Re Brian Joseph Muggleton Ex Parte: Trentstone Pty Ltd [1993] FCA 23 (10 February 1993)

FEDERAL COURT OF AUSTRALIA

Re: BRIAN JOSEPH MUGGLETON
Ex parte: TRENTSTONE PTY. LTD.
No. Q P2055 of 1992
FED No. 51
Number of pages - 20
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
Drummond J.(1)

CATCHWORDS

Bankruptcy - creditor's petition - Court going behind judgment - separate debts owing to creditor - creditor's right to appropriate payments to particular debt - s. 20(3)(a)(ii) of Stock Act 1915 (Qld) not preventing creditor from appropriating moneys received to moneys due in respect of diseased stock.

Bankruptcy Act 1966 (Cth) - ss. 41 and 52

Stock Act 1915 (Qld) - s. 20

The "Mecca" (1897) AC 286

Re Walsh; Ex parte Deputy Commissioner of Taxation (NSW) (1982) 42 ALR 727

Wolff v Donovan (1991) 29 FCR 480

HEARING

BRISBANE, 3 and 5 February 1993
10:2:1993

Counsel for the applicant: A.B. Crowe

Solicitors for the applicant: Sly and Weigall Cannan and Peterson

Counsel for the respondent: J.P. Kimmins

Solicitors for the respondent: Stokes and Panettiere

ORDER

THE COURT ORDERS THAT:
1. A sequestration order be made against the estate of Brian

Joseph Muggleton.
2. The petitioning creditor's costs of and incidental to the
petition, including reserved costs, be taxed and paid in
accordance with the Bankruptcy Act, 1966.

THE COURT DIRECTS THAT:

1. A draft of this order be delivered to the Registrar within
seven days, in accordance with rule 124(2) of the Bankruptcy
Rules.

Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

DECISION

DRUMMOND J. I have before me a creditor's petition based on non-payment of a judgment debt of $324,852 after service on the debtor in July 1992 of a bankruptcy notice in respect of that debt.

2. The debtor's primary submission is that despite the judgment there is, in truth, no debt owing to the creditor. For the following reasons, I think it is appropriate, having regard to the principles discussed in Wolff v Donovan (1991) 29 FCR 480, to go behind the judgment and ascertain for myself whether there is truly a debt owing by the debtor to the creditor:

(a) The judgment was a default judgment in that it
was entered following the failure of the debtor
to comply with an order of Master White that he
give inspection of the documents he had
disclosed on discovery in the Supreme Court
action brought by the creditor against him. The
debtor counterclaimed in this action, for
damages said to flow from the sale to him by the
creditor of two diseased cows. Because of his
failure to give inspection, Dowsett J ordered
that the debtor's defence be struck out and that
he be placed in the same position as if he had
not defended or appeared.
(b) I accept that the debtor did not comply with
Master White's order, despite strenuous efforts
on his part, because he could not persuade his
then solicitors to do any further work in the
matter or to release the file which contained
the documents in question to the debtor unless
and until he paid those solicitors' fees. The
debtor was unable to do this either before or
after those solicitors ceased to be his
solicitors on the record in the Supreme Court
action.
(c) Quite apart from the cause of action against the
creditor that is the subject of his counterclaim
in the Supreme Court proceedings, the debtor has
raised before me a substantial argument based on
the Stock Act 1915 (Qld) which, if correct,
would mean that he was never under any legal
obligation to pay any of the moneys claimed by
the creditor as due by him under the first
contract made between them. The payments
totalling $161,939 made by the debtor to the
creditor overtopped what was payable in respect
of a second contract between them so that, if
there was never a debt due in respect of the
first contract, there would not have been any
moneys owing by the debtor to the creditor when
the judgment was entered.

3. In view of these three considerations, I do not think the fact that the debtor has never sought to set aside the judgment and has not offered an explanation for his failure is sufficient to justify a refusal to go behind the judgment.

