FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - whether Court should go behind judgment debt - application to set aside bankruptcy notice - where agreement for purchase of bus by Corbett Park Holdings Pty Ltd of which debtor was director - where debtor gave personal guarantee for obligations of company and judgment entered against both company and debtor for default in payment of purchase price.  Whether judgment obtained was irregular where creditors obtained money judgment for purchase price of bus in addition to repossessing bus as security - whether alternative rather than cumulative remedies

Bankruptcy Act 1966 (Cth) s 41

Oliveri v Stafford (1989) 24 FCR 413 - cited

Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125 - cited

Re Athans; Ex parte Athans (1991) 29 FCR 302 - cited

Re Briggs; Ex parte Briggs v DCT (1986) 12 FCR 310 - cited

Groongal Pastoral Company Limited (In Liquidation) v Falkiner (1924) 35 CLR 157 -                                                                                                                              followed

China & South Sea Bank v Tan [1990] 1 AC 536 - followed

Westpac Banking Group v Kingsland [1991] 26 NSWLR 700 - followed

State Bank of Victoria v Parry (1989) 7 ACLC 226 - followed

RE: BENJAMIN JOHN HUTCHINS (Applicant); EX PARTE: DAVID J WALL and AMELIA WALL

No QN 1709 of 1996

SPENDER J

BRISBANE

6 MAY 1998

THE COURT ORDERS THAT:

1.         The application to set aside Bankruptcy Notice No 1709 of 1996 be dismissed;

2.         Time for compliance with Bankruptcy Notice No 1709 of 1996 be extended until 6 May 1998.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

This is an application to set aside a bankruptcy notice No 1709 of 1996 which was issued on the application of David J Wall and Amelia Wall on 2 October 1996, and which was served on the debtor (Mr Hutchins) on 16 October 1996.

An application was filed on 13 November 1996 seeking, pursuant to s 41(6B) of the Bankruptcy Act 1966 (‘the Act’), the time limit for compliance with the bankruptcy notice be extended until 12 October 1998 and further, that the bankruptcy notice be set aside.

The application first came before the court on 16 December 1996.

Section 41(6B) was omitted by Act No 44 of 1996 Schedule 1.  That Schedule came into operation on 16 December 1996.  However, s 41(6A) provides, inter alia, that the Court has power to extend the time for compliance with the bankruptcy notice where, before the expiration of the time fixed by the Registrar for compliance with the requirements of a bankruptcy notice, an application to set aside the bankruptcy notice has been filed.  In the present circumstances, the Court has power, subject to s 41(6C), to extend the time for compliance by Mr Hutchins with Bankruptcy Notice No 1709 of 1996.

The application to set aside the bankruptcy notice has its origins in dealings between a company, Corbett Park Holdings Pty Ltd (‘Corbett Park’), of which Mr Hutchins was a director and guarantor, and Mr and Mrs Wall (‘the Walls’), whereby the Walls sold to Corbett Park a Nissan bus registered number 497 ANI for $25,000.  The agreement for sale of the bus was made on 13 April 1993.  On that day a bill of sale over the bus was granted by Corbett Park.  The agreement for sale was supported by a personal guarantee in favour of the Walls by the directors of Corbett Park, including Mr Hutchins.  Stamp duty was paid on the bill of sale on 26 May 1993 and the certificate of entry of a charge on the Australian Register of Company Charges records that a notice in respect of the charge was lodged on 2 July 1993.

Corbett Park made no payments pursuant to the sale agreement and the Walls issued a District Court plaint against Corbett Park on 8 August 1993.  Corbett Park filed an Entry of Appearance and Defence on 16 September 1993.  On 4 November 1993, a judgment was obtained in the District Court against Corbett Park in default of appearance on an application for summary judgment, for $30,365.88 plus costs.  An affidavit on the application for summary judgment by an articled clerk in the employ of the solicitors for the Walls, referred to costs the Walls had incurred in enforcing their rights arising out of various breaches of the bill of sale by Corbett Park.  Those costs include:

“...the costs of a Mercantile Agent in securing recovery of the bus and ongoing storage charges for the bus.”

