'yubovens a AeS 1. CATCHWORODS BANKRUPTCY - application to set aside bankruptcy notice - going behind judgment debt - defence mentioned at trial - debtor not present at trial - no debt in truth and reality. GUARANTEE AND INDEMNITY - bill of sale given by debtor - directors' guarantee in support - bill of sale void due to creditor's negligence - debtor entitled to reduction of liability - implied condition that creditor will take reasonable steps to perfect principal security - complete discharge. Re: Edward Kwan Ex parte: Hastings Deering (Solomon Islands) Limited Qld BN 956 of 1987 PINCUS J. BRISBANE 21 AUGUST 1987 IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) QLD BN956 of 1987 ~ RE: EDWARD KWAN Judgment Debtor EX PARTE: HASTINGS DEERING (SOLOMON ISLANDS) LIMITED Creditor MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 21 AUGUST 1987 WHERE MADE: BRISBANE THE COURT ORDERS THAT: The bankruptcy notice dated 2 June 1987 be set aside. Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. = oO IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION ) QLD BN956 of 1987 BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND ~ ~~ RE: EDWARD KWAN Judgment Debtor EX PARTE: HASTINGS DEERING (SOLOMON ISLANDS) LIMITED Creditor PINCUS J. 21 AUGUST 1987 REASONS FOR JUDGMENT This 1s an application to set aside a bankruptcy notice. The judgment in question is one on a guarantee given in the High Court of the Solomon Islands, and registered in this State. The principal ground of the application is that the judgment debt should be gone behind because, but for its failure to register a security given by the principal debtor, the creditor would have had no need to resort to the guarantee. The High Court of the Solomon Islands held at Honiara entered judgment on10 October 1986 in the sum of $383,714.30 (Solomon Islands) and on 24 October 1986 the Supreme Court of Queensland gave the judgment creditor leave to register the judgment under the Reciprocal Enforcement of Judgments Act rte 1959-1986 (Q.) in the sum of $327,960.94 (Australian). A bankruptcy notice was issued by a Deputy Registrar on 2 June 1987. The judgment debtor says that in 1984 he and others were interested in a company called Forest Development Company Limited and he negotiated on behalf of that company for the purchase of some equipment from the judgment creditor. A telex of 8 October 1984 to the company and others set out a proposal from the judgment creditor to sell the machinery at a certain price on conditions there set out, which included that there would be a bill of sale and guarantees from the directors, one of whom was the judgment debtor. On 10 October 1984, the judgment debtor and others signed a simple form of guarantee which did mot contain any provision excluding what might be called guarantors' special defences. A bill of sale was also executed in accordance with the arrangement between the parties, but for some reason that did not occur until 9 November 1984. According to the judgment debtor's affidavit, the company failed and went into liquidation on 2 May 1985. The following day the judgment creditor wrote to the judgment debtor referring to the guarantee and continuing: "As you are aware we were placed in a position to present a petition to the High Court of the Solomon Islands to validate our security, the result of this being given in favour of the liquidator. Although we now have no access to our security being the 2 Caterpillar D6 Tractors, the Company still has breached the Bill of Sale and we now call upon your persoanl [Csic] guarantee and request settlement of the debt as listed helow. Balance due under the Bill of Sale S1I$372,504.00 Costs of action 10,600.00 S1I$383,104.00" The reference in the letter to validating the security is not easy to follow, since it appears that it was not until 3 June 1985 that that issue was determined by the High Court of the Solomon Islands. In a judgment of that date, Wood C.J. dismissed an application by the judgment creditor for an extension of time to register the bill of sale. His Honour's judgment recites that the bill of sale had to be registered under s.90(1) of the Companies Act within 21 days after its creation. It was submitted for registration after that time. The Registrar of Companies promptly advised the judgment creditor of his refusal to register and the necessity to apply to the High Court for an extension. However, nothing was done about it until after the winding up and his Honour refused to extend the time on the ground that' the rights of the unsecured creditors had crystalised as at the date of the winding up order, and it was therefore too late. It is not in issue before me that the bill of sale should have been, and was not, registered under the relevant legislation and that the effect of failure to register 1s that it is void against the liquidator and the creditors. Further, the judgment debtor swears to the fact that at the date of liqidation there were assets sufficient to discharge all the indebtedness to the creditor under the bill of sale. Counsel for the judgment creditor informed me from the bar table that that allegation is disputed. I note however that it is made in an affidavit filed on 1 July 1987 - nearly seven weeks ago - and there is no material before me to challenge the judgment debtor's evidence on that subject, to which no objection was taken. Nor was any adjournment sought. When the judgment debtor received the demand, quoted above, for moneys due under the guarantee, he tried to get legal advice but encountered difficulty because there were only two private solicitors 1m Honiara, one of whom declined to take the matter on the basis that he had acted for the judgment creditor. A writ was issued. The judgment debtor eventually engaged the Public Solicitor who undoubtedly did the best he could in the circumstances. The difficulties he had included frequent absences of the judgment debtor. The action against the judgment debtor was tried on 16 September 1986. The judgment debtor was not present and liability was not contested. I have a record of the proceedings before me from which 1t appears that a witness, Mr. R.D. Wolfe, disclosed that