FEDERAL COURT OF AUSTRALIA Wenkart v Abignano [1999] FCA 354 BANKRUPTCY – application to set aside bankruptcy notice - notice based on judgment affirmed on appeal - circumstances in which the court will go behind the earlier judgment Bankruptcy Act 1966 (Cth), ss 5, 30(1), 40(1), 41(1), 41(6A), 44(1), 52(1), 52(2) Federal Court Rules, O 52, r 15 Rankin v Palmer (1912) 16 CLR 285, considered Wren v Mahony (1972) 126 CLR 212, considered Abigroup Ltd v Abignano (1992) 39 FCR 74, discussed Wenkart v Pitman, unreported, 6 October 1998, NSWCA, discussed Wenkart v Abignano, unreported, 25 September 1997, discussed Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125, cited Corney v Brien (1951) 84 CLR 343, cited In re Newman; Ex parte Brooke (1876) 3 Ch D 494, cited Ex parte Kibble; In re Onslow (1875) LR10 ChApp 373, cited Emerson v Wreckair Pty Ltd (1992) 33 FCR 581, cited Petrie v Redmond (1942) 13 ABC 44, cited In re Richardson; Ex parte The Governors of St Thomas' Hospital [1911] 2 KB 705, cited Ross-Ireland v Tour Finance Ltd (1965) 39 ALJR 49, cited Olivieri v Stafford (1989) 24 FCR 413, followed THOMAS RICHARD WENKART v GENNARO ABIGNANO & ANOR NG 1229 OF 1998 JUDGES: SACKVILLE, NORTH & HELY JJ PLACE: SYDNEY DATE: 1 APRIL 1999 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 1229 OF 1998 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: THOMAS RICHARD WENKART Appellant AND: GENNARO ABIGNANO First Respondent GENALLCO PTY LIMITED Second Respondent JUDGE: SACKVILLE, NORTH & HELY JJ DATE OF ORDER: 1 APRIL 1999 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant pay the respondents' costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 1229 OF 1998 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: THOMAS RICHARD WENKART Appellant AND: GENNARO ABIGNANO First Respondent GENALLCO PTY LIMITED Second Respondent JUDGE: SACKVILLE, NORTH & HELY JJ DATE: 1 APRIL 1999 PLACE: SYDNEY REASONS FOR JUDGMENT THE COURT 1 This is an appeal from a decision of a Judge of this Court (Hill J), refusing an application to set aside a bankruptcy notice dated 5 March 1998 and served upon the appellant by the respondents on the same day. The bankruptcy notice claims that the appellant owes the respondents a debt of $1,307,537.10, pursuant to a judgment of the Supreme Court of New South Wales (which was expressed to take effect on 29 September 1997) and a deed of assignment dated 10 December 1997 between a Mr Pitman and the respondents. 2 The appeal was not filed within the time prescribed by Federal Court Rules, O 52, r 15. However, Hely J, by orders made on 12 November 1998, extended the time for the filing of a notice of appeal until that date. The notice of appeal was duly filed pursuant to those orders. The Supreme Court Proceedings 3 Sandtara Pty Ltd ("Sandtara") leased premises to Cenrin Pty Ltd ("Cenrin"). Abigroup Ltd ("Abigroup") guaranteed the performance by Cenrin of its obligations under the lease. Cenrin went into liquidation and the liquidator disclaimed the lease, as a result of which Abigroup became liable to pay $1,307,537.10 to Sandtara. 4 Abigroup claimed to be entitled to an indemnity from the respondents in respect of moneys it was liable to pay under the guarantee. In turn, the respondents claimed to be entitled to an indemnity in a similar amount from Mr Pitman. In his turn, Mr Pitman claimed to be entitled to an indemnity from the appellant. Mr Pitman's claim was based on conversations he allegedly had with the appellant, to the effect that the appellant would stand behind him and would ensure that he suffered no loss under the indemnity he had given to the respondents. 5 Hunter J found in favour of each of the claimants to an indemnity: Wenkart v Abignano, unreported, 25 September 1997. In relation to the claim made by Mr Pitman against the appellant, his Honour found that the conversations alleged by Mr Pitman had taken place. His Honour held that these constituted an indemnity by the appellant in respect of Mr Pitman's liability under the indemnity he had given to the respondents. Accordingly, Hunter J concluded that the appellant was liable to indemnify Mr Pitman in respect of the judgment sum for which Mr Pitman was liable under his (Mr Pitman's) indemnity. 6 The declaration and order which directly affected the appellant were made on 29 September 1997 and were expressed in the following form: "10. THE COURT DECLARES that THOMAS RICHARD WENKART is liable to indemnify ALAN PITMAN in respect of his liability to indemnify GENNARO ABIGNANO under paragraph 6 [which declared that Mr Pitman was liable to indemnify the respondents in respect of Mr Abignano's liability to indemnify Abigroup]. 