in any event, even if it was outside the required 14 days, again which I have already decided was not a condition of validity.
144 In my opinion, it would imbue the practical requirements of service with a degree of unacceptable artificiality bordering on intellectual dishonesty to suggest that the certificates of taxation for both costs orders relied on for the bankruptcy notice issued against Ljiljana and the certificate of taxation relied upon for the bankruptcy notice issued against James had not been served on either of them when it was sent to the solicitor acting for them in both processes of taxation, purely because they were sent under cover of a letter referring to different litigants on one side and only Ljiljana on the other side. This Court should not countenance such an artificial contrivance to deny that the practical requirements and purposes of service had been achieved.
145 What matters is whether effective service and thereby notice of the certificate of taxation had in fact taken place. That was achieved by no later than 10 November 2015 for Ljiljana and no later than 3 December 2015 for James, well before either bankruptcy notice was served in 2016.
146 A concession was made by counsel for Prentice during the course of the hearing that service of the certificate of taxation had to take place prior to service of the bankruptcy notice unless that requirement was dispensed with. This was said to be based on the reasoning in Curtis v Singtel Optus Pty Ltd [2014] FCAFC 144; (2014) 225 FCR 458 to the effect that a bankruptcy notice must be valid both at the time of issue and at the time of service. However, I am unable to see why that reasoning governs this question. I am unable to see why a certificate of taxation should not issue on a given day and the bankruptcy notice could not be applied for, issued and, indeed, served on the same day. In that event, service of the bankruptcy notice upon the debtor would at the same time constitute service of the certificate of taxation as required by r 40.32(2), albeit very late and with the relevant consequence in this case of interest not running prior to that time. That is so notwithstanding any review of the taxation that might be sought by a debtor who attended the taxation. The certificate of taxation is taken to be an order of the Court and is valid and binding unless and until it is set aside. On the facts I have found in this case, the application of that concession does not matter because I am satisfied that service of each of the certificates of taxation (subject to the separate arguments about their validity) was effected on both James and Ljiljana by service on the solicitor who was retained to act for both of them before the end of 2015, well before either bankruptcy notice was served.
Question 5: whether the capacity in which Prentice obtained the bankruptcy notices was confusing so as to render them invalid
147 It was asserted that the capacity in which Prentice caused the bankruptcy notices to be issued to both James and Ljiljana was unclear and capable of misleading them. The assertion was made that while the certificates of taxation relied upon as the basis for the bankruptcy notices were issued to Prentice in his capacity as trustee of the bankrupt estate of Robert, the bankruptcy notice itself was issued, and in the case of Ljiljana, the substituted service order was made, in what appeared to be his personal capacity. In the case of the substituted service order, that is simply incorrect as the heading of that document makes it clear that substituted service was obtained by Prentice in his trustee capacity.
148 It was submitted that a notice “which is likely to mislead or even perplex a person in the circumstances of the debtor will generally, perhaps even invariably, be set aside and it will be immaterial that the particular debtor may not have been misled”, citing a series of authorities, but most importantly, failing to cite or make any reference to Adams v Lambert on this point. All of that authority is cast seriously in doubt to the extent that it conflicts with Adams v Lambert.
149 It was submitted by the applicants that the failure to identify the correct creditor is a defect that cannot be saved by s 306(1) of the Bankruptcy Act because it could mislead and confuse the debtor as to the identity of the creditor to whom the debt should be paid, citing Adams v Lambert at 419 [27]. However, it is important that Adams v Lambert not be read in an unduly limited way. That paragraph in Adams v Lambert is expressly stated to be not the full extent of the exclusion from invalidating effect, in the event that a defect is found. It has to be a failure to meet a requirement made essential by the Bankruptcy Act, which involves a conclusion which must be reached after a consideration of the legislative purpose and the valuation of the significance or importance of the error or deficiency in the circumstances of the case at hand: Adams v Lambert at 419-420 [28]-[29].
150 The issue is whether the reference to Prentice as the creditor in the bankruptcy notice itself by his name alone led to it being relevantly misleading as to what either debtor was required to do by that notice. That is, whether there was a doubt as to the capacity in which the creditor was to be paid; and if there was such a doubt, whether it was material so as to be beyond the reach of s 306 of the Bankruptcy Act, or whether it was only like the Adams v Lambert error as to the misidentification of the provision dealing with post-judgment interest.
151 Applying Adams v Lambert to this situation, both bankruptcy notices must be read as including the accompanying order by which costs were ordered to be paid by the present two debtors in favour of Prentice, who was expressly named as suing in his capacity as trustee of the property of Robert Gilbert Coshott, a bankrupt. Read as a whole, the bankruptcy notices were not even misleading, so as not to require the use of s 306(1). But if I am wrong about that, there is no question of either James or Ljiljana being misled about what they had to do, including as to the capacity in which Prentice was to be paid, such that s 306(1) applies.