because of non-registration of the bill of sale the security was lost. Despite the fact that liability was not contested, there was reference during the course of the hearing to the loss of the security and the note of counsel's address reads: "Question of whether it was lost by negligence or inadvertence. Plaintiff had two securities; Bill of Sale and 2 guarantees. If it chose to exercise rights under guarantees, it was not affected by matters in bill of sale. If security in bill of sale were lost by negligence it would not affect guarantee. It is unequivocal." rf Thaor It does not appear that counsel for the judgment debtor challenged these assertions, which appear to me to be overstated. The trial judge made no reference in his reasons to the point I have just mentioned, no doubt because liability was not contested. Further proceedings, to which it is unnecessary to refer in detail, then took place in the High Court. Counsel for the judgment creditor pointed out, before me, the absence of any formal application to set aside the bankruptcy notice. He did not, however, ask that the matter be stood over on that account and Mr. Dutney for the judgment debtor undertook to file a formal application. Mr. Dutney said, in effect, that it is convenirent to consider whether there 15 a proper judgment debt at this stage, a proposition which was not contested by the creditor and appears to me correct (Re V. & J, Removals; Ex parte Earl - unreported, 21 June 1985). Mr. Dutney also submitted that although the judgment was not one by default, I was entitled to take into account in favour of the debtor the circumstances 1n which the judgment was obtained, as set out above. I have been somewhat troubled by the fact that the very point on which the debtor now relies was mentioned to the learned trial judge, although his Honour did not deal with the matter. It appears to me, however, that that circumstance is counter-balanced, so to speak, by the fact that counsel appearing for the creditor said, in effect, (as mentioned above) that the point was legally irrelevant, which it was not. In Buckeridge v. Mercantile Credits Ltd. (1981) 56 A.L.J.R. 28 at p.34, Brennan J. said: "In a case where the act of a creditor does not discharge a surety, but the creditor has nonetheless sacrificed or impaired a security, or by his neglect or default allowed it to be lost or diminished, the surety is entitled in equity to he credited with the deficiency in reduction of his liability ..." Gibbs C.J. and Wilson J. expressed their general agreement with the reasons of Brennan J. in that case and Murphy J. agreed with his Honour. This seems to me a clear case for application of the principle just quoted. There is shown a double failure on the part of the creditor; it did not register the security in time and, its failure having been pointed out, neglected to do anything about 1t until 1t was too late. On the evidence, the amount recoverable under the security 1s greater than the judgment debt, and I therefore hold that there is no "debt in truth and reality". Two other approaches to the matter should be mentioned. One is that even if the amount recoverable under the bill of sale did not exceed the judgment debt, it might have been argued that the sum stated in the bankruptcy notice was too high; however, it was not established that a notice disputing the amount was given in the time prescribed by s.41(5) of the Bankruptcy Act 1966. Secondly, it should be mentioned that counsel for the debtor argued that, irrespective of the precise amount recoverable under it, failure to register the bill of sale had extinguished the . debt. Counsel relied upon the remarks of Dixon J. in Williams v. Frayne (1937) 58 C.L.R. 710 at 738: "Tf the guarantee is given upon a condition, whether express or implied from the circumstances, that a specific security shall be obtained, completed, protected, maintained or preserved, any failure in the performance of the condition operates to discharge the surety and the discharge is complete." Counsel for the judgment creditor, on the other hand, while conceding the principle, contended.that here there was no evidence from which one might safely imply the existence of the condition. In view of my conclusion on the point discussed above, it is not strictly necessary to state an opinion on this matter, but desirable that I do so. On the evidence the case 1s one of a kind familiar in commercial life: the directors of a private company were asked to guarantee a company debt to support a substantial security taken over the company's property, there being no express statement that the efficacy of the guarantee depended upon the creditors troubling to perfect the security. In such a situation, 1t 1s (in general) at least implicit that the creditor will take all reasonable steps to perfect the security. It would be contrary to the expectation of business people that the creditor, not having perfected the security given by the principal debtor, should be free to have recourse to the guarantors. In my opinion, here, where the guarantee was given on the basis of an express stipulation that there should be a bill of sale, there is such an implied condition as I have mentioned; the guarantee is therefore discharged for breach of that condition. It should be added, perhaps superfluously, that what is held here has nothing to do with instances in which the guarantee is so drawn as to exclude the use of such a defence by the guarantor, nor with a case in which the failure to perfect the security was not the fault of the creditor. In the circumstances, the bankruptcy notice must be set aside, but I do not propose to make any order as to costs; the defence should have been raised at a stage earlier than at the point of issue of the bankruptcy notice. fe) ertify that this and ihe 7 preceding 2195 are a true copy of the reasons for yedement herein of His Honour Hr Justice Pincus CT Associate Dated 2/ Ayust (987 Counsel for the Judgment Debtor: Mr. P.R. Dutney Solicitors for the Judgment Debtor: Messrs. Lippiatt & Co. Counsel for the Creditor: Mr. R.W. Gotterson Solicitors for the Creditor: Messrs. Stephens & Tozer Date of Hearing: 17 August 1987