FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - bankruptcy petition - application for substitution as petitioning creditor - standing for substitution - whether creditor seeking substitution had debt in existence at time of act of bankruptcy specified in petition - judgment debt - at relevant time judgment stayed pending appeal - distinction between stay of execution and stay of operation of a judgment - legal consequences of stay of execution - principle of merger of debt in judgment - application of this principle in bankruptcy.

Bankruptcy Act 1966 (Cth) ss 40(1)(g), 43, 44, 49

Hyams v Elder Smith Goldsbrough Mort Ltd (1976) 133 CLR 637 applied

Clifton Securities Ltd v Huntley and Others (1948) 2 All ER 283 applied

In the Marriage of Clemett (1980) 50 FLR 248 considered

Wallace v Trade Credits Ltd (1983) 72 FLR 252 considered

Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378 applied

Re Hayes; Ex parte Thomas Borthwick & Sons (Australasia) Ltd (1970) 18 FLR 216 applied

Re Padagas; Ex parte Carrier Air Conditioning Pty Ltd (1977) 30 FLR 170 applied

Re Nath; Ex parte Ghysels (1996) 63 FCR 523 considered

Pollack v Commissioner of Taxation (1991) 32 FCR 40 applied

Re King & Beesley; Ex parte King & Beesley (1895) 1 QB 189 applied

Field v Commercial Banking Co of Sydney (1978) 22 ALR 403 considered

Dean v Q.U.F. Industries Ltd (1981) 51 FLR 317 considered

Re BRENT HUGHES; Ex Parte WESTPAC BANKING CORPORATION

VG 7279 of 1997

MERKEL J

MELBOURNE

28 NOVEMBER 1997

THE COURT ORDERS THAT:

1.         Westpac Banking Corporation be substituted as the petitioning creditor and the petition be amended accordingly.

2.         Service of the amended petition on the Debtor is dispensed with.

3.         The amended petition be heard and determined forthwith.

4.         The estate of the Debtor be sequestrated.

5.         The costs of the original petitioning creditor and of the substituted petitioning creditor, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth).

REASONS FOR JUDGMENT

BACKGROUND

On 28 April 1997 Geo M. Hume Pty Ltd (“Hume”) petitioned the Court for a sequestration order against the estate of Brent Hughes (“Hughes”) in reliance upon the failure of Hughes to comply with the requirements of 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.  As a result of Hughes’ failure to comply with the requirements of the bankruptcy notice which was issued on the basis of the judgment, or to satisfy the Court that he had a counterclaim, set-off or cross demand equal to or exceeding the amount specified in the notice, Hughes committed an act of bankruptcy on 9 January 1997: see s 40(1)(g) of the Bankruptcy Act 1966 (Cth) (“the Act”).

Hughes opposed the petition on the ground that there was, in “truth and reality” no debt owed by him to Hume.  At the request of the parties I considered, as a preliminary issue, whether the Court 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.  On 29 July 1997 I determined to exercise my discretion to go behind the judgment in the present matter:  see Geo M. Hume Pty Ltd v Hughes (Federal Court of Australia, 29 July 1997, unreported).  Directions were given for a further hearing of the matter after the filing of evidence.  That hearing was to take place over two days before a judicial registrar on 26 November 1997.  However a number of matters have intervened. 

The first is an application by Westpac Banking Corporation (“Westpac”) under s 49 of the Act to be substituted as the petitioning creditor.  Westpac bases its claim to be substituted as a creditor on a judgment debt in the sums of $4,668,210.94 and $20,671.35 which it obtained against Hughes in the Supreme Court of Victoria on 11 October 1996.  By an order of the Court of Appeal execution on the judgment debt was stayed pending the hearing and determination of an appeal to that court.  On 19 August 1997 the appeal was dismissed with the consequence that on that date the stay of execution ceased.  On 10 October 1997 a bankruptcy notice, based on the judgment debt and issued against Hughes on 23 September 1997, was served on Hughes.

The second matter is that at different times, both Hughes and Hume have failed to comply with certain directions which were given to ensure the hearing before a judicial registrar would take place efficiently, expeditiously and without undue delay.  As a result of Westpac’s application and the failure to comply with directions the hearing fixed for 26 November 1997 has been adjourned.

