The recent case of HE v SHANAHAN AS LIQUIDATOR OF EASTERN SOURCE CONSTRUCTION PTY LTD (IN LIQ) & ANOR is another great case for lawyers, insolvency practitioners and the public alike as it clarifies the meaning of “cross-demand” in the context of sections 40(I)(g) and 41 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).

The Law
Section 40(I) of the Bankruptcy Act provides:

s.40(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 counterclaim, 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 counterclaim, 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.

Section 41(7) of the Bankruptcy states:

s.41(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 counterclaim, 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 counterclaim, 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..

The Case

The Applicant’s primary submission was that, having discharged the debt owed by the Second Respondent Company to Holcim, he was entitled to be subrogated into the position of Holcim to make a claim for that amount against the said company. In the alternative, the Applicant contended that the same facts gave rise to a set‑off against the said company.

The Respondents contended that the Applicant had no genuine claim under s.40(1)(g) ors.41(7) because his subrogated right was inchoate and contingent, i.e. at some unspecified time in the future, the Applicant might receive a payment from the First Respondent as liquidators, on an unsecured basis, which may be equal to or greater than the amount of the judgment debt. The subrogated right, therefore, could not be quantified, and, thus, could not be relied on in setting aside the Bankruptcy Notice.

The Findings

After considering the facts and well known authorities on the issue such as:

Bhagat v Global Custodians Limited [2002] FCAFC 51
Guss v Johnstone (2000) 171 ALR 598
Ebert v the Union Trustee Company of Australia Limited [1960] 104 CLR 346

The Court ultimately found that the Applicant’s case was unsuccessful and found in favour of the Respondents view that the Applicant’s claim was contingent or inchoate. It was not only contingent on the outcome of litigation between the two liquidators, but even then it was contingent on sufficient funds being available to pay the Applicant, as a subrogated creditor of the Second Respondent Company, an amount equal to or greater than the debt owed by him. In this regard, it was an inchoate claim.