FEDERAL COURT OF AUSTRALIA

Chancliff Holdings Pty Ltd v Bell [1999] FCA 1708

BANKRUPTCY – review of decision of Registrar - sequestration order – whether satisfactory proof of judgment debt – power of court to go behind judgment – s 52 Bankruptcy Act

Bankruptcy Act 1966 (Cth) ss 40 (1)(g), 41, 43, 52 (1), 52 (2)(b)

Federal Court Rules O 77, rr 7, 8 and 11 (2), O 80, rr 9 (1), 9 (2)

The Ardandhu (1887) 12 App Cas 256 cited

Ex parte Connor; In re Lennox (1816) 16 QBD 315 cited

Wren v Mahoney (1972) 126 CLR 212 cited

Corney v Brien (1951) 84 CLR 343 cited

Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 cited

Re Wong; Ex parte Kitson (1979) 27 ALR 405 cited

Ex parte Kibble; In re Onslow (1875) LR 10 Ch 373 cited

Re Vitoria; Ex parte Vitoria [1894] 2 QB 387 cited

King v Henderson [1898] AC 270 cited

Monroe Schneider Associates v No 1 Raberem Pty Ltd (No2) (1992) 37 FCR 234 cited Bourke v Beneficial Finance Corporation Ltd (1993) 47 FCR 264 cited

Kirk v Ashdown [1999] FCA 522 cited

Mills Conduit Investment Ltd v Leslie [1932] 1 KB 233 cited

Petrie v Redmond (1942) 13 ABC 44 cited

In re Hawkins; Ex parte Troup [1895] 1 QB 404 cited

Simon v O’Gorman Pty Ltd (1879) 27 ALR 619 cited

In re Beauchamp; Ex parte Beauchamp [1904] 1 KB 572 cited

Ex parte Banner; In re Blythe (1881) LR 17 Ch D 480 cited

In re A Debtor [1929] 1 Ch 125 cited

Waugh v H B Clifford & Sons Ltd [1982] Ch 374 cited

Wigan v Edwards (1973) 1 ALR 497 cited

Roberts v Gippsland Agricultural and Earth Moving Contracting Co Pty Ltd [1956] VLR 555 cited

BC Cairns Australian Civil Procedure (3^rd ed, Law Book Company, Sydney, 1992)

WD Edwards The Law Relating to the Compromise of Litigation, Disputes and Differences (Sweet & Maxwell Ltd, London, 1925)

CHANCLIFF HOLDINGS PTY LTD v SONJA ALICJA BELL

LEE J

8 DECEMBER 1999

PERTH

THE COURT ORDERS THAT:

1.      The orders of the Deputy Registrar, made 19 January 1999, that the estate of the respondent be sequestrated and the costs of the applicant be taxed and paid therefrom, be set aside.

2.      The petition for bankruptcy be dismissed.

3.      The parties file submissions as to costs.

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

REASONS FOR JUDGMENT

1                     On 3 December 1998 the applicant (“Chancliff”), by a creditor’s petition, sought a sequestration order against the estate of the respondent (“Ms Bell”) pursuant to s 43 of the Bankruptcy Act 1966 (Cth) (“the Act”).

2                     Chancliff alleged that under s 40(1)(g) of the Act Ms Bell had committed an act of bankruptcy by failing to comply with the requirements of a bankruptcy notice issued by the Official Receiver to Ms Bell on 2 September 1998 on the application of Chancliff made according to s 41 of the Act.  Chancliff claimed that Ms Bell owed it a debt of $110,000 and that it had obtained a judgment against Ms Bell in the Supreme Court of Western Australia in that sum on 2 July 1998.

3                     Pursuant to O 77 r 11 (2) of the Federal Court Rules (“the Rules”) Ms Bell filed a notice stating grounds of her opposition to the petition and an affidavit in support of that notice.  In substance the notice of opposition to the petition denied that Ms Bell owed the debt claimed by Chancliff.

4                     On 19 January 1999 Ms Bell was made bankrupt by a sequestration order made by a Deputy Registrar of this Court pursuant to authority provided under O 77 r 7 of the Rules.  Under O 77 r 8 Ms Bell applied for review of the Registrar’s decision.

5                     When Ms Bell’s application for review was brought before the Court for directions an order was made that Ms Bell, who appeared on her own behalf, receive assistance from a legal practitioner pursuant to the pro bono scheme conducted by the Court under O 80 of the Rules.  In due course counsel took instructions to appear for Ms Bell at the review hearing.  Meanwhile, Ms Bell prepared and filed the affidavits to be used in presentation of her case at the hearing.

6                     The evidence received at the review hearing consisted of affidavits and viva voce evidence adduced from Ms Bell, Mr Rigby (a solicitor who acted for Ms Bell at material times) and Mr Yin (counsel instructed by Mr Rigby).

7                     I find the relevant facts to be as follows.

8                     Between 1976 and 1989 Ms Bell lived with a Mr Nelley as husband and wife.  They resided in Geraldton where Mr Nelley was a crew-hand on a fishing vessel.  In the course of their relationship Mr Nelley obtained his “skipper’s ticket” and in 1985 purchased a licensed fishing boat.  Ms Bell provided some funds to assist Mr Nelley to purchase the vessel but did not have an interest in the vessel as owner, nor any security to protect the sum she had advanced.  Mr. Nelley used the vessel for wet line fishing and for trawling for scallops.

9                     In 1990 Mr Nelley decided to transfer his fishing business to a corporation, Tamara Pty Ltd (“Tamara”).  He approached Ms Bell and asked if she would agree to join him as a director of Tamara.  She assented.  Ms Bell was also appointed company secretary and was recorded as the holder of one of the two issued shares of the company.  Ms Bell took no part in the management of the company or in the conduct of the fishing business.

10                  Tamara became the owner of the fishing vessel and, as successor to Mr Nelley, borrowed of a sum of $110,000 from a financier (“Mercredits”), the loan being secured by a mortgage over the vessel.  Mr Nelley guaranteed repayment of the borrowing.  Ms Bell was not involved in that transaction.

11                  In December 1993, Mercredits demanded repayment of the balance of the loan then outstanding, approximately $70,000.  Mr Nelley discussed the company’s circumstances with Ms Bell.  He informed her that he intended to obtain replacement finance from within the fishing industry.

12                  Chancliff carries on business as a processor of scallops.  On 14 January 1994 a document, described as “Heads of Agreement”, was executed by Chancliff, Tamara, Mr Nelley and Ms Bell.  Mr Nelley and Ms Bell were described as “guarantors”.  The document recorded that Chancliff would lend to Tamara a sum of $70,000 in consideration for which Tamara would supply Chancliff, within 60 days of the start of the 1994 scallop fishing season, nine tonnes of scallop meat of a particular quality.  If a lesser amount was delivered the sum to be repaid was to be reduced in the same proportion as that amount bore to the amount of 9 tonnes.  As “guarantors”, Mr Nelly and Ms Bell agreed to pay Chancliff so much of the loan as remained unpaid by Tamara at the end of the 1994 calendar year.

13                  Pursuant to the above agreement Chancliff advanced to Tamara the monies required to discharge the loan from Mercredits, and Chancliff took possession of the securities held by Mercredits.  At a later date, Tamara received a further advance from Chancliff by the latter purchasing on behalf of Tamara, at a cost of $8,000, a marine engine for installation in Tamara’s vessel.

