FEDERAL COURT OF AUSTRALIA

Katter v Melhem (No 2) [2014] FCA 1176

THE COURT ORDERS THAT:

1.    The application to set aside the bankruptcy notice is dismissed.

2.    The applicants pay the respondent’s costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    In this proceeding, Joseph Katter and his sister, Susan Katter, apply for an order setting aside a bankruptcy notice served on them in August 2013 and January 2014 respectively. The bankruptcy notice was issued on the application of the respondent, Mr Robert Melhem, on the basis of a judgment of the District Court of NSW made on 22 July 2013 (the Judgment). The Judgment has not been set aside or varied.

2    As will be seen, some of the facts and circumstances that underlie the Judgment are, to say the least, unusual if not bizarre. Mr Melhem sued Joseph and Susan Katter in the District Court for $550,000 plus interest said to be owing under a deed of loan. That suit went to hearing, but was settled part way through Mr Melhem’s case. The terms of settlement provided for verdict and judgment for Mr Melhem in the sum of $400,000, but that judgment not be entered if that amount was paid by a particular date, or certain other conditions were satisfied. Failing that, the plaintiff was to have leave to enter judgment for $1 million. That is what occurred. Judgment in favour of Mr Melhem was entered in the sum of $1 million. An application to set aside the Judgment was subsequently dismissed. An appeal from that dismissal was discontinued.

3    Joseph and Susan Katter submit that the Court should “go behind” the Judgment and conclude that they are not indebted to Mr Melhem, or at least not indebted to the tune of $1 million. They contend that no monies were received by them from Mr Melhem or anyone else. On that basis they say that they were never in debt to Mr Melhem as alleged in the District Court proceedings. There is therefore no debt upon which bankruptcy proceedings can be founded. They also submit that the Judgment exceeds the jurisdictional limit of the District Court and was based on terms of settlement that operated as a penalty. As such, they submit that the judgment debt is not enforceable by way of bankruptcy notice.

4    For the reasons that follow, the application to set aside the bankruptcy notice must be dismissed with costs.

Facts and evidence in detail

5    In support of their application, Joseph and Susan Katter both swore and filed affidavits. Their affidavits contain evidence concerning their dealings with Mr Melhem and persons associated with him that culminated in the signing of the deed that was the foundation for the District Court action. They also deal with the District Court proceedings and the circumstances that led them to agree to settle the proceedings. The evidence of Joseph and Susan Katter was not challenged. They were not cross-examined.

6    The evidence relied on by Mr Melhem in opposition to the application is essentially limited to evidence from his past and present solicitors concerning the conduct of the District Court proceedings and the events that followed. The affidavits of Mr Fullick, who was Mr Melhem’s solicitor during the District Court proceeding, exhibit the affidavits that were filed and relied on in the District Court proceedings, as well as the transcript of the oral evidence. The affidavits filed in the District Court proceedings were admitted into evidence in these proceedings on the limited basis that they were evidence of what was before the District Court, but were not evidence of the facts contained in them. Mr Fullick’s affidavits also exhibit the documents, evidence and transcript relevant to the entry of the Judgment and the application to set it aside.

7    The starting point is the unchallenged evidence of Joseph and Susan Katter in relation to the events that apparently gave rise to the District Court proceedings. It is common ground that the affidavits of Joseph and Susan Katter filed in the District Court proceedings contained essentially the same evidence in relation to those events. Following is a brief summary.

8    In January 2009, Joseph Katter’s brother died whilst in Lebanon. For reasons it is unnecessary to delve into in any detail, Mr Katter was suspicious of the cause and circumstances of his brother’s death. It followed a short marriage to a Lebanese woman. The widowed wife made claims on the estate. There was no autopsy or investigation by Lebanese authorities into the circumstances of the death.

9    Mr Katter’s initial attempts to find answers concerning his brother’s death were unsuccessful. It appears that Mr Katter then became desperate. In April 2010, Mr Katter was introduced to Mr Saim Semaan as being someone who might assist. Mr Semaan lived in Sydney and had some association with a brothel in Auburn. It was suggested to Mr Katter, however, that Mr Semaan also had connections in Lebanon.

10    In mid-2010 Mr Katter met with Mr Semaan on a number of occasions in Mr Semaan’s office in the brothel. Mr Semaan said that he could arrange an inquest or an investigation in Lebanon, but that it would cost a lot of money. He estimated around $300,000 to $400,000. Despite the cost, Mr Katter apparently decided to retain the “services” of Mr Semaan to procure the investigation.

11    According to Mr Katter, he raised $100,000 from various sources and gave this money, in cash, to Mr Semaan during a number of meetings in the brothel. The terms of the arrangement between Mr Katter and Mr Semaan were apparently undocumented.

12    The $100,000 provided by Mr Katter was not enough for Mr Semaan. He told Mr Katter that Mr Katter needed to give him more money. Mr Katter said he did not have any more. Mr Semaan said he would lend the money to Mr Katter and organise a contract.

13    True to his word, at least in this respect, Mr Semaan later handed Mr Katter a deed of loan which recorded the terms upon which Mr Semaan would provide a loan of $100,000 to Joseph and Susan Katter. According to Mr Katter, this deed was drafted by a solicitor that he met at the brothel associated with Mr Semaan. It appears that Mr Katter later retained this solicitor, Mr Andrew Scali, to act for him in relation to estate matters. The deed provided that Mr Semaan would make “the advance” to Joseph and Susan Katter by way of “cash advance” on the date of the agreement, or such other date as agreed in writing. Mr Semaan said he would do no further work until the deed was signed.

14    Mr Katter was understandably reluctant to sign. So too was Susan Katter when Mr Katter first showed her a copy of the deed. Nevertheless, Mr Katter did in due course sign the deed. Susan Katter continued to refuse to sign it, so Mr Katter signed her name instead. This deed bears the date 12 May 2010.

15    Importantly, the evidence of both Joseph and Susan Katter is that Mr Semaan never advanced them any money, either under the terms of this deed or otherwise. As will be seen, there was evidence in the District Court from Mr Semaan and others that, contrary to the evidence of Joseph and Susan Katter, $100,000 in cash was in fact provided by Mr Semaan to Mr Katter when the deed was signed. Mr Semaan, however, did not give evidence in this Court. Nor did any of his associates who were involved in the matter.

16    Following the signing of the deed, Mr Semaan asked Mr Katter for yet more money. He asked Mr Katter for a further $20,000 and said that Mr Katter would have to sign another contract. Mr Katter arranged for another $20,000 in cash to be provided to Mr Semaan’s associates. He was then asked to sign a second deed of loan.

17    The second deed of loan appears to be in exactly the same terms as the first deed, save that the loan amount is specified as being $239,000. Presumably this deed was also drafted by Mr Scali who, by this stage, appears to have been acting for Mr Katter, at least in relation to estate matters. The deed does not record that $239,000, or any other amount, had already been loaned. Rather, it provides for cash advances to be made by Mr Semaan, as lender, upon request by the borrower. The borrower is again specified as being Joseph and Susan Katter. Mr Katter was told by one of Mr Semaan’s associates that if he did not sign, Mr Semaan would not do anything else. Mr Katter later signed the documents. As before, he also signed his sister’s name on the document.

18    The evidence of both Joseph and Susan Katter is that they neither requested, nor obtained, any cash advances from Mr Semaan pursuant to this second deed of loan. Again, however, there was evidence in the District Court proceedings from various of Mr Semaan’s associates that $239,000 in cash was in fact provided to Mr Katter. That evidence was not led in these proceedings.

19    At some stage, Mr Semaan went to Lebanon. Susan Katter also went to Lebanon and met with Mr Semaan and a lawyer.

20    Upon his return to Australia in June 2010, Mr Semaan met with Mr Katter. He gave Mr Katter a document in the Arabic language. He told Mr Katter that now he had done his job, Mr Katter had to give him the money. Over the following weeks and months Mr Semaan and his associates made repeated demands for payment. Some of these demands were accompanied by threats of violence.

