IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE ) Nos. NP671-674 of 1995 STATE OF NEW SOUTH WALES ) RE:STANLEY STREET, JUNE SHEILA STREET, FRANCIS TERENCE HALLS and COLLEEN MAY HALLS Judgment Debtors EX PARTE:RETRAVISION (NSW) LIMITED Creditor CORAM: HILL J PLACE: SYDNEY DATED: 18 JULY 1995 REASONS FOR JUDGMENT Before the Court are creditors' petitions relating respectively to Mr Stanley Street, Mrs June Sheila Street, Mr Francis Terence Halls and Mrs Colleen May Halls ("the debtors"), each presented by Retravision (NSW) Limited ("the creditor"). The disputes between the debtors and the creditor have had a long history. The act of bankruptcy alleged in each petition is non-compliance with a bankruptcy notice dated 6 February 1995. That bankruptcy notice is based upon a final judgment obtained by the creditor against the debtors in the sum of $2,817,867.88 on 20 December 1994. The creditor relies in its petition also upon a debt which in the meantime has become a judgment recovered in the Local Court at Moss Vale for a further amount. The matter first came before a registrar of the Court and directions were made and the matter referred to a judge of the Court (Sheppard J). On 30 May 1995 Sheppard J stood over the petitions until 13 June directing the debtors to file and serve all affidavits upon which they propose to rely in opposition to the petitions on or before 9 June. An amended notice of intention to appear setting out the grounds of opposition to the petition showed that the debtors in each case disputed the indebtedness of the creditor and in addition raised the question of solvency. The matter came before me on 13 June when an application for adjournment was pressed on the basis that there was an appeal to the Court of Appeal pending and that an application was to be made for expedition of that appeal. I directed the filing of evidence of assets and liabilities in admissible form, noting that the creditor had indicated that should books and records held by it or a receiver appointed by it be needed those records would be made available. I also directed the filing of all evidence concerning the opposition to other debts owed by both the petitioning creditor and the supporting creditors, these being in respect of Mr Street and Mr Halls, Terry's Sound Lounge, Joncollyn Pty Ltd and Gregory Paul Kelly, the receiver of Terry's Sound Lounge. The matter then was to come before me on 28 June at 9.30am. Commitments on that day made it impossible to deal with the matter which was then adjourned until the next day when an application for adjournment was to be made before Einfeld J. A transcript of the proceedings before Einfeld J discloses that his Honour expressed initial concern that no evidence at all had been filed in opposition to the petition, although there was affidavit evidence not read before his Honour which went to the question of assets and liabilities. Counsel for the debtors indicated to his Honour that evidence had not been put on relating to the debts of the petitioning creditor and justifying the Court going behind the judgment debt because of expense and because there was already an appeal pending within the Court of Appeal. However by today the appeal to the Court of Appeal had been discontinued by the debtors. On more than one occasion in the transcript Einfeld J expressed a tentative view at the difficulty of the position of the debtor going behind the judgment debt in circumstances where there had been a hearing in the Supreme Court, which had proceeded for some four days. However, his Honour was persuaded to grant a further short adjournment. The transcript contains the following passage (at 12): "... the question is whether they should get a short adjournment, it will not be a long one - in order to clarify the situation in the Court of Appeal and to enable the debtors to place in writing their answers to these various contentions. I do not want to impose upon them the responsibility at the moment of justifying going behind the debt because the chances of getting a bankruptcy court to go behind a debt after a four day hearing in the Supreme Court would have to be regarded as somewhat less than low, I should have thought. But I would be willing to allow them to put in writing the arguments they would use if the affidavit evidence was available just so that I can give them an opportunity of being heard on the matter before dealing with it." The transcript refers subsequently to written submissions being filed indicating the evidence which could be established if it were filed. However, the basic reason for the adjournment was essentially because of the then pending Court of Appeal application. His Honour sought and was given undertakings by the debtors not to deal with their assets or other assets over which they had control. One thing is clear and that is that his Honour's intention was that there be filed submissions, which would indicate the evidence to be relied upon, not only as to debts of the petitioning creditor but also debts of supporting creditors. His Honour indicated that he would also take into account evidence of what the debtors were proposing to do in relation to the debts of supporting creditors and what, if anything, stood in the way of the petitioning creditor's realisation of its debt through the sale of secured assets. The matter came today before me. In the meantime the Court of Appeal appeal had been discontinued, as I have indicated. The only evidence read on behalf of the debtors, or sought to be read on behalf of the debtors, were affidavits by each of the debtors going to assets and liabilities. No attempt had been made to have valuations