Guss v Johnstone & Anor M124/2000 [2002] HCATrans 221 (3 May 2002)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M124 of 2000

B e t w e e n -

JOSEPH GUSS

Applicant

and

RAYMOND JOHNSTONE

First Respondent

GEELONG BUILDING SOCIEITY (in Liquidation)

Second Respondent

Application for special leave to appeal

GLEESON CJ

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 3 MAY 2002, AT 9.40 AM

Copyright in the High Court of Australia

MR J. GUSS appeared in person.

MR R.A. BRETT, QC: If it please the Court, I appear with MR S.P. GARDINER, for the respondent. (instructed by Minter Ellison)

MR R. JOHNSTONE appeared in person.

GLEESON CJ: Yes, Mr Guss.

MR GUSS: I am note quite sure whether Mr Johnstone was intending to participate in these proceedings and I would only say that before Justice Kenny his claim was dismissed and it is essential - while he is still a party in the heading, he really is only a nominal party. The real issues are between the second respondent and the applicant, so I am not quite sure whether he is - - -

GLEESON CJ: You go ahead with your argument.

MR GUSS: The material is set out in the submissions of the applicant and the submissions in reply prepared by Mr Garde, who is not available to be here today.

The essential aspects are in respect to the question of section 52(2)(b) and the words "sufficient cause" as set out in the material. I would say that what has happened is that Justice Kenny, and following that Justice Sackville, who wrote the opinion of the Full Court with which the other member concurred, have set out on a probability test without hearing cross-examination or discovery of documents or anything else. It is submitted that the correct test where a proceeding for unliquidated damages was before the court was merely to see whether the proceedings were legitimate and if they were legitimate then the proper course, it is submitted, would have been either to dismiss the petition or to adjourn the petition until those matters had been resolved.

The underlying matter has been resolved. However, there was an additional circumstance which is not in the application book in that there was a stay of the sequestration order which expired after the Full Court hearing and the Supreme Court proceeding was to commence in February the following year. Unbeknown to the applicant or to the plaintiffs in the Supreme Court action, the trustee in bankruptcy had evidently elected to continue the proceeding under section 60 of the Bankruptcy Act and he brought an application in January, just before the Supreme Court proceeding, to the Federal Court on an application to have the election expunged, so to speak, so that he could discontinue the Supreme Court proceeding. That was supported by the second respondent. That failed but Mr Justice Gray held that even in circumstances where there was a trustee action - and this was a trustee action as shown by the material - a trustee could elect. He then went to the Supreme Court on application and while it was felt that Justice Gray's decision in that respect was wrong, it was not appealed, and I actually resigned as one of the trustees and ultimately there was a ruling - I have the ruling here and I could hand that up - by Justice Ashley, ultimately, that the matter proceeded only with the second plaintiff. That is for the sake of completeness.

In respect to the "sufficient cause" argument, I have handed up the cases and what we say is that the test should be unfettered and what has happened is that the primary judge and, indeed, the Full Court, has gone on to deal with it on the probability test.

GLEESON CJ: At what page in the application book do we find the primary judge making the error that you attribute to her?

MR GUSS: It is at page 59.

GLEESON CJ: No, in her reasons.

MR GUSS: In her reasons, I am sorry. I think it is page 18. No, it is not, I am sorry. At page 22 she concludes, at the bottom at line 30, having gone on an extensive summary of the evidence - it starts at page 17, I am sorry, at about line 17, "WHETHER A SEQUESTRATION ORDER SHOULD BE MADE". She says:

In seeking to resist the supporting creditor's application for a sequestration order, the judgment debtor submitted that he had shown "sufficient cause", within the meaning of s 52(2)(b) of the Act, for such an order not to be made.

Then she sets out some affidavit material filed in other actions and she concludes, at the bottom of page 22 - - -

McHUGH J: She really states the principle, does she not, at page 19, line 20:

In proceeding such as this, the Court must, I think, be satisfied that there is sufficient validity in the debtor's claim to justify dismissing or - - -

MR GUSS: Yes. What I would say is that she has not taken into account the correct approach. There is comment in the case of Ling v Enrobook, at page - the analysis - - -

McHUGH J: You rely on Ling v Enrobook as qualifying what Justice Gibbs had said in Schmidt?

