FEDERAL COURT OF AUSTRALIA National Australia Bank v Freeman [2002] FCA 244 BANKRUPTCY – contested creditor's petition – application for sequestration order pursuant to s 43 Bankruptcy Act 1966 (Cth) based on an enforcement warrant pursuant to judgment debt of Supreme Court of Queensland – whether the Court should go behind the judgment of the Supreme Court of Queensland and the Queensland Court of Appeal – no prima facie case of fraud or collusion or miscarriage of justice made out such as to impeach the judgments of the Supreme Court of Queensland and the Queensland Court of Appeal – no substantial reason shown for questioning whether there is in truth and reality a debt due to the petitioning creditor – whether a claim that the sale by the receiver appointed by the petitioning creditor of the debtor's property was at an undervalue can provide a set-off or cross-claim for the debtor against the petitioning creditor, having regard to a contract providing that the receiver is the agent of the mortgagor – stay of proceedings under s 52(3) Bankruptcy Act 1966 (Cth) Bankruptcy Act 1966 (Cth), s 52(3) Supreme Court Act 1995 (Qld) Contracts Review Act 1980 (NSW), s 7 and s 19 Udovenko and Others v Mitchell (1997) 79 FCR 418, applied Commonwealth Bank of Australia v Muirhead (1997) 1 Qd R 567, cited NAB Limited v Troiani and Others [2001] QSC 077, cited Weaver, G.A. and C.R. Craigie (1990) Law Relating to Banker and Customer in Australia, 2nd ed., vol. 2, Sydney: LBC Information Series Butt, P. Conveyancing and Property (1998) 72 ALJ 15 O'Brien, D. Receiver's Duties When Selling Assets (2001) 9 Insolv LJ 180 NATIONAL AUSTRALIA BANK LIMITED V LYNTON NOEL CHARLES FREEMAN No Q 7001 of 2001 SPENDER J BRISBANE 12 MARCH 2002 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 7001 OF 2001 BETWEEN: NATIONAL AUSTRALIA BANK LIMITED APPLICANT AND: LYNTON NOEL CHARLES FREEMAN RESPONDENT JUDGE: SPENDER J DATE OF ORDER: 12 MARCH 2002 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. A sequestration order is made against the estate of the respondent. 2. Costs of and incidental to the petition, including reserved costs, be paid in accordance with the Bankruptcy Act 1966 (Cth). 3. All proceedings under the sequestration order be stayed for a period of 21 days from today. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 7001 OF 2001 BETWEEN: NATIONAL AUSTRALIA BANK LIMITED APPLICANT AND: LYNTON NOEL CHARLES FREEMAN RESPONDENT JUDGE: SPENDER J DATE: 12 MARCH 2002 PLACE: BRISBANE REASONS FOR JUDGMENT 1 This is a contested creditor's petition. It is a further chapter in the long history of litigation between National Australia Bank Limited (the Bank) and the judgment debtor (Mr Freeman). The creditor's petition seeks a sequestration order pursuant to s 43 of the Bankruptcy Act 1966 (Cth) (the Act) based on an enforcement warrant being returned unsatisfied in December 2000. The enforcement warrant was based on a judgment debt of the Supreme Court of Queensland. That debt was in turn based on a claimed indebtedness under a bill facility. 2 In brief summary, in May 1998 the bank commenced proceedings against Mr Freeman for recovery of possession of mortgaged land and for a debt said to be owing by Mr Freeman to the bank under an expired bill facility. The trial in the Supreme Court was heard over four days in September 2000. At the trial, Mr Freeman was represented by solicitor and counsel. On 11 October 2000, Ambrose J handed down judgment in favour of the bank for recovery of Mr Freeman's property and for the sum of $1,427,890.08, together with indemnity costs. The bank has since sold the property through receivers which the bank appointed, and the bank has petitioned for Mr Freeman's bankruptcy. The petition is based on the unsatisfied return of an enforcement warrant in February 2001. Mr Freeman appealed to the Queensland Court of Appeal against the judgment of Ambrose J. That appeal was unsuccessful. In the reasons for judgment of White J in the Court of Appeal, her Honour noted: "There is no substance in any of the grounds of appeal raised by the appellant in the extensive written submissions or in his oral submissions." 3 Subsequent to the judgment of the Court of Appeal, Mr Freeman has sought special leave to appeal to the High Court of Australia. The material before me includes a document relevant to that application for special leave. Part 1 of that document is headed "A Concise Statement of the Special Leave Questions". Part 2 is "A Brief Statement of the Factual Background of the Application" and part 3 contains the "Statement of the Appellant's Argument". The application for special leave has not yet been heard and one of the submissions which Mr Freeman has put to this court, as a discretionary reason against the making of a sequestration order, is that the making of such an order might prejudice his capacity to pursue that special leave application. 