of the assets and I did not permit those parts of the affidavit to be read as referred to value and related matters. Despite the directions that had been given in the past for the filing of evidence concerning the contention that behind the judgment debt there was no true debt to be found, nor was any evidence filed, nor was there any affidavit evidence explaining why that evidence had not been filed. There is, of course, the statements made before Einfeld J that money was, in part at least, the explanation. As a matter of principle, I should have thought a debtor seeking to satisfy a court exercising bankruptcy jurisdiction that it should go behind a judgment, would need evidence. Otherwise it is difficult to see how the Court could be satisfied that there was no true debt. As the judgment of the Full Court in Wolff v Donovan (1991) 29 FCR 480 indicates, there may be circumstances where it will be appropriate for the Court to consider first whether it should undertake a full inquiry as to whether there is in truth and reality a debt due before embarking on a fuller hearing. There is some discussion in the joint judgment of Lee J and myself as to an appropriate form of procedure to determine whether there should be, what are sometimes referred to as, a two-stage procedure or merely a one-stage procedure. The remarks made by Einfeld J and the orders made by his Honour certainly appear to contemplate that his Honour proposed a two-stage proceeding, the first without evidence but merely with submissions indicating the evidence that would otherwise be led to decide whether the Court should engage in a full inquiry. It seems to have been his Honour's idea that unless he was satisfied that there was evidence that could be led he would proceed to hear the petition. Belatedly the debtors filed lengthy submissions. These submissions neither dealt with the additional debts of the petitioning creditor nor for that matter the debts of the supporting creditors. As I read the submissions, they proceed essentially on two grounds. First, it is noted that the proceedings in the Supreme Court involved essentially three stages. The first occurred on 14 October 1994 when the parties were before O'Keefe CJ, then Chief Judge of the Commercial Division. On that day his Honour asked counsel for the creditor to explain why judgment should be entered in its favour. The case for the creditors was that the debtors were indebted to the creditor in respect of certain guarantees. It was clear that there was an issue in dispute between the parties as to the quantum owing on the guarantees. Part of the dispute was that interest was said to be owing under the guarantees and there was an argument that there was no power on the part of the creditor to charge interest. The Chief Judge asked counsel why there should not be a declaration as to liability. To that counsel for the debtors said, "Yes, except that there still will have to be a hearing as to the liability for interest. It will have to be determined." His Honour noted that it would be necessary that the declaration be so worded that it reserved for further argument the questions of quantum. In the result a declaration of liability was made and the matter then fixed for hearing on the question of quantum. The matter then came before Giles J, who by that time had become the Chief Judge of the Commercial Division. That was to deal with applications to amend both the summons and defence. His Honour permitted amendment to the summons but rejected amendments to the defence which sought to raise grounds dealing with a mortgage which did not go at all to the question of the guarantees. His Honour noted that the proposed amended defence did not, inter alia, admit the liability as guarantors. His Honour noted further that to permit this to continue would put in issue by way of non-admission the liability as guarantors which his Honour referred to as having been "consented to". His Honour said: "It was properly acknowledged that in the light of that it was necessary for those defendants to seek to have the declarations discharged, if that be the right word, in order to be able now to put in issue their liability as guarantors." There were other matters which I do not need here to deal with. What is significant is that it would not seem as if any party took the point that the orders or declarations made by O'Keefe CJ CD were wrongly made because they had not been consented to. Certain amendments were permitted which do not have any relevance to the present dispute. The matter then came on for hearing on 20 December 1994 again before Giles CJ. Again his Honour refers to the fact that on 14 October 1994 consent declarations were made to the effect that each of the debtors was liable under his or her respective guarantees for money properly due and owing by Terry's Sound Lounge. By the time this final hearing took place the argument as to power to charge interest had apparently disappeared. As I understand it, four days in total were occupied in the Supreme Court, though I assume that the first two of these included the proceeding before O'Keefe CJ CD and the initial proceedings before Giles CJ. If this be not right, then nothing turns upon it because it is clear that there was a contested hearing of some length before the Supreme Court in which throughout the parties proceeded on the basis that liability under the guarantees was not an issue between them, but rather that the real issue between them lay either with enforceability of a mortgage, irrelevant for present purposes, or the quantum of outstanding interest under the guarantees. Ultimately, judgment was given in favour of the