Australian Litigation Fund Pty Ltd v Mearns (No.4)

[2005] FMCA 1815

FEDERAL MAGISTRATES COURT OF AUSTRALIA

AUSTRALIAN LITIGATION FUND PTY LTD v MEARNS (No.4) [2005] FMCA 1815

BANKRUPTCY – Creditor’s petition – default judgment – whether debt still owing – whether Court should go behind judgment – whether sufficient cause to dismiss petition. 

Bankruptcy Act 1966 (Cth), ss.5, 52, 52(1), 52(2)(b), 52(5), 115, 115(1), 120, 120(3)
Federal Magistrates Court Rules 2001 (Cth), Part 31
Judiciary Act 1903 (Cth), s.78B

Australian Litigation Fund Pty Ltd v Mearns & Anor [2005] FMCA 1727
Wolff v Donovan (1991) 29 FCR 480
Makhoul v Barnes (1995) 60 FCR 572
Australian Litigation Fund Pty Limited v Mearns (No.2) [2005] FMCA 1805
Australian Litigation Fund Pty Limited v Mearns (No.3) [2005] FMCA 1870
Miles v Shell Company of Australia (1998) 156 ALR 133
Wren v Mahony (1972) 126 CLR 212
Re Flatau; Ex parte Scotch Whiskey Distillers Limited (1888) 22 QBD 83
Joosse v Deputy commissioner of Taxation [2004] FCAFC 245
Corney v Brien (1951) 84 CLR 343
Petrie v Redmond (1943) QSR 75
Joosse v Deputy Commissioner of Taxation [2003] FCA 1325
Re Stirling; Ex parte Esanda Limited (1980) 44 FLR 125
Mearns v Willoughby Community Preschool Inc [2003] NSWCA 382
Anscor Pty Ltd v Clout (2004) 135 FCR 469
Emerson v Wreck Air Pty Limited (1992) 33 FCR 581
Re Longo; Ex parte Longo (1995) 57 FCR 523
Re LHF Wools Limited (1970) Ch 27
Re Schmidt; Ex parte Anglewood Pty Limited (1968) 13 FLR 111
Re Kostezky; Ex parte Milder Elfman Szmerling Krycer Pty Ltd (1996) 67 FCR 101
Cain v Whyte (1933) 48 CLR 639

Applicant: AUSTRALIAN LITIGATION FUND PTY LIMITED

Respondent: ROBYN HAYDN MEARNS

File Number: SYG2819 of 2003

Judgment of: Barnes FM

Hearing dates: 25, 28 and 29 November 2005

Date of Last Submission: 2 December 2005

Delivered at: Sydney

Delivered on: 16 December 2005

REPRESENTATION

Counsel for the Applicant: Mr S. Dawson

Solicitors for the Applicant: Abbott Tout Lawyers

Counsel for the Respondent: Mr R. Killalea & Ms A Gibbons

Solicitors for the Respondent: Nil

ORDERS

1. A sequestration order be made against the estate of Robyn Haydn Mearns.

2. The creditor’s costs, including any reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966.

3. A copy of this sequestration order be given to the Official Receiver in Sydney within 2 working days. 

4. The Court notes the date of act of bankruptcy is 11 November 2003.

5. The Court notes that a consent to act as trustee has been signed by Christopher John Palmer and has been lodged with the Official Receiver. 

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG2819 of 2003

AUSTRALIAN LITIGATION FUND PTY LTD

Applicant

And

ROBYN HAYDN MEARNS

Respondent

REASONS FOR JUDGMENT

These proceedings

1. On 18 December 2003 Willoughby Community Preschool Inc (the Preschool) presented a creditor’s petition seeking that a sequestration order be made against the estate of the respondent Robyn Haydn Mearns (the debtor).  The applicant, Australian Litigation Fund Pty Ltd (the creditor), was substituted for the original petitioning creditor by order of this Court made on 24 November 2005.  (See Australian Litigation Fund Pty Ltd v Mearns & Anor [2005] FMCA 1727). The creditor’s petition was amended with leave of the Court and filed on 25 November 2005. Service of the amended creditor’s petition on the debtor was dispensed with by order of the Court. The substituted petitioning creditor seeks a sequestration order against the estate of the debtor. The petition is founded on the failure of the debtor to comply with a bankruptcy notice issued on 15 September 2003 and served on the debtor 16 September 2003.

2. The bankruptcy notice required the debtor to pay within 21 days the sum of $431,759.86 due to the Preschool, the original petitioning creditor, under a default judgment of the District Court of New South Wales entered against the debtor on 25 August 2003.  On 7 October 2003 the debtor filed an application in this Court to set aside the bankruptcy notice.  She sought and was granted an extension of time to comply with the bankruptcy notice.  On 11 November 2003 the application to set aside the bankruptcy notice was dismissed with costs by Federal Magistrate Driver.  The date on which the debtor is said to have failed to comply with the bankruptcy notice is 11 November 2003. 

3. On 22 November 2004 Federal Magistrate Raphael extended the life of the creditor’s petition pursuant to s.52(5) of the Bankruptcy Act 1966 until 17 December 2005.  As explained below, the hearing of the creditor’s petition was adjourned on a number of occasions.  On 24 October 2005 the application by ALF for substitution as petitioning creditor was listed for hearing on 17 November 2005 and the creditor’s petition was listed for hearing on 25 November 2005.  It was heard on 25, 28 and 29 November 2005. 

4. The applicant relies on the creditor’s petition as amended and a number of affidavits, in accordance with Part 31 of the Federal Magistrates Court Rules 2001, being an affidavit of Alan Raynor Cole sworn on

   
   

   5 January 2004 and filed on 10 February 2004 as to service, an affidavit of final debt sworn on 25 November 2005 by Patrick Coope, affidavits of final search sworn by Rose Daoud on 24 November 2005 and Adam Preston Young on 24 November 2005 and two affidavits verifying the petition sworn by Katherine Marion Brown on 18 December 2003.  A signed consent to act and trustee declaration was filed in Court on 29 November 2005.  Also relied on is an affidavit of Adam Preston Young sworn 23 November 2005.  The applicant filed written submissions and a chronology.  A number of exhibits were tendered by the parties.  The debtor relies on affidavits sworn by her on 16 and 21 November 2005 and two affidavits sworn on 25 November 2005 and written submissions filed before and after the hearing. 

The debtor’s notices of motion

1. While the debtor had filed a notice of intention to oppose the petition on 2 February 2004 on the ground that the judgment debt on which the petition was based was subject to being set aside in proceedings in the NSW Court of Appeal, counsel for the debtor confirmed that the debtor no longer sought to oppose the petition on that basis.  Nor did the debtor seek to proceed on a notice of motion filed on 7 April 2005 seeking that the creditor’s petition be dismissed (apparently on the basis that the Preschool had assigned its debt). 

2. However on 17 November 2005 (the date on which the Court heard ALF’s application for substitution as petitioning creditor) the debtor filed a further notice of motion seeking orders that the parties be heard as to whether reason was shown for questioning whether behind the judgment relied upon in the creditor’s petition is really a debt and if such reason was shown, that the issue of whether the creditor’s petition was based on an actual debt be set down for hearing.  The hearing of the creditor’s petition had already (on 24 October 2005) been set down for hearing on 25 November 2005.  Counsel for the debtor indicated that the debtor wished to rely on a large amount of material in support of the notice of motion (and on 18 November 2005 an affidavit of the debtor sworn on 16 November 2005 containing three lever arch files of material was filed in support of the notice of motion).  I indicated that, after such material and written submissions were filed, I would rule at the commencement of the hearing on 25 November 2005 as to whether the Court would proceed by dealing with the matter in two hearings, as sought by the debtor (with the first hearing limited to a determination of the preliminary question of whether there was a prima facie case to go behind the judgment and then, if necessary, a hearing as to whether there was a real debt), or whether the Court would determine the entire issues between the parties in the one proceeding.  (See Wolff v Donovan (1991) 29 FCR 480 and Makhoul v Barnes (1995) 60 FCR 572 at 584).

3. At the commencement of the hearing on 25 November 2005 I indicated that I did not assent to a split proceeding involving determination as a preliminary question (before hearing the creditor’s petition) whether sufficient reason or facts had been shown for questioning whether behind the judgment there was really a debt.  Having regard to the timing of this notice of motion, the impending date for the creditor’s petition to lapse and what Lee and Hill JJ stated in Wolff v Donovan at 487 I considered it appropriate for the Court to hear all of the relevant evidence and submissions on all applications on all issues before it at the hearing set down for 25 November 2005. Counsel for the debtor indicated that he did not press for a two-step process and counsel for both parties indicated their understanding of the manner in which the case was to proceed consistent with what was said in Makhoul v Barnes. 

4. However counsel for the debtor filed a further notice of motion in court on 25 November 2005 seeking an adjournment for 28 days to allow time for Attorneys-General to consider intervention on the basis that the cause involved a matter arising under the Constitution or involving its interpretation within s.78B of the Judiciary Act 1903 and a consequential declaration and also seeking that this Court grant leave to appeal from its decision of 24 November 2005 in relation to substitution of the petitioning creditor.  These matters were dealt with before the hearing of the creditor’s petition proceeded.  The application for leave to appeal was refused on the basis that the proper forum for any such application was the Federal Court (Australian Litigation Fund Pty Limited v Mearns (No.2) [2005] FMCA 1805). The application for an adjournment and declaration was refused (see Australian Litigation Fund Pty Limited v Mearns (No.3) [2005] FMCA 1870). The debtor withdrew an application for an adjournment for further time to prepare her case.

5. Despite the absence of a notice of intention to oppose the petition it is clear that the debtor opposes the making of a sequestration order on a number of grounds. No issue is taken with the material relied on by the applicant in proof of the formal matters in s.52(1) of the Bankruptcy Act 1966. However, the debtor contends that the creditor’s petition was based on a judgment that was obtained by default, that the Court ought to go behind the judgment to determine whether or not there is a real debt standing behind the default judgment, that it is for the creditor to prove that a debt exists in accordance with s.52(1) and that this has not been done. It is also contended for the debtor that the court should dismiss the petition under s.52(2) either because it should not be satisfied with the creditor’s proof that the debts relied on are still owing or because it is satisfied by the debtor that for other sufficient cause a sequestration order ought not be made. (See Miles v Shell Company of Australia (1998) 156 ALR 133).

6. The creditor contends that the court should accept the judgment as satisfactory proof of the debt for the purposes of s.52(1), that there is no substantial reason to go behind the judgment, but that even if the court did go behind the judgment the circumstances are such that it should nonetheless have no hesitation in making the sequestration order sought.