The third matter is that on 3 November 1997, Hughes appointed a trustee to call a meeting of creditors and to take control of his property under Part X of the Act.  Hughes made a proposal, pursuant to s 188 of the Act, that he execute a Deed of Arrangement which involved, inter alia, payment to creditors of $45,000 over three years.  Hughes’ statement of affairs disclosed unsecured creditors of $5,354,051 and unsecured assets of $25,000.  Westpac is listed as a creditor in the sum of $5,277,291 although it claims that the current indebtedness to it is $4,688,882.29.  The meeting of creditors is due to be held on 4 December 1997.  Westpac, the major creditor, has indicated that it is opposed to Hughes’ proposal under which it alleges that it would see a return of approximately 0.047 cents in the dollar over three years.

In my decision to exercise the Court’s discretion to go behind the judgment obtained by Hume, I outlined the tortuous history of this matter and said:

“To describe the present case as a tale of legal woe is an understatement.”

It is unnecessary to revisit the reasons for that conclusion save to say that the history to date has been one of default at different times on the part of Hughes and Hume.  Hughes allowed a judgment to be entered without contest on his part and sought thereafter, unsuccessfully, to re-open the matter in the Magistrates Court and in the Supreme Court.  At the original hearing before me it was open to Hume to demonstrate that its judgment was well founded, but it did not do so, preferring instead to deal only with the question of whether the Court ought to go behind the judgment and then to proceed later to a hearing on the merits if the discretion to go behind the judgment was exercised.  The unchallenged evidence adduced by Hughes at that hearing cast considerable doubt as to whether in “truth and reality” the debt claimed was owed by Hughes to Hume. 

The time, expense and proceedings involved in this matter have borne little relationship to the amount in dispute.  As a result of the foregoing matters I indicated to the parties that I proposed to deal with Westpac’s application under s 49 of the Act and, if I acceded to that application, to proceed forthwith to hear and determine the petition.  Contrary to his earlier position, at a late stage of the hearing Hughes submitted that in the event that Westpac’s application under s 49 is granted, the hearing of the petition should be adjourned until after the meeting of creditors on 4 December 1997.

SHOULD WESTPAC BE SUBSTITUTED AS PETITIONING CREDITOR?

Westpac’s application to be substituted as a petitioning creditor under s 49 is supported by Hume but opposed by Hughes.  Section 49 provides:

“Where a creditor’s petition is not prosecuted with due diligence or where for any other reason the Court considers it proper to do so, the Court may permit to be substituted as petitioner or petitioners another creditor or other creditors to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor, and the petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditor.”

In addition to establishing a reason for the substitution the creditor who is substituted for the petitioning creditor must be a person whose debt was in existence at the time of the act of bankruptcy alleged in the petition:  see McNamara v Langford (1931) 45 CLR 267.  In Hyams v Elder Smith Goldsbrough Mort Ltd (1976) 133 CLR 637 at 639 Barwick CJ (with whom Gibbs and Mason JJ agreed) explained the decision in McNamara as follows:

“Although a creditor seeking an order of substitution must claim the existence of a debt of the required amount as at the date of the act of bankruptcy, it is not necessary, in my opinion, that that creditor should establish, as part of his application, that his debt was in fact in existence at that time.  Of course, if it appears on the face of the material he produces in support of his application that his debt was not in existence at the appropriate time the Court should not order the substitution.  McNamara v Langford, properly understood, decides no more than that.  Whether or not the substituted petitioning creditor’s debt is sufficient in point of time to support the petition will be decided when the petition is heard.”

Section 44(1) requires, inter alia, that the petitioning creditor’s debt be a liquidated sum payable immediately at the date of presentation of the petition or at a certain future time.  As s 49 provides that upon substitution the petition may be proceeded with as if the substituted creditor had been the petitioning creditor, the substituted creditor must satisfy the requirements of s 44(1).

In that context I turn first to consider the question of whether Westpac has standing to be a substituted petitioner.  In the present case that question involves determining whether as at 9 January 1997 (the date of the act of bankruptcy alleged in the petition) and as at 28 April 1997 (the date of the presentation of the petition), the judgment debt was due and owing by Hughes to Westpac.  As at both dates:

·      Westpac was a judgment creditor of Hughes in the sums of $4,668,210.94 and $20,671.35 which were due and payable under the judgment obtained by Westpac against Hughes on 11 October 1996;

·      orders of the Court of Appeal of the Supreme Court of Victoria that execution on the judgment and orders made on 11 October 1996 be stayed pending the hearing and determination of Hughes’ appeal, were still in effect.