11. Upon the undertaking to the Court by ALAN PITMAN to pay to GENNARO ABIGNANO the amount of $1,307,537.10 without deduction therefrom, immediately upon payment of that amount by THOMAS RICHARD WENKART to ALAN PITMAN, and so long as he holds such sum or any part thereof to receive and hold the same on trust for GENNARO ABIGNANO, THE COURT ORDERS that THOMAS RICHARD WENKART pay ALAN PITMAN the amount of $1,307,537.10." 7 An issue which has troubled different courts at different times, and on which different conclusions have been expressed, is whether the primary judgment was effective as and from 29 September 1997, although the undertaking referred to in Order 11 was not actually given by Mr Pitman until 13 February 1998. That is no longer a live issue. 8 We were informed by counsel for the appellant that it had been submitted to Hunter J that an order should not be made against the appellant for the payment of $1,307,537.10 in favour of Mr Pitman, because Mr Pitman had not made any payment to the respondents under the indemnity in respect of their liability to Abigroup. This submission (so we were informed) was based on the principles considered by the High Court in Rankin v Palmer (1912) 16 CLR 285, at 289-290 and Wren v Mahony (1972) 126 CLR 212, at 225-226, that at law a person entitled to an indemnity cannot sue until he or she has actually paid the money due and that equity, although willing to grant quia timet relief, would not compel a surety to pay money to the person to whom he or she was surety before the latter had actually paid. 9 Hunter J made the following observations in relation to the form of orders he ultimately made: "In making the orders in these forms I have acted, I think, in accordance with the analysis of the rights between surety, principal debtor and sub-surety to be found in Abigroup Ltd v Abignano (1992) 39 FCR 74: except, possibly, to the extent that the reasons for judgment in that case expressed the need to show special circumstances in order to support an order for payment directly to the indemnified party prior to satisfaction of that party's liability to the principal creditor. I have been unable to discover from any of the authorities referred to in Abigroup any warrant for that requirement. Accordingly, I have been content to adopt, in substance, the forms of order which found favour with Hodgson J, as his Honour then was, in proceedings in the Equity Division of this Court in Sandtara Pty Ltd v Abigroup Ltd (unreported, 28 [April] 1995) [13 ACLC 607]." We shall refer to Abigroup Ltd v Abignano later in this judgment. 10 Between the date Hunter J made the orders and the hearing of an appeal from his Honour's judgment and orders, Mr Pitman and the respondents entered into a deed of assignment. A copy of the deed, which was dated 10 December 1997, together with a copy of the orders made by Hunter J, accompanied the bankruptcy notice. The relevant provisions of the deed are as follows: "1. RECITALS: 1.1 In Supreme Court Proceedings Commercial Division Number 50057 of 1995 ('the Proceedings') the Assignees have obtained judgment against Pitman in the amount of $1,307,537.10 plus interest and costs ('the Abignano Judgment'). 1.2 In the Proceedings Pitman has obtained judgment against Thomas Richard Wenkart ('Wenkart') in the sum of $1,307,537.10 plus interest and costs ('the Pitman Judgment'). 1.3 Pitman has agreed to assign the benefit of the Pitman Judgment to the Assignees by way of a partial distribution of his assets to a creditor in the form of the Assignees, in exchange for a release from the Assignees of the debt owing to them by Pitman. 2. ASSIGNMENT 2.1 Pitman hereby assigns to the Assignees absolutely all of Pitman's rights, title and interest in the Pitman Judgment and all interest accrued and to accrue thereon, and all rights and entitlements which Pitman has against Wenkart under the Pitman Judgment. 2.2 The Assignees accept the assignment of the Pitman Judgment, and in full satisfaction and discharge of the debt owing by Pitman to the Assignees under the Abignano Judgment, and hereby release Pitman from that debt. 3. COVENANTS ... 