21    It was at this point that Mr Melhem entered the picture. Mr Melhem contacted Mr Katter. He told Mr Katter that he was the person who lent the money Mr Semaan that Mr Katter owed. He demanded a meeting. At the meeting, which occurred at the McDonald’s “restaurant” in Stanmore (it is unclear if the meeting occurred over a “meal”), Mr Melhem told Mr Katter that he had loaned Mr Semaan money. He demanded money from Mr Katter. This must have seemed strange to Mr Katter because on his version he knew nothing of Mr Melhem’s involvement up to this point. Mr Semaan later explained Mr Melhem’s involvement to Mr Katter. He explained that he, Mr Semaan, was now “out of it” and that “it’s between you and him [Mr Melhem].” Mr Semaan also explained that Mr Melhem wanted Mr Katter to sign another document and that Mr Semaan had organised for a solicitor to “organise” a contract.

22    Mr Semaan later arranged for Mr Katter to meet with a solicitor, Kathy Klonis. At the meeting Ms Klonis gave Mr Katter a document. It was the deed that ultimately formed the basis of the District Court proceedings. Mr Katter did not sign that deed immediately. He told Ms Klonis that he needed more time, that he did not know what to do, but that he did not want to sign the document. Ms Klonis told him that he did not have to. Following the meeting, Mr Katter received several threatening phone calls from Mr Semaan demanding that he sign the deed that Ms Klonis had provided to him.

23    If things were not already strange enough, they were about to get stranger still, at least on Mr Katter’s version of events. Mr Katter’s evidence is that at this point he retained Ms Klonis to act for him in relation to issues concerning the estates of his late brother and mother. Presumably she was replacing Mr Scali, who previously acted for Mr Katter in relation to the estate matters and who apparently had some involvement in the drafting of the two earlier deeds of loan. Mr Katter’s retainer of Ms Klonis apparently occurred despite the fact that, on Mr Katter’s version of events, Ms Klonis was apparently already acting for either Mr Semaan or Mr Melhem (or perhaps both) in relation to the deed. Mr Melhem also attended a number of further meetings with Ms Klonis, along with Joseph and Susan Katter and Mr Semaan and his associates. At one of these meetings Mr Melhem attended by telephone.

24    According to both Joseph and Susan Katter, they told Ms Klonis that they did not receive any money from Mr Semaan or Mr Melhem and therefore did not owe them any money. They accordingly did not want to sign the document. They also told Ms Klonis that they had been threatened.

25    But sign the document they did. The deed of loan between Mr Melhem and Joseph and Susan Katter is signed by both Joseph and Susan Katter and their signatures are witnessed by Ms Klonis (the Deed). On any view, Mr Katter’s evidence concerning the signing of the Deed is extraordinary, if not bizarre. It is difficult, if not impossible, to accept that a solicitor would permit her clients to execute a deed of loan in circumstances where the solicitor had been told that no money had been lent or received and that the clients were only signing because they had been threatened. It is even more extraordinary in circumstances where, as will be seen, no defence of duress was raised in the proceedings to enforce the deed.

26    It should also be noted at this stage that Mr Melhem gave evidence in the District Court proceedings. Ms Klonis also swore an affidavit in the District Court proceedings. It was read without objection in Mr Melhem’s case. That evidence is considered further below. Suffice it to say at this stage that the evidence of Mr Melhem and Ms Klonis in the District Court proceedings concerning the circumstances in which the Deed was executed is, to say the least, rather strange. Whilst it is unclear, it appears to be suggested by both Mr Melhem and Ms Klonis that Ms Klonis was acting for Joseph and Susan Katter in relation to the Deed. It is, however, unclear who first provided instructions to Ms Klonis and unclear who drafted the Deed. Ms Klonis apparently cannot remember, though she says it “may” have been provided to her by Joseph and Susan Katter. Strangely, however, on her version of events she did not give them any advice in relation to the Deed, despite their apparent unwillingness to sign it, and despite apparently being aware that they had been threatened. Even more strangely, as will be seen, the terms of the Deed do not appear to reflect any of the various versions of events in relation to the provision of any loan funds. Strange too is the fact that, according to Mr Melhem, he was in regular contact with Ms Klonis. Indeed, the only person Ms Klonis appears to have given advice to concerning the Deed is Ms Melhem. Exactly why is unclear. Plainly nobody was concerned about actual or perceived conflicts of interest. Neither Mr Melhem nor Ms Klonis were called to give evidence in these proceedings.

27    The terms of the Deed between Joseph and Susan Katter (as “Mortgagor”) and Mr Melhem (as “Mortgagee”) are important. The recitals in the Deed are in the following terms:

A.    The Mortgagee has, at the request of the Guarantor (if applicable), agreed to lend moneys to the Mortgagor in accordance with and subject to the terms of this Deed.

B.    The Guarantor (if any) and the Mortgagor acknowledge that the moneys referred to in this Deed have been received by the Mortgagor.

(Emphasis added)

28    Clause 2.1 of the Deed provides that the “Mortgagee [Mr Melhem] has at the request of the Guarantor (if any) agreed to lend to the Mortgagor [Joseph and Susan Katter] the Principal Sum [$600,000]”. Clause 4.1 (in conjunction with the first schedule) provides that the loan was to be repaid on 31 January 2011. That is a loan term of just over one month. Clause 3 provided for the payment of interest of 5% per month if the loan was not repaid in full on 31 January 2011. Under clause 7, Joseph and Susan Katter agreed to execute a mortgage over a property at 30 Shaw Street, Petersham. No such mortgage was ever executed.

29    If, as Joseph and Susan Katter claim, they told Ms Klonis that they had received no money, it is bizarre that Ms Klonis allowed them to sign a document that expressly acknowledged that they had. While the evidence of Joseph and Susan Katter was not challenged on this application, their explanation for signing a deed which acknowledged their receipt of money they maintain they did not receive, it must be said, is barely credible or plausible.

30    According to Mr Katter, he heard nothing further from Mr Melhem after the Deed was signed. Mr Semaan, however, continued to pressure him to make payments. In January and February 2012 Mr Katter made some cash payments to Mr Semaan. He also met with Ms Klonis, who told him that Mr Semaan wanted Mr Katter to pay him some money. Mr Katter told Ms Klonis that he had no money, whereupon, according to Mr Katter, Ms Klonis offered to lend him some money. Given Ms Klonis’ knowledge and role in the transactions, if this occurred it was bizarre. She apparently wrote out a cheque payable to Mr Semaan and told Mr Katter the details of the account into which the cheque was to be deposited. Mr Katter’s evidence is that he believed this money was for the payment of Mr Semaan’s costs of the inquest in Lebanon. The amount borrowed from Ms Klonis and paid in these circumstances is unclear, but it appears to have been either $15,000 or $20,000.

31    Joseph and Susan Katter did not make any repayments to Mr Melhem under the terms of the Deed. On 3 May 2011 Mr Melhem filed a Statement of Claim claiming $550,000, being the balance of the principal sum said to be owing under the Deed, together with interest of $195,366.93 in respect of the 4 month period from 20 December 2010 to 3 May 2011.

32    The pleadings in the Statement of Claim are interesting, though not exactly illuminating as to the precise basis upon which Mr Melhem claimed he was owed $550,000. The two deeds of loan between Joseph and Susan Katter and Mr Semaan are pleaded. It is not, however, alleged that Joseph and Susan Katter requested Mr Semaan to make any payments under the deeds. Nor is it pleaded that Mr Semaan in fact made any advances under the deeds. It is then pleaded that Joseph and Susan Katter, Mr Semaan and Mr Melhem “renegotiated” the “former deeds”. It is not alleged that Mr Melhem advanced any money to Joseph and Susan Katter or anyone else under the terms of the supposedly renegotiated deed. The liability of Joseph and Susan Katter to Mr Melhem is pleaded as arising in the following curious way in paragraphs 12-14 of the Statement of Claim:

12.    By virtue of the guarantee reduced to written form, offered jointly and severally by the defendants to the plaintiff and which the plaintiff accepted and then relied to his detriment when lending money, the first defendant and the second defendant agreed to accept liability in the event of any default and to repay the plaintiff the loan amount of $600,000.00 (“Loan Amount”) plus interest and costs on an indemnity basis.

13.    In addition or in the alterative [sic] to, paragraph 12, the plaintiff relies on the mortgage provided jointly and severally by the first and second defendant and reduced to form and which the plaintiff accepted and then relied upon to his detriment as security for the Loan Amount to secure repayment of the Loan Amount in the event of any default on the defendants’ promise to repay and the subsequent Final Deed of Loan. Further, on the basis as set out in this paragraph, the first defendant and the second defendant also agreed to accept liability to pay to the plaintiff the interest payable as per the Final Deed of Loan and costs on an indemnity basis.

