CATCHWORDS BANKRUPTCY - Creditor's petition - whether Court should exercise its discretion to go behind the judgment Bankruptcy Act ss41(6A) 52 Wolff v Donovan (1991) 29 FCR 480 ANDREW JOHN WILTSHIRE EX PARTE TONMA INTERNATIONAL PTY LTD V ANDREW JOHN WILTSHIRE No VP 199 of 1995 NORTHROP J MELBOURNE 29 NOVEMBER 1995 IN THE FEDERAL COURT OF AUSTRALIA EXERCISING FEDERAL JURISDICTION No VP 199 of 1995 IN BANKRUPTCY BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA RE: ANDREW JOHN WILTSHIRE Debtor EX PARTE: TONMA INTERNATIONAL PTY LTD (ACN 005 186 425) Petitioner AND: ANDREW JOHN WILTSHIRE Respondent COURT: NORTHROP J PLACE: MELBOURNE DATE: 29 NOVEMBER 1995 REASONS FOR JUDGMENT This is a hearing of a petition brought by the petitioner as a judgment creditor against Andrew John Wiltshire as debtor. Acting on the certificate given by a Registrar in Bankruptcy under Bankruptcy Rule 22 and the affidavits filed on behalf of the petitioner I am satisfied that the petitioner has established its petition, as amended, and thus normally a sequestration order should be made. By an amended notice of intention to appear given under Bankruptcy Rule 106, the debtor is opposing the making of the sequestration order on stated grounds which, in essence, claim that he is not indebted to the petitioner. The issue before the Court is whether the debtor is indebted to the petitioner as alleged in paragraph 2 of the petition. The petitioner relies on an act of bankruptcy by the debtor which occurred on 18 November 1994 resulting from his failure to comply with a bankruptcy notice relating to a judgment debt of $14281.67 ($11765.80, interest $477.87, costs $2038.00) obtained in the Magistrates' Court Melbourne on 3 September 1992. The debt related to goods sold and delivered by the petitioner to the debtor under the business name of "Marbles Kidswear". The grounds of opposition, as stated by the debtor in his amended notice, are: "(a)the debtor is able to pay his debts; (b) for other sufficient cause a sequestration order ought not to be made; (c) the Debtor is not liable to the Petitioning Creditor; (d) the debt on which the Petitioning Creditor relies is not owed by the Debtor but by a company, RAW Marketing Pty Ltd." Before referring to the evidence it is helpful to set out a brief chronology. RAW Marketing Pty Ltd ("the company") was incorporated in August 1987. Its then directors were Robert Arthur Wiltshire ("Robert") and his wife. Robert is the debtor's brother. Early in the year 1988, the company commenced trading in the retail sale of clothing at market stalls and shops. The debtor was employed by the company. In 1988 the debtor, possibly with Robert, met with Tony Kisvarda, the managing director of the petitioner. The petitioner carried on the business of importing as well as making clothing, including children's clothing. Some 60% of its stock was imported and the balance was made. It sold its stock wholesale to retailers. In about August or September 1989 the company commenced to use the name "Marbles Kidswear". On 11 September 1989 the debtor registered the name "Marbles Kidswear" under the Business Names Act 1958 (Vic) in his own name as the person carrying on business under the name "Marbles Kidswear". In August 1991 the debtor became a director of the company. On 20 December 1991, the petitioner sold and delivered to "Marbles Kidswear" childrens clothing for $11765.80. The sale and delivery took place at the business premises of the petitioner in Brunswick. This amount was not paid to the petitioner. In April 1992 the petitioner instructed its solicitors to enforce payment of the sum of $11765.80. By letter addressed "Attention: Mr Andrew Wiltshire, Marbles Kidswear, Greensborough Shopping Centre, Greensborough", the solicitor made a demand for payment. The company sold clothing from that shop under the name Marbles Kidswear. No reply was received. Before issuing legal proceedings, the solicitor made a search of the business name "Marbles Kidswear" which showed that the proprietor was the debtor. On 12 May 1992, the solicitor caused the Magistrates' Court complaint to be issued naming the debtor as defendant. It was served on the debtor on 18 May 1992. On the same day the debtor filled in the Notice of Defence that had been served on him together with the complaint stating that he intended to defend the complaint on the ground that "The Business is operated by RAW Marketing P/L and the defendant is a manager/director thereof". This notice stated that the address of the defendant was PO Box 638 Hawthorn and the address for service was the address of the company's Shop at 71 Village Central Staffing Centre, being the shop at Greensborough. The notice was served on the petitioner's solicitor who requested particulars of the defence. These were supplied on 2 June 1992 and made it clear that the debtor was claiming that the goods had been bought by the company. The complaint was heard by the Magistrates' Court on 3 September 1992. The debtor did not appear, claiming