LIMITED DISTRIBUTION CATCHWORDS TRADE PRACTICES - Application to set aside default judgment - Whether shown that applicant has defence on merits. BANKRUPTCY - Contested petition - Application to Court to go behind judgment to determine existence of debt. Trade Practices Act 1974 ss.52, 75B Bankruptcy Act 1966 s.52 Corney v_ Brian (1951) 80 CLR 343, Wren v Mahoney (1972) 126 CLR 212, Bill Acceptance Corporation Ltd v GWA Ltd (1983) 50 ALR 242 applied. NSW G.72 of 1981 TERRENCE GILCHRIST v A T S AMUSEMENTS PTY LIMITED formerly AUSTRALIAN TABLE SOCCER COMPANY LIMITED & ORS P.1452 of 1985 Re FRANKLYN ERNEST YATES (also known as FRANK YATES); Ex parte TERRENCE GILCHRIST PEGART n> Wilcox J Tat Sydney SS7 GN 20 May 1986 is 4 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION WILCOX J SYDNEY 20 MAY 1986 eer ww LIMITED DISTRIBUTION No. G.72 of 1981 TERRENCE GILCHRIST First Applicant A TS AMUSEMENTS PTY LIMITED formerly AUSTRALIAN TABLE SOCCER COMPANY LIMITED First Respondent FRANK YATES Second Respondent BRIAN HUNT Third Respondent JEFF WALLER Fourth Respondent MINUTES OF ORDER THE COURT ORDERS THAT: NOTE: The motion to set aside the judgment in matter No.G.72 of 1981 be dismissed. The applicant in the motion to set aside judgment, Franklyn Ernest Yates, pay to the respondent to that motion, Terrence Gilchrist, his costs of the motion. Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. LIMITED DISTRIBUTION IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) ) ) ) BANRKUTPCY DISTRICT OF THE STAE OF )} ) NEW SOUTH WALES AND ) ) ) THE AUSTRALIAN CAPITAL TERRITORY RE: EX PARTE: CORAM: WILCOX J PLACE: SYDNEY DATE: 20 MAY 1986 No. P.1452 of 1985 FRANKLYN ERNEST YATES (also known as FRANK YATES ) Debtor TERRENCE GILCHRIST A Creditor MINUTES OF' ORDER THE COURT ORDERS THAT: 1. The further hearing of the petition be adjourned for further hearing on Wednesday 11 June 1986. NOTE: Settlement and entry of orders is dealt with by Bankruptcy Rule 124. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISTON LIMITED DISTRIBUTION ee ww a No. G.72 of 1981 TERRENCE GILCHRIST Applicant A T S AMUSEMENTS PTY LIMITED formerly AUSTRALIAN TABLE SOCCER COMPANY PTY LIMITED First Respondent FRANK YATES Second Respondent BRIAN HUNT Third Respondent _ JEFF WALLER Fourth Respondent IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) ) ) ) BANKRUPTCY DISTRICT OF THE STATE OF ) No. P.1452 of 1985 ) NEW SOUTH WALES AND ) ) ) THE AUSTRALIAN CAPITAL TERRITORY RE: FRANKLYN ERNEST YATES (also known as FRANK YATES ) A Debtor EX PARTE: TERRENCE GILCHRIST A Creditor CORAM: WILCOX J PLACE: SYDNEY DATE: 20 MAY 1986 EXTEMPORE REASONS FOR JUDGMENT Two applications made by Frank Yates have been heard together. One application arises pursuant to 0.35 r.7(2) of the Federal Court Rules whereby Mr Yates seeks an order to set aside a judgment obtained against him by Terrence Gilchrist in two stages in the years 1981 and 1982. The other application arises by way of opposition to the making of a sequestration order under the Bankruptcy Act 1966 upon the petition of Mr Gilchrist, the debt relied upon in support of the judgment being the award of damages made in this Court in 1982. Mr Gilchrist commenced proceedings in this Court on 24 June 1981, naming a company called ATS Amusements Pty Limited -- and which had been formerly known as Australian Table Soccer Company Pty Limited -- as first respondent, Mr Yates as second respondent and two other individuals as third and fourth respondents. By the applicant's Amended Application, claims were made for certain declarations as follows: "lL. A declaration that the lst Respondent falsely represented (a) That coin operated soccer equipment had been manufactured to Australian Table Soccer Association standards (b) that such equipment had the strength and durability to last for years (c) that such equipment would be supplied with accessories (d) that the acgquiriers (sic) of such soccer equipment from the list Respondent would be provided with prime locations for siting such equipment, promotional aids and training (e) that the lst Respondent would conduct a national advertising campaign and a table soccer tournament with a first prize of $10,000.00 in contravention of Section 53 of the Trade Practices Act, 1974 as amended 2. A declaration that the lst Respondent by publishing the representations referred to in paragraph 1 hereof in a promotional brochure and newspaper advertisements engaged in misleading and deceptive conduct in contravention of Section 52 of the said Act. representing in a newspaper advertisement that a person who entered into a manufacturing assembly contract with the company would be guaranteed a gross of over $100,000.00 per annum engaged in misleading and deceptive conduct in contravention of Section 52 of the said Act. 3. A declaration that the ist Respondent by 4. A declaration that the 2nd, 3rd and 4th Respondents or any one of them aided abetted or procured the contraventions alleged in paragraphs 1 and 2 hereof, or were knowingly concerned in or party to such contraventions." There was filed in support of the application an affidavit by Mr