4 While I acknowledge that that is a possible consequence of the making of a sequestration order, depending as it does on decisions that may be made by the Trustee of the estate should Mr Freeman be made bankrupt, such a consequence must be viewed in light of the prospects of special leave being granted. As the document to which I have referred makes plain, Mr Freeman is acting on his own behalf in his application for special leave, and such applications have a very low success rate. 5 Furthermore, having regard to the contents of the document relevant to the special leave application, the prospect of special leave being granted is, in my assessment, quite remote. The questions seem to be almost exclusively confined to the particular dealings between the bank and Mr Freeman. They do not seem to involve any question of general principle or of wide application, and regardless of the merits of the particular issues which Mr Freeman wishes to agitate in his application for special leave, the document does not, in my opinion, suggest that the grant of special leave is likely. In fact, I regard the prospects of special leave being granted as very low. 6 However, that is not determinative in any way of the matter. The original grounds for Mr Freeman's defence to the petition appear from his affidavit filed on 27 February 2001. Five grounds are referred to: improper service of the petition and supporting affidavits; the fact that the judgment was then subject to an appeal pending in the Queensland Court of Appeal; a claim, with which Mr Freeman has persisted, that the moneys said to be owing under the judgment "are not owing"; a further ground that property which was described by the bank as security in the petition is not in fact the property of Mr Freeman; and that the warrant was returned unsatisfied because the receiver was in possession of all the assets. 7 In a further document headed "Amended Notice of Intention to Oppose Application or Petition", Mr Freeman indicated his opposition to the petition on the following grounds: "To have the notice set aside. To amend the notice to oppose to include disputed service, not indebted as alleged or at all, livestock are not the property of the respondent. Quantum of the warrant incorrect. Frauded trial, fraud, intend to defraud, deceit, false pretences, false evidence, fabricating evidence, perverting justice, judgment between the parties is unresolved. Failure to produce documents. Deceptive and misleading conduct, unconscionable conduct, non-compliance with discovery order in the Supreme Court. Negligence." 8 In respect of the matters referred to in the affidavit of February 2001, the question of service has been met by an affidavit of Sergeant Harms filed on 13 July 2001. I have already referred to the fact that the appeal to the Court of Appeal was unsuccessful and the noting by White J that there was no substance in any of the grounds of appeal raised by the appellant. 9 As to the question of property said by the bank to be secured to it, but which was in fact not the property of Mr Freeman, that would have the effect of decreasing the amount of the unsecured debt which is owed to the bank. That does not seem to be a factor telling against the bank's petition. Whether the receiver was in possession of secured assets also seems irrelevant to the question of whether Mr Freeman has unsecured assets available to satisfy the enforcement warrant. 10 In respect of the matters compendiously referred to in the amended notice of intention to oppose the petition, there is extensive affidavit material filed by Mr Freeman directed to those aspects of the matter. Mr Salmon is a consultant who specialises in assisting persons who assert they are the victims of banking malpractice. Three affidavits of Mr Salmon are before me, and the questions that are referred to in those affidavits are not directed to the question of whether the enforcement warrant was returned unsatisfied. They are directed to questions of the bank's behaviour. 11 There are extensive affidavits from Mr Freeman himself, from a registered Valuer and Agricultural Consultant, Mr Quinlan, from Kristen Lynne Freeman and from Adam Noel Freeman. Those affidavits, subject to the question of the failure to provide bank statements which is raised before the Court, concern matters which were live in the Supreme Court trial and appeal. This is apparent from the reasons for judgment of Ambrose J and the Court of Appeal. That matter is a very important consideration when this court has to consider whether to go behind the judgment of Ambrose J, affirmed as it was by the dismissal of the appeal to the Court of Appeal. 12 So far as the failure to provide bank statements is concerned, the judgment debt was the amount owing as at October 2000. Issues relating to the debt before that date were the subject of the Supreme Court trial, and since that date the bank has relied on the statutory interest under the Supreme Court Act 1995 (Qld), in respect of which bank statements have no bearing. 13 In my opinion, two real questions are raised by Mr Freeman's defence. The first is whether, on the whole of the material, this court should go behind the judgment of the Supreme Court of Queensland after a contested trial at which the respondent was represented by solicitors and counsel and the subsequent unsuccessful appeal to the Queensland Court of Appeal. The second matter is concerned with complaints of the receiver selling property at an undervalue. I will deal with that second matter in some detail shortly. Both of these matters bear on the claim that the moneys said to be owing "are not owing". 