CATCHWORDS BANKRUPTCY - going behind judgment debt - failure of debtor to argue counterclaim at trial - exercise of Court's discretion. EVIDENCE - hearsay - whether permissible in bankruptcy jurisdiction - application of general practice of courts. Bankruptcy Act and Rules, r.132{(1)(c) Re: Deborah Anne Tosweil Ex parte: Kimberley N.@.1I. Finance Limited Qld. Pi59 of 1987 PINCUS J. BRISBANE 1 MAY 1987 IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ~ QLD PET 159 of 1987 BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND ) ~ RE: DEBORAH ANNE TOSWELE Debtor EX PARTE: KIMBERLEY N.Z.I. FINANCE LIMITED Creditor ! MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 1 MAY 1987 WHERE MADE: BRISBANE THE COURT: i. Makes a sequestration order against the estate of the debtor. 2. Orders that the petitioning creditor's costs of and incidental to the petition in this matter be taxed and paid in accordance with the Bankruptcy Act 1966. NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. Met IN_ THE FFDERAL COURT OF AUSTRALTA ) GENERAL DIVISION ) QLD PET 159 of 1987 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: DEBORAH ANNE TOSWELL ' Debtor EX PARTE: KIMBERLEY N.Z.I. FINANCE LIMITED Creditor PINCUS J. 1 MAY 1987 REASONS FOR JUDGMENT This is a creditor's petition for a sequestration order under the Bankruptcy Act 1966. The debtor has given notice of intention to oppose the petition, and affidavit material has been filed. Counsel for the petitioning creditor objected that the material is in large part hearsay, and so it is. The Bankruptcy Act does not say in what circumstances the Court may act upon hearsay, nor do the rules say so. It is my view that the intention probably was that the Court would apply the practice applicable in courts generally, namely that hearsay is receivable in interlocutory proceedings only; r.132(1)(c) plainly implies that in some circumstances, hearsay may be permitted. The hearsay evidence sought to be used by counsel for the debtor is therefore inadmissible on the hearing of the petition. That is, in this case, a just result because the debtor's husband, the source of the information supplied in the affidavits, was readily available and could have made the affidavit himself. When called, the debtor proved to have very little knowledge of the questions in issue, so that the story put forward could not really be tested. Counsel for the debtor contended, however, that the material could be accepted as relevant to an application to have the proceedings stayed temporarily to allow the taking of certain proceedings in the Supreme Court, referred to below under par.(v) of the summary of the notice of intention to oppose. That appears to me to be correct; such an application would plainly be interlocutory. But the fact that the critical allegations made are not sworn to by a deponent having personal knowledge of them considerably weakens their force and the application for a_ stay appears, in any event, to have no substance. The judgment debt on which the bankruptcy petition is founded was obtained in the Supreme Court of Queensland. The petitioning creditor issued a writ for money claimed to be due under a guarantee and then applied for summary judgment. That application was adjourned once, and when it came before the Supreme Court on a second occasion, there was no appearance for the debtor, and the Court entered judgment. The matters sought to be raised in this Court and referred to below were not raised in the Supreme Court, nor is any explanation advanced for the failure to raise them there. In an application to go behind a default judgment, which is in substance what is sought to be done here, I have previously acted on the view that it is necessary that there be substantial reasons for questioning whether there is a debt in truth and reality, following Wren v. Mahoney (1972) 126 C.L.R. 212 at pp.224, 225 and propose to apply that test here. The notice of intention to oppose sets up that the debtor has a counter-claim, set-off or cross-demand. Counsel for the creditor argued, on the basis of cases referred to by McPherson J. at p.58 of his Honour's work "The Law of Company Liquidation", that it is not enough tc show that there is an arguable set-off which might have been, but has not been, raised in the proceedings in which judgment was obtained: see the authorities in footnote 84, The more significant of those is Re L.H.F. Walls Ltd. £19701 Ch. 27; that case appears to be authority for the proposition that, in a petition to wind up, a claim that there is a set-off or counter-claim gives rise to a discretion to refuse a winding up order. I have not been referred to any authority as to the relevance of an alleged counter-claim in an attempt to go behind a judgment on which a bankruptcy notice has been issued. If the judgment debtor can show the matters set out in s.40(1)(g)(i) of the Bankruptcy Act - that the counter-claim equals or exceeds the amount of the debt and is one that he could not have set up in the action or proceeding in which the judgment was obtained - that is a complete defence; there is then no act of bankruplcy. Here, Uhere is no such counter-claim. The matters complained of could have been raised in the action, but were not. Although counsel contended that the allegation of a counter-claim is an insufficient basis in law on which to go behind a judgment, it is my view that that 1s not necessarily so. A cross-claim for damages may, in some circumstances, be raised by way of equitable set-off: see e.g. per Woodward J. in D. Galambos and Son Pty. Ltd v. McIntyre (1975) 5 A.C.T.R. 10 at pp.25, 26. Presumably such a set-off may be raised in bankruptcy jurisdiction to attack the