he had no money to instruct solicitors. It was a deliberate decision not to appear. Judgment was entered on 3 September 1992. On 31 May 1993 a bankruptcy notice was issued but was not served. On 18 August 1993 the company went into liquidation. For practical purposes, its unsecured creditors will receive nothing. On 2 February 1994 the bankruptcy notice on which the petition is based, was issued. It was served pursuant to an order for substituted service made on 7 October 1994, service being deemed to be effected on 4 November 1994. The debtor received the bankruptcy notice and wrote to the Registrar in Bankruptcy a letter dated 20 October 1994 claiming the debt had been incurred by the company. By letter dated 2 November 1994, a Registrar in Bankruptcy wrote to the debtor stating that if he disputed the debt, he could apply to the Magistrates' Court to have the judgment set aside and if he did this before 18 November 1995 he could apply under subsection 41(6A) of the Bankruptcy Act to have the time for compliance with the bankruptcy notice extended. The letter referred also to other provisions of the bankruptcy notice. The debtor did not take any step to apply to have the judgment set aside. The petition was presented on 13 February 1995, returnable on 1 May 1995. The petition was served on 9 March 1995. On 1 May 1995 the parties were represented by their legal representatives. The hearing of the petition was adjourned to 31 May 1995 and the debtor was directed to file any notice of opposition and affidavit in support by 15 May 1995. By notice dated 28 April 1995 and filed on 2 May 1995 the solicitors for the debtor gave notice that the debtor opposed the making of a sequestration order on the grounds: "(a)the debtor is able to pay his debts; (b) for other sufficient cause a sequestration order ought not to be made." On 31 May 1995 the hearing of the petition was adjourned to 5 July 1995 and the debtor was directed to file and serve affidavits in opposition by 19 June 1995. On 5 July 1995, the petition was placed in the list of cases awaiting trial. Early in October 1995, the debtor made application to the Magistrates' Court to set aside the judgment made on 3 September 1992. On 27 October 1995 the Magistrates' Court refused to set aside the judgment on the ground of the long delay from the time the debtor knew of the existence of the judgment to the date of the application. The petition was heard by the Court on 2 and 3 November 1995. Subsections 52(1) and (2) of the Bankruptcy Act provide: "52(1) At the hearing of a creditor's petition, the Court shall require proof of: (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b) service of the petition; and (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. (2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor: (a) that he is able to pay his debts; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition." It is clear that under subsection 52(1) the petitioner has the ultimate onus of proving the matters stated in the petition as amended, in this case that the debtor "is justly and truly indebted to the petitioning creditor in the sum of $18,300.26 (which sum includes $4,018.59 interest upon the amount for which judgment was entered, namely $14,281.67 as set out in the Bankruptcy Notice ... plus further interest at the rate of 13.2 per cent per annum to the 18 November, 1994) being the amount due and payable by the debtor to the petitioning creditor under a final judgment obtained in the Magistrates' Court of Victoria at Melbourne on the 3rd September, 1992 for monies owed for goods sold and delivered to the debtor by the judgment creditor together with interest." The debtor does not dispute that he committed an act of bankruptcy on 18 November 1994. Nor does he pursue his opposition based on his ability to pay his debts. The correct approach to be applied in cases of this kind is expressed by Lee and Hill JJ in Wolff v Donovan (1991) 29 FCR 480 at 487 where, after referring to a number of earlier authorities, they say: "Once the judgment is proved, and it is prima facie evidence of the existence of the underlying debt, there is a tactical onus on the debtor to show that there are circumstances which make it appropriate to go behind the debt (sic) to see whether the judgment (sic) was in truth and reality a true debt. The overall onus of proof of the existence of a real debt underlying a judgment, however, remains always with the petitioning creditor." Two principles are inherent in this statement. First, the Court, in an appropriate case, is entitled to go behind the judgment, and second, where this is done, the Court is to determine whether there exists "in truth and reality" a true debt. In some cases, it may be appropriate to determine, as a separate question, whether the Court should go behind the judgment; see what was said by Lee and Hill JJ at 486-487, while in others the case is not split as in Wolff v Donovan. In the present case, the petition and grounds of opposition has been heard in