FEDERAL COURT OF AUSTRALIA BANKRUPTCY – application to set aside sequestration order – factual issue as to whether debt paid. Bankruptcy Act 1966 (Cth): s 43 AVCO ACCESS LIMITED v CARMEL FRENDO No 7240 of 1998 GOLDBERG J MELBOURNE 21 DECEMBER 1998 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 7240 of 1998 In the matter of CARMEL FRENDO (as known as CARMEL BARONE BETWEEN: AVCO ACCESS LIMITED (formerly known as HOUSEHOLD FINANCIAL SERVICES LIMITED) (000 032 075) Applicant AND: CARMEL FRENDO (as known as CARMEL BARONE) Respondent JUDGE: GOLDBERG J DATE OF ORDER: 21 DECEMBER 1998 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The respondent's motion filed 1 June 1998 be dismissed. 2. The applicant creditor's costs of and incidental to the motion including reserved costs be taxed and be part of its costs of the petition. Note: Settlement and entry of orders is dealt with in O 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 7240 of 1998 In the matter of CARMEL FRENDO (as known as CARMEL BARONE BETWEEN: AVCO ACCESS LIMITED (formerly known as HOUSEHOLD FINANCIAL SERVICES LIMITED) (000 032 075) Applicant AND: CARMEL FRENDO (as known as CARMEL BARONE) Respondent JUDGE: GOLDBERG J DATE: 21 december 1998 PLACE: MELBOURNE REASONS FOR JUDGMENT Introduction and Background On 9 April 1998 the applicant, formerly known as Household Financial Services Limited, filed a creditor's petition seeking a sequestration order under s 43 of the Bankruptcy Act 1966 (Cth) ("the Act") against the estate of the respondent. The act of bankruptcy relied upon was the failure of the respondent to comply on or before 19 March 1998 with the requirements of a bankruptcy notice issued on 9 February 1998 served on her on 26 February 1998. The bankruptcy notice related to a judgment debt obtained by the applicant in the Magistrates' Court of Victoria at Melbourne on 5 March 1996 and interest on the judgment debt from 6 March 1996 to 8 February 1998. The amount of the judgment was $12,090.06 and the amount of interest was $3,076.48. The respondent was duly served with a copy of the petition and supporting documentation on 20 April 1998. On 20 May 1998 the first return date of the petition, the further hearing was adjourned to enable the respondent to put material before the Court. On 20 May 1998 the respondent filed an affidavit in which she stated that she did not owe any money to the applicant and that the creditor's petition was incorrect. On the same day the respondent filed a notice of opposition in which she stated that: "The amount is paid in full to HFC Limited and I do not owe any amount to this Co." The notice also stated that the amount claimed by the applicant was incorrect and that the respondent did not have an account with Avco Access but only with HFC Limited. On 27 May 1998 the applicant filed an affidavit by Peter Buttigieg, an officer of the applicant, who set out the following circumstances leading up to the obtaining of the judgment. On 8 March 1995 the respondent applied to the applicant for a $10,000 line of credit. That application was approved on 17 March 1995 and the respondent signed a contract schedule agreeing to the terms and conditions of the contract which included the payment of interest. It appears that the respondent drew down on that line of credit and as at 30 September 1996 the respondent owed the applicant $11,171.17. The amount has been verified by a copy of the applicant's cardholder transaction history report for the respondent's account as at 20 May 1998. The report, one of the business records of the applicant, shows a number of credit and debit transactions made in respect of the respondent's account between 11 April 1995 and 28 November 1995. The petition came on for hearing before Registrar Efthim on 1 June 1998 when, in the absence of appearance by the respondent, he made a sequestration order against the estate of the respondent. Later in the day the respondent filed a motion for the petition to be re‑heard before a judge of the Court as she had appeared in the Magistrates' Court at 9.30 am and had appeared in the Federal Court later in the morning at 10.30 am after the sequestration order was made. The motion for the re‑hearing of the petition came on before me on 6 July 1998 when I gave directions for the further conduct of the proceeding. On that day the respondent's husband sought to appear on the respondent's behalf as she was unable to come to Court. He produced what he said two account statements from the applicant which had a bank stamp imprinted upon them and which he said showed payments to the applicant of $4,000 and $8,249.78. I adjourned the proceeding to 24 August 