FEDERAL COURT OF AUSTRALIA BANKRUPTCY - creditor's petition - judgment debt - substantial costs order arising out of Supreme Court litigation - allegations of fraud and collusion - going behind judgment - contested hearing in Supreme Court - appeal to Full Court - special leave application to High Court - no basis for reopening litigation - no basis for adjournment of petition - sequestration order made. Bankruptcy Act 1966 s 40, s 52 Corney v Brien (1951) 84 CLR 343 Ross-Ireland v Tour Finance Ltd (1956) 39 ALJR 49 Wren v Mahony (1972) 126 CLR 212 Wolff v Donovan (1991) 29 FCR 480 Bride and Another as Trustees for the Pinwernying Family Trust v KMG Hungerfords (1991) 109 FLR 256 RE: EDWARD JAMES BRIDE AND WENDY MARGARET BRIDE AS TRUSTEES OF THE PINWERNYING FAMILY TRUST EX PARTE: KMG HUNGERFORDS (A FIRM) P1935 OF 1996 FRENCH J PERTH 26 NOVEMBER 1997 IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY P1935 of 1996 GENERAL DIVISION BANKRUPTCY DIVISION OF THE STATE OF WESTERN AUSTRALIA RE: EDWARD JAMES BRIDE AND WENDY MARGARET BRIDE AS TRUSTEES OF THE PINWERNYING FAMILY TRUST judgment debtors ex parte: kmg hungerfords (a firm) judgment creditor JUDGE: FRENCH J DATE OF ORDER: 26 NOVEMBER 1997 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. A sequestration order be made against the estate of Edward James Bride and Wendy Margaret Bride as Trustees of the Pinwernying Family Trust. 2. The Judgment Creditor's costs be taxed and paid from the estate of the Judgment Debtors in accordance with the Bankruptcy Act 1966. . Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY P1935 of 1996 general division bankruptcy division of the state of western australia RE: EDWARD JAMES BRIDE AND WENDY MARGARET BRIDE AS TRUSTEES OF THE PINWERNYING FAMILY TRUST judgment dEBTORS EX PARTE KMG HUNGERFORDS (a firm) judgment Creditor JUDGE: FRENCH J DATE: 26 NOVEMBER 1997 PLACE: PERTH REASONS FOR JUDGMENT ON CREDITOR'S PETITION NATURE OF THESE PROCEEDINGS On 18 November 1996, KMG Hungerfords procured the issue of a creditor's petition against Edward James Bride and his wife, Wendy Margaret Bride ("the Brides"), as Trustees of the Pinwernying Family Trust. The petition was based upon the Brides' failure to comply with the requirements of a bankruptcy notice which had been served on them on 20 June 1996. The notice demanded payment of the sum of $163,967.27. That sum represented the taxed costs owing by the Brides to KMG Hungerfords following the dismissal of their action against that firm in the Supreme Court of Western Australia on 10 June 1991 and the dismissal by the Full Court of an appeal against that judgment on 14 July 1994. Application for special leave to appeal to the High Court was dismissed on 9 December 1994. The bankruptcy notice served on the Brides requested payment of the judgment debt to be made by 11 July 1996 or that the debtors satisfy the Court that they had a counter-claim, set-off or cross demand equal to or exceeding the sum specified in the bankruptcy notice which could not have been set up in the action in which judgment was obtained. In December 1996, the Brides filed a notice of intention to appear and of opposition to the petition. In their grounds of opposition it was contended, inter alia, that the notice was an abuse of the process of the Court, that KMG Hungerfords was improperly attempting to use the Bankruptcy Court (sic) apparently to collect "a debt" but in reality to stop the Brides from taking further action in the Supreme Court against KMG Hungerfords amalgamated entity, being KPMG Peat Marwick, the Australian (sic) Bank Ltd and others. In addition, it was said that the petition was based upon sharp practice, dishonest practice, fraud and collusion. The sharp practice, dishonesty, fraud and collusion alleged went to the conduct of the trial in the Supreme Court and the inadequacies of the judgment and processes of the Supreme Court at first instance and on appeal. An amended notice of opposition was filed on 10 January 1997. The critical paragraphs of the amended notice are in the following terms: "4.. The dismissal of the debtors case in the Supreme Court occured as a result of fraud and/or collusion and/or there was a miscarraige of justice. In such circumstances the Court exercising Bankruptcy juristiction can go behind the judgment and enquire into its validity. 5.. A further reason to look behind the judgment is that the creditor was represented by senior counsel at the Supreme Court trial while the debtors had no legal representation. 6.. The Court should look behind the judgment in this case and enquire into its validity. 7.. The judgment against the debtors was invalidly obtained. 8.. The debtors have a substancial legal action in progress in the Supreme Court, No. 1804 of 1989 against a number of persons who were partners in the creditor firm which amounts to a set off, counter claim or cross demand exceeding the creditors claim which could not have been set up in the action in which judgment was obtained. 