14 On the question of whether, in respect of the numerous matters which Mr Freeman wishes to raise and which are referred to in his amended notice of intention to oppose, the Court should go behind the judgments of the Supreme Court and the Court of Appeal, the position is outlined by Davies J in a judgment of the Full Court of the Federal Court in Udovenko and Others v Mitchell (1997) 79 FCR 418 at 420 to 421. I will set out his Honour's observations at some length because they are critical to the first aspect of the opposition to the making of a sequestration order in this case. Davies J said: "The approach to be taken by a Court in its bankruptcy jurisdiction was enunciated by the High Court of Australia in Corney v Brien (1951) 84 CLR 343 where Dixon, Williams, Webb and Kitto JJ, in their joint judgment (at 347), and Fullagar J in his separate judgment (at 355), cited with approval the dictum of Lord Eldon in Ex parte Bryant (1813) 1 V & B 211 at 214; 35 ER 83 at 84 that: 'Proof upon a Judgment will not stand merely upon that, if there is not a Debt due in Truth and Reality, for which the Consideration must be looked to.' Fullager J observed that no limiting effect has ever been ascribed to the concluding words of that passage (at 355). In Wren v Mahony (1972) 126 CLR 212, Barwick CJ, with whom Windeyer and Owen JJ agreed, also cited the passage. Menzies J, with whom Walsh J agreed, applied a similar principle. The reference to 'discretion' in this context is a reference to the discretion which exists in a court of bankruptcy to examine for itself the matters which underlie the judgment relied upon. In Wren v Mahoney at 224-225, Barwick CJ put the matter this way: '… the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration. It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor's debt is a mere matter of its own discretion. Nothing in Corney v Brien (1951) 84 CLR 343 lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor's debt. The Court's discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner.' The circumstances in which a court will go behind a judgment cannot be stated in a definitive manner; however there are two guiding principles. First, as Fullager J said in Corney v Brien at 356-357: 'If the judgment in question followed a full investigation at trial on which both parties appeared, the Court will not reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out.' Secondly, in the same case, Dixon, Williams, Webb and Kitto JJ (at 348) cited the remarks of Latham CJ in Petrie v Redmond (1942) 13 ABC 44 at 49 that '… the court looks with suspicion on consent judgments and default judgments'. Fullagar J put this point more forcefully when he said (at 357 to 358): 'But, whenever the judgment in question is a judgment by default, it appears that the Court will always "go behind" the judgment if there is what it regards as a bona-fide allegation that no real debt "lay behind" the judgment." Earlier in that passage is the crucial statement for this case: "If the judgment in question followed a full investigation at a trial on which both parties appeared, the Court will not reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out." 15 Applying that principle to the circumstances of this case, in my opinion, a prima facie case of fraud or collusion or miscarriage of justice has not been made out such as to impeach the judgment that was obtained after a full investigation at a trial on which both parties appeared and were represented by solicitor and counsel. Despite the voluminous nature of the material which has been put forward by Mr Freeman, no substantial reason has been shown for questioning whether there is in truth and reality a debt due to the petitioning creditor. 16 That observation has to be subject to the more particular matter which I earlier said I would address: the complaint that the sale by the receiver was at an undervalue. It has to be accepted that there have been a number of opportunities by Mr Freeman to air his complaints in this regard and his other complaints concerning the bank. There was the mediation in December 1987, which is the foundation of the later litigation. The sale at an alleged undervalue was subsequent, of course, to the judgment of Ambrose J. In respect of the present petition, the statement of claim filed on 11 March 2002 in the Supreme Court has direct relevance. 17 Paragraph 2 of that statement of claim alleges that, at all material times, Mr Freeman was the lessee of land contained in specified Crown Plans; was the owner of timber on the land; was party to and beneficiary of a mining compensation agreement; was the owner of cattle depastured on that land; was the owner of gravel and basalt resources on that land; and was the owner of land improved with irrigation. The statement of claim further alleges that the defendant was the mortgagee of the plaintiff's interest in that land under Registered Memorandum of Mortgage L85084 and Livestock Mortgage 920253. Paragraph 6 of the statement of claim alleges: "In or about June 2001 the Defendant as Mortgagee in Possession enforcing power of Sale, sold the Plaintiff's Interest referred to as paragraph 2 above to Darren Scott Keitley, Janette Elizabeth Keitley, Neville Frederick Keitley, Kellie Leigh Keitley at the net price of $768,347.49." 