FEDERAL COURT OF AUSTRALIA

Menzies v Paccar Financial Pty Ltd [2011] FCA 460

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The orders made by the Federal Magistrate on 11 June 2010:

(a)    substituting the respondent as the petitioning creditor;

(b)    sequestrating the estates of the appellants; and

(c)    ordering the appellants to pay the respondent’s costs

be set aside.

3.    The creditor’s petition be remitted to the Federal Magistrates Court.

4.    The appellants’ costs of and incidental to the respondent’s application for substitution and the hearing of the creditor’s petition in the Federal Magistrates Court, together with the costs of this appeal, be paid by the respondent.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

introduction

1    This is an appeal from the judgment of a Federal Magistrate whose reasons for judgment are published as BP Australia Pty Ltd v Ian David Menzies & Anor [2010] FMCA 375. The learned Federal Magistrate made orders that the respondent (“Paccar”) be substituted as petitioning creditor in place of BP Australia Pty Ltd (“BP”); that there be a sequestration order against the estates of the first appellant (“Ian Menzies”) and the second appellant (“Colleen Menzies”); together with other consequential orders, including that the Menzies pay Paccar’s costs.

2    Section 24(1)(d) of the Federal Court of Australia Act 1976 (Cth) (“the Federal Court Act”) provides for an appeal to this Court from a judgment of the Federal Magistrates Court. The appellant jurisdiction of the Court in relation to an appeal from a judgment of the Federal Magistrates Court may be exercised by a single Judge of the Court: s 25(1A)(a). Such an appeal is neither a hearing de novo nor an appeal in the strict sense, but it is an appeal by way of re-hearing. As Kenny J stated in Farrington v Deputy Commissioner of Taxation [2002] 50 ATR 429 at [4]:

An appeal from a judgment of the Federal Magistrates Court is not an appeal by way of a hearing de novo, nor is it an appeal in the strict sense: cf Low v Commonwealth of Australia [2001] FCA 702, per Marshall J at [3]. Such an appeal is conducted as a re-hearing. On an appeal by way of re-hearing, the powers of an appellate court are exercisable only if the appellant can demonstrate that, having regard to the evidence before the appellate court, the judgment under appeal is a consequence of some legal, factual, or discretionary error: see Allesch v Maunz (2000) 173 ALR 648, at 653-4 per Gaudron, McHugh, Gummow and Hayne JJ; Minister for Immigration and Multicultural and Indigenous Affairs v Jia (2001) 178 ALR 421, at 439 per Gleeson CJ and Gummow J; and Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission [2000] HCA 47; (2000) 174 ALR 585, at 590 per Gleeson CJ, Gaudron and Hayne JJ.

3    For the reasons that follow, I am satisfied that the judgment of the Federal Magistrate is affected by discretionary error and as a consequence the appeal should be allowed.

background

4    Mr and Mrs Menzies were involved in a trucking business. The business was conducted through their company, Menzies Haulage Pty Ltd (“Menzies Haulage”). In May 2006, Paccar financed the purchase by Menzies Haulage of two long haul trucks and trailers (“the trucks and trailers”). Paccar alleges that the Menzies guaranteed the liability of Menzies Haulage to Paccar in respect of those loans (“the Guarantee”).

5    In March 2009, BP Australia Pty Ltd (“BP”) obtained a judgment from the Magistrates Court of Victoria against the Menzies in the sum of $32,125.45.

6    In late May 2009, Paccar commenced Supreme Court proceedings in the Victorian Supreme Court against Mr and Mrs Menzies (“the Victorian Supreme Court proceeding”). That proceeding was based on the Guarantee said to have been executed by the Menzies in May 2006 in New South Wales.

7    On 13 August 2009, BP served a bankruptcy notice on the Menzies. On 18 September 2009, BP presented a creditor’s petition against the Menzies and commenced the Federal Magistrates Court proceedings the subject of this appeal, on the basis that the Menzies had committed an act of bankruptcy on 4 September 2009.

8    In October 2009, BP and the Menzies settled their differences on the basis that BP’s creditor’s petition would be dismissed.

9    On 19 November 2009, Paccar applied, pursuant to s 49 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”), to be substituted as the petitioning creditor (“the application for substitution”).

10    On 11 December 2009 the Victorian Supreme Court proceeding was transferred to the New South Wales Supreme Court (“the first New South Wales proceeding”).

