Halstead, P.A. v Ex parte Westpac Banking Corporation

Re: PAUL ANTHONY HALSTEAD AND MARCELLA MARY HALSTEAD
Ex Parte: WESTPAC BANKING CORPORATION
No. Q N25 of 1991
FED No. 551
Bankruptcy
(1991) 31 FCR 337

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
BANKRUPTCY DIVISION
Heerey J.(1)

CATCHWORDS

Bankruptcy - validity of bankruptcy notice - discretion to go behind judgment - whether debtor has "counter-claim, set-off or cross-demand" - s.40(1)(g) Bankruptcy Act 1966.

Bankruptcy - validity of bankruptcy notice - whether judgment impeachable - mortgage - unconscionable conduct - husband and wife - wife surety for debt - understanding of wife - whether wife had direct or indirect interest in debt - whether whole transaction should be set aside - onus.

Bankruptcy - validity of bankruptcy notice - judgment found to overstate amount in fact due - debt remaining due in excess of statutory minimum.

Bankruptcy Act 1966: s.30, s.40(1)(g), s.41(2)(a)(i), (5), (6), (6A), (6B) and (6C),

Real Property Act 1861 (Qld): s.76A

Trade Practices Act 1974: s.52

Bank of Victoria Ltd v Mueller (1925) VLR 642

Re Brink (1980) 30 ALR 433

Commercial and General Acceptance Limited v Nixon (1983) 152 CLR 491

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447

Corney v Brien (1951) 84 CLR 343

Re Greenhill (1984) 5 FCR 84

Olivieri v Stafford (1989) 91 ALR 91

Re Prossimo (1952) 16 ABC 86

Sercombe v Sanders (1865) 34 Beav 382

Re Sterling (1980) 30 ALR 77

Re Stokvis (1934) 7 ABC 53

Union Bank of Australia Ltd v Puddy (1949) VLR at p 242

Walsh v Deputy Commissioner of Taxation (1984) 58 ALJR 368

Warburton v Whiteley (1989) NSW Conv R 58,283

Warnock v Australia and New Zealand Banking Group Limited (1989) ATPR 50,045

Re Westpac Banking Corporation (1987) Qd R 300

Re Williams (1982) 43 ALR 552

Wren v Mahony (1971) 126 CLR 212

Yerkey v Jones (1939) 63 CLR 649

Yourell v Hibernian Bank Limited (1918) AC 372

HEARING

MELBOURNE

#DATE 6:9:1991

The applicants Mr P.A. Halstead and Mrs M.M. Halstead appeared in person.

Counsel for the Respondent: Miss E. M O'Reilly

Solicitors for the Respondent: Feez Ruthning

ORDER

The application of Paul Anthony Halstead be dismissed.

The bankruptcy notice dated 7 January 1991 be set aside as against Marcella Mary Halstead.

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

JUDGE1

The first applicant, Paul Anthony Halstead, has been the moving force behind the design and manufacture in Australia of a high performance sports car called the Giocattolo. The business was conducted by his company Giocattolo Holdings Pty Ltd ("the company"). Operations commenced in a factory at Caloundra on the Sunshine Coast in March 1987. The Giocattolo is constructed on the chassis of an Alfa Romeo Sprint. For reasons which I need not elaborate, the method adopted was to purchase new Alfa Romeo Sprints, strip them down virtually to the chassis and install a Holden engine and new parts. It was a much more sophisticated operation than this brief description would indicate, and articles in the motoring Press which were in evidence indicated that the finished product was a very desirable motor vehicle.