14                  The date of commencement of the 1994 scallop-fishing season was 24 March 1994.  Shortly before that date the relationship between Chancliff and Tamara soured.  Chancliff demanded that Tamara repay the sums advanced.  Chancliff boarded Tamara’s vessel and removed the engine.  On or about 18 March 1994 Chancliff returned the engine to Tamara.  Tamara obtained advice from its solicitors that it was not bound to deliver scallop meat to Chancliff and that on the 60th day after commencement of the scallop season, it could repay to Chancliff the sum borrowed, namely, $78,000.

15                  On 24 May 1994 Tamara tendered the sum of $78,000 to Chancliff in repayment of the sums advanced to it.  Chancliff refused to accept the tender.

16                  In September 1994 proceedings were commenced by Tamara, Mr Nelley and Ms Bell against Chancliff in the Supreme Court of Western Australia in which a declaration was sought that the plaintiffs had been discharged from all liability under the Heads of Agreement and an order that Chancliff deliver up, or provide discharges for, the securities handed to Chancliff by Mercredits.  Tamara sought an award of damages against Chancliff for loss Tamara claimed to have suffered by reason of the refusal by Chancliff to deliver up the security documents.  Mr Nelley and Ms Bell also sought a declaration that their liability under the agreement was limited to the sum of $70,000 referred to in the Heads of Agreement and did not include the further sum of $8,000 advanced by Chancliff.

17                  In March 1996 Chancliff accepted payment from Tamara of the sum of $78,000 and interest thereon.  It did not deliver up to Tamara the security documents in respect of the vessel.  The proceedings in the Supreme Court continued.

18                  At some time after April 1996 Tamara instructed another firm of solicitors, Haydn Rigby & Associates (Mr Rigby), to act on its behalf.  Mr Nelley instructed Mr Rigby on behalf of Tamara, himself and Ms Bell.

19                  In about May 1997 the statement of claim in the Supreme Court proceeding was amended to include a claim for loss of earnings suffered by Mr Nelley and Ms Bell by reason of the conduct of Chancliff in refusing to deliver up the security documents.

20                  Why such a claim was made on behalf of Ms Bell is difficult to understand.  It was not suggested that she was, or would have been, an employee to be remunerated by Tamara or that she had received, or could have expected to receive, earnings from Tamara by way of director’s fees.  When Ms Bell and Mr Nelley separated in 1989 Ms Bell moved to Perth with their two children.  In 1990 Mr Nelley went to Ms Bell and asked her to act as a director of Tamara because two directors were required under the law relating to corporations as it stood at that time, but it was not intended that Ms Bell take any part in the management, or business, of Tamara.  Mr Nelley was the mind and will of Tamara.

21                  In the defence and counterclaim filed by Chancliff it was claimed by Chancliff that pursuant to an agreement made between Chancliff and Tamara, Chancliff was entitled to retain the security documents as security for the performance of obligations undertaken by Tamara under that agreement.  The agreement pleaded by Chancliff was said to be partly in writing, in the Heads of Agreement, and partly oral.  Chancliff pleaded that it was a term of that agreement that Tamara supply to Chancliff 9 tonnes of scallop meat of a particular quality within 60 days of the start of the 1994 scallop fishing season.  It was said to be an oral term of the agreement that Tamara deliver to Chancliff all scallops of the required quality caught by Tamara in the 1994 season until the required quantity of scallop meat was met.  As pleaded by Chancliff, repayment by Tamara of the sum of $70,000 lent to it by Chancliff, was to be made within 4 months of the date of the advance, by Tamara delivering to Chancliff an amount of scallop meat for which Chancliff would make no payment and recover therefrom a profit of $220,000.  With respect to the further advance of $8,000 Chancliff claimed that pursuant to an agreement in writing made between Chancliff and Tamara on 18 March 1994, Tamara had agreed to repay the advance by delivering to Chancliff ½ tonne of scallop meat within 2 months.  Chancliff claimed that it had suffered loss by reason of non-delivery of scallop meat by Tamara under the agreements, in an amount of approximately $232,000.  Chancliff claimed it was entitled to retain the sum of $78,000, and interest thereon, it had received from Tamara without crediting that sum against the sum claimed as damages for breaches of contract.  On their face, the agreements pleaded by Chancliff were onerous bargains for Tamara.

22                  In so far as Chancliff’s counterclaim made any claim against Ms Bell it was as follows:

“By reason of the matters pleaded in paragraph 6 of the Amended Statement of Claim (Mr Nelley and Ms Bell) are answerable to (Chancliff) for the defaults by (Tamara) in (Tamara’s) performance of (Tamara’s) obligations under the First Agreement as pleaded in each of paragraphs 41, 42 and 43 and must indemnify (Chancliff) in relation to the loss and damage suffered by (Chancliff) as pleaded in paragraph 44.”

            The ‘loss and damage’ referred to was the sum of $220,000 referred to above.  Chancliff sought an order for damages against Ms Bell.

23                  It was conceded by counsel that “paragraph 6 of the Amended Statement of Claim” is to be taken to be a reference to paragraph 8, which read as follows:

“In further consideration of (Chancliff) making the loan to (Tamara), (Mr Nelley and Ms Bell) guaranteed repayment of the loan or such proportion as shall remain unpaid at the expiration of the 1994 calendar year.”

24                  That paragraph of the statement of claim paraphrased the relevant clause of the Heads of Agreement (clause 5) which read as follows:

“(Mr Nelley and Ms Bell) agree that Chancliff has made the loan in consideration of their undertaking to guarantee the repayment of the loan or such proportion as shall remain unpaid at the expiration of the 1994 calendar year.”

25                  The ‘loan’ described in the Heads of Agreement was a sum of $70,000 to be paid by Chancliff on Tamara’s behalf to discharge the amount owed by Tamara to the successor to Mercredits’ interest, Esanda Finance Corporation Ltd.

26                  Immediately, it is obvious that Chancliff’s counterclaim against Ms Bell could not succeed.  The terms of the “guarantee” provided to Chancliff by Ms Bell, set out in the Heads of Agreement, provided no foundation for such a counterclaim.  Clause 5 of the Heads of Agreement was in simple terms.  Ms Bell “guaranteed” repayment of such balance of the monies lent to Tamara as remained outstanding on 31 December 1994.  The plain meaning of the clause was a promise to pay a liquidated sum in the event that such sum remained undischarged by Tamara.  The obligation of the “guarantors” arose on 31 December 1994 when they became liable to repay to Chancliff the sum borrowed by Tamara, or so much thereof as remained outstanding, if, under the agreement between Chancliff and Tamara, Tamara had not discharged the repayment of the sum lent, an event contemplated by that agreement to be effected in whole or in part by Tamara by 24 May 1994.

27                  Whether the “guarantors” continued to be bound after Chancliff refused to accept repayment of the sum the subject of the “guarantee”, when that sum was tendered by Tamara to Chancliff on 24 May 1994, may have been an arguable question, but after 11 March 1996, when Chancliff accepted repayment of the sum lent with interest thereon, there could have been no argument that the “guarantors” were liable to Chancliff for the payment of that sum by Tamara.