full and, if the opposition fails, a sequestration order will be made subject to the filing of the final affidavits of searches and debt. Before turning to the further facts, reference must be made to the principles to be applied in determining whether the Court should go behind the judgment. This matter is discussed at some length by Lee and Hill JJ in Wolff v Donovan commencing at 485 where reference is made to a number of the earlier authorities on this issue. It is helpful to set out a lengthy passage from that judgment: "As was said by the Full Court of this Court in Boral Johns Perry Industries Pty Ltd v Piccardi (unreported, 23 June 1989, at 13): "It is well established that a court exercising bankruptcy jurisdiction has power to go behind a default judgment, and will do so, in a case where a reason is shown for questioning whether - behind the judgment, or, as it is sometimes said, as the consideration for it - there was really a debt: see Petrie v Redmond [1943] QSR 71; Corney v Brien (1951) 84 CLR 343; Wren v Mahony (1972) 126 CLR 212." As the above quotation makes clear it will not be in every case that the court will go behind a judgment. The existence of the judgment is prima facie evidence of the debt: cf Re Fraser; Ex parte Central Bank of London [1892] 2 QB 633 at 636-637. No doubt it will be relevant that the judgment debtor has made no attempt to set aside the judgment although failure so to do may be explained, as it was in the present case, by the fact that the debtor lacked funds to pursue this course. It was, however, made clear by Lord Esher in Re Flatau; Ex parte Scotch Whisky Distillers Ltd (1888) 22 QBD 83 at 85-86 that the court will not go behind the judgment as a matter of course but only if appropriate circumstances are shown to exist. Barwick CJ expressed the law in Wren v Mahony (supra) (at 224-225) as follows: "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 ... 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." [Emphasis added.] Where a judgment is obtained by default the court in bankruptcy will more readily look behind the judgment than it would if the judgment were obtained following a hearing on the merits: see Re Pinkerton; Ex parte B G Textiles Pty Ltd (In liq) (1984) 4 FCR 64; Re Wong; Ex parte Kitson (1979) 38 FLR 207 at 218 et seq; and Simon v Vincent J O'Gorman Pty Ltd (1979) 41 FLR 95." In the present case, it is doubtful if the judgment can be described as a default judgment. The debtor had given notice of his intention to defend. He knew of the date of the hearing. He did not appear. The creditor would have been required to prove its case. It is easy to visualize this being done by evidence and the production of the two invoices in the name of "Marbles Kidswear" the production of the business names certificate showing the debtor the proprietor of the business carried on under that name, the delivery of the goods and the non-payment; compare what was said by Lockhart J in Re Wong Ex parte Kitson (1979) 27 ALR 405 commencing at 421. In the present case, there is evidence to suggest that the company, not the debtor, was carrying on business under the name Marbles Kidswear. From the time of the service of the complaint, the debtor has been consistent in claiming that the debt had in truth been incurred by the company and not by himself. At the same time, he deliberately took no action to have the judgment set aside until October 1995. Despite his attention being drawn to subsection 41(6A) of the Bankruptcy Act, in November 1994, the debtor did not apply to have the judgment set aside until October 1995. Despite having legal representation from at least 1 May 1995, the debtor did not make application to have the judgment set aside until October 1995. The debtor claims this was because of lack of funds. He presented as an articulate person. He was a salesman engaged in business and was used to dealing with persons. There is no valid reason why he could not have appeared at the hearing before the Magistrates' Court in September 1992. The reason for not defending his position is weak, namely no funds. However, before exercising the discretion of whether to go behind the judgment, the evidence relating to the debt needs to be considered. Although a large number of affidavits were read and most of the deponents were cross-examined, the evidence is most unsatisfactory. There is no direct evidence of what occurred on 20 December 1990 when the goods were sold and delivered. There is no evidence as to who attended the petitioner's premises and collected the goods. Two invoices made out to Marbles Kidswear were produced. The managing director gave evidence, which I accept, that the petitioner kept sales books under the name of each individual customer, that sales were entered into the sales book by the person making the sale and that if payment was made at the time of the sale, the payment was recorded in the sales book and no further book entries were made. Many cash sales of this kind were made. If payment was