Finance for the venture was provided by the respondent, Westpac Banking Corporation ("Westpac"), the Queensland Industry Development Corporation ("QIDC"), a group of local investors who formed a company called Kilcoy Holdings Pty Ltd ("Kilcoy"), and Mr Halstead himself.
Unfortunately the performance of the Giocattolo was not matched by the financial progress of the company. In June 1989 Westpac withdrew funding and on 6 July the company's business was closed down when QIDC took possession of its assets under a fixed and floating charge. Mr Halstead had on 2 December 1988 guaranteed the company's debt to Westpac and he and his wife, the second applicant, Marcella Mary Halstead, had in March 1989 executed a second mortgage over their home as further security. On 23 November 1990 Westpac obtained judgment against Mr and Mrs Halstead in the Supreme Court of Queensland for $414,759.18 for debt and $29,625.29 for interest and also against Mr Halstead for $144,301.61 for debt and $10,306.05 for interest. The judgment also provided for the defendants to pay Westpac's costs to be taxed. The judgment was obtained in default of defence. On 7 January 1991 the Registrar issued a bankruptcy notice based on that judgment and the notice was served on 15 January. By application filed on 8 February Mr and Mrs Halstead made application to set aside the bankruptcy notice "upon the grounds that it overstates the amount in fact due to the creditor". After a series of interlocutory applications and directions this application came on for hearing before me on 19 July. Mr Halstead, who is not legally qualified, appeared on behalf of himself and his wife and presented what was necessarily a complex case with courtesy and considerable skill.
Going Behind the Judgment
This Court has of course a discretion to go behind the judgment relied on by the petitioning creditor. The discretion will be the more readily exercised where the judgment has been obtained by default, although the debtor must still show some reason: Corney v Brien (1951) 84 CLR 343, Wren v Mahony (1971) 126 CLR 212.
At an early stage this matter came on for hearing before Registrar Allen for directions as to discovery. In the course of that application Westpac argued that the application to set aside the bankruptcy notice should be dismissed as "not bona fide". Registrar Allen gave a ruling on that submission on 15 March. After a comprehensive and enlightening review of the authorities, the Registrar found that there was no support "for the proposition here sought to be advanced by the creditor, that there is a threshold question to be determined as to whether the allegation that no real debt exists has been made bona fide and not for the purposes of delay, before the Court can advance to an inquiry whether reasons, or substantial reasons, have been shown for questioning whether, behind the judgment, there was in truth and reality a debt". I agree with that conclusion.
Westpac's primary contention before me was that I should not go behind the judgment. But the course of evidence and argument was largely directed towards the merits of Westpac's claim and the various answers to it raised by Mr and Mrs Halstead. This was probably unavoidable, since it is difficult in a case like the present one to separate out as a threshold issue the question of going behind the judgment when the case for doing so is an attack on the merits of the claim on which the judgment is based.
Counsel for Westpac accepted that if I should decide to go behind the judgment I did not have to make a finding, as I would on a trial, that the debt is or is not due but simply whether there was a triable issue. She agreed that it was an exercise analogous to that carried out on an application for summary judgment. It was also accepted that, if I reached that stage, it was not appropriate for the matter to be further litigated in this Court.
It will be a more convenient course if I deal with the facts discretely in relation to each of the issues raised by Mr Halstead rather than attempt one comprehensive narrative. The case of Mrs Halstead needs to be considered separately.
Sale of the Brisbane Cars
On 14 March 1990 QIDC sold by auction assets of the company. Included in the sale were two completed Giocattolos which, together with some spare parts, realised $147,715. The total gross proceeds of the auction were $290,961 and total costs were $84,601.54. After apportioning those costs, QIDC paid to Westpac $43,960 which was applied in reduction of the company's account. Mr Halstead complains that a greater sum should have been paid by QIDC to Westpac, with a corresponding reduction in the amount for which judgment was obtained. Relevant to this issue is a dispute which arose between QIDC and Westpac as to security over the vehicles concerned.
Initially QIDC and Kilcoy had a fixed and floating charge over all of the assets of the company. In the latter part of 1988 Mr Halstead arranged for the purchase of nine new Alfa Romeo Sprints from New Zealand, the final shipment of which arrived in Sydney in November. On 2 December 1988 Mr Halstead signed a personal guarantee to Westpac in respect of the finance for those vehicles and the company executed a bill of sale over them. The vehicles were identified in the bill of sale by, amongst other things, their chassis numbers which were the original numbers stamped by the manufacturer Alfa Romeo. QIDC agreed to a partial release of its fixed and floating charge in relation to the nine chassis and on 5 December executed a form 52 release which it provided to Westpac.
In December 1988 Mr Halstead was informed of a further three Alfa Romeo Sprints available in New Zealand which were said to be the last three available in that country or in Australia. The company had used up its Westpac facility but Mr Halstead spoke to QIDC's representative on the company's board who agreed that the three further cars should be bought and that QIDC would fund them by way of a temporary extension of the QIDC loans secured by the fixed and floating charge. The cars were then purchased and shipped direct to Brisbane, in contrast to all the earlier shipments which had gone to Sydney. I shall refer to these three vehicles as "the Brisbane cars".
On 8 March 1989 Westpac granted a further term loan of $340,000 to the company. Various security documents had been proposed but not yet executed, but the Bank already had Mr Halstead's personal guarantee as well as a bill of sale from the company over the nine vehicles. In respect of the Brisbane cars an additional bill of sale was to be drawn up after the payment out of QIDC, who had loaned the money in December 1988 to purchase them. On 16 March the local Westpac Manager wrote to the Bank's office in Brisbane asking that they attend settlement, pay QIDC and obtain a form 52 in respect of the Brisbane cars, the chassis numbers being given. By this time the cars had been collected from the Brisbane wharf and were at the Caloundra factory in the process of being turned into Giocattolos.
On 17 March settlement was completed and QIDC were paid $41,454.73 by Westpac. Kilcoy provided a form 52 in respect of the Brisbane cars but there is no evidence of a form having been received from QIDC. The form 52 was apparently not lodged with the Corporate Affairs Office. The Brisbane cars had not been included in the bill of sale executed in December 1988. By May 1989 the only vehicles listed in that bill of sale and not sold to customers by the company were three vehicles in bond store in Sydney ("the Sydney cars"). On 1 June, at the urgent request of Westpac, Mr Halstead arranged for the company to execute a further bill of sale over the Brisbane cars. On 20 June Westpac withdrew lending support to the company. On 6 July QIDC took possession of the Caloundra factory. Two of the Brisbane cars were in the factory in an almost completed condition, the third having been sold. The bill of sale executed on 1 June was not registered by Westpac until 12 July.
A dispute then ensued between QIDC and Westpac over the two cars. QIDC claimed that Westpac's right went no further than the chassis. Westpac on the other hand claimed that it had security over the chassis and, by virtue of accretion, the whole vehicle.
Initially QIDC and Westpac agreed that QIDC should sell the two cars at auction, along with the other plant and equipment as to which there was no dispute as to QIDC's entitlement, with the rights of QIDC and Westpac being determined later. The auction was fixed for 3 October 1989. However Mr Halstead made public statements to the effect that the two cars were not completed and not in a safe condition to sell and that he had legal advice indicating that QIDC did not have the right to sell the cars because the charge over them had been released. He made other attacks on QIDC over its closing down of the business. On 28 September Mr Halstead and his solicitor met representatives of Westpac and its solicitors. Mr Halstead repeated his complaint about the safety of the cars for sale in their present state and stated his intention to disrupt the auction and to bring legal proceedings against QIDC. An agreement was reached which was recorded in a letter of that date from Westpac's solicitors to Mr Halstead's solicitors. In essence the agreement was that Westpac would withdraw its authority to QIDC to sell the cars and that it would attempt to obtain possession of them, Mr Halstead would arrange for such repairs, alterations or modifications as were necessary and would attempt to sell the cars at a price to be agreed by the Bank and QIDC within a period of 30 days, and if the vehicles were not sold within that period then Westpac would be at liberty to dispose of them in any manner which it thought fit. Westpac stipulated that it gave no guarantee that it could obtain possession of the cars from QIDC. If it was unable to do that, Westpac reserved its right to authorise QIDC to sell the vehicles at the auction on 3 October "upon such terms and conditions as Westpac may in its absolute discretion think fit". The following term was included:

All proceeds of any sale, either by your client (with the consent of Westpac and QIDC) or by Westpac (with or without QIDC) at auction shall be set aside so that Westpac and QIDC can resolve their dispute as to the proceeds in any manner which Westpac thinks in its interests to be desirable. Westpac gives no warranty that all of the sale proceeds, or any part of them, will be applied against your client's debt to the Bank. Westpac reserves its right to settle its dispute with QIDC in its absolute discretion and on its own terms.