Gilchrist dated 22 June 1981. In that affidavit Mr Gilchrist deposed to having seen in a daily newspaper in June 1980 an advertisement soliciting inquiries by persons interested in assembling imported games modules. The advertisement included this sentence, "the company guarantees a gross of over $100,000 pa plus service and delivery contracts as options". The advertisement directed inquirers to the marketing director of Australian Table Soccer Company Pty Limited. Mr Gilchrist said in his affidavit that in response to the advertisement he telephoned the company and arranged an appointment to see Mr Yates, who introduced himself to Mr Gilchrist as the chairman of the company. His affidavit went on to say that in the first interview, and also in subsequent discussions, Mr Yates gave him certain information including that the company was seeking 27,000 outlets and that an extensive advertising campaign would be conducted. He said that Mr Yates informed him that he had appointed an advertising agent for the company and he introduced him to Mr deff Waller, the fourth respondent, as being the sales director of the company. Mr Gilchrist was given an advertising brochure which is in evidence. It speaks in glowing terms of table soccer. The brochure was apparently directed to persons who are to become promoters of the company. It includes an answer to cne question, "what do I get for my investment?" in these terms, "equipment, locations, training, advertising, promotional aids, and the big $10,000.00 cash soccer tournament". On the same page of the brochure, under the heading "$10,000.00 cash prize", the statement is made that: "The first Australian tournament will be held in 1980-81. Competitors from all areas will compete in doubles competition. The winning pair will take away $10,000.00 in cash, plus a chance to compete in the U.S. $1,000,000 tournament circuit." On the back page of the brochure there is a computation described as "projected cash returns per table". This shows both income and expenses, and under the heading of "advertising" the figure of ""$750.00 Nett" is shown, being "joint promoters expenses subsidized by the Company". This apparently refers to the cost to be undertaken by a promoter who has six tables. At that rate the total amount expended on advertising would be considerable. | yoooe Mr Gilchrist said in his affidavit that on 4 July 1980 he entered into an agreement with the company to acquire the sole assembly rights to all soccer machines sold by that company. That agreement was tendered in evidence before Morling J at the subsequent hearing of the matter. The agreement calls for the payment of $50,000.00 in consideration of the grant to the applicant of sole assembly rights. That money was paid. Mr Gilchrist went on to say that between July and November 1980 he made numerous inquiries of Mr Yates as to the commencement of the advertising campaign and the arrival of the first shipment of machines. On 17 November 1980 he attended a meeting with Mr Yates and Mr Waller, at which Mr Yates told him that the company was not going to promote the table soccer tournament and that the company was not going to conduct the promised advertising campaign. In an endeavour to minimize his losses, Mr Gilchrist acquired title to the soccer tables in his possession but he found that such tables are virtually unsaleable due to a lack of promotion of the game and the shortage of spare parts. Three agreements were executed on 1 December 1980, whereby Mr Gilchrist, inter alia, took over title to approximately 57 machines which were not then sold. The evidence which is before me indicates that there was only one container load of unassembled machines imported into Australia. The load comprised 110 units. Mr Gilchrist assembled 53 of those units. He was paid the total sum of $10,600.00 for his work. This figure represents a rate of $200.00 per machine, rather than the figure of $100.00 per machine referred to in the contract of 4 July. The remaining 57 machines were undisposed of as at 1 December 1980, and it was to these machines, pursuant to the arrangements made on that day, that Mr Gilchrist acquired title; and the capacity to deal with them for his own benefit as best he could. After the proceedings in this Court were commenced a notice of motion was filed on behalf of Mr Yates by Mr Michael Lynn, solicitor. Mr Lynn appeared on a number of occasions when the matter was mentioned, but apparently failed to comply with certain directions made against his client. Thereupon Mr Gilchrist applied for summary judgment. On 6 November 1981 Morling J made declarations that the first respondent had falsely represented to the applicants the matters set out in sub-paras.