3]. " Ke rrnttiee CATCHWORDS BANKRUPTCY - notice of intention to oppose creditor's petition - going behind judgment debt - no general rule for default judgments - lack of evidence to disprove existence of debt - no notice of dispute under s.41(5) of the Act - possibility of judgment debt being too high irrelevant. Bankruptcy Act s.41(5) Re: William Frederick Burgess & Anor. Ex parte: Octagon Enterprises Pty. Ltd. Qld. P1347 of 1986 PINCUS J. BRISBANE 1 JUNE 1987 * IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ~ QLD P1347 of 1986 BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND RE: WILLIAM FREDERICK BURGESS and GAIL MIGNION BURGESS EX PARTE: OCTAGON ENTERPRISES PTY. LTD. (IN LIQUIDATION) PINCUS J. 1 JUNE 1987 REASONS FOR JUDGMENT This 1s a creditor's petition for a sequestration order against the estates of William Frederick Burgess and his wife Gail Mignion Burgess, based on a judgment debt. The judgment debtors have filed a notice of intention to oppose the petition on the ground that this court should re-examine the existence of the debt on which the judgment, given in the District Court, was founded. The petitioning creditor is a company, Octagon Enterprises Pty. Ltd., formerly controlled by the debtors. Although no evidence was led directly on this point, the case was conducted on the assumption that the debtors were the sole shareholders. The company's business was not successful and on 5 November 1984 liquidators were appointed. The company's accounts for the financial year ended 30 June 1983 showed amongst its current assets a_ shareholders' current account of $33,464.45; the shareholders in question were the judgment debtors. These company accounts were prepared by accountants, Messrs. Maynard Murtagh and Smith, on the instructions of the debtors, were initialled and signed as correct by the debtors, and were submitted to the Commissioner of Taxation as being the true and correct accounts of the company. The accounts were adopted by the debtors as shareholders at the annual general meeting of the company, while at a meeting of directors shortly before the general meeting they resolved that "All current Assets are likely to realise their value as shown in the Accounting Records of the Company inthe ordinary course of business." On 25 January 1985 the debtors sued Arthur Andersen and Co., a firm of accountants, for having allegedly converted to their own use a cheque for $9.936.74 payable to them as' trustees of the company's "director fund". It appears that the debtors later came to the view that the firm originally named should not have been joined and they continued the proceedings against the company's liquidators, Messrs. D.W. Knight and R.A. Duus. There was also anstituted an action by the company against the debtors to recover the sum mentioned above shown as due by them in the accounts. Both actions were defended. The two actions were consolidated and the matter set down for hearing on 18 August 1986. The debtors say that prior to the hearing date they experienced difficulty with their solicitors, the exact nature of which is unclear. Counsel appeared for the debtors at the hearing and sought an adjournment of both cases. This was refused and the debtors' action against Messrs. Knight and Duus, the liquidators, was dismissed with costs. Counsel for the debtors then sought leave to withdraw in relation to the action by the liquidators, such leave being granted. Oral evidence was given by one of the liquidators. The debtors were then unrepresented and appear to have given no evidence; indeed, 1t does not seem that they were present at the hearing. Judgment was given against them for an amount of $33,464.45, plus interest assessed at $4,576.84, plus costs to be taxed, being the amounts mentioned in the Bankruptcy Notice. The creditor's petition was served on both debtors on 25 November 1986 and the notice of intention to oppose was filed on 10 December 1986. At the hearing before me, affidavit and cral evidence was given by the male debtor and the petitioning creditor's former accountant, Mr. Maynard, both of whom were cross-examined. Mr. Duus, the liquidator, was also called. The debtors maintain that the company's accounting records were incorrectly prepared and do not accurately reflect the true state of the company's financial affairs. The evidence given by the male debtor is to the effect that he and his wife borrowed various sums from a variety of financial institutions in order to repay the shareholders' current account, and that these monies were never credited against that account. The male debtor's evidence 1s unsatisfactory. By his affidavit sworn on12 December 1986, the debtor on behalf of himself and his wife says that the reason for the inaccuracy in the accounts 1s that he wrongly advised the accountants that all deposits to the company account represented sales. He goes on to say that he made a number of deposits to the company account (being the various sums borrowed) which did not represent sales but which were paid in reduction of the shareholders' account. Various mortgages were produced which tended to support' the obtaining of the loans, although the names of the financial institutions vary somewhat from those shown in the affidavit. A deposit book was produced which records some deposits, to an unidentified account, of sums which coincide with amounts drawn down on a loan from Australian Guarantee Corporation Limited, according to a letter from that company. In cross-examination the male debtor stated that at least some of the moneys were not banked to the company's account, as he swore in his affidavit, but into the debtors' personal accounts. This was done, according to the male debtor, on his accountant's instructions, and at a time when at least some of the company's bankings were being effected through the debtors' accounts. The debtors have never made available to the liquidators the bank statements relating to the personal