By letter of the same date Westpac's solicitors put to QIDC the proposal that the auction for the following Tuesday be cancelled, the cars be delivered into Westpac's possession and that after the defects were remedied Mr Halstead would attempt to sell the cars at a price approved by Westpac and QIDC. The letter advised that "irrespective of your attitude to this (proposal), our client withdraws its consent" to QIDC selling. QIDC replied on the same day. It rejected the allegations as to unsafety of the cars and maintained that the auction would proceed. The letter stated "we do not believe that the Bank can now withdraw its consent as its consent was never conditional".
I pause to make the comment that, in my view, Westpac could validly withdraw its consent. At worst, such a withdrawal might have been a breach of a contract between Westpac and QIDC, but it was nonetheless effective in law.
On Monday, 2 October Mr Halstead and the company obtained from the Supreme Court of Queensland an injunction restraining QIDC from proceeding with the auction. The injunction was conditional on $30,000 being paid to QIDC prior to commencement of the auction, this amount being the interest payment in respect of which the company was in default. A bank cheque for $30,000 was delivered to QIDC at 9:45am on the following day and the auction was cancelled. Mr Halstead at this stage intended to resume the company's operations and complete assembly of a final three Giocattolos, using the Sydney cars. On the same day Westpac's solicitors wrote to QIDC asking that the Brisbane cars be delivered to Westpac for the purpose of rectifying any defects and then selling, with proceeds to be placed in a separate account in the joint names of the Bank and QIDC "until our dispute as to the proceeds of sale is resolved". But on Friday, 6 October QIDC commenced to remove plant and equipment from the Caloundra factory. An urgent application was made to the Queensland Supreme Court on the Friday afternoon on behalf of Mr Halstead and the company for an injunction to stop this removal, but McKenzie J. dismissed the application on the ground that, as QIDC claimed, most of the plant and equipment had already been moved to Brisbane and it was more convenient that the removal be completed rather than ordering the return of the plant and equipment already relocated to Brisbane. Mr Halstead asserts, and there is some evidence to support him, that on the Friday none of the plant and equipment had been moved and the only items moved to Brisbane had been office furniture. It was not until the weekend that the plant and equipment was removed.
By the Sunday, the factory had been stripped bare, including wiring, lights, water and compressed air lines. Mr Halstead claims that by this stage the company was not in default under its loan with QIDC because the $30,000 paid on the Tuesday morning had met interest liability up to 31 December 1989. I shall say no more as to this, since QIDC is not a party to these proceedings and has not had the opportunity to answer any allegations made. However it would seem clear that for practical purposes the company's business as a going concern had been destroyed and Mr Halstead's efforts to find another investor rendered fruitless.
The two Brisbane cars were not handed over to Westpac and on 14 March 1990 the two cars and Alfa Romeo parts, together with other items of plant and equipment, were sold by Premier Auctions Pty Ltd acting under instructions from QIDC.
A Westpac file note of 15 March 1990 records a meeting between Westpac officials, their solicitor, and a representative of QIDC. At this stage a full accounting had not been provided but the approximate results of the auction were known. The note states:

Both Bank and QIDC were claiming a priority charge in respect to these motor vehicles and this has been the subject of much discussion/negotiation details of which can be perused from the file. A meeting was arranged between the Bank and QIDC to discuss an equitable arrangement for the distribution of these funds, bearing in mind the ongoing dispute.

After much discussion and legal argument it was agreed that distribution would be on a 50/50 basis.

QIDC will account to Bank in due course with amount to be received to be approximately $45/50,000. This is a better result than we had previously expected as we had only estimated Bank receiving the value of the chassis i.e. a total of $15,000.

As I have noted, the amount in fact subsequently received by Westpac from QIDC was $43,960. A detailed statement was provided by QIDC to Westpac, but Mr Halstead did not obtain a copy of it until much later.
Mr Halstead claims that the QIDC statement "contains very serious and obvious flaws, and ...... that the people representing or employed by Westpac, who were involved to a greater or lesser extent in the negotiation of the settlement terms, and the subsequent acceptance of the proceeds resulting from the auction of my two Giocattolos, all without reference to me, are responsible for gross negligence".
Mr Halstead complains that in the statement certain costs have been wrongly debited against the proceeds of the sale of the two Brisbane cars and parts and that some of those costs have been duplicated. He also says that many of the costs have been either incorrectly applied or are unreasonable. For example there is said to be an excessive amount charged for insurance of the cars and some of the general costs such as the charge for attendance and accommodation of the auctioneers are unreasonable. The amount of $10,044 for completion of the vehicles for sale is said to be unreasonable in that parts were in stock and only one day's work was needed at a total cost of $320. The agent's commission of 20% was unreasonable as were legal fees for negotiations. Mr Halstead says that a "properly negotiated 50/50 settlement would have both parties pay their own legal costs".
Mr Halstead also says that the solicitors for Westpac failed to attend to the necessary registration procedures to protect Westpac's security in relation to the Brisbane cars. The bill of sale that included these cars was executed by the company on 1 June 1989 but registration was not effected by the solicitors until 12 July, six days after QIDC had seized them. He says the three cars were mentioned in a form 52 release sent by QIDC on 17 March 1989 under the bill of sale registered on 28 February 1989, but they were not in that bill of sale at all. Mr Halstead says that he did everything possible to assist Westpac with their securities over the Brisbane cars and tried to regain them after they had been seized by QIDC. He says that he is not responsible for any part of the failure to register the security over the cars correctly and had no part in the subsequent agreement, auction and settlement of the sale of them.