28                  So much is acknowledged in the counterclaim against Ms Bell which does not plead that Ms Bell failed to pay such a sum but pleads, instead, that Ms Bell is “answerable” to Chancliff for the default of Tamara in performing its “obligations” under an agreement Tamara made with Chancliff, variously described in paras 41, 42 and 43 of the counterclaim as an obligation to deliver to Chancliff 9 tonnes of scallop meat within 60 days of commencement of the 1994 scallop season; an obligation to use its best endeavours to supply 9 tonnes of scallop meat; and an obligation to supply to Chancliff all of the required quality scallops caught by Tamara during the 1994 scallop season until 9 tonnes of scallop meat had been delivered.

29                  The plain meaning of the words used in clause 5 of the Heads of Agreement left no room for any suggestion that the “guarantors” undertook that Tamara would perform such obligations, of which only the first was a term set out in the Heads of Agreement, much less that they undertook that Tamara would perform obligations said by Chancliff to have been oral terms of some other agreement pleaded by Chancliff.

30                  In August 1997 Ms Bell resigned as a director and as secretary of Tamara.

31                  The Supreme Court proceeding came on for hearing on 17 November 1997.  The matter was set down to be heard over 2-3 days.  On about 12 November 1997 Mr Rigby instructed counsel, Mr Yin, to appear for his clients at the hearing.  Mr Yin had not received previous instructions in respect of the matter.  Counsel other than Mr Yin had been instructed to draw the pleadings and, apparently, to provide an opinion in respect of some aspect of the matter.  Mr Rigby did not have in trust any monies on account of counsel fees.  Mr Rigby said that counsel previously instructed had informed Mr Rigby that he was not prepared to accept a brief to appear at the hearing unless Mr Rigby held sufficient funds for those fees.

32                  The brief delivered to Mr Yin appeared to be Mr Rigby’s file and some notes.  It is not clear whether statements of evidence of proposed witnesses had been obtained and were included on the file.  Nor was it clear whether Mr Rigby had obtained an advice on evidence from counsel.  It seems that the opinion provided by counsel did not deal with the counterclaim against Ms Bell.  Mr Yin conferred with Mr Rigby, Mr Nelley and Ms Bell in his chambers on Friday, 14 November 1997 and thought he may also have met with them on Thursday, 13 November 1997.  Those parties met at Mr Rigby’s offices on Sunday, 16 November 1997.

33                  On the morning of trial counsel for Chancliff advised Mr Yin that the matter could be “settled” if the “plaintiffs” agreed to pay Chancliff $120,000 inclusive of costs.  At that time Mr Yin and Mr Rigby were with Mr Nelley and Ms Bell in Mr Yin’s chambers.  The settlement proposal was discussed.  In that discussion Ms Bell said that any settlement terms should include a provision that “the securities are lifted”.  Mr Yin, acting on instructions from Mr Nelley, informed counsel for Chancliff that the “plaintiffs” would agree to pay Chancliff $100,000 in settlement of the litigation provided securities over the vessel were “lifted” to allow finance to be raised.  Counsel for Chancliff, in a later telephone call to Mr Yin, said Chancliff would accept $110,000.  Mr Yin, acting on instructions from Mr Nelley, advised counsel for Chancliff that the “plaintiffs” would agree to pay $110,000.

34                  The exchange between counsel did not separate the action from the counterclaim.  No instructions in writing to effect compromise were obtained by Mr Rigby from Tamara, Mr Nelley or Ms Bell.  Mr Rigby conceded that no express or specific instructions were sought or obtained from Ms Bell to effect a compromise in the above terms and that at no time was she asked whether she would agree to undertake a personal liability to Chancliff in the sum of $110,000.

35                  A letter prepared by Chancliff’s solicitors and signed by counsel was forwarded to Mr Yin by facsimile transmission providing for Mr Yin as counsel to countersign the document on behalf of the “plaintiffs”.  Mr Yin did not wish to sign the letter.  Another letter was prepared by Chancliff’s solicitors and forwarded to Mr Yin’s chambers to be countersigned by Mr Rigby.  Mr Rigby signed the document.  It read as follows:

“I wish to confirm the terms upon which we have agreed to settle the matter between our respective clients set for trial today.  The terms are as follows:

1.      the plaintiffs will consent to judgment in the amount of $110,000.00 and will agree to pay that amount before 8 weeks from today’s date have elapsed, that is, on or before 12 January 1998;

2.      my client will hold the consent to judgment in escrow and will not enter it unless payment is not made within the 8 week period;

3.      my client will provide a discharge of the security documents in such manner as to allow simultaneous settlement of a re-financing of the vessel and its licences, together with payment of the judgment amount.  I anticipate that this can be done by appropriate solicitors’ undertakings; and

4.      the parties will execute a mutual general release, to be prepared by you.

Would you please sign and return a copy of this facsimile and the attached consent order to indicate your acceptance of these terms.”

36                  The “attached Consent Order” forwarded to Mr Yin with the first letter was entitled “Minute of Proposed Consent Orders” and was in the following form:

“1.       The plaintiffs pay the defendant the sum of $110,000.00, inclusive of costs, in settlement of this action.

2.                The plaintiffs file a notice of discontinuance of action.”

37                  The Minute of Proposed Consent Orders signed by Mr Rigby later that day contained the following terms:

“1.       The plaintiffs pay the defendant the sum of $110,000.00, inclusive of costs, in settlement of this action.

 2.        The defendant’s counterclaim be dismissed.

3.                The plaintiffs file a notice of discontinuance of action.”

38                  Neither Mr Yin or Mr Rigby could recall how the provision for dismissal of the counterclaim came to be added.

39                  When the matter was called on for hearing before a Judge of the Supreme Court on 17 November 1997 counsel for the parties advised the court that the matter had been “settled” and requested that trial dates be vacated and the matter adjourned.  The court ordered that the action be removed from the trial list and relisted for mention in court on 12 January 1998.

40                  At the time he instructed Mr Yin, I believe that Mr Rigby had formed the view that the litigation had to be compromised.  Mr Rigby accepted that Tamara and Mr Nelley could succeed in obtaining an order against Chancliff for delivery up of the security documents but neither they, nor Ms Bell, had any prospect of obtaining an order against Chancliff for the payment of damages.  No analysis had been made of the substance of Chancliff’s separate counterclaim against Mr Nelley and Ms Bell.  So much appears from the form of the defence to the counterclaim, which, expressed in three lines as a joint defence of Tamara, Mr Nelley and Ms Bell, consisted of a bare denial of liability.

41                  Mr Rigby held no funds with which to pay counsel and had no belief that his clients could recover monies in the litigation.  He was aware that Tamara’s vessel had been seized already by a third party.  The circumstances in which Mr Yin received Mr Rigby’s file at short notice do not suggest that the matter was well-prepared for a 2-3 day trial.  Mr Rigby thought that if the matter went to trial Chancliff would succeed in obtaining a judgment against Tamara on the counterclaim.  Mr Nelley, as sole director and controller of Tamara, and Tamara were regarded as one in that consideration.  The separate position of Ms Bell was not examined and, in effect, was ignored.  Mr Yin said that in conference with Mr Nelley and Ms Bell on the day before trial he had said to Mr Nelley and Ms Bell that Chancliff ‘probably won’t get home’ on its counterclaim against them but conceded that no consideration was given to Ms Bell’s position separately from that of Tamara or Mr Nelley.  Mr Rigby, however, said that he “didn’t feel that there was a defence that could be run” by Mr Nelley and Ms Bell.  I am satisfied that if the prospect of Ms Bell defending the counterclaim was raised, it occurred in only a most oblique manner and no advice was given to Ms Bell that the counterclaim against her could not succeed.  Mr Rigby stated that he believed that Ms Bell had no defence unless Tamara had a defence.  It would not have been in the forefront of Mr Rigby’s mind to provide advice to Ms Bell that her position in respect of the counterclaim was separate from that of Tamara.  Indeed Mr Rigby conceded that he did not address that question and that he treated Tamara and Ms Bell as one on that issue. Mr Rigby faced a conflict between his own interests and those of his respective clients and there was a potential conflict between the interests of Ms Bell and those of Mr Nelley and Tamara.  Mr Rigby was not assisted in dealing with those matters by failing to appreciate that Chancliff’s counterclaim against Ms Bell was without substance.