4. I turn now to the facts upon which the debtor's argument is based. On 8 October, 1990 the debtor agreed to buy three classes of cows totalling "approximately" 900 beasts at a fixed price per beast according to the class. The creditor's agent invoiced the debtor for an amount of $269,330 for the 845 cows that were, in fact, delivered in respect of this contract. The creditor has, however, only insisted on payment of $268,830 because two of the cows were later found to be infected with tuberculosis. The contract of 8 October, 1990, which I have called "the first contract", under which the debtor took delivery of the 845 cows, contains the following clause:

"Numbers believed to be approximate but not guaranteed ...".
Clause 5 says:
"The subject stock shall be counted and pro forma delivery
given and taken on trucks at Broadmeadow (the creditor's
property) on or before 19 October, 1990".

5. The debtor's affidavit evidence is that between 8 and 10 October, 1990, his carrier picked up 528 of the 845 head of cattle from the creditor's property, "Broadmeadows", and transported them to Rolleston. On 18 October, 1990, the debtor's carrier picked up the rest of these cows from "Broadmeadows" and took them to Rolleston, arriving on 19 October. 254 of the cows were then moved by the debtor from Rolleston to his property, "Boorandalla". The other 591 cows were moved by the debtor to Goondiwindi and then to New South Wales for agistment.

6. The debtor deposes that the cow first condemned as TB infected "came from those beasts agisted". It does not, however, emerge from his various affidavits whether this cow was one of the 528 picked up in the period 8 to 10 October or one of the balance 317 cows picked up on 18 October. What the creditor's principal, Mr. Struss, says about this condemned cow being "one of the dry cows delivered to the debtor" does not assist in identifying whether it was part of the first lot or the second lot of cows that were delivered to the debtor's carrier at "Broadmeadows".

7. It is clear from the debtor's evidence that the creditor performed its contractual duty to deliver the cows to him at "Broadmeadows" on or before 19 October, 1990: 528 cows were delivered by 10 October, 1990 and the balance 317 cows were delivered by 18 October, 1990.

8. By a second contract made on 1 November, 1990, the creditor sold 360 steers to the debtor at a price of $1.15 per kilogram live weight. On 5 November, 1990, the creditor's agent invoiced the debtor for these steers in an amount of $144,900. This lot of cattle was transported in the period 2 to 5 November, 1990 from "Broadmeadows" by the debtor's carrier to Clermont, where they were weighed and dipped, and then transported to his property "Boorandalla". They were later moved to another of his properties, "West Wairuna", for pasturing for a short period and were then moved back to "Boorandalla".

9. Section 20 of the Stock Act, and I omit the irrelevant portions, provides:

"(1) On any sale or agreement for the sale of stock,
there shall be implied a warranty that, ...
shall be binding upon the seller namely that
each head of such stock is not suffering from or
affected by any disease specified in this
section ...
(3) (a) Without limiting the effect of subsection
(1), if there is, in relation to a sale
or agreement for sale referred to in
subsection (1), conclusive evidence of a
breach of warranty ... then -
(i) if the sale price has not been paid
for an animal suffering from or
affected by a disease referred to
in subsection (4) or (9), there
shall be no legal obligation on the
purchaser to pay the sale price for
that animal ...;
(ii) if the sale price has been paid for
an animal suffering from or
affected by a disease referred to
in subsection (4) or (9), the
vendor shall, forthwith upon notice
in writing being given to him that
there is conclusive evidence of a
breach of the warranty expressed by
this section and describing that
evidence, refund the sale price for
the animal to the person who paid
the sale price ...
(b) ...
(c) For the purposes of paragraph (a), where
an animal suffering from or affected by a
disease, the subject of an Order in
Council under section 30, is part of a
consignment of travelling stock, then all
stock forming part of that consignment
shall be deemed to be suffering from or
affected by that disease."

10. So far as is relevant, the term "travelling stock" is defined in s. 4(1) of the Act as follows:

"Stock whilst being travelled, driven, or conveyed by land,
... other than in the holding where they are ordinarily
pastured ...".
"(4) Proof that cattle suffered with or were affected
by tuberculosis, ... within -
(a) ... 30 days; or
(b) ...,
of the date of sale or agreement for sale of
those cattle, or of the date of delivery thereof
on such sale or agreement for sale whichever is
the later, shall be conclusive evidence of the
breach of the warranty expressed by this section."