Power to go behind a judgment

1. Under s.52(1) of the Bankruptcy Act 1966 the creditor is obliged to prove that the debt or debts on which it relies is or are still owing. The Court has a discretion to accept a judgment as proof of the debt relied on to found the creditor’s petition. In this instance the substituted petitioning creditor relies on the default judgment obtained by the Preschool (the initial petitioning creditor) on 25 August 2003 in the District Court of New South Wales. It is not disputed that the Court of Bankruptcy has power to go behind a judgment and inquire whether, notwithstanding the judgment, there is a debt due to the petitioning creditor. In the context of s.52(1) the court’s discretion was described in Wren v Mahoney (1972) 126 CLR 212 at 225 by Barwick CJ, with whom Windeyer and Owen JJ agreed:

   … The Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor’s debt.  In that sense that the Court has a discretion.  It may or may not so accept the judgment.  But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof.  It must then exercise its power, or if you will, its discretion to look at what is behind the judgment:  to what is its consideration.  It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor’s debt is a mere matter of its own discretion.  Nothing in Corney v Brien (1951) 84 CLR 343 lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor’s debt. The Court’s discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That discretion 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.

2. The Court will not go behind a judgment as a matter of course but only if appropriate circumstances are shown to exist: Re Flatau; Ex parte Scotch Whiskey Distillers Limited (1888) 22 QBD 83 at 85 – 6 per Lord Esher. As North and Finklestein JJ stated in Joosse v Deputy Commissioner of Taxation [2004] FCAFC 245 at [3]:

   “The Court can go behind a judgment to determine whether it is founded on a real debt because a sequestration order should not be made on the petition of a person who is not a real creditor.  The Court has a discretion whether or not to go behind the judgment.  The discretion is of a limited kind”.

3. The Court may have sufficient reason not to exercise its discretion to treat a judgment as satisfactory proof of the debt if there are substantial reasons for doubting whether there really is a debt due to the creditor (Corney v Brien (1951) 84 CLR 343 per Fullaghar J at 353 – 358). In such circumstances rather than treating the judgment as establishing the existence of the debt the Court will “go behind” the judgment.

4. In Wolff v Donovan (1991) 29 FCR 480 at 486 Lee and Hill JJ quoted the passage set out above from the judgment of Barwick CJ in Wren v Mahony and continued:

   Where a judgment is obtained by default the Court in Bankruptcy will more readily look behind the judgment than it would if the judgment were obtained following a hearing on the merits. 

5. It was in that context that their Honours suggested in Wolff v Donovan at 487 that:

   “Once the judgment is proved, and it is prima facie evidence of the existence of the underlying debt there is a tactical onus on the debtor to show that there are circumstances which make it appropriate to go behind the debt to see whether the judgment was in truth and reality a true debt.  The overall onus of proof of the existence of a real debt underlying a judgment, however, remains always with the petitioning creditor”. 

6. It has been said that “the Court looks with suspicion on consent judgments and default judgments”: Corney v Brien (1951) 84 CLR 343 at 348 referring to Petrie v Redmond (1943) QSR 75 at 76 per Latham CJ and it is the case that the Court will more readily look behind a judgment obtained by default than it would if the judgment were obtained following a hearing on the merits (Wolff v Donovan).  As Gray CJ stated in Joosse v Deputy Commissioner of Taxation [2003] FCA 1325 at [9] (upheld on appeal in Joosse v Deputy Commissioner of Taxation [2004] FCAFC 245) where the judgment was obtained by default it is sometimes necessary to accept ‘more readily’ that there may be a substantial reason why the judgment should not be accepted as satisfactory proof of the debt.

7. It is also relevant to have regard to what was said by the Full Court of the Federal Court in Makhoul v Barnes (1995) 60 FCR 572. A distinction was drawn between a debtor seeking to go behind a judgment on an application to set aside a bankruptcy notice which relied on such a judgment (in which case the onus would be on the debtor to establish that the bankruptcy notice should be set aside as not founded on a genuine debt of the debtor see Re Stirling; Ex parte Esanda Limited (1980) 44 FLR 125 at 129) and the consideration at a hearing of a creditor’s petition of whether the Court should exercise its discretion to accept proof of a judgment as satisfactory proof of the petitioning creditor’s debt. In the latter case, as their Honours pointed out at 581:

   In a case where the Court, having concluded that it would be appropriate to inquire into the judgment debt, does so inquire and in the result is unable to be satisfied that there was consideration for it, the Court will exercise its discretion against the making of a sequestration order.  The creditor will not have satisfied that burden on it of establishing a case for the making of the petition:  Wolff v Donovan (1991) 29 FCR 480. The Court, however, does not determine as an issue between the parties the ultimate question whether the judgment debtor is indebted to the judgment creditor in the amount claimed. The judgment remains and an order dismissing the petition would not found an estoppel if a subsequent petition were presented. …

   Failure to show a real debt underlying the judgment gives rise to a discretion, in the sense discussed above, to refuse to make a sequestration order, notwithstanding that evidence of the judgment has been tendered.

8. The Court went on to say that, while there would be an act of bankruptcy in such a case, if the Court determined that the circumstances were such that it should go behind the judgment debt relied upon and having done so was not satisfied that there had been shown to be real consideration for it, then it would, in the exercise of its discretion dismiss the petition notwithstanding a proven act of bankruptcy (at 582). 

9. Hence the initial issue for determination is whether the Court should exercise its discretion to treat the judgment as satisfactory proof of the debt or whether it should go behind the judgment.  The debtor contended that the circumstances in which she has a current application for the default judgment to be set aside on the basis of a proposed defence prima facie would satisfy the preconditions necessary to the exercise of a court’s discretion to set aside the default judgment.  It was contended that ‘likewise’ this Court in these proceedings ought to be satisfied that it should go behind the judgment to determine whether or not there was a real debt standing behind the default judgment.  In other words, the substance of this contention is that the District Court would set aside the default judgment and that that is a substantial reason such as to satisfy the Court that it should go behind the default judgment.  It was submitted that if the Court went behind the judgment it should be satisfied that no debt was owed to the creditor by Mrs Mearns. 

10. Counsel for the creditor contended that an analysis of the history of the applications made by the debtor, her conduct of the litigation and the proposed defence on which reliance was placed in the latest application to set aside the judgment led to the conclusion that there is no substantial reason for the Court to go behind the judgment and that it could, with comfort, exercise its discretion to accept the judgment as proof of the debt. 

11. For the reasons given below I am satisfied that I should accept the District Court judgment as satisfactory proof of the creditor’s debt. I dealt in my judgment of 24 November 2005 (reported as [2005] FMCA 1727) with the assignment of debt by the Preschool to Australian Litigation Fund Pty Ltd, the substituted petitioning creditor. The only debt in issue is the judgment debt obtained by the Preschool in the District Court of New South Wales on 25 August 2003 by default. I am not satisfied that substantial reasons are given for questioning whether behind the judgment there is in truth and reality a debt due to ALF as assignee from the Preschool. Hence it is not necessary to consider the submissions relating to the task of the Court if it goes behind the judgment.

The history of proceedings

1. It is relevant to consider in some detail the history of proceedings between the Preschool (the original petitioning creditor) and the debtor.  The debtor was a former employee of the Preschool (and its predecessor) from some time in the 1970s to September 2001.  She was the Director of the Preschool at all times relevant for present purposes. 

2. On 31 August 2001 the debtor was stood down from her duties.  On 12 September 2001 the Preschool wrote to the debtor seeking a response to a number of questions about the financial accounts of the Preschool which, it stated, it believed may constitute misconduct by the debtor, in particular in relation to specific transactions for which copies of invoices, receipts and account statements were provided.  The Preschool also sought return of financial records including the petty cash book.  On 28 September 2001 the applicant’s employment was terminated. 

3. On 5 December 2002 the solicitors for the Preschool sent a letter of demand to the debtor, which the debtor acknowledged as received by letter dated 5 January 2003.  The letter of 5 December 2002 is Annexure ‘A’ to the affidavit of Adam Preston Young sworn on 23 November 2005.  It stated that the debtor had day to day management of the Preschool but that her authority to use Preschool funds was limited to expenditure necessary for the running of the Preschool and that on 20 September 1991 the Preschool management committee had set a $300 per item spending cap on her authority to use its funds to purchase equipment.  It was alleged that during her time of employment as Director the debtor had used the Preschool’s funds without authority and for purposes other than for the Preschool.  Attached to this letter were nine detailed schedules in relation to cheques and payments the subject of the Preschool’s claim.  The letter detailed the manner in which it was contended that the debtor had used funds without authority and made transactions unlawfully.  The schedules contain full details of each disputed cheque, the purported payee recorded on the cheque butt, the purpose of payment as noted on the cheque butt or allocation sheet and the actual payee recorded on the cheque.  Similar details of transactions on other Preschool bank and store accounts which were said to have been made unlawfully by the debtor were also provided.  Petty cash transactions and payment of premiums under a life policy in the names of the debtor and her husband were also detailed. 

4. The letter noted that the Preschool had previously sought the debtor’s response to its queries regarding these matters, including by letters dated 12, 19, 21 and 25 September 2001.  It demanded payment as specified within 14 days and stated that if the amount was not paid within 14 days proceedings would be commenced.

5. On 7 March 2003 the debtor entered into guarantees for loans totalling $1.4 million in relation to the obligations of Bringalong Pty Limited as trustee for the Mearns family trust and to secure the indebtedness of the debtor’s husband (Edwin Mearns) pursuant to a business/mortgage combination bank loan.  Security for the bank loans included a mortgage over property situated at Artarmon of which the applicant was the registered proprietor. 

6. On 27 June 2003 Willoughby filed a statement of liquidated claim in the District Court of New South Wales against the debtor pleading breach of contract, breach of fiduciary duty, fraud, money had and received and constructive trust seeking recovery of $356,835.50 plus interest and costs.  The statement of claim detailed approximately 1,000 transactions on bank and store accounts and the manner in which each transaction was alleged to be unauthorised.  Schedules set out details of each of these transactions. 

7. By way of example, Schedule 1 details payments totalling $134,670.81 from the Preschool’s National Australia Bank account between 12 October 1999 and 22 August 2001.  It was alleged that during the course of her employment the debtor drew cheques against this account, recorded details on the cheque butts and lists of cheque payees which she caused to be entered in the Preschool’s ledger book by their bookkeeper.  It was further alleged that she made some 263 specified unauthorised payments from this account, in that the payments were used to acquire goods and services not necessary for, or used in, the running of the Preschool; that were used for the personal use of Mrs Mearns and, in many cases, that exceeded the spending cap limit of $300 expenditure without the consent of the Management Committee.  It was further alleged that Mrs Mearns disguised these payments by falsely recording fictitious payees on cheque butts and in the ledger book or falsely completing cheque butts and ledger book entries to disguise cash cheques as cheques made out to legitimate payees. 

8. Similar allegations were made about specified transactions on a number of other Preschool accounts.  For example, it was alleged that Mrs Mearns made specified unauthorised purchases on store accounts (which were paid from Preschool funds) which were purchases of goods not necessary for, or used in, the running of the Preschool and/or were used for her personal use.  It was also alleged that she made specified unauthorised purchases using petty cash which she disguised by making false entries in the petty cash book.  Finally it was alleged that she made payments and directed payments of premiums for a life insurance policy in her name and the name of her husband that were not authorised or approved by the Preschool. 