42                  As far as Ms Bell was concerned her connection with the litigation was tenuous.  She had only a nominal interest as plaintiff and the need for any declaration as to the monetary limit on her personal liability as a guarantor had fallen away when the sum guaranteed was repaid in March 1996.

43                  The instructions received by Mr Yin and Mr Rigby in respect of settlement, were sought, and obtained, from Mr Nelley.  Ms Bell was not advised that she would have a personal liability in the matter, for which her separate instructions would be required.  Mr Rigby said that at one point Ms Bell asked, “Do we have to sign anything?” to which Mr Rigby responded, “No, I can sign the documentation on your behalf.”  That response became mutated in Ms Bell’s recollection as advice that she did not have to sign or agree to anything, but the enquiry she directed to Mr Rigby was not inconsistent with a belief on her part that the settlement proposal on which instructions were being sought from Mr Nelley did not entail personal liability for her as a ‘plaintiff’, but involved liability for her associates, Mr Nelley and Tamara, as the ‘plaintiffs’ who had dealt with Chancliff.  Indeed if Ms Bell was informed that a term of the proposed settlement was that the counterclaim was to be dismissed such an understanding on her part could only have been reinforced.  Mr Rigby said that he paraphrased to all present the terms of settlement set out by Chancliff’s solicitors in the letter they had forwarded to him by facsimile transmission.  That action did not provide to Ms Bell any further explanation of the terms of compromise that had been discussed by counsel, and, in particular, did not draw her attention to the fact that she would be undertaking a personal liability to Chancliff.

44                  Mr Yin said that in the course of, or after, the settlement discussions he had said to those present at his chambers words to the effect “if you don’t find the money you’ll all be in trouble”.  That, of course, was said in the context of Mr Nelley having decided that such a sum could be raised by him, or Tamara, and Mr Nelley instructing Mr Yin and Mr Rigby to arrange a settlement in which such a sum would be paid on delivery-up of the securities.  Mr Yin’s remark was not a comment made after specific instructions had been sought and obtained from Ms Bell and was insufficient to inform Ms Bell that the proposed compromise would involve a personal undertaking by her to pay to Chancliff the sum Mr Nelley had agreed to pay.

45                  Ms Bell asserted in her evidence that she had said to Mr Rigby she would not agree to anything and that he would be signing only for Mr Nelley and Tamara.  I accept that Ms Bell assumed that the proposed compromise involved only Mr Nelley and Tamara in respect of the payment of money to Chancliff and that Mr Rigby would “sign” on behalf of Mr Nelley and Tamara, but her recollection that she had given expression to that assumption is incorrect.  Mr Yin did not recall such a statement being made by Ms Bell and I would expect that if it had happened it would have been noted and recalled by him.

46                  Any settlement proposal which included a proposition that Ms Bell be liable for the payment of a sum of money to Chancliff would have obliged Mr Rigby to provide appropriate advice.  Proper advice to Ms Bell would have raised for consideration whether the least she could expect by way of a compromise would be termination of the litigation without orders being made for or against her.

47                  Ms Bell should have been advised that as a ‘plaintiff’ she had no liability to Chancliff and that Chancliff’s claim against her by counterclaim could not succeed.  It was not suggested at any time that Ms Bell had a liability to Chancliff in respect of the costs of the action in which she was a plaintiff.  It seems that the settlement proposed by Chancliff, however expressed, was directed to the recovery by Chancliff of monies it claimed by counterclaim and costs thereon. Chancliff’s costs in defending the action brought by Tamara and others was not an issue in the settlement discussions.  In any event, if the prospect of Ms Bell being liable for costs as an unsuccessful plaintiff had been raised, she would not have been advised that such a consequence was inevitable, for Mr Rigby understood that Tamara had a strong case on a substantial issue in the plaintiffs’ claim, namely, Tamara’s right to recover the security documents.  Furthermore, Mr Rigby would have been required to provide advice to Ms Bell that any potential liability for costs as a plaintiff was likely to be offset by her entitlement to an order for costs against Chancliff on the counterclaim.

48                  In summary Ms Bell should have been advised separately that she had no liability to Chancliff in respect of which it could be said that a proposal that she undertake to pay to Chancliff $110,000 could be said to be a compromise in her interest.  Such separate advice should have informed Ms Bell that in any settlement negotiations she was entitled to insist on an outcome that, for her, had a neutral result.  She should have been informed that if she joined in the compromise by agreeing to pay Chancliff a sum of $110,000, in effect she would be undertaking a fresh personal liability to Chancliff by reason of that compromise and should consider whether her interests would be served by doing so and whether she had the means to meet that liability.  Ms Bell had no assets and the only income she received was a sole-parent pension and income from part-time work, applied to the maintainance of herself and her two children, aged 15 and 14.

49                  None of these matters was discussed with Ms Bell.  No advice at all was provided to her from which she may have determined how she should respond to the proposed compromise or whether the proposal was in her interest.  Ms Bell was not asked whether she agreed to accept personal liability under the compromise to pay a sum of $110,000 to Chancliff.  Her acquiescence was assumed, notwithstanding that she had not received advice from Mr Rigby pursuant to the duty he owed to her to put her in a position to enable her to make an informed decision on the matter.

50                  On 3 December 1997 Mr Rigby forwarded to Chancliff’s solicitors a draft “Deed of Settlement” for their “consideration and comment”.  The recitals to the draft Deed were as follows:

“A.      The Plaintiffs have brought the Action against the Defendant;

 B.        The Defendant has brought the Counterclaim against the Plaintiffs;

C.              The Plaintiffs and the Defendant have agreed to settle the Action and the Counterclaim on the terms and conditions of this Deed;”

51                  The draft Deed provided that Tamara, Mr Nelley, and Ms Bell would do all things, and execute all instruments, necessary to consent to judgment being entered against them in the sum of $110,000 provided that Chancliff’s solicitors held such consent to judgment “in escrow” until 12 January 1998.  Other terms were that Tamara, Mr Nelley and Ms Bell would file a notice of discontinuance of their action against Chancliff as soon as practicable after execution of the deed, whereupon Chancliff was to file, simultaneously, notice of discontinuance of its counterclaim.

52                  How such a Deed could have operated according to its terms is not clear.  If the parties filed discontinuance of their respective claims upon execution of the Deed, a consent to judgment, whether executed thereafter or executed before the action and counterclaim were discontinued and held “in escrow”, would have no proceeding on foot in respect of which it could apply.  That suggests that the ‘consent to judgment’ referred to in the draft Deed would be no more than an acknowledgment of liability under the Deed upon which Chancliff could sue if the sum were not paid.

53                  On 12 December 1997 Chancliff’s solicitors returned the draft with amendments said to “bring the release in line with our agreement”.  The amendments were significant.

