federaL COURT OF AUSTRALIA

BANKRUPTCY – sequestration order – appeal - appellant unrepresented at trial – whether right to representation – whether appellant had cause of action against respondent for damages greater than the amount of the judgment debt – finding of fact by trial judge concerning service of bankruptcy notice – when finding of fact should be overturned on appeal

Bankruptcy Act 1966 (Cth) s 52(2)

Brunskill v Sovereign Marine and General Insurance Co Pty Ltd (1985) 59 ALJR 842 mentioned

Devries v Australian National Railways Commission (1993) 177 CLR 472 followed

Ling v Enrobrook Pty Ltd  (1997) 74 FCR 19 mentioned

Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 mentioned

PAUL JAMES LOVE v PAUL PATTISON (AS TRUSTEE OF THE BANKRUPT ESTATE OF PAUL JAMES LOVE) and PYRAMID BUILDING SOCIETY (IN LIQUIDATION)

VG 395 of 1997

BRANSON, SACKVILLE & FINKELSTEIN JJ

MELBOURNE

24 JULY 1998

THE COURT ORDERS THAT:

1.         The appeal be dismissed

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

REASONS FOR JUDGMENT (EX TEMPORE)

THE COURT:  This is an appeal from an order of the Court constituted by Heerey J that the estate of the appellant be sequestrated.  The petition which founded the order was based upon the failure by the appellant to comply with a bankruptcy notice said to have been served in accordance with an order for substituted service made by a registrar of the Court.  The order required service of the bankruptcy notice to be effected by posting a copy of the notice and a copy of the order for substituted service to the appellant at 10 Taylor Court, Highton and by handing a letter addressed to the appellant containing a copy of the bankruptcy notice and a copy of the order to a person apparently over the age of 16 years and apparently residing at that address.

The respondent had obtained a judgment against the appellant in the Supreme Court of Victoria in the amount of $1,014,682.19 together with costs.  The bankruptcy notice required the appellant to pay or secure the payment of the judgment debt but the appellant failed to do so.  Hence the respondent presented its petition. 

At the hearing below the appellant opposed the making of the sequestration order on two grounds.  First it was alleged that service of the bankruptcy notice had not been effected in accordance with the order for substituted service in that there had been no copy bankruptcy notice and no copy order for substituted service served on a person at 10 Taylor Court.  Secondly, it was alleged that the appellant had a good cause of action for damages against the respondent in an amount that is by no means clear but presumably was said to exceed the amount of the judgment debt.

In relation to the service of the bankruptcy notice the respondent relied upon an affidavit sworn by a process server who deposed that he had given to the appellant’s wife a letter addressed to the appellant containing a copy bankruptcy notice and a copy order for substituted service.  The appellant filed an affidavit by his wife wherein she denied that she had been handed the letter and deposed that the only relevant documents that had been served were those that were left in the letterbox at 10 Taylor Court.  The appellant also filed a number of affidavits to support his second ground of opposition.  What these affidavits and other material that was before the Court show is set out below.

The appellant and his wife had taken a loan from the respondent the repayment of which was secured by mortgage over a property at 77 Barrabool Road, Geelong.  The appellant, the appellant and his wife jointly and the appellant and one Bernard Love jointly had also borrowed money from Geelong Building Society.  There were five loans taken from that building society.  The repayment of each loan from Geelong Building Society was also secured by a mortgage over real property.  It appears that there was a separate mortgage for each loan. 

In 1991 Geelong Building Society instituted two proceedings in the Supreme Court of Victoria, one wherein the appellant was the defendant and the other wherein the appellant and Bernard Love were the defendants.  By each proceeding Geelong Building Society sought to recover possession of the properties that had been mortgaged to it to secure the repayment of the loans that had been made to the appellant and to the appellant and Bernard Love jointly.  Geelong Building Society alleged that there had been default under the loan agreements that entitled it to obtain possession of the mortgaged land.

