Re Joseph Francis Emerson and Wilma Lucy Emerson v Wreckair Pty Limited [1992] FCA 16; (1992) 33 FCR 581 (31 January 1992)

FEDERAL COURT OF AUSTRALIA

Re: JOSEPH FRANCIS EMERSON and WILMA LUCY EMERSON
And: WRECKAIR PTY. LIMITED
No. G68 of 1991
FED No. 16
Bankruptcy
[1992] FCA 16; (1992) 33 FCR 581

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Morling(1), Neaves(1) and Spender(1) JJ.

CATCHWORDS

Bankruptcy - Bankruptcy notice - Validity - Notice founded on judgment entered after contested hearing in which debtors legally represented - Appeal from judgment pending - No stay of judgment - Allegation that judgment entered for too large a sum - Amount claimed in the bankruptcy notice in accordance with judgment - No circumstances justifying court in bankruptcy "going behind" judgment - Circumstance that judgment subsequently varied on appeal not of significance.

Bankruptcy - Bankruptcy notice - Application to extend time for compliance - Whether Registrar in Bankruptcy had power to specify different dates for compliance in respect of identifiable components of the amount of the judgment debt on which notice founded.

Bankruptcy - Bankruptcy notice - Appeal pending against judgment on which notice founded - No case made out to extend time for compliance pending determination of appeal.

HEARING

BRISBANE
31:1:1992

Counsel for the appellants: Mr P.E. Hack

Solicitors for the appellants: Lees Marshall and Warwick

Counsel for the respondent: Mr K. Varley

Solicitor for the respondent: Barker Gosling

ORDER

The appeal be dismissed.

The appellants pay the respondent's costs of and incidental to the appeal.

The time for compliance with the bankruptcy notice issued on 14 December 1990 be extended until 21 days after the date of this order.

In the event that a sequestration order is made against the appellants founded upon the bankruptcy notice issued on 14 December 1990, any part of the costs of the appeal which then remains unpaid is to be treated as if that part of the costs were petitioning creditor's costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

This is an appeal by Joseph Francis Emerson and Wilma Lucy Emerson ("the appellants") from part of a judgment given by a single judge of the Court (Pincus J.) on 8 May 1991. The subject matter of the judgment is a bankruptcy notice addressed to the appellants that was issued by a Deputy Registrar in Bankruptcy on 14 December 1990 upon an application in that behalf by Wreckair Pty Limited ("the respondent").

2. The bankruptcy notice was founded upon a final judgment obtained by the respondent against the appellants in the District Court of Queensland (Kimmins D.C.J.) on 27 November 1990 after a contested hearing in which the appellants and the respondent were legally represented. The judgment, which was in the sum of $29,081.65 plus interest of $4,560.64 and costs, arose out of an agreement dated 29 August 1988 whereby, in consideration of the respondent supplying goods and services on credit to a company called Joe Emerson Pty Limited ("the company"), the appellants jointly and severally guaranteed to the respondent the payment by the company of the cost of those goods and services and of any other moneys that from time to time might be owed to the respondent by the company.

3. In ascertaining the company's indebtedness to the respondent and, in consequence, the liability of the appellants under the guarantee, credit was given for amounts owing by the respondent to the company pursuant to an agreement between them that had been entered into on 3 April 1989. That agreement provided that the respondent would hire out two pumps and associated equipment that were the property of the company and that the money obtained from the hiring would be divided between the respondent and the company, the respondent retaining 40 per cent. and accounting to the company for 60 per cent. of the moneys received. The amounts so credited related to the period up to 7 July 1989, that being the date of commencement of the winding up of the company.

4. The bankruptcy notice required the appellants, within 28 days after service of the notice, to pay the sum of $33,642.29 (being the sums of $29,081.65 and $4,560.64 referred to above) due under the judgment or to secure the payment of that sum to the satisfaction of this Court or other court exercising federal jurisdiction in bankruptcy or the respondent or compound that sum to the satisfaction of the respondent. The notice was served on each of the appellants on 2 January 1991.

5. On 21 December 1990, the appellants had filed in the Supreme Court of Queensland a notice of appeal against the whole of the judgment of the District Court. At no stage, however, was execution of that judgment stayed.

6. On 29 January 1991, that is to say within the time limited by the bankruptcy notice for compliance with its requirements, the appellants, pursuant to s.41(5) of the Bankruptcy Act 1966 (Cth), gave notice to the respondent that they disputed the amount claimed in the notice as being overstated. On the same day, 29 January 1991, the appellants filed an application in this Court seeking an order that the bankruptcy notice be set aside and an order that the time for compliance with the notice be extended until 28 days after the determination of the application to set it aside or until 28 days after the determination of the appeal to the Supreme Court of Queensland whichever should be the later.