The judgment included “storage charges for bus from 21/09/93 to 03/11/93, 44 days @ $5.00 per day”.

There was not, and has not been subsequent to the entry of judgment in the District Court, any application by Corbett Park to set aside that judgment or to appeal it.  Corbett Park was wound up by order of the Supreme Court on 16 March 1994.

On 24 January 1994 the Walls filed proceedings against Mr Hutchins in the Magistrates Court, pursuant to his personal guarantee of the obligations of Corbett Park.  Judgment was given on 6 March 1994 against Mr Hutchins in the Magistrates Court for $31,287.63.  It is that judgment on which the bankruptcy notice is founded.  There has been no application to set aside that judgment nor any appeal from it.  The judgment was entered in default of entry of appearance and defence.

The bankruptcy notice issued on 2 October 1996, was served on Mr Hutchins on 16 October 1996, and his application seeking an extension of time to comply with the bankruptcy notice and to set the notice aside was filed on 13 November 1996.  It is to be noted that no notice disputing the validity of the notice on the ground of a misstatement of the amount due has been given by the debtor pursuant to s 41(5) of the Act, nor has there been any tender of what might be said by Mr Hutchins to be the correct amount due by him to the creditors.  Gibbs CJ said in Walsh v Deputy Commissioner of Taxation (1984) 156 CLR 337 at 339:

“There is no doubt that a bankruptcy notice will be invalid if the sum specified in the notice as the amount due to the creditor exceeds the amount for which the creditor is entitled to issue execution, provided that the debtor gives timely notice under s 41(5) of the Bankruptcy Act 1966 (Cth), as amended, that he disputes the validity of the notice on that ground.”

The essential contention by Mr Hutchins is that the entry of judgment against Corbett Park in the District Court was irregular because the Walls were not entitled to enter judgment on an agreement where they had unrealised security; it was suggested that a creditor is obliged to value his security and enter judgment for the difference.  The irregularity claimed by Mr Hutchins is encapsulated by his contention that the creditor can’t “have his cake and eat it too”.  The District Court plaint filed on behalf of the Walls commences:

“The Plaintiff’s claim is for the recovery of possession of goods, namely a Nissan 22 seater bus, bearing Registered Number 497 ANI, or alternatively, monies lent, interest and costs under a Bill of Sale dated the 13th day of April, 1993,...”

Paragraph 15 of the plaint pleaded:

“The Defendant fails and refuses to deliver up the said vehicle and/or to pay to the Plaintiff the moneys due to the Plaintiff under the Bill of Sale.”

Between late 1993 through to March 1995 Mr Hutchins says that he made attempts to resolve the matter of dispute with the Walls, by way of agreement between Corbett Park, the Walls, and one Robert Johnson.  In about 4 August 1993, Corbett Park, when it was in breach of its obligations under the bill of sale, purported to sell the Nissan bus to Robert Johnson, and Johnson granted to Corbett Park a bill of sale dated 5 August 1993, which bill was registered under the Motor Vehicles Securities Act 1986 (Qld) on 5 August 1993.  It appears that the bus was repossessed by an agent of the Walls from the possession of Johnson on 14 September 1993.  As earlier noted, the affidavit in support of summary judgment refers to storage charges from 21 September 1993 to the day preceding the grant of summary judgment.  As that affidavit and its attachments make plain, judgment in the District Court was obtained for the principal due under the Agreement, interest, and costs recoverable under sub-clause 1(iii) of the Bill of Sale, being solicitors’ costs and outlays, bailiff costs, costs of the repossession agent, and storage charges.  The material before the court demonstrated that the Walls were in possession of the bus at the time of judgment.

Evidence given by Sergeant Thompson suggests that the vehicle was in the possession of Mr Hutchins on 16 November 1993, and was taken possession of by a mercantile agent on behalf of the Walls at the Mitchelton Police Station on that day.  How possession of the bus by Mr Hutchins came about is not apparent from the evidence.  It seems further that the bus was for a considerable time stored in the open yard of a towing company at Everton Park and that eventually Mr Johnson made some arrangement with the towing and storage people and obtained possession of the motor vehicle.  The claim on behalf of the Walls against Johnson was met by a claim by Johnson that, in his dealings with the Nissan bus, he was a purchaser for value without notice, and therefore obtained title to the bus.