The main ground of defence taken in both proceedings was that the building society had no power to make commercial loans, that the loans to the appellant and the appellant and Bernard Love were commercial loans and accordingly the mortgages were void and unenforceable.  It was also alleged that the building society had failed to comply with a number of the provisions of the Building Societies Act 1986 (Vic) with the consequence, so it was said, that the mortgages were illegal and therefore unenforceable. 

Geelong Building Society applied for summary judgment in both proceedings before a master of the Supreme Court of Victoria.  The master refused to grant that relief.  On appeal to a single judge of the Supreme Court, Byrne J, the decision of the master was reversed and judgment for possession was entered against the defendants.  Byrne J held that the defendants had no arguable defence to the claims for possession made against them.  Appeals to the Full Court of the Supreme Court of Victoria were subsequently dismissed.

In 1992 the building societies, that is, Geelong Building Society and the respondent, commenced a further proceeding against the appellant, his wife and Bernard Love.  In that proceeding the building societies sought to recover the amount of the outstanding loans due to them by the appellant.  It was in that proceeding that the respondent obtained its judgment against the appellant.  That judgment was obtained on an application for summary judgment.  The appellant had attempted to defend the application for summary judgment on the same grounds as he had sought to defend the actions for possession of the mortgaged land.  The appellant also contended that he had a claim in damages against the building societies arising out of the manner in which they had disposed of the mortgaged land.  The appellant led evidence to the effect that the building societies had failed to obtain reasonable prices for the mortgaged land as a consequence of their negligent conduct in the preparation for sale, marketing and sale of the land.  Notwithstanding these allegations, judgment was entered against the appellant in the amount claimed. 

At the trial of this proceeding Heerey J first considered whether the bankruptcy notice had been properly served.  The affidavits dealing with this issue were read and the deponents gave evidence.  Each of them was cross-examined.  At the conclusion of their evidence his Honour said:

“I'm satisfied that the bankruptcy notice was served in the way described by the process server.  I accept his evidence.  It would be inherently unlikely for a professional process server to so clearly disregard the directions of service of an important document like a bankruptcy notice in the way suggested.”

His Honour then considered whether the appellant had a claim for damages against the respondent.  The reason for considering this matter is as follows.  Section 51(1) of the Bankruptcy Act 1966 (Cth) sets out the matters that a petitioner must prove before a sequestration order will be made.  Those matters are proof of the matters stated in the petition, proof of the service of the petition and proof of the fact that the debt on which the petitioner relies is still owing. 

However, even if each of these matters is proved, the Court retains a discretion whether or not to make a sequestration order.  Section 52(2) of the Bankruptcy Act provides that the Court may dismiss a petition if it satisfied by the debtor that he is able to pay his debts or "for other sufficient cause" an order should not be made.  There is no doubt that if a debtor has a legitimate claim against his judgment creditor for an amount that is equal to or exceeds the debt due to the creditor that is often a good reason why a sequestration order should not be made: see generally Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25.

The mere assertion of the existence of a claim will not usually be sufficient to avoid a sequestration order being made. Nor would it be sufficient for a debtor to show that he has a claim against his judgment creditor but that the amount of that claim is less than the amount of a petitioning creditor's judgment debt.  In that event the proper course for a debtor to take, if he wishes to avoid a sequestration order, is to pay the difference between the amount of the judgment debt and the amount which it seems probable he will recover in proceedings against the petitioning creditor: see Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116. 

Having considered the evidence concerning the claims alleged to exist against the building societies, Heerey J said:

“The complaints made by the debtor are, in essence, speculative; that had different decisions been made as to the tenanting of the properties or the marketing of them a higher price might have been received.  But having regard to the overall amount of the debt, it seems unlikely in the extreme that the matters relied on would have made any practical difference.”

Although on this appeal no complaint was made about this finding we should record, having read the evidence, that in our view his Honour was plainly correct.  It must be remembered that of the six properties mortgaged to the building societies five, or perhaps even six, were sold by Geelong Building Society.  Only one property had been mortgaged to the respondent - that is the property at 77 Barrabool Road.  It seems likely, although it is by no means clear, that this property was also sold by Geelong Building Society pursuant to a first mortgage which Geelong Building Society held over the property.