Question 6: if the debts owed by Prentice were effectively assigned, whether the Court was satisfied that the debts so assigned were equal to or exceeded the bankruptcy debts for the purposes of ss 40(1)(g) and 41(7) of the Bankruptcy Act
152 Prentice relied upon an affidavit of Christie Lonnon dated 5 May 2016 in each of the proceedings to produce detailed objections to the bills of costs for the purposes of taxation. It is not appropriate that the process of taxation either be replicated or second-guessed. Nor did any party suggest that course should be embarked upon. What matters is that a substantial basis was advanced to object to the total sums in the bills of costs being allowed on taxation. Prentice argues that the bills of costs are not sufficient to quantify the offsetting claims so as to meet the requirement of establishing that the offsetting claims meet or exceed the bankruptcy debts.
153 Independently of the process of taxation, I observe that the bills of costs annexed to Robert’s affidavits (sworn 23 February 2016 for James and sworn 6 April 2016 for Ljiljana) are very sparse in detail, to the point of it not being at all clear what many entries relate to or the work that was done or why. No information was provided by the applicants by which this Court could make any assessment of the reasonableness or otherwise of any of the items of work listed, nor even as to whether in fact any of that work had in fact been done or disbursements in fact occurred (for example, counsel fee notes were not included), beyond a one-sentence certification by Bruce Hocking, the former solicitor for the Coshott parties. There was no evidence that any of the three bills of costs was ever rendered on the parties to the litigation prior to taxation, with reliance placed entirely on those lodged with the Federal Circuit Court or this Court.
154 Mr Hocking was called to give evidence, but did not advance the situation because he was unwell and could not remember anything and apparently had no independent records, or at least produced none. He was, most likely due to his poor health, a most unimpressive witness. Extracted below is an exchange during cross-examination of Mr Hocking by counsel for Prentice, which positively established that no time records were kept by him for what was almost entirely time-based billing. This is at least a cause for serious concern. Mr Hocking’s evidence was as follows (emphasis added):
MR JOHNSON: That, Mr Hocking, is a bill of costs that was prepared in relation to the appeal from the decision of Federal Circuit Court Judge Driver - - -?---Yes.
- - - in the proceeding?---Yes.
And did you have a costs agreement in relation to that?---I presume so.
Did you prepare it on the basis of your time charges reflected on page 78 by reference to that costs agreement?---I presume so, but I can’t remember.
And what records did you have available to you to enable you to prepare this bill of costs?---I would have had diary entries and I would have had documents.
Did you keep time records?---No, I don’t keep time records.
How are you able to identify – for example, on page 70, item 1 – that you spent 1.3 hours on a matter?---I can’t remember how I estimated the time.
Did you estimate that time or did Mr Coshott estimate that time?---No, I would have estimated the time. Perhaps it might have been in conjunction with him.
Yes. Was this bill of costs prepared on your computer or on Mr Coshott’s computer?---I can’t remember. Probably on mine, but I can’t remember.
Without wishing to be unkind, this was the high watermark and most lucid component of his evidence.
155 In substance, James and Ljiljana both argue that the bills of costs are sufficiently certain to meet the requirement that they equal or exceed the bankruptcy debts as required by s 40(1)(g) of the Bankruptcy Act. In support of that argument, reliance is placed on the total dollar amounts referred to in the three bills of costs which exceeds $1 million and the fact that the largest of them was estimated only by a Registrar of the Court at $475,632, along with the fact that the smallest had been estimated at $20,500 and the third with a relevant total of $238,511.60 is in the process of taxation. It was therefore asserted that there can be no doubt that both applicants had the necessary nature and extent of set-off such that the bankruptcy notices should be set aside. However, such estimates are made without the benefit of opposing arguments or objections.
156 In my view, the poor quality of the bills of costs and their uncertain status makes it impossible to conclude safely, even at the level of a preliminary assessment at a relatively low threshold, that James and/or Ljiljana have, by reason of the assigned debts, an offsetting claim equal to or exceeding the amount of their respective bankruptcy debts. That is, I am unable to be satisfied, on the balance of probabilities, that the amount on taxation is likely to be any particular amount at all, therefore I am unable to be satisfied that it is likely to equal or exceed the bankruptcy debt.
157 Accordingly, I am not satisfied that the test required to be met of an offsetting claim equal to or exceeding the amount of the bankruptcy debt has been met.