11    On 18 December 2009 the Menzies commenced proceedings in the New South Wales Supreme Court against Paccar (“the second New South Wales proceeding”).

12    In the first New South Wales proceeding, Paccar claims that Menzies Haulage made with Paccar four Deed of Loan and Charge Agreements (“the Contracts”). Paccar claims that Menzies Haulage failed to meet its payment obligations under the Contracts and was in default. Paccar alleges that it terminated the Contracts, sought repossession of the trucks and trailers for which it had loaned monies and a termination amount of $375,098. By reason of the alleged Guarantee provided by the Menzies, Paccar sought the payment of the termination amount from the Menzies and claimed $390,455 from the Menzies (being the termination amount plus costs and legal costs).

13    By their Defence to the first New South Wales proceedings and by the second New South Wales proceedings in which the Menzies were plaintiffs, the Menzies deny their indebtedness to Paccar and claim damages and other relief. This is put on a number of grounds which I summarise as follows:

(i)    the Contracts and Guarantee were never executed by Menzies Haulage or the Menzies and were of no legal consequence or effect (“the non est factum defence”);

(ii)    that any loan agreements made between Paccar and Menzies Haulage were the subject of variations by two agreements made in August 2008 (“the Variation Agreements”). Those variations were to the effect that Paccar agreed to receive certain payments from Menzies Haulage and agreed that if Menzies Haulage made further payments as agreed, Paccar would not seek to repossess the trucks and trailers and would not seek to make a claim as against the Menzies under the Guarantee or the Contracts. The Menzies claim that the Variation Agreements were breached by Paccar including because: Paccar sought to repossess the trucks and trailers; Paccar petitioned for and wound up Menzies Haulage; and, Paccar reported the Menzies as credit defaulters with the effect of limiting their capacity to refinance and pay out any monies owed to Paccar;

(iii)    the Menzies also claim that representations and warranties were made by Paccar in May 2006 to the effect that if Menzies Haulage entered into loan agreements, Paccar would provide Menzies Haulage with flexible repayment terms in order to accommodate any material change in circumstances. The Menzies claim that the representations made were misleading and deceptive conduct within the meaning of s 52 of the Trade Practices Act 1975 (Cth) (“the Trade Practices Act”) and s 42 of the Fair Trading Act 1982 (NSW). They claim that despite the representations made, Paccar refused to extend to Menzies Haulage flexible payment terms in circumstances where material change had occurred; and

(iv)    the Menzies also claim that the Guarantee was an unjust contract within the meaning of the Contracts Review Act 1980 (NSW) and seek that the Guarantee be set aside or alternatively be varied.

proceedings in the federal magistrates court

14    In support of its substitution application and the creditor’s petition, Paccar filed and relied upon a number of affidavits. Those affidavits sought to prove the indebtedness of the Menzies based on the Guarantee. Mr and Mrs Menzies filed affidavits in opposition and further affidavits in response were filed by Paccar.

15    The hearing of the proceedings commenced on 8 February 2010. The Federal Magistrate initially proceeded on the basis that she would deal with the substitution application only. In the course of the hearing on that day, the solicitor for the Menzies advised the court that the Menzies would be calling no evidence and encouraged her Honour to deal with both the substitution application and the creditor’s petition together. Her Honour determined to do so. Two witnesses for Paccar were called and the solicitor for the Menzies cross-examined each witness.

16    No evidence was called for the Menzies. Late on that day, the solicitor for the Menzies raised for the first time the contention that the Menzies had not been served with the creditor’s petition. It was contended that the proceeding should be dismissed on the basis of the failure to serve the creditor’s petition. That misconceived strategy was responded to by her Honour making orders for substituted service of the petition and adjourning the hearing to a later date.

17    Prior to the resumption of the hearing, the Menzies filed an application seeking an order that the application for substitution be dismissed, the bankruptcy notice be set aside and that the proceedings be dismissed. In support of that application, the Menzies filed Points of Claim. Those Points of Claim referred to Mr and Mrs Menzies being defendants in the first New South Wales proceeding and that they were plaintiffs in the second New South Wales proceeding. The Points of Claim asserted that it would be an improper exercise of the discretion of the Court to sequestrate the estates of the Menzies in circumstances where they were seeking to prosecute their claim in the second New South Wales proceeding and had filed a defence in the first New South Wales proceeding. Reference was made to the affidavits filed by Paccar. It was asserted that the Federal Magistrates Court was not the court of trial for the subject matter of the New South Wales proceedings. The Menzies claimed that it would be both burdensome and vexatious to require or expect the Menzies to meet the case sought to be made out through the affidavits intended to be relied upon by Paccar, by the filing and serving of affidavit evidence.