There is no doubt that the court has jurisdiction to entertain the application to set aside the bankruptcy notice.  In Oliveri v Stafford (1989) 24 FCR 413, Gummow J said at 431:

“The Court is invested with jurisdiction upon an application to set aside a bankruptcy notice by s 30(1) of the Act, where such an order is necessary for the purpose of carrying out or giving effect to the Act in the particular case; also, the express power in s 41 to extend the time for compliance with the requirements of such a notice has been said to carry with it the power to set aside the notice itself: Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125.”

In Re Sterling (1980) 30 ALR 77, Lockhart J said at 83:

“It is not clear why Parliament did not expressly confer power on the court to set aside a bankruptcy notice; but plainly it assumed the existence of the power when enacting s 41(6A).

It is necessary for the purpose of carrying out or giving effect to the express power vested in the court to extend time for compliance with the requirements of bankruptcy notices that the court may set aside such notices.  Hence s 30(1) is a source of the court’s power to set aside bankruptcy notices.

In my opinion the power to set aside a bankruptcy notice arises from an alternative source, namely, the principle of interpretation of statutes that a power conferred by Parliament carries with it the power necessary for its performance or execution.  Ubi aliquid conceditur, conceditur etiam et id sine quo res ipsa non esse potest: see Oath Before Justices Case (1611) 12 Co Rep 130; 77 ER 1405; Bane v Methuen (1824) 2 Bing 63; 130 ER 228; Clarence Rail Co v Great North of England, Clarence and Hartlepool Junction Rail Co (1845) 13 M & W 706; 114 ER 815; Cookson v Lee (1853) 23 LJ Ch 473; Ex parte Martin (1879) 4 QBD 212; affirmed on appeal sub nom Martin v Bannister (1879) 4 QBD 491.

The power expressly conferred by Parliament on the court to extend time for compliance with the requirements of a bankruptcy notice where an application has been filed to set it aside carries with it the power to set aside the notice itself.

Plainly the power to extend time for compliance is in aid of the power to set aside the notice itself.  What is the point in extending time for compliance otherwise than for the purpose of enabling the court to hear the application to set aside the notice without the occurrence of an act of bankruptcy in the meantime?”

In Re Athans; Ex parte Athans (1991) 29 FCR 302, Hill J said at 310:

“The Act gives no general discretion to the court to set aside bankruptcy notices valid in form which are not an abuse of the process and I know of no case where a bankruptcy notice has in such circumstances been set aside.  The Act permits the issue of a bankruptcy notice and if valid in form prescribes the consequences to the bankrupt of non-compliance.  The court’s jurisdiction to set aside a defective notice stems from s 30 of the Act but it is not a general discretionary jurisdiction.  In this sense, it differs from, for example, the jurisdiction to make a sequestration order under s 52(1) which is expressly discretionary.”

In Re Briggs; Ex parte Briggs v DCT (1986) 12 FCR 310, Toohey J considered the scope of the court’s power in regard to the setting aside of a bankruptcy notice.  At 311 he said:

“The Bankruptcy Act 1966 (Cth) does not expressly confer power on the Court to set aside a bankruptcy notice.  But I am content to adopt the views expressed by Lockhart J in Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125 in which his Honour held the power to derive from at least two sources - s 30(1) of the Bankruptcy Act 1966, which gives the Court power to decide all questions coming within its cognisance and to make orders necessary for carrying out or giving effect to the Act, and the principle that a power conferred by parliament carries with it the power necessary for its performance or execution, so that the express power to extend time for compliance with the requirements of a bankruptcy notice, when an application to set it aside has been filed, carries with it the power to set aside the bankruptcy notice itself.  On the matter of necessary powers, I would refer also to Parsons v Martin (1984) 5 FCR 235 at 240-241.”

