FEDERAL COURT OF AUSTRALIA Commonwealth Bank of Australia v Jeans [2005] FCA 569 BANKRUPTCY – Creditor's petition where petition based on judgment debt - opposition to creditor's petition - where Court invited to determine as a preliminary question whether it ought to exercise its discretion to go behind the judgment to ascertain the existence of a real debt - whether reason has been shown for questioning the debt to be separately investigated by the Court as a preliminary issue prior to any further hearing of the creditor's petition Bourke v Beneficial Finance Corporation Ltd (1993) 47 FCR 264 distinguished Corney v Brien (1951) 84 CLR 343 cited Deangrove Pty Ltd v Commonwealth Bank of Australia [2003] FCA 470 cited Deangrove Pty Ltd v Commonwealth Bank of Australia[2003] FCA 268 cited In re Frazer; Ex parte Central Bank of London (1892) 2 QB 633 distinguished Jeans v Commonwealth Bank of Australia [2003] FCAFC 309 cited Makhoul v Barnes (1995) 60 FCR 572 cited Wolff v Donovan (1991) 29 FCR 480 cited Wren v Mahony (1971-1972) 126 CLR 212 applied COMMONWEALTH BANK OF AUSTRALIA v JOHN ANTHONY JEANS NSD 1079 OF 2004 HELY J 6 MAY 2005 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1079 OF 2004 BETWEEN: COMMONWEALTH BANK OF AUSTRALIA APPLICANT AND: JOHN ANTHONY JEANS RESPONDENT JUDGE: HELY J DATE OF ORDER: 6 MAY 2005 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The following question be determined before any further trial on the creditor's petition: 'Whether the Court ought to exercise its discretion to go behind the judgment on which the petition is based, on grounds 1 to 8 identified in the notice of intention to oppose the petition, having regard to the following judgments relating to the petition: (a) [2003] FCA 268; (b) [2003] FCA 470; (c) (2003) 204 ALR 327; (d) [2004] HCATrans 548, and on the assumption that there is a prima facie case that the debtor will establish the admissible factual matters contained in the affidavits filed to date in opposition to the petition.' 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 NSD 1079 OF 2004 BETWEEN: COMMONWEALTH BANK OF AUSTRALIA APPLICANT AND: JOHN ANTHONY JEANS RESPONDENT JUDGE: HELY J DATE: 6 MAY 2005 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The creditor's petition is based upon a debt allegedly owing by the debtor to the Commonwealth Bank of Australia ('the Bank') under a final judgment entered by order of Sackville J in favour of the Bank on 16 May 2003 after a contested hearing which occupied some ten days: Deangrove Pty Ltd v Commonwealth Bank of Australia [2003] FCA 470. 2 The Federal Court proceedings related to a facility which the Bank had provided to Deangrove Pty Ltd for property development. One of the securities required by the Bank in order to provide that facility was an unlimited guarantee from the debtor, who was the sole director and shareholder of Deangrove. The Bank held a document styled 'Deed of Guarantee' dated 12 June 1998 purportedly signed by the debtor as guarantor, and again as sole director and secretary of Deangrove by way of attestation of the affixing of the common seal of Deangrove to the document. 3 Deangrove and the debtor sued the Bank for damages for alleged misrepresentations by the Bank in relation to the facility, and the debtor applied for the guarantee to be set aside on the basis of those misrepresentations. The Bank cross-claimed against Deangrove and the debtor seeking a judgment for the amount outstanding under the facility. The cross-claim against the debtor was based on his liability under the guarantee. In the debtor's statement of claim in the Federal Court proceedings he alleged that he had executed the guarantee. He also admitted that he signed the guarantee in his defence to the Bank's cross-claim. Furthermore, in a number of affidavits filed in the proceedings, the debtor swore he had executed the guarantee. It was a fundamental premise of the case originally articulated by the debtor that he had executed the guarantee. 4 On the third day of the trial, whilst under cross-examination, the debtor asserted for the first time that he had not executed the guarantee as guarantor, although he accepted the genuineness of his signature as sole director and secretary of Deangrove. Thereafter, application was made to Sackville J for leave to withdraw the debtor's admission that he had duly executed the guarantee as guarantor, and for leave to amend the pleadings to allege that a Bank officer, Mr Cleary, who had purportedly witnessed the debtor's signature to the guarantee, had forged the debtor's signature on the guarantee. 5 Sackville J refused the leave sought: see Deangrove Pty Ltd v Commonwealth Bank of Australia[2003] FCA 268 and the hearing continued, resulting in the judgment referred to above. 6 An appeal to the Full Court from that judgment was dismissed: see Jeans v Commonwealth Bank of Australia Ltd [2003] FCAFC 309. The judgment of the Full Court includes the following (at [32]): 'We accept that if Mr Jeans had been given leave to withdraw the admission he had made the question whether he had executed the guarantee would have become a very significant issue in the application. While it might not, as his Honour said, have ultimately been determinative, refusal of the motion clearly locked Mr Jeans out for all time to have this issue determined. Failure to grant the motion thereby created a prejudice to Mr Jeans that could not thereafter be remedied. While this is clearly a very important matter to take into account in deciding whether leave should be granted it is not the only factor. Other factors, such as the prejudice to Mr Cleary and the Bank in dealing with the allegation of fraud some five years after the event will also be relevant. So too is the time at which the application is raised and the lack of an adequate explanation for the fact that the matter was raised at so late a time. Ultimately, as his Honour realised, the question is one of "the attainment of justice" as Dawson, Gaudron and McHugh JJ observed at 143 in JL Holdings. That involves balancing all relevant circumstances including the prejudice which must attach to one party or the other.' 7 An application for special leave to appeal to the High Court of Australia from the judgment of the Full Court was refused: see Jeans v Commonwealth Bank of Australia [2004] HCATrans 548. McHugh and Callinan JJ were not persuaded that there was any miscarriage of justice by reason of Sackville J refusing to grant the leave which the debtor had sought to withdraw the admission. 