54                  First, a clause was introduced to provide for payment of the “Settlement Sum” on a “Settlement Date”.  The Settlement Sum was $110,000 and the Settlement Date was 12 January 1998.  The clause provided that in consideration of the payment of the Settlement Sum Chancliff would provide to Tamara, Mr Nelley and Ms Bell a signed discharge of the “Securities Documents”, defined as a bill of sale and a debenture assigned to Chancliff by Mercredits and blank applications for a transfer of boat licence and transfer of fishing boat apparently executed by Tamara.  The clause did not provide that Chancliff was to deliver-up the securities in exchange for payment of the Settlement Sum.

55                  Second, the amendments proposed by Chancliff’s solicitors deleted the reference to a consent to judgment being held “in escrow” and provided that Tamara, Mr Nelley and Ms Bell would do all things and execute all instruments, necessary to consent to judgment being entered against them “in the event that the Settlement Sum is not paid on the Settlement Date”.

56                  Third, the draft was further amended to provide that discontinuance of the counterclaim would occur only upon payment of the Settlement Sum.  If the Settlement Sum were not paid Chancliff could resume prosecution of the counterclaim by entering judgment pursuant to the consent to judgment Tamara, Mr Nelley, and Ms Bell were obliged to provide in the event that the Settlement Sum were not paid on the Settlement Date.

57                  The draft was further amended to provide that the counterclaim could be further prosecuted by Chancliff taking all steps lawfully available to it, “including the enforcement of the Security Documents, so as to recover the Settlement Sum”.

58                  The draft Deed prepared by Mr Rigby provided that execution of the Deed released Chancliff from all claims arising from the action, and Tamara, Mr Nelley and Ms Bell from all claims arising from the counterclaim.  That was amended by Chancliff’s solicitors to provide that execution of the Deed released Chancliff from all claims but only payment of the Settlement Sum on the Settlement Date would release Tamara, Mr Nelley and Ms Bell from claims arising under the counterclaim.

59                  On 23 December 1997 Mr Rigby advised that subject to his client’s comments he agreed to the proposed changes to his draft and would endeavour to provide Chancliff’s solicitors with “execution copies” by the following day.  On 24 December 1997 he forwarded to Chancliff’s solicitors an engrossed Deed for execution and return for execution by his clients.  At that time Mr Rigby had no instructions from his clients that they approved the Deed as amended.

60                  On 29 December 1997 Chancliff’s solicitors returned the engrossed copies to Mr Rigby, unexecuted, advising that the solicitor handling the matter was on leave until 12 January 1998.  Although the firm held a power of attorney authorising it to execute the Deed on behalf of Chancliff it preferred to await the return of the solicitor from leave and asked that, meanwhile, Mr Rigby have the Deed executed by his clients.

61                  On 5 January 1998 Mr Rigby forwarded the engrossed Deed to Tamara, at Ms Bell’s address, for execution.  That brought the following response from Miss Bell on behalf of Mr Nelley by facsimile-transmitted letter dated 6 January 1998:

“Re:  Settlement Deed

John refuses to sign the documents handing further power to Rowe.  He agreed to raise the $110,000.00 to have the action stopped and that is all.  Unless some other deed stating this fact is presented the issue regarding the Security Documents being held by Rowe will be brought before the court when he applies for judgement.

Please rectify the mistakes in this deed immediately.

Johns (sic) address is 74 Griffin Crescent Manning  Tamara P/L (Reg Office) 5 Charles St. South Perth.”

62                  Mr Rigby did not seek further instructions from Mr Nelley, or Ms Bell, in respect of Mr Nelley’s objection to executing the Deed.

63                  On 8 January 1998 Mr Rigby wrote to Chancliff’s solicitors in the following terms:

“Further to our telephone discussion today, I confirm that my clients have, contrary to my advice, refused to sign the Settlement Deeds.

However, the proposed Consent Orders being held in escrow by yourselves until 12 January 1998 (a copy of which you have provided me with) will be effective after that date regardless of my clients’ stance vis-à-vis the signing of the Settlement Deed.”

64                  It is difficult to understand why Mr Rigby informed Chancliff’s solicitors that his clients had been advised by him that they should sign the Deed as engrossed.  In fact no advice had been given to Tamara, Mr Nelley, or Ms Bell by Mr Rigby in respect of the terms of the Deed as amended by Chancliff.  Similarly, it is not easy to discern how it was thought the interests of his clients would be advanced by volunteering to Chancliff’s solicitors the opinion that his clients would be bound by the “proposed Consent Orders” if they did not sign the “Settlement Deed”.  The document described as a Minute of Proposed Consent Orders signed by Mr Rigby was, on either version of the proposed Deed, inappropriate for entry of a judgment by consent and was, instead, a partial record of terms of an agreement under which the trial dates would be vacated and the proceedings adjourned, upon the “plaintiffs” agreeing to pay to Chancliff $110,000 by 12 January 1998.  According to the draft Deed prepared by Mr Rigby the proceedings would be terminated upon execution of the Deed, by each party filing, forthwith, notices of discontinuance and in place of the counterclaim Chancliff would have promises under the Deed from the defendants to the counterclaim, to pay to Chancliff a sum of $110,000.  Chancliff’s solicitors, by the amendments they made to the draft Deed, submitted another form of accord, namely, that the “plaintiffs” agreed to discontinue their action and released Chancliff from all claims upon execution of the Deed and, as defendants to the counterclaim, agreed to provide a consent to judgment being entered against them on the counterclaim if they had not paid the sum of $110,000 to Chancliff by 12 January 1998.  Neither form of the proposed Deed was consistent with the “Minute of Proposed Consent Orders” which purported to record an agreement that the counterclaim was to be dismissed.

65                  If, before writing that letter, Mr Rigby considered that he could no longer act for Tamara, or Mr Nelley, or Ms Bell, and that he was entitled to terminate his retainer, he should have so acted and advised Chancliff’s solicitors accordingly.  Alternatively, if he felt he could no longer carry out his duties to his clients pursuant to the obligations of his retainer he should have informed his clients accordingly and asked that they instruct other solicitors, and should have refrained from communicating with Chancliff’s solicitors until appropriately instructed.

66                  If he continued to act for his clients, Mr Rigby should have examined Mr Nelley’s objection to executing the Deed and provided advice to him thereon and determined whether the Deed required further amendment to reflect the agreement either made, or contemplated, by the parties.

67                  In particular, Mr Rigby should have been aware that the introduction of a provision in the Deed enabling Chancliff to enforce the “Security Documents” to recover the “Settlement Sum” if that sum were not paid on the “Settlement Date”, was not a term of the proposed compromise discussed by counsel.  Mr Nelley would have been entitled to receive appropriate advice from Mr Rigby on that matter.  On the limited material before the Court it seems to have been more than arguable that the “Security Documents” did not provide any right in Chancliff to enforce the securities for non-performance by Tamara of terms of the agreement made between Chancliff and Tamara to which the litigation related, and the proposed amendment to the Deed, to purportedly extend Chancliff’s right to execute the securities to enforce a term of the compromise, was not only not part of the compromise but was a proposal to which Mr Nelley would be likely to object.

68                  The explanation offered by Mr Rigby was that he was “annoyed” with his clients.

69                  On 8 January 1998 Tamara appointed an Administrator.  No payment was made to Chancliff on 12 January 1998.  On about 24 April 1998 Tamara was placed in liquidation. 

