Royal Australia Finance Ltd V Donnelly, William James [1998] FCA 337

FEDERAL COURT OF AUSTRALIA BANKRUPTCY - sequestration - allegation that order for judgment debt improperly obtained - complaint that judgment debt was for excessive amount - circumstances in which Court will go behind a judgment debt Bankruptcy Act 1966 (Cth) s 52 Corney v Brien (1951) 84 CLR 343 applied In Re a Debtor [1929] 1 Ch 125 aplied In re Flatau; Ex parte Scotch Whiskey Distillers Ltd (1888) 22 QBD 83 mentioned In Re Fraser: Ex parte Central Bank of London [1892] 2 QB 633 applied In Re Hawkins; Ex parte Troup [1895] 1 QB 404 applied Re Longo; Ex parte Longo (1995) 57 FCR 523 applied Wren v Mahony (1971-1972) 126 CLR 212 applied ROYAL AUSTRALIA FINANCE LTD v WILLIAM JAMES DONNELLY VG 7642 of 1997 FINKELSTEIN J MELBOURNE 2 MARCH 1998

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY vg 7642 of 1997

BETWEEN: ROYAL AUSTRALIA FINANCE LTD

Petitioner

and: william james donnelly

Respondent

JUDGE: FINKELSTEIN J

DATE OF ORDER: 2 MARCH 1998

WHERE MADE: MELBOURNE

THE COURT ORDERS THAT: 1. A sequestration order be made against the estate of William James Donnelly. 2. The petitioner's and the supporting creditor's costs of and incidental to the petition be taxed and paid according to the Bankruptcy Act 1966 (Cth). Note: Date of act of bankruptcy as: 1 August 1997 Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

