Re James Dalrymple Gourlay; Ex Parte: James Dalrymple Gourlay v Friends' Provident Life Office [1989] FCA 319 (16 August 1989)

FEDERAL COURT OF AUSTRALIA

Re: JAMES DALRYMPLE GOURLAY; Ex parte: JAMES DALRYMPLE GOURLAY
And: FRIENDS' PROVIDENT LIFE OFFICE
No. B 512 of 1989
FED No. 449
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Burchett J.(1)

CATCHWORDS

Bankruptcy - application to set aside bankruptcy notice - power of court to go behind a judgment - default judgment - observations about the position where a default judgment in the District Court, although a court exercising jurisdiction in bankruptcy refuses to enforce it in bankruptcy proceedings, remains in full force as a judgment upon which execution may issue - whether judgment could be supported upon a count not pleaded in the proceedings in which it was entered.

Bankruptcy Act, 1966 s.41

HEARING

SYDNEY
16:8:1989

Applicant appeared in person

Counsel for the Respondent: J.B. Pender

Solicitors for the Respondent: Tzovaras & Company

DECISION

This is an application to set aside a bankruptcy notice dated 27 February 1989 requiring payment of the sum of $65,764.21 within fourteen days from the date of service of the notice, that is to say, 23 March 1989. The notice is based on a default judgment entered in the District Court of New South Wales on 6 September 1985 in the sum of $41,623.28 together with interest on the judgment amounting at 9 February 1989 to $24,140.93. The debtor's application is founded on his claim that he is not truly liable in respect of the judgment, and that this court should go behind it in order to establish that fact.

2. When the debtor's application was filed in this court, he also indicated that he was filing an application in the District Court to have the default judgment set aside. At the hearing, there was tendered in evidence the judgment of Madgwick D.C.J., dated 23 June 1989, in the matter of Friends' Provident Life Office v. Gourlay, refusing the debtor's application made in the District Court. The kernel of it is as follows:
"I am not minded to accede to his (ie the

debtor's) application, for the following
reasons: - Firstly, upon legal advice he made
the choice a long time ago about whether he
would defend this action. There is no reason
in my view why since he made that choice he
should not be responsible for its
consequences. Secondly, it does not strike
me as at all oppressive, having regard to the
circumstances in which the claim arose and to
which I have referred above, that the
judgment should be allowed to stand even if
there be some technical defence. Thirdly, on
any view of the matter there has been
considerable delay by Mr Gourlay. Fourthly,
if the judgment creditor goes on to pursue
the bankruptcy of Mr Gourlay, Mr Gourlay will
not be without the remedy of seeking to
persuade those responsible not to accept this
judgment as a provable debt against him,
notwithstanding its existence.
Finally, to allow Mr Gourlay in to defend the
matter now, having regard to his assertion of
impecuniosity, is to have the judgment creditor
waste costs thus far incurred by it and to face
the prospect of further irrecoverable costs."

3. The fourth reason calls for some comment. If this court were to consider that no true debt founded the judgment, so that the bankruptcy notice should be set aside, there would remain a fully effective judgment of the District Court under which execution could be levied or other steps taken. Any order I might make could not alter that. It is no ground for refusing to set aside a judgment, which ought to be set aside, that the discharge of its duty by another court may avert one of the resulting unjust consequences, though necessarily leaving others unaffected. It is unfortunate that the power of this court to go behind the judgment has been referred to in language suggesting it would constitute a reason why the court which entered the judgment should not investigate its propriety. However, other reasons for refusing to examine the circumstances were given, and it may be they were thought in themselves sufficient. None of those reasons addresses the fundamental question whether behind the judgment lay a real debt.