9.. The matters deposed to in the petition have not been proved as the deponent states "I am a partner in the firm K M G Hungerfords, the Petitioning Creditor herein" whereas this firm no longer exists. " (sic) An affidavit in opposition sworn by Mr Bride on 13 January 1997 was filed on 15 January. It exhibited four volumes of documents. In substance what Mr and Mrs Bride seek to do is to defend the petition by going behind the judgment upon which it is ultimately based that is, the judgment dismissing their action in the Supreme Court and deciding that they must pay the costs of that action. Before going to the particular facts of the case, it is convenient to set out the relevant statutory provisions and to identify some of the general principles governing their application. STATUTORY FRAMEWORK Acts of bankruptcy are defined by s 40 of the Bankruptcy Act 1966 which includes non-compliance with a bankruptcy notice in that category. Thus s 40(g): "(g) if a creditor who has obtained against a debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not: (i) where the notice was served in Australia - within the time fixed by the Registrar by whom the notice was issued; or (ii) where the notice was served elsewhere - within the time fixed for the purpose by the order giving leave to effect the service, comply with the requirements of the notice or satisfy the Court that he has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he could not have set up in the action or proceeding in which the judgment or order was obtained." Bankruptcy notices are issued by an official receiver on the application of a judgment creditor (s 41). Where an act of bankruptcy has been committed the court may upon a petition presented by the creditor make a sequestration order against the estate of the debtor (s 43). The creditors petition can only be presented when the amount of the debt exceeds $2,000 and the act of bankruptcy was committed within six months after the presentation of the petition (s 44). A petition may be presented against the partnership (s 45) or two or more joint debtors (s 46). The matters of which proof is required and the orders that can be made on a petition are set out in s 52 which provides in its first two subsections: "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. 52(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 debt; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition." GOING BEHIND THE JUDGMENT It is not disputed that a court exercising jurisdiction in bankruptcy has the power to go behind the judgment which grounds a creditors petition - Corney v Brien (1951) 84 CLR 343; Ross-Ireland v Tour Finance Ltd (1956) 39 ALJR 49 and Wren v Mahony (1972) 126 CLR 212. In a frequently cited passage in the latter case Barwick CJ (with whom Windeyer and Owen JJ agreed) said 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 thatwhere 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." Where the judgment has been obtained by default the Court will more readily look behind it than where it was obtained following a hearing on the merits - Wolff v Donovan (1991) 29 FCR 480 at 486. In the present case the judgment was obtained following a hearing before a Judge of the Supreme Court of Western Australia which occupied some seventeen hearing days. It was subsequently the subject of an appeal by the judgment debtors to the Full Court of the Supreme Court of Western Australia which in turn occupied four hearing days. An application for special leave to the High Court of Australia was subsequently dismissed. Given that history, the circumstances in which this Court could be persuaded to go behind the judgment would have to be exceptional and the possibility that it could be persuaded to undertake such a task is vanishingly small. For, unlike the case of a default or even summary judgment, such a course would involve the reopening of litigation concluded on the merits after a hearing. Judicial resources are limited. They are not to be expended upon the collateral duplication of that which has been done by another court. There is generally a public interest in achieving finality in litigation. THE JUDGMENT IN THE SUPREME COURT The nature of the action brought in the Supreme Court of Western Australia is fully described in the judgment of Murray J which is reported as Bride and Another as Trustees for the Pinwernying Family Trust v KMG Hungerfords (1991) 109 FLR 256. It is also summarised in the judgment of the Full Court. It is not necessary to repeat the detail of it here beyond a reference to its salient features. KMG Hungerfords was engaged in 1983 by the Australia Bank Ltd which had provided finance to the Brides' business of stock and feed producers. The engagement required the firm to carry out a financial investigation in respect of the business and to report back to the Bank. Bryan Guthrie Stewart ("Stewart"), under the control of Messrs de Crespigny and Norgard, partners in the firm, compiled the report. It is alleged that KMG Hungerfords became the Bank's financial controllers of the Brides' business and affairs. Subsequently, Stewart was said to have been appointed "and unlawfully assumed the role of receiver/manager for the Bank". The appointment was said to be unlawful on the ground that the Brides were not in default in respect of the loan which they obtained from the Bank and no demand had been made for repayment. Allegations of negligence were made against KMG Hungerfords. Stewart, allegedly lacking relevant competence and professional experience in the milling industry, was said to have produced a report factually incorrect and damning in its tone. The breach of duty of care on the part of KMG Hungerfords allegedly lay in its failure to have appointed to the task for which it was engaged by the Australia Bank, a person of sufficient and relevant competence and skill. It was further alleged that KMG Hungerfords had acted fraudulently between February 1983 and August 1984 in respect of the affairs of the Brides. In the April 1983 report, presented by KMG Hungerfords to the Bank, it was said to have deliberately and falsely misrepresented the assets of the Pinwernying Family Trust. Other fraudulent statements of fact or opinion were said to have been made in the April 1983 report and a further report dated 29 January 1993. Various other allegations of fraud were also made against KMG Hungerfords. The learned trial judge also identified a claim in the pleadings amounting to an allegation that the firm owed a fiduciary duty to the Brides and had breached that duty by using its position of involvement in the Brides' business "dishonestly for the benefit of another party". It was alleged that the Brides had suffered "loss of personal status due to eventual bankruptcy" and "extreme mental anguish and torment due to the eventual bankruptcy" as well as the loss of their family home and one hundred and four acres of rural land of which they were said to be the respective registered proprietors. Damages by reason of loss of income and earnings were claimed. The action was brought by the Brides in their capacities as Trustees of the Pinwernying Family Trust. In the event, the trial judge found that the business in respect of which their action was brought was owned and operated by them in partnership and not as trustees. They therefore lacked standing to bring the claim, it having vested in the trustee in bankruptcy under a sequestration order which had been made on 6 November 1990. Despite his finding adverse to their standing, Murray J went on to consider the substance of the claims made in case he was in error on the standing question. The negligence claim would have failed for want of a relationship of proximity giving rise to a duty of care. If there were a duty of care, the court was not persuaded that there was in any respect a breach of that duty by KMG Hungerfords. No evidence could be found to sustain the conclusion that KMG Hungerfords had put incompetent people into the task or that the task had been carried out other than with an appropriate and reasonable degree of care and skill in the conduct of the investigation and the compilation of the report which followed it. On the fraud claims, it was his Honour's opinion that the true cause of action pursued by the Brides was not deceit but the more limited cause of action described as "injurious falsehood". The action with respect to injurious falsehoods, having been based on fraud, the court would not find them made out except upon the clearest evidence. There was, it was held, not only no persuasive evidence but no evidence at all of deliberate falsehood or error or of an intention by any such means to deliberately injure the Brides' commercial interests. Murray J said at 281: "In my view it is abundantly clear that the evidence in this case does not meet the required standard of persuasion in respect of any of the alleged misstatements or the conduct which occurred thereafter. There is nothing I think to establish deliberate falsehood, as part of a scheme by the defendant to injure the plaintiffs' business so as to reduce its value for the purpose of enabling its acquisition upon favourable commercial terms by any person, let alone any specific person or entity. So in my view, there is not only no persuasive evidence but no evidence at all of deliberate falsehood or error or of an intention by any such means to deliberately injure the plaintiffs' commercial interests." THE APPEAL TO THE FULL COURT Issues raised before the Full Court on appeal included the following: 1. The refusal of the trial judge to allow the Brides to lead "similar fact evidence" of alleged conduct by KMG Hungerfords in unrelated matters said to have features in common with the conduct complained of in the present case. On this matter, the Full Court declined to interfere with the discretion of the trial judge. 