Cascades Marble v Moore - [2001] FMCA 51

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CASCADES MARBLE v MOORE [2001] FMCA51

BANKRUPTCY – Creditors Petition – going behind judgment – whether cross-claim sufficient cause to refuse sequestration order – whether claim likely to succeed

Wren v Mahoney (1972) 126 CLR 212
Corney v Brien (1951) 84 CLR 343
St. George Bank v Helfenbaum (1999) FCA 1337
Monroe Schneider Associates v No. 1 Raberem No. 2 (1992) 37 SCR 234
Wolff v Donovan (1991) 29 FCR 480

Bankruptcy Act 1966, s 40(1)(g) and s 52

Applicant:

CASCADES MARBLE & GRANITE PTY LTD

Respondent:

RAYMOND JEFFREY MOORE

File No:

BZ 135 of 2001

Delivered on:

10 August 2001

Delivered at:

Melbourne

Hearing Date:

13 July 2001

Judgment of:

McInnis FM

REPRESENTATION

Counsel for the Applicant:

Mr D O’Brien

Solicitors for the Applicant:

Shand Taylor

Counsel for the Respondent:

Ms P Hay

Solicitors for the Respondent:

Reardon & Associates

ORDERS

The estate of RAYMOND JEFFREY MOORE be sequestrated.
The respondent debtor pay the applicant creditor’s costs pursuant to Order 62 of the Federal Court Rules, including any reserved costs to be taxed and paid in accordance with the Bankruptcy Act.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE

BZ 135 of 2001

CASCADES MARBLE & GRANITE PTY LTD

Applicant

And

RAYMOND JEFFREY MOORE

Respondent

REASONS FOR JUDGMENT

Introduction

This is a Creditors Petition wherein CASCADES MARBLE & GRANITE PTY LTD (“the creditor”) seeks a sequestration order against RAYMOND JEFFREY MOORE (“the debtor”) based upon a Bankruptcy Notice dated 19 January 2001 which was served on

24 January 2001.
The date of the act of bankruptcy is 14 February 2001. Leave was granted to the creditor to amend the creditors petition to insert 14 February 2001 as the correct date of the failure to comply with the bankruptcy notice by the debtor.
The bankruptcy notice is based upon a judgment obtained by the creditor against the debtor in the District Court of Queensland on

10 January 2001 for the sum of $54,914.63.
The judgment that was obtained by the creditor against the debtor was based upon a claim arising from two cheques presented by the debtor to the creditor. The first cheque dated 6 November 2000 was for an amount of $20,000 and the second cheque dated 13 November 2000 was for the sum of $32,945.20. The first cheque was presented on 7 November 2000 and dishonoured on 8 November 2000. The second cheque was presented on 23 November 2000 and dishonoured on 24 November 2000. There is no dispute that the cheques were presented and dishonoured as indicated. It was upon this basis that the creditor claimed before the District Court of Queensland to be entitled to a judgment of $52,945.20 plus an amount for interest of $731.33 and costs of $1,220.10 making a total of the judgment of $54,914.63.
In the Notice of Intention to Oppose the Petition, the debtor relies upon the following grounds:
“1. That the said Raymond Jeffrey Moore has an offsetting claim greater than the amount claimed in the bankruptcy notice;
2. The said Raymond Jeffrey Moore intends to apply to have the judgment of 10 January 2001 upon which the bankruptcy notice is issued set aside; and
3. It is otherwise not just and equitable to make a sequestration order against the estate of the said Raymond Jeffrey Moore.”