70                  In June 1998 Chancliff made application to the Supreme Court for leave to proceed against Tamara by “filing a Minute of Proposed Consent Orders” and by “extracting the judgment contemplated by the Minute of Proposed Consent Orders”.  It appears that Mr Rigby remained on the record in the Supreme Court proceeding as solicitor for Tamara, Mr Nelley and Ms Bell although he may have ceased to act for Ms Bell as of that date.  Ms Bell, who had received from Mr Rigby a copy of Chancliff’s application for leave to proceed against Tamara, advised Chancliff’s solicitors that the time appointed for hearing the application was not suitable to her and asked if another time could be arranged.  Chancliff’s solicitors advised they wished to proceed with the application on the date listed.

71                  The application was heard in the absence of Ms Bell and leave was granted to Chancliff as sought in the application.  One of the reasons expressed by the Master for granting leave was that entry of judgment in terms of the “Minute of Proposed Consent Orders” would enable Chancliff to proceed further against Ms Bell.  Whether the Minute was appropriate for the entry of judgment by consent was not canvassed.  On 2 July 1998 judgment was entered in terms of the Minute set out earlier in these reasons.

72                  The bankruptcy notice dated 2 September 1998 directed to Ms Bell followed.

73                  On 25 September 1998 Ms Bell, acting on her own behalf, made application in the Supreme Court to have the judgment entered against her on 2 July 1998 set aside.  On 9 October 1998 the application was heard and dismissed by an Acting Master.

74                  Before considering when the Court may go behind a judgment of record, it is necessary to identify the terms of the compromise, if any, made by counsel on behalf of the parties, on which the judgment is based.

75                  Was there an agreement to settle the litigation only on terms to be agreed and set out in a Deed, or had terms been agreed on which the proceeding, in whole or in part, was to be brought to an end.

76                  Recital C to the draft Deed, confirmed by the solicitors for the parties as reflecting the intentions of their clients, suggests the former, whilst other material suggests the latter, such material being the letter “confirming” the agreement; the Minute; and the draft Deed and amendments thereto.

77                  First, it can be concluded that it had not been agreed that proceedings in the claim and counterclaim were at an end and the parties thereto released from all claims.  No more had been agreed in that respect than the proceedings were to stand adjourned pending payment of the sum of $110,000 to Chancliff by 12 January 1998.

78                  Second, it seems to have been agreed that if the sum of $110,000 was not paid to Chancliff on 12 January 1998, Chancliff could enter for judgment on its counterclaim without being obliged to deliver up the security documents.  It would seem, therefore, that Tamara’s action would remain a live proceeding.  The obligation of Tamara to discontinue its action would arise only if a Deed providing for the same were executed by Tamara, or if the security documents were delivered to Tamara, or discharged, as part of settlement of the payment of $110,000.

79                  In their discussion of settlement counsel did not address what was to happen to Tamara’s action if no payment was made by Tamara on 12 January 1998.  The provision that the action be discontinued was predicated upon finance being obtained to make the payment of $110,000 to Chancliff in exchange for the security documents.  No consideration was given to what would happen to the action if Tamara failed to obtain those funds.  In that respect no more can be drawn from the evidence presented than that Tamara had agreed that judgment could be entered against it on the counterclaim but had not abandoned its claim that Chancliff was obliged to deliver up the security documents.

80                  It may have been open to Tamara to continue its action, and seek a stay of execution of the judgment entered against it on the counterclaim until its claim to the right to have the security documents returned to it was determined.

81                  The letter from Chancliff’s solicitors, purporting to record the agreement reached between counsel, does not refer to the action, or to discontinuance thereof.  It refers to a “mutual general release” to be prepared.  There would seem to have been no common intention to support a “mutual general release” unless Tamara obtained the possession of the security documents, or discharge thereof.  That is, if Chancliff continued proceedings on the counterclaim by entering judgment, then, in the absence of a clear agreement to the contrary, Tamara would retain the right to proceed on its action for return of the security documents.  Whether Tamara could pursue its claim for damages against Chancliff would depend upon whether it was intended by the parties, as may have been the case, that the judgment on the counterclaim represent the net position of Chancliff and Tamara on money issues.

82                  No doubt if judgment were entered in the terms of the “Minute of Proposed Consent Orders” Tamara would need leave to continue proceedings in the action, instead of discontinuing it, and to support that application by showing that the terms of the Minute reflected only part of a compromise that had not terminated proceedings in the action or the counterclaim.  Even if it did file such a discontinuance it would be arguable that Tamara could start a new proceeding in any event.  (See: “The Ardandhu” (1887) 12 App Cas 256).  It is to be noted that the parties distinguished between Tamara’s action being discontinued and Chancliff’s counterclaim being dismissed.

83                  It is possible to find an agreement in limited terms, namely, one which provided for compromise of the counterclaim and which anticipated that performance of the terms of settlement of the counterclaim would resolve all claims in the action.  The elements of that agreement would seem to be as follows:

1.         Proceedings in the claim and the counterclaim were to be stayed for the time being.

2.         The “plaintiffs” were to pay $110,000 to Chancliff by 12 January 1998.

3.         Upon payment of $110,000 Chancliff would deliver up the security documents; the counterclaim would be dismissed; and the action would be discontinued.

4.         If the sum of $110,000 was not paid by 12 January 1998 judgment by consent was to be entered on the counterclaim in that amount inclusive of costs.

84                  I turn now to how a court of bankruptcy is to deal with the foregoing facts.

85                  It is clear that on the hearing of a creditor’s petition the Court has the power, or discretion, under s 52(1) of the Act to examine the circumstances out of which a judgment arose where the judgment is relied upon as proof of the existence of a debt.  For a court of bankruptcy a judgment is not necessarily conclusive of the existence of a true debt.  It must be shown to the Court, however, that there are circumstances which justify the Court going behind a judgment to examine whether in truth and reality there is a real debt underlying the judgment.  The Court may be persuaded to exercise that power more readily where the judgment relied upon is a judgment by default.  Where the judgment is the result of a trial, however, the Court may decline to exercise the power unless fraud or unconscionable conduct is suggested by the material presented

86                  The principle was stated as follows by Lord Esher M.R. in Ex parte Lennox In re Lennox (1886) 16 QBD 315 at 323:

“It cannot be doubted that a judgment is prima facie evidence of a debt, and that a judgment or order to which a debtor has consented is far stronger evidence against him of the validity of the debt for which it purports to be given than a mere judgment by default.  It is very strong evidence against him.  Nevertheless, it seems to me that, upon certain allegations being brought forward, the Court is entitled to inquire into the alleged debt, and the Court, exercising a judicial authority, is bound to do so upon a sufficient case being shewn.  Circumstances may be alleged which would shew that the judgment ought to be disregarded in bankruptcy.”

87                  Barwick C.J. amplified the point in Wren v Mahony (1972) 126 CLR 212 at 224 to 225:

“Lord Esher in emphasizing that the Bankruptcy Court did not go behind a judgment as a matter of course but only if appropriate circumstances were shown to exist, said in Re Flatau; Ex parte Scotch Whisky Distillers Ltd. (1888) 22 Q.B.D., 83 at pp 85-86:

            “There is no statute which imposes any such obligation on the Court of Bankruptcy.  Section 7 [of which s. 52(1) is a counterpart] does no more than give a discretion.”