4. In the circumstances, it is necessary for me to undertake the task of considering the true complexion of the facts. The legal advice firstly referred to in the reasons quoted above was based on a complete misapprehension, and should not be taken as concluding the matter against the debtor. Nor would I refuse merely on the ground of delay, particularly in a case of impecuniosity and where misleading legal advice had been obtained, to consider the merits. On examining the merits, I cannot brush aside any legal defence on the footing of a personal view that the debtor would not be oppressed if he had to pay. That would be directly contrary to the principles laid down by the High Court in Corney v. Brien [1951] HCA 31; (1951) 84 CLR 343 and Wren v. Mahony [1972] HCA 5; (1972) 126 CLR 212.

5. The beginning is the debtor's bankruptcy. He was made bankrupt on 28 August 1977. From that bankruptcy, he received a statutory discharge on 2 February 1986, of which, however, he appears to have been unaware until about 16 January 1987. While he was an undischarged bankrupt, the debtor, according to his account, earned moneys as an independent consultant and agent retained by a number of companies which were carrying on businesses as insurance agents or finance consultants. One of these companies was Fogden Pty Limited, the then bankrupt's association with which seems to have commenced some time in 1979. It was the registered proprietor of the business name "Combined Services Finance and Taxation Planning".

6. Late in 1983 or early in 1984, Mr Gourlay had a chance meeting with an old school friend, Mr Neil Breden, who was then sales manager for the respondent Friends' Provident Life Office ("the insurance company"). As a result of this meeting, they decided that Mr Gourlay would carry out the work of an agent for the sale of life insurance on behalf of the insurance company. Mr Gourlay has sworn that he told Mr Breden he was an undischarged bankrupt, and Mr Breden has not been called to deny this. Furthermore, the documents, to which I shall refer, are consistent with Mr Gourlay's claim, which he has consistently maintained since the question was first raised in his examination in respect of his bankruptcy. I accept that Mr Breden was told Mr Gourlay was an undischarged bankrupt.

7. Although Mr Gourlay had previously been able to arrange to sell life insurance on behalf of life offices, utilizing companies as agent intermediaries between himself and the offices, for some reason, on this occasion, he decided to make use of a family trust to contract with the insurance company as its agent. No convincing explanation was proffered, and it may be that the reason was a fear that any company available to be utilized in that way was already at risk of being wound up by reason of agency debts owed to other life offices, or that its predicament might come to the notice of the insurance company. At any rate, a document was completed, entitled "APPLICATION FOR APPOINTMENT AS A BROKER AGENT", showing the applicant as "the Gourlay Family Trust trading as 'Combined Services Finance & Taxation Planning'". It was dated 25 January 1984, and was signed by the debtor's wife, Sophia Mary Gourlay. The form of application had a space providing for the completion of "names of directors/principals"; in this not very appropriate space was inserted Mrs Gourlay's name, with the word "trustee" written after it, and underneath the name of Mr Gourlay himself without any description. On the same day, Mrs Gourlay signed a document headed "BROKER AGREEMENT". It was a printed form of agreement, by which the insurance company appointed as broker "the Gourlay Family Trust trading as 'Combined Services Finance & Taxation Planning'" upon terms and conditions set forth in the document. The agreement was accepted on behalf the insurance company on 2 February 1984. It does not bear Mr Gourlay's name. Also on 25 January 1984, Mrs Gourlay signed a form of guarantee; on that document her signature has been witnessed by Mr Gourlay, but clearly as a witness and not as a contracting party. After Mrs Gourlay's signature, the words "Sole Trustee" have been added in brackets. The printed form has been filled in to show that it relates to the appointment (as agent, and not as broker) of "the Gourlay Family Trust", which is described as "trading as and having its registered office at 'Combined Services Finance & Taxation Planning'".