The stay of execution appears to have been ordered under O 64, r 25 of the General Rules of Procedure in Civil Proceedings 1996 of the Supreme Court of Victoria.  The legal processes available by way of enforcement, but stayed under the order, are those set out in Orders 66 to 76 inclusive.  In my view, a distinction is to be drawn between a stay of execution of a judgment and a stay on the operation of the judgment.  In principle, a stay of execution relates solely to a stay in respect of the legal processes of enforcement which are available in respect of the judgment but does not, of itself, suspend or otherwise affect the validity or operation of the judgment.  A stay on the operation of the judgment, suspends the operation and the legal affect of, and the rights conferred under, the judgment. 

The legal consequences of a stay of execution were stated succinctly by Denning J in Clifton Securities Ltd v Huntley and Others [1948] 2 All ER 283 at 284:

“A stay of execution only prevents the plaintiffs from putting into operation the machinery of law - the legal processes of warrants of execution and so forth - in order to regain possession.  It does not take away any other rights which they have.  It does not prevent their exercising any right or remedy which they have apart from the process of the court.”

Although the statement of Denning J has been the subject of some doubt (see In the Marriage of Clemett (1980) 50 FLR 248 and Future Graphics Pty Ltd v Fullpoint Pty Ltd (1990) 8 ACLC 700 at 703) it seems to me that it is clearly correct. 

In the context of a stay of execution under O 64, r 25 I can see no contextual or textual reason for taking a different view from that expressed by Denning J in respect of a court ordered stay of execution on a judgment.  I would add that the view of Denning J is also supported by the majority judgments in Pollack v Commissioner of Taxation (1991) 32 FCR 40.  Pincus J (at 51-52) and Gummow J (at 56-57) found that  a “stay of enforcement” under Part 31A of the District Court Rules 1973 (NSW) pending the hearing of an application by a judgment debtor to pay the judgment by instalments did not, without more, deprive the judgment debt of its character as an obligation that is payable immediately.  As was said by Pincus J at 51:

“the obligation subsists but enforcement of the judgment cannot take place;”

and by Gummow J at 56:

“The debt may be payable by the debtor although the means of enforcement are denied to the creditor.”

Although Beaumont J (at 48) expressed a different view, the majority view in Pollack is authority which directly supports Westpac’s contention that the stay of execution in the present case did not affect its status as a creditor to whom a judgment debt was immediately payable as at the date of the act of bankruptcy and for the purposes of s 44(1)(b)(ii) of the Act.

The distinction to which I have referred has been recognised and given effect to in numerous statutory provisions providing for orders staying execution or staying the operation of a judgment or decision.  Indeed, Clemmett concerned reg 120(8A) of the Family Law Regulations under which the Court may make an order staying the execution or operation of a decree:  see also for example s 41(2) of the Administrative Appeals Act 1975 (Cth)and s 15(1) of the Administrative Decisions (Judicial Review) Act 1977 (Cth).

The distinction has also been recognised in bankruptcy where it has been held that the issue of a bankruptcy notice is not, of itself, a form of execution:  see Wallace v Trade Credits Ltd (1983) 72 FLR 252 at 254 per Bowen CJ, McGregor and Neaves JJ and In Re A Bankruptcy Notice [1898] 1 QB 383 at 387.  Section 40(1)(g) of the Act is likely to have been enacted on the basis that a judgment, the execution of which has been stayed, can still result in the judgment debt being due and owing, that is, on the basis that the stay of execution does not affect the operation of the judgment.  It seems to me that s 40(1)(g) supports Westpac’s position on the basis that it takes into account a factor (a stay of execution) to which, apart from the statutory provision, the Court might not have been entitled to have regard on the issue of whether a judgment debt was due and payable;  cf In Re Amalgamated Properties of  Rhodesia (1913) Limited [1917] 2 Ch 115 at 123 per Sargant J.

In my view the stay of execution on the judgment and orders under which the judgment debt was payable did not suspend or stay the operation of the judgment or orders with the consequence that as at 9 January 1997 and 28 April 1997 Westpac was a creditor of Hughes and the judgment debt was a liquidated sum which was immediately payable by Hughes to Westpac.  Accordingly, Westpac has the necessary standing to be substituted as the petitioning creditor in the present matter.