existence, as a matter of "truth and reality", of the debt on which judgment has been obtained. But TI have not found it necessary to attempt to determine the limits within which it is permissible to raise a cross-claim by way of attack on the judgment debt. That is so because, quite apart from the legal argument just mentioned, the matters relied on do not seem to me sufficient to justify going behind the judgment. The notice of intention to oppose petition filed on 22 April says in substance that: (i) The receivers and managers of a company called Twinego Pty. Ltd. acted in conjunction with the petitioning creditor "to prejudice the (debtor's) position in respect to the realisation of assets" which could have extinguished the debtor's liability. (ii) The petitioning creditor, Twinego, and others agreed to act so as to injure the debtor and certain companies in which she holds an interest. (iii) Securities held by the petitioning creditor could pay the whole debt. (iv) The principal debtor (the debtor's liability being under a guarantee) is solvent and able to repay the money. (v) The judgment debtor is entitled to indemnity from Twinego and proposes to bring proceedings in the Supreme Court to establish that right. (vi) If a sequestration order were made, it would give the petitioning creditor a certain advantage. Not all of these matters warrant detailed consideration; as to most of them there is no relevant evidence. The principal affidavit of the debtor is, as I have said, hearsay in large part. In summary, its contents are as follows. In March 1985 the judgment debtor guaranteed a loan from the petitioning creditor to Twinego which was secured by, inter alia, a bill of sale over certain assets of Twinego. About the same time, the debtor and her husband agreed to sell a 50% interest in Twinego to people called Ryan, and the petitioning creditor leased certain chattels to Twinego. ye In August 1985, so the affidavit says, the debtor and her husband agreed to sell the rest of Twinego to the Ryans, the company then having four shops, each of which had substantial turnover. In January 1986 Twinego and another company sued the debtor and her husband in the Supreme Court claiming, inter alia, that there were breaches of the agreements for sale already referred to and seeking damages for those breaches. About the same time, Twinego defaulted in respect of its liabilities to the petitioning creditor and receivers and managers were appointed. A little later the petitioning creditor sued the debtor and her husband in the Supreme Court on the guarantee. The affidavit suggests that the assets of Twinego are substantial and that its business at the date of appointment of receivers and managers was worth between $300,000 and 400,000. The affidavit says that the receivers managed the assets subject to the bill of sale by closing down the store whereupon assets "disappeared". They also acted irresponsibly, 1t is said, in failing to agree to sales of property at a good price, selling later at a lower price. The affidavit also attacks the conduct of the petitioning creditor in respect of realisation of securities, relying in particular upon an alleged sale of a property at Surfers Paradise at a gross undervalue and the sale at an undervalue of a certain boat. The investigation of the questions thus briefly outlined would be a considerable undertaking, involving (counsel conceded) discovery and consideration of a number of transactions and potential transactions, questions of valuation and the like. I think this Court is entitled to take into account against the debtor that (as is admitted) no reliance was placed on any of these matters in the proceedings in which judgment was obtained, although the debtor was there initially represented by solicitors and counsel. It is by no means a matter of routine that this Court will undertake the task of determining in bankruptcy jurisdiction questions which should have been raised in the Supreme Court; such a policy would damage the Court's prospects of properly carrying out its primary functions under federal law. Counsel for the petitioning creditor said that, insofar as the debtor relied upon the alleged misdeeds of the receivers and managers, the contentions raised were not open; that was. so, counsel argued, because the receivers and managers were agents of Twinego and not of the petitioning creditor. But the notice of intention to oppose indicates that the case which was sought to be raised would connect the petitioning creditor directly with the actions of the receivers and managers; so the answer made by counsel is not conclusive. The debtor gave evidence that she had substantial debts, apart from that currently in issue. She said she owed hundreds of thousands of dollars to a company called Rothwells, about $100,000 to the A.N.Z2. Bank and that those companies were pursuing their rights. She was unsure about the extent of her liabilities to the oe ' petitioning creditor (other than the debt discussed above) but thought she owed it at least $200,000. In my opinion, the case is one in which the Court's discretion to go behind the judgment should not be exercised. If the matters I have mentioned had substance, one would have expected them to have been set up in the Supreme Court. Secondly, a number of the questions raised in the notice of intention to object are, as I have pointed out, completely untouched by the evidence. Thirdly, there is no direct evidence in support of any of the assertions made. I propose to make a sequestration order. i certify that this and the F preceding Pagés ara a trua copy cf the reasons for Judgment herein of His Honour Mr. Justice Pincus TE Associate Dated / May (997