8 The debtor has given notice of intention to oppose the creditor's petition on a number of grounds. One of those grounds is that the bankruptcy court ought to exercise its discretion to go behind the judgment of the Federal Court in considering the creditor's petition. The ground on which the debtor seeks to go behind the judgment is the same ground on which he sought to withdraw his admission during the course of the Federal Court proceedings. He wishes to assert that he did not sign the guarantee which is the foundation of the judgment debt against him, but that his signature on that guarantee was forged by Mr Cleary. 9 The only question which arises at this stage of the proceedings is whether an order should be made for the separate determination of the question as to whether the Court should go behind the Federal Court judgment. The separate question proposed by the Bank is as follows: 'Whether the Court ought to exercise its discretion to go behind the judgment on which the petition is based, on grounds 1 to 8 identified in the notice of intention to oppose the petition, having regard to the following judgments relating to the petition: (a) [2003] FCA 268; (b) [2003] FCA 470; (c) (2003) 204 ALR 327; (d) [2004] HCATrans 548, and on the assumption that there is a prima facie case that the debtor will establish the admissible factual matters contained in the affidavits filed to date in opposition to the petition.' The somewhat obscure reference to 'the admissible factual matters' is intended to preserve the Bank's position that an assertion by the debtor in an affidavit filed in support of his notice of opposition that it was Mr Cleary who forged his signature on the guarantee is not admissible to prove that fact. 10 The existence of a judgment is prima facie evidence of a debt, and the bankruptcy court will not go behind the judgment as a matter of course. It will do so only where reasons are shown for questioning whether there really was a debt. There may be circumstances where the question of whether there really was a debt should be determined by a two stage process. A party may seek to have the judge in bankruptcy decide as a preliminary question whether reason has been shown for questioning whether there was a real debt behind the judgment before proceeding to determine that issue for itself. In other cases it will be appropriate for the two questions to be determined at the one time. What is important is that all parties should be aware of how the case is to proceed: see Makhoul v Barnes (1995) 60 FCR 572 at 584. 11 Orders are made from time to time in bankruptcy proceedings for the separate determination of the question whether the Court should go behind a judgment, and only if the answer to that question is in the affirmative, proceed to consider whether there is a real debt due to the creditor: Wolff v Donovan (1991) 29 FCR 480 at 486. In that case Lee and Hill JJ observed (at 487) that it would ordinarily not be appropriate for the case to be split by a preliminary decision being made as to whether sufficient facts have been shown to suggest that an investigation into the judgment should be pursued. 12 If the Court were to decide that it will 'go behind' the judgment, then the whole matter of whether the debtor is indebted to the Bank in a sum sufficient to sustain the petition whether by virtue of the guarantee or by virtue of some oral guarantee, or by principles of estoppel or otherwise, would fall for consideration. There would be no alternative but to retry the whole question of whether the debtor is indebted to the Bank: Corney v Brien (1951) 84 CLR 343 at 358. 13 In Wren v Mahony (1971-1972) 126 CLR 212 the High Court held that the bankruptcy court not only may go behind a judgment, but must do so if there appear to be substantial reasons for doubting whether there really was a debt due to the petitioning creditor. However, a judgment after the trial of an action will not usually be re-opened unless a prima facie case of fraud, collusion, or miscarriage of justice is made out: Corney v Brien (supra) at 356-357. 14 Here, the debtor has not applied, nor could he have applied, to have the judgment of Sackville J set aside on the ground of fraud, which is one of the classic examples of the circumstances in which a court would go behind a judgment: Bourke v Beneficial Finance Corporation Ltd (1993) 47 FCR 264 at 271. Nor is it a case in which judgment was entered by default, which is another of the classic cases in which a court may go behind a judgment, even though an application to set aside the judgment had been refused, and that refusal affirmed on appeal: In re Frazer; Ex parte Central Bank of London (1892) 2 QB 633. 15 Rather, this is a case in which, on the findings in the Federal Court proceedings, the debtor had ample opportunity to raise a defence that he did not sign the guarantee as guarantor, but the debtor failed to take advantage of that opportunity until it was too late for him to do so. On the findings of the Full Court and the High Court the refusal of Sackville J to allow the debtor to withdraw his admissions of due execution as guarantor did not involve any miscarriage of justice. 16 The rationale for the approach to the finality of judgments propounded by the majority in Wren v Mahoney (supra) is that the making of a bankruptcy order affects not merely the parties to the judgment, but the right of all creditors. Nonetheless, as presently advised, it seems to me to be at least reasonably arguable that this Court should not go behind the Federal Court judgment in the peculiar circumstances of the present case. There is therefore some point in having a preliminary determination of that question. There is a practical utility in doing so, as if the question is answered in the negative, there will be a considerable saving in time and costs, as it will not be necessary to decide whether the debtor's signature as guarantor was in fact a forgery, or whether the debt can be sustained independently of the judgment. 17 The separate question proposed by the Bank should be determined before any further trial in the proceedings. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely. Associate: Dated: 6 May 2005 Counsel for the Applicant: A G Bell SC, D A McLure Solicitor for the Applicant: J K O'Sullivan Counsel for the Respondent: J M Ireland QC Solicitor for the Respondent: Robert H Butler Counsel for the Supporting Creditor: N Murray Solicitor for the Supporting Creditor: Clarke & Kann Date of Hearing: 6 April 2005 Date of Judgment: 6 May 2005