FEDERAL COURT OF AUSTRALIA BANKRUPTCY ‑ Sequestration order ‑ Judgment debt ‑ Power of court to go behind judgment ‑ Debt based on guarantee by married woman ‑ Whether defence to debt based on unconscionable conduct by creditor or on principle in Yerkey v Jones GUARANTEE ‑ Guarantor under disability ‑ Whether lender knew or ought to have known of disability ‑ Unconscionability ‑ Equitable presumption of an invalidating tendency ‑ Credit extended to company of which wife a director and shareholder ‑ Whether presumption applies ‑ Whether presumption part of Australian law. Bankruptcy Act 1966 s 52 Yerkey v Jones (1939) 63 CLR 649 Warburton v Whiteley (1989) NSW Conv R 55‑453 Australia and New Zealand Banking Group Ltd v McGee (1994) ASC 56‑278 European Asian of Australia Ltd v Kurland(1985) 8 NSWLR 192 Akins v National Australia Bank (1994) ASC 56‑279 Dowling v Dalgety Australia Ltd (1992) 34 FCR 109 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 National Australia Bank Ltd v Garcia (1997) ANZ Conv R 34 Teachers Health Investments Pty Ltd v Wynne (1997) ANZ Conv R 40 Gregg v Tasmanian Trustees Ltd (1997) 73 FCR 91 Bank of Victoria Ltd v Mueller [1925] VLR 642 Howes v Bishop [1909] 2 KB 390 Talbot v Von Boris (1910) 27 TLR 95; [1911] 1 KB 854 Cain v White (1933) 48 CLR 639 JOYCE RUBY MILES v THE SHELL COMPANY OF AUSTRALIA (ACN 004 610 459) VG 7674 OF 1997 SUNDBERG J 9 JUNE 1998 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 7674 of 1997 BETWEEN: JOYCE RUBY MILES Applicant AND: THE SHELL COMPANY OF AUSTRALIA (ACN 004 610 459) Respondent JUDGE: SUNDBERG J DATE OF ORDER: 9 JUNE 1998 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 2. The respondent's costs of and incidental to the application be taxed and paid in accordance with s 109 of the Bankruptcy Act 1966 out of the estate of the applicant, with the same priority as if a sequestration order had been made on the hearing of this application. 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 7674 of 1997 BETWEEN: JOYCE RUBY MILES Applicant AND: THE SHELL COMPANY OF AUSTRALIA (ACN 004 610 459) Respondent JUDGE: SUNDBERG J DATE: 9 JUNE 1998 PLACE: MELBOURNE REASONS FOR JUDGMENT INTRODUCTION J T & J R Miles Pty Ltd ("the company") was incorporated in 1972. The applicant and her husband were the two directors and each held one of the two issued shares. In August 1993 the company applied to the respondent for a Shell Card and the application was successful. The directors guaranteed the company's obligations arising from its use of the Card. In November 1996 the respondent made demand on the guarantors for payment of amounts due in respect of transactions carried out by use of the Card. The demand was not complied with, and in January 1997 a writ was issued against the guarantors in the County Court, and on 7 February 1997 judgment for $75,420.34 was entered against them in default of appearance. On 25 February the applicant's solicitors informed her that judgment had been entered. On 4 April a bankruptcy notice issued on the application of the respondent. The demand in the notice was not complied with. Shell issued a creditor's petition on 16 October. The act of bankruptcy relied on was the non‑compliance with the notice. On 26 November a Registrar made a sequestration order against the applicant's estate. On 17 December the applicant sought a review of the Registrar's decision pursuant to O 77 r 8 of the Bankruptcy Rules. That is the application before me. The application is a hearing de novo: Re Kwiatek (1989) 89 ALR 631. THE APPLICANT'S EVIDENCE The applicant deposed that in or about early 1997 a man came to her house and gave her and her husband some papers. The papers turned out to be the County Court writ. She did not actually recall receiving the writ personally, as her husband looked after the mail and all matters involving their finances and business affairs. He had done this ever since their marriage in 1946. The applicant left school at the age of 14 and has no qualifications of any kind. Since her marriage she has not worked save for a three month period in 1959‑1960 when she worked in a laundry. It was not until 16 December 1997 that the applicant discovered that default judgment had been entered. Although her husband had known of the judgment since February, he did not tell her until December. The applicant said she was not aware that she had ever signed a guarantee, although she did sign various documents in her capacity as a director. Although she was a director, she had no part in the day to day running of the company, and was a director only because her husband told her she had to be because a company had to have two directors. She signed documents and papers her husband put before her without understanding or indeed inquiring as to what they were. She has always done what her husband asked her to do as regards financial matters and always trusted him. She said that if she did sign the guarantee, its contents were not explained to her and she received no independent legal advice about it. In May 1997 the applicant and her husband were handed a document by a man who came to their house. She did not ask her husband what the document was. Although she does not say so, it was the bankruptcy notice. In November the applicant was handed another document by a man who came to the house. She gave