MR GUSS: Yes, your Honour, and that, I think, is apparent even in - at page 116 of the Schmidt Case, Justice Gibbs said:

Where, however, the debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor the position seems to me to be different. As a general rule this Court is not an appropriate forum to decide such a claim and is limited to forming a view as to whether it appears that there is sufficient validity in the debtor's claims to justify a dismissal or adjournment of the petition . . . Considerable evidence directed to this issue has been given before me -

that is in the Schmidt Case -

and it seems to me that I ought to consider this evidence for the purpose of deciding only whether it is probable that the debtor has against the petitioning creditor a claim which is likely to succeed. If I am satisfied that the debtor has a claim against the petitioning creditor equal to or exceeding the amount of the judgment debt, I should not make sequestration order.

What we say is that that is qualified by Ling.

GLEESON CJ: What page of Ling?

MR GUSS: It is set out at page 63 of the application book, at line 24. Mr Garde, in his submissions, says that:

The appellant submits in the alternative that, if it is appropriate to apply a particular test in the present context, the test in Re Schmidt is too strict. Where the "other sufficient cause" relied upon by the debtor is a pending claim against the creditor, and the debtor shows that the claim is neither bad on its face nor obviously devoid of merit, the court should find (or it should be open to the court to find) that there is sufficient cause for dismissing or adjourning the petition for sequestration. In other words, the appropriate test should be: is there a legitimate claim pending against the petitioning creditor?

That was the test applied in Ling v Enrobook -

at page 25.

McHUGH J: In Ling they quoted a passage from Justice Gibbs in Re Schmidt and seem to have taken the view that it stated the law, did they not?

MR GUSS: At page 25, I think we say, as the Full Court said:

A review of the authorities discloses that in certain circumstances, but not in all circumstances, the fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor's debt will amount to `other sufficient cause' not to make a sequestration order. . . . The circumstances that the legitimate claim of the debtor is one against the judgment creditor is likely to be a significant circumstance for the purposes of s 52(2)(b).

It is implicit in this passage that the appropriate test is whether the debtor has a legitimate claim against the judgment creditor before a court. If, there is, there will ordinarily be "other sufficient cause" not to make a sequestration order.

Going on - - -

McHUGH J: Mr Guss, did her Honour not, in effect, apply a more favourable test than Schmidt, more favourable to you, even though she referred to Schmidt? I mean, she spoke about "sufficient validity" and then said "cf Re Schmidt" in her judgment.

MR GUSS: Yes. I would say, no, because what she went on to do was to look at affidavits in other cases and say that, effectively, the probability was that the Supreme Court action would not succeed. That is the real complaint. We say that - - -

GLEESON CJ: Have a look at Ling at page 26, in the paragraph in the middle of page 26, beginning with the words, "The authorities also show". Do you see that?

The authorities also show that satisfaction that the debtor is well advanced with litigation likely to result in the debtor being in a position to pay his or her debts may -

et cetera.

MR GUSS: Yes, but then it goes on:

But the authorities do not suggest that it is in the public -

that is another question.

GLEESON CJ: Yes, and if you look at the last sentence in that paragraph they are talking about a situation where the "state of insolvency" is "likely" - likely - "to be of only short duration". That reference to likelihood in that paragraph is simply the same idea that was picked up by Justice Gibbs, is it not?

MR GUSS: I think he went further. He is really talking about probability.

GLEESON CJ: What is the different between probability and likelihood?

MR GUSS: It is a difficult connotation, your Honour, but we would say that once you have a legitimate cause of action before the court then the authorities - and I will go to those just in a moment - show that the jurisdiction should not be really fettered. What is happening is that Justice Gibbs is establishing a probability test and he is saying in Re Schmidt you need a probability. What we are saying is that sufficient cause - that should not be fettered and what the Court should look at is circumstances, however, because the Court cannot or should not prejudge the outcome of other litigation in another court, it merely needs to look at the legitimacy of the claim and not, in fact, prejudge the likely outcome which Justice Kenny has done, and which - - -

McHUGH J: Why do you say that? Her Honour said, at page 19, that there had to be "sufficient validity". She examined some of the evidence and she just concluded that there was not sufficient validity. It does not seem to me that - - -

MR GUSS: That is because she had adopted a probability test.

McHUGH J: She has not. She never used the term "probability" at any stage. She herself just simply said "satisfied that there is sufficient validity" and she referred to Schmidt and, interestingly, she did not cite Schmidt, she said "cf Re Schmidt". It seems to me that she may have formulated a test which was much more favourable to you than the test of Justice Gibbs.

MR GUSS: Except what she has done is she that she has examined the evidence and she has formed a view of the likely outcome of the Supreme Court proceedings. We say that she should not have done that. What she only should have done was to see that it was a legitimate claim, it was not fraudulent or such. If it was a legitimate claim then what she should have done was either dismiss the petition or adjourn the petition until that had been determined.