14.    In addition or in the alterative [sic] to, paragraphs 12 and 13, the plaintiff relies on the defendants’ representations, made jointly and severally, to the plaintiff upon which the plaintiff relied to his determent prior or contemporaneous to lending the Loan Amount.

33    Despite the rather opaque and unsatisfactory nature of the pleadings, there was no strike out application. Nor was any issue taken about the pleadings before the trial judge in the District Court.

34    Joseph and Susan Katter filed a defence to the Statement of Claim. They admitted signing the Deed with Mr Melhem but denied that any money was ever advanced to them by either Mr Semaan or Mr Melhem. They accordingly denied that they were liable to repay any amount under the Deed. Importantly, however, they did not plead duress or otherwise contend that the deed was invalid, unenforceable or should be rectified in any way.

35    The parties prepared and filed affidavit evidence in the District Court. As previously indicated, the affidavits filed by Joseph and Susan Katter were in substantially similar terms to their affidavits filed in these proceedings in so far as they address the events leading up to the execution of the Deed. In support of his case, Mr Melhem filed affidavits from himself, Mr Semaan, Ms Klonis and a number of other people who worked for or with Mr Semaan.

36    It is unnecessary to set out the contents of the affidavits relied on by Mr Melhem in any detail. The key point to note is that the general thrust of the affidavit evidence is that Mr Katter approached Mr Semaan for a loan of about $400,000. Mr Semaan told Mr Katter that he did not have that sort of money, but that he would approach his cousin (Mr Melhem). Mr Semaan then spoke with Mr Melhem. The upshot was that Mr Melhem, at Mr Semaan’s request, gave Mr Semaan $100,000 and $239,000 in May 2010 on the basis that these amounts would be provided by way of loan to Joseph Katter.

37    Exactly who would lend the funds to Mr Katter is somewhat unclear from the affidavit evidence. Mr Melhem seems to suggest that he would loan the funds to Mr Semaan and Mr Semaan would then lend them to Mr Katter. Mr Semaan appears to suggest that Mr Melhem told him that he (Mr Melhem) would loan the money to Mr Katter, but that Mr Katter would have to repay Mr Semaan. It is unclear, on Mr Semaan’s version of events, what Mr Katter was told concerning the origin of the money loaned to him, or who was loaning it to him.

38    According to the affidavits of both Mr Semaan and Mr Melhem, the first two deeds (for $100,000 and $239,000 respectively) were prepared by Mr Scali, who was at this stage acting for Mr Katter. Strangely, however, Mr Semaan indicated that Mr Scali told him that he had a conflict of interest having previously acted for Mr Semaan, and that accordingly he only gave Mr Katter a “standard agreement”.

39    Mr Melhem’s evidence in the District Court was that he did not deal directly with Mr Katter in relation to the two cash payments of $100,000 and $239,000. He delivered the cash to Mr Semaan or one of his associates. Mr Semaan’s evidence was that he gave Mr Katter the first payment of $100,000 in cash. Mr Semaan was apparently in Lebanon when the second cash payment of $239,000 was made. There was evidence in the District Court from one of Mr Semaan’s associates to the effect that he provided this cash to Mr Katter.

40    The circumstances in which the Deed between Mr Melhem and Joseph and Susan Katter was prepared is somewhat unclear on the evidence relied on by Mr Melhem in the District Court. Mr Melhem’s evidence was, in essence, that when Joseph Katter did not pay him, Mr Katter offered to get his solicitor, Ms Klonis, to prepare an agreement. Mr Melhem requested that the agreement be directly with him. Strangely, given that Ms Klonis was supposedly acting for Mr Katter, Ms Klonis, on Mr Melhem’s version of events, consulted with Mr Melham and provided him with advice. Exactly how the amount in the Deed came to be $600,000 is also somewhat unclear, though the suggestion appears to be that by December 2010 the debt supposedly owing by Joseph and Susan Katter to Mr Melhem was $680,000, presumably as a result of interest. According to Mr Melhem, he agreed to cap the amount owing at $600,000.

41    Exactly who instructed Ms Klonis to draft the Deed is unclear from the evidence filed by Mr Melham in the District Court, though the suggestion appears to be that it was Mr Katter. Ms Klonis’ affidavit sheds no real light on this issue. Exactly why it was drafted in terms that appeared to bear no relationship whatsoever to what had in fact occurred, on any version of the events, is a complete mystery. There is no suggestion in the recitals to the Deed, or elsewhere, that Joseph and Susan Katter owed money to Mr Melhem as a result of the renegotiation of the two earlier deeds of loan between Joseph and Susan Katter and Mr Semaan. Yet that was the way the matter was pleaded.

42    The trial in the District Court commenced on 7 August 2012. The transcript of the proceedings is in evidence. It is again unnecessary to recite in any detail what occurred at the trial. A few matters, however, are worth noting.

43    First, perhaps not surprisingly, Mr Melhem relied heavily on the terms of the Deed between himself and Joseph and Susan Katter. In his opening address, Mr Melhem’s counsel submitted, in effect, that Joseph and Susan Katter, having admitted that they signed the Deed, were not able to go behind the recitals to the Deed and deny that they received the loan monies.

44    Second, counsel for Joseph and Susan Katter appears to have approached the case on the basis that the Deed was either inadmissible or unenforceable under the terms of the Duties Act 1997 (NSW) (Duties Act) because no duty had been paid in respect of it. He raised this point with the District Court trial judge at the very beginning of the proceeding. Placing all his eggs in this basket was perhaps not wise. The trial judge was unimpressed with the argument based on the Duties Act and duly admitted the Deed into evidence. Unfortunately for Joseph and Susan Katter, it does not appear that their counsel had much of a “Plan B”.

45    Third, the affidavits relied on by Mr Melhem were tendered, subject to some minor objections. Both Mr Melhem and Mr Semaan were cross-examined by counsel for Joseph and Susan Katter. Without going into any great detail in relation to the cross-examination, it is important to note that Mr Melhem agreed in the course of cross-examination that he initially loaned the money to Mr Semaan not Joseph and Susan Katter. He acknowledged that he had no dealings or communications with the Joseph and Susan Katter in relation to the initial loans of $100,000 and $239,000 and agreed that he did not himself give $600,000 to the Katters. Nevertheless, it was never put to Mr Melhem, in terms, that he did not provide $339,000 to Mr Semaan on the basis it would be loaned to Mr Katter. It was never directly put to Mr Melhem that he knew that no money had been received by Mr Katter. It was never put to Mr Melhem that he well knew that he was not entitled to any money under the Deed because no funds had been advanced to Joseph and Susan Katter.

46    Mr Semaan also agreed, in cross-examination, that he (not Mr Melhem) lent the funds to Mr Katter, though he described himself as the “middleman”. Whilst it appears that the cross-examination of Mr Semaan had not concluded, it was not put to him in cross-examination that he never provided the funds to Mr Katter. Nor was it suggested to him that Mr Melhem never paid money to him on the basis that it would then be loaned to Mr Katter.

47    When the matter was adjourned for lunch on the first day, Mr Semaan was still in cross-examination. Mr Katter’s evidence is that during the adjournment, his barrister and solicitor advised him, in fairly strong and emphatic terms, that he should settle the case. His barrister advised him that because the Deed had been admitted in evidence “we’re going down”. Susan Katter’s evidence is that the barrister advised her that they were going to lose. She says that she agreed to settle because she was told she was in a hopeless legal situation.

48    Following this exchange between Joseph and Susan Katter and their legal advisers, settlement negotiations took place between the respective legal teams. At some stage of the afternoon agreement was apparently reached. Terms of settlement were prepared. The terms of settlement were as follows:

1.    Verdict and judgment for the plaintiff in the sum of $400,000 inclusive of interest and costs.

2.    Judgment against the defendants jointly and severally.

3.    No interest to run on judgment if paid within 90 days of 7 August 2012. If not paid within such time, interest shall be payable from 7 August 2012 at the rate prescribed for post-judgment interest.

4.    Leave to the plaintiff to enter judgment in the sum of $1 million if payment under 1 (and/or 2 if applicable) has not been paid by 1 April 2013, or unless paragraph 5 herein applies.

5.    Each defendant (either jointly or separately) shall execute a put and call option in favour of the plaintiff for the sale of a unit on reasonable terms at 136-138 New Canterbury Rd Petersham.