8. According to Mr Gourlay, these documents were signed by his wife while on holidays. When they were signed, they were in blank, and he merely told his wife that they related to the appointment of the family trust as an agent. He also says that at the same time a "deed of settlement" was completed, to constitute the family trust, although the document produced bears the date 1 July 1982 as the date of its making. It purports to appoint Mrs Gourlay as trustee of "the Gourlay Family Trust", and to nominate as beneficiaries Mrs Gourlay, her sister, and the two children of Mr and Mrs Gourlay. The sum settled, as shown in the document, was $20.00, but it is not suggested that any money was actually paid, or that any step was taken, such as the opening of a bank account, to implement the settlement in any way. Although the document was intended to be executed as a deed, it appears merely to have been signed by the settlor named in it, Mrs Gourlay's sister, and by Mrs Gourlay and a party designated "the appointor". Mr Gourlay was unable to explain how it came about that the document constituting the trust, which was completed in January 1984, showed on its face that it was made on 1 July 1982. A possible explanation is that the back dating was a ploy to give the trust the appearance of an established entity.

9. Mr Gourlay proceeded to obtain certain proposals for insurance on behalf of the insurance company, as a result of which three cheques for commissions and bonuses were handed to him by Mr Breden in about April 1984. The cheques, which totalled over $37,000.00, were made out to Combined Services Finance & Taxation Planning. As that was the registered trading name of Fogden Pty Limited, which had a bank account, Mr Gourlay decided to pay the cheques into the company's account. Although the company had had nothing to do with the earning of these commissions, Mr Gourlay's personal relationship with one of its directors, a Miss Catchlove, enabled him to arrange to utilize its account. He withdrew the money, in part to pay various accounts and in part in cash. None of it was paid to the trustee named in the deed of settlement, Mrs Gourlay; on the evidence, I conclude that Mr Gourlay treated it as entirely at his own disposal. He had at no stage consulted his wife about the business arrangements with the insurance company or the handling of the proceeds of those arrangements. He had merely asked her to sign the documents I have mentioned with at most a perfunctory statement of their nature.

10. The policies arranged by Mr Gourlay had an extremely brief life. By termination or lapse, they came to an end within a few months. It has never been disputed that the insurance company was entitled to a refund from someone of the commissions and bonuses paid in respect of them. Indeed, Mr Gourlay offered in writing to make repayment, though he says this was only on the understanding that the agency would continue so that repayment could be made out of further commissions earned.

11. When Mr Gourlay's promises did not bear fruit, the insurance company decided to terminate the agency and sue for the return of the money. In about April 1985, a statement of liquidated claim issued out of the District Court at Sydney against Sophia Mary Gourlay, James Dalrymple Gourlay and Fogden Pty Limited, claiming the sum of $35,524.65. The cause of action was pleaded in a number of ways. First, it was alleged that the insurance company had entered into the written agreement, which it was asserted Mrs Gourlay had signed on behalf of herself and of the other defendants; the amount claimed was then alleged to be due under the agreement for commissions and bonuses repayable by virtue of cancellations and lapses of policies in respect of which it had been paid. There was further a count upon the guarantee signed by Mrs Gourlay. Also, by paragraphs 15 and 16 of the statement of liquidated claim, it was alleged as follows:

"15. Alternatively the Plaintiff claims
$35,524.65 being money payable by the
Defendants and each of them to the Plaintiff
for money had and received by the Defendants
or any of them for the use of the Plaintiff.
16. Alternatively in the premises the
consideration for the payment by the
Plaintiff of $35,524.65 to the Defendants has
wholly failed and the Defendants and each of
them has had and received the said sum to the
use of the Plaintiff."

12. Interest was claimed under s.83 AA of the District Court Act 1973 (N.S.W.).

13. Mr and Mrs Gourlay took the process to their solicitor. It appears that he advised Mr Gourlay he could not be liable personally since he was bankrupt. This of course was incorrect. The debt had arisen (if at all) subsequently to his bankruptcy. However that may be, no defence was filed on behalf of Mr Gourlay, and judgment was entered against him by default on 6 September 1985. On the same date, judgment was also entered against Fogden Pty Limited, but that company is apparently without assets. Mrs Gourlay filed a defence by which she alleged she had signed the broker agreement as trustee of the Gourlay Family Trust; she also denied that the plaintiff had paid commissions to her, that she was liable to repay commissions or bonuses, and that she was liable upon the guarantee. She asserted the guarantee had been signed

"in reliance upon the false and fraudulent
representation made by the Second Defendant
James Dalrymple Gourlay that it was a Family
Trust Deed and Broker Agreement and not
otherwise, without knowing that it was a
Guarantee and without any negligence on her
part."