Evidence

In support of the application, the creditor relied upon the formal proofs in relation to service and proof of debt and affidavits in relation to the appropriate searches. No dispute has arisen in relation to the formal proofs otherwise required by s 52 of the Bankruptcy Act 1966 (“the Act”) and accordingly I find that the formal requirements of that section have been established.
The creditor further relies, however, upon affidavits of Mr RICARDO JAVILLONAR sworn 20 March 2001 and 22 May 2001. In addition, the creditor has relied upon an affidavit of RODERICK ERNEST O’SULLIVAN sworn 22 May 2001 and a further affidavit from Mr O’Sullivan sworn 13 July 2001. The second of those affidavits is simply an affidavit referring to the appropriate searches which have been undertaken.
In addition to the affidavit material, the creditor subpoenaed evidence from Mr SALVATORE PATORNITI. Mr Patorniti attended and gave evidence before the Court. Mr Patorniti at all material times was the director of Cubdale Pty Ltd, a builder which had engaged the debtor who in turn sought the supply of marble and granite in order to fit out kitchens in dwellings which were being constructed by Mr Patorniti.
The debtor relied upon affidavits sworn by him on 11 May 2001 and 24 May 2001 together with a further affidavit sworn 13 July 2001 which the debtor was granted leave to file on day of the hearing. In addition to those affidavits, the debtor relied upon an affidavit of ERROL ARTHUR WATKINS sworn 23 May 2001.
At the hearing, both Mr Moore and Mr Watkins were cross-examined after adopting the affidavits to which I have referred.
As indicated, the grounds relied upon by the debtor in his opposition to the petition, essentially require some analysis of the judgment which was entered in the Queensland District Court. The judgment was entered in default and it is common ground that there was no Notice of Intention to Defend filed. Mr Moore in his evidence indicated that at the time the judgment was entered, he was absent.
It was submitted by Mr O’Brien for the creditor that the Court should follow the decision of the High Court in Wren v Mahoney (1972) 126 CLR 212 at 224–225 in relation to whether to go behind a judgment. In that case, the Court held that where reason is shown for questioning whether behind the judgment of a Court there is in truth in reality a debt due to a petitioning creditor within s 52 of the Bankruptcy Act 1966 (Cth), the Federal Court of Bankruptcy must exercise its power to look at what is behind a judgment. In his judgment, Barwick CJ at 224 states:
“The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has emerged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor’s debt. In that sense, 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 a judgment: to what is its consideration.”
It is clear that the Court may have sufficient reason not to exercise its discretion to treat a judgment as satisfactory where there are substantial reasons for doubting whether there really is a debt due to the creditor [see Corney v Brien (1951) 84 CLR 343.]
There is clear authority where courts have considered it appropriate to go behind the judgment where it is established the judgment was obtained by fraud, collusion or a miscarriage of justice.
In the present case, the challenge is made to the judgment on the basis that it is now said by the debtor that he has a defence and/or counter-claim to that judgment. Annexed to the affidavit of the debtor sworn 13 July 2001, is a draft “Defence and Counter-claim” which the Court was told would be filed in support of an application to set aside the judgment in the District Court of Queensland and that the application to set aside the judgment has in fact been listed for hearing in the Queensland District Court on 26 July 2001. It was agreed, however, by counsel that the application to set aside the judgment in the District Court of Queensland would be deferred pending the outcome of these proceedings.
As I have indicated, the creditor notes that the matters required to be proved in s 52 have been established and that the Court should also be satisfied that the debtor is indebted to the creditor in the sum of $54,914.63 and having been served with a Bankruptcy Notice relying upon the judgment obtained in the District Court of Queensland has failed to comply with the provisions of the Bankruptcy Notice within the time specified and therefore has committed the act of bankruptcy as provided in s 40(1)(g) of the Act
In relation to the issue of going behind the judgment and considering whether there is other sufficient cause, it has been submitted by the Creditor that the Court should not go behind the judgment and in particular the defence now sought to be raised is a belated attempt to delay matters as over a period of six months no attempt has been made to set aside the judgment, nothwithstanding the service of the Bankruptcy Notice and Creditors Petition, and the fact that there have been two earlier adjournments of the petition. Essentially it is noted that in reality the significant issue raised in the present case is the alleged counter-claim based on a collateral contract arising out of the conditions of the presentation of the cheques.
In considering the issue of whether there is a counter-claim which will provide a basis for finding that there is other sufficient cause made out to persuade the Court not to proceed with a sequestration order, the creditor submits that there is no legitimate claim by the debtor against the creditor and in any event any claim that may be made is far less than the amount of the judgment debt. Significant attack is made by the creditor upon the expert evidence which is relied upon by the debtor, to which I shall refer later in this judgment.
There is a useful statement in relation to the issue of whether a cross-claim is sufficient cause within the meaning of s 52(2)(b) of the Act in the decision of Sundberg J in the matter of St. George Bank v Helfenbaum (1999) FCA 1337. In that case, His Honour said:
“The existence of a cross-claim may be a ‘sufficient cause’ within s 52(2)(b) for declining to make a sequestration order: Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25. It is for the debtor to establish the existence of ‘sufficient cause’: Cain v Whyte (1933) 48 CLR 639 at 645-646; Ling at 24. He must establish that he has a real claim against the creditor that is likely to succeed. If the Court is satisfied that there is such a claim, and that its quantum is likely to equal or exceed the credtior’s claim, it will not make a sequestration order. If the claim is likely to be less than the creditor’s claim, the Court will require the debtor, if he is to avoid a sequestration order, to pay the difference between the judgment debt and the amount he is likely to recover on his claim. See Re Player (1962) 19 ABC 277 at 282; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116; Ling at 25-26; Commonwealth Bank v McDonald [1999] FCA 984. A debtor does not establish a real claim that is likely to succeed merely by producing a statement of claim in an action against the creditor: Re Rivett; Ex parte Edward Fay Ltd (1932) 5 ABC 182; Player at 282, or by pointing to the existence of current litigation against the creditor: cf Re Douglas Griggs Engineering Ltd [1963] 1 Ch 19 at 23. While the Court does not try the cross-claim in advance, the debtor must adduce sufficient evidence to show that it is a real claim which is likely to succeed: cf Vogwell v Vogwell (1939) 11 ABC 83 at 88; Player at 282.”
The debtor has submitted that in the present case, the Court’s discretion should be exercised, not to accept the creditor’s judgment and to do so on the basis that there was previously unobtainable evidence from the expert, Mr Watkins. [See Monroe Schneider Associates v No. 1 Raberem No. 2 (1992) 37 SCR 234 at 242 & 244.]