11. Tuberculosis is one of the diseases to which the provisions of s. 20(1) to (3) of the Stock Act are applicable.

12. The debtor's evidence is that on 16 November, 1990 the Department of Primary Industries issued to him a preliminary notification of carcass condemnation in respect of one of the cows purchased by him under the first contract. He learnt of this notification only on 27 November, 1990. The notification contains the following statements:

"The following animal which has been traced to your
ownership has been totally condemned here at slaughter. The
abnormalities in the carcass were consistent with those of
bovine tuberculosis."

13. (The animal is then identified by brand and abattoir tail tag.)

"Samples have been forwarded for laboratory examination, and
the results of the preliminary tests should reach your
Divisional Veterinary Officer ... in approximately two
weeks."

14. On that same day, 27 November, 1990, the Department of Primary Industries issued to the debtor a notice of quarantine under s. 13 of the Stock Act. A pathology report of 22 November on the carcass identified the presence of tuberculosis, something confirmed by the final pathology report which the debtor received on 8 January, 1991. The notice of quarantine contains the following statements:

"Take notice that stock of the species Bovine class cattle
depasturing on the holding known as `Boorandalla' and `West
Wairuna' of which you are the owner are or are suspected to
be affected with tuberculosis and I hereby place the said
holdings in quarantine, in accordance with section 13 of the
Stock Act. ... Conditions for isolation/ confinement of
stock: movement off properties of named species and class
is restricted to immediate slaughter only.
Such quarantine shall continue until such area has been
released by the Minister ..."

15. This quarantine was not lifted until early in 1991. Any contravention by the debtor of the requirements imposed by the notice of quarantine would have been an offence: see s. 13(4) of the Stock Act.

16. On 24 January, 1991 the debtor received a further preliminary notice of condemnation in respect of the carcass of a second cow which he had purchased from the creditor under the first contract. Argument, however, focused on the first condemnation that led to the issue of the quarantine order that I have referred to.

17. The debtor was in the business of buying cattle for fattening on his own and other properties for resale. On the evidence before me the consequences for the debtor of a quarantine order were catastrophic. There is extensive evidence explaining how these losses resulted from his purchase of a cow from the creditor that was later found to be infected with tuberculosis. There is also detailed information before me showing how the debtor's losses, quantified at $269,518, have been made up. They are the kind of losses for which the debtor may be able to recover damages if he can make out a claim for breach of contract against the creditor.

18. The debtor submitted that the preliminary notification of condemnation issued on 16 November, 1990 was sufficient proof for the purposes of s. 20(4) of the Stock Act that one of the cows that the debtor had bought under the contract of 8 October, 1990 was infected with tuberculosis as at the date 16 November. He further submitted that 16 November, 1990 was a date which in terms of s. 20(4) was within 30 days of the date of delivery of the particular cow under the sale agreement of 8 October. He further submits that this proof therefore amounted to conclusive evidence that the warranty implied into the contract of 8 October, 1990 by s. 20(1) of the Act was breached in respect of this cow, that is, that it is conclusive evidence that as at the date of sale, 8 October, 1990, that cow was TB infected. He further submits that all 845 cows, the subject of the contract of 8 October, comprised a single consignment of stock for the purposes of s. 20(3)(c) and that the consignment was of "travelling stock" because it was a consignment of stock that had to be and was conveyed from the creditor's property to destinations directed by the debtor. He further submits that since the infected cow was part of that consignment, s. 20(3)(c) operated to deem the whole 845 cows to be suffering from tuberculosis and the implied warranty was thus breached in respect of the whole 845 cows and thus, by reason of s. 20(3)(a)(i), the debtor was never under any legal obligation to pay the sale price of any of those 845 cows.