7. That application was heard by a Deputy District Registrar of this Court who, on 22 February 1991, made orders in the following terms:
"(i) I extend time for compliance with the bankruptcy notice, in

respect of $5,400 claimed therein, until 21 days from the
determination of the (appellants') appeal to the Full Court
(of the Supreme Court of Queensland), provided that, if the
Full Court varies the judgment of his Honour Judge Kimmins
by that or a lesser amount, the bankruptcy notice is amended
accordingly to either extinguish its effect, if the
variation be for the full amount as aforesaid, or be amended
to claim that part of the above amount still outstanding, if
there be partial variation thereof.
(ii) I extend time for compliance with the bankruptcy (notice) in
respect of the balance of $23,681.65 claimed therein to 21
days from today's date.
(iii) There be liberty to apply."

8. It appears that the application to set aside the bankruptcy notice was not pressed before the Deputy District Registrar, the only matter argued before him being the application for an extension of the time for compliance with the bankruptcy notice until after the determination by the Supreme Court of Queensland of the appeal from the judgment on which the bankruptcy notice was founded.

9. The Deputy District Registrar gave lengthy reasons for his decision in the course of which he undertook an extensive review of the part that was before him of the evidence, oral and documentary, tendered in the proceedings before the District Court. He concluded that "there was a clear case" that the amount shown on the face of the judgment was overstated by $900.00, being an amount which he was satisfied had been received by the respondent in respect of the hiring of a pump to a company called Gemvale Pty Limited during a period prior to the commencement of the winding up of Joe Emerson Pty Limited on 7 July 1989 but had not been accounted for. The Deputy District Registrar also examined in considerable detail the question whether the District Court was correct in refusing to allow a set off of an amount of $4,500.00 representing 60 per cent. of hiring charges received by the respondent in respect of the hiring of a pump to Gemvale Pty Limited for periods after the commencement of the winding up of Joe Emerson Pty Limited. Noting that the appellants' notice of appeal to the Supreme Court of Queensland did not expressly refer to those sums of $900.00 and $4,500.00 and that the appellants had foreshadowed an application to the Supreme Court to amend the notice of appeal in that respect, the Deputy District Registrar concluded that the appellants' prospects of success before the Supreme Court in relation to those amounts were "reasonably good". As to the balance of the judgment, viz. $23,681.65, the Deputy District Registrar, again after a detailed examination of evidence, including oral evidence, that was before the District Court and the findings of Kimmins D.C.J., concluded that the appellants' prospects of success on the appeal were "negligible". He was also of opinion that the appeal, in so far as it related to the amount of $23,681.65, had not been instituted bona fide.

10. Although the Deputy District Registrar explained that the purpose of the detailed examination that he had undertaken of the evidence before the District Court and of the judgment of that Court was to deal with an argument that the appeal to the Supreme Court had no merit and was only a delaying tactic, what was done went beyond what was appropriate for that purpose and would only have been warranted if the case had been one in which, in the proper exercise of the undoubted power of this Court to do so where the circumstances require it, it was necessary to go behind the judgment to determine whether there was, in truth, a debt owing by the appellants to the respondent. As will appear, we do not regard this as such a case.

11. It should also be said that it was not open to the Deputy District Registrar to make the orders which he did. The power to extend the time for compliance with the requirements of a bankruptcy notice does not, in our opinion, authorise the specification of different dates for compliance with the notice in respect of identifiable components of the amount of the judgment debt upon which the notice is founded.

12. The appellants then made application, pursuant to s.14(5) of the Bankruptcy Act, for an order setting aside the orders made by the Deputy District Registrar and a further order extending the time for compliance with the bankruptcy notice until 21 days after the determination of the appeal to the Supreme Court of Queensland.

13. That application came before Pincus J. who, notwithstanding that the point had not been argued before the Deputy District Registrar, heard argument upon the question whether the bankruptcy notice should be set aside on the ground that the amount of the judgment upon which the bankruptcy notice was founded exceeded the amount due by the appellants to the respondent. It was argued that the trial judge, Kimmins D.C.J., had failed to give credit to the company Joe Emerson Pty Limited, and thus to the appellants, in respect of certain hiring charges received by the respondent prior to the commencement of the winding up of that company. It was further argued that Kimmins D.C.J. had wrongly held, in effect, that no credit was due to the company, and thus to the appellants, for moneys received by the respondent for pump hiring during periods after the winding up commenced, his Honour having held that those moneys became the property of the liquidator.

14. On 8 May 1991, Pincus J. made the following orders:

"1. The application be dismissed.
2. That in the event of a sequestration order being made
founded on the bankruptcy notice herein the costs of the
creditor of and incidental to this application be treated as
petitioning creditor's costs. If no such sequestration
order is made, then the debtors must pay the taxed costs of
and incidental to the application.
3. The time for compliance with the bankruptcy notice be
extended until 22 May 1991."

15. Following the institution of the present appeal, Pincus J., on 17 May 1991, ordered that the time for compliance with the bankruptcy notice be extended until the determination of the appeal or further earlier order.

16. A consideration of his Honour's judgment makes it plain that the application which his Honour ordered be dismissed was the application that the bankruptcy notice be set aside and not the application that the orders made by the Deputy District Registrar be set aside. This must be so because the effect of his Honour's orders was to overturn the first of the orders made by the Deputy District Registrar.

17. His Honour was not satisfied that the time for compliance with the notice should be extended until the determination of the appeal to the Supreme Court as he was of opinion that the appeal had little substance except as to the sums totalling $5,400.00 referred to earlier in these reasons. Having expressed that view, his Honour turned to the question whether the bankruptcy notice should be set aside on the ground that the judgment on which it was based was entered for too large a sum. His Honour accepted as being beyond dispute that the judgment of the District Court had failed to give the appellants credit for an amount, being $750.00 or $900.00, in respect of hiring charges relating to the period prior to the commencement of the winding up of Joe Emerson Pty Limited. His Honour made no finding in respect of the submission noted above that Kimmins D.C.J. erred in failing to give the appellants credit for moneys received by the respondent for hiring charges relating to the period after the commencement of the winding up.

18. In dismissing the application to set aside the bankruptcy notice, his Honour said:

"Rather surprisingly, after such a long period of time during
which s.41(5) (of the Bankruptcy Act) or its predecessor has been
part of our law, it is still not clear whether a bankruptcy notice
is valid where the judgment has been entered for too great a sum.
The decision of the Full Court in Olivieri v Stafford ((1989) 24
FCR 413) shows that there is a discretion whether or not to go
behind the judgment to determine whether it is excessive. It will
be recalled that there it was common ground that an amount had
been included in the judgment which should not have been included,
but it was not common ground that if re-examined as a whole the
judgment would prove to be excessive.
Here, as it appears to me, that problem does not arise and it must
be found that the judgment is too high. The question therefore is
whether or not one should distinguish Olivieri on that ground.
Although the question is an arguable one, and at one stage I was
inclined to accept the powerful submission made by Mr Hack
(counsel for the present appellants),I propose to follow what
seems to me to be the central point in Olivieri and hold that
there is a discretion to go behind the judgment. In this case, it
seems to me that the discretion should be exercised against the
debtors. The amount of the excess is not a particularly large one
in relation to the sum for which the judgment is given, and more
importantly, it seems clear that if one did go behind the judgment
and re-examine the matter, still it would be necessary to hold
there is a substantial debt due, sufficient to support a
bankruptcy notice."

19. On the hearing of the appeal to this Court counsel for the appellants submitted that, since Pincus J. found that the judgment entered in the District Court was for too large a sum, he ought to have made an order setting aside the bankruptcy notice. In support of this argument counsel relied upon Re Prossimo; Ex parte de Marco (1952) 16 ABC 86: Re Murray (1959) 18 ABC 152: Re Williams; Ex parte Alberton Electrical Service Pty Ltd (1982) 43 ALR 552; and Re Greenhill; Ex parte Myer (NSW) Ltd (1984) 5 FCR 84.

20. At the conclusion of argument the Court reserved its decision upon the appeal. Sometime thereafter, the Court was informed that, after this Court had reserved its decision on the present appeal, the Supreme Court of Queensland had delivered judgment upon the appellants' appeal to that Court from the judgment of the District Court. The Court was in due course provided with a copy of the reasons for judgment of the members of the Supreme Court (see (1991) 5 ASCR 576). From those reasons it appears that counsel for the appellants did not persist with the grounds of appeal that had been set out in the notice of appeal filed on 21 December 1990 and that he was permitted to amend the notice of appeal to argue two other grounds the effect of which was that Kimmins D.C.J. should have allowed the appellants a set-off in the sum of $5,400.00 against the amount for which judgment was given. The Supreme Court allowed the appeal to the extent of reducing the judgment given for $29,018.65 by the sum of $5,400.00 but ordered that in other respects the judgment should stand.

21. The parties took advantage of the opportunity afforded to them by the Court to make written submissions as to the effect, if any, which the judgment of the Supreme Court should have upon the determination of the present appeal.

22. A debtor commits an act of bankruptcy if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice and the debtor does not comply with the requirements of the notice or satisfy the Court that he has a counter-claim, set-off or cross-demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross-demand that he could not have set up in the action or proceeding in which the judgment or order was obtained (Bankruptcy Act, s.40(1)(g)). A bankruptcy notice is to be in accordance with the prescribed form (s.41(1)), such prescribed form to be such that the notice requires the debtor named in it, within a specified time, to pay the judgment debt or sum ordered to be paid in accordance with the judgment or order or secure the payment of, or compound, the debt or sum (s.41(2)).

23. A bankruptcy notice may be invalid if the amount specified in the notice as the amount due to the creditor exceeds the amount in fact due. The date as at which the inquiry whether the amount specified in the notice is excessive is to be made is the date of the issue of the notice: Walsh v Deputy Commissioner of Taxation [1984] HCA 33; (1984) 156 CLR 337. A payment in reduction of the judgment debt made after the date of the issue of the notice but before its service on the debtor will not invalidate the notice: ibid. In that case, Gibbs C.J., in whose judgment the other members of the Court agreed, said at p 340:

"In form the notice speaks as at the date which it bears, that is
the date of its issue, and although service is essential to make
non-compliance an act of bankruptcy, and although the time fixed
for compliance runs from the date of service, the notice must be
understood as speaking as at the date of its issue and the
requirement of the notice, for the purposes of s.40(1)(g) of the
Bankruptcy Act, must be ascertained in that context. This
reinforces the view that the amount which must be correctly stated
is the amount of the judgment debt owing at the date of issue."

24. It is also well established that, once an act of bankruptcy has been committed by the debtor's failure within the time specified to comply with the requirements of a bankruptcy notice or to satisfy the Court that he has a counter-claim, set-off or cross-demand of the requisite kind, it remains an available act of bankruptcy even though subsequently the judgment on which it is based is set aside: Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378; Re Hayes; Ex parte Thomas Borthwick and Sons (Australasia) Ltd (1970) 18 FLR 216; Clyne v Deputy Commissioner of Taxation (1983) 57 ALJR 673; Re Vella; Ex parte Seymour [1983] FCA 115; (1983) 67 FLR 287; Re Zagoridis; Ex parte Q'plas Group Pty Ltd [1990] FCA 459; (1990) 27 FCR 108. In the present case, of course, no act of bankruptcy has yet been committed by virtue of the service of the bankruptcy notice as the time for compliance has been extended until the determination of the present appeal.

25. In the instance case, the amount specified in the notice, viz. $33,642.29 was the sum of the amounts stated in the judgment ($29,081.65 and $4,560.64). Whatever pre-existing obligation there was between the appellants and the respondent merged in the new obligation created by that judgment: Corney v Brien [1951] HCA 31; (1951) 84 CLR 343 at pp 353-4. The amount due by the appellants to the respondent and the amount for which execution might issue was the sum of the amounts stated in the judgment. The notice, therefore, claimed an amount that was in accordance with the judgment. It did not specify as the amount due to the respondent an amount exceeding the amount in fact due. The circumstance that the amount of the judgment was subsequently reduced is not to the point.

26. It is not open to doubt that a court exercising jurisdiction in bankruptcy may, in an appropriate case, "go behind" a judgment and inquire whether it was founded on a real debt: Corney v Brien [1951] HCA 31; (1951) 84 CLR 343; Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212; Olivieri v Stafford (supra) per Beaumont J. at pp 422-3. Such a court, however, has no power to set aside a judgment but only to prevent the judgment creditor from having recourse to the provisions of the Bankruptcy Act: Re Vitoria (1894) 2 QB 387; King v Henderson (1898) AC 720. As between the parties the judgment remains unimpeached and may be enforced accordingly by whatever means may otherwise be available.

27. In the present case, there had been a full hearing before the District Court at which the appellants and the respondent appeared and were legally represented. All the issues were carefully examined and judicially determined. This is not a case, like many of the cases in this area of the law, where judgment was entered in default of appearance or defence. There may be circumstances which justify, in a particular case, a review of the proceedings in another court which, after a hearing, have resulted in the entry of judgment against a debtor: see Wilkinson v Osborne [1915] HCA 92; (1915) 21 CLR 89. For example, if an allegation is made that a judgment has been obtained by fraud, it may be proper for a court exercising jurisdiction in bankruptcy to go behind the judgment to ascertain whether there is a real debt. But there is nothing in the facts of the present case that would have warranted this Court embarking on what would have amounted to a re-trial of the issues that had been determined after a contested hearing and which were the subject of an appeal to the Supreme Court of Queensland. That Court, not this Court, was the appropriate forum in which to review the correctness of the District Court judgment. The circumstance that the Supreme Court subsequently varied the judgment entered in the District Court, reducing it by the sum of $5,400.00, provides no support for the contention that this Court should have itself examined the correctness of the judgment. Nor, given the particular circumstances of this case, do any of the cases on which the appellants relied support the appellants' contention.