There is an additional basis for Westpac’s standing to be a petitioning creditor under the Act.  It is common ground that the judgment debt was founded upon Hughes’ liability as a guarantor of the repayment of certain loans to Westpac.  Accordingly, the contractual liability which gave rise to the judgment debt was in respect of a liquidated sum being the amount of the loans and interest thereon which was due and payable by Hughes under the guarantee.  It is well established that in such circumstances the general rule that the original debt merges in the judgment does not apply in bankruptcy.  In Re King & Beesley;  Ex parte King & Beesley [1895] 1 QB 189 at 191 Vaughan Williams J expressed the principle as follows:

“I am of the opinion that this appeal should be dismissed.  It is contended that the petitioning creditor’s debt is a judgment debt, and that the effect of the judgment is that the original debt has been extinguished and has ceased to exist.  I do not agree with that contention, and I think that the judgment has not extinguished the debt for bankruptcy purposes or for the purpose of supporting a bankruptcy petition.  The authorities prior to the Act of 1883 seem to be conclusive against the contention of the debtors.  It has been further urged that an alteration in the law has been effected by the Act of 1883, but I have entirely failed to discover what that alteration is.”

See also Kennedy J at 193 and Bayne v Blake (1909) 9 CLR 360 at 363 per Griffith CJ.  Vaughan Williams J at 192 in King & Beesley observed that the judgment is, prima facie, conclusive evidence of the underlying debt.

The above principles have been accepted as applicable to bankruptcy proceedings under the Act in Australia:  see Re Agrillo; Ex parte the Bankrupt (1977) 29 FLR 484 at 489 and Pollack at 53 per Pincus J and at 58 per Gummow J.

Although in most cases s 40(1)(g) is likely to denude the principles to which I have referred above of extensive practical application, as the present case demonstrates, they can still have practical and legal significance.  To the extent that the application of the principles can lead to anomalous or unintended outcomes in particular matters the Court has ample discretion under s 52(2)(b) to deal with such matters.

The next issue is whether the other requirements of s 49 are satisfied.  In my view it is proper to permit Westpac to be substituted under s 49 of the Act as the petitioning creditor for the following reasons:

1.         A bankruptcy petition is for the benefit of all creditors:  see Davis v Holding [1836] 1 M & W 159 at 165 per Lord Arbinger.  As Hughes is hopelessly insolvent it is in the interest of all creditors that the bankruptcy petition be heard and determined without further delay and unnecessary expense.

2.         Section 49 helps avoid a multiplicity of petitions:  see Dean v Q.U.F. Industries Ltd (1981) 51 FLR 317 at 321.  Westpac has already served its own bankruptcy notice.  A refusal to permit the substitution would result in a two day hearing before a judicial registrar with a possible review before the Court on the debt claimed by Hume.  In the light of Hughes’ insolvency, Hume is unlikely to recover the costs of that hearing if it succeeds.  Further, as Westpac is undoubtedly a creditor in a substantial sum it is contrary to common sense and justice to put Hume, Hughes, Westpac and the Court through a lengthy, time-consuming and expensive process which sooner or later will almost inevitably lead to Hughes’ bankruptcy on a petition by Hume or Westpac.

3.         If a sequestration order is made there is evidence that the substitution can be in the interests of creditors, in relation to the relation back period under ss 115, 120, 122 and 123 of the Act in respect of any dealings with Hughes’ assets. 

4.         Hume supports the substitution and Hughes has not put forward any justifiable countervailing reason why the substitution should not be permitted.

There has also been dilatoriness on the part of Hume in bringing this matter to finality.  Its failure to comply with my directions in my view amount to a failure to prosecute the petition with due diligence for the purposes of s 49.

Accordingly, for the above reasons it is appropriate to make an order under s 49 of the Act substituting Westpac as the petitioning creditor. 

SHOULD A SEQUESTRATION ORDER BE MADE?

Section 43(1) of the Act provides, inter alia, for a sequestration order to be made against a debtor personally present or ordinarily resident in Australia, where the debtor has committed an act of bankruptcy.

Hughes committed an act of bankruptcy on 9 January 1997 as alleged in the petition.  The issue that initially troubled me was whether it was appropriate to make a sequestration order on the basis of that act of bankruptcy in circumstances where I have regarded it as appropriate to exercise the Court’s discretion to go behind the judgment the subject of the bankruptcy notice which gave rise to the act of bankruptcy.