19. In the course of the hearing, the debtor by his counsel sought to appropriate to the second contract so much of the two payments totalling $161,939 that he made to the creditor, as was necessary to satisfy the price of $144,900 payable in respect of that second contract. The creditor, later in the hearing, led evidence from which it appeared that the creditor's agent, who received payment from the debtor for the creditor, had long ago appropriated those payments to the first contract. If the debtor is now entitled to appropriate the $161,939 paid to meet (and overtop) the amount payable in respect of the second contract and if his argument that there was never any debt due by him to the creditor in respect of the first contract because of the operation of s. 20 of the Stock Act in the events which have happened is well founded, it would follow that the creditor could not prove that which is required by s. 52(1)(c) of the Bankruptcy Act 1966 (Cth), namely, that there is a debt still owing, in which event the petition would have to be dismissed.

20. In Re Walsh; Ex parte Deputy Commissioner of Taxation (NSW) (1982) 42 ALR 727 at 728-9, a case involving not a current account but separate debts, it was accepted without argument that, where a debtor does not appropriate a payment at the time he makes it to either of two debts owing by him to his creditor and where the creditor does not himself appropriate it at the time he receives it, the law appropriates the payment to the earlier debt. The rule in Clayton's Case produces this result when the question involves the appropriation of payments made in respect of a current account. But where there are separate debts, the better view in my opinion is that, in the absence of an appropriation by the debtor at the time he makes the payment, the creditor has the right at any subsequent time to make an appropriation of the payment, a right he will lose only by finally exercising that right of appropriation or upon something happening which would make it inequitable for him to make the appropriation at the time he seeks to do so: see The "Mecca" (1897) AC 286 and Halsbury's Laws of England, 4th edition, volume 9 at paragraph 506.

21. There is no acceptable evidence that the debtor appropriated the payments of $161,939 to the second contract at the time those payments were made, notwithstanding some suggestion made by the debtor in cross-examination. The evidence shows that the creditor, by its agent, appropriated the payments to the first contract at the time they were received. It is not open to the debtor now to set-off those payments against the first contract.

22. But the debtor went on to submit that there can be no effective appropriation by the creditor as payee unless that which it seeks to set the payment received against is a debt due to it. I think this is correct. A creditor can only appropriate a payment by his debtor to a claim which constitutes a legal or equitable demand against the debtor: see Halsbury's Laws of England, 4th edition, volume 9 at paragraph 506 (in particular, the cases mentioned in note 8), Chitty on Contracts (General Principles), 26th edition, at paragraph 1536 and Seymour v Pickett (1905) 1 KB 715. If the debtor's argument that, because of the operation of the Stock Act, he was never obliged to pay the creditor anything in respect of the first contract is correct, it would therefore follow that, even if the creditor long ago did all it could to appropriate the debtor's payment to the first contract, because there was no legal demand to which any such appropriation could effectively be made by the creditor that payment must be taken to have been made against the second contract.

23. However, I do not think that, even if the debtor's argument there was a breach of warranty implied by s. 20(1) of the Stock Act in respect of all 845 cows the subject of the first contract is correct, it follows that the creditor was not entitled to do what it long ago sought to do by appropriating the debtor's payments of $161,939 in part satisfaction of the price fixed by the first contract.

24. Section 20(3)(a)(ii) of the Stock Act contemplates that the price agreed to be paid for cattle that turn out to be infected, in breach of a statutory warranty, may have been paid before the breach was discovered. What it does in that event is confer on the purchaser, upon compliance by him with the requirements of that subsection, an enforceable right to a refund by the vendor of the "sale price for the animal to the person who paid the sale price." Thus the statute does not deprive the vendor's claim to payment of the price of infected stock of its character as a legal demand. There is therefore nothing in the Act that prevents a vendor from appropriating a payment made by a purchaser to a contract in respect of which there is a breach of a statutory warranty - even though the vendor may have to refund that price - rather than to another contract with the same purchaser in respect of which there is no such breach.

25. This conclusion makes it unnecessary for me to deal with the debtor's argument based on s. 20(3)(c) and (4) of the Stock Act that the statutory warranty was breached with respect to all 845 cows, the subject of the first contract.

26. In my view, the creditor has effectively appropriated the $161,939 paid by the debtor in part satisfaction of the first contract price.

27. If the debtor's argument as to the 845 cows is correct, the creditor could not demand payment (because of s. 20(3)(a)(i) of the Stock Act) of the balance owing in respect of the first contract, namely, the sum of $106,891. But at least $144,900 was owing in respect of the second contract, both when the bankruptcy notice was served and now, given the appropriation that I have held the creditor effectively made.

28. The debtor did not attack the bankruptcy notice as overstating the amount due, as he could have done pursuant to s. 41(5) of the Bankruptcy Act. In these circumstances, the fact that the bankruptcy notice may overstate the amount truly due does not provide the debtor with a basis for denying the creditor's entitlement to a sequestration order on the ground that there is no debt due to the creditor: see Wolff v Donovan (1991) 29 FCR 480 at 485 and Olivieri v Stafford (1989) 91 ALR 91 at 109.

29. This is the first reason why the debtor's opposition to the making of a sequestration order, based on the proposition that there is no debt truly due to the creditor, must fail.

30. The debtor also submitted that, even if there was a breach of a statutory warranty with respect to only those two of the 845 cows which tested positive for tuberculosis, the losses claimed at $269,518 that flowed from those two breaches comprise a good equitable set-off, sufficient in amount to extinguish the creditor's entitlement to be paid for the 845 cows. It was further submitted that in that case the payment by the debtor of $161,939 would necessarily have to be regarded as a payment against the price owing against the second contract, which payment was more than sufficient to satisfy that price, with the consequence that the creditor would not be able to prove the existence of any debt sufficient to found the sequestration order, notwithstanding the appropriation that the creditor had sought to make.

31. However, the foundation for the debtor's argument, based on the existence of a set-off, is that the evidence before me is sufficient to prove a breach of a statutory warranty in respect of either of the two cows delivered under the first contract that were later found to be TB affected. I do not think the evidence establishes this.

32. The presumption created by s. 20(4) of the Stock Act only arises if there is proof that a particular beast or beasts was or were TB affected within 30 days of either the date of sale or the date of delivery on such sale. That the second cow was found to be infected with TB in January 1991 cannot assist the debtor since that was found to be the case only long after the 30 day period referred to in s. 20(4), after sale and delivery pursuant to such sale of that beast, had expired.

33. The debtor has to rely upon the facts concerning the first cow found to be infected with TB. Even assuming that the evidence available to the debtor concerning the first cow's condition on 16 November, 1990, to which I have already referred, is accepted as amounting to proof that the cow was then TB affected, the sale under which the debtor purchased that cow from the creditor took place on 8 October, 1990, a date which was more than 30 days before there was proof that the cow was TB affected. It is only if the date of delivery of that cow, pursuant to the contract, fell in the period 17 October to 16 November, 1990 that the second limb of s. 20(4) could apply to make that proof conclusive evidence that the warranty was breached, that is, conclusive evidence that the particular cow was, at 8 October, 1990, affected with TB.

34. The contract of 8 October, 1990 expressly provided for delivery to be given and taken on trucks at "Broadmeadows" on or before 19 October, 1990, that is, the contract allowed for delivery of the 845 cows to be given and taken in instalments or batches so long as all contractual deliveries were complete by 19 October. The evidence is that, while the cow in question undoubtedly came from "Broadmeadows" and was sold under the contract of 8 October, it was either delivered in terms of the contract by being placed on the debtor's carrier's trucks in the period 8 to 10 October or on 18 October, 1990, but it is not possible, on the evidence before me, to say when such delivery occurred. I have already summarised what the debtor says in his various affidavits in this regard. In cross-examination, at page 68 of the transcript, he gave this evidence:

"The two cows that tested positive were in the first
consignment, were not they?---Definitely not.
You said two cows were tested positive?---Two cows were
tested positive, but not in the first consignment.
No steers?---No steers tested positive."