18 It is further alleged that the sale of the plaintiff's interest at that price constituted a breach of a duty of care owed by the bank to Mr Freeman. The particulars of the alleged breach are: "(a) Failing to advertise the land and attributes, improvements, Timber, royalties and potential property. (a) Failing to obtain the True Value." 19 The statement of claim further alleges that, as a consequence of the breach, Mr Freeman suffered loss and damage, which he lists as: "(a) The Grazing value at the time of sale. (b) The cattle. (c) The Timber. (d) Mining Royalties. (e) Gravel Royalties. (f) Mined Screening royalties. (g) Irrigation. (h) And interest on the sum of $7,081,652-51." 20 This claim asserts that the conduct of the receiver appointed by the bank in selling Mr Freeman's property exposed the bank to a liability at Mr Freeman's hands for negligence in the conduct of that sale. The short answer by the bank is that, pursuant to the mortgage, the receiver was the mortgagor's agent and so any claim that Mr Freeman has is against the receiver as his principal, and that that claim does not assist him as against the bank. That involves a consideration of the efficacy of the term of the mortgage by which the parties agreed (using the somewhat artificial meaning of agreement when a mortgagor is presented by a mortgagee with a mortgage to sign) which provides that the receiver appointed by the mortgagee is the agent of the mortgagor. 21 The unreality of that situation in fact is a matter which has troubled me on a number of occasions, but the authorities to which I will refer make it plain that I ought to accept that the contractual term is effective, so that the receiver appointed by the mortgagee, exercising the power expressed in the bill of mortgage, is acting as agent for the mortgagor. Notwithstanding what might be thought the unreality of the situation, the legal position is that, if there was negligence in the conduct of the sale, Mr Freeman would have an action against the receiver. Almost certainly, the receiver will have received an indemnity from the bank, but the legal characterisation of his rights in respect of any claimed sale at an undervalue is legally a claim against the receiver and not against the bank. 22 I should refer to a number of authorities which touch on this question. In Law Relating to Banker and Customer in Australia by Weaver and Craigie, paragraph 22.430 contains the following statement: "In O'Callaghan v Custom Corporation Limited (unreported, Sup Ct of WA, No CIV 1363 of 1993), Anderson J was invited to hold that the agency relationship between the mortgagor and the receiver ought to be regarded as artificial, being little more than a fiction and should be treated as an idle informality. Reaffirming the well established position, Anderson J said (at p 7 of the judgment): 'I do not think it really is a fiction to hold that the receiver appointed in the usual way is the mortgagor's agent rather than the agent of the mortgagee appointing. The receiver's agency on behalf of the mortgagor may be "special and limited in character" (R v Board of Trade; Ex parte St Martins Preserving Co Limited [1965] 1 QB 603 at 617) but it is none the less real. While it seems to have come into use as a device to avoid the consequences of the stringent rules that have been mentioned, the relationship of principal and agent as between the mortgagor and the receiver appointed by the mortgagee is founded on the contract between the debtor who gives the security and the creditor who takes the security. The arrangement is therefore fully supported by valuable consideration and the relationship has been recognised as legally real and has been enforced in the courts of equity for a very long time.'" 23 Later in that paragraph, the learned authors say: "The fact that the receiver was stated to be the agent of the mortgagor, rather than the mortgagee, was decisive in the decision of the Queensland Court of Appeal in Muirhead v Commonwealth Bank of Australia (1996) 125 FLR 434. The court decided that s 85 of the Property Law Act 1974 (Qld) had no application to a receiver appointed on this basis, leading to the consequence that the appointor chargee could not be made liable in damages if the receiver failed to take reasonable care to ensure that the security property was sold at market value. This case was applied in Australia and New Zealand Banking Group Ltd v Julian (unreported, Sup Ct of Qld, No 10058 of 1999, Wilson J, 31 March 2000), despite a claim by the mortgagors that the mortgagee had interfered to such an extent that the receiver had become, contrary to the express terms of the mortgage, an agent of the mortgagee." 