not made, clerical staff made up invoices from the sales book and these were forwarded to the purchasers. The managing director had not made any credit check of the debtor. It was not suggested he had made a credit check of the company. He knew of the name of the company but at all times he believed the petitioner was dealing with the debtor who carried on his business under the name of Marbles Kidswear. He did not know of the registration of the business name until shortly before the legal proceedings were commenced. No question of estoppel arises from the existence of the registration. He said he may have met Robert but does not remember meeting him. He says the petitioner did not have a sales book in the name of the company. Other people had, from time to time, ordered goods in the name of Marbles Kidswear but he thought they were being ordered on behalf of the debtor. He said he did not remember any cheques made out on the account of the company for payment of amounts owing by Marbles Kidswear, but if he had it would not have surprised him, compare what was said by McGregor J in Re Draper Ex parte Brosalco Pty Ltd (1983) 48 ALR 656 at 661: "The first cheque paid to the petitioning creditor apparently was drawn by the company. I agree with the comment of Lockhart J in Simon v O'Gorman (1979) 27 ALR at p637 that it is not uncommon in business for payments to be made by persons other than those with whom the relevant contract has been made." The debtor said that he first met the managing director of the petitioner in 1988 when he and Robert discussed the possibility of buying goods from the petitioner. He said he made it clear that goods were being bought by the company. This meeting took place before the company began to use the name Marbles Kidswear. The company's records have been delivered to the liquidator of the company and were produced to the Court under subpoena. The records show four cheques drawn by the company to the petitioner as payee. One cheque had been cleared through the bank account of the petitioner. No documents showing a ledger of goods purchased by the company from the petitioner were produced. No copies of accounts rendered by the petitioner to the company were produced. With compliments cards and letterheads in the name of Marbles Kidswear and showing the name of the company were produced but the managing director said he had never seen any of them. I accept as a fact that the company carried on its business under the name of Marbles Kidswear, but this fact alone is not sufficient to establish the judgment was wrongly obtained. Further, the statement of affairs of the company showing that the company owed the money to the petitioner was certified by the debtor in December 1993. This does not assist. There is no evidence to show from where this figure was obtained. The evidence given by Mr Cohen, a former employee of the company, does not assist. In reality, each party relies upon a general course of conduct over a lengthy period as establishing the identity of the purchaser of the goods in question. The only direct evidence is the invoice in the name of Marbles Kidswear. On all of the evidence, in my opinion, it was open to the petitioner, by its managing director, to believe that it was dealing with the debtor carrying on business under the name of Marbles Kidswear but I make no specific finding on that issue. Having regard to all the material before the Court, the long delay in the debtor taking steps to have the judgment set aside, the fact that the Magistrates' Court refused to set aside the judgment because of delay as well as the unsatisfactory nature of the evidence relating to the dealings between the petitioner and the debtor and the petitioner and the company, this is a case where the Court, in the exercise of its discretion, should not go behind the judgment debt. In the result, relying upon the judgment debt, I am satisfied, subject to the filing of the final affidavits of search and debt, with the proof of the matters referred to in subsection 52(1) of the Bankruptcy Act. The debtor has not satisfied the Court of any of the matters referred to in subsection 52(2) of the Bankruptcy Act. I am satisfied that the debtor on 18 November 1994 committed the act of bankruptcy alleged in the petition as amended. I note that Tim A Jonas, a registered trustee, has consented to act as the trustee of the estate of the debtor. On the filing of the two affidavits I shall make a sequestration order against the estate of the debtor and order the petitioning creditors costs, including reserved costs, be taxed and paid according to the Bankruptcy Act. I certify that this and the preceding thirteen (13) pages are a true copy of the Reasons for Judgment of The Honourable Justice R.M. Northrop. Associate: Date: ATTACHMENT Counsel for the Debtor: Mr J.K. Arthur Solicitor for the Debtor: Messrs William Abbott & Associates Counsel for the Petitioner: Mr R.S. Randall Solicitor for the Petitioner: Swersky & Velos Date of Hearing: 3 November 1995