She further claimed a declaration that the guarantee was void pursuant to the Contracts Review Act 1980 (N.S.W.). Following the filing of this defence, it appears the matter was settled (as between the insurance company and Mrs Gourlay) upon terms involving withdrawal of the claim against her.

14. It is upon these facts that the question arises whether I should go behind the judgment of the District Court in order, as Mr Gourlay claims, to find it unsupported by any true debt. So far as the guarantee is concerned, I think it is plain that the insurance company deliberately stipulated for the liability of someone other than Mr Gourlay because he was an undischarged bankrupt at the time. The guarantee was that of Mrs Gourlay. Whether or not her defence represented the truth, I do not think Mr Gourlay could be held liable as a guarantor upon the footing that a document specifically drawn to show his wife as guarantor had been signed by her on his behalf. Similarly, he could not be liable upon the principal agreement, which the insurance company had elected to conclude, not with an undischarged bankrupt, but with the trustee of the family trust, that is, with Mrs Gourlay.

15. For the insurance company, it was suggested the judgment might be sustained on the ground of breach of warranty of authority. The argument is that Mr Gourlay impliedly warranted he had his wife's authority to propose, on her behalf, the contracts of agency and guarantee. There are several reasons why I cannot accede to this submission. In the first place, it could not support a default judgment. (Cf. Wren v. Mahony (supra) at 230.) Secondly, no such claim was pleaded. Finally, before I could uphold this contention, I would have to decline to follow the considered judgment of a judge of the court in Re McCollum; Ex parte The Bankrupt (1987) 71 ALR 626. There Pincus J., at 628-629, found authority in Corney v. Brien (supra) for the principle that a judgment which cannot stand upon the only cause of action pleaded is not saved by the existence of a true debt upon a different cause of action.

16. But it was pleaded here, in the alternative, that the amount claimed was owing as money had and received by Mr Gourlay for the use of the insurance company. The circumstances reveal that Mr Gourlay received cheques from the insurance company as agent for the trustee of the Gourlay Family Trust, with whom the insurance company had contracted. He withheld those cheques from the trustee, paying them into an account over which he had a de facto control. Fogden Pty Limited, in the name of which the account stood, had no connection with these matters - it merely allowed its business name to be used as the business name of another and its bank account to be used for the clearance of cheques made out to that name in respect of business which was not its own. In the familiar metaphor, the bank account of Fogden Pty Limited was merely a conduit through which the proceeds of the cheques were diverted to Mr Gourlay or as he directed. When Mr Gourlay usurped the position of the trustee in this way, he could not claim to have received these moneys freed of obligations under which the trustee herself lay. Had the trustee received the cheques, she would have been obligated to make repayment upon the cancellation or lapse of the policies. I think the same obligation attached to Mr Gourlay, who had chosen to thrust himself into the trustee's place. It was a correct legal formulation of the cause of action which arose against the debtor to say that he had received money for the use of the insurance company. Accordingly, the judgment reflects a real debt, and the bankruptcy notice is not liable to be set aside.

17. Upon short minutes being brought in on behalf of the respondent, Friends' Provident Life Office, on Monday 21 August 1989, I shall dismiss the application of the debtor. During the hearing, I extended the bankruptcy notice, although its period had been allowed to expire, until further order. I did so in reliance upon the decision in Streimer v. Tamas [1981] FCA 123; (1981) 54 FLR 253. Attention should perhaps be drawn to the fact that the making of an order on 21 August 1989 will bring that extension to an end.