35. I take it that the debtor was here using the term "first consignment" as a reference to the first lot of 528 cows which he bought under the first contract and which were picked up between 8 and 10 October, 1990. I am not, however, prepared to accept this oral evidence from the debtor as establishing that the two cows that tested positive for tuberculosis came from the second batch of 317 cows sold under that contract which were only picked up on 18 October, that is, within 30 days of there being evidence that one of those cows was infected with tuberculosis.

36. It may well be that the debtor, faced with the calamity of imminent bankruptcy and all the anxieties that has undoubtedly provoked in him, has allowed himself to give evidence aimed more at assisting his case than at stating the true facts. There are a number of considerations that have led me to this view of his evidence. As I read the debtor's affidavits, he made a careful attempt to identify just when it was he took delivery of the cow first condemned as being infected with TB. The best he could then do was to identify it as one of the cows from the total of 845 cows purchased under the first contract and trucked in two lots to Rolleston, which he later sent to New South Wales on agistment.

37. Against the background of his affidavit evidence, which left the matter uncertain, he did not offer, in cross-examination and he was not asked in re-examination to give his reasons for his apparent certainty in the witness box that the two cows identified as TB affected on 16 November, 1990 and 24 January, 1991 respectively were delivered to him on 18 October. He gave this oral evidence after hearing legal argument which highlighted the importance for his case of his being able to show that the infected cows were in the second batch rather than the first batch of cattle delivered under the first contract. Moreover, when being questioned about how he would fund the prosecution of his counterclaim, which he asserted here he would deal with expeditiously, he suggested that there were interested people whom he could approach for funding, quite apart from his family, even though in the course of earlier cross-examination, when he needed to explain why he had not pushed his counterclaim on for hearing prior to service of the bankruptcy notice on him in July last, he said there were no funds available from anyone. His attempts in cross-examination to distance himself from the statements his solicitors repeatedly made on his behalf to the solicitors for the creditor in seeking several adjournments for the petition, that the debtor was seeking to refinance his indebtedness and would, if successful, be able to pay out the creditor in full, did not leave me with any firm belief that I could safely act on his oral evidence.

38. Since there is no acceptable evidence in my view that the cow identified as tuberculosis affected on 16 November, 1990 was delivered in the second delivery of 18 October, 1990, the debtor cannot rely on s. 20(4) of the Stock Act to establish a breach of warranty with respect to that cow. Apart from s. 20(4), there is no other evidence before me from which it might be possible to infer that that cow, being infected on 16 November, 1990, was likely to have been infected on any particular prior date.

39. I note that the creditor deliberately did not claim payment from the debtor for the two infected cows. Mr. Struss, a director of the creditor, refers to this in paragraph 13 of his affidavit. I am not, however, prepared, on the very limited evidence concerning this matter, to treat the creditor's decision not to claim payment for these two cows as an admission by the creditor that they were infected with tuberculosis either at the time they were sold to the debtor or at the time they were delivered to the debtor: see Phipson on Evidence, 14th edition, at paragraph 24-18.

40. In short, there is no evidence sufficient to show that the warranty implied in the first contract by s. 20(1) of the Stock Act was breached and thus no evidence that, because of the existence of a set- off, the debtor never owed any debt to the creditor in respect of that first contract.

41. The lack of evidence in this regard also provides the second reason why the debtor's argument, based upon there being a breach of the statutory warranty in respect of all 845 cows delivered under the first contract, cannot succeed.

42. In the absence of any evidence that the creditor breached the warranty implied in the first contract by s. 20(1) of the Stock Act with respect to one or more cows the subject of that contract, there is no ground on the evidence before me for holding that, even if the debtor does not have a set-off arising from his losses he may have a good cause of action against the creditor - namely that which was the subject of his counterclaim in the Supreme Court proceedings - which would require consideration to be given to s. 52(2)(b) of the Bankruptcy Act, under which provision the Court may in its discretion dismiss the petition, even though the requirements of s. 52(1) are satisfied.

43. I am satisfied that the debtor committed the act of bankruptcy alleged in the petition. I am also satisfied with the proof of the other matters required by s. 52(1) of the Bankruptcy Act. I therefore make a sequestration order against the estate of the debtor and order that the petitioning creditor's costs of and incidental to the petition, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act.