(a) to (e) inclusive in para.1l of the Amended Application; that the first respondent had engaged in misleading or deceptive conduct in the manner alleged in paras.2Z and 3 of the Amended Application, and that the second and third respondents had aided, abetted and procured the contraventions alleged in paras.1, 2 and 3 of the Amended~ Application. The Court ordered that each of the first, second and third respondents pay damages, in an amount to be assessed. we ee eee we ow eee oe - . - - - - ne os Damages were assessed by Morling J on 2 April 1982. Notice of the hearing on damages was given to the respondents, but there was no appearance on behalf of any of them on that occasion. The total damages, as assessed by his Honour, came to $63,400.00, this consisting of the initial payment of $50,000.00, loss of six months' income by Mr Gilchrist because of his preoccupation with the amusement machines, loss of interest and certain bank charges; less, by deduction from that total sum, the amount of moneys received by Mr Gilchrist. The damages have not been paid. In due course a bankruptcy notice was issued against Mr Yates. The non-compliance by Mr Yates with the requirements of this notice has given rise to the bankruptcy petition which is presently before the Court. Counsel appearing for Mr Yates submits that the Court should set aside the judgment, in relation both to the declaration of liability and to the assessment of damages, and, in the bankruptcy proceedings, that the Court should not make any sequestration order founded upon that judgment. In relation to the reason why the present applicant failed to appear and to contest the matter at the appropriate time, reference is made to the fact that a sequestration order had been made against Mr Yates' estate on 23 June 1980. Mr Yates has sworn an affidavit in which he says that he was advised by his solicitor, Mr Lynn, that it would be / inappropriate for him to defend the matter as he was already bankrupt. It is difficult to reconcile the claim that Mr Lynn gave that advice with the active participation in the proceedings in this Court by Mr Lynn on behalf, inter alia, of Mr Yates. However, as Mr Yates' claim is not contradicted I propose to deal with the present matter upon the basis that he was advised to this effect by Mr Lynn and that this was the reason why he did not actively participate in the proceedings in 1981 and 1982. It would have been appropriate for Mr Gilchrist to prove in the previous bankruptcy of Mr Yates only if his cause of action had arisen prior to the making of the sequestration order on 23 June 1980. The evidence does not disclose whether the advertisement referred to by Mr Gilchrist was seen by him before or after 23 June. He merely says that he saw it in June. Nor is it established whether his first contact with Mr Yates took place before or after that date. It follows that it is not possible to make any finding as to whether the misrepresentations relied upon were made before or after 23 June 1980. However, it is clear that Mr Gilchrist did not go into the transaction prior to 4 July. As at 23 June 1980 he may have been in the position of having had his interest . titillated, but he was uncommitted and he had not incurred any expense. It would not have been possible for him to make any claim for damages as at that date; he had not then incurred any damage. There is therefore no question of the present claim being barred because of the previous bankruptcy, and I pew ew we eee a ae ee ee ee ee ee - nner rr 10. gay this because it was suggested in argument that there may be a defence upon this basis. It follows of course that any advice to the suggested effect which Mr Lynn may have given would have been erroneous. However, as I have said, for present purposes I am prepared to accept that such advice was given and I think it was the reason why Mr Yates did not take any part in the proceedings. Under those circumstances the question arises as to whether there is an arguable case that there is no valid debt behind the judgment which Mr Gilchrist has obtained. The test to be applied in relation to going behind a default judgment for the purposes of bankruptcy proceedings has been referred to in numerous cases. It is sufficient to refer to what was said in Corney v Brian (1951) 80 CLR 343 and in Wren v_ Mahoney (1972) 126 CLR 212. The language used by the various members of the High Court in those two cases differs a little but the most liberal test, from the point of view of a judgment debtor, is that the court must be satisfied that there is a substantial reason for questioning the existence of a debt to- the petitioner. It is important to remember that the reference is to "a debt". It is not necessary to show that the amount of the debt is precisely that which is claimed by the petitioner. If the Court is satisfied that there is a debt of an amount sufficient to found a petition -- that is, at the date when ll. this petition was filed, $1,000.00 -- then the appropriate course is to proceed to make a sequestration order, leaving it to the trustee upon lodgment of a proof of debt to determine the actual indebtedness. It appears to me that there is no reason to doubt that Mr Yates aided and abetted or, to use more common terminology, was knowingly concerned in false and misleading conduct by the first respondent in relation to Mr Gilchrist. Counsel for Mr Yates points out that it is not directly proved that he had anything to do with the lodgment of the newspaper *-- advertisement but I think that I