His Lordship, in using this expression, was not intending, in my opinion, to weaken the emphasis he had always placed on the need for the Court of Bankruptcy to be satisfied of the existence of the petitioning creditor’s debt.  Rather, if one reads all his expressions in the several cases I have cited, he was pointing out that the Bankruptcy Court could in general accept a judgment debt as sufficient proof of that debt particularly where it resulted from a fully heard contest between parties but that it always had the power to go behind the judgment and if the case was a proper one, should do so.  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 not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor’s debt is a mere matter of its own discretion.  Nothing in Corney v Brien (1951) 84 C.L.R. 343 lends support for such a view.  Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor's debt.  The Court’s discretion in my opinion has a discretion to accept the judgment as satisfactory proof of that debt.  That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner.”

88                  In Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 at 148 a Full Court of this Court said as follows:

“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.”

89                  Whether the inquiry undertaken by the Court depends upon a prima facie case being shown that there are grounds to examine the reality of a debt recorded in a judgment, or upon the Court being satisfied upon preliminary investigation, of the merits of the attack on the judgment, is, perhaps, a distinction without a difference.

90                  There is no inflexible rule as to the circumstances in which the power to go behind a judgment is to be exercised, (See: Re Wong; Ex parte Kitson (1979) 27 ALR 405 per Lockhart J at 415), but it may be said that a Court will not act unless it is persuaded that there is cause to do so.  Such cause will not be demonstrated by mere complaint of dissatisfaction which does not identify material which points to the need for further inquiry to be made by the Court to ensure that the law of bankruptcy will be justly applied and not used as an instrument to further a miscarriage.

Once the Court embarks upon such an inquiry the ultimate burden of showing that it is appropriate to rely upon the judgment as proof of the debt rests upon the petitioning creditor.  (See: Corney v Brien (1951) 84 CLR 343 per Fullagar J at 358)

91                  Although a judgment entered pursuant to compromise is more than a judgment by default, it remains a form of judgment by consent to which a court of bankruptcy will more readily apply scrutiny if circumstances are shown which justify such an inquiry being made.  As Dixon, Williams, Webb and Kitto JJ stated in Corney v Brien (at 347), a judgment entered pursuant to compromise may be examined to determine whether the record of obligation to pay, relied upon as proof of existence of a debt, is in truth based upon a “real” debt which “precedes” the judgment of record:

“Section 56 (2)(a) of the Bankruptcy Act 1924 – 1950 provides that the court at the hearing shall require proof of the debt of the petitioning creditor.  Under this provision the Court of Bankruptcy has undoubted jurisdiction to go behind a judgment obtained by default or compromise or where fraud or collusion is alleged and inquire whether the judgment is founded on a real debt.”

92                  Fullagar J (at 357) added the following:

“Where judgment has been entered in pursuance of a compromise, ground must be shown for challenging the compromise as such before the subject matter of the judgment will be reopened.  But in In re Hawkins: Ex parte Troup (1895) 1 Q.B. 404, it was held that such a judgment should be reopened in circumstances which fell far short of fraud and merely persuaded the court that the compromise was unfair and unreasonable because one party knew certain relevant facts of which the other was ignorant.  Lord Esher M.R., who was possibly prepared to go a little further in those matters than some judges, said: “I myself should say that the question for the court is whether there is, or is not, a reasonable doubt that the judgment has been obtained by one side or the other fairly” (p. 409).  But Lopes L.J. agreed with him in the result, though Rigby L.J. dissented.  Where the party challenging a judgment entered on a compromise has acted on the advice of counsel, the judgment will not generally be reopened (see In re a Debtor (1929) 1 Ch. 125), but in Ex parte Banner: In re Blythe (1881) 17 Ch. D. 480, a judgment entered in pursuance of a compromise was reopened although counsel had advised the compromise.  It was held that there had been a yielding to an unjust claim through fear of disclosures which were likely to be made if the “debtor” by resisting the claim, necessarily submitted himself to cross-examination as to credit.”

93                  Having regard to the facts recited above I am satisfied that the claim that no debt underlies the consent judgment on which the petition is based, is a “bona fide” claim, and that sufficient cause has been shown to warrant the Court exercising a discretion to examine the judgment, and surrounding circumstances, to determine whether Chancliff has satisfied the Court that a “real” debt exists on which a sequestration order may be made against Ms Bell.

94                  The question determined by a court of bankruptcy is whether the court is satisfied with proof of the debt relied upon by the petitioning creditor.  (See: Ex parte Lennox per Cotton L. J. at 326-327, per Lindley L.J. at 328-329).  The court is not bound to make a sequestration order and has a discretion whether to accept a judgment as satisfactory proof of the debt relied upon to ground the petition. (See: Wren v Mahony per Barwick C. J. at 224; Ex parte Kibble; In re Onslow (1875) L.R. 10 Ch. 373).  If a judgment is not accepted as satisfactory proof of a debt, the judgment, of course, remains on foot and continues to bind the judgment debtor, estopping the debtor from saying everywhere else but in a court of bankruptcy that no debt is due to the judgment creditor.  (See: Ex parte Lennox per Lord Esher at 323; In re Vitoria; Ex parte Vitoria [1894] 2 QB 387; King v Henderson [1898] AC 720).

95                  In going behind a judgment a court of bankruptcy is not determining whether the judgment is to be set aside and is not restricted by principles relevant to that issue, namely, the existence of an equitable, or legal, right to impeach the judgment.  (See: Monroe Schneider Associates v No.1 Raberem Pty Ltd (No 2) (1992) 37 FCR 234, at 238-242; Bourke v Beneficial Finance Corporation Ltd (1993) 47 FCR 264; Kirk v Ashdown [1999] FCA 522).  However, a court may always stay a judgment obtained by consent that is inconsistent with justice, as noted by Lord Hanworth M.R. in Mills Conduit Investment Ltd v Leslie [1932] 1 KB 233 at 239:

“The consent of the parties cannot relax the duty or lessen the powers of the Court.  I would refer to the observation of Alderson B. arguendo in Wade v Simeon (1845) 13 M. & W. 647, 649:  ‘It is open to the Court, at any time before judgment signed and execution executed, to see that that which is done under the authority of the Court shall not be done unjustly.’  That dictum is given its full effect in the decision of the Court holding that a judge’s order, obtained by consent, staying proceedings upon payment of the debt and costs, could and ought to be set aside by the Court if the act was inconsistent with justice.”