2. The ruling of the trial judge that a subpoena served on Mr R.C. de Crespigny to testify for the Brides was not enforceable. In his reasons for judgment the trial judge had commented that: "...upon all the evidence before me, it would seem to me that Mr de Crespigny, if he was present and able to give evidence would have been unlikely to add to the picture before me in any significant way." The Full Court was of the view that nothing had been put before it on the part of the Brides to suggest that Murray J's appraisal of the matter was in any way in error. 3. The refusal of the trial judge to order that Mr J.C. Vaughan, who had acted as solicitor for KMG Hungerfords, produce certain documents which, according to Mr Bride, he had failed to produce in response to a subpoena duces tecum. The Full Court held that the production of the additional letters was not subsequently pursued by Mr Bride. The letters were included among the additional documents the subject of the Brides' application for leave to have them admitted as further evidence on the appeal. That application was dismissed at the hearing of the appeal. 4. Allegations of fraud. The findings of the trial judge and the evidence before him were comprehensively reviewed by the Full Court. The challenges to those findings were comprehensively rejected. In the judgment of the Chief Justice, with which the other two members of the Court agreed, it was said at p 106: "I would only add with regret, that in my opinion, the nature of the allegations of fraud and conspiracy in this case and the lack of evidence in support of them, make it an example of the kind of case to which Lord Pearce referred in Rondel v Worsley [1969] 1 AC 191 at 257 when he said: "The history of this case has, in its general lines, followed a pattern which is not unfamiliar. Even in your Lordships' House many hours are spent each year (and in the Court of Appeal the numbers are naturally larger) in listening to wholly unbalanced attempts to re-open, without justification, a case which a party has lost and which, by brooding over it, he can no longer see in an objective light. Disgruntled by a decision, he reflects on various side issues (often quite irrelevant or at least not matters of decisive importance) of which he now considers that the judge failed to take any account or any sufficient account."" His Honour, the Chief Justice said at 107: "The learned trial Judge described Mr Bride as an astute man, as well as being passionately convinced of the merits of his case. I accept this assessment. As difficult as it may be for him to accept it, the fact remains that as against these respondents there was no evidence to support the pleaded case in fraud or the broader allegations of conspiracy made at the trial which, unfortunately, extended to include persons who were not parties to the action." 5. Negligence. The Full Court also found that so far as KMG Hungerfords choice of Stewart was concerned, there was no evidence upon which it could be found that they owed the Brides a duty of care. It went further and agreed with the conclusions of Murray J that even if there were a duty of care it had not been breached by the appointment of Stewart to carry out the task of investigation and report undertaken by KMG Hungerfords. THE PENDING ACTION AGAINST KPMG PEAT MARWICK Mr Bride's affidavit first pointed out that the petitioning creditor merged with Peat Marwick Mitchell to form a new firm known as KPMG Peat Marwick. Those who had been partners in the petitioning creditor were among those now practising in partnership as KPMG Peat Marwick. He asserted that he and his wife as Trustees of the Pinwernying Family Trust have a substantial claim the subject of Supreme Court action 1804 of 1989 against Peat Marwick Mitchell. He exhibited a copy of the statement of claim in that action and purported to verify that all of the facts pleaded in it are true and correct. He said that the value of that claim would exceed the value of the debt claimed in the creditor's petition. He said that the action was ready to be entered for trial as at January 1997. It was Mr Bride's contention that the petition was calculated to frustrate him from proceeding with his Supreme Court action. As appears from the statement of claim exhibited to his affidavit, action number 1804 of 1989 in the Supreme Court of Western Australia relates to foreclosure action and the appointment by the Australia Bank Ltd of two partners in Peat Marwick Mitchell, David James Young and John Dures Anderson, as receivers and