9. No defence was filed.  An application for default judgment was filed on 14 August 2003.  Default judgment for $431,759.86 was entered on 25 August 2003.  On 1 September 2003 the debtor filed an application in the District Court to set aside the default judgment together with an affidavit sworn by her then solicitor relating to correspondence between the parties’ solicitors before the judgment was entered.  The evidence about what had occurred before judgment was entered included evidence that the defendant’s solicitors claimed to have prepared but were not able to confirm dispatch of a letter to the plaintiff’s solicitors seeking particulars.  In relation to the allegations in the statement of claim, the debtor’s solicitor stated that he was instructed and believed that the defendant had not obtained funds from the plaintiff as alleged but also that she had a viable claim by way of set-off and counter-claim against the plaintiff for unpaid wages, superannuation and long service leave. 

10. Included in the evidence before the Court are copies of the transcript of proceedings before Acting Judge Bowden of 5 September 2003 and 11 September 2003 and his Honour’s judgments of those dates.  On 5 September 2003 Bowden AJ found that he was satisfied, on the basis of the affidavit material before him, that a satisfactory explanation had been given in relation to delay but that that was only the first limb in relation to an application to set aside a default judgment.  The second limb required the defendant to show that she had at least some part of a defence to the claim.  His Honour recorded the submission for the debtor that because the statement of claim involved over one thousand separate transactions she needed to have full details of particulars and to search the records and look at all the documentation before she could decide whether or not any of those were transactions that resulted in money being due to the Preschool.  Bowden AJ noted that the solicitor for the debtor had sworn that he was instructed and believed that the debtor had not obtained funds from the plaintiff as alleged and also that she had a viable claim by way of set off.  His Honour described this as a ‘bit strange’ amounting to a statement “I didn’t get any money but if I did then I could make a claim for a set-off in respect of something that is owed to me” but acknowledged that it was permissible under the Rules.  However he had regard to the absence of evidence as to the basis for this belief from the debtor.  While his Honour noted that there were criminal proceedings against the debtor (as discussed further below) he held that if she had a defence she could still swear a statement indicating the basis for such a defence. 

11. Rather than just dismiss the notice of motion his Honour acceded to what counsel for the debtor sought, by allowing an adjournment until 11 September 2003 to give the debtor an opportunity to put on some sworn evidence.  An affidavit sworn by the debtor on 9 September 2003 was tendered on 11 September 2003. 

12. On 11 September 2003 Bowden AJ found that the judgment had been regularly obtained and that the delay had been explained.  His Honour recorded that the debtor had filed an affidavit dealing with the question of the spending cap on the expenditure which claimed that while there was a cap put in place, shortly afterwards she had a conversation with somebody where it was agreed that it was no longer a problem.  However his Honour stated that this “does not, of course, deal with the real gravamen of the plaintiff’s case”.  The debtor’s affidavit of 9 September 2003 stated: “In respect of the balance of the allegations, I say that, without access to the records of the plaintiff or the answers to further and better particulars requested by my solicitors … to the best of my recollection, all other payments were used properly for the legitimate purposes of the Preschool and were authorised on behalf of the plaintiff.  I deny any indebtedness to the plaintiff as alleged at all”.  Bowden AJ stated that this was precisely the sort of defence that the Rules stated should not be pleaded to a matter commenced by way of a liquidated statement of claim and that it was necessary to deal with questions of fact. 

13. His Honour observed that the Preschool had listed schedule after schedule of payments that it said were unauthorised and wrongfully made and that some of them “would appear, on the face of it, to scream for an explanation, and there is just none attempted”.  He referred specifically to one transaction (Number 38 in Schedule 1 to the statement of liquidated claim filed in the District Court on 27 June 2003).  The cheque butt indicated that the cheque was drawn in favour of Pro Ed for the sum of $354.48 but the cheque itself was drawn in favour of Crown of the Hill, a chain of liquor stores.  The records indicated it was used for “resources”.  His Honour observed that while there may be a good explanation for this, none had been provided.  He held that the general denial by the defendant did not suffice to establish a prima facie defence on the merits.  Rather the defendant was required to put some factual statements before the Court dealing with the very specific allegations and claims that had been made.  The notice of motion was dismissed with costs. 

14. In the meantime, on 9 September 2003, Mrs Mearns executed an unregistered transfer to her husband of a half interest in her property at Artarmon.  Mr Mearns lodged a caveat to protect his alleged interest.  On 12 September 2003 the Preschool commenced proceedings in the Supreme Court of New South Wales and obtained an injunction to preserve the Artarmon property as an asset of Mrs Mearns.  The injunction was continued on a number of occasions.  On 15 December 2003 Mr and Mrs Mearns made an unsuccessful attempt to vary the Mareva injunction.  These proceedings are still on foot. 

15. As indicated, on 15 September 2003 the bankruptcy notice was issued against Mrs Mearns.  It was served on 16 September 2003.  The debtor’s application to set aside the bankruptcy notice was dismissed on 11 November 2003. 

16. The debtor applied to the New South Wales Court of Appeal for leave to appeal from the decision of Acting Judge Bowden of 11 September 2003.  On 17 December 2003 the Court of Appeal dismissed the application for leave to appeal with costs.  (See Mearns v Willoughby Community Preschool Inc [2003] NSWCA 382). Hodgson JA referred to the Schedules to the statement of liquidated claim, noting that in many cases the payee recorded on the cheque was “cash” while the purported payees recorded on the cheque butts were various suppliers of goods that may have been appropriate for acquisition by the Preschool. His Honour observed that the detailed Schedules identified all the cheques in question and gave details of the cheque number, amount of cheque, date the cheque was presented, the purported payee noted on the cheque butt, the actual payee recorded on the cheque and the purpose of payment as noted on the cheque butt or allocation sheet and in some cases the purpose of payment as noted in the relevant ledger. His Honour noted that the allegation was not only that the payments made pursuant to the cheques were used to acquire goods and services not necessarily used in the running of the Preschool and used for the personal use of Mrs Mearns but also that it was specifically alleged that the payments were disguised by falsely recording fictitious payees and by falsely completing cheque butts and other entries to disguise cash cheques as cheques made out to legitimate payees.

17. His Honour recited the history of the litigation and the essence of the judgment of Bowden AJ.  He considered that the affidavit sworn on 9 September 2003 by the defendant in substance asserted all expenditure was appropriate and necessary for the running of the Preschool, dealt with particular allegations concerning a life insurance policy in her name but did not otherwise deal with any specific item in the statement of claim.  In particular, it made no answer to the allegations concerning the disguising of the payments by falsely recording fictitious payees and falsely completing records to disguise the nature of the payments.  Hodgson JA noted that no draft defence had been submitted and that the defendant appeared to have proceeded on the basis that there was no need for a defence to be put on until the request for further particulars had been answered.  He stated (at [15] – [16]):

    I have to say that, in my view, the statement of claim was pleaded with adequate particularity and that the request that was made for particulars was one to which the defendant was not entitled to have an answer before putting on a defence or, indeed, probably at all. 

    In those circumstances, it seems to me that the application which the claimant made to have the judgment set aside should have been accompanied by a proposed defence, and the failure to have a proposed defence put to the judge hearing the application was a significant deficiency in the application that was made.

18. His Honour held that important allegations in the statement of claim, including deliberate falsification in relation to the recording of transactions so as to disguise the nature of the payments, had not been addressed and certainly would have to be in any defence and that the application for leave to appeal should be dismissed.  His Honour observed that while there was some suggestion in the papers before him that the applicant had a cross-claim, there was no reason why a cross-claim could not be pursued in separate proceedings or, if it had sufficient substance, support an application for some kind of stay of the execution of the default judgment. 

19. His Honour continued at [21]:

    The dismissal of this application will not, as a matter of absolute necessity, preclude a future application.  However, I imagine that such a future application would have no chance of success whatsoever, unless it was supported by very clear and specific evidence as to the application of particular money and proof that that money was actually used for the benefit of the school.

    Ipp JA agreed with Hodgson JA and added at [23]:

    The allegation of falsification of cheque butts and ledger books form the very powerful part of the opponent’s case.  For the claimant to disclose a case on the merits, in my view that allegation had to be dealt with in the claimant’s affidavit.  The allegation that she made, however, was, in effect, nothing more than a general denial, albeit that she asserted that all payments were used properly for the legitimate purposes of the Preschool.  In my view, his Honour was entitled to come to the conclusion that he did by reason of the claimant’s submission to explain how it came about that she wrote up the cheque butts and the ledgers as she did, but drew the cheques on the basis that they were payable to “cash”.

20. Meanwhile, the debtor had filed a further notice of motion in the District Court seeking to set aside the default judgment on technical grounds relating to the regularity of the judgment.  That application was dismissed by Black J on 12 December 2003.  His Honour found that the judgment was not irregular.

21. On 18 December 2003 the Preschool filed and presented a creditor’s petition dated 18 December 2003 in the Federal Magistrates Court.  Accompanying affidavits were sworn and filed.  There is no dispute that the creditor’s petition and relevant affidavits were served personally on Mrs Mearns.  On the return date of 2 February 2004 the creditor’s petition was adjourned to 10 February 2004. 

22. The chronology provided to the Court by counsel for the creditor indicates that criminal proceedings in the Local Court against Mrs Mearns (being 148 charges of destruction or falsification of accounts, in particular cheque books, by a clerk with intent to defraud) in relation to a number of the transactions to which the District Court proceedings related were before the Local Court on 19 January 2003.  It is not clear whether this is intended to be a reference to 19 January 2004 (as it follows an event of 30 December 2003 in the chronology).  In any event it is not disputed that the criminal proceedings were instituted prior to 5 November 2003 (when Bowden AJ referred to such proceedings in his judgment).  Nor is it disputed that the hearing of these charges commenced on 24 May 2004.  Mrs Mearns pleaded not guilty to all charges.  The criminal proceedings have continued over a number of days of hearing.  There have been a number of adjournments.  These proceedings are not yet finalised.  The transcript of some but not all of the Local Court proceedings is before the Court as an exhibit to the debtor’s affidavit of 16 November 2005, but the Court’s attention was not directed to any particular section of the transcript. 

23. On 10 February 2004 the debtor served a holding summons (number 40110/04) for leave to appeal to the New South Wales Court of Appeal, apparently in relation to the decision of Black J.  According to the chronology provided to the Court this appeal was out of time.  An affidavit was sworn by the debtor on 10 February 2004 annexing a proposed defence to the statement of liquidated claim in the District Court proceedings.  In that affidavit Mrs Mearns stated that she had been depressed since the termination of her employment, became very stressed when served with the liquidated claim and could not deal with it properly, but had been under a treating psychiatrist since 28 October 2003 and had been able to settle her defence since that time with the assistance of counsel.  I will return to the substance of the notice of grounds of defence.