it to her husband without reading it. Although she does not say so, this document was the creditor's petition. The applicant knew that the two documents had to do with money that was claimed from the company, but she did not know what they meant or that they related to claims against her personally. The applicant did not become aware that bankruptcy proceedings had been instituted against her until she was informed by her solicitor in December 1997 that the sequestration order had been made. The applicant's account was supported by her husband. He said that in 1963 he began the business J T & J R Miles. He and his wife were partners for tax reasons based on their accountant's advice. The partnership was incorporated in 1972. He was responsible for the day to day running of the business. The applicant had no involvement other than to sign documents when he required her to do so. He said that in August 1993 he applied to the respondent for a Shell Card. The company was operating a number of trucks carting goods in Western Australia, and paying for fuel by way of a card was more convenient than carrying cash or cheque books around. Shell sent an application form incorporating a guarantee which the husband filled in and arranged for the applicant to sign. They signed the form before a witness who happened to be there at the time. The witness had no connection with the respondent. The husband did not explain the document to the applicant. He did not think she read it. He did not tell the applicant about the writ or the default judgment because he did not want to worry her. The "Shell Card Application" is an eight page brochure on good quality thick cardboard‑like paper. The pages are stapled together in a manner that enables one to read the brochure as one would read a book. The first page bears the words "Shell Card Application". The second page is introduced by an invitation to the customer to ring the Shell Card Service Centre with any queries about the application. Then follows provision for the insertion of "Account Details". These words appear in large black capital letters on a bright red background. On the third page is provision for "Fleet Details" and "Financial Details", also in capital letters on a red background. The financial details sought include trade references. The fourth page begins with the words "This Application Form is a legal document which should be understood and accepted by applicants when signing". Under the heading "Acceptance of Terms & Conditions" in capital letters on a red background, provision is made for the customer to be bound, upon signing, by the terms and conditions contained on the last page. The fifth page is headed "Guarantee & Privacy Laws" in capitals on a red background. The eight lines constituting the guarantee are in much smaller print than that on the earlier pages. Underneath the guarantee is provision for the guarantors to sign. The next two pages deal with direct debiting and are of no present concern. The back page contains terms and conditions in very small print. They are, however, of no present relevance. THE RESPONDENT'S EVIDENCE The respondents' credit manager, Shelley Butler, swore an affidavit and was cross‑examined. She explained how she processed the company's application for the Shell Card. She noted that the company was a transport company which operated about eight vehicles, and that it required fuel purchases of approximately $7,000 per month. She obtained a report on the company from Dun & Bradstreet which confirmed that J T Miles and J R Miles were directors. The report showed that they had been directors since 1972. According to Ms Butler, at no time until the present application did she have any reason to believe that the applicant did not understand financial matters and relied entirely on her husband for guidance. Ms Butler made inquiries of the referees, and when satisfied with them approved the application. She checked that the guarantee part of the application had been completed, and that the guarantors' signatures had been witnessed. She said there was nothing in the way in which the application was filled out which caused her to suspect that either of the directors was incapable of understanding it. GOING BEHIND JUDGMENT The basis of the present application is that despite the judgment the applicant was not in truth indebted to the respondent. When a court exercising bankruptcy jurisdiction is invited to go behind a judgment, the first question is whether it should accept the invitation. The court does not as a matter of course go behind a judgment simply because it is asked to do so. The case an applicant must make out before the court will intervene depends on the circumstances, in particular those in which the judgment came to be entered. When the judgment followed a full investigation at trial in which both parties participated, the court will not reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out. Where judgment has been entered in pursuance of a compromise, ground must be shown for challenging the compromise as such before the judgment will be reopened. In the case of a default judgment, the court will always go behind it if there is what it regards as a bona fide allegation that no real debt lay behind the judgment. Whether the judgment is to be reopened will often involve some preliminary investigation of the merits of the attack on it. But when the court decides that it will go behind the judgment, the question is whether there was in fact and in law a debt which could legally found the judgment. The two stage process involved was explained by Fullagar J in Corney v Brien (1951) 84 CLR 343 at 356 to 358. Of the second stage his Honour said (at 358): when once the court decides that it will "go behind" the judgment, ... the whole matter is open. When once it is considered proper to "reopen", the only question will be whether there was, in fact and in law, a debt which could legally found the judgment ‑ whether there was in "Truth and Reality" an obligation not of record before there was an obligation of record. If the case should be one of those rare cases ... where it is legitimate to "go behind" a judgment entered after trial in court, there would be, I think, no alternative but to re‑try the whole case. The matter to be decided is the existence or non‑existence of a debt antecedent to the judgment. It has been said on several occasions that the judgment is prima facie evidence of the antecedent debt. But, when once the inquiry is undertaken, I think that the ultimate burden of proof rests on the person claiming to be a creditor. In the present case there is what I regard as a bona fide allegation that no real debt lay behind the default judgment. The applicant has thus satisfied the threshold test. YERKEY V JONES In support of the submission that the applicant was not indebted to the respondent counsel first relied on what has been called the principle in Yerkey v Jones (1939) 63 CLR 649. In that case Dixon J at 683 said: if a married woman's consent to become a surety for her husband's debt is procured by the husband and without understanding its effect in essential respects she executes an instrument of suretyship which the creditor accepts without directly dealing with her personally, she has a prima‑facie right to have it set aside. The words "her husband's debt" have not been taken literally. Dixon J's proposition has been applied where the debt is that of a company which is the alter ego of the husband or in which he has, and the wife does not have, a substantial interest. See for example Warburton v Whiteley (1989) NSW Conv R 55‑453 at 58,291. In Warburton at 58,288 McHugh JA said: Upon these facts Mrs Warburton had a prima facie right to have the guarantee declared invalid .... If the evidence had established that Mrs Warburton had a shareholding in the company sufficiently substantial to warrant a finding that she had a beneficial interest in the company's debt, the prima facie application of the Yerkey v Jones principle would have been displaced. At 58,293 Clarke JA said: It seems to me that the voluntary nature of a gift, or the execution of a guarantee, by a wife is critical to the application of the principle. If there is no undue influence, and none was found in this case, then Mrs Warburton would be entitled to relief only if her guarantee was voluntary in the sense that it was solely, or at least substantially, only for the benefit of the respondents and her husband. If in fact the guarantee was executed to secure the past or future debts of a company in which she was substantially interested then it would be difficult to find a basis upon which to grant relief. See also per Kirby P at 58,286. The members of the Court of Appeal differed as to the onus of proof in relation to the existence of a substantial interest. Kirby P and McHugh JA imposed it on the creditor; Clarke JA on the wife. The evidence on the point was not clear, and accordingly the wife was successful. The same approach was taken as to both substantial interest and onus of proof in Australia and New Zealand Banking Group Ltd v McGee (1994) ASC 56‑278. See also European Asian of Australia Ltd v Kurland (1985) 8 NSWLR 192 at 200‑201 and Akins v National Australia Bank (1994) ASC 56‑279 at 58,937 per Clarke JA, with whom Sheller JA agreed. IS YERKEY THE LAW TODAY? In the preceding discussion I have assumed that Yerkey is binding authority for the proposition I have quoted from Dixon J's judgment. In Warburton and McGee the court was of the view that Yerkey was so binding. In more recent cases its authority has been doubted. In Akins Clarke and Sheller JJA were of the view that the "special rule" in Yerkey should no longer be applied as it had been supplanted by Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. In National Australia Bank Ltd v Garcia (1997) ANZ Conv R 34 the New South Wales Court of Appeal (Mahoney P, Meagher and Sheller JJA) held that Yerkey should no longer be applied in New South Wales. Their Honours were of the opinion that the views of Dixon J had not been shared by a majority of the justices in Yerkey. In Teachers Health Investments Pty Ltd v Wynne (1997) ANZ Conv R 40 a differently constituted Court of Appeal followed Garcia. In Gregg v Tasmanian Trustees Ltd (1997) 73 FCR 91 Merkel J held that "the presumption or invalidating tendency in favour of a married woman in Yerkey v Jones has been subsumed or superseded by Amadio": at 113. Although the matter is not free from doubt, in my opinion Yerkey does not stand as a binding decision of the High Court for the proposition contained in Dixon J's judgment. McTiernan J clearly decided the case on the facts alone. No legal principle can be discerned from his judgment. Rich J also decided the case on the facts. But he prefaced his examination of them by the observation that he did "not wish to derogate in the least degree from the judgment of Cussen J in the case of Bank of Victoria Ltd v Mueller [1925] VLR 642, which contains a valuable exposition of equitable doctrine and a discussion and explanation of authorities which have caused much confusion": at 665‑666. His Honour then said that the facts fell short of establishing the necessary foundation of fact. The significance of the endorsement of Mueller is that that case formed the basis of Dixon J's judgment. At 680 of Yerkey his Honour said that much of what followed in his reasons "is no more than an echo and discussion of Cussen J's views". At 683 the so‑called principle is attributed to Cussen J's exposition of Howes v Bishop [1909] 2 KB 390 and Talbot v Von Boris (1910) 27 TLR 95; [1911] 1 KB 854. Latham CJ, having dismissed Mrs Jones' reliance on undue influence and other defences, said that her case "must depend upon some special rules applying to a wife who becomes a surety for her husband". He described the rule relied on as "a rather vague and indefinite survival from the days when a married woman was almost incapable in law and when the courts of equity gave her special protection in relation to transactions affecting her special property". He then stated the principle relied on "in the form most favourable to the defendant" as it appeared in Halsbury's Law of England 2nd ed, vol 15 at 282 ‑ "where creditors of a husband procure the wife's signature to a security for his debt through the agency of the husband, they must, in order to succeed in an action on the security, be in a position to prove that the proper explanation of the effect of the document was given to the wife": at 663‑664. His Honour then said that the rule could not be made to fit into "any systematic statement of the principles relating to fraud, misrepresentation or undue influence, but there is authority to support it" (emphasis added). His Honour then mentioned three cases, one of which was Mueller. He distinguished all three from the case before him. Despite the words I have underlined, I do not think the Chief Justice intended to espouse Mueller or expressly adopt "the rule relied on". He was suspicious of its origins. He did not, I think, accept the Halsbury rendering of the "principle", which he said was expressed in the form most favourable to the defendant. The principle relied on was put in the most ample form from the point of view of the party who relied on it, and the case was said not to fall within its ambit. That is not an endorsement of the principle. Cussen J's elaborate examination of the law was referred to but not adopted. Mueller was simply distinguished on its facts. Thus, even if Rich J's approval of the Mueller exposition binds him in with Dixon J, there is no majority support for Dixon J's proposition. I am therefore not bound to apply Dixon J's proposition in Yerkey. THE PRESENT CASE In case I am wrong about the continued applicability of Yerkey, I will in this paragraph assume that is a principle upon which the applicant is entitled to rely. The evidence in the present case is reasonably clear. The partnership business was called "J T and J R Miles". "J R" are the applicant's initials. She was a partner in the business for tax reasons based on the advice of the partners' accountant. The company was incorporated in 1972. Husband and wife were the two directors and each held one of the two issued shares. The applicant had a substantial "beneficial" interest in the company. The evidence thus discharges the onus that is on the respondent to establish that the applicant had a sufficient interest in the company to displace the prima facie application of the Yerkey principle. On the facts, counsel for the applicant was driven to submit that a beneficial interest is not substantial unless it is a controlling interest. The natural meaning of "substantial" in a context such as the present is "of real worth or value" ‑ "of ample or considerable amount". See Macquarie Dictionary. In Dowling v Dalgety Australia Ltd (1992) 34 FCR 109 at 139 Lockhart J said that "substantial" in the phrase "substantial degree of power in a market" did not mean a controlling power, but one that was considerable or large. "Controlling" is not the sense that has been attributed to "substantial" in the cases which have dealt with the nature of a wife's interest in a company in the present context. See for example McGee at 58,930, and Kurland at 200‑201 where the wife's half interest in the company was treated as displacing the principle. The applicant has not on the basis of Yerkey established that she was not indebted to the respondent. AMADIO At 462 of Amadio Mason J spoke of an underlying general principle which may be invoked whenever one party by reason of some condition [or] circumstance is placed at a special disadvantage vis‑a‑vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party. See also Gibbs CJ at 459 and Deane J at 475. Assuming in favour of the applicant that she laboured under a special disadvantage by reason of her lack of education, ignorance of commercial affairs, and reliance on her husband, the respondent did not know of