At 312 he said:

“Counsel for the applicant argued for some general principle of fairness, according to which a bankruptcy notice will be set aside if in some way the notice is unfair to the debtor.  I do not accept the existence of such a principle.  There is nothing in the Bankruptcy Act 1966 to justify it and no authority to support it.  It seems to me that, however formulated, the grounds upon which a bankruptcy notice may be set aside must relate to the form or content of the notice itself, service of the notice or the existence of the debt upon which the judgment and in turn the notice is founded.  Having regard to the language of s 40(1)(g), reference to the existence of a debt must include the existence of a counter-claim, set-off or cross demand equal to or exceeding the amount of the debt.

A court hearing an application to set aside a bankruptcy notice is not hearing a petition for sequestration and the provisions of s 52(2), whereby a court may dismiss a petition if satisfied that the debtor is able to pay his debts or that for other sufficient cause a sequestration order ought not be made, cannot be imported into such an application.  In my view a court faced with an application to set aside a bankruptcy notice is constrained to look only at the regularity of the notice itself (including service) and otherwise at the circumstances surrounding the existence of the judgment debt and any demand which the debtor may have against the creditor for a comparable amount.”

In this case the only relevant question is the existence of the debt.

In the context of a creditor’s petition, it is accepted that a judgment debt may be accepted as satisfactory proof of the petitioning creditor’s debt but should not be so accepted if substantial reasons are given for questioning whether behind the judgment there is in truth and reality a debt due to the petitioner: Wolff v Donovan (1991) 29 FCR 480;  Wren v Mahony (1972) 126 CLR 212 at 224-5; Re Flateau; Ex parte Scotch Whisky Distillers Ltd (1888) 22 QBD 83 at 85-86.

As the Court noted in Wolff v Donovan (supra), the Court will more readily look behind a judgment if it was obtained by default, but it is relevant in that regard to ascertain whether any attempt had been made by the judgment debtor to have the judgment set aside.  The Court, in that case, envisaged that there could be a two stage process, the first being a preliminary inquiry into whether reason has been shown for questioning whether behind the judgment there is in truth and reality a debt, and if there is reason shown, there may be further and separate proceedings to determine the issue as to whether there was in fact a debt.  Fullagar J in Corney v Brien (1951) 84 CLR 343 said at 358:

“The question whether the judgment is to be reopened or ‘gone behind’ at all will, of course, often involve some preliminary investigation of the merits of the attack on the judgment.”

In the present case, the complaint by Mr Hutchins is not directed, in the first instance in any event, to the judgment obtained on his guarantee in the Magistrates Court.  What is alleged is the debt between Corbett Park and the Walls established by the District Court judgment is said to be irregular in that the Walls obtained a money judgment at the time when they were in possession of the bus the subject of the money claim and in respect of which, if not then, at a later time they permitted or acquiesced in a diminution in the value of the bus by failure to take proper care of it.

I turn to consider whether reason has been shown for questioning whether behind the judgment there is in truth and reality a debt owed by him to the Walls, adopting the most favourable view of the material to the applicant, Mr Hutchins.

I am in no doubt that there is and was at the time of the judgment obtained in the Magistrates Court a debt owed by Mr Hutchins to the Walls on which a creditor’s petition might properly be based.

First it should be noted, as was said in Groongal Pastoral Company Limited (In Liquidation) v Falkiner (1924) 35 CLR 157 at 164:

“The mortgage itself...is a security only.  The personal obligation itself is independent of the security, but it is contained in and constituted by the statutory deed by which also it is secured.”

In China & South Sea Bank v Tan [1990] 1 AC 536, the Privy Council said at 545:

“In the present case the security was neither surrendered nor lost nor imperfect nor altered in condition by reason of what was done by the creditor.  The creditor had three sources of repayment.  The creditor could sue the debtor, sell the mortgage securities or sue the surety.  All these remedies could be exercised at any time or times simultaneously or contemporaneously or successively or not at all.  If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgaged securities to the surety.  If the creditor chose to exercise his power of sale over the mortgaged security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell.  The creditor does not become a trustee of the mortgaged securities and the power of sale for the surety unless and until the creditor is paid in full and the surety, having paid the whole of the debt is entitled to a transfer of the mortgaged securities to procure recovery of the whole or part of the sum he has paid to the creditor.

