Wiltshire-Smith D. v Olsson M. [1995] FCA 477

CATCHWORDS Bankruptcy - failure to comply with bankruptcy notice based on default judgment - whether Court should go behind the judgment - debt incurred for professional services rendered at request of the debtor in relation to a business - whether debtor contracted as agent for a company or personally - whether debtor merely manager of the business or conducting it on his own behalf as lessee - whether appointment of a receiver manager of the business and control of the proceeds from its realisation by the Family Court prevented execution on the judgment. Matter No. SG 94 of 1994 DOUGLAS WILTSHIRE-SMITH v MELLOR OLSSON VON DOUSSA, MOORE & R D NICHOLSON ADELAIDE 6 JULY 1995

IN THE FULL COURT OF THE ) ) FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT ) ) REGISTRY ) No. SG 94 of 1994 ) GENERAL DIVISION ) ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: DOUGLAS WILTSHIRE-SMITH Appellant AND: MELLOR OLSSON (REGISTERED)

MINUTES OF ORDER JUDGES MAKING ORDER : VON DOUSSA, MOORE & R D NICHOLSON JJ. WHERE MADE : ADELAIDE DATE OF ORDER : 6 JULY 1995 THE COURT ORDERS THAT: The appeal be dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FULL COURT OF THE ) ) FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT ) ) REGISTRY ) No. SG 94 of 1994 ) GENERAL DIVISION ) ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: DOUGLAS WILTSHIRE-SMITH Appellant AND: MELLOR OLSSON (REGISTERED) Respondent CORAM: VON DOUSSA, MOORE & R D NICHOLSON JJ PLACE: ADELAIDE DATE : 6 JULY 1995 REASONS FOR JUDGMENT THE COURT: This is an appeal against a sequestration order made on 5 December 1994 by Branson J. The respondent firm, Mellor Olsson, is the judgment creditor on whose petition the order was made. Before Branson J the appellant unsuccessfully opposed the making of the sequestration order on the ground that he was not indebted to the respondent firm of legal practitioners who seek to recover professional fees. The petition was based on an act of bankruptcy alleged to have occurred on 25 August 1994 when the appellant failed to comply with a 14 day bankruptcy notice. The bankruptcy notice had been issued on 30 June 1994 and was served on 11 August 1994. The bankruptcy notice was based on a default judgment for $1,794.00 obtained by the respondent in the Adelaide Magistrates Court in its Civil Division on 25 March 1993, some seventeen months earlier. On 16 February 1994 the appellant had applied to the Adelaide Magistrates Court to have the judgment set aside. The application was heard by Mr Prescott SM and dismissed. After the expiry of the 14 day period for compliance with the bankruptcy notice, the appellant sought an order in this Court to set aside the bankruptcy notice. The application was heard by O'Loughlin J who dismissed it with costs. His Honour did not construe the application as containing an application for an extension of time with which to comply with the bankruptcy notice but indicated that, even if such an application had been made, he would have dismissed it. An application for leave to appeal from the decision of O'Loughlin J was also refused. The grounds of appeal are that the judgment debt on which the bankruptcy notice was based relates to a debt of Leighton Hill Pty Ltd (in liquidation) ("Leighton Hill") and is not a debt of the appellant; that O'Loughlin J and Branson J erred in exercising their discretions not to inquire into the judgment as the weight of documentary evidence before Mr Prescott and before each of the judges was that the debt belonged to Leighton Hill; and that a grave injustice occurred because the sequestration order was based on a debt owed by that company and not by the appellant. The evidentiary material placed in turn before Mr Prescott, O'Loughlin J, and Branson J was in each instance substantially the same. In the course of argument before this Court the appellant has sought to challenge aspects of the decisions of each of the three judicial officers who have considered the matter. Although this is not an appeal against the decision of O'Loughlin J, as Branson J adopted parts of O'Loughlin J's reasons for judgment as her reasons for making the sequestration order, the appeal indirectly raises for consideration the decision of O'Loughlin J. Both judges recognised the undoubted jurisdiction of the Court in its bankruptcy jurisdiction to "go behind" a judgment for debt entered in other proceedings between the debtor and the judgment creditor. O'Loughlin J summarised the power of the Court in the following way: "There is no doubt that this Court is entitled to go behind the Magistrates Court judgment and inquire into the validity of the debt - Petrie v Redmond (1942) 13 ABC 44. For bankruptcy purposes, a judgment is only prima facie evidence of a debt - Ex Parte Lennox (1885) 16 QBD 315 at 329 - but a court will not do so as a matter of course - Wren v Mahony (1972) 126 CLR 212. It is not sufficient for a debtor to express dissatisfaction with the results of earlier litigation. Nor is it enough to make general accusations, such as the judgment creditors well knew that the debtor was merely acting as a representative of a limited liability company. I share the view expressed by Justice Pincus in Re V & J Removals Ex Parte Earl (unreported judgment, Federal Court, delivered 21 June 1985) that Wren v Mahony (supra) is authority for the proposition that a judgment debtor must satisfy the court that there are substantial reasons for questioning the validity of a judgment." Branson J agreed with that summary. The summary is in accordance with statements of principle in the majority judgments in Wren v Mahony (1972) 126 CLR 212: see Barwick CJ, with whom Windeyer and Owen JJ agreed, at 224-225. In Elkhoury and anor v Farrow Mortgage Services Pty Ltd (in liq.) (1993) 114 ALR 541 at 548 a Full Court of this Court agreed with the conclusion of the primary judge that the Court should only exercise its discretion to go behind a judgment, entered without a trial of the proceeding, if persuaded that the judgment were infected "by an identifiable error of substantive law" so that its continued existence represented a miscarriage of justice. The nature of the discretion possessed by the Bankruptcy Court was explained by Barwick CJ in Wren v Mahony at 224-225: "The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning 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, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration. It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor's debt is a mere matter of its own discretion. Nothing in Corney v Brien (1951) 84 CLR 343 lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor's debt. The Court's discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner." Both O'Loughlin J and Branson J concluded that substantial reasons did not exist "for questioning the validity of the judgment" entered in the Magistrates Court. Neither of their Honours in their reasons canvassed the evidentiary material advanced by the parties. The appellant submits that it should be inferred from their reasons that both O'Loughlin J and Branson J accepted the judgment of the Adelaide Magistrates Court as satisfactory proof of the debt because all the information before each of them had been before Mr Prescott. It is submitted that each of them erred in the exercise of the discretion by failing to consider the evidentiary material afresh to determine if there were substantial reasons for questioning whether there was a real debt owing by the appellant to the judgment creditor. O'Loughlin J said that he considered it a matter of importance that after the entry of the default judgment an application had been made to the Magistrates Court to set the judgment aside, which application was dismissed. His Honour went on to say: "No information was placed before the court in these proceedings that would point to any irregularity in the proceedings before Mr Prescott. Although I was informed from the bar table that the magistrate did not give any reasons for his decision, no challenge has been mounted about the manner in which he conducted the debtor's application to have the judgment set aside. I have come to the conclusion that the debtor has failed to satisfy me that there are substantial reasons for questioning the validity of the judgment..."