A further ground sought to be relied upon
158 For completeness I should also address a further point raised in support of the offsetting claim. Despite the written grounds expressly referring to the three deeds as constituting the offsetting claim and nothing more, senior counsel for Ljiljana nonetheless sought to re-open a point in later written submissions first raised in initial written submissions concerning a statement of claim by which she sues Prentice for breach of duty. Not only was this not listed as one of the grounds of argument reproduced above, it is a bare statement of claim. A statement of claim is not evidence of anything: Bhagat v Global Custodians Ltd [2002] FCA 223; sub nom Bhagat v Global Custodians Ltd [2002] FCAFC 51 at [52]-[53] and also the single judge decision in Massih v Esber [2008] FCA 1452; (2008) 250 ALR 648 at 651-2 [18]. In my view, reliance should never have been placed on that statement of claim and it should not have been pressed in submissions. Accordingly, it is rejected as any basis to impugn Ljiljana’s bankruptcy notice. To the extent that there is any power to grant leave to rely upon an additional ground not referred to in the application, not referred to in the supporting affidavit and not referred to in the enlarged grounds which I permitted the applicants to make submissions about, such leave is, in any event, refused. For completeness, I note in any event that the proceedings brought by that statement of claim were, on 13 December 2016, discontinued by leave mid-trial with indemnity costs ordered against Ljiljana.
Conclusion on the applications to set aside the bankruptcy notices
159 As none of the six questions have been resolved in favour of James or Ljiljana, each of their applications must be dismissed with costs.
Collateral relief: power to extend the time for compliance with a bankruptcy notice and exercise of such a power
160 As noted above, senior counsel for both James and for Ljiljana submitted that there was a general power to extend the time for compliance with the bankruptcy notice contained in s 41(6A) of the Bankruptcy Act. Counsel for Prentice submitted that there was no such general power, and that in any event the s 41(6A) power was constrained by s 41(6C). The existence of the power and its exercise was argued on behalf of James and Ljiljana to facilitate the enlargement of the scope of the applications to set aside the bankruptcy notices to encompass the 6 May 2016 Deed (the third deed), which arguably created a mutual offsetting claim to the bankruptcy debts, although as I have found, too late.
161 For the reasons detailed further below I am of the view that this Court does have a general power to extend the time for compliance with a bankruptcy notice, being a power that is not constrained by s 41(7) in its application to offsetting claims. However, in my opinion, the exercise of that power does not enable an invalid application to set a bankruptcy notice aside to be retrospectively validated because of the clearly limited way in which s 41(7) is expressed. The question that must therefore be considered is the basis for finding that such a general power exists, and whether any of the circumstances in this case are such that it should be exercised.
162 Turning first of all to the question of power, in Streimer v Tamas (1981) 37 ALR 211, the Full Court of this Court considered a situation in which, inadvertently, a further extension of time for compliance with the bankruptcy notice was not sought and therefore not ordered. It was argued that as a result, an act of bankruptcy had occurred, and the appeal court was powerless to do anything about that. Deane and Ellicott JJ did not accept that argument, stating at 214-5:
Section 41(6a) introduced into Commonwealth bankruptcy legislation, for the first time, express provision on the subject of extending the time for compliance with the requirements of a bankruptcy notice. The Parliament plainly turned its attention to the question of what steps needed to be taken before the expiry of the time which the bankruptcy notice fixed for compliance with its terms. It specified two alternative steps, namely, the institution of proceedings to set aside the relevant judgment or order or the filing of an application to set aside the bankruptcy notice. Subject to either of those steps being taken within the time limited for compliance, the power to extend time is conferred in general words. It would, in our view, be contrary to the plain import of the words used by the Parliament to construe s 41(6a) as requiring not only that one or other of the alternative express conditions precedent to jurisdiction be fulfilled within the time originally fixed for compliance, but as also requiring that both the application for an order and any initial order be made within that time. Indeed, such a constricted construction would render otiose a large part of the sub-section, namely, the words “before the expiration of the time fixed by the Court or the Registrar for compliance with the requirements of a bankruptcy notice”.
We do not accept the proposition that, in the absence of an independent power to annul an act of bankruptcy, an order extending the time for compliance with the requirements of a bankruptcy notice would be futile if it were not made within the time initially fixed for compliance or some persisting extension thereof. The power conferred by s 41(6a) is a power to “extend” the previous period of time. It is not a power to establish a new, distinct and independent period of time for compliance. The effect of an order extending the time for compliance, which is made after the expiry of the time originally fixed and any previous extension thereof, will be to enlarge the overall time allowed for compliance with the result that what would otherwise have constituted an act of bankruptcy no longer does (cf Esso Research and Engineering Co v Commissioner of Patents (1960) 102 CLR 347 at 351). Ignoring any transitional problems where special considerations may be applicable, this does not mean that s 41(6a) operates so as retrospectively to divest rights to rely upon an act of bankruptcy which would otherwise exist. What s 41(6a) does is to modify, by the introduction of a contingency, the actual and potential rights and liabilities resulting from failure to comply with the requirements of a bankruptcy notice within the time allowed by the notice in a case where, within that time, one of the two conditions specified in the sub-section has been fulfilled.