The creditor is not obliged to do anything.  If the creditor does nothing and the debtor declines into bankruptcy the mortgaged securities become valueless and the surety decamps abroad, the creditor loses his money.  If disaster strikes the debtor and the mortgaged securities but the surety remains capable of repaying the debt then the creditor loses nothing.  The surety contracts to pay if the debtor does not pay and the surety is bound by his contract.  If the surety, perhaps less indolent or less well protected than the creditor, is worried that the mortgaged securities may decline in value then the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities and sell them.  No creditor could carry on the business of lending if he could become liable to a mortgagor and to a surety or to either of them for a decline in value of mortgaged property, unless the creditor was personally responsible for the decline.  Applying the rule as specified by Pollock CB in Watts v Shuttleworth, 5 H & N 235, 247, it appears to their Lordships that in the present case the creditor did no act injurious to the surety, did no act inconsistent with the rights of the surety and the creditor did not omit any act which his duty enjoined him to do.  The creditor was not under a duty to exercise his power of sale over the mortgaged securities at any particular time or at all.”

Cole J in Westpac Banking Group v Kingsland [1991] 26 NSWLR 700 said at 705:

“The cross-defendants argued, in my view correctly, that there is no obligation upon a mortgagor to exercise a power of sale if it does not wish to do so.  If there be no obligation to sell at all, or at any particular time, failure to sell at any point of time could not constitute a breach of duty, or an ‘act injurious’ to either the mortgagor or the guarantor.  It has been held by high authority that there is no duty owed by a mortgagee to a guarantor to exercise the power of sale at any point in time.  The mortgagee, and thus the receiver, may exercise that power if it so chooses and when it so chooses.  If a surety believes he is suffering damage by failure of the mortgagee to exercise the power of sale in that the surety believes that the value of the mortgaged property may decline, his entitlement is to pay out the mortgagee, obtain the security and sell it.”

In State Bank of Victoria v Parry (1989) 7 ACLC 226 at 229, Malcolm CJ said:

“It is firmly established in Australia that a creditor has no duty in equity to enforce a security, as distinct from perfecting it.”

and later on the same page he said:

“Whatever the content of the duty, either at law or in equity, it has been clearly decided that the duty may be modified or circumscribed by the terms of the mortgage or guarantee itself:...”

In my opinion there was nothing irregular in the Walls obtaining judgment against Corbett Park in the District Court for the moneys due under the Bill of Sale, at a time when they were in possession of the chattel the subject of the Bill of Sale.  Notwithstanding the “alternative” formulation in the pleading of the District Court plaint, there is no prohibition on the obtaining of a money judgment in respect of the bus, after it had been repossessed.

The bill of sale contained a clause which provided:

“...the Grantee shall not be answerable or accountable for any involuntary losses which may happen in or about the exercise or execution attempted exercise or non-exercise of the aforesaid powers and trusts or any of them or for any loss whatever not occasioned by his own wilful default nor for any more money than shall actually come to the Grantee’s hands whether the sale be for cash or upon credit and only from the time of its actual receipt by the Grantee (any purchase money unpaid until actually received by the Grantee to be deemed an unsatisfied part of the moneys hereby secured and bear interest accordingly) or for the acts neglect or dishonesty of any servant or agent employed by the Grantee all losses to be deemed unavoidable and inevitable unless positive and wilful default be proved to have been made by the Grantee.”

Even if it might somehow be asserted by Mr Hutchins that there was some conduct by the Walls in relation to the storage of the vehicle which resulted in some diminution in value, that diminution has never sought to be quantified.  Crucially, there has been no affidavit filed relying on s 41(7) of the Bankruptcy Act that the debtor has a counterclaim, set-off or cross demand that he could not have set up in the proceedings in which the judgment was obtained.

For the reasons I have expressed the Court declines to “go behind” the judgment in the Magistrates Court because, even on the best view of the debtor’s case, to do so would not establish that there is not in truth and reality a debt owing by him to the judgment creditors upon which bankruptcy proceedings can be founded.

I extend the time for compliance with bankruptcy notice No 1709 of 1996 until 6 May 1998  The application to set aside the bankruptcy notice is dismissed.

I will hear the parties on costs.

Associate:

Dated:              6 May 1998