96                  A sequestration order is an order which affects more than the interests of a debtor or of a petitioning creditor.  It is notice to the world of a change of a person’s status which will affect the rights, not only of that person, but of third parties.  A court of bankruptcy will not exercise the discretion to make such an order where it is satisfied that in all the circumstances, proof of the debt relied upon to ground the petition by reference to a judgment of record, should not be accepted as satisfactory proof of the debt where those circumstances demonstrate that to treat the judgment debt as a debt in truth and reality would be to promote a miscarriage of justice.  (See: Petrie v Redmond per Latham C.J. (1942) 13 ABC 44, at 49)

97                  The role of a court of bankruptcy petitioned by a creditor to make a sequestration order against a person, where the evidence of the debt relied upon is a judgment against that person obtained by compromise, is described as follows by Lord Esher M.R. in In re Hawkins Ex parte Troup [1895] 1 QB 404:

“Where a judgment has been obtained by a compromise, the Court has to say, looking at that compromise and all the facts which led up to it, whether in their opinion it is a just and proper compromise.  In one case I know it was said that the Court would go behind a judgment obtained by a compromise, and consider that compromise as one of the facts in the case.  I myself should say that the question for the Court is whether there is, or is not, a reasonable doubt that the judgment had been obtained by one side or the other fairly.  Was there a reasonable doubt at the time the compromise was made, and would the Court, when it considers the whole matter, with the knowledge it then has, have agreed to that compromise?  If the compromise is found to be a reasonable one the Court will support the judgment; but if it is found not to be a reasonable compromise, although not fraudulent, then the Court will not support the judgment.  For instance, I know we have said that though both parties to the compromise knew all the circumstances and agreed to it, yet if the Court finds that it was foolish, absurd, and improper, and one that ought not to have been made, they will not bind the whole body of creditors to the compromise.  Still more, if the Court finds that the compromise was made when one party knew all the circumstances, and the other did not, then, even if there be no fraud, the compromise cannot be a fair one.” (at 409)

“There was no good cause of action to support the judgment, if that judgment was founded on something other than the compromise.  If founded on the compromise only, it was founded on an unfair compromise.  In either of those cases the Court will not allow the judgment to be utilized for the purpose of proceedings which may result in making a man bankrupt, or for the purpose of proof of bankruptcy.” (at 410)

(See also Re Wong per Lockhart J at 415; Simon v O’Gorman Pty Ltd (1979) 27 ALR 619 per Lockhart J at 633)

98                  The exercise of a discretion not to accept a judgment as proof of the existence of a debt for the purpose of s 52 of the Act does not depend upon it being shown that the creditor has engaged in sharp practice or taken unfair advantage of the debtor in obtaining the compromise and the judgment based upon it.  If, in all the circumstances, the compromise is seen to the Court to be foolish, absurd and improper, or unreasonable, the Court may conclude that the debt recorded in the judgment is not preceded in truth and reality by a debt due to the petitioner and that the judgment should not be accepted as satisfactory proof of such a debt.  Alternatively, the debtor may satisfy the Court under s 52(2)(b) of the Act that the circumstances represent sufficient cause as to why a sequestration order ought not to be made on the creditor’s petition.  (See: In re Beauchamp Ex parte Beauchamp [1904] 1 KB 572, at 581)

99                  Going behind a judgment involves a determination by a court of bankruptcy whether it is satisfied that the consideration for the judgment was a debt due to the creditor in truth and reality.  In a bankruptcy proceeding a judgment entered pursuant to a compromise, for which there was clearly and obviously no cause of action to support it, will not be satisfactory proof of the existence of a debt, notwithstanding that the parties may have believed there was such a cause of action.  (See: Ex parte Banner In re Blythe (1881) L.R. 17 Ch. D 480 per Brett L. J. at 490)

100               The fact that counsel may have advised a party to compromise a matter will not mean that an inquiry will not be undertaken into whether a “real” debt underlies the judgment based on the compromise.  (See: Ex parte Banner per Brett L.J. at 489)  If, however, counsel has full knowledge of all relevant facts, and no suspicion of unfairness or impropriety in the compromise arises, a court may decline to go behind a judgment submitted to on the advice of counsel.  (See: In re A Debtor [1929] 1 Ch. 125)

101               Whether it appeared to the judgment creditor that counsel, or solicitor, for the judgment debtor had ostensible authority to conclude a compromise on Ms Bell’s behalf is not the issue.  (See: Waugh v H.B.Clifford & Sons Ltd [1982] Ch 374, at 387).  The question for the Court is whether after examination of the facts which led to the compromise, the Court is of the opinion that the compromise was foolish, improper, unreasonable or involved a miscarriage of justice.  The fact that Chancliff was unaware that Ms Bell was disadvantaged by breaches of duties owed to her, is only one element to be considered and does not in itself make the compromise reasonable and proper.

102               A judgment may be regarded as being based on an unreasonable compromise if the consideration for the compromise is forebearance to pursue a claim, the assertion of which is ‘incompatible with both honesty and the exercise of a reasonable degree of intelligence’.  (See: Wigan v Edwards (1973) 1 ALR 497 per Mason J at 513)

103               In this case, the circumstances in which the compromise, upon which the judgment was entered, was made, were palpably unfair to Ms Bell.  Ms Bell, by reason of the breach of duties owed to her, was not informed, or advised, as to her position at law or as to the true nature of the proposed compromise, and was not in a position to provide an informed consent to that proposal.

104               Proper advice in respect of the compromise was not provided to Ms Bell by her solicitor. In particular, she was not advised that the counterclaim against her was without substance.  Furthermore, no instructions were sought from Ms Bell on a specific proposal that she promise to pay Chancliff $110,000 in consideration for the termination of Chancliff’s proceeding against Tamara.  Her mind was not directed to that question and neither counsel, nor her solicitor, could assume that he had any instructions in that regard.  If it had been asserted that the compromise made for Ms Bell was not payment of a sum in full settlement of Chancliff’s counterclaim but a new promise by Ms Bell to pay Chancliff $110,000 in consideration of Chancliff forebearing to prosecute its counterclaim against Tamara, it would have been arguable that the compromise involved an issue beyond the scope of the original proceeding and that the compromise could not be enforced in that proceeding by entering judgment against Ms Bell.  On that argument Chancliff would have to commence a new proceeding to enforce the compromise against Ms Bell and issues raised therein would be dealt with on pleadings.  (See: Roberts v Gippsland Agricultural and Earth Moving Contracting Co Pty Ltd [1956] VLR 555 per Lowe, O’Bryan JJ at 557, Smith J at 562-565; B C Cairns Australian Civil Procedure (3rd Ed) at 385-388; Edwards and Whatmough “The Law Relating to Compromises of Litigation, Disputes and Differences” at 189)

105               In any event the compromise involving Ms Bell was puportedly based upon the forbearance of Chancliff to pursue its counterclaim against her.  It is unlikely that Chancliff could have had any belief that the counterclaim pleaded against Ms Bell, transparently untenable as it was, was based on a true cause of action.  No evidence of such a belief was adduced by Chancliff.

106               If, as Lord Esher states in In Re Hawkins (at 409), the Court, is to ask whether with knowledge of the facts now placed before it, it would have agreed to the compromise, the answer in this case, on the evidence presented, unequivocally must be ‘no’.

107               I am satisfied that in respect of Ms Bell the compromise made on her behalf by Mr Rigby was unreasonable and in all the circumstances involved a miscarriage of justice.  The Court should not accept that the judgment relied upon by Chancliff to prove that a debt was owed to it by Ms Bell is sufficient to show that in truth and reality there was a real debt due to Chancliff by Ms Bell which preceded the judgment.

108               It follows that the requirements of s 52(1) of the Act have not been met and a sequestration order may not be made.  The order of the Deputy Registrar made 19 January 1999 that the estate of Ms Bell be sequestrated will be set aside and an order made that the petition be dismissed, with costs.  There will be an order that Chancliff pay the costs of this application, which, pursuant to O 80 r 9 (2), will include fees counsel may otherwise have rendered but for the provisions O 80 r 9 (1).

109               In the conduct of this matter the Court was assisted, and inefficient use of Court resources avoided, by the representation provided for Ms Bell by counsel participating in the ‘pro bono’ scheme conducted by the Court under the Rules.  Counsel who provide their services under that scheme accept, without expectation of remuneration, the duties involved in advising, and appearing on behalf of, parties before the Court.  In doing so counsel render a substantial community service.

Associate:

Dated: