FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - bankruptcy petition - judgment debt - discretion of court to go behind judgment - documents relevant to debt and identity of debtor not discovered - whether there was in reality an adjudication of the substantive issue of whether debt was owing.

Ahern v Deputy Commission of Taxation (Qld) (1987) 76 ALR 137

Wren v Mahony (1972) 126 CLR 212.

Commonwealth Bank of Australia v Quade (1991) 178 CLR 134

Re: BRENT HUGHES Ex Parte: GEO M. HUME PTY. LTD.

VG 7279 of 1997

MERKEL J

MELBOURNE

29 JULY 1997

REASONS FOR JUDGMENT

INTRODUCTION

Geo M. Hume Pty Ltd (“Hume”) has petitioned the Court for a sequestration order against the estate of Brent Hughes (“Hughes”) in reliance upon the failure of Hughes to comply with a Bankruptcy Notice served on him on 3 September 1996.  The debt the subject of the Notice arose as a result of a judgment obtained by Hume against Hughes in the Magistrates’ Court of Victoria on 11 April 1996 in the sum of $13,819.52. 

The proceeding in the Magistrates’ Court related to advertising expenses allegedly incurred by Hume for and on behalf of Hughes in relation to the proposed sale of Unit 7, 2 Collins Street, Melbourne (“the unit”), which was owned by Market Services International Pty Ltd (“MSI”).  The advertising expenses, totalling $9,611.40, related to advertising carried out as from May 1993.

Hughes opposed the petition on the ground that there was, in “truth and reality” no debt owed by him to Hume.  It was common ground between counsel that the Court should determine, as a preliminary issue, whether it should exercise its discretion to go behind the judgment:  see generally Ahern v Deputy Commission of Taxation (Qld) (1987) 76 ALR 137, 147-8, and Wren v Mahony (1972) 126 CLR 212, 224.

THE FACTS

To describe the present case as a tale of legal woe is an understatement.  The facts relating to the alleged debt are relatively simple.

MSI wished to sell the unit.  Hume suggested a sale by public tender with appropriate advertising.  On or about 22 June 1993 Hughes appears to have signed an agreement confirming an exclusive agency by MSI in favour of Hume for the public tender and sale of the unit.  By a letter dated that date on the letterhead of “Mintel - A division of Market Services Pty Ltd”, Hughes sent the “signed agreement” to Hume.  Prior to the execution of the agency agreement Hughes had written a letter to Hume dated 28 May 1993 on the letterhead of “Market Services” confirming that the agreement appointing Hume to market “our property at No. 2 Collins Street” was to contain variations to the standard conditions which included -

“Your agreement to underwrite the cost of the advertising campaigns confirmed in your schedule plus Brochure cost (our printer is able to produce full colour for $1000 to $1500).  We understand that on sales these costs would be deducted from deposit monies received.  In the event that no sale proceeds within 60 days of close of tender full advertising costs will be rebated.”

On 4 March 1994 Humes sent an invoice for advertising expenditure of $9611.40 in respect of the unit to “Mr B Hughes Market Services Pty Ltd”.

The expenses were not paid.  That led to a proceeding in the Magistrates’ Court (“the proceeding”) by Hume against Hughes. The affidavit of documents of Hume in the proceeding did not discover any original invoices, the agency agreement or obviously relevant correspondence including letters dated 8 April, 28 May and 22 June 1993 (“the 1993 documentation”).  In this Court counsel for Hughes relied on the 1993 documentation to demonstrate that any contract for advertising was between MSI and Hume and accordingly, any debt due as a consequence of advertising was due by MSI, rather than Hughes.

Shortly prior to the hearing of the proceeding Hughes was unable to continue to fund his legal representation.  Judgment was obtained against Hughes after an unopposed hearing in which Hume adduced evidence to establish the debt it claimed was owing by Hughes.  Hughes applied, unsuccessfully, to set aside the judgment on three occasions.  On the third occasion Hughes sought to rely upon some of the 1993 documentation which he had obtained from a third party but appears not to have succeeded in doing so.  Finally, an application by Hughes to the Supreme Court of Victoria to review the decision made on the third application to set aside the judgment, on the ground of denial of natural justice, also failed.  The bankruptcy petition was issued after the first application to set aside the judgment.

My summary of the facts is based on the very limited material filed in Court to date.  Humes did not go into evidence on the substantive issues relating to the debt, preferring instead to persuade the Court not to go behind the judgment.

THE LAW

The principles relevant to the exercise of the Court’s discretion to go behind a judgment are stated by the Full Court in Ahern at 147-148.

“These principles apply to proceedings under bankruptcy legislation including, as here, the hearing of a petition to sequestrate a debtor’s estate.  The court hearing a bankruptcy petition is directed by statute to require proof of the fact that the debt on which the petitioning creditor relies is still owing (s 52(1)(c));  and it is not until the court is satisfied with proof of that matter and other matters of which s 52(1)(a) and (b) speaks that it may make a sequestration order against the estate of the debtor.