1998 to enable the applicant to consider this material and to enable the respondent to file an affidavit verifying the material upon which she relied. On 10 August 1998 the respondent filed an affidavit in which she said she did not owe any money to the applicant. She maintained in the affidavit that she had paid her account in full in accordance with the statements which had been shown to me on 6 July 1998. These statements were exhibited to her affidavit and she contended that her husband had sent copies to Mr Jim Ziogas then an employee of the applicant, on 24 and 26 June 1996. The respondent also said that on 9 October 1996 she received a facsimile transmission from Mr Ziogas about her account to the effect that she did not owe any money to the applicant, that the account was in credit $10,831.28 and that the applicant provided an apology. The letter sent by facsimile transmission has been produced by the respondent and it shows at the top the facsimile number of the applicant, at that date known as Household Financial Services Limited, and it displays the letterhead of the applicant under that name. The authenticity of that letter is denied by the applicant and it is necessary to set it out in full. "09/10/96 : AS4 MRS <CARMEL> FRENDO 28 GOODWIN ST BLACKBURN VIC 3130 FAX: 03 877 0165 PAGES TO FAX: 01 DEAR CUSTOMER, RE: ACCOUNT NUMBER 5887083030152980 AS PER TELEPHONE CONVERSATION BETWEEN MR FRENDO AND MR ZIOGAS OF THIS OFFICE ON THE 24/06/96 AND PER COPYS RECEIVED BY MAIL ON THE 26/06/96 AND FAX TO US ON THE 24/06/96 BY MR FRENDO AS TO THE ACCOUNT 5887083030152980. HOUSEHOLD FINANCIAL SERVICES HAS CARFEULLY INVESTIGATED THIS MATTER AND AS PER COPIES FROM YOUR HOUSEHOLD FINANCIAL SERVICES WILL CREDIT YOU AND MAKE ALL THE NECESSARY ADJUSTMENTS. PAYMENTS RECEIVED AMOUNT $8,249.78 DATE 22/06/95 AND AMOUNT $4,000.00 DATE 26/07/95 A TOTAL $12,249.78 TO BE CREDIT BACK TO MRS FRENDO ACCOUNT AND THE CLOSING BALANCE AS TO THIS DATE 09/10/96 IS $0.00. WE WILL ALLSO CREDIT YOUR ACC DAILY PERCENTAGE RATE OF 0.06712%. WE ALSO NOTICE THAT MRS FRENDO HAS OVER PAYMENT OF $831.28 WHICH MRS FRENDO CAN USE FROM THIS ACCOUNT. AS OF THIS FAX LETTER TO YOU MRS FRENDO DATED THE 09/10/96, YOUR ACCOUNT IS BACK IN CREDIT LIMIT $10,000 AND $831.28 A TOTAL OF $10,831.28. MRS FRENDO WE HOPE YOU ACCEPT OUR APOLOGY AND ANY INCONVENIENCE FROM HOUSEHOLD FINANCIAL SERVICES AND WE LOOK FORWARD TO HAVE YOU AS A VALUE CUSTOMER. AS PER TELEPHONE CONVERSATION WITH MR FRENDO AND MR ZIOGAS ON THE 24/06/96 THAT YOU WOULD LIKE TO CLOSE YOUR ACCOUNT WITH HOUSEHOLD FINANCIAL SERVICES. AS WE HAVE INVESTIGATED THIS MATTER AND MADE ALL THE NECESSARY ADJUSTMENTS TO YOUR ACCOUNT WE WOULD LIKE YOU MRS FRENDO TO RECONSIDER AGAIN. WE APPRECIATE YOUR COMMITMENT IN THIS MATTER AND WE HOPE TO KEEP YOU AS A VALUE CUSTOMER. YOU MAY ADVISE US BY TELEPONING OUR OFFICE FROM 8:00 AM – 7:30 PM TOLL FREE 1800 815 659 ME OR ONE OF MY STAFF WILL HELP YOU. YOURS SINCERELY, JIM ZIOGAS HOUSEHOLD HFC" On 7 October 1998 the applicant filed an affidavit by Peter Buttigieg responding to the matters raised by the respondent in her affidavit of 10 August 1998. Mr Buttigieg addressed the two statements of the respondent's account dated 25 May 1998 and 28 June 1995. These statements bore rubber stamps of the Westpac Bank and the respondent claimed that payment of $8,249.78 was made at the Westpac branch at Blackburn on 22 June 1995 and that a payment of $4,000 was made at a Westpac branch on 26 July 1995. Mr Buttigieg said that the respondent cardholder transaction history report did not record either of these payments although it did record payments of $300, $400 and $300 shown on the respondent's statement as credited on 10 May, 16 May and 29 May 1995 respectively. The applicant's records do not disclose that either of the payments relied upon by the respondent are recorded in its records or accounts. On 11 November 1998 the respondent filed a further affidavit in which she continued to maintain that she did not owe any money to the applicant. In the affidavit she referred to a number of withdrawals she had made from the account by the use of automatic teller machines when the balance shown in the account was incorrect. She says that she telephoned the applicant in New South Wales and was told that the matter would be looked at. On 14 May 1995 she wrote to Mr Trelawney of the applicant in the following terms: "Dear Sir Re-Telephone conversation the 12 May 1995, that my Account 5887 0830 3015 2980 have a credit of $10,000 Dollars, which is now $13,588 Dollars on the 11 May 1995 as I made an ATM withdrawal in Doncaster for $500.00 Dollars and my balance was $13,588 Dollars