6.    The unit referred to in Order 5 above must be the first available to be sold. On settlement, clear title must be provided.

7.    The defendants shall do all things necessary to facilitate the giving effect of Orders 5 and 6 herein.

8.    The provision of a unit to the plaintiff under these Orders shall release the Defendants from the liability that they would otherwise have under these Orders provided that:

(a)    The sale value of the unit is at least $400,000 (plus the amount of any applicable interest under Order 3) at the time of settlement of the unit; and

(b)    The relevant contract in respect of the sale of the unit is entered into not later than 31 March 2013.

49    When the matter came back before the trial judge, her Honour (no doubt with some enthusiasm) made orders in accordance with paragraphs 1 and 2 of the terms of settlement, and noted that judgment would not be entered until 1 April 2013. Her Honour then merely noted the contents of paragraphs 3 to 8 of the terms of settlement.

50    There are problems with the terms of settlement. They are poorly drafted and in some respects difficult to understand. It is unusual that judgment could be given (but not entered) for one amount ($400,000) but that later, if certain things did not occur, judgment could be entered for a larger amount ($1 million). The terms of the agreement recorded in paragraphs 5 to 8 are also difficult to understand. As will be seen, this became an issue when application was later made to set aside the Judgment.

51    It is important to emphasise that Joseph and Susan Katter do not, in either their evidence or submissions, criticise the solicitor and counsel who appeared for them in the District Court. They do not say, at least expressly, that they were forced or pressured into settling the matter in accordance with the terms of settlement. They do not suggest that they were misled or did not fully understand why they were settling the matter or what the terms of settlement were.

52    Joseph and Susan Katter did not pay $400,000 to Mr Melhem by 1 April 2013 as envisaged in the terms of settlement. There was correspondence between the solicitors for Joseph and Susan Katter and Mr Melhem concerning a put and call option that Joseph and Susan Katter prepared in purported compliance with paragraph 5 of the terms of settlement. It appears that a put and call option was signed by Joseph and Susan Katter, however Mr Melhem did not agree with the terms of the option or the proposed sale of the unit that it related to. Amongst other things, Mr Melhem did not agree that the option and proposed sale were on “reasonable terms”.

53    On 12 April 2013, Mr Melhem’s solicitors wrote to the solicitor acting for Joseph and Susan Katter and advised that Mr Melhem was “proceeding to enforce judgment”. On 25 June 2013 Mr Melhem’s solicitor wrote to the District Court and sought “entry up of the Consent Judgment as set out in Consent Order 4”. The letter enclosed two affidavits sworn by Mr Melhem. Those affidavits deposed to the fact that Mr Melhem had not been paid $400,000 and that paragraphs 5 to 8 of the terms of the settlement had not been complied with. They also contained an interest calculation that suggested that interest payable up to 4 April 2013 amounted to $632,500. This made the total amount claimed a figure exceeding $1 million. In the affidavits, Mr Melhem asserted that the “default amount in paragraph 4 of the Consent Orders was negotiated at the time as a reasonable pre-estimate of my holding fees and costs for lost use of personal money.”

54    On 22 July 2013 the District Court trial judge made an order or gave judgment for Mr Melhem in the sum of $1 million jointly and severally against Joseph and Susan Katter. It would appear that these orders were made in chambers. There was certainly no hearing before the trial judge. The orders bear a notation indicating that the orders were entered on 23 July and the Judgment was taken out on 30 July 2013.

55    The entry of the Judgment was not, by any means, the end of the matter. On 15 August 2013 Joseph and Susan Katter filed a Notice of Motion in the District Court seeking, amongst other things, that the Judgment be set aside. The application was made pursuant to rule 36.15 of the Uniform Civil Procedure Rules 2005 (UCPR), which provides that a judgment or order may, on sufficient cause shown, be set aside if the judgment was given or entered, or the order was made “irregularly, illegally or against good faith”.

56    The motion to set aside the judgment was heard by the District Court judge on 27 September 2013. Joseph and Susan Katter were represented by new counsel. The primary submission made on behalf of Joseph and Susan Katter in support of their application was that the Judgment was given or entered against good faith because they had complied with paragraph 5 of the terms of settlement. There were other arguments advanced, though some of them are not easy to comprehend. It would appear that Joseph and Susan Katter did not advance any argument concerning the circumstances in which the terms of settlement were agreed, aside from a suggestion in their written submissions that their counsel was not authorised to settle the proceedings. It appears that this submission was not pressed. Importantly, for present purposes, they did not argue that the terms of settlement were invalid or unenforceable because they were entered into under duress, or that they were misled or did not understand the terms. They did not argue that the terms were irregular, illegal or against good faith because no money was ever advanced to them by Mr Semaan or Mr Melhem. They did not contend that the terms of settlement or the entry of judgment of $1 million was oppressive or amounted to a penalty. Nor was any point taken about the jurisdictional limit of the District Court.

57    On 18 October 2013 the District Court judge dismissed the motion to set aside the judgment. Her Honour’s judgment turns largely on the construction of the terms of settlement. Her Honour found, amongst other things, that Joseph and Susan Katter did not comply with paragraph 5 of the terms of settlement because the option for the sale of the unit that had been signed by Joseph and Susan Katter was not on reasonable terms.

58    On 8 November 2013 Joseph and Susan Katter filed an appeal in the New South Wales Court of Appeal. The grounds of appeal challenged the finding by the District Court judge concerning compliance with paragraph 5 of the terms of settlement. The appeal also raised, for the first time, an argument that paragraph 4 of the terms of settlement operated as a penalty and was therefore void and unenforceable. On 30 January 2014, however, that appeal was discontinued. The Judgment for $1 million against Joseph and Susan Katter accordingly still stands. It has not been varied or set aside.

59    It should again be emphasised that Joseph and Susan Katter again do not criticise, in either their evidence or submissions, the solicitor and new counsel who appeared for them on the application to set aside the Judgment. Exactly why none of the arguments now advanced were put in support of the application to set aside the Judgment is unclear.

The parties’ submissions

60    Joseph and Susan Katter submit that this is a case where the Court should exercise its discretion to “go behind” the judgment of the District Court and investigate whether a valid debt in fact lies behind it. They advance three reasons why the Court should not simply accept the judgment as evidence of the debt, but should inquire whether there really is a debt due by Joseph and Susan Katter to Mr Melhem.

61    First, they submit that the evidence before this Court is that no monies were ever received by them from either Mr Melhem or, for that matter, Mr Semaan. In their submission, if it is found that no monies were ever received by them, the terms of settlement do not constitute a contract because there was a total lack or failure of consideration. It follows that there was in turn no consideration for the Judgment. They emphasise that the evidence on this point is all one way. Their uncontested evidence on this application was that they received no money. Neither Mr Melhem nor Mr Semaan swore affidavits or gave evidence in these proceedings.

62    Second, Joseph and Susan Katter submit that the terms of settlement include a term that is an unlawful or unenforceable penalty. Paragraph 4 of the terms of the settlement in their submission operates as a penalty because it permits entry of a judgment for $1 million in circumstances where that amount is not a genuine pre-estimate of any loss caused to Mr Melhem arising from the failure to pay $400,000, as provided in paragraphs 1 and 4 of the terms. This, in their submission, provides an additional reason for going behind the judgment.

63    Third, Joseph and Susan Katter submit that the bankruptcy notice should be set aside because it seeks to enforce a judgment which is beyond the jurisdictional limit of the District Court. The jurisdictional limit of the District Court is $750,000. They submit that the provisions of the District Court Act 1973 (NSW) (District Court Act) that permit the jurisdictional limit to be extended in certain circumstances do not apply to the facts of the case.

64    The primary submission advanced by Mr Melhem is that Joseph and Susan Katter have not established any good or compelling reason for going behind the Judgment to investigate whether there is in truth a debt owing by them to Mr Melhem. They point in particular to the fact that the Judgment was entered after the commencement of a hearing on the merits and as a result of a compromise reached on the advice of counsel. Joseph and Susan Katter have not, in Mr Melhem’s submission, established that the compromise was affected by any collusion or dishonesty between Mr Melhem and Joseph and Susan Katter or their representatives, or any other impropriety or unfairness.