163 The application to set aside the bankruptcy notice in Streimer v Tamas was not an application under ss 40(1)(g) and 41(7). That case involved an application arising from an appeal from the judgment upon which the bankruptcy notice was based rather than an offsetting claim and was concerned with interpreting s 41(6A). However, in the later High Court case of Guss v Johnstone, the ability to use s 41(6A) to extend the time for compliance with the bankruptcy notice in the context of proceedings based on ss 40(1)(g) and 41(7) was considered, albeit in the context of exercise by the High Court or by the Full Court of this Court after judgment in the court below and after the automatic extension of time had been exhausted and an act of bankruptcy otherwise committed. In those circumstances the use of the general power was specifically contemplated and endorsed as follows at 610-11 [63]:
We are unable to accept that whenever, in a proceeding under s 40(1)(g) and s 41(7), a judge at first instance has determined that he or she is not satisfied of the matter referred to in s 41(7), and has declined to interfere with the process initiated by a creditor, no appellate reversal of that decision, whether by the Full Court or by this court, can alter the consequences of the decision. In a proper case it would have been within the power of the Full Court to set aside the declaration made by Sundberg J. The consequences for proceedings and events that had occurred in the meantime would vary with the circumstances, but they could include the same consequences as flowed from the order in Streimer v Tamas (1981) 37 ALR 211, where the statutory power to extend time for compliance with a bankruptcy notice, given by s 41(6A), was exercised after an act of bankruptcy had been committed.
164 Importantly, it also does not appear that the High Court in Guss v Johnstone was of the view that the power in s 41(6A) should be read down to exclude the application to offsetting claim cases by reason of that being exclusively dealt with by the automatic statutory extension of time in s 41(7). Thus the power in s 41(6A) to extend time for compliance of the bankruptcy notice has a wider application for deployment whenever properly required in the interests of justice, including in a case when an application under ss 40(1)(g) and 41(7) has not been successful.
165 The general power to extend time for compliance with a bankruptcy notice is not constrained by any need for a valid application to set aside such a bankruptcy notice. There are several reasons for that conclusion. The first is that the text does not require and interpretation does not demand that the application be valid. It is not an automatic benefit. Judicial power must be engaged to have that effect. Secondly, the power is being exercised in respect of the bankruptcy notice, not in respect of the application to set the bankruptcy notice aside. Thirdly, the practical implications that would flow from the power not existing in those circumstances support the text and nature of the power being exercised. If an application is made for a s 41(6A)(b) extension of time, and is granted by a court (including by the exercise of delegated judicial power by a registrar), a debtor would be entitled to proceed upon the basis that the court’s order means that he or she will not commit an act of bankruptcy because the time for compliance had been deferred. That is quite different from a step taken by a debtor alone of doing no more than filing the application to set aside, and, by reason of the invalidity of the application, failing to activate an automatic statutory extension time. That is because there has been no intervention by or on behalf of a judicial officer and no exercise of judicial power. However, there is no corresponding basis for finding that a s 41(6A)(b) extension of time for compliance with the bankruptcy notice also bestows any power or foundation for the retroactive validation of an invalid application to set aside the bankruptcy notice, having regard to the language and terms of s 41(7).
166 If such a power exists for the use of the Full Court or the High Court, there is no reason in principle why it should not also exist for this Court at first instance to deploy in an appropriate case. There is no material difference between an appeal court being able to avoid the injustice of an act of bankruptcy occurring despite the success of the debtor on appeal and a first instance court being able to avoid the injustice of the time for presenting a creditor’s petition expiring through no fault of the creditor. The issues concerning the current effect of the 6 May 2016 Deed can be dealt with appropriately and fairly in the context of the issue of whether a sequestration order should be made if a creditor’s petition is presented by Prentice in relation to either of James or Ljiljana.
167 In all the circumstances, I consider that it is in the interests of justice to extend the time for compliance with the bankruptcy notices to the date of this judgment to achieve the same outcome as if the applications had been valid and the automatic extension of time in s 41(7) had been triggered. For those reasons I decided I should make those additional orders extending the time for compliance of the bankruptcy notice to the date of this judgment and reasons.
I certify that the preceding one hundred and sixty-seven (167) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bromwich. |
Associate:
