Re John Campbell Mulhall Ex Parte: Roy Keith Hayes [1992] FCA 129 (25 March 1992)

FEDERAL COURT OF AUSTRALIA

Re: JOHN CAMPBELL MULHALL
Ex Parte: ROY KEITH HAYES
No. P4372 of 1991
FED No. 140
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
Gummow J.(1)

CATCHWORDS

Bankruptcy - judgment debt entered in Local Court - discrepancy between interest stated in bankruptcy notice and in annexure - whether understatement of interest invalidated bankruptcy notice under Bankruptcy Act 1966, s. 306 - whether debtor could reasonably be misled as to requirements for compliance with bankruptcy notice - whether Court should "go behind" judgment - whether debt due to creditor proved to satisfaction of Court under Bankruptcy Act 1966, s. 52 - inquiry into "reality" of matter in hand.

Practice and Procedure - whether action in Local Court irregularly constituted because creditor sued as sole plaintiff on guarantee jointly taken by six persons - position of joint promisees in Judicature system of pleading.

Bankruptcy Act 1986

Federal Court Rules O.6, r.8

Supreme Court Rules 1970 (N.S.W.), Part 8, r.8

Local Courts (Civil Claims) Rules 1988 (N.S.W.), Part 6, r.8

Kleinwort Benson Australia Limited v Crowl [1988] HCA 34; (1988) 165 CLR 71.

Re Athans; Ex parte Athans (1991) 29 FCR 302.

Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212.

Olivieri v Stafford (1989) 24 FCR 413.

Sunbird Plaza Proprietary Limited v Maloney (1988) 166 CLR 245.

Buckland v Newsame [1809] EngR 78; (1809) 1 Taunt 477; 127 ER 919.

Emery v Mucklow [1833] EngR 614; (1833) 10 Bing 23; 131 ER 813.

Laws v Bott (1847) 16 M and W 301; [1847] EngR 24; 153 ER 1203.

Cullen v Knowles (1898) 2 QB 380.

HEARING

SYDNEY
25:3:1992

Counsel and solicitors Mr M.K. Meek instructed by Harrison and
for the debtor: and Associates, Wollongong.

Counsel and solicitors Mr R.J.H. Darke instructed by Messrs Holt for the petitioner:

ORDER

The estate of John Campbell Mulhall be sequestrated.

The petitioner's costs (including any reserved costs) be

taxed and paid according to the Bankruptcy Act 1966.
Note: Settlement and entry of orders is dealt with in Order 124 of the Bankruptcy Rules.

DECISION

By creditor's petition presented 19 November 1991, Mr Roy Keith Hayes ("the petitioner") seeks a sequestration order against the estate of Mr John Campbell Mulhall ("the debtor"). The petitioner states that the debtor is indebted to him in the sum of $9,119.08, being the amount due under a final judgment for $4,892.03 entered in the Local Court at Kiama in the State of New South Wales on 25 February 1987. The consideration for the debt is stated to be rent pursuant to a Memorandum of Lease dated 31 May 1984 and interest on the judgment debt at various rates fixed from time to time pursuant to the applicable New South Wales law. The act of bankruptcy relied upon is failure to comply with the requirements of a bankruptcy notice which in turn was based on the judgment debt to which I have referred.

2. In his opposition to the petition, counsel for the debtor initially relied upon several grounds, but only two of these were pressed. First, the commission of an act of bankruptcy was challenged on the footing that the bankruptcy notice understated the interest due on the judgment debt and further, or perhaps alternatively, that when the contents of the annexure to the bankruptcy notice were read with the body of the notice, a debtor could reasonably be misled as to what was necessary to comply with it as regards the payment of interest.

3. The bankruptcy notice states that the petitioner, described therein as "the judgment creditor":

". . . has claimed that the sum of $4,892.03
together with interest thereon at the rate set
out in the attached annexure from 25 February
1987 which at the date of issue of this Notice
amounts to $4,132.74 making a total of $9,024.77
is due by you to him under a final judgment
obtained by him against you in the Local Court
of New South Wales at Kiama on the 25th day of
February 1987, being a judgment the execution of
which has not been stayed . . ."
(Emphasis supplied).