It was further submitted by counsel for the debtor that the Court should exercise its discretion to go behind the default judgment. [See Wolff v Donovan (1991) 29 FCR 480.] The existence of a valid set-off or counter-claim, it was submitted, creates a substantial reason for the Court to question whether to go behind the judgment. Other principles to which I have already referred were relied upon, namely that the existence of a counter-claim is a sufficient cause to decline to make a sequestration order and that in the circumstances the Court should be satisfied the claim is a real one and/or is bona fide and/or based on genuine and arguable grounds, sufficient to persuade the Court not to make a sequestration order.
It is evident from the draft Defence and Counter-claim that reliance is placed by the debtor in his defence upon the assertion that the cheques which were the subject of the statement of claim, were not cheques within the meaning of the term as defined in the Cheques Act 1986, as the cheques were both contingent upon work being performed by the creditor for the debtor.
The debtor, in his evidence, indicated that although he had forwarded the cheques to the creditor, he did so with a covering note indicating the following:
“I have enclosed two cheques.
Cheque 731 for $20,000 to be banked on 6 Nov.
732 for $32,945.20 to be banked on 13 Nov.”
After referring to that in writing by letter dated 25 October 2000, it will be noted that in the same letter the debtor advises the creditor as follows:
“The job is now in its final stages and final inspection by the builder will be carried out on the week of 6 November to culminate in final payment.”
At the hearing it was suggested by the debtor that this was meant to infer that the cheques would not be presented by the creditor until such time as payment had been received upon final inspection of the work.
Indeed, in his affidavit sworn 11 May 2001, the debtor states at paragraph 14, “I say that the conditions precedent to the banking of the cheques which were post-dated, included: (a) That the cheques not be presented until such time as I was paid by Cubdale, and
(b) That the cheques not be presented until after the final inspection of the works.”
There is no dispute in the present case that the building works undertaken by Cubdale Pty Ltd which involve the supply of granite kitchen benches by the creditor to be installed on a sub-contracting basis by the debtor had certain defects. The extent and nature of the defects and the rectification work required is disputed. The value of the rectification work is disputed, which in turn relies upon the extent and nature of the defect identified.
Mr Patorniti gave evidence that he had a contract for new kitchens and renovations with the debtor and that the contract (Exhibit A1) provided a condition that “All work guaranteed for two years and carried out to the best quality of workmanship.” Mr Patorniti indicated to the Court that he had withheld almost $12,000 from the total payment due to the debtor of $242,500 on the basis that upon inspection of the work undertaken by the debtor, he was satisfied there were defects he would need to correct, and that the sum retained would be sufficient to cover the cost of the defect in the granite benchtops along with other minor defects which he identified in evidence. He gave evidence that he was not interested in pursuing the debtor in reliance upon the guarantee condition to which I have just referred. He indicated that this would be the position despite being confronted with a suggestion made by counsel for the debtor that there was now evidence from an expert, Mr Watkins, that the potential cost of rectification may be as high as $107,100 to correct all defects, or at least $55,660 as an alternative.
The debtor still claims that he is entitled to cross-claim against the creditor for the potential loss which may be pursued by Mr Patorniti as assessed by an expert. The expert he relied upon as indicated was Mr Watkins who is a licensed builder and in addition to swearing affidavits as I have indicated, gave evidence on oath.
I was not impressed with the evidence of Mr Watkins and in particular I note that he has sworn an affidavit which attaches two reports. The first report dated 23 January 2001 states in relation to the work he inspected at the unit development at Oxlay Drive, Newfarm, that:
“A large proportion of the granite benchwork is satisfactory, however, there is a significant number of areas of unsatisfactory or incomplete work which require attention, particularly with a view to eliminating all actual and potential differential movements in slab joints. Where movement has taken place, obviously the benchwork is not fit for the purpose intended.”
In the same report Mr Watkins states:
“Should any rectification involve the removal of slabs, obviously there will be significant attendant costs involved from other trades, eg. tiling, painting, plumbing and benchwork.
In the units I inspected I currently do not expect this to occur.”
He then returned and inspected the premises again on 23 April 2001. On that occasion he inspected a further three units and reinspected another unit which had previously been inspected by him in January.
In his second report dated 23 April 2001 he provides various estimates of the cost of rectification. On one assessment the total cost would be $107,100. In the second report he suggests that all slab joints should be opened up, inspected for inadequate gap, absence of adhesive, removed or separated sufficiently to rectify the joint inadequacies and then replaced in final position and promptly supported. He refers in some detail to the costs and tasks involved in this process. In evidence he agreed, however, that the appearance of the fault had not altered significantly since the time of his first inspection. I gained the distinct impression that he was a somewhat reluctant expert witness who indicated he had retired from work and was in fact prevailed upon by the debtor to assist in obtaining a quotation for the rectification work.
At one stage he stated that an alternative cost of rectification of $17,080 would be a figure that would cover the costs of rectification which would satisfy all parties, although he did indicate that it may not comply with the building requirements. In any event, it is clear on the evidence that the builder, Mr Patorniti, who had the contract in relation to the new kitchens and who was provided a guarantee to the consumers, is the person whom the Court is entitled to rely upon as providing a realistic and accurate assessment of the cost of rectification.
I find that the cost of rectification is certainly no more than $20,000 and on the evidence of Mr Patorniti, it is unlikely to exceed the amount he has withheld, namely $12,000.
The debtor gave evidence and adopted affidavits sworn by him on 11 May 2001, 24 May 2001 and 13 July 2001. The main thrust of his evidence was that in the circumstances he still expected that the cheques would not be presented until everybody had been paid. It seems in the circumstances that that may have been a view genuinely held by him at the time, but I conclude that it was not in fact the basis of any agreement between the parties when the cheques were provided by him to the creditor.
It was noted that the debtor has in fact instructed solicitors to prepare a detailed defence and counter-claim in support of his application to set aside the judgment in the Queensland District Court. As I have indicated, the defence seeks to rely upon the suggestion that the cheques which had been produced by the debtor to the creditor were in fact an order to pay on a contingency, namely that the work undertaken would be the subject of a final inspection and approval.
It is clear from the evidence of Mr Patorniti that he in fact has paid the debtor all money due, save for an amount of almost $12,000, which he withheld from the total payment of $242,500. This was the subject of agreement at the hearing and in fact Mr Moore in his evidence referred to a figure of $11,836 being an amount still outstanding. It is noted in his affidavit of 24 May 2001 that an amount of $40,000 was claimed to be outstanding, though this was corrected at the hearing. In passing, I should add that the affidavit incorrectly refers to the amount as “$40,8034.10”.