this should be a balance of $9,100 Dollars. Mr Trollony please fix this problem as I am very concerned about my Account as there is something wrong, please attend to this as soon as possible. I look forward to hear from you thank you." These incorrect account balances are not relevant to the issues presently before the Court. The applicant denies that the two payments of $8,249.78 and $4,000 claimed to have been made by the respondent were in fact either made by the respondent or received by the applicant. The applicant relies on the evidence of a number of witnesses to support its contention. Dorothy Shaw, an employee of Westpac Banking Corporation Limited, has the responsibility, inter alia, to trace banking transactions from origin to final destination and has access to the books and records of Westpac Bank branches in Victoria. Ms Shaw has examined the two statements of the respondent's account with the applicant dated 25 May 1995 and 28 June 1995 upon which the respondent relies to support the payments alleged to have been made of $8,249.78 and $4,000. Ms Shaw examined relevant records of Westpac Bank and is satisfied that according to the Bank's records no payment was made on the applicant's account at the Westpac branch at Blackburn on 22 June 1995 or 26 July 1995 nor at the Westpac branch at Doncaster on 26 July 1995. In October 1996 Mr Ziogas was the National Collections Manager of the applicant. He denies that he is the author of the letter sent by facsimile transmission produced by the respondent. It is important to identify his evidence in support of this denial. It is in the following terms: "5. I am able to categorically say that I am not the author of the letter because of the following matters: (a) the grammar, spelling and wording of the letter is poor. I have a strong command of the English language. I completed my High School Certificate at Christian Brothers College, St Marys Cathedral, College Street in Sydney in 1982. Between 1983‑84 I studied a Bachelor of Economics degree at Macquarie University for 1˝ years, majoring in Accounting and Financial Management. I did not complete that degree. I am currently in my first year of a Masters of Business Administration at Charles Sturt University in New South Wales. (b) I always sign letters I write. I note the letter is unsigned, which is contrary to my practice. I would not allow a letter under my hand to be forwarded to a customer without my signature. (c) The letter is written entirely in capital letters. This is not only unprofessional in its presentation but contrary to my practice. (d) The first name of the addressee has < and > symbols either side. Again, such presentation is unprofessional and contrary to my usual practice. 6. Whilst in the employ of the respondent [the applicant creditor] I always noted any telephone or written communication with a customer on the respondent's 'Cardpac' Credit Management System. The Cardpac system was used to keep a continuing record of matters pertaining to a customer's account. … 5.[sic] I have perused the Cardpac printout and I make the following comments: (a) The letter twice refers to a telephone conversation between Mr Frendo and I on 24 June 1996. There is no reference in the Cardpac printout to any such telephone conversation. (b) There is no reference in the Cardpac printout to the letter. The letter in so far as it purports to acknowledge previous payments and to credit a customer's account are matters of particular importance and would have been noted by me on the Cardpac system. I would have also instructed the respondent's solicitors to cease action in relation to the applicant's account. I am informed by Stuart Andrew Lewin that the solicitors for the applicant received no such instructions. (c) If I had spoken to Mr Frendo on 24 June 1996 or written to the applicant on 9 October 1996 I would have noted those attendances on the Cardpac system." Simone Marin is a solicitor employed by Home Wilkinson & Lowry the firm who acted for the applicant in relation to the Magistrates' Court proceeding issued against the respondent. Ms Marin said that after the Magistrates' Court complaint was issued and served a telephone message was left at her office by a "Mr Frando" to the effect that he had received the complaint issued by the applicant and that he could not pay until he received all the invoices from the applicant. On 7 February 1996 Ms Marin spoke to a Mr Joe Frendo who had called and said that he had spoken to Mr Trelawney of the applicant. Ms Marin says that Mr Frendo advised her that: "(a) he was disputing the amount; (b) he would get the statements from the respondent; (c) his wife was having surgery; (d) he has $6,000.00 he wanted to pay to the Respondent; (e) the amount on the statement was wrong; (f) the Respondent was overcharging; (g) he wanted to pay $6,000.00 in full and final settlement; (h) he believes he only owes $6,000.00 and can prove he only owes $6,000.00 (i) Mr Trolorny of the Respondent knew he only owed $6,000.00 (j) he and his wife had recently changed their address to 6 Springfield Road, Blackburn and at the time of service he and his wife were not living at the address; (k) That he had received a copy of the Magistrates' Court Complaint." Ms Marin told Mr Frendo that she would get instructions and get back to him. Ms Marin obtained instructions and on 13 February 1996 spoke to Mr Frendo. Mr Frendo said that he had made a $4,000 payment and that he had proof of that payment and that Mr Trelawney had proof of the payment. Mr Frendo said that he had made four cash payments and a cheque payment to Westpac Bank and that he would fax proof of the payments to Ms Marin within the next few days. Ms Marin never received from Mr Frendo the documents which he said he would fax to her to prove payment. She said that the respondent failed to file a defence in the Magistrates' Court and on 5 March 1996 the Court made an order for the applicant on its claim for $11,185.20 together with interest of $345.36 and costs of $559.50. At the hearing Mr Nolan of counsel appeared for the applicant and the respondent appeared in person. The respondent challenged Mr Ziogas' evidence that he was not the author of the letter dated 9 October 1996 and, in particular, sought to challenge his evidence that he always signed letters that he wrote, that it was contrary to his practice to write letters in capital letters and to put the arrow head symbols on either side of the name of the addressee of the letter. In support of this challenge the respondent produced two original letters from Household Financial Services to her dated 23 November 1995 and 19 December 1995, each of which was typed in capital letters, had the arrow head symbols on each side of the respondent's first name as addressee of the letter and one of them was over Mr Ziogas' name but was not signed by him. Mr Ziogas said in cross‑examination that each of these two letters was a standard pro forma default letter generated by the company's computer system and was not sent by him to the respondent. He said that the letter of 9 October 1996 was a particular letter dealing with an account and he would not have written it in the same form as the standard pro forma default letters. Legal principles There is a threshold issue to be determined because the act of bankruptcy relied upon by the applicant is the respondent's failure to comply with the bankruptcy notice which, in terms, is based upon a judgment debt. Section 40(1)(g) of the Act provides that a debtor commits an act of bankruptcy if a creditor who has obtained a final judgment has served on the debtor a bankruptcy notice and the debtor does not comply with the requirements of the bankruptcy notice or satisfy the Court that he or she has a counter‑claim, set‑off or cross‑demand equal to or exceeding the amount of the judgment debt which he or she could not have set up in the proceeding in which the judgment was obtained. The act of bankruptcy relied upon by the applicant is the respondent's failure to comply with the requirements of a bankruptcy notice based on a judgment debt. As a matter of principle, a judgment debt is not conclusive and where a judgment has been obtained after a determination on the merits a bankruptcy court will decline to go behind the judgment unless there are substantial reasons given for questioning whether the judgment is founded on a real debt: Wren v Mahony (1972) 126 CLR 212 at 225 per Barwick CJ; Re David; Ex parte Lahood (1979) 27 ALR 306, 307; Bourke v Beneficial Finance Corporation Ltd (1993) 47 FCR 264, 270‑271. However, a court is more willing to go behind a judgment debt where the judgment obtained was by default: Corney v Brien (1951) 84 CLR 343. In the present circumstances although the judgment debt was obtained by default the respondent, through her husband, was aware of the proceeding in the Magistrates' Court and although her husband had raised a defence to part of her claim in discussions with the solicitors for the applicant, no attempt was made to contest the proceeding. Nevertheless in all the circumstances particularly having regard to the material the respondent has now placed before the Court I consider it appropriate to go behind the judgment debt and determine whether in fact the debt the subject of the judgment existed. Was the judgment debt due? There is clearly an issue of fact between the parties as to whether the payments relied upon by the respondent have been made. I am not satisfied on the whole of the evidence before me that they were made as claimed by the respondent. In particular, I am not satisfied that Mr Ziogas wrote the letter relied upon by the respondent. Its authenticity is denied by Mr Ziogas and it is not expressed in the terms which one would expect to have been sent by an organisation such as the applicant. I accept Mr Ziogas' explanation for the manner in which and circumstances in which the two original letters from the applicant dated 23 November 1995 and 19 December 1995 came into existence. Although the letter sent by facsimile transmission dated 9 October 1996 has a facsimile transmission imprint on it showing the applicant's sending facsimile number Mr Ziogas said that on 9 October 1996 the National Collections Department of which he was manager was not physically located at the company's St Leonard's address which used the facsimile number on the letter of 9 October 1996 but was rather located at the National Australia Bank building, 341 George Street, Sydney which had a different facsimile number. Mr Ziogas said that if the company had made an error and was sending out a correction letter it would have been referred to him but no such letter was sent by him to the respondent. I had the opportunity of observing Mr Ziogas in the witness box and I am satisfied that he was a credible and truthful witness. I am satisfied that he did not send the letter relied upon by the respondent. There is no evidence that it was sent by anyone else who had the authority of the applicant to send a letter in such terms but I am unable to determine on the evidence how the letter came into existence. The respondent contends that she made two payments to the applicant through the Westpac Bank but neither the Bank nor the applicant has any documentary record of having received the two amounts claimed. Further, the conversations which the respondent's husband had with the applicant's solicitor after the Magistrates' Court complaint was served is inconsistent with a claim that the full amount of the debt had been paid and was not otherwise owing. The evidence in relation to the two payments claimed to be made by the respondent, namely $8,249.78 and $4,000 unsatisfactory. The only evidence as to the date of such payments is to be found in the facsimile letter dated 9 October 1996, the authenticity of which is denied by the applicant. That letter states that $8,249.78 was received on 22 June 1995 and that $4,000 was received on 26 July 1995. Neither the applicant's records nor the Westpac Bank's records disclose or support any such payments. No receipt as such for each amount was given and the only documentary evidence of the Bank's involvement is the rubber stamp imprint on the applicant's statement forms. No explanation was given as to how that stamp came to be placed on the statements or to what transaction it related. The respondent gave evidence that she paid the amount of $8,249.78 in cash at the Westpac branch at Blackburn but she was not able to give any evidence as to the payment of the $4,000 on 26 July 1995. The respondent said that she obtained the cash from a tin which she kept in a drawer in her home and that she had saved the money from money given to her from time to time by her husband. The respondent gave inconsistent and varying accounts of the circumstances in which she received the amounts and the actual amounts received. The thrust of her evidence overall was that from time to time her husband was paid for work he had done and he would give her money which started with payments of $500 and rose to higher amounts. The respondent said that she saved up the money to pay the bills and that she first started saving money in January 1995. She did not recall how much was in the tin by June 1995. I am not satisfied that the respondent paid $8,249.78 in cash to the Westpac Bank on 22 June 1995, in reduction of her outstanding account with the applicant. The relevant statement received from the applicant has written on it in her husband's hand the amount of $8,249.78. The respondent said that that entry was made shortly after the statement was received. However, later in her evidence she said that she did not tell her husband that she had paid the amount until approximately one month after it had been paid because, in substance, she wanted to give him a surprise and she wanted him to ask if it had been paid. I find this evidence inconsistent with the fact that her husband had written what is said to be the