18    The Menzies also filed further affidavits in which extensive reference was made to the two New South Wales proceedings. Those affidavits included denials by the Menzies of the debt claimed by Paccar based on the Defence of the Menzies in the first New South Wales proceeding and their Statement of Claim in the second New South Wales proceeding. Further, the Menzies objected to the bankruptcy proceeding becoming the forum for dealing with the substance of the matters at issue in the New South Wales proceedings. The Menzies alleged that their position in the New South Wales proceedings would be prejudiced if they were required to go into evidence in the bankruptcy proceeding and answer the affidavits of Paccar. Additionally, the Menzies asserted that they would be forced into a position where they had to run a trial in relation to the alleged debt in Victoria in circumstances where the Victorian Supreme Court proceeding about that debt had, on their application, been successfully transferred to New South Wales. The evidence relied upon by the Menzies included their Defence in the first New South Wales proceeding and their Statement of Claim in the second New South Wales proceeding.

19    When the matter resumed on 19 April 2010, it appears to have continued on the basis that the court would deal with both the substitution application and the creditor’s petition together. Paccar called no further evidence and relied on its evidence given on 8 February 2010. Counsel appearing for the Menzies called Mr and Mrs Menzies. Each of Mr and Mrs Menzies were cross-examined at length including in relation to the issues raised by their non est factum defence.

20    In the course of the cross-examination of Mrs Menzies (who was cross-examined first), counsel for the Menzies raised an objection to the cross-examination of Mrs Menzies in relation to the non est factum defence. That objection was overruled. The precise basis for the objection and any reasons given for its rejection by her Honour are not part of the transcript in the appeal book. Neither party sought to put that transcript before me at the hearing of this appeal.

21    In her reasons for judgment, the learned Magistrate dealt with both the application for sequestration and the creditor’s petition. Relevantly, and in relation to the substitution application, her Honour referred to s 49 of the Bankruptcy Act and correctly observed that the power to substitute a petitioner was discretionary. Her Honour referred to Dean v QUF Industries Ltd (1981) 51 FLR 317 to support the proposition that a party may be substituted as petitioner even where that party’s asserted debt is disputed. Her Honour stated that in this case the claim was disputed and identified the question to be considered as whether there was a genuine dispute about the existence of the debt. In posing that question, the Federal Magistrate referred to South-East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465 and Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785. I will refer to each of these decisions in more detail shortly.

22    Her Honour agreed with Paccar’s submission that there was no genuine dispute as to the existence of the debt. Her Honour stated that the Menzies contended the debt claimed was subject to a genuine dispute, evidenced by the existence of proceedings in the Supreme Court of New South Wales. She said however, that the mere existence of proceedings did not establish a genuine dispute. Her Honour was satisfied, on the basis of evidence called by Paccar, that Paccar had established the principal debt owed by Menzies Haulage. Her Honour said at [13] that it then became incumbent on the Menzies to establish that “there is a triable issue as to indebtedness which would justify dismissal or adjourning of the petition (pending resolution of the Supreme Court proceedings)”.

23    Her Honour observed that the Menzies alleged that only the execution pages of the Guarantee had been signed by them and that they relied on the doctrine of non est factum. Her Honour then proceeded to summarise the evidence before her and made findings “on the balance of probabilities”. Her Honour continued at [14]:

In essence, the evidence of the respondents where it differs from that of the applicant is not accepted. On all of the evidence before the Court including that given by the respondents in the witness box the Court does not accept that a genuine dispute exists.

24    Her Honour then summarised some of the evidence before her. She referred to evidence given on behalf of Paccar by Mr Penter to the effect that he had attended the residence of the Menzies with the Contracts and the Guarantee. His evidence was that those documents were stapled, bound and complete documents and that each were signed by the Menzies. His evidence was that each of the Menzies had reviewed and signed the documents in his presence.