her disadvantage. Nor in my view ought it to have known of it. From the respondent's point of view the transaction was a routine and unexceptional event. A man had telephoned inquiring about a Shell Card. An application form was posted out and was completed in the company's name and signed by both directors, who also signed as guarantors. The form was returned to the respondent whose credit manager checked the details, confirmed that the signatories were in fact directors, and contacted the referees. After receiving favourable reports from the referees, she approved the application. There was nothing to alert her, or even to suggest, that one of the directors was or might be labouring under a disadvantage. Assuming in favour of the applicant that the credit manager should have concluded from the material in the application form that the applicant was the wife of the other director, (for there was no statement to that effect), that of itself would be an insufficient basis upon which to find that the respondent ought to have known that the applicant laboured under a special disability. As Kirby P said in Warburton at 58,287: The mere knowledge by the creditors that one guarantor is the wife of the other should not, without more, be sufficient in Australian society today to establish that the wife was under a special disability as to her own interests in relation to the transaction. To hold otherwise would be to hold wives in a permanently subordinate and inferior position for no reason other than that they are wives. ... Effectively, it would be to revive the Yerkey principle in another guise, imposing on those who deal with a married woman the prima facie obligation to ensure that the wife is independently advised. Such reasoning would not only offend what is now the prima facie respect for the equality of women (including wives) in economic and other matters. It would also impose an economic burden on financial transactions with all married women as such. Such a burden would not be warranted by the utility of the occasional response to advice given about the protection of the wife's independent financial position. Furthermore, there was nothing in the nature of the transaction itself which would give rise to suspicion on the respondent's part. The applicant was not guaranteeing her husband's existing or future indebtedness. A company of which they were the directors and equal shareholders had a fleet of trucks which required fuel. The transaction was a simple credit facility for the routine on‑going operation of, in effect, their joint business. In Warburton at 58,286 ‑ 58,287 Kirby P said: The evidence is just not sufficient, in my view, to establish that the creditors were on notice of Mrs Warburton's special disabilities and of the improvidence of the transaction from her point of view. In Amadio it was shown that the bank knew that the transaction was improvident for the parents. That was an important factor in fixing the bank with constructive notice of the parents' special disabilities. ... The importance of the improvident nature of the bargain as an alert to the creditors was referred to in European Asian of Australia Ltd v Kurland (1985) 8 NSWLR 192 at 200. See also Bawn v Trade Credits (1986) NSW Conv R 55‑290. In Wynne, the financial information in the creditor's possession showed that the principal debtor had no ability to service the interest on the loan and that his financial position was suspect. In those circumstances the Court of Appeal concluded that the creditor should have been on notice that the transaction was "perilous" from the principal debtor's point of view and "improvident" from the wife's point of view: at 43‑44. See also Gregg at 120‑121. The applicant has not on the basis of Amadio established that she was not indebted to the respondent. DISCRETION TO REFUSE SEQUESTRATION ORDER The Court has a discretion under s 52(2) of the Bankruptcy Act 1966 to decline to make a sequestration order at the suit of a petitioner who has otherwise established a case for such relief. But a debtor must show "sufficient cause" before the court will take that course: Cain v White (1933) 48 CLR 639 at 646. The matters relied on by the applicant are these: · she is a 69 years old pensioner · there are no supporting creditors · she does not propose to engage in any future trading · the respondent's documents were "miserable in their capacity for communication" · the methods used by the respondent fell below acceptable practice. It will be apparent from what I have said that I do not accept the last two contentions. Nor do I regard the first three as constituting sufficient cause not to make a sequestration order. The applicant signed a guarantee, clearly labelled as such in large letters on a bright red background, to enable the company in which she had a half interest, and of which she was a director, to buy petrol on credit. The company did not pay, and she must bear the consequences. CONCLUSION The application is dismissed, and the applicant must pay the respondent's costs. I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg Associate: Dated: 9 June 1998 Counsel for the Applicant A W Ellis Solicitors for the Applicant Consumer Credit Legal Service Counsel for the Respondent: M LaPirow Solicitors for the Respondent: Davies Moloney Date of Hearing: 28 May 1998