creditors and it was this judgment which the debtors sought to appeal to the Court of Appeal. Much is sought to be made in the written submissions of the fact that the declarations made by O'Keefe CJ CD were crucial to the ultimate outcome of the proceedings before Giles CJ and the suggestion that, in fact, no consent had at all been given. No attempt has ever been made to set aside the declarations of O'Keefe CJ CD nor it would seem at any time before Giles CJ was the consent ever contested. Even when the matter of amendment of the defence was being argued it appears to have been conceded by the defendants that they could not raise those defences having regard to the consent orders unless the consent orders first disappeared. It was never suggested there was no consent given to those orders. The second matter upon which the submissions seize is an allegation that at some date after June 1993, the plaintiff, ie the creditor, appointed one of its employees, "to be a de facto receiver and manager of the business called Terry's Sound Lounge Proprietary Limited carried on in substance by the Halls in respect of which the alleged liability under the guarantees had accrued due." It is not clear to me precisely what a de facto receiver is and I should say that counsel for the creditor specifically rejected the suggestion that any such appointment had been made. However, I am prepared, for present purposes, to accept the statement that such an appointment had been made, whatever it may mean, to test whether in the result the Court should go behind the judgment debt. The submissions proceed as follows: 'It appears that this de facto receivership resulted in liabilities to the plaintiff being increased by in excess of $1M. No defence was filed and apparently no submissions were put to the trial judge that the conduct of the plaintiff in the proceedings may have discharged the liability of the debtors under the guarantees." The submission refers to Phillips and O'Donovan, second edition, The Modern Contract of Guarantee, at 361ff. The pages cited make it clear that in cases where a creditor has done some positive act to the prejudice of the security, or has been guilty of some such degree of negligence as would imply connivance and amount to fraud, i.e. conduct unfair to a surety, a guarantor may be discharged. Two problems arise, however, with the submission. The first is that the submission does not detail any evidence at all of a kind which would, if sworn to, constitute a positive act done by the creditor to the prejudice of the surety, or the relevant degree of negligence. Nothing at all is referred to in the submission. The second problem, in any event, with the submission is that while it may be true that the principle relied upon might operate to discharge the guarantees, it is not clear to me that it would do so in respect of amounts prior to the appointment of the de facto guarantor. However, that is not a matter that need be elaborated upon. There was no dispute between the parties that in an appropriate case the Court is entitled to go behind the judgment debt to ensure there really is a true consideration as it is often put, but there is nothing in the submissions, if I treat them as material of a factual nature, or summary of the material, which the debtors would propose to advance which would justify the Court in so doing. I note in particular that the debtors have had ample opportunity to put evidence in the past on in support of their allegation, but have not done so. But for my concern that reliance upon the failure here to advance evidence would suffice to deal with the petition this afternoon I would not have taken the course which Einfeld J perhaps envisaged of dealing with the matter in the absence of evidence. There is another reason why, in my view, the petition should be granted. Even if I were to accept that there was a case which the debtors had which would satisfy the Court that it was appropriate to investigate further whether a true debt existed between the creditors and the debtors, and that is that other moneys are in any event owing between the parties which are not at all the subject of any submissions. The evidence has shown and it is not in dispute that there has been an act of bankruptcy. There is nothing in the evidence which indicates one way or the other any reason why an amount or amounts recovered in the local court should not be relied upon if, contrary to my view, the judgment debt was not available. The debtors sought a further adjournment to enable additional evidence to be filed both as to factual matters going to the main judgment debt of $2,817,687.88 as well presumably as the judgment debt in the local court. However it seems to me that the debtors have had every opportunity to file whatever needed to be filed to satisfy the Court. They have not done so and further adjournment will only necessitate further costs being incurred. At some stage a party must be bound by the course he or she has taken. In these circumstances I am satisfied that the creditors have proved the matters of which s52 of the Bankruptcy Act 1966 (Cth) requires proof. I would accordingly make a sequestration order against the estates of each of the respective debtors. I make the usual directions about filing a draft of the order in accordance with the rules. I certify that this and the preceding twelve (12) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Hill. Associate: Date: Counsel and SolicitorsJ Chippendall instructed by for Debtors:A Jackson Counsel and SolicitorsJ Johnson instructed by for Creditor:JR Gibb & Co Date of Hearing:18 July 1995 Date Judgment Delivered:18 July 1995