25    Her Honour noted Mr Penter had not been cross-examined and said that she accepted his evidence.

26    Her Honour observed that contrary evidence had been given by the Menzies. Their evidence was that Mr Penter had attended their home and that they had only been shown the attestation pages of the Contracts and Guarantee and that they had signed those pages without being otherwise shown the Contracts or Guarantees. The Federal Magistrate rejected the evidence of Mr and Mrs Menzies and preferred that of the witnesses of Paccar. Her Honour relied on what she saw as inconsistent accounts given by Mrs Menzies and also the absence of a credible explanation as to why the Menzies signed execution papers without an attached agreement. Her Honour also relied on a letter of 25 November 2008 written by Mr Menzies, construing from the contents of that letter a suggestion that the contracts were complete when signed. On the basis of the Federal Magistrate’s rejection of the evidence of Mr and Mrs Menzies, her Honour concluded that the evidence before her did not establish that there was a genuine dispute about the existence of the debt claimed by Paccar.

27    Her Honour’s reasons for judgment then dealt with other matters not relevant for present purposes. On the creditor’s petition, her Honour was satisfied that all the matters required by s 52(1) of the Bankruptcy Act were established. Consequently, her Honour made orders that: Paccar be substituted as the petitioning creditor; the estates of the Menzies be sequestrated; and, that the Menzies pay Paccar’s costs of the petition and the interlocutory application (which I assume is a reference to the application for substitution).

grounds of appeal

28    The Notice of Appeal relied upon by the Menzies contains six grounds. The main basis for challenge (said to be encompassed by grounds 1, 2 and 3 of the Notice of Appeal) was the contention that the Federal Magistrate should have found that there was a genuine dispute as to the debt relied upon by Paccar and thus that her Honour’s discretion miscarried in ordering that Paccar be substituted as the petitioning creditor. For the reasons I will shortly give, I have allowed the appeal on that ground.

29    Grounds 5 and 6 were not pressed. Ground 4 of the Notice of Appeal was only faintly argued by counsel for the Menzies on the appeal. At the conclusion of the hearing, I raised with counsel whether ground 4 was being pressed by the Menzies or not. Counsel sought time to obtain instructions and the matter was left on the basis that in a further written submission to be filed dealing with a number of matters, the Court would be informed as to whether ground 4 was being pressed. A written submission dated 20 December 2010 and prepared by the solicitor for the Menzies was received. In that submission the solicitor did not simply indicate whether ground 4 was being pressed on the basis put by counsel at the hearing but sought to agitate ground 4 on a different basis. That was sought to be done without the Court’s leave and in circumstances where Paccar has had no opportunity to respond to it. In the circumstances, I have proceeded on the basis that ground 4 (as argued on the appeal) was not pressed by the Menzies.

legal principles – substitution of a petitioner

30    Section 49 of the Bankruptcy Act is in the following terms:

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

31    The court’s power under s 49 to permit to be substituted another creditor as the petitioner, is not conditioned by any qualifying criteria and gives the court a wide discretion. The basis upon which that discretion ought to be exercised has not been the subject of much judicial consideration although, as I later detail, some useful guidance is given by the authorities that have considered s 465B of the Corporations Act 2001 (Cth) (“the Corporations Act”) which deals with the substitution of an applicant on an application for a company to be wound up.

32    Some of the purposes of s 49 were described to by Deane, McGregor and Sheppard JJ in Dean at 321. Their Honours stated that s 49 serves a number of important practical purposes, including helping to avoid multiplicity of petitions and by providing creditors other than the petitioning creditor a degree of protection against dilatoriness on the part of the petitioning creditor, or collusion between the petitioner and the debtor to defeat or delay other creditors. The interests of creditors other than the petitioning creditor should not be disregarded, and courts have traditionally been reluctant to allow the withdrawal of bankruptcy or winding up petitions merely because an accommodation has been reached between the petitioning creditor and the debtor: Kitoria at 467; Johnstone v Guss [1998] FCA 1658 at 15-16.

33    The protection of the legitimate interests of current and future creditors, as those of the debtor, need to be taken into account in the exercise of the discretion. Those interests are to be identified including by reference to the underlying policy of the Bankruptcy Act. That is the approach that Ryan J took in relation to the exercise of discretion under s 465B of the Corporations Act. The policy considerations identified by Ryan J are equally applicable to the Bankruptcy Act. At 472 Ryan J in Kitoria relevantly said:

In my view, the proper exercise of the discretion conferred by s 465B of the [Corporations] Law requires the court to weigh in the balance two competing policies. The first is that an insolvent company should not be permitted to continue to trade to the detriment of its existing and future creditors but should be wound up as expeditiously as possible. If the achievement of that objective is jeopardised by the inaction or lack of diligence of the petitioning creditor, another creditor should be substituted as contemplated by s 465B(1)(a) to allow the winding up proceedings to continue in the interests of the generality of creditors, some of whom may have refrained from initiating their own proceedings in the knowledge that the original petition had been instituted. On the other hand, the court should not allow winding up proceedings to be used as a debt-collecting mechanism or an instrument of oppression to be held over the head of a company otherwise trading satisfactorily by a creditor whose debt is the subject of a genuine dispute.

34    The fact that the debt of the petitioning creditor has been paid and the absence of any other creditor, other than the applicant for substitution, is relevant to the discretion which the court is called upon to exercise: Kitoria at 472.

35    The fact that the debt upon which a petition is based is disputed in another proceeding is relevant to whether the hearing of a bankruptcy petition should be adjourned and as to whether the petition should be dismissed: Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148; Adamopoulous v Olympic Airways (1990) 95 ALR 525 at 531; and Australia and New Zealand Banking Group Ltd v Prestia [2001] FCA 792 at [17]-[20].

36    If the existence of a disputed debt may be the basis for an adjournment of the petition immediately upon the grant of an order under s 49, it makes sense that the assertion of a disputed debt should be taken into account when raised on an application for substitution. That the existence of a disputed debt is a circumstance relevant to the exercise of the court’s discretion to refuse substitution, was recognised in Dean at 322 and followed in Re Juanita Lee Faint Ex Parte: the Shell Company of Australia Ltd, Westpac Banking Corporation and Australian Guarantee Corporation Limited [1994] FCA 1363 at [10].

37    In Re Juanita Lee Faint, Cooper J took into account not only the fact of the dispute, but also the convenience of the dispute being resolved in the bankruptcy proceeding. His Honour took into account that the challenged debt was already the subject of litigation in another court. In that respect, Cooper J recognised the undesirability of the duplication of proceedings in two superior courts, including because of the attendant additional costs and the possibility of different conclusions being drawn by different tribunals. His Honour gave weight to his view that the issues raised were not capable of easy or quick determination as part of the exercise of the jurisdiction of a bankruptcy court. I respectfully agree with his Honour’s approach.

38    It is then necessary, particularly in the context of this case, to consider the standard of satisfaction which the Court should require in assessing a disputed debt on an application for substitution.

39    In relation to the adjournment or dismissal of a petition by reason of the existence of other proceedings in which the debt is contested, the requisite standard of satisfaction has been expressed in the terms of the need to demonstrate “genuine and arguable grounds” (Ahern at 148) or “a triable issue” (Prestia at [19]).

40    In the exercise of the discretion provided by s 465B of the Corporations Act, the requisite standard of satisfaction as to the disputed debt has often been expressed in terms of the existence of a “genuine dispute” as to the debt. That term may well have been borrowed from s 459H of the Corporations Act which deals with the standard of satisfaction in relation to a disputed debt in the context of an application to set aside a statutory demand served on a company. The authorities which have considered both s 465B and s 459H of the Corporations Act are of assistance.

41    Ryan J in Kitoria adopted the “genuine dispute” standard but noted at 470-472 that the courts have applied various formulations of genuineness including a bona fide dispute on substantial grounds (Re Calsil Ltd (1982) 6 ACLR 515) and a dispute which is not plainly vexatious or frivolous and that may have some substance (Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at 39).

42    In Chadwick Industries (followed by Santow J in Jarpab v Winter (1994) 14 ACSR 255 at 261) Lockhart J concluded at 39 that a review of the authorities indicated that the “standard of satisfaction which a court requires is not a particularly high one”.

43    In Re Juanita Lee Faint and in relation to s 49 of the Bankruptcy Act, Cooper J assessed the nature of the dispute as not “insubstantial and destined to fail” (at [11]).

44    What is abundantly clear from the authorities, is that the court does not test a claim of genuineness by determining the merits of the dispute. The judgment of McClelland CJ in Eq in Eyota has often been referred to as striking the right balance (Jarpab at 261; Kitoria at 471; and Rhagodia Pty Ltd v National Australia Bank Ltd (2008) 67 ACSR 367 at [93]). McClelland CJ opined that the expression “genuine dispute” (in s 459H of the Corporations Act) connotes “a plausible contention requiring investigation, and raises much of the same sort of considerations as the ‘serious question to be tried’ criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat”. His Honour continued at 787:

This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit ``however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be'’ not having ``sufficient prima facie plausibility to merit further investigation as to [its] truth'’ (cf Eng Mee Yong v Letchumanan [1980] AC 331 at 341), or ``a patently feeble legal argument or an assertion of facts unsupported by evidence'’: cf South Australia v Wall (1980) 24 SASR 189 at 194.

But it does mean that, except in such an extreme case, a court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute.

45    His Honour referred to Mibor Investments Pty Ltd v Commonwealth Bank of Australia (1993) 11 ACSR 362 at 366-367 where Hayne J said that in determining whether a genuine dispute exists, the court will not embark upon an extended inquiry and will not attempt to weigh the merits of the dispute. In Eyota, McClelland CJ determined that the decision-maker under review had been correct to have been satisfied of the existence of a genuine dispute because the evidence challenging the validity of the alleged debt was not “inherently improbable or otherwise defective” so as to require further investigation (at 788).

46    More recently, Dodds-Streeton JA (with whom Neave and Kellam JJA concurred) considered the expression “genuine dispute” in s 459H of the Corporations Act in TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd (2008) 66 ACSR 67. Her Honour noted that no in-depth examination or determination of the merits of the alleged dispute is necessary or indeed appropriate and that that was particularly so because the determination of the “ultimate question” of the existence of the debt should not be compromised (at [57]). Her Honour continued at [71]:

The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile.

47    In my view, on an application for substitution, a relevant consideration in the exercise of the court’s discretion is the debtor’s challenge to the debt upon which the applicant relies. The standard of satisfaction which the Court should require in assessing the challenge should be no higher than that required by the “arguable case” or “serious question to be tried” criteria. The Court will not determine the merits of the challenge, but simply consider whether it may have merit and thus whether there exists an arguable dispute. Once the debtor demonstrates that “even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow”: Roadships Logistics Ltd v Tree (2007) 64 ACSR 671 at [24]; and Rhagodia at [112] and [114].

48    It is to be expected that in an investigation that falls short of determining the merits of a dispute, cross-examination of deponents will not ordinarily be necessary (Rhagodia at [113] and [114]) and the court will not embark upon an inquiry as to the credit of a deponent whose evidence is relied on as giving rise to the dispute (Eyota at 787). The line may be impermissibly crossed where the court assesses the credibility of the testimony of the person in support of an arguable case: Gajic & Anor v Poyser [2007] VSCA 175 per Chernov JA (with whom Ashley and Neave JJA agreed) at [15] and [16]. However, that does not mean that the court must accept uncritically every statement in an affidavit however improbable, lacking in precision or inconsistent with undisputed contemporary documents, statements by the same person, or the objective surrounding circumstances: Eyota at 787; Gajic at [17]; Rhagodia at [93] and [115]. Where the contest is confined to “oath against oath”, it is unlikely that the court could fairly determine that the debtor’s claim was not arguable: Gajic at [17].

did the discretion on the substitution application miscarry?

49    In my view, her Honour’s discretion miscarried when she granted Paccar’s application for substitution as the petitioning creditor.

50    Although, by their affidavits, the Menzies raised inconvenience and prejudice if the dispute as to the debt was determined in the bankruptcy proceeding rather than in the New South Wales proceedings, those matters do not seem to have been relied upon in the submissions put to the Federal Magistrate and, in any event, the fact that considerations of that kind were not taken into account, is not a ground raised in the appeal.

51    The miscarriage of discretion asserted by the Menzies is based solely on her Honour’s finding that there was not a genuine dispute in relation to the debt claimed by Paccar. It was contended that instead of determining whether or not a genuine dispute existed, her Honour determined the merits of and resolved that dispute.

52    I agree that her Honour incorrectly dealt with whether or not a genuine dispute existed. Whilst her Honour correctly sourced from Kitoria and Eyota some of the relevant principles, her Honour failed to apply those principles to the substitution application before her. Rather than testing the existence of a genuine or arguable dispute on the basis of whether the Menzies’ non est factum defence was arguable, her Honour determined that claim to finality, finding on the balance of probabilities, that the Menzies had executed the Contracts and Guarantee and not merely the execution pages as they had claimed on oath. Rather than considering and determining whether the Menzies had established an arguable case, her Honour considered and found that the Menzies had no case. It is apparent that in making that finding, her Honour imposed on the Menzies a standard of satisfaction as to whether an arguable or genuine dispute existed beyond that which is appropriate in the exercise of the s 49 discretion. Her Honour effectively required the Menzies to demonstrate that they had a valid non est factum defence rather than an arguable non est factum defence. By doing that, her Honour acted upon a wrong principle and thereby her discretion miscarried: House v R (1936) 55 CLR 499 at 504-5.