managers of the Brides' business. It is asserted in the statement of claim, inter alia, that the appointment of the receivers and managers was invalid and that Peat Marwick Mitchell was aware of the defects in the appointment and knew that neither they nor the Bank had a valid authority to sell either the land or the business. Moreover, the receivers and managers were said to have been in breach of duties owed to the Brides to act in good faith in the management and sale of the land and business and to discharge ancillary obligations. It is said, inter alia, that they sold the business and land at a price substantially below a reasonable market value and failed to make a bona fide attempt to obtain the best, reasonable market price for the land and business. Moreover, they permitted another to manage the business who had no relevant industry knowledge. They are said to have failed to maintain a full and competent workforce and refused to purchase replacement parts for machinery and to have perpetrated other deficiencies in the operation of the business. There is a claim for damages for the value of the land and business and for loss of profit and capital gain from the land and business from the date of the appointment of the receivers and managers. That material together with the mere assertion of its correctness by Mr Bride does not constitute a basis for dismissing the petition. And as to the suggestion that the petition is calculated to frustrate the proceeding, counsel for KMG Hungerfords has pointed out that the Supreme Court action is brought by Mr and Mrs Bride in their capacity as Trustees of the Pinwernying Family Trust. As counsel said, the fact that Mr and Mrs Bride may be declared bankrupt or have their estate sequestrated would not have the necessary result of preventing the Trust from appointing new Trustees and proceeding with the action. Moreover, there is no person being nominated as Trustee of their bankrupt estate by KMG Hungerfords. If the bankruptcy order is made, then the administration of the estate will fall into the hands of the Trustee under the Bankruptcy Act. There will be no basis for any collusive approach between the judgment creditor and that official. The existence of the pending action against KPMG Peat Marwick in the Supreme Court of Western Australia does not disclose any basis for either adjourning or dismissing the petition. THE CHALLENGE TO THE JUDGMENT DEBT In relation to the judgment of Murray J, Mr Bride's affidavit set out in summary what were described as "the facts giving rise to the action". He said that at the trial he and his wife had no legal representation whereas KMG Hungerfords were represented by "a team of lawyers". He claimed that at the trial Murray J was "misled as to the ownership and conduct of the business". This complaint related to an amendment to the defence at trial which raised the question of the Brides' standing. This was said to be an amendment which reopened an issue previously concluded in favour of the Brides before Master Ng. This was, of course, a matter which was well within the ambit of any appeal to the Full Court. The affidavit went on to raise the non-production of documents pursuant to a subpoena served on Mr J.C. Vaughan. This, of course, was a matter which had been canvassed in the Full Court. The question of the subpoena directed to Mr de Crespigny was also raised in the affidavit. Again, this was a matter which was canvassed in the Full Court. The admission of evidence relating to the conduct of Stewart including so called "similar fact evidence" was referred to as was the refusal of the trial judge at the trial of the action to allow Mr Bride to cross examine certain witnesses. These are all matters falling well and truly within the framework of the litigation at first instance and on appeal in the Supreme Court. Whether or not they were raised precisely in the terms set out in the affidavit is immaterial. They either were so raised or were capable of being raised. This aspect of Mr Bride's argument simply invites this Court to reopen litigation in the Supreme Court which has been tested on appeal and in respect of which special leave was refused by the High Court. There is no basis to go behind the judgment. CONCLUSION For the preceding reasons no basis has been shown for granting an adjournment of the creditor's petition. Subject to proof of continuing debt and an affidavit of search, an order will be made sequestrating the estate of the debtors. The costs of the petition will be paid out of the bankrupt estate. I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice French Associate: Dated: 26 November 1997 Mr E. Bride appeared in person. Counsel for the Judgment Creditor: Mr S. Penglis Solicitor for the Judgment Creditor: Freehill Hollingdale & Page Date of Hearing: 23 June 1997 Date of Judgment: 26 November 1997