It is well established that a court exercising bankruptcy jurisdiction has undoubted discretion to go behind a judgment, particularly one obtained by default or compromise or where fraud or collusion is involved and inquire whether the judgment is founded on a real debt:  Corney v Brien (1951) 84 CLR 343.  Where the judgment is by default the court will go behind the judgment if there is a bona fide allegation that no real debt underlies the judgment:  Corney v Brien.  Even where the judgment was obtained following a hearing on the merits where both parties appeared, if there are substantial reasons for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor, the court will go behind the judgment and inquire into the consideration for it:  Wren v Mahony (1972) 126 CLR 212 per Barwick CJ, with whose reasons Windeyer and Owen JJ agreed;  Menzies and Walsh JJ dissenting.  Barwick CJ said (at 224):

“The judgment is never conclusive in bankruptcy.  It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment.  But 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 also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds:  Re  Rhodes;  Ex parte Heyworth (1884) 14 QBD 49;  Bayne v Baillieu (1907) 5 CLR 64  and Re Verma;  Ex parte DCT (1985) 4 FCR 181.

These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt.  Bankruptcy is not mere inter partes litigation.  It involves change of status and has quasi-penal consequences.”

Counsel for Hume relied upon a passage from the judgment of Beaumont J in Olivieri v Stafford (1989) 91 ALR 91 at 102 in support of her submission that where there has been an adjudication on the merits in respect of the debt the Court of Bankruptcy ought not to re-investigate the same matter.  His Honour said:

“As has been said, a Court of Bankruptcy is concerned to inquire into the ‘reality’ of the matter in hand.  Here the ‘reality’ of the matter is that the merits of the respondents’ claim have been demonstrated to the satisfaction of one judge of the District Court and another judge of that court has declined to disturb the judgment.  As a matter of substance, it is appropriate, in all the circumstances, for a Court of Bankruptcy to treat what happened in the two hearings in the District Court as a trial of the merits of the respondents’ claim.  That is to say, a Court of Bankruptcy should, I think, accept that a process of adjudication in the District Court has established that the underlying transactions created a true debt which could, in turn, provide a proper foundation for the entry of a judgment in respect of which a bankruptcy notice could properly issue.”

The difficulty with the submission, in the present case, is that I am not satisfied that the Magistrates’ Court has really adjudicated on the issue presently arising, viz, whether the liability for advertising is a liability of MSI rather than Hughes.  The hearing on the merits was conducted in the absence of Hughes.  In the subsequent applications to set aside the judgment, the Magistrates’ Court did not appear to have, or have regard to, the 1993 documentation.  The matter contested in the Supreme Court was a challenge on  administrative law grounds, rather than a substantive challenge to the third decision in the Magistrates’ Court not to grant a rehearing of the proceeding.  In these circumstances it is difficult to accept that the process of adjudication that has occurred has in “reality” resulted in an adjudication of the real issue now arising between the parties.  Further, the failure of Hume to discover what appears to be highly relevant documentation further undermines the submission that there has truly been an adjudication of the case sought to be argued by Hughes:  see Commonwealth Bank of Australia v Quade (1991) 178 CLR 134.  The adjudication that has occurred, whilst relevant to the discretion to go behind the judgment, is not such as to require the exercise of the discretion against going behind the judgment.

Should the Court go behind the judgment?

In my view there are several reasons why the Court should exercise its discretion to go behind the judgment in the present case.  They are:

1.         The limited material adduced in evidence before me suggests that there are “substantial reasons for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor”:  see Ahern (supra) at 148.  In particular the 1993 documentation clearly points  to an agreement for the sale and advertising of the unit which was entered into by Hume with Hughes acting as agent for MSI and not as a principal in his own right.

2.         There has not, in reality, been an adjudication of the substantive issue raised by Hughes in this Court.  Whilst I accept that Hughes must bear the substantial part of the responsibility for that having occurred it is not suggested that his default in that regard was deliberate or mala fide.  Hughes’ failure to continue with his initial legal representation in the proceeding was obviously a significant factor in the extraordinary series of legal proceedings that have eventuated in this matter.  Whilst such considerations might carry great weight in inter partes litigation, as was pointed out in Ahern (at 148) bankruptcy is not mere inter parties litigation;  it involves change of status and has quasi-penal consequences.

3.         There has been no explanation as to why the 1993 documentation was not discovered by Hume.  On its face the documentation appears to be highly relevant and strongly supportive of Hughes’ case that he did not, on his own behalf, contract for the advertising of the unit.  A failure to discover relevant documentation can result in an order for a new trial:  see Quade (supra).   In the present case I need go no further than to decide, as I do, that that failure is a factor in favour of the exercise of the discretion to go behind the judgment.

4.         A question has been raised by Hughes as to whether the advertising expenses were, in fact, incurred as claimed by Hume.  The evidence is ambivalent on this issue.  There was no discovery in the proceeding of any accounts for the advertising claimed to have occurred.  Whilst I doubt that I would have acted upon this aspect of the matter alone it is an additional factor which, together with the other matters referred to above, warrants the exercise of the discretion in favour of Hughes.

CONCLUSION

I am satisfied that:

·      the debt on which the judgment is founded ought to be investigated before Hughes is made bankrupt;

·      the Court ought to exercise its discretion to go behind the judgment in the present case. 

Accordingly it is appropriate for directions to be given for the further hearing of the matter.

I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of his Honour Merkel J

Associate:

Dated:              July 1997