24. On 10 February the debtor sought an adjournment of the hearing of the creditor’s petition in this Court because an appeal to the Court of Appeal was pending.  The hearing was adjourned to 3 March 2004. 

25. On 12 February 2004 the solicitors for the Preschool wrote to Mrs Mearns requesting her to appear at the creditor’s petition hearing which had been listed for 3 March 2004 for cross-examination and on every other adjourned occasion for cross-examination. 

26. On 27 February 2004 the Registry of the Court of Appeal wrote to Mrs Mearns about her summons for leave to appeal.  On 1 March 2004 Mrs Mearns withdrew the motion seeking an extension of time to file a holding summons and, according to the chronology, indicated before a Registrar of the Court of Appeal that she would seek to file a summons for leave to appeal out of time when the judgment of Black J was obtained.  There is no suggestion that this occurred. 

1. On 1 March 2004 Mrs Mearns filed a third application in the District Court to set aside the default judgment.  An affidavit was filed in support attaching a verified defence.

2. On 3 March 2004 Mrs Mearns sought a further adjournment of the hearing of the creditor’s petition in this Court on the basis of the third set aside application filed in the District Court.  The hearing of the creditor’s petition was adjourned. 

3. Thereafter the application in the District Court to set aside the default judgment, which had been listed for hearing, was adjourned on a number of occasions pending the outcome of the criminal proceedings.  On 7 October 2005 it was stood over to 3 February 2006.  The hearing of the creditor’s petition was also adjourned on a number of occasions and the life of the creditor’s petition was extended. 

4. There are ongoing proceedings between the parties in the Supreme Court in relation to the Mareva injunction.  None of the Local Court criminal proceedings, the third application in the District Court to set aside the default judgment or the Supreme Court proceedings have been resolved. 

5. Meanwhile, on 6 May 2005 ALF applied to be substituted as the petitioning creditor.  Further adjournments were granted.  On 11 October 2005 the matter came before me for mention.  The application for substitution was provisionally listed for hearing on 17 November 2005 subject to what occurred in concurrent Supreme Court proceedings.  On 24 October 2005 the listing date of 17 November 2005 for hearing of the motion for substitution was confirmed and the creditor’s petition was listed for hearing on 25 November 2005.  As discussed above, the application for substitution was heard on 17 November 2005.  Also heard, and dismissed, was a notice of motion filed by the debtor on 7 November 2005 seeking refusal of the motion for substitution and that no hearing of the creditor’s petition proceed before judgment was given in the District Court proceedings number 2901 of 2003. 

6. No issue is taken by the debtor with the proof of the formal requirements in s.52(1) of the Bankruptcy Act 1966, other than the question of whether proof of the fact that the debt on which the creditor relies is still owing has been established to the satisfaction of the Court.  Counsel for the debtor had no objection to dispensing with requirements for service in relation to documents as to such formal matters which were filed in Court.

Whether the Court should go behind the judgment

1. I recognise that it is sometimes necessary to accept more readily that there may be a substantial reason why a judgment should not be accepted as satisfactory proof of the debt where it was obtained by default (Joosse v Deputy Commissioner of Taxation at [9] per Gray J upheld on appeal in Joosse v Deputy Commissioner of Taxation [2004] FCAFC 245) However, in this instance, when one considers the history of the proceedings and all the circumstances, the case for there being a substantial reason on the basis that the judgment was obtained by default is not as ‘strong’ as in other cases (see Joosse per Gray J at first instance at [9]).

2. First there is no suggestion that there has been “fraud, collusion or miscarriage of justice” providing a basis for going behind a judgment as considered in Corney v Brien and other cases.  There was nothing irregular in the way in which the default judgment was obtained, as stated by the Court of Appeal per Hodgson JA and in the subsequent judgment of Black J.  The decisions of the District Court and Court of Appeal on the applications which have been made to date by Mrs Mearns and determined leave this beyond doubt. 

3. However I have considered in these proceedings the circumstances in which the default judgment was obtained.  At all relevant times Mrs Mearns had legal representation.  A letter of demand was sent to her which she received no later than 5 January 2003.  The Preschool did not commence the proceedings in the District Court until 27 June 2003.  Mrs Mearns instructed a solicitor to file a defence on or about 1 July 2003.  On or about 17 July 2003 her solicitor requested instructions to brief counsel.  On 28 July 2003 the debtor’s solicitor wrote to the Preschool’s solicitors requesting them not to enter judgment without reasonable notice to their client and requested 14 days to respond.  The Preschool’s solicitors responded by letter of 30 July 2003 referring to the time of service of the letter of demand and noting that a copy of the letter of demand had been sent to the solicitors for the debtor on 12 May 2003, that the statement of liquidated claim was served on 1 July 2003 and that counsel had already had 28 days in which to adequately draft a response and file a defence.  The letter stated that it was intended to enter judgment on 13 August 2003 without further notice if the defence had not been filed prior to that date.  No defence was filed. 

4. The solicitor for the debtor subsequently filed an affidavit in the District Court stating that on 5 August 2003 he received a draft letter requesting particulars which had been drafted by counsel, that he instructed his clerk to forward a re-engrossed copy of counsel’s request for particulars to the plaintiff’s solicitors, but that he was unable to confirm dispatch of such letter.  He wrote to the Preschool’s solicitors on 21 August 2003 asking whether the letter had been received and seeking confirmation that the solicitors for the Preschool would not proceed to judgment without reasonable notice.  On 25 August 2003 the solicitors for the Preschool responded, indicating that they had not agreed to provide reasonable notice before proceeding to judgment but had advised they would enter a judgment on 13 August 2003 without further notice.  They had not received a fax of 5 August 2003 requesting particulars nor any correspondence since the letter of 28 July 2003 explaining the failure to file a defence or requesting further time to do so.  An application for default judgment had been filed on 14 August 2003.  Due to technical problems with the District Court Registry’s computer system an amended affidavit of debt was unable to be processed but the letter indicated that confirmation that judgment had been entered was awaited. 

5. If this were the entire history of the proceedings there may well have been an ordinary default judgment such as was referred to in Corney v Brien (1951) 84 CLR 343 at 348. However this was not the end of the matter. As detailed above, the debtor applied to the District Court to have the judgment set aside. Despite the fact that the test to set aside a judgment is relatively easy, in that all that is required is an arguable defence, not one that is bound to succeed, the two applications considered by the District Court (and in one case the Court of Appeal) were unsuccessful.

6. On the first occasion Bowden AJ allowed an adjournment for the filing of an affidavit by the debtor rather than dismissing the application. Subsequently Bowden AJ found, relevantly, that the applicant’s affidavit, which consisted primarily of a general denial of indebtedness and lacked factual statements dealing with very specific allegations and claims, did not establish a prima facie defence on the merits such as was required to set aside the default judgment.  No proposed defence was produced at that stage.

7. In the Court of Appeal, as set out above, Hodgson JA stated at [21]:

   “… a future application would have no chance of success whatsoever, unless it was supported by very clear and specific evidence as to the application of particular money and proof that that money was actually used for the benefit of the school”. 

8. Contrary to the contention of counsel for the debtor this statement does not provide the “imprimatur” of the New South Wales Court of Appeal for a future set aside application.  Rather it acknowledges that while a future application to set aside the default judgment may in theory be brought, it would have no chance of success unless it was supported by clear and specific evidence.  Ipp JA also made the point that for the claimant to disclose a case on the merits, the “very powerful” part of the case alleging falsification of cheque butts and ledger books had to be dealt with by her.  The second application to the District Court was to set aside the default judgment on technical grounds in relation to the regularity of the judgment obtained.  It was also unsuccessful. 

9. Thus the debtor has been found not to meet the test to set aside the default judgment on three occasions by the District Court and once by the Court of Appeal.  Putting on one side the further attempted appeal, which was not pursued, the debtor then made a further application to the District Court to set aside the default judgment.  On 1 March 2004 she filed an affidavit and notice of motion in the District Court seeking that the default judgment be set aside and that she have leave to file notice of grounds of defence within 14 days.  Her accompanying affidavit (which is an annexure to an affidavit sworn by the debtor on 25 November 2005) claimed that after service of the statement of claim her solicitor prepared a request for further and better particulars, that there was a delay in forwarding the request and default judgment was entered on 25 August 2003.  She stated that she had been depressed, referred to the judgment of the Court of Appeal and stated that over Christmas/New Year she had endeavoured to prepare a detailed defence and had included a draft form of defence in a summons for leave which she had sought to file on or about 19 January 2004.  She completed and signed a notice of grounds of defence on 9 February 2004 which was filed in the Court of Appeal with a second summons for leave to appeal from the judgment of Bowden AJ.  A copy of the notice of defence was also filed in the District Court.  A further affidavit was filed in the District Court by the debtor on 14 April 2004. 

10. On 16 April 2004 the notice of motion was set down for hearing in the District Court on 3 June 2004.  Since that time the matter has been before the District Court on a number of occasions.  On each occasion the hearing date has been vacated or the matter stood over pending the outcome of the criminal proceedings in the Local Court.  The application to set aside the default judgment is now listed before the District Court in February 2006.  It is relevant to note (given the unresolved criminal proceedings) that the current proceedings before the District Court are not substantive proceedings in which the claims of the Preschool would be determined, but rather proceedings in which it is for the debtor to establish that she has an arguable or prima facie defence (not one that is bound to succeed) so that the judgment should be set aside.  

11. The debtor responds to the contention that it is relevant that she has brought a multiplicity of unsuccessful set aside proceedings by submitting that such contention is met simply by an appreciation of her situation.  It is submitted that the debtor had a default judgment entered against her in the context of her solicitors awaiting an answer to a request for further and better particulars (which was said to explain the delay beyond the 28 day period after which judgment could be entered in default of a defence being filed by her).  However this submission does not address the contentions made by the creditor in relation to the history of the proceedings.  Further, it is notable that any suggestion that the fact that her solicitors could not put on a defence because they were waiting for particulars was rejected by Bowden AJ and by Hodgson JA as a basis for setting aside the default judgment.  In his judgment of 11 September 2005 Bowden AJ observed that the plaintiff had provided Schedule after Schedule of payments.  His Honour considered the timing of the correspondence which included the request for particulars (the sending of which could not be confirmed).  He rejected the suggestion that anything unfair or improper had occurred.  Moreover Hodgson JA in the Court of Appeal said at [15]:

    I should say at the outset that it seems to me that, right up to the time when the application to set aside the judgment was dismissed, the claimant appeared to be proceeding on the basis that there was no need for a defence to be put on until request for further particulars had been answered.  I have to say that, in my view, the statement of claim was pleaded with adequate particularity and that the request that was made for particulars was one to which the defendant was not entitled to have an answer before putting on a defence or, indeed, probably at all.

12. It was not until February 2004 that the final form of the proposed defence was prepared.  By this time the debtor had the benefit of the indications given by Bowden AJ on two occasions, and reinforced very clearly by what both of the judges of the Court of Appeal stated, in relation to the need for clear and specific evidence as to the application of particular money and proof that the money was actually used for the benefit of the school going beyond a general denial and the need for an answer to the specific allegations concerning the falsification to disguise payments and the nature of payments. 

13. The third primary application to set aside the default judgment was filed in the District Court on 1 March 2004. Counsel for the creditor contended that it was significant that the debtor left until that time her attempt to put forward a defence on the merits and that while it was a matter for the debtor that she thereafter sought to delay the hearing of the application to set aside the default judgment while the criminal proceedings were on foot, contrary to the suggestion by counsel for the debtor, the Preschool was not to be criticised for not bringing an application to dismiss the application to set aside the default judgment. It was submitted that it would be absurd for the judgment creditor to bring on an application to set aside a default judgment obtained regularly and that the judgment creditor (or the substituted creditor) could not be criticised because the judgment creditor had not sought dismissal of the motion in the District Court to set aside the default judgment which continued to be adjourned. I agree that such criticism is unwarranted. The fact that the judgment creditor (or substituted creditor) has not sought dismissal of the notice of motion is not a factor which supports findings that the Court should not accept the default judgment as proof of the debt or which supports the exercise of the discretion not to make a sequestration order under s.52 of the Bankruptcy Act 1966. 

14. It was submitted for the creditor that the debtor could have chosen to proceed with the application to set aside the default judgment at any time from March 2004 and could not say that she should be given more time to pursue that application on the basis that she had the “imprimatur” of the Court of Appeal.  She herself was responsible for the delay and it was submitted that she did not have the “imprimatur” of the Court of Appeal in the manner suggested.  Counsel for the debtor contended that the circumstances warranted that as a matter of justice she should be entitled to go to a hearing in the District Court in her own right. 

15. It is the case that the debtor has not sought to ventilate matters (in the limited sense necessary on the hearing of an application to set aside the default judgment) despite ample opportunity to have her application to set aside the default judgment dealt with by the District Court.  She may have chosen not to do so on the basis that the criminal proceedings are not finalised.  However this is to be seen in context.  Contrary to the debtor’s contention that she had proceeded expeditiously to set aside the default judgment, she has made three such applications, two of which have been unsuccessful and the third of which she has not sought to have determined. 

16. Bowden AJ addressed the relevance of the criminal proceedings in his judgment of 5 November 2003.  His Honour noted that it had been suggested that because there were criminal proceedings on foot that to require Mrs Mearns to swear “something” might have far-reaching consequences.  However, as his Honour stated: 

    “If she has a defence to these proceedings, it seems to me that she can give something now in a sworn statement.  She does not have to go through each part; she can be concerned about the criminal proceedings, but we do need to have some basis upon which she would have a defence to these proceedings”. 

17. It is apparent from this judgment that the criminal proceedings had already been initiated at the time of the first application to set aside the default judgment.  There was no suggestion that the application to set aside the default judgment on the basis of a sworn statement such as was proposed could not or should not be determined while the criminal proceedings were on foot either by Bowden AJ or by the judges of the Court of Appeal.  The first two set aside applications were pursued expeditiously.  Both were dealt with before the creditor’s petition was presented.  I also accept that while the decision of the Court of Appeal acknowledged that it was possible for Mrs Mearns to bring a further application to set aside the default judgment, it did not give her its “imprimatur”.   

18. It was contended by counsel for the creditor that the significance of these events was highlighted by the possibility of prejudice to the petitioning creditor because of the consequences that would follow if the creditor’s petition lapsed as a product of the debtor’s own actions and where she now sought to take advantage of that. Counsel for the creditor contended that if the creditor’s petition was not granted by 17 December 2005 the creditor would be prejudiced by operation of s.120 of the Bankruptcy Act 1966.  Counsel for the debtor had suggested that while the creditor’s petition would lapse on 18 December 2005 unless the Court made a sequestration order before that date, that was the proper course, that the debtor could thereafter pursue the notice of motion to set aside the judgment debt and that if she was unsuccessful in that application or in a subsequent hearing in the District Court she could be the subject of a further creditor’s petition with little prejudice to the creditor compared to the prejudice to her should the sequestration order be made. 

19. These arguments may be relevant to a number of issues, in particular whether the Court should accept the judgment as proof of the debt and whether the Court should make a sequestration order having regard to s.52(2)(b). It is convenient to consider them at this stage.

20. The basis of the creditor’s contention is that the relevant act of bankruptcy occurred on 11 November 2003 (being the date on which Federal Magistrate Driver dismissed the debtor’s application to set aside the bankruptcy notice). I accept that this was the date of the act of bankruptcy for the purposes of the hearing of the creditor’s petition. Counsel for the creditor contended that on this basis the date of the commencement of bankruptcy would, by virtue of s.115, be 11 November 2003 for the purposes of s.120. The transactions of 7 March 2003 and 9 September 2003 (which the creditor contended would be void) were within the two years prior to this date. Section 120 deals with transfers by a person who later becomes a bankrupt which are void as against the trustee in bankruptcy. Relevantly, for present purposes, transfers in the period beginning 5 years before the commencement of bankruptcy are potentially within this provision, but, under s.120(3), a transfer is not void against the trustee if it took place more than 2 years before the commencement of the bankruptcy and the transferee proves that, at the time of the transfer, the transferor was solvent. It was contended for the creditor that if the sequestration order was made before the creditor’s petition lapsed, the period within which a transaction could be challenged under s.120 would include the time at which the debtor entered the guarantee and purported transfer of a half interest in her home. However, if the sequestration order was not made before the creditor’s petition lapsed it would be necessary to pursue a fresh creditor’s petition based on a further bankruptcy notice and further act of bankruptcy. In those circumstances the provisions of s.120 may not be available to be relied upon by the petitioning creditor in relation to the two transactions entered into by the debtor in relation to her property at Artarmon on 7 March 2003 and 9 September 2003 because they would probably fall outside the period in which s.120 could apply to transfers (particularly if s.120(3) applied on the basis that the debtor was, as she claimed, solvent at the time of the transactions).

1. This was said to be the prejudice the creditor would suffer by reason of the debtor’s delay and continual adjournment of the application to set aside the default judgment in the District Court.  It was contended that she should not be allowed to take advantage of that delay and conduct in these circumstances.  It was also pointed out that the debtor was on notice at the time she entered into those 2003 transactions of a substantial claim for moneys made against her by the Preschool.  The transaction of 7 March 2003 followed the letter of demand which the debtor acknowledged was received by letter dated 5 January 2003.  By 9 September 2003 the default judgment had been entered. 

2. It was contended for the debtor that the creditor’s claim of prejudice arising upon the operation of s.120 of the Bankruptcy Act 1966 was without foundation because the two year period before the “commencement of the bankruptcy” in s.120(3) would be calculated by reference to the date any creditor’s petition was granted and not by reference to the date of an act of bankruptcy. Thus it was contended that even if the sequestration order was made on a date in December 2005 the two year period under s.120(3) would commence no earlier than two years earlier (December 2003). On that analysis the dates of concern to the creditor (7 March and 9 September 2003) would both fall outside the two year period provided for by s.120(3) (it being suggested that the debtor was solvent at those times) and would not be void as against any trustee yet to be appointed. I am not persuaded by these submissions.

3. While it is not appropriate or necessary to determine the precise application of s.120 in these proceedings, I note that the debtor’s contention makes no reference to any authority in support of the proposition that “the commencement of the bankruptcy” in s.120 is the date of the sequestration order (and see generally to the contrary Anscor Pty Ltd v Clout (2004) 135 FCR 469 at [43] per Lindgren J, with whom Wilcox and Moore JJ agreed). ‘The date of the bankruptcy’ is defined in s.5 to mean the date on which a sequestration order was made. However the definition of “the commencement of the bankruptcy” in s.5 of the Act refers to the time at which the bankruptcy is, by virtue of s.115, to be deemed to have commenced. Section 115(1) relevantly provides:

   If a person becomes a bankrupt on a creditor’s petition and subsection (1A) does not apply, then the bankruptcy is taken to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period of six months immediately before the date on which the creditor’s petition was presented. 

4. It does not appear that subsection (1A) has any application to the present proceedings. The creditor’s petition was presented on 18 December 2003. An act of bankruptcy was committed on 11 November 2003. On this basis, on the material presently before the Court, unless there is an earlier act of bankruptcy within the six months immediately preceding the presentation of the creditor’s petition, if a sequestration order is made before the creditor’s petition lapses, 11 November 2003 would be the date which, by virtue of s.115, was the date of commencement of the bankruptcy for the purposes of s.120. On this basis the transactions of March and September 2003 would fall to be considered under s.120 even if s.120(3) applied as contended by the creditor.

5. In light of these provisions of the Bankruptcy Act 1966 it cannot be said that the creditor’s claim of potential prejudice is without foundation. However, such potential prejudice is not of itself a reason for exercising the discretion to treat the District Court judgment as satisfactory proof of the debt or of itself a reason for making a sequestration order. Rather it is part of all the circumstances I have considered under s.52 of the Bankruptcy Act 1966.   

The proposed defence

1. The debtor’s central contention is that prima facie her proposed defence to the statement of liquidated claim satisfies the preconditions necessary to the exercise of a court’s discretion to set aside the default judgment and ‘likewise’ this Court should be satisfied that it ought to go behind the judgment.  It is, of course, not for this Court to determine whether the default judgment obtained in the District Court should be set aside, but the basis of the application to go behind the judgment involves some consideration of the proposed defence on which reliance is placed in the latest application to set aside the District Court judgment. 

2. Apart from the contention that Mrs Mearns proceeded expeditiously to set aside the default judgment (which is discussed above), counsel for Mrs Mearns submitted that the present application is based on a formal defence with detailed particulars in relation to each cheque and transaction in the Schedules to the statement of liquidated claim, an affidavit of 9 February 2004 verifying the grounds of defence, an affidavit of 14 April 2004 and a detailed statement.  It is said that the critical contentions in Mrs Mearns proposed defence are essentially that Mrs Mearns was entitled to reimburse herself for moneys expended on behalf of the Preschool, and Mrs Mearns did so, and that Mrs Mearns was entitled to a bonus of $30/week (initially) rising to $60/week by reference to salary increases, and Mrs Mearns was to take this bonus by expenditure on the Preschool’s accounts by direct payment, and Mrs Mearns did take such bonus.  Further it is contended that any expenditures represented by the cheques in issue may be accounted for by acknowledgement of direct expenditure on the Preschool (dockets, receipts or notes generally being put forward to the Preschool’s bookkeeper as evidence of such expenditure) or otherwise accounted for as the bonus due to Mrs Mearns. 

3. This affidavit of 14 April 2004 is a short affidavit about the debtor’s cheque signing authority.  It annexes a statement covering her employment with the Preschool which is said to be made to the best of her recollection.  She stated in the affidavit that in the context of her ‘best recollection’, and in the context of the time frame in which she had prepared the statement, she said that everything in the statement was true.  She also stated that the statement was prepared over the period 3 March 2004 to 14 April 2004 but principally over about the two weeks to 14 April 2004. 