As will be apparent from the above, the evident purpose of the attachment of the annexure was to specify the rate at which interest was computed. The annexure is in the following terms:

"Judgment dated: 25 February 1987
25.2.87 - 1.11.87 19.5% 249 days $ 650.88
2.11.87 - 1.3.88 18% 119 days $ 325.33
2.3.88 - 24.9.91 15% 1,309 days $3,157.24
$4,133.45"

It also will be apparent that the computation of interest in the annexure produces a result which is 71 cents greater than the amount of $4,132.74 set out on the face of the bankruptcy notice. It was common ground before me that the statement of $4,132.74 on the face of the bankruptcy notice was an understatement in the sum of 71 cents.

4. The applicable principles appear from Kleinwort Benson Australia Limited v Crowl [1988] HCA 34; (1988) 165 CLR 71. The subject has been further discussed by Hill J. in Re Athans; Ex parte Athans (1991) 29 FCR 302.

5. In various decisions, understatement of interest has been accepted as a formal defect or irregularity attracting the operation of sub-s. 306 (1) of the Bankruptcy Act 1966 ("the Act"). In Kleinwort Benson (at 80) Mason C.J., Wilson, Brennan and Gaudron JJ. said:

"Understatement of the amount due, whether it be
an understatement of the judgment debt or of
interest payable thereon, will thus constitute a
defect which is substantive rather than formal
only if the understatement is objectively
capable of misleading the debtor as to what is
necessary for compliance with the notice.
It may be that, in a given case, understatement
is capable of misleading the judgment debtor
particularly if the notice is capable of
producing uncertainty as to whether the debtor
is required to pay the amount in fact due or the
amount specified in the notice. In such a case
uncertainty arises, not merely from the under-statement,
but from the understatement in the
context of the particular bankruptcy notice. No
uncertainty arises if it is clear that payment
of the amount specified in the notice will
constitute compliance with the notice."

6. I have set out the introductory portion of the bankruptcy notice in question. It continues by stating:

"THEREFORE TAKE NOTICE that within Twenty One
days after service of this notice on you,
excluding the day on which this notice is served
on you, you are required -
(A) to pay the sum of $9,024.77 so
claimed by the judgment creditor to
(c) the judgment creditor
- OR -
(B) . . ."

I accept the submission of counsel for the creditor that it is clear from the bankruptcy notice that payment of the sum of $9,024.77 will constitute compliance with it, that sum having the earlier stated components of $4,892.03 and interest of $4,132.74. Nor, in my view, is the presence of the additional amount of 71 cents in the sum of $4,133.45 stated in the annexure such that the debtor could reasonably be misled as to what was necessary to comply with the bankruptcy notice. The purpose of the annexure is, as stated in the notice itself, to specify the interest rates which fluctuated from time to time.

7. No evidence was presented in this case of actual injustice having been caused by the understatement of the interest and there is thus no basis upon an opinion could be formed to deny the automatic operation of sub-s. 306 (1) of the Act.

8. Accordingly, I do not accept the first branch of the argument presented for the debtor.

9. Section 52 of the Act conditions the power of the Court to make a sequestration order on a creditor's petition upon proof to the satisfaction of the Court of the debt due to the petitioning creditor. There is a paramount need to have satisfactory proof of the petitioning creditor's debt, and where what is relied upon is a judgment debt, the discretion of the Court "to look at what is behind the judgment" is not well exercised where substantial reasons are given for questioning whether behind that judgment there was "in truth and reality" a debt due to the petitioner: Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212 at 224-5; see also Olivieri v Stafford (1989) 24 FCR 413.

10. As the second ground of his resistance to the making of a sequestration order upon the creditor's petition, counsel for the debtor submitted that there were substantial reasons for questioning whether behind the judgment entered in the Local Court, there was in truth and reality a debt due to the petitioner, within the sense of the authorities construing s. 52 of the Act. Counsel contended, as a point not taken in the Local Court, that the petitioning creditor was one only of several obligors on the guarantee on which the debtor had been sued to judgment.

