CATCHWORDS BANKRUPTCY - annulment - going behind default Supreme Court judgment - judgment obtained on writ setting out wrong cause of action - whether existence of real debt. Bankruptcy Act 1966, s.154(1) Re: Jan Malcolm McCollum Ex parte: The Bankrupt E564 of 1985 PINCUS J. BRISBANE 5 MARCH 1987 x ~ 6 MAR 1987 EDERAL COURT OF F AUSTRALIA PRINCIPAL REGISTRY ~ IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISTON ) QLD E564 of 1985 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: IAN MALCOLM McCOLLUM EX PARTE: THE _ BANKRUPT MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 5 MARCH 1987 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The sequestration order made on 12 August 1985 be annulled; 2. The judgment creditor pay one half of the applicant's costs of the application to annul, to be taxed. NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION wv QLD E564 of 1985 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: IAN MALCOLM McCOLLUM EX PARTE: THE BANKRUPT PINCUS J. 5 MARCH 1987 REASONS FOR JUDGMENT This 1s an application for annulment of a sequestration order. The ground on which the annulment is sought is one of those in s.154(1) of the Bankruptcy Act 1966, namely that the order "ought not to have been made". The sequestration order, which was made on 12 August 1985, was based upon an act of bankruptcy consisting in failure to comply with a bankruptcy notice which was founded on a judgment obtained in the Supreme Court of Queensland. That judgment was given in default of appearance on 13 December 1983, and the bankrupt says: (a) he was never served with the writ; (b) he was never indebted to the judgment creditor in respect of the goods sold and delivered mentioned in the writ. 2. As to (a), the question whether the writ was properly served has not been fully litigated before me, but Mr. Clair for the creditor says that it does not matter whether it was properly served or not. He invites me so to hold, thus making it unnecessary to determine the factual question, As to (b), there is, on the other hand, no dispute as to the factual point on which the judgment debtor relies, namely that he was never indebted for goods sold and delivered. It appears that by an error the writ was issued so endorsed, whereas' the creditor's claim should in truth have been on a guarantee given to secure payment of moneys due by a company, McCollum Brothers Pty. Ltd., 1n respect of goods sold to that company in 1981. The judgment debtor says that he was formerly involved in the company but sold out of it in 1980. At that time there was in existence a guarantee executed by him covering goods sold and delivered by the judgment creditor to McCollum Brothers Pty. Ltd. The debtor says that when he sold his interest in the company he gave instructions for the guarantee to be cancelled, but there 1s no evidence that his instructions were carried out. After judgment was entered, the bankrupt was served with a bankruptcy notice, and consulted solicitors, giving them instuctions to contest the matter. They filed an affidavit in this Court, but took no further steps and a sequestration order was made. 3. Mr. Paratz for the bankrupt says that I should go behind the judgment. In Re Deriu (1970) 16 F.L.R. 420, Gibbs J. held in effect that, where it is shown that there was in truth no debt, an annulment order is appropriate; there is, of course, a discretion to annul or not to do so, even if the ground mentioned is made out: Re Middleton - unreported (4 February 1987). The first question, however, is whether it is right to go behind a default judgment for the reason that the writ instituting the proceedings in which judgment was obtained set out the wrong cause of action. In favour of the creditor, 1t must be said that the test commonly applied includes the expression "... whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor ..." (Wren v. Mahony (1972) 126 C.L.R. 212 at p.224 per Barwick C.d.). Here, there 1s, i1inmy view, not sufficient shown to justify an enquiry into the (now rather stale) question of whether a debt on the guarantee truly did arise in 1981, but it 1s said on behalf of the debtor that one must determine the existence of the judgment debt by reference to what was claimed in the action. In Re Ferguson; Ex parte E.N. Thorne and Co. Pty. Ltd. (1969) 14 F.L.R. 311, a judgment has been obtained at common law {before the fusion of law and equity) for money lent, in the Supreme Court of New South Wales. Bankruptcy proceedings followed and the judgment debtors said the creditor should have brought proceedings in equity, alleging a breach of fiduciary duty, in 4. order to recover the money in question and therefore there was no proper debt. Gibbs J. disagreed, saying: "The court will go behind the judgment for the purpose of considering whether it was founded on a real debt. The fact that the judgment may be irregular or wrong in form is no sufficient reason for dismissing the petition... The object of going behind a judgment is not to enquire whether the proper procedure was followed to obtain it, but to determine whether the debtor in reality owed to the creditor the moneys which the judgment held that he owed. Once it is found that the debtor was really indebted to the petitioning creditor in the amount for which judgment was given, any irregularities of procedure, however important they may have been had they been relied upon in the proceedings in which the judgment was obtained, cease to be of importance ... once the existence of the debt is found, 1t cannot be sufficient cause for refusing to make a sequestration order that a judgment for the correct amount, given by a Court having jurisdiction, was obtained by the wrong procedure or given in the wrong form." These remarks favour the judgment creditor in the case before me and point to a conclusion that the misdescription of the claim 1s of no present consequence. However, the reasons given in Corney v. Brien (1951) 84 C.L.R. 343 were relied on as authority to the contrary. In that case, a