4. It was submitted for Mrs Mearns that she gave oral evidence to this Court that she prepared the defence in the absence of any material being available to her, in particular that her requests (Exhibits 1, 2 and 3) did not result in information being provided to her by the Preschool on which to consider the expenditure in respect of some 993 cheques in issue.  It was submitted that the only information which Mrs Mearns had before her in settling her defence was such detail as was disclosed by the statement of liquidated claim. 

5. It was also submitted by counsel for the debtor that in cross-examination Mrs Mearns ‘confidently and consistently’ refuted any and all suggestion of ALF that she constructed the defence of ‘reimbursement and bonus’ and acknowledged that her defence (as was said to be prepared in an intensive session on 30 January, 31 January and 1 February 2004 i.e. after the Court of Appeal’s judgment on 17 December 2004) now stood to be amended after further consideration and refreshing of her memory through multiple interim hearings and attendances in the District Court and the Local Court and the multiplicity of other proceedings attendant upon the judgment debt.  It was submitted for Mrs Mearns that the indicated amendments were simply to the effect that some expenditure which she had asserted to be reimbursement might also be or include a bonus component (and/or vice versa).  On this basis it was suggested that this Court should go behind the judgment. 

6. Counsel for the creditor contended however that, apart from the history of the proceedings and conduct of the litigation, the proposed defence and affidavits in support were without merit and did not address the issues in the way that the Court of Appeal suggested. In particular, it was contended that there was no ‘very clear and specific evidence as to the application of particular money and proof that that money was actually used for the benefit of the school’ without which the application ‘would have no chance of success’ as the Court of Appeal stated at [21]. While there is a considerable amount of material in the proposed defence and affidavits, it was contended that the debtor had not, on the face of the material alone, let alone in light of her cross-examination in these proceedings, dealt with the allegations in the statement of liquidated claim in the way that the Court of Appeal made clear was necessary. It was also contended that the evidence before the Court did not support the suggestion that Mrs Mearns was kept out of information by the Preschool when preparing her defence. It was submitted for the creditor that in all the circumstances the debtor’s submissions and evidence on the basis for her defence did not make out sufficient reason to set aside the default judgment or warrant the Court exercising its discretion to go behind the judgment.

7. Before turning to the precise nature of the proposed defence it is relevant to note that the majority of the allegations about cheque use related to transactions where it was alleged that the cheque butt recorded the name of an organisation as payee but the cheque itself was drawn to ‘cash’.  In other cases the actual payee was alleged to be an entity other than that shown on the cheque butt and in others while the same payee was recorded on the cheque and on the cheque butt, it was nonetheless alleged to be an unauthorised transaction or one not for the benefit of the Preschool (for example because of the nature of the items the subject of the transaction).  Similarly the store account transactions detailed were said to be for items not for the benefit or use of the Preschool. 

8. The notice of grounds of defence has three main elements.  First, while the defendant admitted that there was a spending cap on the use of Preschool funds communicated to her on or about 20 September 1991 she stated generally that shortly thereafter (as from October 1991) spending in accordance with the spending cap was waived.  The defence also stated that if the defendant’s contract had an express term that she would not exceed the spending cap “such a course of action arose before 27 June 1997 and, in consequence is statute barred”.  The defence admitted that the defendant was an authorised signatory to all of the accounts identified in the statement of claim.  In cross-examination Mrs Mearns agreed that there was a practice whereby cheques would be pre-signed by one signatory.  Her explanation for discrepancies between the cheque butt and the payee named on the cheque and for the nature of expenditure recorded was twofold.  First the defence referred to ‘the arrangement’ which was described as follows: “Members of staff would often purchase items for the school’s use within their private purchases and/or with petty cash.  The school would subsequently reimburse these amounts to the staff member and/or to petty cash in cash, using an honour system where receipts were not produced.  This arrangement (“the arrangement”) was common practice for many years, recognising the time and effort expended on the school’s behalf.” 

9. The applicant told the Court that when she drew cheques to pay for personal matters or a combination of personal matters and Preschool matters for a particular recipient she was reimbursing herself for amounts from her own cash spent by her for the Preschool with some other supplier in accordance with “the arrangement”.  She told the Court in cross-examination that she kept a “float” of her own money in the sum of $2,000 or thereabouts (which in re-examination she said she kept in her purse) from which she spent money for cash purchases for the Preschool and that she would reimburse herself by a cheque drawn to cash or to some other payee from whom she acquired items for her own use or for a combination of her own use and Preschool use.

10. The other explanation provided was that particular transactions were said to be acquisitions of private items for the debtor’s own use as part of her bonus.  In that part of the proposed defence relating to expenditure on the Grace Brothers Preschool account the debtor claimed that it was suggested or indicated to her or agreed after discussions with the school committee that she would have a bonus, initially of $30 a week, and subsequently of $60 a week, whereby she could charge items through whichever account of the Preschool was convenient for her.  The bonus was said to accrue on a weekly basis but she claimed that she rarely used it on a regular basis but did use it from time to time for personal items and accounted for it on an honour basis. 

11. The proposed defence addresses each transaction listed in the Schedules to the statement of liquidated claim.  The explanations provided for individual transactions also take three main forms.  The majority of claims are met by what the debtor herself described as a ‘cut and paste’ exercise consisting of a general denial, being a statement that by reference to the cheque stub to which the particular amount relates the debtor “cannot recall specifically what items were purchased” accompanied by a statement that “to the best of my knowledge and belief the amount was expended in cash by myself for the school’s use or … [on a suggested type of item]”.  In many cases it is stated that in the absence of better particulars Mrs Mearns is unable to describe the item accurately.  Such explanations do not on their face provide clear and specific evidence as to the application of particular money. 

12. The creditor contended that while the debtor asserted in general terms her “innocence” and that she did nothing wrong (the sort of general denial that Ipp JA stated was not sufficient), she did not provide a specific explanation in connection with her proposed defence in relation to those items which, as Bowden AJ had said, “scream” for an explanation.  It was also contended that nothing in the defence could be taken as being anything but a reconstruction, because the applicant had conceded in cross-examination that she could not recall specifics.  It was said that there was no item which was the subject of a specific explanation as to what actually happened as opposed to what happened by virtue of a reconstruction process which process was flawed because it stemmed from the general denial that nothing the debtor did could be wrong, that everything she did was for the Preschool’s use and proceeded not on the basis of clear and specific evidence but by an assertion that looking at the information on the cheque butt and on the cheque and what the Preschool had put together in the Schedules it was probably expenditure for particular reasons.  There is force in this submission given Mrs Mearns’ inability to recall specific items and the extent to which the accounts she gave in cross-examination on just a few of the transactions in issue differed from those in the defence. 

13. It was conceded for the creditor that the explanations in the defence for items said to represent part of the ‘bonus’ are expressed in specific terms, but contended that Mrs Mearns retreated from this specificity in relation to each of the ‘bonus’ items put to her in cross-examination. 

14. The creditor also contended that the claimed “bonus” system, whereby the debtor claimed that she was entitled simply to use the Preschool cheque book (and store accounts) to pay her personal expenses for which she accounted on an honour basis, was inherently unbelievable.  There was no explanation of how the ‘honour’ system of accounting for the bonus operated.  It was suggested that if a bonus system had really existed there would have been a transparent and open arrangement. 

15. In cross-examination Mrs Mearns was questioned about her understanding of the arrangement and the bonus scheme referred to in the proposed notice of defence.  She described a practice whereby cheques which required two signatures, one of which was hers, would be pre-signed by the other person.  She told the Court that it was not her custom to record on a cheque butt the payee named on the cheque.  She was cross-examined about a number of items in Schedule 1 to the statement of liquidated claim filed in the District Court and her responses in the defence.  Some of these were items in relation to which she claimed specifically that “by reference to the relevant cheque stub to which [the] amount relates was for a personal item for my own use as part of my bonus”.  In relation to others the defence stated generally that by reference to the relevant cheque stub to which the amount related “I cannot recall specifically.  To the best of my knowledge and belief the amount was expended on …”

16. Mrs Mearns was cross-examined about six items in Schedule 1 for which the explanation provided was that they related to personal items for her own use as part of her bonus (items 37, 38, 50, 53, 57 and 65 in Schedule 1).  These related to transactions between May 2000 and June 2000 amounting to about $3,000.  Initially she was not able to explain why it was that she took so much in bonus payments in that particular period of time and not at other times.  She suggested that she kept some mental tally of her bonus entitlement, despite the fact that she also conceded that she was not able to add up very well.  There was no clear explanation for why it was that the claimed taking of the bonus as recorded in the defence was so erratic (for example $2,102.86 between 1995 and 1999 according to Schedule 4, $3,257.60 between May 2000 and June 2000 and $819.03 between February 2000 and April 2001 (Schedule 5) and one other payment between November 2000 and August 2001 of $34.40). 

17. In the course of cross-examination it emerged that while Mrs Mearns had provided specific explanations in the defence in relation to cheque stubs which she claimed related to amounts relating to personal items for her own use as part of her bonus, in evidence she varied this explanation, suggesting that some of the “bonus” items which were put to her were in fact either a reimbursement pursuant to the claimed “arrangement” while others were a combination of bonus and reimbursement. 

18. Counsel for the creditor contended that one item in particular, which was discussed in cross-examination, revealed the lack of a satisfactory explanation.  Exhibit 11 includes a number of documents relating to item 37 in Schedule 1 which was a transaction involving a cheque drawn to John W. Thompson in the sum of $520 on 6 May 2000.  The cheque butt was marked “J.W. Thompson fixtures and fittings”.  The correct amount was stated.  The applicant conceded that she never purchased any fixtures and fittings for the Preschool at J.W. Thompson.  When asked what J.W. Thompson did she suggested he was an engraver.  She failed to mention that J.W. Thompson was also a jeweller until pressed.  It emerged that Mrs Mearns used a Preschool cheque to buy a gold signet ring with her family coat of arms on it.  Counsel for the creditor contended that if this was a legitimate bonus payment one would have expected the cheque butt to reveal this, rather than to refer to “fixtures and fittings”.  When the implausibility of this cheque butt entry was suggested to the debtor she suggested that the item may have been partly a bonus and partly a Preschool expense and therefore included a reimbursement for money she had spent elsewhere on some fixtures and fittings. 

19. It is notable that in this instance, while Mrs Mearns claimed that this transaction related in part to a reimbursement for fixtures and fittings purchased elsewhere, she did not follow what she had said was her practice of recording on the cheque butt the shop where she bought such items.  She conceded that this did not always happen. 

1. In relation to a number of other items where the cheque was allegedly  made out to a payee other than ‘cash’ but not the payee recorded on cheque butt, the debtor also provided an explanation in cross-examination which varied from the explanation provided in the proposed notice of defence.  However she told the Court that she had not filed any amendment to the proposed notice of defence in the District Court.   