11. Proceedings in the State court were commenced by plaint and default summons dated 22 January 1987. Default judgment was entered on 25 February 1987. The proceedings were brought by the creditor as plaintiff against D. and J. Florists Pty Limited as first defendant, and, as second and third defendants respectively, the debtor and Diane Milne, his de facto wife. They were directors of the first defendant. The particulars stated:

"The second and third defendants are sued as
Guarantors pursuant to Guarantee dated 31st of
May 1983."

As regards the first defendant, the claim was for rent ($4,222.08) for the period, 1 January - 19 April 1986, of shop premises in Kiama and repairs to the premises totalling $226.95 which were stated to be the responsibility of the first defendant. The liability of the guarantors was thus one in a liquidated amount, not damages: Sunbird Plaza Proprietary Limited v Maloney (1988) 166 CLR 245 at 254-7.

12. The essential point taken by counsel is that when regard is had to the terms of the guarantee, it is apparent that the action brought on it by the creditor as sole plaintiff was irregularly constituted. A copy of the instrument signed by the debtor and Diane Milne is in evidence. It is expressed to be between them, "(hereinafter called the Guarantor)", of the one part, and six persons, "(hereinafter called the Lessor)", of the other part. The creditor is the third of those six named persons. The recital in the instrument is in the following:

"WHEREAS the Lessor has at the request of the Guarantor agreed to
lease to D and J FLORISTS PTY. LIMITED a company incorporated
and having its registered office at 19 King Street, Berry in the
State afore-said (hereinafter called the Lessee) the premises
known as shop No. 13 in the shopping centre at 106 Terralong
Street, Kiama under lease dated the 31st day of May 1983
(hereinafter called the lease) upon the terms and conditions
therein appearing and upon the Guarantor giving the guarantee
hereinafter contained . . ."

It is then stated that in consideration of the premises, the guarantor guarantees to the lessor the due performance by the lessee of all its covenants and obligations under the lease.

13. Clause 8 is in the following terms:

"8. (a) That where two or more Guarantors are parties to this
guarantee the covenants and agreements herein contained
or implied shall bind them or any two of them jointly
and each of them severally and their and each of their
executors and administrators;
(b) Wherever herein used words importing the plural or
singular number shall be deemed to include the singular
or plural number respectively and words importing the
masculine or feminine shall be deemed to include the
feminine or masculine respectively.
(b) The word 'Lessee' wherever herein used shall mean and
include the Lessee its successors and assigns".

Both counsel accepted that there was nothing in these or the other terms of the instrument to achieve a result whereby the covenants by the guarantor were taken by the parties defined as "the Lessor" otherwise than jointly.

14. The evidence also includes a copy of a power of attorney dated 10 February 1983. It appears from this instrument that the six persons described in the guarantee as "the Lessor" were registered proprietors of the land, the subject of the lease, to D. and J. Florists Pty Limited. The remaining five proprietors authorised the sixth, the creditor, to execute the lease. No authority was given thereby for him to take on their behalf any steps to enforce the guarantee.

15. It is appropriate at this stage to refer to some basic common law principles.

16. The first is that in an action on a contract, all the persons with whom the contract is made in the eye of the law should join in as plaintiffs since A cannot recover damages for the breach of a contract made with A and B: Buckland v Newsame [1809] EngR 78; (1809) 1 Taunt 477 at 478; [1809] EngR 78; 127 ER 919 at 920, Dicey, "A Treatise on the Rules for the Selection of the Parties to an Action", 1870, p 11. Secondly, a release given by one of a number of joint creditors discharges the obligation as against all of them, although a debtor will not be allowed to set up a release obtained by him from one of a number of joint creditors in fraud of the others: "Halsbury's Laws of England", 4th Ed., Vol 9, p 431. Thirdly, one of a number of co-plaintiffs has a right to bring an action in the name of all of them, and, unless there is fraud, the court will not interfere even if the names of the other co-plaintiffs are used against their will: Emery v Mucklow [1833] EngR 614; (1833) 10 Bing 23; 131 ER 813. Fourthly, a co-plaintiff whose name is used in this way without his consent may apply to the court to have the proceedings stayed until he is given a security for costs by the party making use of his name: Laws v Bott (1847) 16 M and W 301; [1847] EngR 24; 153 ER 1203, Dicey supra, p 108. Further, in accordance with the first principle mentioned above, the unwilling co-plaintiff may release or settle the action, such release being good against all of the co-plaintiffs, and may be pleaded against all of them, unless fraudulent: Dicey supra, p 108.