McHUGH J: Would you contend that she should grant an adjournment if she thought it had no prospects of succeeding?

MR GUSS: No. What we are saying is that it was a legitimate claim.

GLEESON CJ: You seem to use the word "legitimate" to mean bona fide. Is that what you mean by it?

MR GUSS: Certainly, bona fide. I would go further and say that "legitimate" means that it is a - - -

GLEESON CJ: Not an abuse of process?

MR GUSS: Certainly, not an abuse of process. Certainly, it is a bona fide claim but it is a claim that can properly be made in the circumstances.

GLEESON CJ: And the court is not concerned with its likelihood of success?

MR GUSS: What we would say is that the court cannot prejudge, looking at the authorities, where there is an unliquidated damages claim - once you get to the stage of showing that is a bona fide or legitimate claim for an amount in excess of the creditor's claim, then the bankruptcy court should not prejudge the outcome of those proceedings - - -

McHUGH J: Can I just interrupt you to say what is wrong, as a matter of principle, with what her Honour said at page 24, in those two sentences at lines 8 and 10?

For the reasons set out above, I do not consider that the claim . . . has sufficient prospects of success to justify an exercise of discretion in the judgment debtor's favour. Having regard to the interest of the parties and of the public, I am not satisfied that a sequestration order ought not to be made.

MR GUSS: Because, your Honour, that is prejudging the outcome of an unliquidated damages claim.

McHUGH J: No, she is just saying that there is just not sufficient prospects of success. Of course she is making some sort of a judgment. She is not determining whether or not you will succeed but she says, "You really have not got sufficient prospects of success to justify me exercising the discretion." After all, it has to be sufficient cause and the case you rely on, Sophron, in effect, says, there has got to be something positive that requires the exercise of the discretion in your favour and her Honour seems to be saying no more than that. She was not satisfied that your prospects were such that justified the exercise of the discretion in your favour.

MR GUSS: One can compare that situation, your Honour, with the cases mentioned at the bottom of page 60 and the top of page 61 of the application book. What we would say is, as set out:

But the same general principle applies in this context, and hence in applying s 52(2)(b) it is it is a mistake to reduce the expression "sufficient cause" to a more rigid test which the legislature has chosen to provide.

The cases thereafter set out - they are extension of time cases, but those cases made it clear that - for example, I quote from Dix v Crimes Compensation Tribunal at page 299, line 5:

The tribunal is empowered to extend the time for the making of an application to it for a review of a decision, whether or not that time has expired . . . The section says nothing about what matters are to be taken into account by the tribunal in determining an application for extension of time and does not in terms lay down any pre-condition to the granting of an extension apart from the prohibition contained in sub-s. (4) . . .

At line 45:

As with Victorian section 31, nothing is said by the section as to the matters to be taken into account in determining whether to extend the time and no pre-condition is in terms laid down to the grant of an extension.

Then, what was held was that the first question is whether the tribunal did proceed in this way, that was, looking at the acceptable explanation of the delay because in its opinion neither applicant had done this, and the court says at page 301, at line 17:

The first question is whether the tribunal did proceed in this way. After a close consideration of its reasons for decision as a whole, I am satisfied that it did: in other words, that it considered itself constrained to dismiss the application by the operation of a principle or rule that regardless of other circumstances, no application for an extension of time could be granted unless the applicant showed by way of the fulfilment of a pre-condition an "acceptable explanation of the delay".

That is the same sort of principle, in our submission - it is applicable when it comes from Sophron as well - that shows that the court should not enter into those prejudgments. What it should do is to exercise its discretion in an unfettered way and those three cases cited, FAI General Insurance v Southern Cross, Dix v Crimes Compensation Tribunal, and Comcare v A'Hearn, all state that effective principle.

What we have got here is a situation where what we say is that the primary judge has adopted a test which she should not have adopted. Justice Sackville, in his decision in the Full Court really goes further.

GLEESON CJ: Your time seems to have expired, Mr Guss.

MR GUSS: I am sorry.

GLEESON CJ: Yes, we do not need to hear you, Mr Brett.

This case turned upon the application of well-settled principles to the facts and circumstances. We are not persuaded that there is an arguable case that there was any error of principle in the approach of the primary judge or the Full Court of the Federal Court to the question the applicant seeks to agitate. The application is dismissed with costs.

AT 10.07 AM THE MATTER WAS CONCLUDED