writ had been issued claiming a sum alleged to be due in respect of the purchase of a tractor. Judgment was obtained in default of appearance and bankruptcy proceedings followed. The primary judge (Clyne J.) said there was no evidence that the judgment creditor Brien "was either the vendor or owner of the tractor" (p.349). According to the account of his judgment given by the majority, his Honour's reasoning went on: "On the other hand, there was little doubt that Brien produced the money, whereby the debtors were able to obtain the tractor. He thought that the claim was irregular, but that no injustice had been caused. Where a Court of Bankruptcy inquired into the consideration for a judgment debt, it usually did so where there was evidence that the judgment had been obtained by fraud or collusion or where there had been some miscarriage of justice. The fact that a judgment was irregular and wrong in form was not a sufficient ground for going behind it." Fullagar J. agreed with Clyne J. that the petitioning creditor "ought not to be held strictly to the cause of action actually alleged in the writ ..." (p.360), but the majority appear to have advanced two distinct grounds of decision, the principal one being that there was no agreement between the parties and a subsidiary one, advanced on the assumption that there was such an agreement, that the claim in the writ was wrong. The judgment of Dixon, Williams, Webb and Kitto Jd., at p.352, includes the following: "Even assuming there was an agreement between Corney and Irvine and Brien on the terms of the document, a further objection exists to the proof of the judgment debt. Clause 9 of the document is in the following terms: ..." Their Honours then set that clause out and continued: "Corney and Irvine did not at any time comply with the terms and conditions of the document. They did not pay any of the instalments of hire. They could not and did not elect to purchase the tractor by notifying Brien of their election. Accordingly, the claim in the writ that they were indebted to Brien for the purchase money was wrong. They were indebted to Brien if at all for the instalments of hire and for interest on the overdue instalments eee Unless there was a sale of the tractor by Brien to Corney and Irvine there was no consideration for the purchase money. The fact that Corney and Irvine may have been indebted to Brien in a different sum for a different consideration, namely for the instalments for the hire of the tractor, is immaterial. Tt is clear that there was no consideration for the judgment debt. It was not a good debt irrespective of the judgment." The principle underlying this "further objection" to the proof of the judgment debt is implied rather than stated. The essence of the reasoning is in my view in the third last sentence quoted above. It is true that the reasons include reference to the possibility of indebtedness in a different sum as well as to indebtedness for a different consideration, but reading the passage as a whole, it appears to support the principle that i1t would not have been enough for the judgment creditor to show that there was money due to him for hire; it had to appear that there was purchase money due to him, since it was purchase money for which he had sued. Although there cannot be drawn from Corney v. Brien a rule that any discrepancy between the claim as formulated and the true nature of the debt as found is fatal, here the discrepancy is very comparable with that which existed in the High Court case. In both cases, the liability was described in the writ as if it arose under a contract for sale and purchase of goods. The difference between the two cases is that in Corney v. Brien the true liability, if any, was for hire; here 1t was under a guarantee. If, as may be deduced from Corney v. Brien, the rule is that the "consideration" for the judgment debt must be judged by reference to what was claimed in the writ, it has to be said in 7. favour of the judgment debtor that the indebtedness, if any, was for an entirely different consideration. In short, I can see no sufficient ground for distinguishing Corney v. Brien as to the second ground of decision in that case and think myself obliged to hold that there was, to use the words of the High Court, "no consideration for the judgment debt". That makes it unnecessary to consider in detail the other allegation made here, namely that the writ was unserved. It is enough to say that I would not, on the material before me, have regarded that point as having any substance. It remains to consider the exercise of discretion. There has been considerable delay on the part of the debtor in bringing these proceedings, and he was not represented when the petition was heard. On the other hand, he raised the very point on which he has succeeded early, and in a formal way, by filing the affidavit mentioned above. Further, he has consistently asserted that the order was bad and refused to acknowledge his bankruptcy. The delay which has occurred does not appear to have prejudiced the judgment creditor. The sequestration order will be annulled and the judgment creditor will be ordered to pay one half of the applicant's costs of the application to annul, to be taxed. 1 certify that this and the "7 precedin Pages are a true copy of the reasons for judgment herein of His Honour Mr. Justice Pincus Aetborf — bssociete Dated Oy Which PP 7 Counsel for the Applicant: Mr. D. Paratz Solicitors for the Applicant: Cranston McEachern & Co., town agents for Petersen & Lade Counsel for the Respondent: Mr. F. Clair Solicitors for tne Respondent: Wheldon & Tierney Date of Hearing: 3 February 1987 IN_THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ~ QLD E564 of 1985 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: IAN MALCOLM McCOLLUM EX PARTE: THE BANKRUPT CORRIGENDA Amendment to the judgment of his Honour Mr. Justice Pincus dated 5 March 1987: Page 2, para.4, line 3 - "instuctions" should read "instructions". ANNA BOOY ASSOCIATE TO PINCUS J. 6 MARCH 1987