3.2.4 Pitman shall do all acts and things, including without limitation the execution of all such further documents, as may be reasonably required by the Assignees to give effect to the assignment provided for in this deed." 11 In reliance on the deed of assignment, the respondents attempted to execute the orders made by Hunter J in Mr Pitman's cross-claim against the appellant. This prompted a motion by the appellant seeking orders that execution of so much of the orders made by Hunter J against the appellant be stayed permanently. On 13 February 1998, Hunter J dismissed that motion. 12 The present appellant applied for leave to appeal from the judgment and orders of Hunter J made on 29 September 1998. On 6 October 1998, the Court of Appeal granted leave to appeal from the orders made by Hunter J on 13 February 1998, but dismissed the appeal: Wenkart v Pitman, unreported, 6 October 1998. 13 The principal judgment in the Court of Appeal was delivered by Powell JA, with whom Mason P and Sheppard AJA agreed. Powell JA held that Hunter J's orders against the appellant were operative prior to the execution of the deed of assignment, even though at the date of the deed Mr Pitman had not given the undertaking contemplated by Order 11. He rejected an argument put by the appellant, that by reason of the principles discussed in Rankin v Palmer and Wren v Mahony, it was not open to Hunter J to make orders requiring the indemnifier (the appellant) to exonerate the person indemnified (Mr Pitman) from liability by making payment directly to the person entitled to recover against the person indemnified. He further held that Mr Pitman, at the date of the deed of assignment, had a presently enforceable judgment and thus a debt which was capable of assignment. Powell JA also held that the respondents, as assignees, could enforce the judgment debt. In his view, Rankin v Palmer and Wren v Mahony did not bear on this issue. 14 We have been informed that the appellant has applied for special leave to appeal to the High Court from the judgment of the Court of Appeal. That application has not yet been determined. 15 At the risk of recording the obvious, the proceedings before Hunter J and the Court of Appeal were vigorously contested. The parties were at arms length, and legally represented. There is no suggestion that the judgments either at first instance or on appeal were obtained by collusion or procured by improper conduct on the part of any of the parties to the proceedings. The Appellant's Case 16 A number of grounds were advanced before Hill J in support of the appellant's contention that the Bankruptcy Notice should be set aside. None was successful, and none has been pursued in this Court. 17 In this Court, the appellant contended that the bankruptcy notice should be set aside on the ground that the judgment on which it is based: · was wrongly made, because an order for a monetary payment under an indemnity cannot be made unless the person entitled to the indemnity has himself paid out the sum for which he seeks indemnity; and · even if "valid", the judgment was in substance one which granted equitable quia timet relief, and would not sustain the issue of a bankruptcy notice. Thus, in one way or another, the appellant seeks to go behind the judgment, either by a direct contention that it was wrongly made or, indirectly, by a contention that there is some substance underlying the judgment which is different from its form. 18 That is not the way in which the matter was argued before Hill J. His Honour noted: "In fact, counsel for Dr Wenkart does not really seek to go behind the judgment at all for any purpose of his submission. He takes the judgment as it stands, but seeks to conclude from it that it was not assignable, or at least that as a result of the purported assignment the respondents have no right to enforce payment of it." It follows that the appellant seeks to agitate on appeal matters not argued before the primary Judge. No matter how wasteful, irritating and annoying it is when a hearing at first instance is approached as if it were a mere dress rehearsal, since the matter now sought to be agitated is an issue of law and is of a fundamental nature, we feel obliged to entertain it. The Bankruptcy Act 1966 19 The Bankruptcy Act 1966 (Cth) ("Bankruptcy Act") provides that a bankruptcy notice can be issued on the application of a creditor who has obtained against the debtor a final judgment or order (the execution of which has not been stayed) that is for an amount of at least $2000: s 41(1). Failure to comply with the bankruptcy notice is an act of bankruptcy: s 40(1)(g). 