In respect of the matters of detail of which Mr Halstead complains I have given no more than examples. I think the short answer to all the complaints under this head is that Westpac did not sell the Brisbane cars as mortgagee. Therefore no question arises as to the precise nature of the obligation owed by a mortgagee to his mortgagor when exercising a power of sale; cf. Commercial and General Acceptance Limited v Nixon (1983) 152 CLR 491. The fact is that it was QIDC that was selling. Although Westpac did not make any attempt to stop QIDC selling, the authority to sell on Westpac's behalf had been expressly withdrawn. QIDC, in carrying out the sale, was not acting as agent for Westpac. The fact that after the sale an agreement as to the distribution of the proceeds was negotiated between QIDC and Westpac does not alter the character in which QIDC sold.
One secured creditor who stands back and lets another secured creditor exercise a power of sale owes no duty to the debtor. Westpac is, in my opinion, in no worse position. Indeed its case is considerably stronger because at Mr Halstead's request, and for his benefit, it expressly withdrew its authority to QIDC to sell on its behalf.
Further, I think that it was open to Westpac to negotiate such a division of the proceeds of sale with QIDC as it saw fit. Again, in this regard, it was not acting as a mortgagee selling and it did not owe any duty of care to the company or Mr Halstead. In any case, any such obligation had been expressly excluded by the agreement on 28 September 1989 between Westpac and Mr Halstead and the company to which I have already referred. If QIDC overcharged Westpac by wrongful deductions from the proceeds of sale, that is a matter between QIDC and Westpac. It may be that the agreement between them, which was concluded before any detailed account was rendered, was subject to an implied term that only reasonable costs be deducted. But if Westpac was free to enter into an agreement with QIDC as to the division of proceeds as it saw fit without incurring any obligation to Mr Halstead or the company, then equally any questions as to the performance of that agreement and the correctness or otherwise of deductions from the proceeds of sale prior to division are matters between Westpac and QIDC only. Whether or not Mr Halstead or the company have any rights against QIDC is also a matter which cannot affect Westpac's rights.
The Sydney Cars
As has been mentioned, the Sydney cars were subject to the bill of sale which was granted on 2 December 1988.
Mr Halstead says that he does not know what transpired with these vehicles except that in a statement received by the company from QIDC there is a credit entry dated 22 May 1990 for $8,755.39 described as "recovery from BHP". Mr Halstead says that it was BHP Shipping that carried the three vehicles from New Zealand and held them in the Sydney bond store and the inference is that this amount is the net proceeds of sale after duty and storage have been paid.
There was no other evidence on this point and in particular whether the Sydney cars were sold by Westpac or QIDC. The former would appear more likely since these cars were the subject of a bill of sale to Westpac and were released by QIDC from its fixed and floating charge. Yet, as already mentioned, they appear to be the subject of a credit in the QIDC statement. I think all I can say is that there is no evidence sufficient to raise an issue that Mr Halstead has a claim in respect of these sales.
Interest
In his affidavit Mr Halstead contended that interest could not be charged against his personal account by the Bank in the absence of any express agreement. However he now accepts, correctly in my view, that there is a liability for interest. On any view, this is an obligation which arises from the relationship of banker and customer: Yourell v Hibernian Bank, Limited (1918) AC 372.
Legal Fees
Mr Halstead complains that he has been charged legal fees "that are incurred as a result of the combined incompetence of the solicitors acting on behalf of Westpac in this matter and instructing bank staff". He does not see why his account should be debited with costs for advice, negotiations etc, the contents of which are withheld from him as privileged information.
In my opinion the right to debit his account with legal costs incurred is clearly covered by clause 7 of the guarantee which Mr Halstead executed on 2 December 1988.
The Lamborghini
On 1 June 1989 part of the security given to Westpac was a bill of sale over a 1979 Lamborghini Countach owned by Mr Halstead. It was planned that this vehicle would be sold by arrangement with Westpac and the proceeds used to reduce the company's debt. Mr Halstead took steps towards that end. On 23 August 1989 he published an advertisement in the Australian Financial Review which asked $260,000 for the vehicle. A substantial amount of "re-building" had been carried out by the company on the car, the purpose of which was, in Mr Halstead's words, "to substantially increase the financial return to Westpac by the vehicle's sale". He estimates the value of this work as $70,000. It included "Targa" modifications, suspension modifications and flared guards. Mr Halstead I might add had in a previous business been the sole distributor for Lamborghini in New South Wales.
On 18 September the Lamborghini was transported to P.L. Pickles and Co Auctioneers ("Pickles") at Epping in New South Wales and received by them on the following day. On 9 October Pickles gave a written report to Westpac which included this comment:

The vehicle presents well and we believe should be worth somewhere in the vicinity of $200,000.

The vehicle was included by Pickles in an auction conducted by them on 6 November, a brochure for which was published throughout Australia.
On 27 October Westpac asked Mr Halstead what would be an acceptable reserve price and he gave a figure of $170,000. A Westpac file note of that date indicates that valuations to hand showed valuations at $200,000 and $80,000. The latter valuation was not in evidence. The note also states that the sale was "at debtor's voluntary request".
At the auction the highest bid received was $170,000, but it appears that the vehicle was passed in because Westpac had set a reserve price of $200,000.
The vehicle was put up by Pickles at a second auction on 27 November and again passed in.
In November Mr Halstead put a proposal to Westpac that the Lamborghini be sent to Dutton Performance Cars in Melbourne for sale. Mr Dutton of that firm had some eleven months earlier expressed the view that he could "get.... about $200,000 for the vehicle". Westpac declined that proposal. A file note of 30 November indicates that inquiries made in the trade suggested that there was no real prospect of obtaining a buyer in Melbourne. This memorandum indicated that an offer of $130,000 had been received and that unsuccessful attempts had been made to contact Mr Halstead to advise him that Westpac was going to accept that offer. The evidence does not disclose what happened in relation to that offer, but it was apparently not accepted. The vehicle was put up at a third auction on 26 March 1990. The highest bid received was $95,000 and a few days later that bidder increased his offer to $100,000 which was accepted by Westpac. Shortly afterwards Pickles provided a second valuation by letter dated 30 March 1990. That commenced:

Regarding our original valuation of this unit, we realise that our normal procedure, which is pricing repossessions within an hour of receival, was incorrect for a vehicle such as this. The Lamborghini did require a lot of investigation before a price was determined as we have since discovered.

The letter then makes a number of criticisms of the vehicle, in general that it was not original and had been altered with non-standard fittings. The letter concludes:

Because of the abovementioned facts the vehicle loses its market to the collector and value greatly decreases to a figure of $90-95,000.