2. For example, item 185 is recorded in Schedule 1 to the statement of liquidated claim as a cheque for $825 dated 22 December 2000 with a purported payee on the cheque butt of Samsung (or Samsun) and an actual payee of Samsung.  The purpose of payment noted on the cheque butt is “two listening posts” (words which Mrs Mearns agreed she had written on the cheque butt although the words special needs had also been added).  The defence stated that to the best of Mrs Mearns’ knowledge and belief the amount was expended on audio/visual aids for the special needs group paid to Samsung.  Mrs Mearns told the Court that it was her “best guess” that this cheque was spent on audio/visual aids for the special needs group but that she did not really remember as it was in 2000.  After being shown a copy of an invoice for $825 issued to the Preschool relating to air conditioning units (two items of $300 and $450 plus GST) “to be collected” from Samsung she conceded that the cheque related to air conditioning.  She agreed that the cheque butt was inaccurate.  She said that that happened on occasions because she filled the cheque butts in later.  She was not able to explain why this item was recorded in the Preschool ledger as listening posts with an allocation of $400 of the $825 to special needs and $350 of the amount to sundries and with a GST of $75. 

3. Another item put to Mrs Mearns in cross-examination was item 182 of Schedule 1 which is recorded in the statement of claim as an amount of $718.98 relating to a cheque dated 20 December 2000 made out to BBQ Galore.  The cheque butt also recorded BBQ Galore as the payee and stated picnic rugs etcetera, gas bottles.  Mrs Mearns told the Court that the cheque butt was in her writing (other than the reference to gas bottles).  In her proposed defence in relation to this item she had stated that to the best of her knowledge the amount was expended on a barbecue for the Preschool to use for fundraising and school use and was paid to BBQ Galore.  She could not explain the allocation in the ledger of $300 to Kindy Supplies and $353.59 to Kindy Equipment and $65.36 to GST with no details as to the expenditure.  Mrs Mearns agreed that she had bought a barbecue which she claimed was for the Preschool, but told the Court that it had been stored in the garage at her home, had been damaged by water and had been disposed of at the tip.  She did not remember whether it had actually been used by the Preschool.  She had not reimbursed the Preschool for the amount of money spent on the barbecue.  She suggested that the cheque butt recorded “picnic rugs” because she probably filled it in in a hurry from memory and that she did buy picnic rugs from BBQ Galore on an annual basis. 

4. In relation to item 44 in Schedule 1, a cheque for $82 dated 20 May 2000 made out to Kennards, the cheque butt recorded the payee as Kennards and purpose as “drainer”.  The defence stated that to the best of the debtor’s knowledge and belief the amount was expended on “the hire of equipment for the maintenance program … or we may have had the cement pressure cleaned”.  However in cross-examination Mrs Mearns volunteered that she had been asked about this item in other proceedings and could not remember what it was and suggested that it turned out to be some kind of heater and may have been an offset for the drainer she purchased at another time.  An invoice made out to Mr Mearns (and the Preschool) showed that the cheque was for the hire of two patio heaters.  Mrs Mearns was unable to explain the ledger entry (made by the book-keeper) of “in-service training”.  She could not recall if the heaters were used for her personal use but suggested that if she rented them for a party, as was put to her, (the 20^th of May being the date of her son’s 21^st birthday) the purchase would be an “offset” for a drainer that was used at the Preschool. 

5. Item 140 of Schedule 1 is a cheque dated 26 June 2000 for $140 made out to Morris Minor Centre.  The purported payee on the cheque butt was Woolworths and the purpose was recorded as “plants & mulch garden”.  The defence stated that the amount was expended in cash for consumables for the school at Woolworths and the cheque made out to Morris Minor as reimbursement in accordance with the arrangement.  When asked why she had not paid Woolworths by cheque, despite the availability of a cheque on 26 June 2000 and the fact that the Preschool had arrangements for payment by cheque with two branches of Woolworths, Mrs Mearns provided a number of possible explanations, in particular that she may have shopped at a different Woolworths or on a day when no pre-signed cheque was available. 

6. Item 53 in Schedule 1 is a cheque for $735 dated 6 June 2000 paid to Morris Minor World.  The cheque butt recorded “Kooka Blinds Tracks”.  The defence stated that the item “by reference to the relevant cheque stub to which that amount relates to personal items for my own use as part of my bonus”.  However in cross-examination the debtor said that she now had more information (as she had now seen the cheque butt).  When it was pointed out that her defence was said to be prepared by reference to the cheque stub, she said she did not think she had seen it then.  She told the Court that she did the defence very quickly and it must have been a computer thing that crept in and kept going.  She told the Court that she now claimed that this item was part-reimbursement for cash of $500 she had paid to a man who provided tracks for blinds and that the rest was part of her bonus.  She could not explain the entry in the ledger of $735 for sundries.  She later volunteered that she had prepared the defence by reference to the information in the statement of claim. 

7. Mrs Mearns told the Court that item 38 ($354.48 paid to Crown of the Hill, with a purported payee of “Pro Ed resources”) was not a bonus as claimed in the defence but a reimbursement.  She was not sure whether item 50, (a cheque for $550 paid to Barry Hopkins trimming, which Mrs Mearns said had something to do with Morris Minor, with the cheque butt stating Barry Hopkins Pty Ltd with a purpose ‘electrical work, new plugs, fixtures’), which was recorded as bonus in the defence, was part-bonus with other stuff.  Item 57, a cheque for $230 paid to Morris Minor World with the cheque butt recording the payee as Paper Company and a purpose “cardboard” was described in the defence as bonus, but in cross-examination was said to be a reimbursement.  Item 65, a cheque for $150 made out to Barry Hopkins Trimming with a cheque butt recording the payee as Automatic Fire Service and the purpose listed as “fittings” was said in cross-examination to be either a straight reimbursement or a combination of bonus and reimbursement.  Mrs Mearns claimed she recalled these things later when she “looked at some of the stuff in the criminal trial”.  She had not prepared an amended defence in the District Court proceedings. 

8. Item 41 in Schedule 1 is a cheque dated 16 May 2000 for $380 paid to John Thompson with the cheque butt recording The Book Garden and the purpose “resources”.  In cross-examination Mrs Mearns stated that (as stated in the defence) this was a reimbursement.  She agreed that it was a second payment for the signet ring.  She was not able to say precisely why it had been inconvenient to pay The Book Garden with a cheque instead of cash but suggested a number of possibilities.  She answered yes when asked if she had ever paid The Book Garden with a Preschool cheque. 

9. As counsel for the creditor noted, there is no explanation for why the so-called “arrangement” and the bonus system was in place in lieu of properly documented transactions with cheque butts recording actual payees and actual items purchased.  Evidence was given for the first time in re-examination of the debtor to the effect that she had a cash float of $2,000 of her own money which she claimed she kept in her purse.  Because of the time at which this was raised, counsel for the creditor could not question the debtor about this claim.  This was the only explanation for the fact that in relation to the items in Schedule 1 alone, Mrs Mearns managed in two years to spend more than double her final net salary of $46,800 per year (supposedly from her own money) on such transactions.  It is not an explanation that appears in the defence. 

10. There was no explanation of how this “arrangement” or the “bonus” was accounted for – other than a general suggestion that the bookkeeper could somehow work it out from the fact that bundles of most but not all dockets were provided to her as well as the completed (but sometimes incorrect) cheque butts.  No consistent explanation of the way in which the accounting and cheque records were kept was provided. 

11. The evidence given by Mrs Mearns in cross-examination does not advance her case that the proposed defence is such as to satisfy this Court that there is sufficient reason to go behind the default judgment.  Indeed the effect of much of her evidence was contrary to claims in the defence, in particular those that were specific about the payments put to her which were said to form part of her “bonus”.  This removed from the proposed defence what might otherwise be seen to be clear and specific evidence in defence.  She told the Court she could not remember specific transactions.  She now says that some of what is in the proposed defence is no longer correct.  In particular she told the Court that during the course of the Local Court criminal proceedings she had access to other information which had led her to believe that what she said in the defence was not correct.  Despite this claim there has been no attempt to bring such matters to the attention of the District Court.  Importantly, the precise extent of such inaccuracy is not disclosed.  The cross-examination dealt with only a few of the items in issue in the District Court proceedings.

12. It is relevant to this aspect of the material before the Court that Mrs Mearns’ acknowledgement and submission that the defence now stands to be amended after further consideration and refreshing of her memory in other proceedings, implicitly acknowledges that the proposed defence is deficient.  This submission may have been of some utility to Mrs Mearns if those amendments to the proposed defence were such as to improve the defence, but the submissions themselves acknowledge the contrary.  It was submitted that the indicated amendments were simply to the effect that some expenditure which Mrs Mearns has asserted to be reimbursements might also be or include a bonus component (and/or vice-versa). 

13. Plainly the foreshadowed amendments would serve only to confuse and generalise the assertions in the defence further.  The modifications of “might also be or include” and “and/or vice-versa” do not suggest the “very clear and specific evidence” of which the Court of Appeal spoke.  The cross-examination of Mrs Mearns supports the conclusion that the Court should, in the exercise of its discretion, accept the default judgment as satisfactory proof that there is in truth and reality a debt due to the petitioning creditor. 

Access to documents

1. The debtor raised what appears to be an allegation that she was hindered in relation to preparation of her defence by a lack of access to documents from the Preschool.  Her counsel’s submissions complained that she had had to settle her defence in the absence of probative documents and in the context of the Preschool refusing to provide copies of any material that might be of assistance.  This is said to be relevant to whether the default judgment ought to be set aside and to showing that there is no debt owed to the creditor. 

2. However, apart from Mrs Mearns’ general assertions, the evidence in support of this contention (led as evidence in chief without notice to the creditor) consisted of three exhibits.  The first is a photocopy of what was said to be a notice to produce sent by the debtor to the Preschool which is dated 27 February 2003.  It bears a handwritten notation that it was sent by fax on 27 February 2003.  However it requires production of documents for the hearing in the Federal Magistrates Court on 3 March 2004 being “the minutes of committee meetings of the Willoughby Community Preschool including annual general meetings in the period 1 January 03 to the present”.  Putting on one side the difficulty with the nature of this handwritten document in the absence of proof that it was sent and the fact that the date it bears is prior to the date on which the matter was listed in the Federal Magistrates Court, in any event the documents which are sought pursuant to this claimed notice to produce were the minutes of meetings and not what the debtor told the Court she needed to defend herself: being the dockets she said she kept and provided to the book-keeper.  The debtor also tendered what was said to be a letter sent to the Preschool on 4 February 2004 requesting copies “of all school documents dating from the year 1991 and all minutes and correspondence pertaining to committee meetings dating from the year 1974”.  A letter from the solicitors for the Preschool dated 5 February 2004 refers to a fax dated 4 February 2004 and disputes the debtor’s entitlement to such documents as not being relevant to any current dispute.  Again, however, there is no specificity about invoices or documents and nothing in the nature of the material that the debtor now says she needed to defend herself.  Finally the debtor tendered a subpoena for production addressed to the director of the Preschool issued by the debtor in relation to the criminal proceedings.  This subpoena is very widely expressed, in that it seeks documents dating from 1974 to the date of the subpoena (being 2 April 2004) but the documents sought are documents relating to the debtor’s appointment, the appointment of committee members, minute books, diaries and memoranda relating to committee meetings, records of completed works carried out to structures inside and exterior grounds of the premises and wages books.  On the face of it, this subpoena could not have resulted in the documents Mrs Mearns says she required being produced.  There is no evidence that an appropriate application or request was made, despite the fact that Mrs Mearns was legally represented at relevant times. 