17. In a Judicature system of pleading, one of two joint promisees can maintain an action on the contract, making the other joint promisee a co-defendant if, after tender of an indemnity against costs, he refuses to be joined as a co-plaintiff. The object of the rules is to get all the parties interested in the litigation before the court: Cullen v Knowles (1898) 2 QB 380; A.J. Meagher and R.A. Meagher, "Parties to an Action", 1988, 2.13. See, for example, Federal Court Rules O.6, r.8, Supreme Court Rules 1970 (N.S.W.), Part 8, r.8. The Local Courts (Civil Claims) Rules 1988 (N.S.W.), Part 6, r.8, follows the form of the Supreme Court Rules.

18. Upon the material before this Court on the issue of whether the judgment entered in the Local Court should be accepted as satisfactory proof of a debt, it cannot be denied that in truth and reality, there is a liability on the guarantee owed to the six persons comprising "the Lessor", one of whom is the petitioning creditor. That liability was, at least in part, admitted in the Local Court, a point to which I will return. Whilst it may be true the petitioning creditor at common law could not sue alone to recover the amount due on the guarantee, he would have the right to join all the other relevant parties in the action so that it was regularly constituted. In any event, he acting alone would have been able, in accordance with the above authorities, to effect a release of the rights of all of them, at least in the absence of some contrary contractual provision between all the parties.

19. In considering the exercise of the Court's discretion in the matter, it is appropriate also to have regard to the course of events in the litigation. The debtor was served with the process in the Local Court on 23 January 1987, the day after it was issued. On about 1 February, he instructed a solicitor to defend the proceedings on his behalf. No defence was filed within time. The result was that on 27 February 1987, the default judgment was obtained. The debtor's solicitor then applied to the Local Court at Kiama to set aside the default judgment. The application was made on the ground that the company denied liability for the rent in the amount stated in the plaint, and denied liability for the repairs as alleged in the plaint. The debtor had experienced difficulty in locating the various records relating to the lease which would have enabled him to dispute the claim.

20. On 23 June 1987, the application to set aside the default judgment was dismissed. Counsel's advice was obtained, and an application was made for a stated case. The magistrate did state a case and it was uplifted on 15 June 1988. But the solicitor then retained by the debtor (not his present solicitor) did not commence proceedings on it in the Supreme Court for three years thereafter. However, for some considerable portion of this time the whereabouts of the debtor were unknown to his solicitor. The Supreme Court proceeding was not commenced until 19 April 1991. This followed the issue on 19 March 1991 by the creditor of a writ of execution against the debtor.

21. The debtor says (and this is not challenged) that he was never informed of the hearing date set down for the Supreme Court proceeding on 17 May 1991. There was no appearance for him on that day, and the summons was struck out with costs awarded against him. Not until he made inquiries after service of the bankruptcy on 11 October 1991 was the debtor told by his solicitor that the stated case had been dismissed.