Westpac were in my opinion selling the Lamborghini as mortgagee notwithstanding the fact that there was, at least in the initial stages, a degree of involvement and co-operation on the part of Mr Halstead. The inference to be drawn from the evidence is that it was Westpac, and not Mr Halstead, who passed title to the purchaser.
That being so, Westpac were liable for any loss caused by the negligent conduct of an agent engaged by it to conduct a sale of the mortgaged property: Nixon (1983) 152 CLR at p 508 per Aickin J. (I assume for present purposes in Mr Halstead's favour that the duty owed by a mortgagee is to take reasonable care and not just a duty to avoid wilfully or recklessly sacrificing the mortgagor's interests.)
There seems to be at least an arguable case for saying that Pickles was, by its own admission, negligent in valuing the car at $200,000. If Pickles had taken the time to make the proper inquiries (and the car was in its possession for over six weeks) and provided what it later admitted to be a proper valuation (viz $95,000), the likelihood is that Westpac would have accepted the bid of $170,000 at the first auction. On this basis, Mr Halstead has an arguable case that he has suffered a loss to the extent of $70,000, the difference between the amount of the rejected bid and the price subsequently received.
In the present case, the only remedy that could be available to Mr Halstead is a claim in damages for that deficiency: cf. Nixon (1983) 152 CLR at pp 501, 517. The sale was completed in March 1990 so there can be no question of restraining the sale or setting it aside. It is not suggested that the buyer of the car was other than a bona fide purchaser for value without notice.
Setting aside the Bankruptcy Notice - Mr Halstead's Case While the Bankruptcy Act 1966 contains references to setting aside a bankruptcy notice (see s.41(6A),(6B) and (6C)), the jurisdiction to do so is not conferred in express terms. Yet such jurisdiction undoubtedly exists and has been exercised on many occasions. Its basis may be found in s.30 or alternatively in the principle of interpretation of statutes that a power conferred by Parliament carries with it the power necessary for its performance or execution: Re Sterling (1980) 30 ALR 77, Re Brink (1980) 30 ALR 433 at p 436.
The problem that I see in Mr Halstead's case is that while the jurisdiction to set aside a bankruptcy notice is undefined, in the sense that its exercise is not subject to any prescribed conditions, it could not in my view be exercised in a manner inconsistent with the express provisions of the Act. In particular, the notice could not rationally be set aside on grounds which would not avail the debtor were they to be advanced at the hearing of the petition itself.
The statutory definition of the act of bankruptcy constituted by non-compliance with a bankruptcy notice (s.40(1)(g)) specifically refers to "counter-claim, set-off or cross-demand". It provides that there will be an act of bankruptcy if the debtor does not comply with the requirements of the notice "or satisfy the Court that he has a counter-claim, claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he could not have set up in the action or proceeding in which the judgment or order was obtained".
As a matter of law, Mr Halstead could have set up his counter-claim in the Supreme Court of Queensland; see O.22 r.3 of the Supreme Court Rules. In Re Stokvis (1934) 7 ABC 53 at p 57 Lukin J. said:

I take a counter-claim, set-off, or cross demand which could not be set up as one which, from point of time, or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained..... Mere failure to take advantage of the opportunity can hardly be said to be inability.

This passage was followed by Lockhart J. in Re Brink (1980) 30 ALR 433 at p 437.
Also, of course, the amount of the counterclaim here does not equal or exceed the amount of the judgment debt.
Since the full amount of the judgment against Mr Halstead is supported by the claim on the guarantee which he signed, he stands in a different position to Mrs Halstead. Westpac can make out a case against him without relying on the second mortgage which he and Mrs Halstead executed. And, as will appear, Mrs Halstead's position as a married woman who appears to have had no interest in the company's debt has consequences in law which do not apply in the case of her husband.
I conclude therefore that Mr Halstead's application to set aside the bankruptcy notice must be dismissed.
Mrs Halstead and the Second Mortgage
As far as the evidence discloses, Mrs Halstead did not play any active part in the conduct of the business. Nor did she sign the guarantee the company's liability to Westpac along with her husband on 2 December 1988. The claim against her is based solely on a second mortgage over the home of her husband and herself. In paragraph 3 of Westpac's statement of claim it is alleged (the first defendant being Mr Halstead and the second defendant Mrs Halstead):

By registered mortgage number J936053Y dated March 1989 ("the mortgage") the first defendant and the second defendant, in consideration of the plaintiff's agreement as reflected therein, covenanted and agreed to pay the plaintiff all moneys owing or payable by Giocattolo to the plaintiff.

In brief Mrs Halstead's case is that she believed the mortgage security was limited to $30,000 and was in any event of no force once the mortgage had been discharged after the home was sold by Westpac, as it was in June 1990.
The mortgage itself bears date 15 March 1989 and appears to be signed by Mr and Mrs Halstead with their signatures being witnessed by a Justice of the Peace whose Christian name appears to be Michael but whose surname is not decipherable in the photocopy which is in evidence. The consideration in the mortgage is stated to be as follows:

The consideration is the Bank, at the request of (inter alia) the Mortgagor referred to above and GIOCATTOLO HOLDINGS PTY LTD (called "the Debtor") (which request is testified respectively by the execution by the Mortgagor and the Debtor of the Mortgage), forbearing to make immediate demand for repayment of and/or sue forthwith in respect of advances or accommodation already granted or afforded, and/or presently granting or affording advances or accommodation and/or at any time or from time to time hereafter granting or affording advances or accommodation and in each such case whether such advances or accommodation are at the discretion and during the pleasure of the Bank or otherwise, to the Debtor. The rate of interest and terms of repayment/payment are as provided in Memorandum No. H902996 filed in the office of the Registrar of Titles, in respect of the "Moneys Hereby Secured" as therein defined.

The sums of money the payment of which is to be secured are the "Moneys Hereby Secured" defined in the said Memorandum.

The memorandum of covenants referred to is a lengthy list of covenants extending over 33 pages of small print. It is recorded by the Registrar of Titles under s.76A of the Real Property Act 1861 (Qld); cf. Re Westpac Banking Corporation (1987) Qd R 300. The memorandum includes covenants by the mortgagor to pay Westpac on demand the moneys secured. As a matter of construction of the document, these monies plainly include the whole debt, including interest, owed by the company to Westpac. I was told that a mortgagor is bound by such covenants recorded by the Registrar whether or not they were seen at the time the mortgage was executed but that the practice of Westpac was to provide a copy of the memorandum of covenants to the mortgagor at the time of execution of a mortgage. There was tendered in evidence a document, referred to as an acknowledgment, which is in these terms:

I/We, the mortgagor(s)/debtor(s) named in the Bill of Mortgage executed by me/us in favour of Westpac Banking Corporation, acknowledge receipt of, at the time of such execution, a copy of the Memorandum of Covenants deemed to be incorporated in and read as if set out in full in such Bill of Mortgage.