3. Moreover in the course of cross-examination, exhibited to Mrs Mearns were four expander files of material which she conceded were produced in response to a subpoena to the Preschool in the criminal proceedings.  Also the letter of 12 September 2001 (exhibit 7) from the Preschool to Mrs Mearns which sought information about specific transactions enclosed a considerable number of invoices and dockets relating to specific transactions and cheques signed by the debtor.  Mrs Mearns told the Court that she had no recollection of actually receiving this document.  There is no other explanation for why at least those items for which receipts and precise details were provided in that letter were not addressed specifically in the proposed notice of defence.  Her lack of recollection of receiving this letter casts doubt on the accuracy of her assertion that she never received any documents from the Preschool.  Moreover the Schedules to the statement of claim made it clear what the cheque butts said, to whom the cheques were actually made out, who was recorded as payee, the date and amount.  There is no evidence before the Court, other than Mrs Mearns’ assertion from the witness box (which is not reliable on this point), to support the submission that the Preschool is to be blamed for any shortcomings in the proposed defence.  The material before the Court does not establish that the Preschool in some way kept the debtor in the dark or left her in a position that she was not able to put forward more adequate material.  I am not persuaded that the debtor was under a disadvantage at the hands of the Preschool in preparing a defence on the merits to the District Court proceedings as contended. 

4. The debtor also took issue with the absence of particulars to the statement of claim (despite the fact that there was no evidence that the original request for particulars was sent to the Preschool’s solicitors).  However, as Hodgson JA suggested, the statement of claim was pleaded with adequate particularity and the request for particulars was one which the defendant was not entitled to have an answer to before putting on a defence or indeed probably at all (at [15]).  These complaints do not establish, either alone or in conjunction with other matters, sufficient reason to go behind the judgment or sufficient cause not to make a sequestration order. 

Time to prepare defence

1. Mrs Mearns also suggested that she had insufficient time to prepare the defence and that this explanation for any deficiencies was relevant to the Court’s consideration of whether it should go behind the judgment.  There is some contradiction in the evidence in relation to the time taken to prepare the proposed defence.  The debtor’s submissions refer to an intensive three day session from 30 January to 1 February 2004.  However it is notable that in the affidavit filed in the District Court on 1 March 2004 the debtor stated that “over the Christmas/New Year I endeavoured to prepare a detailed defence.  I included a draft form of the defence in the summons for leave which I sought to file on or about 19 January 2004”.  It continues that she completed and signed a notice of grounds for defence on 9 February 2004.  In any event, in light of the significant amount of time which has passed since 1 March 2004 (because the application to set aside the default judgment has been adjourned on numerous occasions), the debtor has had an opportunity to deal with any shortcomings in the proposed defence which arose from time limitations or which became apparent after access to further material which ‘refreshed’ her memory.  Even if the defence could be improved, the debtor has had ample time to do so and has not done so.  Yet she asks this Court to go behind the judgment based on the adequacy of a proposed defence which is now conceded to be incorrect and where the amendments which she now suggests might be made are not such as to deal with the difficulties inherent in the defence. 

2. I note that the creditor contended that the evidence (in particular the transactions considered in cross-examination) demonstrated in any event that the grounds of challenge were such that even if some were accepted the amount of the judgment would still be well in excess of $2,000.  It was contended that on this basis the Court should decline to go behind the judgment (see Emerson v Wreck Air Pty Limited (1992) 33 FCR 581 at 587-9; Re Longo; Ex parte Longo (1995) 57 FCR 523 at 530). This was not the primary basis for the creditor’s submissions, which were that the Court should not go behind the judgment. There was no quantification or identification of those amounts which, it is said, would without any doubt survive the debtor’s challenge to the statement of liquidated claim.

3. However, it is not necessary to address this matter further in light of the conclusion I have reached on the evidence before me that I should accept the judgment of the District Court as proof of the debt relied on.  The judgment of the District Court is not just an ordinary default judgment such as would more readily give rise to sufficient reason to go behind the judgment.  The test for setting aside a default judgment has been described as a “relatively easy one to satisfy” (see Gray J in Joosse v Deputy Commissioner of Taxation at [15]) requiring only an arguable defence not one that is bound to succeed. The debtor had the opportunity and made two unsuccessful applications to have the judgment set aside. However she was found by Bowden AJ on two occasions, Black J and by the Court of Appeal by to have failed to meet the test for setting aside a judgment. The debtor has not sought to have the current application to set aside the default judgment determined by the District Court – despite the time that has passed since it was filed (and despite the fact that she pursued the first two applications while the criminal proceedings were unresolved). She has refrained from such action in circumstances where the creditor’s petition would lapse if not determined and where there is at least a strong possibility that the creditor would be prejudiced by an inability to rely on s.120 of the Bankruptcy Act 1966 if it was necessary to commence fresh proceedings. 

1. The proposed defence which the debtor now seeks to rely on in the District Court does not support her contention that she has an arguable defence or that there is reason shown for questioning whether there was in truth and reality a debt due to the petitioning creditor.  As discussed the defence lacks specificity.  The debtor changed some of the explanations in cross-examination.  The defence is now said by the debtor to be in need of amendment.  No amended defence has been prepared and such amendments as are said to be proposed do not address its deficiencies in a manner which would constitute clear and specific evidence addressing the allegations of falsification.  There is no evidence as to the extent of amendment contemplated. 

2. Having regard to all of the material before me, in particular the history of the applications to set aside the District Court judgment and the conduct of the litigation as well as the proposed defence I am not satisfied that there is a substantial reason to go behind the judgment debt. In all the circumstances I am satisfied that the Court should exercise its discretion to accept the judgment entered on 25 August 2003 as satisfactory proof of the debt for the purposes of s.52(1) of the Bankruptcy Act 1966.

3. I am also satisfied with the proof of the matters stated in the creditor’s petition.  I should note in that regard that the affidavit sworn by Adam Preston Young on 23 November 2005 suggests that the date of the act of bankruptcy upon which the applicant creditor seeks to rely is 11 December 2003.  However, as stated in the creditor’s petition and as counsel for the applicant submitted, the relevant act of bankruptcy committed by the respondent debtor within six months before the presentation of the petition (on 18 December 2003) was that the respondent debtor failed to comply with bankruptcy notice NN2319/03 which was served on her on 16 September 2003.  The date on which the debtor failed to comply with the bankruptcy notice was 11 November 2003.  It is not disputed that this is the date of the act of bankruptcy relied upon to found the creditor’s petition. 

Whether for sufficient cause a sequestration order ought not to be made

1. Apart from submissions in relation to going behind the judgment, the debtor made post-hearing submissions addressing a number of matters.  It was pointed out that if the creditor’s petition resulted in a sequestration order being made the debtor would lose her home (or at least her half share of that property) as her property would vest in the trustee in bankruptcy.  However the fact that a bankrupt’s property vests in the trustee in bankruptcy is not of itself a matter which persuades me, either alone or in conjunction with other factors, that for sufficient cause a sequestration order ought not to be made. 

2. In addition to matters discussed above, counsel for the debtor contended that if the Court went behind the judgment, even if it was satisfied that some debt had been proved, it had not been proved by the creditor to the requisite level to found a sequestration order, as it needed or ought to be proved to the level of $24,420.28 being $2,000 plus the debtor’s claim against the Preschool in proceedings commenced in the Industrial Magistrate’s Court on or about 3 October 2005 in relation to long service leave benefits.  In fact that claim is for $24,420.28 and it may be that this is intended to be a submission that the debt had to be proved to the level of $26,420.28.  It appears that this is raised on the basis that the debtor allegedly has a claim for an amount equal to or greater than the amount the debtor owes the creditor.  There is authority that in this context the debtor must show that the claim is a genuine and serious one which he or she has not reasonably been able to litigate (Re LHF Wools Limited (1970) Ch 27) and that it is a “real claim” that is “likely to succeed” having “sufficient validity … to justify dismissal or adjournment of the petition”: See in particular Re Schmidt; Ex parte Anglewood Pty Limited (1968) 13 FLR 111 at 116 and Re Kostezky; Ex parte Milder Elfman Szmerling Krycer Pty Ltd (1996) 67 FCR 101 at 106. In this instance there is no explanation before the Court as to why the claim against the Preschool has not been litigated earlier. On the material before the Court there is nothing to indicate whether the debtor has good prospects of success and there is no explanation for the delay in instituting such proceedings. In any event on the material before the Court I have accepted the default judgment as satisfactory proof of debt for the purposes of s.52(1). It has not been established that the debtor has a claim against the petitioning creditor which is likely to equal or exceed the petitioning creditor’s debt. Nor has it been established by the debtor that there is in truth no debt (see Joosse v Deputy Commissioner of Taxation [2003] FCA 1325).

3. Insofar as the debtor takes issue with the motivation of the substituted petitioning creditor (or the original petitioning creditor) these contentions do not establish that there was an intention to use the process for a purpose which is not legitimate or that there is otherwise an abuse of process.  Nor does the contention that the circumstances warrant as a matter of natural justice that the debtor be entitled to go to hearing in the District Court in her own right and not subject to the vagaries and unlikelihood of representation by a trustee in bankruptcy establish other sufficient cause such as to warrant dismissal of the petition. A petitioning creditor has a prima facie right to a sequestration order unless the debtor establishes some very special circumstances which would justify the Court not making such order (Cain v Whyte (1933) 48 CLR 639 at 646).

4. I have had regard to the possibility that the making of a sequestration order will have a prejudicial effect on the debtor’s ability to pursue the current application to set aside the default judgment in the District Court.  The debtor has had a considerable period of time in which to pursue the application to set aside the default judgment in the District Court.  I have taken into account the fact that there are unresolved criminal proceedings.  However in the circumstances of this case these matters are not such as to persuade me, either alone or together with the other matters raised, that for other sufficient cause a sequestration order ought not to be made. 

5. I am satisfied that the debtor committed the act of bankruptcy alleged in the petition (as amended) on 11 November 2003. I am satisfied with the proof of the matters required by s.52 of the Bankruptcy Act 1966.  Accordingly I make a sequestration order against the estate of Robyn Haydn Mearns.  I order that the creditor’s costs, including any reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966. 

   
   

   I note that a consent to act as trustee has been signed. 

I certify that the preceding one hundred and twenty-five (125) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate: 

Date:  16 December 2005.