I accept Mr Moore’s evidence that when the default judgment was entered he was absent and otherwise accept that he now wishes to pursue an application to set aside the judgment and pursue a Notice of Counter-claim.
In the light of this evidence, it was submitted by counsel for the creditor and I accept that the Court cannot be satisfied that there is indeed a proper basis upon which the debtor can pursue the counter-claim against the creditor. I find that there is simply insufficient evidence to confirm that there is a potential claim which would in turn be the basis upon which damages could be claimed by the debtor against the creditor. The direct evidence of the potential claimant in fact is clearly to the contrary and it should be of some comfort to the debtor to know that that potential claimant, Mr Patorniti, has clearly indicated that he does not intend to pursue the claim and nor does he intend to rely upon any guarantee that may have been given by the debtor in relation to the work he performed.
It is also noteworthy, in my view, to consider the chronology of events in this matter. It is clear that the default judgment was entered in the absence of the debtor but in my view since that date the debtor has not been proactive in pursuing any claim he may have against the creditor, even if one were to assume there was some merit in that claim. Indeed it is noted that the document which is the Defence and Counter-claim to be relied upon in an application to set aside a judgment has only recently been completed, despite the fact that the judgment debt was obtained on 10 January 2001 and the subject of the Bankruptcy Notice dated 19 January 2001.
Having found that I am not satisfied with the expert evidence of Mr Watkins and further finding that there is in fact no condition attached to the presentation of the cheques by the debtor to the creditor, it is my conclusion that the counter-claim which has been produced to this Court does not have any proper basis and/or likelihood of success. It is my view that the mere presentation of a counter-claim in these circumstances is insufficient and I am not satisfied that there is sufficient evidence which would establish that that counter-claim is a real claim likely to succeed. In any event, I am also not satisfied that the claim, even if it had some prospect of success, is for an amount likely to exceed the amount of the judgment debt. There is no suggestion in the present case by the debtor that in order to avoid the sequestration order he is prepared to pay the difference between the judgment debt and the amount likely to be recovered on his claim.
I propose making the following orders:
(1)The estate of RAYMOND JEFFREY MOORE be sequestrated.
(2)The respondent debtor pay the applicant creditor’s costs pursuant to Order 62 of the Federal Court Rules, including any reserved costs to be taxed and paid in accordance with the Bankruptcy Act.
It is noted that the date of the Act of Bankruptcy is 14 February 2001.

I certify that the preceding forty three (43) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 10 August 2001