65    Mr Melhem submits that the Court only goes behind a judgment to inquire whether there was “consideration” for a judgment. Here, the consideration for the Judgment was not the debt arising under the Deed which was sued upon. Rather, it was the agreement or compromise reflected in the terms of settlement. To set aside the compromise, the Katters would need to establish that Mr Melhem’s action in the District Court was essentially dishonest or fraudulent because he knew his claim had no foundation. In Mr Melhem’s submission, such a conclusion is not available on the evidence.

66    In relation to the excess of jurisdiction and penalty points raised by Joseph and Susan Katter, Mr Melhem submits that the Court should not exercise its discretion to go behind a judgment if the challenge would only support a finding that the debt should be reduced. In Mr Melhem’s submission, that is the case with the jurisdiction and penalty grounds agitated by the Katters. Even if established, those grounds would only have the effect of reducing the enforceable debt to $750,000 or $400,000 respectively. These grounds therefore provide no basis for going behind the judgment.

67    In any event, in Mr Melhem’s submission there was no excess of jurisdiction and no penalty. In relation to jurisdiction, Mr Melhem contends that the District Court had consent jurisdiction under s 51(3)(b) of the District Court Act because no objection to the Court’s jurisdiction was raised prior to 3 months before the trial of the action commenced. In relation to penalty, Mr Melhem submits that had the issue been raised before the District Court judge, there was evidence that $1 million was a reasonable pre-estimate of his loss if the $400,000 settlement figure was not paid in accordance with paragraph 1 of the terms of settlement.

68    Finally, Mr Melhem submits that all the points now raised by Joseph and Susan Katter could have been, but were not, raised in the District Court. In particular, it was open to them to raise the no consideration, excess jurisdiction and penalty arguments in the application to set aside the judgment. They did not do so. In Mr Melhem’s submission this is a compelling reason not to exercise the discretion to go behind the judgment.

Relevant principles – “going behind” a judgment

69    The existence of a judgment is prima facie evidence of a debt: Corney v Brien (1951) 84 CLR 343 (Corney v Brien) at 355 (Fullagar J). However, a judgment is never conclusive in bankruptcy and the Court has a discretion to “go behind” the judgment to investigate whether there was a good debt to support it: Corney v Brien at 347 (Dixon, Williams, Webb, Kitto JJ), 353-354 (Fullagar J).

70    The Court will not, however, inquire into the consideration for a judgment as a matter of course: Wren v Mahoney (1972) 126 CLR 212 at 222-223 (Barwick CJ). Whilst the circumstances in which the Court will inquire into the validity of a judgment debt are not closed (Commonwealth Bank of Australia v Jeans [2005] FCA 978 (Commonwealth Bank v Jeans) at [15]) and there is no inflexible rule (Re Wong; Ex parte Kitson (1979) 27 ALR 405; Chancliff Holdings Pty Ltd v Bell [1999] FCA 1708 (Chancliff) at [90]), it is possible to identify a number of guiding principles.

71    First, the Court looks with suspicion on consent judgments and default judgments: Corney v Brien at 348 (Dixon, Williams, Webb and Kitto JJ) citing Latham CJ in Petrie v Redmond (1942) 13 ABC 44 at 48-49. Where the judgment in question is a default judgment, it appears that the Court will always “go behind” the judgment if there is what it regards as a bona fide allegation that no real debt lay behind the judgment: Corney v Brien at 357-358 (Fullagar J).

72    Second, if the judgment in question followed a full investigation at a trial at which both parties appeared, the Court will not reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out: Corney v Brien at 356-357 (Fullagar J). In Re Flatau; Ex parte Scotch Whisky Distillers Ltd (1888) 22 QBD 83 at 86, Fry LJ said: “this power has never, so far as I am aware, been extended to cases in which a judgment has been obtained after issues have been tried out before a [c]ourt”. In Corney v Brien, Fullagar J said (at 358) that he had not been able to find any such case since Fry LJ made this statement in 1888.

73    Third, where judgment has been entered in pursuance of a compromise, grounds must be shown for challenging the compromise before the subject matter of the judgment will be reopened: Corney v Brien at 357 (Fullagar J). That is because it is the compromise and not the claim that was compromised that is the foundation of the judgment: Harrison v Charalambous [1999] FCA 902 (Harrison v Charalambous) at [9].

74    Where a party challenges a judgment entered on a compromise and that party has acted on the advice of counsel, the judgment will not generally be reopened: Corney v Brien at 357. The presumption in such circumstances is that it is difficult, although not impossible, to impugn the compromise: Harrison v Charalambous at [9]. One instance where the Court may go behind a judgment in these circumstances is where both parties knew the original claim was not a bona fide claim and the judgment or compromise was obtained by dishonesty known to both parties: Ex parte Banner; In re Blythe (1881) 17 Ch D 480 (Re Blythe). If, however, counsel had 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: In re A Debtor [1929] 1 Ch. 125; Chancliff at [100]; Smith v Abbott, Stillman & Wilson [2007] FCA 1256.

75    The fact that the debtor may have been pressured by his legal advisers to compromise the claim, despite the merits of his defence, will not generally be sufficient to warrant going behind the judgment entered pursuant to that compromise. That will particularly be the case where the judgment creditor was unaware of, or was not implicated in, the alleged undue pressure: Harrison v Charalambous at [11]. In that case, Finkelstein J said (at [12]):

To my mind, what has occurred in this case is not a sufficient basis to go behind the judgment based on the compromise. Although the debtor may have been placed under undue pressure to enter into the compromise, I cannot discern any unfairness or impropriety of such a kind as would justify me in looking behind the judgment. The reality is that the debtor, perhaps through no fault of his own, was placed in a position where his commercial interests necessitated a compromise and he agreed to it in accordance with those interests. In one sense the position the debtor found himself in is not very different to the circumstances which other litigants have often had to confront. I do not doubt that litigants regularly compromise actions otherwise than in accordance with the true merits of the claims made, but that is not a sufficient reason to deny efficacy to the agreements to compromise that these litigants reach. It is certainly not a sufficient reason in this case.

76    It is implicit in this statement that the mere fact that the compromise may not have been “in accordance with the true merits of the claims made” will not be sufficient to impugn the compromise. Such a circumstance alone will therefore not warrant the Court going behind the judgment.

77    Fourth, the Court should not go behind a judgment where the grounds upon which the judgment is challenged are such that, if accepted, they would only support a finding that the amount of the debt be reduced and would not support a finding that there was, in truth, no debt at all: Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 at 589; Olivieri v Stafford (1989) 24 FCR 413 (Olivieri v Stafford) at 431-432 (Gummow J); Re Cosimo Longo Ex parte: Cosimo Longo [1995] FCA 1324 at [23]-[25]; Cumins v Deputy Commissioner of Taxation (2008) 172 FCR 425 at [7]-[10]; Re Riviere; Ex parte Original Mont de Piete Ltd (1919) 20 SR (NSW) 77 (Re Riviere) at 83-84.

78    The particular circumstances of any given case may no doubt throw up other considerations relevant to whether the Court should exercise its discretion to go behind a judgment. Where the judgment debtor seeks to go behind the judgment on particular grounds, it is difficult to see why it would not be a relevant consideration that those grounds could have been, but were not, raised in opposition to the judgment, or in an application to set aside the judgment. Parties are ordinarily bound by the way they have chosen to conduct litigation. The fact that, for whatever reason, a party did not put particular arguments before the court that made (or refused to set aside) the judgment does not mean that there was no relevant hearing on the merits: Commonwealth Bank v Jeans at [18]-[21]; Olivieri v Stafford at 424 (Beaumont J).

79    The question whether the judgment is to be reopened or “gone behind” at all will usually involve some preliminary investigation of the merits of the attack of the judgment: Corney v Brien at 358. That question can and often is dealt with as a preliminary question: see for example Commonwealth Bank v Jeans. Once the Court decides that it will go behind the judgment “the whole [of the] matter is open”: Corney v Brien at 358. Where it is legitimate to go behind a judgment entered after trial, there would effectively be no alternative but to retry the whole case.

80    The parties in this matter did not ultimately ask the Court to decide the question whether the Court should go behind the judgment as a separate preliminary question. The evidence relied on by the parties was relied on for all purposes.

81    It is, however, obviously necessary to first determine whether the discretion should be exercised. If not, it is unnecessary to go further.

Should the Court go behind the judgment?