am entitled to infer that the chairman of a proprietary company, being a person who was actively engaged in the promotion of the relevant amusement machines, would have been aware of the terms of an advertisement lodged by his company. It is not as if Mr Yates was a part-time chairman or devoted his attentions to other aspects of the company's business. He appears to have been the person principally concerned in the negotiations with Mr Gilchrist in response to the very subject matter of the advertisement. In respect of the brochure, it appears that he was present when the brochure was actually delivered to Mr Gilchrist. In those circumstances it is necessary to consider whether there is reason to doubt the correctness of the finding of misleading conduct in regard to the matters 12. contained in the advertisement and the brochure. So far as the advertisement is concerned, the only relevant statement appears to be a prediction that the applicant will gross over $100,000.00 per year. I bear in mind the authorities which emphasise that predictions only constitute misleading conduct for the purposes of s.52 where it can be inferred that at the time they were made there was no genuine belief that the prediction would be fulfilled. See, for example, Bill Acceptance Corporation Ltd v GWA Ltd (1983) 50 ALR 242. In the present case it is proper to infer that there was no genuine belief in the ability of an assembler to earn $100,000.00 per annum. The amount which was to be paid to the successful applicant as at the time that the advertisement was lodged, and as at the time the agreement was made on 4 July was to be $100.00 per machine. This means that it would be necessary for the assembler to assemble 1,000 machines per year. That is the equivalent of a little over nine container loads. In the period of five months which elapsed from the time that the agreement was signed until the renegotiated arrangements on 1 December only one container load arrived in Australia. Mr Yates has said in his recent affidavit that there were problems in having the container unloaded because of industrial disputes on the wharves. It may be that there was some delay from this cause. But it is not suggested that there was ever an order lodged for a second container load. There was nothing said in the advertisement to suggest that wee eae ee mee - ee ee ee ft ew eeereee cee ee 13. the $100,000.00 was only to commence to run after some preliminary interval. The suggestion was that this amount was available to the assembler upon appointment. It seems to me that, in the absence of orders having been lodged for machines to be exported from the place of manufacture to Australia prior to the time when the advertisement was inserted, there was no possibility whatever of the successful applicant for the assembly rights earning at the rate of $100,000.00. At the most, it could be said that -- at some future date after appropriate steps had been taken -- the earnings might -build up to that amount.~ In relation to the brochure, considerable emphasis is placed upon advertising. The whole effect of the brochure is to suggest to readers that table soccer will be the subject of significant promotion and that it will become very popular, with substantial cash prizes for excellence in using the tables. This is consistent only with a major advertising campaign. As I have indicated, Mr Gilchrist claimed that he was specifically told about an advertising campaign when he had his discussion with Mr Yates. He said that he subsequently spoke to Mr Yates on numerous occasions from the time of his initial agreement right up till the time when it was decided that he should buy out the unsold tables, and that there never was any advertising campaign. Eventually Mr Yates said that there would not be any campaign. It think that the - Cem wee eee - ed eee deed nee ee tee renee ee 14. only inference which can be drawn is that there was no genuine intention of promoting the goods in the manner suggested by the brochure. It is not apparent why there would have been any failure to undertake an advertising campaign had it been proposed all aiong that this would occur. Consequently it seems to me that the complaints made in respect of both the advertisement and the brochure, that is to say the matters referred to respectively in paras.3 and 2 of the Amended Application, are made out. In relation to para.1, there is no evidence of the falsity of the matters referred to in sub-paras.