53    It may well be the case that her Honour’s error was a consequence of her Honour determining both the application for substitution and the creditor’s petition together. There is confusion in her Honour’s reasons for judgment, including because whilst apparently dealing with the substitution application, her Honour at the bottom of [13], in the context of whether a genuine dispute existed, appears to turn her mind to the dismissal or adjournment of the creditor’s petition. Perhaps much of the blame for the confusion lies with the inadequate assistance that her Honour gained from those representing the Menzies. In that respect, I should add that I reject the contention of the Menzies that her Honour failed to take into account, on the question of whether a genuine dispute existed, the claims and defences of the Menzies beyond the non est factum defence. As the transcript reveals, other than for a passing reference to the claim based on the Trade Practices Act in counsel’s reply, reliance on the existence of a genuine dispute was pressed on the basis of the non est factum defence alone.

disposition

54    As I have found that her Honour’s discretion on the substitution application miscarried, it is open to me to re-exercise the discretion given by s 49 of the Bankruptcy Act.

55    Mr and Mrs Menzies gave evidence under oath that they had only signed the execution page of the Guarantee in circumstances where they had not been presented with the terms of that document. They were cross-examined in relation to their evidence and maintained their position. Evidence to the contrary was received from Mr Penter, however for the reasons I have already explained, this is not the occasion upon which to resolve the factual controversy by reference to findings as to credibility. I need not accept uncritically the evidence of the Menzies. However, I am unable to conclude that their evidence is so improbable or so inconsistent with undisputed contemporary documents or other objective surrounding circumstances as to warrant its non-acceptance. In that regard, I have taken into account the letter of 25 November 2008 written by Mr Menzies, from which adverse inferences against the Menzies may be drawn but which, on its own, does not satisfy me that the evidence given on oath is so improbable as to be rejected. Due regard should be given to the fact that the Menzies deposed on oath as to the relevant facts, no doubt conscious of the very serious ramifications involved in the giving of false evidence.

56     I also take into account the existence of the New South Wales proceedings, which I was informed by counsel had been stayed pending this appeal. I regard those proceedings as providing a better forum than a bankruptcy court in which the debt claimed by Paccar, as well as the damages claims of the Menzies, may be resolved. I take into account also that the Victorian Supreme Court determined that the dispute over the debt ought to be resolved in New South Wales and not in Victoria. Further, there is no evidence to suggest that the resolution of the issue over the disputed debt in the New South Wales proceedings and thus any consequent delay in the determination of the creditor’s petition will adversely affect any existing or future creditors of the Menzies. For those reasons, I decline to exercise the discretion in favour of substituting Paccar as the petitioning creditor.

57    In those circumstances, I will set aside the order for substitution made by the Federal Magistrate and it follows that I should also set aside the order sequestrating the estates of the Menzies.

58    I will further order that the creditor’s petition be remitted to the Federal Magistrates Court. I agree with the contention of Paccar that on the authority of Deputy Commissioner of Taxation v Clyne (1984) 4 FCR 156, the creditor’s petition has not lapsed despite the fact that more than twelve months has expired after its presentation. As a sequestration order was made by the Federal Magistrate, an exception to the operation of s 52(4) of the Bankruptcy Act is made out.

59    Paccar accepted that costs should follow the event, with the exception of the costs of the hearing on 8 February 2010. In relation to the costs of that day, Paccar contends that the Menzies should pay its costs or alternatively that each party should bear its own costs. The contention is based on that day having been wasted by reason of the failure of the Menzies to raise the issue relating to service of the petition at the outset of the hearing. Whilst I have some sympathy with that submission, a review of the transcript suggests that the day was not wasted because relevant evidence was received which would have had to have been received at a later time, even if the service issue had been raised at the outset on 8 February 2010. Accordingly, I will also make orders setting aside the cost order made by the Federal Magistrate and order that the Menzies’ costs of and incidental to the application for substitution and the hearing of the creditor’s petition, together with the costs of the appeal, be paid by Paccar.

Associate:

Dated:    10 May 2011