correct amount on the statement. However, there are further reasons why I do not find the respondent's explanation in relation to this payment credible. According to the applicant's records, $5,000 was paid in reduction of the outstanding balance of the account on 2 June 1995. Thus, for the respondent's case to be consistent she would have had to have received a substantial amount of money from her husband in order to pay a further $8,249.78 seventeen days later on 22 June 1995. What is more telling against the respondent's explanation is that if the $8,249.78 had been paid on 22 June 1995 then the balance shown on the statement dated 28 June 1995 would not have been $9,060.55 but would rather have been of the order of $810.77. If that be correct it is not credible that when the next statement from the applicant was received dated 28 June 1995 the respondent would not have queried the balance which failed to take into account the most substantial payment claimed to have been made by the respondent in respect of the account at the time. What is more lacking in credibility is that on 28 July 1998 or, indeed, on any date after 28 June 1995 the respondent would have paid $4,000 in reduction of a balance which on the respondent's version was only $810.77. There was no reason why the respondent would want to place her account with the applicant in credit to the extent of some $3,189.23. This inconsistency in the respondent's explanation is also exacerbated by the applicant's records which show the $1,000 was paid in reduction of the balance on 22 June 1995 and a further $650 was paid in reduction of the balance on 26 June 1995. It is also significant that the account was not used by the respondent after 7 July 1995 when, according to the applicant there was no further credit available. However, at that time, if the respondent's explanation is accepted she would have had an available line of credit of $10,000 or thereabouts, consistently with the terms of the account. Mr Ziogas produced his record of all telephone and written communications he received in relation to the respondent's account. There is no reference in this record to any telephone conversation on 24 June 1996 as claimed in the facsimile letter of 9 October 1996. Further, the record discloses a telephone communication from the respondent's husband on 5 December 1995 in which Mr Frendo claimed that the balance should be less than what it was then said to be and he identified a number of payments, including the payment of $5,000 made on 2 June 1995 to which I have already referred. He also referred to a payment of $4,000 on 26 July 1995 which is in issue but, more importantly, he made no reference to a payment of $8,249.78 on 22 June 1995 or on any other date. It will be remembered that Mrs Frendo said that she told her husband of this payment approximately one month after she made it so at the latest he would have known about it by the beginning of August 1995. If such a payment had been made it is not credible that it would not have been identified by Mr Frendo in his telephone discussion with Mr Ziogas on 5 December 1995. Mr Ziogas' record of telephone and written communications also shows that on 6 February 1996 Mr Frendo told him that he was shocked that his wife had received a summons, that a $4,000 payment was missing and he had $6,000 he wanted to pay. Importantly in this conversation Mr Frendo made no reference to any missing payment of $8,249.78. His statement that he had $6,000 to pay was quite inconsistent with such a payment having been made. I am not satisfied that the respondent paid the sum of $8,249.78 on 22 June 1995 or on any other date or the sum of $4,000 on 28 July 1995 or on any other date in reduction of the balance of her account with the applicant. Accordingly I am satisfied that the judgment debt was founded on a real debt and that the applicant was entitled to issue and serve the bankruptcy notice in relation to the amount of that judgment debt. In all those circumstances I am satisfied that the respondent has committed an act of bankruptcy in her failure to comply with the bankruptcy notice and in those circumstances the sequestration order made against the estate of the respondent by Registrar Efthim on 1 June 1998 must stand. The respondent's motion will be dismissed and the applicant creditor's costs will be part of its costs of the petition. I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg Associate: Dated: 21 December 1998 Counsel for the Applicant: Mr J Nolan Solicitor for the Applicant: Mills Oakley Counsel for the Respondent: in person Date of Hearing: 21 December 1998 Date of Judgment: 21 December 1998