28. We, therefore, agree with the conclusions reached by Pincus J. that the discretion to go behind the judgment of the District Court should be exercised against the appellants and that, in consequence, the application to set aside the bankruptcy notice failed, though we do so on grounds different from those which his Honour embraced. We have some difficulty in seeing how, consistently with the conclusion that the Court should not go behind the judgment, it was appropriate for his Honour to examine the correctness of the judgment and conclude that it was entered for too large a sum. We should add that we also have some difficulty with his Honour's reference to the circumstance that, if one did go behind the judgment and re-examine the matter, it would be found that there was a substantial debt due, "sufficient to support a bankruptcy notice". The latter reference appears to be based upon what was said by Owen A.J. in Re Riviere; Ex parte Original Mont de Piete Ltd (1919) 20 SR (N.S.W.) 77 at pp 83-4 and the reference to the matter by Gummow J. in Olivieri v Stafford (supra) at pp 429-430, 431-2. To found the presentation of a creditor's petition it is necessary that there be owing by the debtor to the petitioning creditor a debt that amounts to $1,500 or two or more debts that amount in the aggregate to $1,500 (Bankruptcy Act, s.44(1)(a)). There is, however, no requirement for the issue of a bankruptcy notice that the creditor have a judgment for any minimum amount. Nor is there a requirement that a creditor who petitions for a sequestration order based upon an act of bankruptcy of the kind for which s.40(1)(g) of the Bankruptcy Act provides rely, wholly or at all, upon the debt upon which the bankruptcy notice was founded. It would, therefore, seem appropriate that upon an application to a court exercising jurisdiction in bankruptcy to set aside a bankruptcy notice, 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.

29. We are also of opinion that his Honour was correct in refusing to extend the time for compliance with the requirements of the bankruptcy notice until the determination of the appeal to the Supreme Court of Queensland. His Honour did so on the basis that there was little substance in the appeal except for the point that the judgment should be reduced by the amount of $5,400.00. That conclusion was vindicated by the abandonment by the appellants of all the grounds set out in the notice of appeal as filed which sought to have the judgment of the District Court set aside in its entirety.

30. Consistently with the above reasons, the appeal should be dismissed. As the time for compliance with the bankruptcy notice has been extended until the determination of this appeal, the effect of an order dismissing the appeal would be that, upon the dismissal taking effect, an act of bankruptcy would have been committed by the appellants, assuming, of course, that they have not previously complied with its requirements. The Court could, of course, extend the time further so as to give the appellants a last opportunity to avoid the commission of an act of bankruptcy and it may be proper in the circumstances to do so. The question arises, however, whether the circumstance that the Supreme Court of Queensland has, since judgment upon the present appeal was reserved, allowed the appeal to that Court from the judgment of the District Court to the extent of reducing the judgment given for $29,018.65 by the sum of $5,400.00 requires this Court to do other than dismiss the present appeal.

31. In Walsh v Deputy Commissioner of Taxation (supra) an amount in reduction of the judgment debt had been paid by the debtor between the date of issue of the bankruptcy notice and the date of its service. The notice was held to be valid and the appeal was dismissed notwithstanding that, according to its terms, the notice required payment after service of an amount larger than was then due. Gibbs C.J., in whose judgment the other member of the Court agreed, dealt with the matter by saying, at p 340:

"Although the notice in form required payment to be made after
service it is apparent that a payment made before service, but
after the issue of the notice, must be taken into account in
deciding whether there has been a compliance with the requirements
of the notice under s.40(1)(g)."

32. We think it is appropriate to adopt a similar approach in this case. If in subsequent proceedings for the making of a sequestration order against the appellants the question arises whether an act of bankruptcy has been committed based upon the bankruptcy notice issued on 14 December 1990, it will be necessary for the Court to take into account that the amount of the judgment debt is not $33,642.29 but that amount less $5,400.00.

33. The appeal is, therefore, dismissed with costs. The time for compliance with the requirements of the bankruptcy notice is extended until 21 days after the date of this order. In the event that a sequestration order is made against the appellants founded upon the bankruptcy notice, any part of the costs of the appeal which then remains unpaid is to be treated as if that part of the costs were petitioning creditor's costs.