20 The entitlement of a creditor to present a creditor's petition is dependent upon the debtor owing the petitioning creditor a debt that amounts to $2000: s 44(1)(a). Debt is defined in s 5 so as to include liability. Section 44(1)(b) makes it clear that the debt must be a liquidated sum due at law or in equity and that is payable either immediately or at some future time. 21 On the hearing of a creditor's petition, the Court is to require proof of (inter alia) the fact that the debt on which the petition relies is still owing: s 52(1). If the Court is not satisfied with the proof of any matters required to be proven, it may dismiss the petition: s 52(2). Going Behind a Judgment Debt 22 The Court is invested with jurisdiction upon an application to set aside a bankruptcy notice, by s 30(1) of the Bankruptcy Act, where such an order is necessary for the purpose of carrying out or giving effect to the Act in the particular case. The express power in s 41(6A) to extend time for compliance with the requirements of such a notice has also been said to carry with it the power to set aside the notice itself: Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125. 23 It is not open to doubt that a court exercising jurisdiction in bankruptcy may, in an appropriate case, "go behind" a judgment and enquire whether it was founded on a "real debt": Corney v Brien (1951) 84 CLR 343, at 347; Wren v Mahony. This principle is not confined to a case where judgment is founded on an antecedent liquidated debt, but extends to cases where the debt relied on in the bankruptcy notice or creditor's petition is created by the judgment. This is the case, for example, where a claim for unliquidated damages in tort is the subject of a judgment in favour of the creditor: In re Newman; Ex parte Brooke (1876) 3 Ch D 494 (CA). Thus the rule is sometimes said to be "that the Court of Bankruptcy can inquire into the consideration for a judgment debt": Ex parte Kibble; In re Onslow (1875) LR10 ChApp 373, at 376, cited in Corney v Brien, at 347. The court exercising bankruptcy jurisdiction has no power to set aside the judgment and does not destroy the res judicata effect of the judgment as between the parties to it: J L Goldring, "Going Behind a Judgment" (1973) 47 ALJ 377, at 379. The court's powers are limited to preventing a judgment creditor having recourse to the provisions of the Bankruptcy Act: Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 (FC), at 587-588. 24 A bankruptcy court does not go behind a judgment as a matter of course: Wren v Mahony, at 222-223. It is entitled to do so where there has been "fraud, collusion or miscarriage of justice", while consent and default judgments are viewed "with suspicion": Petrie v Redmond (1942) 13 ABC 44, at 48-49, per Philp J; Corney v Brien, at 348. These are not the only circumstances in which a court will exercise its power to go behind the judgment, but caution is to be exercised where the judgment results from "a fully heard contest between parties": Wren v Mahony, at 224. The Present Case 25 In the present case, the appellant relied on the common law principle that a person entitled to an indemnity cannot enforce his or her entitlement until he or she has paid the amount due to the creditor: In re Richardson; Ex parte The Governors of St Thomas' Hospital [1911] 2 KB 705, at 713. This principle was confirmed in Rankin v Palmer and Wren v Mahony, although in the latter case, Barwick CJ (at 227) pointed out that it may be necessary to distinguish between a promise to indemnify the promisee and a promise given to the promisee for the payment by the promisor of the debt in question. According to the appellant, these authorities also confirm that, while a broader range of remedies may be available in equity, including remedies in advance of payment, a court of equity will not order an indemnifier to pay the party indemnified before that party has made the payment to which the indemnity relates. Accordingly, it was submitted that Hunter J should not have made Order 11 and that the Court of Appeal should not have upheld the terms of the order. 26 Both Hunter J and the Court of Appeal referred to and, to some extent, relied on the judgment of the Full Court in Abigroup Ltd v Abignano. The appellant argued that there was an inconsistency between the reasoning of the Full Court and that of the High Court in Rankin v Palmer. Some reference should therefore be made to the decision of the Full Court decision in Abigroup Ltd v Abignano. 