24 In Commonwealth Bank of Australia v Muirhead (1997) 1 Qd R 567, McPherson JA said at 580: "The question for determination here is whether the duty imposed on a mortgagee by s. 85(1) [of the Property Law Act (Qld)] of taking reasonable care to ensure that the property is sold at market value extends to a case like this, where the power of sale has been exercised not by the mortgagee itself but by a receiver appointed by the mortgagee, who in exercising the power is expressed by the bill of mortgage to be acting as agent for the mortgagor." 25 His Honour answered that question at 582 by saying: "... I have come to the conclusion that the prospective claim of the appellant Muirheads as mortgagors against the respondent Bank as mortgagee for damages for alleged breach by Harris of the duty imposed by s. 85(1) of the Property Law Act (if that is what is intended to be pleaded) is not one that is in law capable of prevailing over the express provisions of cl. 4 of the bills of mortgage that the receiver 'shall be the agent of the mortgagor, and the mortgagor alone shall be responsible for his acts and defaults.' The learned judge was therefore correct in holding that no triable defence or issue was disclosed on the application for summary judgment." 26 Subsequent to that case, De Jersey CJ followed the judgment of the Court of Appeal in Muirhead v Commonwealth Bank in NAB Limited v Troiani and Others [2001] QSC 077. In his Honour's reasons for judgment, the Chief Justice said, at paragraphs 4 and 5: "[4] … The respondents contend that the applicant breached a duty under s 85 Property Law Act and s 420A Corporations Law to take reasonable care to sell the secured property at market value. Had that duty been fulfilled, they contend, no amount would have been due. [5] The relevant sales were effected by the receivers and managers. By clause 17.8 of the debenture, the receivers and managers were, as is usual, deemed the agents of the company, with the company 'solely responsible' for their acts, and any defaults. The applicant therefore bears no consequent liability (Commonwealth Bank of Australia v Muirhead [1997] 1 Qd R 567)." 27 Commonwealth Bank v Muirhead was the subject of a comment by Peter Butt in Conveyancing and Property (1998) 72 ALJ 15. He noted: "Given the provision in the mortgage, the receiver was the agent of the mortgagor, not the mortgagee, and so the sale could not be said to be a sale by the mortgagee. Section 85 did not impose liability on a mortgage where the sale was by a receiver whom the mortgage declared to be the agent of the mortgagor – even though, as a practical matter, the mortgagee appointed the receiver. The same result would have followed had the receiver been appointed, not under the provisions of the bill of mortgage strictly, but under the statutory power to appoint a receiver (under the Property Law Act 1974, s 92)." 28 It may be that there is room for the application of s 7 and s 19 of the Contracts Review Act 1980 (NSW) in an appropriate case. However, it seems that there has been no case where a clause providing for a receiver to be a mortgagor's agent has been struck down or excised from the mortgage, pursuant to that or similar powers in Fair Contracts Acts. 29 I also note a comment in the article by Dominic O'Brien, Receiver's Duties When Selling Assets (2001) 9 Insolv LJ 180 at 189: "... the purpose and effect of rendering the receiver the agent of the mortgagor is to relieve the mortgagee from the liabilities which the law ordinarily casts upon a mortgagee entering into possession of mortgaged property and instead place upon the mortgagor the liability for the receiver's acts and defaults. Unfortunately for the mortgagee, however, the appointment of a receiver does not absolve the mortgagee from liability if the mortgagee interferes with the receiver's conduct of the realisation of the mortgaged property." 30 For the reasons which I have set out, Mr Freeman has not established that there is in truth and reality a debt owing by him to the bank because there is a need to offset the alleged selling of his property at an undervalue and in breach of the duty owed to him. 31 I am satisfied of the act of bankruptcy alleged in the petition and of the other matters of which the Act requires proof. The Court has not been satisfied by the debtor that there is other sufficient reason why a sequestration order ought not be made and in those circumstances I make a sequestration order against the estate of Mr Freeman. I order that the costs of and incidental to the petition, including reserved costs, be paid in accordance with the Act. 32 (There were submissions concerning a stay.) 33 Pursuant to the power which the Court has under s 52(3) of the Bankruptcy Act 1966 (Cth)I stay all proceedings under the sequestration order for a period of 21 days from today. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender. Associate: Dated: 14 March 2002 Counsel for the Applicant: Mr J.W. Peden Solicitor for the Applicant: Mallesons Stephen Jaques The Respondent appeared on his own behalf Date of Hearing: 28 February 2002 Date of Judgment: 12 March 2002