82    There are many aspects of the District Court proceedings and judgment that give rise to a general sense of disquiet. The facts and circumstances relied on by Mr Melhem in the District Court case are, as can be seen, unusual. There are some ambiguities and inconsistencies in the evidence and the way Mr Melhem’s case was pleaded and put in the District Court. Yet the story told by Joseph and Susan Katter in their evidence (both in the District Court and this Court) is, in many respects, equally unusual, if not bizarre, and contains its own inconsistencies and incongruities. Their strident denial in these proceedings that they ever received any money from Mr Melhem or Mr Semaan sits uneasily, in many respects, with the conduct of their case in the District Court. The fact remains that, on the advice of their solicitor and counsel, which is not criticised, they were prepared to and did compromise Mr Melhem’s claim.

83    Likewise, there are issues concerning the terms of settlement, the entry of judgment and the application to set aside the judgment. The terms of settlement themselves are ineloquently drafted and unclear or ambiguous in many respects. Yet they did not trouble counsel who appeared for the parties in the District Court. Nor did they appear to ultimately trouble the District Court judge. The District Court judge was ultimately able to construe the terms of settlement when application was made to set aside the judgment. The appeal from the District Court judge’s judgment in relation to that application was ultimately discontinued. The judgment that was entered in the District Court exceeded the District Court jurisdictional limit, yet this was not an issue that was adverted to by counsel or the trial judge in the District Court, either when the initial orders were made, when the judgment was entered, or when application was made to set the judgment aside.

84    But are these unusual or even troubling features of the matter sufficient to warrant the Court going behind the judgment? Is there a sufficient basis to reopen the matter given that the judgment was based on a compromise entered into on the advice of counsel following a partial hearing on the merits of the action, and given that there was an unsuccessful application to set the judgment aside in the District Court that was not ultimately appealed from?

85    For the following reasons, and having regard to the principles considered earlier, this is not an appropriate case for the Court to go behind the Judgment. Joseph and Susan Katter have not established that, in all the circumstances, there are substantial reasons to warrant the exercise of the discretion to go behind the judgment. There are also a number of powerful considerations that militate against the exercise of the discretion in favour of Joseph and Susan Katter. Most important is the fact that, for reasons that are largely unexplained, they failed to raise any of the arguments they now raise in the District Court or on appeal to the Court of Appeal.

The “no monies received” argument

86    As already indicated, the main argument advanced by Joseph and Susan Katter for why the Court should go behind the Judgment is that they did not receive any money from either Mr Semaan or Mr Melhem. For this reason, so it is argued, the terms of settlement were unsupported by consideration and did not constitute a valid or enforceable contract. If the terms of settlement do not constitute a contract, there was, on Joseph and Susan Katter’s argument, therefore no consideration for the judgment.

87    There are a number of difficulties with this argument even if it may be accepted that the evidence that Joseph and Susan Katter did not receive any money is, as they submit, “all one way”. Even if no money was received by Joseph and Susan Katter, the fact is that, on the advice of counsel, that is not criticised or attacked in any way on this application, Joseph and Susan Katter entered into a new bargain whereby they compromised the disputed claim. They no doubt did so ultimately in the belief that the advantage in resolving the proceedings on the basis set out in the terms of settlement outweighed the risk or disadvantage of potentially losing the case and having a judgment entered against them for possibly in excess of $1 million. The basis of, or consideration for, the Judgment was this new bargain or compromise, not the debt the subject of the original claim.

88    The new bargain represented by the terms of settlement was supported by consideration. The consideration was the compromise of the disputed claim. Joseph and Susan Katter agreed to either pay Mr Melhem $400,000, enter into a put and call option as set out in the terms of settlement, or alternatively accept the entry of judgment against them in consideration for Mr Melhem’s promise not to pursue his claim for a judgment which, together with costs, may well have exceeded $1 million.

89    The fact that Mr Melhem’s claim may ultimately have been unmeritorious is immaterial to the validity of the compromise, so as long as it was an honest or bona fide claim, or a claim that was not so frivolous or vexatious that no person could have held an honest belief that the claim was well founded: Wigan v Edwards (1973) 1 ALR 497 at 512-513; General Credits Limited v Ebsworth [1986] 2 Qd R 162.

90    It is perhaps in recognition of this principle that in their submissions Joseph and Susan Katter also attack the honesty of Mr Melhem’s claim in the District Court. They submit that if it is accepted that no funds were received by them, it must necessarily follow that Mr Melhem’s claim was not honest or bona fide.

91    There is, however, insufficient evidence to establish that Mr Melhem’s claim was not honest or bona fide. That is so even if it may be accepted, on the unchallenged evidence of Joseph and Susan Katter in this Court, that they did not receive any money from Mr Semaan or Mr Melhem. Mr Melhem’s case in the District Court was based largely on the Deed. His evidence was that he provided money to Mr Semaan in the belief or understanding that Mr Semaan would advance it to Mr Katter. There is no evidence that Mr Melhem did not advance the funds to Mr Semaan. There is also insufficient evidence to establish that Mr Melhem did not believe that Mr Semaan would or had advanced the money to Mr Katter, even if (contrary to Mr Semaan’s sworn evidence in the District Court proceedings) Mr Semaan did not ultimately pay the money on to Mr Katter. The highest the evidence gets is that in one conversation between Mr Katter and Mr Melhem, Mr Katter said “I never got any money”. But Mr Katter went on to say “I don’t know you. I was dealing with Saim [Semaan]”. Mr Katter’s assertion may be taken to have amounted to a statement that he had not received money from Mr Melhem. There is no sound basis to infer that Mr Melhem knew or believed that Joseph and Susan Katter had not received any money from Mr Semaan.

92    Mr Melham’s case in the District Court was, in substance, that the effect of the Deed was that Joseph and Susan Katter directly owed him the money he had previously advanced to Mr Semaan which, to his belief, had then been loaned to the Katters. His case was that the Deed was a “renegotiation” of the earlier deeds of loan between Joseph and Susan Katter and Mr Semaan. He relied, in particular, on the fact that in the Deed, Joseph and Susan Katter expressly acknowledge that they had received “the moneys” referred to in the Deed. The evidence of Mr Fullick, Mr Melhem’s solicitor at the time, was that he was of the view that Mr Melhem had an “overwhelmingly strong claim” based on the Deed. This view was not necessarily predicated on whether Mr Semaan had in fact provided money to Mr Katter. Mr Fullick advised Mr Melhem that he believed that Mr Melhem had a strong case based on the Deed. Again, that advice was not necessarily predicated on whether Mr Katter had in fact received any money from Mr Semaan. In the absence of evidence that he knew that no money had been received by Mr Katter, and in light of the advice he had received about his claim based on the Deed, it is difficult, if not impossible, to infer, without more, that Mr Melhem knew that his claim was not honest or bona fide.

93    It would also appear that others formed the view that Mr Melhem’s claim based on the Deed was far from unmeritorious, let alone frivolous or vexatious. Counsel for Joseph and Susan Katter in the District Court apparently formed the view that, once the Deed was admitted into evidence, it was likely that Mr Melhem’s claim would succeed. It was on this basis that counsel advised Joseph and Susan Katter to settle. This view and advice was not necessarily predicated on whether or not Joseph and Susan Katter had in fact received any money. Counsel knew that Joseph and Susan Katter had denied on oath that they had received any money from Mr Semaan. Counsel had been briefed with affidavits that were in all relevant respects the same as the affidavits relied on in these proceedings. Counsel’s view, rightly or wrongly, was that the terms of the Deed, once the Deed was admitted into evidence, made Mr Melhem’s case almost unassailable. It is hardly likely that counsel would have advised his clients to settle if he had cause to believe that Mr Melhem’s claim was dishonest or mala fides.

94    In all the circumstances, the mere fact that Joseph and Susan Katter did not receive any money does not necessarily support an inference that Mr Melhem’s claim in the District Court was not bona fide, or was dishonest, frivolous or vexatious. Nor does such an inference flow from any other evidence relied on by Joseph and Susan Katter in this Court.

95    Mr Melhem did not give evidence in these proceedings. Joseph and Susan Katter submit that in these circumstances it should be inferred that his evidence would not have assisted his position: Jones v Dunkel (1959) 101 CLR 298 (Jones v Dunkel). In the circumstances here, however, there is no, or very limited, scope for any such inference. It was never part of Mr Melhem’s case that he gave the money to Joseph and Susan Katter. It was therefore not incumbent on him to respond to their evidence that they did not receive any money from Mr Semaan. In any event, any such inference could not fill the gap in the circumstantial case advanced by Joseph and Susan Katter: Jones v Dunkel at 308, 312. It would not alone, or in conjunction with any other evidence, support a finding that Mr Melhem’s District Court claim was not an honest or bona fide claim.

96    Regard must also be had to the nature of these proceedings. It is clear that Mr Melhem elected to oppose the application to set aside the bankruptcy notice on the basis that the Court should exercise its discretion not to go behind the judgment. He chose not to file affidavits in these proceedings that simply reproduced the evidence he filed in the District Court and thereby effectively invite a re-run of the District Court proceedings. He chose to fight the matter on the more limited basis that, in any event, the Court should not exercise its discretion to go behind the judgment. That is perhaps understandable.

97    The other fundamental difficulty for Joseph and Susan Katter is that, irrespective of their claim that they never received any money, and irrespective of the merits of Mr Melhem’s claim in the District Court, they agreed to compromise the District Court claim. They did so on counsel’s advice. There is no suggestion in the evidence, nor is it contended by Joseph and Susan Katter, that they agreed to compromise as a result of duress, non-disclosure, misrepresentation or mistake. In his opening remarks, senior counsel for Joseph and Susan Katter suggested that it would be submitted that the compromise was entered into under duress. However, ultimately no such submission was made. No mention is made of duress in the written submissions. The evidence, in any event, does not establish duress.

98    Nor is there any suggestion, let alone evidence, of dishonesty or collusion between the parties or their representatives of the sort considered in Re Blythe. There is also no evidence that counsel for Joseph and Susan Katter did not have complete knowledge of the facts, or knew or believed that Mr Melhem’s case was dishonest or manifestly unmeritorious. Counsel was briefed with affidavit evidence that was not different in any material respect to the affidavits before this Court. It may be inferred that Joseph and Susan Katter instructed their counsel that they did not receive any money. Yet counsel still advised them to settle the case and Joseph and Susan Katter acted on that advice. Joseph and Susan Katter did not lead any evidence from their counsel or solicitor on this application.

99    There is accordingly no evidence of any unfairness or impropriety of the sort that would warrant the Court going behind the compromise or the judgment. Nor can it be concluded that there has been a miscarriage of justice, or that there is even a suspicion of a miscarriage of justice. As in Harrison v Charalambous, Joseph and Susan Katter may have compromised an action that was, as far as they were concerned, unmeritorious. That alone, however, is insufficient to justify the Court going behind the Judgment based on the compromise.

100    There is a further and important discretionary consideration that militates against going behind the judgment on the basis of the contention that no money was received by Joseph and Susan Katter. That consideration is that it was open to Joseph and Susan Katter to seek to have the judgment set aside, either under s 73 of the Civil Procedure Act 2005 (NSW) (Civil Procedure Act), or under rules 36.15 or 36.16 of the UCPR, on the basis that they received no money and that Mr Melhem’s claim was not bona fide. They did not raise any such argument when they did apply to have the judgment set aside. They have provided no explanation for this. No evidence has been led from the new counsel who represented Joseph and Susan Katter at the hearing of the application to set aside the Judgment.

101    Section 73 of the Civil Procedure Act confers power on the Court to determine any question in dispute between the parties as to whether, and on what terms, the proceedings have been compromised or settled between them. The Court may make such orders as it considers appropriate to give effect to any such determination. It plainly would have been open to Joseph and Susan Katter to argue, pursuant to s 73 of the Civil Procedure Act, that the terms of settlement were not supported by consideration. They could have also argued that the compromise should be set aside because Mr Melhem’s claim was not honest or bona fide, or because they agreed to compromise on the basis of duress, fraud, misrepresentation or even mistake. They did not raise any of these arguments. Nor have they explained why they did not do so.

102    The fact that Joseph and Susan Katter did not put these arguments to the District Court when they applied to have the judgment set aside does not mean that there was no hearing on the merits in the District Court: Commonwealth Bank v Jeans at [18]-[21]. They are bound by the way the proceedings were conducted on their behalf. The question whether the Judgment should be set aside has been the subject of adjudication in the District Court. No appeal from that adjudication has been pressed. It is difficult to see why, in these circumstances, Joseph and Susan Katter should be given another opportunity to ventilate these arguments by permitting them to go behind the judgment.

103    In Olivieri v Stafford, the appellant was sued in the District Court. At the hearing in the District Court he unsuccessfully applied for an adjournment and then, with leave, withdrew from the proceedings. He unsuccessfully appealed to the Court of Appeal and unsuccessfully applied for an order that the District Court judgment be set aside. A bankruptcy notice issued for the judgment debt. The appellant then unsuccessfully applied for an order setting aside the bankruptcy notice. On appeal, Beaumont J said (at 424):

As has been said, a court of bankruptcy is concerned to inquire into the “reality” of the matter in hand. Here the “reality” of the matter is that the merits of the respondents’ claim have been demonstrated to the satisfaction of one judge of the District Court and another judge of that Court has declined to disturb that judgment. As a matter of substance, it is appropriate, in all the circumstances, for a court of bankruptcy to treat what happened in the two hearings in the District Court as a trial of the merits of the respondents’ claim. That is to say, a court of bankruptcy should, I think, accept that a process of adjudication in the District Court has established that the underlying transactions created a true debt which could, in turn, provide a proper foundation for the entry of a judgment in respect of which a bankruptcy notice could properly issue.

104    These observations apply equally to this case.

105    It is unclear where the truth lies in relation to the original dispute which was the subject of the District Court proceedings. The cases advanced by both parties in the District Court proceedings were in some respects equally unsatisfactory, if not bizarre. But one thing is clear. Joseph and Susan Katter had the opportunity to defend Mr Melhem’s claim. They initially did, but when things appeared not to be going well for them, they agreed to compromise the action on the advice of counsel who was fully apprised of all relevant facts. They also had the opportunity to later set-aside the compromise and the judgment based on it. They took up that opportunity, but inexplicably did not raise any of the arguments they now seek to raise, including the fact that they did not receive any money and Mr Melham’s action was therefore dishonest. In all the circumstances, to adapt the words of Beaumont J, this Court should accept that a process of adjudication in the District Court has found that the compromise has established a true debt, which could, in turn, provide a proper foundation for the entry of a judgment in respect of which a bankruptcy notice could properly issue.

The jurisdictional limit argument

106    There are a number of equally compelling discretionary considerations that militate against the Court going behind the Judgment on the basis of the contention that it exceeds the District Court jurisdictional limit. Before turning to these considerations, a number of points should be made about the District Court’s jurisdictional limit.

107    The District Court of NSW has a civil jurisdiction limited by subject matter, geographical area and amount of claim. The monetary limit is $750,000. That jurisdictional limit is not, however, absolute. It can be waived and jurisdiction beyond it can be conferred by consent: Woodward Pty Limited v Kelleher [1989] NSWCA 82 (Woodward v Kelleher) at 2-3; Richards v Cornford (2010) 76 NSWLR 572 (Richards v Cornford) at [6].

108    Section 51 of the District Court Act provides expressly for consent jurisdiction in certain circumstances, namely where the parties have filed a memorandum of consent (s 51(2)(a)) and where no objection has been raised by the parties prior to three months before the trial of the action commences (s 51(2)(b)). This provision does not lend itself to a literal or inflexible construction: Richards v Cornford at [12]. There may also be cases where, even though the formalities of s 51 have not been complied with, the parties may be estopped from denying that fact where they have nonetheless conducted themselves in such a way as to indicate consent to the jurisdiction: Eyres v Butt [1986] 2 Qd R 243 (Eyres v Butt); Woodward v Kelleher at 9-10.

109    Here, there could be little doubt that in agreeing to the terms of settlement, Joseph and Susan Katter effectively waived any objection they might otherwise have had based on the District Court’s jurisdiction and accordingly consented to extended jurisdiction. The terms of settlement envisaged that if certain conditions were not satisfied, Mr Melhem could enter judgment for $1 million. These terms were entered into on the advice of counsel. It is difficult to imagine that counsel would have been unaware of the jurisdictional limit in the District Court. No objection or issue was taken before the District Court judge when orders were made in accordance with the terms of settlement.