The document appears to bear the signatures of Mr and Mrs Halstead in black ballpoint. The figures 15/3/89 are written in blue ballpoint. The only evidence on behalf of Westpac as to the execution of the acknowledgment is contained in an affidavit sworn by Mr Brian Francis Randall who is Assistant Manager Recoveries, Loans Management Department. He deposes that he has examined all of Westpac's files relevant to the accounts of Mr and Mrs Halstead and the company and produces a true copy of the acknowledgment. Mr Randall also deposes that the mortgage was executed by Mr and Mrs Halstead "in March 1989". Westpac's evidence, consistently with its statement of claim, does not state on which date in March the mortgage was executed. Mr Randall does not purport to give direct evidence as to the circumstances in which the acknowledgment was signed or whether the memorandum of covenants was in fact made available to Mr and Mrs Halstead.
The mortgage was given as part of the security for a term loan of $340,000 which Westpac at about the end of February 1989 agreed with Mr Halstead to grant to the company. It would seem that the mortgage also secured past advances. According to Mr Halstead's affidavit sworn 16 July 1991, the securities which he agreed in late February would be provided included "an unlimited guarantee from Marcella and me".
Mrs Halstead, in an affidavit sworn 16 July 1991, swears that it was not until 24 June 1991 that she learned that Westpac were relying on the second mortgage for a claim of $444,384.47 against her even though the mortgage had been discharged. By this time the house had been sold. That evening she spoke to Mr Howe, the Manager of Westpac's Mooloolooba branch, who told her that once the property was sold the mortgage was cleared and that the second mortgage had been taken out by the Westpac Trading Bank to entitle it to all the excess proceeds of the house sale after the Savings Bank's first mortgage was paid out. Mr Howe told her the second mortgage was not an unlimited guarantee but was only left open-ended in case the house sold for an amount that was greater than the market value.
In a further affidavit sworn on 22 July 1991 Mrs Halstead deposes that on or about 15 March 1989 she and her husband attended the office of Mr Howe. Mrs Halstead had taken the day off from her work for this purpose. Mr Howe asked them both to sign a second mortgage over their home. Mr Howe told them he needed the second mortgage "in order to give the Bank an extra $30,000 security". Mrs Halstead deposes that "whilst I remember signing the second mortgage....at no time did Mr Howe or any other representative of the Westpac Bank tell me that this document was anything other than a second mortgage with a value of $30,000. Mr Howe made it very clear to both my husband and myself, that by signing this second mortgage, he was authorised to lend to Giocattolo Holdings an additional $30,000 and he said that this second mortgage could be discharged by a repayment of the $30,000."
Mr Halstead also swore an affidavit on 22 July 1991 in which he deposed to visiting Mr Howe's office on the morning of 15 March 1989. He says that Mr Howe asked his wife and himself to sign a second mortgage over the house to give the Bank an additional $30,000 security against loans that had been advanced to the company. He said that Mr Howe "explained that this document (second mortgage) was in effect, just "tidying up" the Bank's securities, and that he had placed a security value on the second mortgage of $30,000". Mr Halstead states that he was not shown, nor did he subsequently receive, a copy of the memorandum of covenants, nor were any of the contents of the memorandum of covenants discussed at the meeting of 15 March 1989. He further states that he was absolutely clear in his mind that the second mortgage would be discharged by payment of $30,000 and any appropriate interest. Mrs Halstead does not advert to the question of the memorandum of covenants in her affidavits but I do not think that in the circumstances I should treat that as an admission by failure to deny.

Mr and Mrs Halstead tendered an affidavit sworn by Mr Howe himself on 23 July 1991. He deposes to having read the affidavits of Mrs Halstead sworn on 16 and 22 July 1991 and also the affidavit of Mr Halstead sworn 22 July 1991. Mr Howe states that "the comments contained in the abovementioned affidavits are a true representation of my involvement in the matter stated". He makes some minor qualifications, the substance of which are that he says that in relation to Mrs Halstead's affidavit of 22 July, para. 7 should read:

... at no time did Mr Howe, or any other representative of the Westpac Bank, tell me that this document was anything other than a second mortgage to give the Bank additional cover of $30,000 in view of the property value of $120,000.

Similarly with Mr Halstead's affidavit of 22 July Mr Howe says he used the words "top up security" rather than "tidying up the Bank's securities" and that he had said to Mr and Mrs Halstead that he had placed a security value on this second mortgage of $30,000 "in view of the property value being $120,000 with a first mortgage of $90,000". He also deposes that as to Mrs Halstead's affidavit of 16 July 1991 (which deals with their discussion in June 1991) "this is a true record of our discussion and accurately records my understanding of the position and why the second mortgage was taken".
Thus Mr and Mrs Halstead's account of the circumstances in which they executed the second mortgage, and their understanding of it, is directly corroborated by the responsible officer of Westpac with whom they dealt. Counsel for Westpac did not seek to cross-examine Mr Howe, or indeed Mr or Mrs Halstead.
Mrs Halstead's Case
In my opinion, the evidence discloses grounds on which the bankruptcy notice ought to be set aside as against Mrs Halstead.
The notice is based on a judgment which in turn is founded on a claim against her under the covenant to pay contained in the second mortgage. There is an arguable case that the mortgage should be set aside as against her by the application of that rule of equity which prevents the enforcement of unconscionable bargains.
Before going to these matters in details, two points should be mentioned. First, the ground mentioned does not constitute a "counter-claim set-off or cross-demand" in the sense used in the discussion of Mr Halstead's case. In that case, the judgment against Mr Halstead was based on the guarantee signed by him. On going behind that judgment, I found it to be soundly based. There is an arguable claim for damages available to Mr Halstead, but that arises out of the conduct of Westpac in enforcing its security, albeit one for the same debt. But in the case of Mrs Halstead, it seems to me that the judgment itself is impeachable because there is, arguably at least, an answer to the very claim on which it was founded.
Secondly, this ground was not raised in oral argument before me. This is not surprising, since Mr and Mrs Halstead were not legally represented. Although counsel for Westpac was conspicuously fair, she could not reasonably be expected to explore every possible defence that might be raised against her client. Some time after the conclusion of the hearing, the parties were requested to make submissions in writing, which they did. However it follows that evidence presented was not specifically directed towards this issue. There are therefore, necessarily, gaps, but bearing in mind that the present exercise is only concerned with an investigation whether Mrs Halstead has an arguable case, I have come to the conclusion that a sufficient basis nevertheless exists for setting aside the bankruptcy notice.
Unconscionable Conduct
The authoritative restatement of the law on the subject is to be found in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. For the moment, the principle can be sufficiently identified by a passage from the judgment of Mason J. (at p 462) where his Honour spoke of:

".....an underlying general principle which may be invoked whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-a-vis another and unfair or unconscientious advantage thereby created."