27 Abigroup Ltd v Abignano was one of a number of decisions arising out of the lease from Sandtara to Cenrin and the associated guarantees and indemnities. The Supreme Court of New South Wales (Brownie J), on a claim by Abigroup (guarantor) against Mr Abignano (indemnifier), made a declaration that Mr Abignano was liable to indemnify Abigroup against its liability to Sandtara as lessor of the premises, and ordered Abignano to pay the arrears of rental directly to Sandtara. 28 Abigroup caused a bankruptcy notice to be issued to Mr Abignano, founded on the orders made by the Supreme Court. Davies J set aside the bankruptcy notice and the Full Court affirmed his decision, on the ground that the sum claimed in the notice was owed not to Abigroup, but to Sandtara. The Court said this (at 86): "In our opinion the 'creditor' who is entitled to obtain the issue of a bankruptcy notice, non compliance with which will found an act of bankruptcy pursuant to par (g) of s 40(1) must be a judgment creditor to whom money is owed by the judgment debtor under the final judgment (or final order) which is the foundation of the bankruptcy notice." Accordingly, Abigroup had no entitlement, either before or after the orders made by the Supreme Court, to require Mr Abignano to pay the relevant sum to it. 29 The Court recognised (at 81) that, at law, the right to an indemnity which a surety has against the principal debtor does not arise until the surety has discharged the debt. However, their Honours pointed out that, where a liability from a guarantor to the principal creditor has accrued, the guarantor has a right in equity to require the principal debtor to exonerate him from his liability by paying off the creditor. They said this (at 82-83): "This equitable right to mitigate the hardship which the common law imposed upon a guarantor by requiring him to pay the principal debt before pursuing his right of indemnity against the principal debtor is a quia timet action in equity, the rationale for which is that the guarantor should be able to remove 'the cloud hanging over his head before it starts to rain'. ... It is well and long established in equity that a person entitled to an indemnity may obtain relief from the indemnifying party as soon as the person's liability to the third person arises and before he has made payment himself; except where the contract otherwise provides or certain exceptional circumstances exist ... The person may therefore, where appropriate, obtain an order to compel the person who has given the indemnity to set aside a fund from which liability may be met ... or to pay the amount due directly to the third person ... or where the giver of the indemnity is under no liability to the third person, in some circumstances even to pay the amount to himself (ie the person entitled to the indemnity) ... But, as is noted correctly, in the passage mentioned above from Halsbury's, the equitable right to enforce an indemnity does not constitute a debt ...". (Emphasis added.) The Court also commented (at 84-85) on the orders made by Brownie J: "The orders of 14 September 1992 recognise the principle mentioned earlier which entitles the appellant to an order that the respondent pay directly to Sandtara the moneys due by the appellant to Sandtara. But those orders do not reflect the other principle, also mentioned earlier, that in appropriate circumstances a person (the appellant) may enforce an indemnity by an order compelling the person giving the indemnity (the respondent) who is under no liability to the third person (Sandtara) to pay the amount due directly to the person entitled to enforce the indemnity (the appellant). As mentioned earlier, this principle applies only in special circumstances, and an order of this kind was not sought in the first cross-claim, nor was it made by the Supreme Court. Indeed, it may well be open to doubt that in the circumstances of this case (so far as the somewhat sparse evidence reveals) the appellant would be entitled to such an order against the respondent, and no doubt explains why it was not sought before the Supreme Court in the first cross-claim." 