22. The evidence before me includes the stated case signed by the magistrate. Paragraph 2 of the stated case is headed "Facts" and sub-paras. (c) - (q) are in the following terms:

"(c) On or about 22 January, 1987, the defendants instructed
their solicitor, Mr. Alan Davis, to prepare notice of
grounds of defence to the said plaint and default summons.
(d) In order to prepare such defence it was necessary for the
defendants to obtain certain documents and financial records
and to produce the same to their said Solicitor.
(e) The defendants further instructed their said Solicitor to
request the plaintiff's Solicitors for an extension of time
in which to file the said defence.
(f) As a result of discussions between the respective solicitors
for the plaintiff and the defendants, the plaintiff's
Solicitors agreed to extend the time for the filing of the
said defence until 16 February 1987.
(g) No such defence was filed by the defendants prior to said 16
February, 1987, or thereafter up to and including 25
February, 1987.
(h) On 25 February, 1987, the Registrar of the Local Court at
Kiama entered default judgment against the first and second
defendants at the request of the plaintiff for the amount of
the plaintiff's claim, together with Court fees and
professional costs.
(i) On 17 March, 1987, the defendants signed a notice of grounds
of defence to the said plaint and default summons.
(j) On 18 March, 1987, the defendants made and filed an
application to set the said default judgement (sic) aside,
together with affidavits in support thereof.
(k) Neither of such affidavits contained any reason for the
delay by the defendants in filing the defence to the plaint
and default summons.
(l) On 27 April, 1987 the first defendant signed and filed in
the Local Court, Kiama, on application for a stay of
proceedings under Section 32 of the Local Courts (Civil
Claims) Act, 1970.
(m) On 28 April, 1987, the said (1) application to set aside the
default judgement (sic) and (2) the said application for a
stay of proceedings came on for hearing before me at the
said Local Court, Kiama.
(n) The hearing of each application was adjourned to the
sittings of the Local Court, Kiama on 26 May, 1987. The
proceedings were stayed until that date and I requested that
the defendants file affidavits to indicate the reason for
their delay ihn (sic) filing a defence to the plaint and
default summons within the prescribed time of 14 days from
the date of service of such plaint and default summons. I
further requested that the plaintiff's solicitors should
then file any affidavits in reply.
(o) On 26 May, 1987, the hearing was further adjourned to 23
June, 1987 and the proceedings were similarly stayed until
that date."

Paragraphs (p) and (q) are particularly significant:

"(p) on 23 June, 1987, the matter again came before me. In its
defence, the first defendant made an admission of liability
in respect of part of the debt claimed, but denied its
liability for the balance thereof.
(q) The second and third defendants pleaded similarly in respect
of the debt claimed."

As I have said, on this day, 23 June 1987, the magistrate refused the applications to set aside the default judgment and to stay the proceedings.

23. Under the heading "Grounds of Determination" in para. 3, the magistrate states that there has been a partial admission of liability by all three defendants, that there was no undue haste on the part of the plaintiff to obtain default judgment at the expiry of the time they had extended for the filing of the appropriate defence, and that the defendants had not explained to his satisfaction the reasons for the delay on their part in not filing the defence.

24. As Beaumont J. pointed out in Olivieri v Stafford supra at 424, the Court, as a court of bankruptcy, is concerned to inquire into the "reality" of the matter in hand. Here, that reality is that (i) the Local Court dealt with the merits of the application to set aside the default judgment and refused to do so on 23 June 1987, (ii) before the Local Court there was an admission as to liability in respect of part of the debt claimed, (iii) the point now taken as to the composition of the proceedings in the Local Court was not taken at the earlier stage, although it is one which appears from the face of the basic documents in the case, (iv) there were delays in taking the matter to the Supreme Court and an unsatisfactory carriage of it in that court, but at least to some extent the then solicitor for the debtor was handicapped from a difficulty in locating his client, and (v) the procedural principles considered earlier in these reasons indicate that the point now taken for the debtor is technical in nature and that if the point had been taken in the State court, procedures would have been available to the creditor to bring all necessary parties into the Local Court proceeding.

25. In all the circumstances, this Court should accept the judgment entered in the Local Court as sufficient evidence as a real antecedent debt in the amount stated in it.

26. Counsel for the debtor accepted that if I were to find against his client on the two points that were argued, it would inevitably follow that a sequestration order be made in respect of his estate. Accordingly, I will so order. The petitioner's costs (including any reserved costs) will be taxed and paid according to the Act.