(see also per Deane J. at p 474).

However, within the general area of unconscionability there is a special category of cases where a husband procures his wife to become surety for his debt (cf. Amadio, per Dawson J. at p 486). A leading case is The Bank of Victoria Ltd v Mueller (1925) VLR 642 where Cussen J.'s review of the authorities was said by Dixon J. in Yerkey v Jones (1939) 63 CLR 649 at p 680 to have a "value.... to anyone dealing with the subject (which) can hardly be overstated".
Yerkey was discussed recently by the New South Wales Court of Appeal in Warburton v Whiteley (1989) NSW Conv R 58,283 (a condensed version of the judgment delivered on 10 February 1989; the full judgment is unreported). Kirby P. described a rule giving special consideration to married women as "anomalous and anachronistic" and "inappropriate" in the light of modern advances in the status and education of women but held that it must be applied until reconsidered by the High Court. McHugh J.A. and Clarke J.A., without any apparent societal misgivings, both considered the rule applicable.
In Yerkey Dixon J. found that the cases as analysed by Cussen J. in Mueller supported ".....the proposition that, if a married woman's consent to become a surety for her husband's debt is procured by the husband and without understanding its effect in essential respects she executes an instrument of suretyship which the creditor accepts without dealing with her personally, she has a prima facie right to set it aside" ((1939) 63 CLR at p 683).
That formulation of the rule of course is adapted to the situation, typical of many of the cases, where the creditor requests the husband/debtor to obtain a guarantee from his wife and the husband, in the absence of the creditor, makes some misrepresentation or fails to disclose material matters to his wife.
The present case is different, and, I think, stronger from the wife's point of view. If there was relevant misrepresentation or non-disclosure, it was something which occurred directly as between Westpac, through its employee Mr Howe, and Mrs Halstead.
What does emerge clearly from Mueller is the importance of proper understanding on the part of the wife. Lack of understanding in this context is a different concept from that fundamental mistake as to the nature of the document which a defendant pleading non est factum must show. Cussen J. said ((1925) VLR at p 656):

The authorities above mentioned seem to me to afford a strong and consistent body of authority that a wife is not deprived of equitable relief in such cases if it appears that she did not substantially understand her liability, and that this applies even as against those giving consideration if the circumstances are such as to give them notice of facts which in law are held to show that it is necessary, in order absolutely to fasten liability on her, that she should fully understand the transaction. Altering to some extent the language of Lord Cranworth in Owen v Homan

(1853) 17 Jur 861, without saying that in every case a creditor is bound to inquire in what circumstances his debtor has obtained the concurrence of a surety, it may safely be stated that, if the dealings are such as fairly to lead a reasonable man to the conclusion that the relation between the debtor and the surety and the advantage to be conferred by the latter are such that it is necessary as between these two that the matter should be fully understood by the surety, and if it appears that it was not understood, the surety may be entitled to equitable relief as against the creditor, even though he has given consideration.

In the present case there is no need to rely on what the perception of a hypothetical reasonable man might be as to Mrs Halstead's understanding. The uncontested evidence is that all concerned, Mr and Mrs Halstead and the Bank Manager, shared the same misunderstanding as to the effect of the document.
Further there is the circumstance that the second mortgage was something which conferred no apparent benefit on Mrs Halstead "though no doubt 'consideration' exists" (Mueller (1925) VLR at p 649). As I have noted, Mrs Halstead apparently took no part in the day to day running of the company. She had her own employment. The fact that she did not sign the guarantee of the company's debt in December 1988 suggests she was not a director or shareholder although she did witness the execution of a bill of sale by the company on 1 June 1989. There is no direct evidence at all as to whether she was a shareholder, but in any event, a majority of the Court of Appeal in Warburton v Whiteley held that once the relationship of husband and wife as between debtor and surety is established, the onus of establishing that the wife had any direct or indirect interest in the debt, so as to displace her prima facie right to have the guarantee declared invalid, is on the creditor. See especially the judgment of McHugh J.A. (1989) NSW Conv R at p 58,287.
The second mortgage was executed by Mrs Halstead in circumstances where such evidence as there was concerning the financial state of the company at that stage (especially the fact that Westpac withdrew all lending support about three months later) suggests that a competent independent adviser may well have advised her against accepting any personal liability at all, still less unlimited liability for a sum which might amount to three times the value of her home. The fact that Westpac only turned to Mrs Halstead for security in the declining stages of the Giocattolo venture brings to mind the warning of Romilly MR in Sercombe v Sanders (1865) 34 Beav 382:

It is important that creditors should understand that they cannot improve their security taken from persons to whom they have given credit by inducing them at the last moment to compel near relations or persons under their influence, and not in a situation to resist their importunity, to pay their debts.

In Mueller (1925) VLR at p 658 Cussen J. cited the above passage and added:

That passage cannot be applied in its entirety to a case of a wife giving a security for her husband, but if she did not in fact understand in a substantial respect her liability, it seems to me eminently desirable that the same result should follow.