The result is that even if the appellant has a good claim for damages for misconduct in the sale of the mortgaged properties that claim, or the substantial portion of that claim, is one that lies against Geelong Building Society.  In that circumstance, even if the appellant has a claim against the respondent arising out of the sale of 77 Barrabool Road property the quantum of that claim could not equal or exceed the amount of the judgment debt. 

Before this Court the appellant, who appeared in person as he did in the court below, relies on two or perhaps three grounds to challenge the order of Heerey J.  First he says that he was entitled to have a solicitor represent him at the hearing before Heerey J.  The notice of appeal states that a solicitor was needed because the appellant has a good claim against the respondent and Geelong Building Society and has been unfairly treated by them.  It may be that this last mentioned proposition should be taken as a second ground of appeal namely that by reason of the existence of a cause of action against the respondent the learned trial judge did not properly exercise his discretion when considering whether to make the sequestration order.  Finally, the appellant says that his Honour erred in accepting the evidence of the process server concerning the service of the bankruptcy notice.

Each of these grounds of appeal can be disposed of briefly.  The first ground is, if we might say so, somewhat difficult to follow.  It seems to assume that the appellant had a right to legal representation and because he appeared unrepresented the trial judge should have adjourned the case pending legal representation being obtained or that the trial judge should have taken some other step to secure that representation for the appellant.  Indeed, before us the appellant suggested that it would have been “fair” if the respondent had provided legal representation on the appellant's behalf.

Whether fair or not, the argument involves misconception.  The misconception is that a party in a civil proceeding has some right to be represented by a legal practitioner.  Our law knows no such right in a civil proceeding. 

It may be that the appellant's complaint should be understood to mean that he had requested the trial judge to adjourn the further hearing of the petition in order to enable the appellant to obtain representation.  Our reading of the transcript of the proceedings suggests that no such request was made, certainly not expressly and, in our view, not impliedly.  Even if there had been a request for an adjournment it does not really advance the appellant's position.  No adjournment would have been granted because the appellant had not given any explanation why he was not represented at the hearing and did not put forward material to show that it was at least likely that he would be represented on an adjourned day.   

In any event, it seems to us that the appellant was not disadvantaged in any way by the absence of legal representation.  First, most of the affidavits upon which he placed reliance had been prepared by his legal advisers for use in the proceedings in the Supreme Court.  Second, the transcript reveals that respondents’ counsel explained to the learned trial judge the nature of the claims that the appellant was seeking to assert against the two building societies and the learned trial judge read the affidavits himself.  Third, the fact is that the affidavits failed to demonstrate that the appellant had a claim against the respondent for an amount that was equal to or greater than the quantum of the judgment debt obtained against him.  This is not a matter that could have been cured even by the most competent of counsel.

The final alleged error is that the trial judge wrongly rejected the evidence of the appellant's wife concerning the service of the bankruptcy notice.  It is apparent from the brief reasons given by the learned trial judge that his Honour accepted the evidence of the process server, in part at least for the reason that he appeared to the trial judge to be a witness of truth.  It is true that his Honour also took into account other circumstances, namely the unlikelihood of a process server serving a bankruptcy notice in an irregular way.  Nevertheless once it appears that his Honour based his findings on his observation of a witness it is only possible for a court sitting on appeal to overturn the trial judge's findings if those findings were not reasonably open: see Devries v Australian National Railways Commission (1993) 177 CLR 472 at 483.  Sometimes it is said that it is necessary to show that the finding was "glaringly improbable" before it could be set aside: see Brunskill v Sovereign Marine and General Insurance Co Pty Ltd (1985) 59 ALJR 842 at 844.  There is nothing "glaringly improbable" about the findings made by the trial judge.  His Honour had before him two inconsistent versions of what had occurred.  His Honour had to choose between those versions.  He could have accepted either, but preferred the evidence of the process server and did so based on his impressions of the witness.  In this connection, no error is demonstrated. 

Accordingly, the appeal should be dismissed.

Associate:

Dated:              14 August 1998