The jurisdiction to make a sequestration order is founded on the act of bankruptcy alleged in the petition rather than the debt that led to the act of bankruptcy.  Accordingly, it has been accepted that the failure to comply with a bankruptcy notice requiring payment of a judgment debt constitutes an act of bankruptcy notwithstanding that the judgment has later been set aside and the debtor allowed to defend the creditor’s action:  see Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378 at 381 and Re Hayes; Ex parte Thomas Borthwick & Sons (Australasia) Ltd (1970) 18 FLR 216 at 217-218.  I regard those circumstances as analogous to those arising in a case such as the present where the Court has exercised its discretion to go behind the judgment to ascertain whether in truth and reality a debt was owed by Hughes to Hume.

Similarly, it has been held that a petition may be founded on the act of bankruptcy of failing to pay a judgment debt notwithstanding that at a later time, prior to the hearing of the petition, execution of the judgment had been stayed:  see Re Padagas; Ex parte Carrier Air Conditioning Pty Ltd (1977) 30 FLR 170 at 172 and Re Nath; Ex parte Ghysels (1996) 63 FCR 523 at 525.  The rationale for these decisions is that although a stay is provided for in s 40(1)(g) in relation to an act of bankruptcy, ss 43 and 44 do not require that the debt the subject of a petition be one the execution of which has not been stayed:  see Padagas at 172.

The situation presently before the Court is analogous to that in Re Hayes where the court made a sequestration order on the application of a substituted petitioner in reliance upon an act of bankruptcy constituted by the failure to pay a judgment debt to the original petitioning creditor, notwithstanding that the judgment had been set aside. 

For the above reasons:

·      Hughes’ act of bankruptcy on 9 January 1997 satisfies the requirements of s 43(1) and s 44(1) of the Act which provide for the Court’s jurisdiction and power to make a sequestration order;

·      Westpac, as a substituted petitioning creditor, is entitled to rely on the act of bankruptcy alleged in the petition, notwithstanding that I have exercised my discretion to go behind the judgment obtained by Hume against Hughes.

The next question is whether I ought to exercise the Court’s discretion to dismiss the petition under s 52(2)(b) on the ground that there is “sufficient cause” why a sequestration order ought not be made.  I have regarded it as proper that Westpac be substituted as the petitioning creditor.  Subject to the adjournment application to which I will now turn, I am not satisfied that there is any reason why a sequestration order should not be made.  Indeed the reasons I have given for permitting Westpac to be substituted as petitioning creditor constitute good cause for the making of a sequestration order on the petition in the event that I am satisfied of the matters of which I am required to be satisfied under the Act.

SHOULD THE HEARING OF THE PETITION BE ADJOURNED?

At the conclusion of the hearing counsel for Hughes submitted that if I permit the substitution I ought nevertheless to adjourn the petition pending the outcome of the meeting of creditors on 4 December 1997.

In Field v Commercial Banking Co of Sydney (1978) 22 ALR 403 at 411-412 a number of considerations are set out which are relevant to the discretion to adjourn the petition in such circumstances.  Of those considerations the hopeless insolvency of Hughes, the derisory benefits offered under the deed, the substantial indebtedness of Hughes, the opposition of Westpac and Hume and the absence of support from other creditors strongly suggest that the adjournment is not likely to be for the benefit of the creditors.  Further, as indicated earlier, the history of the present petition has been such that an expeditious and final determination of it is in my view in the interests of the creditors.

In these circumstances I am not satisfied that an adjournment of the hearing of the petition is appropriate and accordingly, I refuse the application.

CONCLUSIONS:

I am satisfied that Hughes committed the act of bankruptcy alleged in the petition.  I am satisfied with the proof of the other matters of which s 52(1) requires proof.

Accordingly, for the reasons set out above I propose to make the following orders:

1.         Westpac Banking Corporation be substituted as the petitioning creditor and the petition be amended accordingly.

2.         Service of the amended petition on the Debtor be dispensed with.

3.         The amended petition be heard and determined forthwith.

4.         The estate of the Debtor be sequestrated.

5.         The costs of the original petitioning creditor and of the substituted petitioning creditor, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth).

I certify that this and the preceding

ten (10) pages are a true copy of the

Reasons for Judgment herein of his

Honour Merkel J

Associate:

Dated:              28 November 1997