accounts during this period and, indeed, had not informed the liquidator prior to the hearing that such transactions had allegedly taken place. The company's former accountant did not avert to this unorthodox practice, either in his affidavit or in oral evidence. I am not asked finally to determine the question whether the judgment debt was truly due. The issue is whether I should give leave to go behind the judgment debt. Nevertheless, in the circumstances it was in my opinion incumbent upon the judgment debtors to give a careful and accurate account of the dealings in question; that they have plainly failed to do. A number of the payments alleged to have been made are confirmed by the deposit book, but there 1s no clear evidence as to the identity of the account to which they were credited. The debtor maintains that the deposit book recorded only company transactions. However, his understanding of what 1s a "company" transaction was shown to be somewhat hazy. Although the recelving bank has stamped each deposit butt, no bank statements for the relevant period were produced to the liquidators, or to the court. Indeed, there 15 apparently a gap in the bank statements supplied to the liquidators from 30 June 1982 to 28 August 1983, a period including that during which the amounts recorded in the deposit book are said to have been paid to the company's account. Whether or not the monies were paid into the company's bank account or to personal accounts, the male debtor maintains that they were all intended to diminish the shareholders' current indebtedness to the company. The reason he gives for borrowing monies at interest in order to pay back his own company is that he did not want to let the account mount up. I find that unconvincing. Usually those in control of a company would not be concerned by the amount shown in their loan account, considered in isolation. If the company were short of funds, then one might expect those in control to relieve the shortage, 1f they saw it as being in their interests to do so, but it appears unlikely that the state of the loan account would, in itself, be a reason for concern. Some evidence was also given by the current liquidator, Mr. Duus, to the effect that in relation to the cheque for $9936.74 which the debtors allege was misapplied, there 15 a likelihood that the debtors will be entitled to some credit from that amount to be set off against the current account, after legal costs have been ascertained. Counsel sought to make something of this evidence, but 1t appears to me clear enough that merely showing that the judgment debt 1s too high cannot avail the judgment debtors, no notice of dispute having been given under s.41(5) of the Bankruptcy Act. The law in relation to this Court's power to go behind a judgment has been considered by the High Court in the leading cases of Corney v. Brien (1951) 84 C.L.R. 343 and Wren v. Mahoney (1972) 126 C.L.R. 212. These cases and others are discussed by Mr. Colvin in his article "Assailing a Judgment Relied Upon in a Bankruptcy Notice" 1n the August 1986 issue of the Australian Bar Review. I agree with the learned author's view, expressed at pp.172 and 173, to the effect that there is no general rule that the Court must go behind a judgment entered by reason of default. The present judgment should, at least ina practical sense, he regarded as one obtained in default of appearance at the trial. It 1s not easy to understand why, as has sometimes been suggested, a default judgment should arouse suspicion - at least where there is no suggestion of any sharp practice or irregularity in the entry of judgment. Very many judgments are entered in default, in proceedings alleging the existence of the debt. The reason for the default is, no doubt, commonly that the defendant finds it difficult to raise funds to meet the costs of litigation, but it would appear to be impractical to adopt a policy of routinely examining the correctness of such judgments in detail in this Court. The present case 15 a good example of the difficulty to which such practice would give rise. I prefer to adhere to the test which I have applied in other cases, of enquiring whether there are substantial reasons for questioning whether there 1s a debt in truth and reality; I do not consider that the fact that the judgment here was (in substance) one given in default should necessarily advantage the judgment debtors. Here, on the whole, and not without doubt, I have come to the conclusion that it would not be right to go behind the judgment debt. Although some documentary evidence has been produced, in the end the judgment debtors' case rests upon oral evidence being, as I have pointed out above, inconsistent with the affidavit evidence adduced on their behalf. One could not rationally deny the possibility that, 1f the issue were fully fought out, the judgment debtors could succeed, but the probability of their doing so seems low; the challenge to the ry accounts which the judgment debtors had approved appears to have been made for the first time towards the end of 1984, not long before the company went into liquidation. Documents necessary to establish that the accounts approved by the judgment debtors were wrong have not been produced. I have not overlooked that, in the action in which judgment was obtained, the debtors raised the question of the accuracy of the accounting records, but am not satisfied that the evidence is strong enough to justify conducting in this Court the contest which would (had the debtors pursued their defence) have been determined elsewhere. I therefore propose to make a sequestration order, but in all the circumstances will delay formally doing so until the judgment debtors have had an opportunity to consider their position. i certify that this and the 7 preceding rR) ragsons fir fe) Oo we Pages are a tru2 copy of th J. 2) judgment here'n of His H nour ' > ,g¢ Mr Justice Pincus ~ caper! Associate Dated | Fy22 1487