IN THE FEDERAL COURT OF AUSTRALIA

victoria DISTRICT REGISTRY vg 7642 of 1997

BETWEEN: royal australia finance ltd

Petitioner AND: william james donnelly

Respondent

JUDGE: finkelstein j

DATE: 2 march 1998

PLACE: melbourne

REASONS FOR JUDGMENT HIS HONOUR: Royal Australia Finance Ltd (the creditor) petitions for the sequestration of the estate of William James Donnelly (the debtor). The petition is based upon the failure by the debtor to comply with a bankruptcy notice that was served on him on 19 June 1997. The debtor opposes the making of a sequestration order on the ground that when the bankruptcy notice was served the creditor did not have a good petitioning debt. The creditor had obtained a judgment against the debtor in the County Court of Victoria for the sum of $88,876.69. It has received part payment of that judgment debt and the bankruptcy notice required the debtor to pay or to secure to the satisfaction of the creditor the balance of the judgment debt namely $76,376.69. However, the debtor contends that the judgment in the County Court was improperly obtained and that he is not in fact indebted to the creditor in any amount. It is well established in bankruptcy that the Court has power to enquire into a judgment debt to ascertain whether it is a good debt. This is for the reason that s 52(1) of the Bankruptcy Act 1966 (Cth) requires the Court to be satisfied, before it will make a sequestration order, that the debt upon which the petition is based is in fact due to the creditor. When the Court does enquire whether the creditor is owed a debt, the Court does not set aside the judgment that was obtained. What the Court does do, as was explained by Lord Esher MR In Re Fraser: Ex parte Central Bank of London [1892] 2 QB 633 at 636, is that it "goes round the judgment, and inquires into the subject matter" for the purpose of satisfying itself that the petitioning creditor founds his petition on a "real debt": see also In Re a Debtor [1929] 1 Ch 125 at 127 per Astbury J. It is clear that the Court will not as a matter of course enquire into the validity of a judgment debt: Wren v Mahony (1971-1972) 126 CLR 212 at 222-223. Before the Court will undertake that enquiry there must be some prima facie case shown that the debt relied upon is not a "real debt". In that event the Court will go into the whole matter and decide for itself whether the judgment debt was properly obtained: In Re Hawkins; Ex parte Troup [1895] 1 QB 404 at 408-409. It is by no means clear when the Court will exercise the power to "go behind" a judgment debt. It seems to be established that where a judgment debt is obtained after a trial where both parties appeared the Court will not generally reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out: Corney v Brien (1951) 84 CLR 343 at 350 and 356. See also Wren v Mahony supra at 223 where Barwick CJ, citing In re Flatau; Ex parte Scotch Whiskey Distillers Ltd (1888) 22 QBD 83, explained that the bankruptcy court may accept a judgment as satisfactory proof of the petitioning creditor's debt where it resulted from a fully heard contest, but even then the judgment is not conclusive when there are substantial reasons shown for questioning that judgment. It is not necessary for me to consider whether there is any inconsistency in approach between Corney v Brien on the one hand and Wren v Mahoney on the other. There is one other point that should be mentioned with regard to "going behind" a judgment even though it might be thought to be an obvious one to make. When the Court does "go behind" a judgment the enquiry is whether there is a debt upon which the bankruptcy proceedings can be founded. The Court will not reconsider a judgment when the complaint is that the judgment was entered for an excessive amount. The reason is that a judgment for an excessive amount can properly found a sequestration order: see Re Longo; Ex parte Longo (1995) 57 FCR 523 at 530 and the cases there cited. Has the debtor shown any reason for the Court to "go behind" the judgment obtained against him in the County Court? The action in the County Court was brought to recover money due under three guarantees given by the debtor. By three lease agreements the creditor had leased goods to a company, Genda Corporation Pty Ltd, of which the debtor was a director. The obligations under each lease were guaranteed by the debtor and he had also agreed to indemnify the creditor against any default by the company under those leases. Judgment was entered against the debtor after a full hearing. Subsequently the debtor filed a notice of appeal but the appeal was discontinued when the creditor agreed to accept payment of a sum that was less than the amount of the judgment debt that had been obtained. The amount which the petitioning creditor had agreed to accept was not paid and, as a result, the balance of the judgment debt remains payable by the debtor. The debtor raises two matters which are said to justify an enquiry whether he is indebted to the creditor. First, the debtor contends that the judgment was procured by fraud or that there was a miscarriage of justice as a consequence of the failure by the creditor to discover in the County Court proceeding a material document that ought to have been discovered. Secondly, it is said that an examination of the facts shows that there is no legal foundation for the judgment entered against him. I must confess to being under considerable difficulty in dealing with the issues raised by these submissions. While I have been provided with the pleadings in the County Court proceeding, which are of some assistance in determining what occurred during the course of the trial, none of the parties has been able to provide me with a copy of the reasons for decision of the learned County Court Judge. Although his Honour's reasons were recorded the tape recording cannot now be found. Nor has any party provided me with a summary of the trial judge's reasons for judgment although it is possible that such a summary exists. Not only has the absence of reasons (or the absence of a summary of those reasons) caused me difficulty it has proven even more difficult for the debtor who I should mention has appeared in person. To understand the allegation that the County Court proceedings were tainted by fraud or involved a miscarriage of justice it is necessary to explain the relevance of the document that ought to have been discovered. Each lease contains a liquidated damages clause which is to the effect that upon an event of default (as defined in each lease) the creditor can terminate the lease and without prejudice to other rights and remedies the creditor may have it may in writing demand the payment of liquidated damages. Those damages are specified as the sum of the present value of the unpaid balance of the rent, any unpaid rent due under the lease, certain costs and expenses (it is not necessary to specify them) and the residual value of the goods less the net proceeds of the sale of those goods or their value as certified. The creditor apparently recovered possession of the goods that were leased under two of the leases but did not recover possession of certain duct manufacturing equipment that was the subject of the third lease. It was said that the duct manufacturing equipment could not be located. At the trial the debtor argued, so it appears, that the creditor had breached a duty that it owed to him to recover or to take reasonable steps to recover the duct manufacturing equipment. No doubt this contention was put forward in order to reduce or eliminate any potential liability under the guarantee given in respect of the lease of the duct manufacturing equipment. The document that the debtor says ought to have been discovered is a valuation of that equipment. The argument seems to be that if the creditor breached its duty to the debtor as alleged the loss that the debtor suffered was the difference between the other amount claimed under the guarantee and the value of the equipment which the debtor says would have eliminated the claim. I will assume in the debtor's favour that the valuation should have been discovered. I will also assume in the debtor's favour that the failure to discover the valuation was deliberate. Prima facie at least this seems to be the correct view. But it does not follow that had the valuation been tendered in evidence or had its author been called as a witness, the trial judge would have found in favour of the debtor. Indeed it is by no means clear that the valuation would have had any significant effect on the outcome of the case. If the debtor was able to establish that the creditor had not taken reasonable steps to recover the duct manufacturing equipment in breach of some duty owed to him that may have affected the quantum of the creditor's claim and therefore may have affected the quantum of the judgment obtained against him. But this would only be true in respect of the claim under the guarantee for the duct manufacturing equipment lease. It would have had no effect on the quantum of the claim made under the remaining two guarantees. In any case the County Court Judge decided that the creditor had not in fact breached any duty owed to the debtor. The debtor did submit that the existence of the valuation could have established that officers of the creditor had given false evidence at the trial. Even if this be correct (I do not say that it is because there is no transcript of the evidence to enable a view to be formed on this issue) I am unable to see how this is a substantial reason for inquiring into the judgment. There appears to be no dispute that the company made default under the leases. Nor does there appear to be any dispute that the creditor suffered loss as a result of those defaults. The most that can be said, at least on the ground presently under consideration, is that the trial judge overestimated that loss. As I have already said that is not a sufficient reason for going behind a judgment. The second ground upon which the debtor relies is that he was not in any event liable under the guarantees. The argument appears to be as follows. Under the liquidated damages clause in each lease those damages, when properly calculated, were only payable after a written demand for payment has been made. The debtor says that there was no such demand. It follows, so the argument goes, that the creditor was not entitled to maintain its claim against the debtor. The submission proceeds on the assumption that in making its claim against the debtor the creditor was basing its claim on the failure by the company to pay it liquidated damages. I am not at all satisfied that this was so. The evidence rather suggests that the trial judge treated the liquidated damages clause as one method by which the creditor could establish the quantum of its claim but that it in fact did not do so. Here I refer to the debtor's evidence that the trial judge had rejected a submission made on the debtor's behalf that the creditor was obliged to maintain its claim under the liquidated damages clause. According to the debtor the trial judge held that on the proper construction of the relevant clause in each lease the creditor had the option of proceeding under that clause or establishing the quantum of its claim in the ordinary way. It appears that it elected to proceed in the ordinary way. The argument also ignores the obligation of the debtor to indemnify the creditor from loss suffered by reason of the company's default under the leasing agreements. That obligation exists whether or not the creditor made a written demand on the company for liquidated damages under the liquidated damages clause in each lease. It is not otherwise disputed that the creditor has established each of the matters which by s 52(1) of the Bankruptcy Act it is required to establish before a sequestration order will be made. It follows that such an order should be made against the estate of the debtor.