It is implicit in the foregoing discussion that I have treated Mrs Halstead's position as that of a surety. She was of course a mortgagor, but since that mortgage was given in substance, and indeed in form, to secure the primary liability of the company to Westpac it seems to me that Mrs Halstead is entitled to the benefit of the principle that the surety is "a favoured debtor" upon whose interests the Courts look "with a jealous eye": The Union Bank of Australia Ltd v Puddy (1949) VLR at p 247 per Fullagar J.
Doing Equity
Counsel for Westpac argued that on any view it was entitled to judgment against Mrs Halstead for a sum of approximately $12,000, which was an amount in excess of the statutory minimum. After the sale of Mr and Mrs Halstead's home for $125,000 was completed on 6 June 1990, the first mortgage to Westpac Savings Bank was paid off and amounts totalling $17,870.48 were credited to the trading account of the company. Therefore it was said that there still would have been a liability to pay the balance of the amount for which Mrs Halstead thought the second mortgage was to be security, viz $30,000. (In written submissions a different set of calculations was provided by Westpac which were to the effect that only $8,925 was credited to the company's account leaving a liability of $21,075. I am inclined to think the former calculations are correct, but the actual amount is immaterial since it is clear that out of $30,000 an amount remained owing which was in excess of the statutory minimum.)
In Amadio the creditor had argued that the relief granted to the sureties should only be such as would put them in the same position as if the mortgage represented the amount of the potential liability they intended to undertake. That argument was rejected. Deane J. reviewed the evidence and concluded ((1983) 151 CLR at p 481):

The whole transaction should properly be seen as flowing from the special disability which was evident to the bank and as being unfair, unjust and unreasonable.

A similar argument was put in Mueller, and also failed: (1925) VLR at pp 660-661.
Clearly this is a question depending on the particular circumstances. As I have noted, the history of the present case is such that the issue of unconscionability was not addressed directly in the evidence. There are some parts of the evidence which might lead to a view that Mrs Halstead would have executed an unlimited guarantee in any event (notably Mr Halstead's evidence about the agreement of late February 1989). But equally there is evidence that what she thought she was in fact signing (no document of guarantee as such having been in fact presented to her on 15 March 1989) was a document which limited her liability to $30,000 and, what is more, a document which would cease to impose any liability after her home was sold. The question may be posed, what would Mrs Halstead have done if she had not been told in effect that the mortgage was limited to $30,000 and if she clearly understood the covenant to pay continued in force after her home was sold? It may be that she would not have executed the mortgage at all, or would only have executed it if it were limited to $30,000, or to the surplus on sale after the first mortgage. In either of the latter two cases, Westpac might not have accepted that limitation. If Mrs Halstead had been given a choice of total liability for the company's debts or no second mortgage at all, she might have refused to execute any second mortgage. And what would have been the effect of independent advice? I think all one can say is that there is a triable issue. That in turn would depend on what an independent assessment of the company's prospects as at March 1989 might show.
Westpac bear the onus. Once the step is taken of going behind the judgment the ultimate onus rests on the person claiming to be a creditor: Corney v Brien (1951) 84 CLR 343 at p 358 per Fullagar J. More specifically, Westpac would also bear the onus of showing there were circumstances which required Mrs Halstead, having made out her case for equitable relief, to "do equity" by accepting something less than a setting aside of the whole transaction.
I therefore do not think such an argument should stand in the way of an order in favour of Mrs Halstead.
Olivieri v Stafford
Another answer, at least arguably, to this contention might be found in Olivieri v Stafford (1989) 91 ALR 91. The Full Court there considered what is the consequence if, on going behind the judgment on which a bankruptcy notice is founded, it appears the amount owing to the judgment creditor is in truth less than the amount of the judgment, but there remains a debt in excess of the statutory minimum. In my respectful opinion the case does not present a clear ratio to the effect that the notice remains valid. Certainly Gummow J. was of that view, but the other member of the majority, Beaumont J., decided the case on the basis that it was not appropriate to go behind the District Court judgment because there had been a hearing, albeit undefended, and an unsuccessful application to set aside the judgment and that therefore the case had been determined on the merits in the District Court. His Honour distinguished Re Prossimo (1952) 16 ABC 86, Re Williams (1982) 43 ALR 552 and Re Greenhill (1984) 5 FCR 84 on the ground that the judgments had been obtained by default and that therefore it was appropriate to go behind them. It seems to me implicit in his Honour's reasoning that those cases are correct, and that once it is appropriate to go behind a judgment the bankruptcy notice founded on it will be invalid if the amount in fact due is less than the amount of the judgment, notwithstanding that an amount in excess of the statutory minimum remains owing.
Sweeney A.C.J., who dissented on the result, appears to have been of that view.
The relevant act of bankruptcy which a petitioning creditor who has served a bankruptcy notice will seek to make out is that the debtor has not "compl(ied) with the requirements of the notice": s.40(1)(g). The bankruptcy notice must require the debtor to pay the judgment debt in accordance with the judgment: s.41(2)(a)(i). If the circumstances are such that it is appropriate to go behind the judgment, and if it is found that something less than the amount of the judgment is due, then I think the notice should in principle be invalid because otherwise an act of bankruptcy would be committed by the debtor failing to do something which it has been found he was not obliged to do.
Logically it seems to me there is no difference between a case where the bankruptcy notice demands an amount in excess of that in fact due because an amount has been paid to the creditor after the judgment (but before the issue of the notice: Walsh v Deputy Commissioner of Taxation (1984) 58 ALJR 368) and a case where the Court goes behind the judgment and finds that the judgment overstates the amount in fact due. In both cases the notice demands more than is in fact due and will be invalid (provided the debtor complies with either s.41(5) or (6)).
Trade Practices Act
There might be an arguable case that there was conduct by Westpac which was in breach of s.52 of the Trade Practices Act 1974 in that the nature and effect of the second mortgage was misrepresented (albeit innocently on Mr Howe's part) to Mrs Halstead.
However the onus would clearly be on Mrs Halstead to show what steps she would have taken had the misrepresentation not been made: cf. Warnock v Australia and New Zealand Banking Group Limited (1989) ATPR 50,045 at 50,050. This onus therefore falls differently from that on the unconscionability issue. I do not rely on the Trade Practices Act 1974 as a ground for setting aside the bankruptcy notice.
Orders
I order that the application of Mr Halstead be dismissed but that the bankruptcy notice as against Mrs Halstead be set aside.
Since there has been partial success on either side and the issues were inextricably connected, I think I should not make any order as to costs.

[1991] FCA 551

06 SEPTEMBER 1991