30 It follows from the analysis in Abigroup Ltd v Abignano that no relationship of creditor and debtor existed between the appellant and respondents prior to the orders made by Hunter J. However, the orders made by his Honour created that relationship because they obliged the appellant to pay $1,307,537.10 to the respondents, albeit on the respondents' undertaking to the Court to pass the money up the chain of indemnities. It also follows from Abigroup Ltd v Abignano, assuming the reasoning to be correct, that in some circumstances, at least, an indemnifier may be ordered to pay moneys to the persons entitled to the indemnity before the latter has made any payment to the third party. 31 The appellant's argument that Abigroup Ltd v Abignano is inconsistent with Rankin v Palmer and that, in any event, the New South Wales Court of Appeal was incorrect in Wenkart v Pitman in upholding the orders made by Hunter J cannot, in our view, be dismissed as simply ill-founded or as unworthy of serious consideration. That, however, does not answer the question of whether this Court should go behind the order affirmed by the Court of Appeal to assess whether the order should have been made. The appellant's arguments were considered and rejected by Hunter J. They were also considered and rejected by the Court of Appeal. Hill J extended the time for compliance with the bankruptcy notice until a date after the judgment of the Court of Appeal was handed down. His Honour took this course in order to give the appellant an opportunity to pursue its arguments before the Court of Appeal. 32 There is nothing in these circumstances which would warrant this Court embarking on what would amount to a re-trial of issues determined after a contested hearing in the Supreme Court and a contested appeal to the Court of Appeal. Emerson v Wreckair Pty Ltd, referred to earlier, is a decision of the Full Court recognising the inappropriateness of this Court going behind the judgment of the Supreme Court in such circumstances. See also Ross-Ireland v Tour Finance Ltd (1965) 39 ALJR 49. In Olivieri v Stafford (1989) 24 FCR 413, Gummow J said this (at 429): "it must be a rare case that this Court, upon an application to set aside a bankruptcy notice, will further extend time for compliance with a bankruptcy notice, so that this Court may embark upon an inquiry as to what lies behind the judgment debt, where an extension of time for compliance with the bankruptcy notice initially was granted to enable the matter to be raised in the court in question and that court has dismissed the application made to it by the judgment debtor." 33 As we have noted, the appellant has applied to the High Court for special leave to appeal from the judgment of the Court of Appeal. Should the High Court grant special leave and allow the appeal, the foundation for the judgment debt would be removed. In those circumstances, the respondents (assuming they filed a creditor's petition relying on the appellant's failure to comply with the bankruptcy notice) would not be able to satisfy s 52(1)(c) of the Act, which requires the creditors to prove that the debt on which they rely is still owing. However, the pendency of the special leave application does not bear on the issue we have to decide. The Alternative Argument 34 Nor do we think that there is any substance in the alternative argument which the appellant puts. If the judgment is not impeachable, there is no underlying "substance" which is different from its legal effect or form. It may have been open to the Supreme Court, on the application of Mr Pitman, to have ordered the appellant to pay the sum in question directly to the respondents. Had such an order been made, it would follow from Abigroup Ltd v Abignano that Mr Pitman could not have caused a bankruptcy notice to be issued to the appellant in reliance on that judgment. However, the fact that there may have been other ways of giving effect to the rights of the parties, does not mean that the judgment actually given should be stamped with some character different from that which it bears. 35 It may be that the appellant's argument proceeded on the basis that a judgment cannot found a bankruptcy notice unless there is an antecedent debt supporting the judgment. If so, the assumption is not well-founded. Conclusion 36 The appeal should be dismissed, with costs. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate: Dated: 1 April 1999 Counsel for the Appellant: Mr D J Hammerschlag with Mr M Green Solicitor for the Appellant: Solomon Garland Partners Counsel for the Respondents: Mr C D Curtis with Mr A J L Ogborne Solicitor for the Respondents: Bruce & Stewart Date of Hearing: 4 March 1999 Date of Judgment: 1 April 1999