(a), (b) or (c). In relation to (d), the allegation overlaps with that relating to the brochure because the reference there is to the provision of prime locations for siting equipment, promotional aids and training. It appears that none of this was ever done, and I think that this must be judged in the same way as the advertising campaign. Sub-paragraph (e) refers to the stated intention to conduct a national advertising campaign of a table soccer tournament with the first prize of $10,000.00. This is apparently a reference to what is said in the brochure and is covered by what I have already said. It follows that in my opinion the evidence- overwhelmingly demonstrates the making of representations which were in fact false and to the knowledge of Mr Yates. Under those circumstances the applicant was entitled to rt wer me i5. succeed in bringing proceedings under s.52 and to obtain relief against Mr Yates pursuant to s.75B of the Trade Practices Act. Counsel for Mr Yates submits that, even if Mr Gilchrist was entitled to succeed, the damages assessed were excessive. The basis of this submission is that Mr Gilchrist had the benefit of the unsold machines -- apparently about 57 in number -- and that he could have sold these by way of reduction, or even elimination, of his loss. Reference is made to the fact that, in the brochure, the list of expenses for a promoter includes as an outgoing six tournament soccer tables, at a cost of $1,375.00 each. Upon the basis of this reference it is suggested that there is evidence that unused tables were worth $1,375.00. It seems to me that there are at least two problems about that submission. The first of them is that the value is simply an assertion in a brochure, the accuracy of which, in other respects, has been the subject of successful attack. The figure is not verified in any way for the purposes of these proceedings. Secondly that is a figure to be demanded by Australian Table Soccer Company Pty Limited of promoters, but on the basis of a major promotion of soccer tables in accordance with the brochure. It is another matter altogether whether the tables would realise that figure in the absence of 16. such a promotion, and when there will be a mere handful of tables on the market so that they cannot achieve widespread popular recognition and acceptance. There is evidence that the actual cost of the machines landed in Australia is $350.00 and the difference between that figure and the asking price of $1,375.00° presumably represents the return desired to be achieved by Australian Table Soccer Company together with a reimbursement of such promotional expenditure as it might eventually undertake. I do not think there is any evidence at all that these machines could have been sold for $1,375.00 or anything like that figure. In the evidence before Morling J, Mr Gilchrist said in para.8 of his affidavit: "In an endeavour to minimise my losses I acquired title of the soccer tables in my possession but find that such tables are virtually unsaleable due to the lack of promotion of the game and the shortage of spare parts." In his judgment, Morling J referred to the question whether the goods were saleable. He indicated there was some evidence that they were saleable for some amount of money but he declined to make any deduction in relation to the machines of which Mr Gilchrist had possession because he thought that there was no title in Mr Gilchrist. In this respect it is I think clear that his Honour fell into error. The error is easy to understand because the only reference to title was that contained in the paragraph of the affidavit to which I ' FAN ie ee ne ee ee ee oe rena hos 4 - -.% - . a2 . re ' : ' . * ' 7, fe . ens o : - ir eee eee ——e <a —e me ee ae ne 17. have referred. This affidavit had been looked at when liability was considered but it was presumably not again read when the matter of damages was before the Court. The question is whether this would have made any relevant difference. It seems to me that it clearly would not have done. The only evidence before Morling J, assuming title, was that the tables are virtually unsaleable. There is no evidence to suggest otherwise, even today. It may be that some small amount could have been realized by selling these machines, either individually or in the aggregate, but there is nothing to suggest that this would have been a significant sum. Certainly it is clear that the amount would not have realized anything like the amount necessary to reduce the. figure to which Morling J held the applicant entitled to a sum not exceeding $1,000.00. I am not satisfied that the applicant has discharged the onus of demonstrating that there is no relevant debt behind the judgment which has been obtained. On the contrary, and subject only to the matter of title, it seems to me that the more complete evidence now before the Court reinforces the correctness of the view taken by Morling J. Consequently I dismiss the application made in the trade practices proceedings, that is to say number G.72 of 1981 to set aside the judgment in that matter. Lene we ee 18. I certify that the seventeen (17) preceding pages are a true copy of the Reasons for Judgment of his Honour Mr Justice Wilcox. Associate: UvgQAre. A. He ttow Date: © IZ dune 1486 No.G.72/81 Counsel for the Applicant, Terrence Gilchrist: Mr F Lever Solicitors for the Applicant, Terrence Gilchrist: . Messrs Kennedy & Kennedy~ Counsel for the Respondent, Frank Yates: ~ Mr K Horler Solicitors for the Respondent, Frank Yates: Messrs Horowitz & Bilinsky No.P.1452 of 1985 Counsel for Petitioning Creditor: Mr F Lever Solicitors for Petitioning Creditor: Messrs Kennedy & Kennedy Counsel for Debtor: Mr K Horler Solicitors for Debtor: Messrs Horowitz & Bilinsky Date(s) of hearing: - 20 May 1986