110    Nor was any jurisdictional issue raised by Joseph and Susan Katter when they were notified (through their solicitor) in January and March 2013 that Mr Melhem intended to have judgment for $1 million entered in accordance with the terms of settlement. Judgment was in fact entered in July 2013. Nice questions may arise as to whether, in these circumstances, the formalities in s 51(2)(b) of the District Court Act might have been satisfied on the basis that no objection was raised to the entry of a judgment exceeding the jurisdictional limit in the three months preceding “the trial of the action”. That would depend on whether the entry of judgment could be considered to be the trial of the action. That is perhaps doubtful. It is also doubtful that s 51(2) applies at all to the circumstances of this case, given the terms of s 51(1), which confines the operation of the section to “actions” that, but for s 51, the District Court would not have jurisdiction to dispose of by reason only of the fact that the amount claimed exceeds the jurisdictional limit at the time the action was commenced. In the circumstances, however, it is not necessary to decide these issues. The point remains that the conduct of Joseph and Susan Katter in raising no objection to the terms of settlement or judgment on the basis of the jurisdictional limit could reasonably be considered to amount to a waiver or consent, or to give rise to an estoppel of the type considered in Eyres v Butt.

111    More significantly, Joseph and Susan Katter raised no issue concerning the District Court’s jurisdiction when they applied to have the judgment set aside. Had they wanted to challenge the Judgment on the basis that it exceeded the jurisdictional limit, they could reasonably argued that the Judgment was “irregular” (for the purposes of rule 36.15 of UCPR) because the formalities in s 51 of the District Court Act had not been complied with. It would also have been open to them to seek to set aside or vary the terms of settlement and therefore the Judgment on this jurisdictional ground pursuant to s 73 of the Civil Procedure Act. Yet they did not do so.

112    Had that issue been raised before the District Court judge on the application to set aside the Judgment, it would have been open to Mr Melhem to argue that s 51(2)(b) of the District Court Act had been complied with, or that in any event, in all the circumstances, Joseph and Susan Katter were estopped from denying that they had consented to extended jurisdiction. He could also perhaps have argued that any failure to file a memorandum pursuant to s 51(2)(b) of the District Court Act was an irregularity that did not invalidate the Judgment and was able to be corrected pursuant to s 63 of the Civil Procedure Act. Section 63 of the Civil Procedure Act confers jurisdiction on a court to give directions with respect to procedural irregularities. The issue then could sensibly and simply have been resolved at the District Court level. Any issue about the resolution of this issue by the District Court could have been taken on appeal to the Court of Appeal. The fact that this did not occur provides a strong discretionary reason for not now permitting this to occur by going behind the Judgment.

113    Joseph and Susan Katter submit that the jurisdictional issue could not have been raised at the District Court level or on appeal in the Court of Appeal. That submission is rejected. It may be accepted that recent authority suggests that the District Court has jurisdiction to give a judgment in excess of the jurisdictional limit and that the effect of s 23 of the Civil Procedure Act is that, if there is no consent jurisdiction under s 51, the claimant cannot recover more than the jurisdictional limit: Richards v Cornford at [12]. On this basis it would appear that, even if there was no extended jurisdiction, the judgment here was not beyond power. All that would follow would be that Mr Melhem could not recover beyond $750,000. However, the fact remains that if there was in fact any issue concerning jurisdiction, that issue could, and plainly should, have been ventilated at the District Court level, either as an “irregularity” under rule 36.15 of the UCPR (or s 63 of the Civil Procedure Act) or under s 73 of the Civil Procedure Act.

114    There is another reason for not going behind the judgment to consider this issue. As earlier indicated, the authorities establish that the Court should not go behind a judgment where the nature of the challenge, if accepted, would only support a finding that the debt was in fact less than the judgment debt. To an extent, that is the position here, though the case advanced by Joseph and Susan Katter is not that the debt should be reduced. Rather, their case is that the amount recoverable is limited to the District Court jurisdictional limit of $750,000.

115    Joseph and Susan Katter submit that this principle is not applicable here because the difference between the amount of the judgment and the amount able to be recovered is large ($250,000). They call in aid those provisions of the Act relating to overstatements in bankruptcy notices and formal defects: ss 41(5), 41(6) and 306 of the Act. That submission is rejected for two reasons.

116    First, there is no overstatement in the bankruptcy notice such as to bring ss 41(5) and 41(6) into play. Nor is there any formal defect or irregularity for the purposes of s 306. The Judgment was for $1 million. The Judgment has not been set aside. As previously indicated, the Court is entitled to approach the matter on the basis that the question whether the judgment should be set aside or varied has been fully litigated on the merits in the District Court. The bankruptcy notice on that basis correctly records the judgment debt as being $1 million. There is accordingly no overstatement: cf. Olivieri v Stafford at 424.

117    Second, the authorities that establish that the Court will not go behind a judgment if the only basis for doing so is that the debt should be reduced do not indicate that anything turns on whether the reduction is substantial or insubstantial. In Olivieri v Stafford, Gummow J quoted (at 431) with approval the following passage from the judgment of Owen AJ in Re Riviere at 84:

At the same time, I think it is equally clear that the Court will only reconsider the judgment in order to ascertain whether the petitioning creditor’s debt, on which the bankruptcy proceedings have been founded, should be struck out altogether … The Court does not reconsider the judgment merely with the view to seeing whether the judgment debt should be reduced, but in order to ascertain whether the creditor has a debt upon which the bankruptcy proceedings can be founded.

118    Here, even if there is an issue concerning the recoverability of any amount in excess of $750,000, there could be no question (putting aside the other grounds relied on by Joseph and Susan Katter) that Mr Melhem has a debt upon which the bankruptcy proceedings can be founded. There is accordingly no basis for going behind the judgment in relation to the jurisdictional issue.

The penalty argument

119    Virtually identical considerations apply in relation to the argument that the Court should go behind the Judgment on the basis that the terms of settlement were not enforceable because they operated as a penalty. The issue whether the terms of settlement that provided for the entry for judgment for $1 million were unenforceable as a penalty could have been raised before the District Court judge in opposition to the entry of judgment for $1 million. The issue could also have been raised on the application to set aside the Judgment, either pursuant to rule 36.15 of UCPR or s 73 of the Civil Procedure Act.

120    Had that occurred, it appears that there was evidence that could have been relied on by Mr Melhem in opposition to any argument that the terms operated as a penalty. As earlier indicated, Mr Melhem’s affidavits that were relied on in support of the entry of judgment provided an interest calculation and asserted that the figure of $1 million was a genuine pre-estimate of Mr Melhem’s loss if he was not paid $400,000 as provided for in the terms of settlement. That evidence was ultimately not read because the question of penalty was not raised by Joseph and Susan Katter on the application to set aside the judgment. Had the penalty argument been raised before the District Court judge, either on the application for entry of judgment or on the application for judgment to be set aside, it could have been decided by the District Court judge and been the subject of appeal to the Court of Appeal.

121    For the reasons given earlier, the fact that this argument was not raised in the District Court or pursued on appeal provides a powerful reason why the Court should decline to go behind the Judgment in relation to this issue.

122    Another reason for refusing to go behind the judgment on this point is that, like the jurisdictional argument, even if correct the result is, at best, a finding that the debt is $400,000, not $1 million. The terms of settlement effectively so provided. The mere fact that the debt might be less than the judgment debt does not provide a proper basis for going behind the Judgment.

123    It should perhaps also be added that there is at least a reasonable argument that the terms of settlement did not operate as a penalty. Whilst the terms of settlement are poorly drafted and somewhat obscure, it is at least arguable that they operated in a way similar to the terms considered by Darke J in Lachlan v HP Mercantile Pty Ltd [2014] NSWSC 356. The terms appear to acknowledge a present indebtedness for $1 million, together with an agreement that a judgment for that amount would not be enforced or entered if either a lesser sum ($400,000) was paid by a particular date, or the put and call condition set out in the terms of settlement was satisfied. It is, however, unnecessary to decide this issue. There is no proper basis to go behind the Judgment to consider this question in any event.

Conclusion and disposition

124    There are no substantial reasons for the Court to go behind the District Court judgment upon which the bankruptcy notice is based. Indeed, there are compelling discretionary reasons for not going behind the Judgment. The Judgment should be considered to be satisfactory evidence of the debt the subject of the bankruptcy notice. There is no other basis for setting aside the bankruptcy notice. The application by Joseph and Susan Katter to set aside the bankruptcy notice is accordingly dismissed with costs.

Associate:

Dated:    6 November 2014