ING Bank (Australia) Limited v Haddad
[2008] FMCA 1695
•23 December 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| ING BANK (AUSTRALIA) LIMITED v HADDAD | [2008] FMCA 1695 |
| BANKRUPTCY – Creditor’s petition – default judgment – whether Court should go behind the judgment. |
| Bankruptcy Act 1966 (Cth), s.52 Civil Procedure Act 2005 (NSW), s.101 Contracts Review Act 1980 (NSW), ss.7, 9 |
| Commonwealth Bank of Australia v Jeans (2005) 219 ALR 22 Corney v Brien (1951) 84 CLR 343 Harrison v Charalambous [1999] FCA 902 In re Blythe; Ex parte Banner (1881) 17 Ch D 480 In Re Fraser; Ex parte Central Bank of London [1892] 2 QB 633 |
| Applicant: | ING BANK (AUSTRALIA) LIMITED |
| Respondent: | LEILA HADDAD |
| File Number: | SYG 1687 of 2008 |
| Judgment of: | Barnes FM |
| Hearing date: | 3 October 2008 |
| Last date for Submission: | 17 October 2008 |
| Delivered at: | Sydney |
| Delivered on: | 23 December 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr A Spencer |
| Solicitors for the Applicant: | Gadens Lawyers |
| Solicitors for the Respondent: | John McEncroe & Co |
| Solicitors for the Supporting Creditor: | Hugh & Associates |
ORDERS
That the preliminary question as to whether the Court ought to exercise its discretion to go behind the judgment on which the creditor’s petition is based be determined in the negative.
The parties draft short minutes of order to give effect to the determination in order one and for the further conduct of the proceedings.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1687 of 2008
| ING BANK (AUSTRALIA) LIMITED |
Applicant
And
| LEILA HADDAD |
Respondent
REASONS FOR JUDGMENT
Background
On 2 July 2008 the applicant, ING Bank (Australia) Limited presented a creditor’s petition seeking that a sequestration order be made against the estate of the respondent, Leila Haddad. The creditor’s petition relies on a debt in the sum of $570,674.60 said to be the balance due under a judgment entered in the Supreme Court of New South Wales on 6 February 2008 pursuant to a loan agreement. It is also claimed that the respondent further owes the petitioning creditor the amount of $143,818.42 for enforcement expenses and fees accrued on the account pursuant to the terms of the loan agreement. The total debt due and owing is said to be $714,493.02.
The creditor’s petition discloses that the creditor holds security over a specified property of the debtor to the estimated amount of $130,000 leaving an unsecured debt of $584,492.02.
The creditor relies on an act of bankruptcy said to consist of a failure by the debtor to comply on or before 25 June 2008 with the requirements of a bankruptcy notice served on her on 25 February 2008.
The judgment relied on in the bankruptcy notice is a default judgment of the Supreme Court of New South Wales in proceedings number 15326 of 2007 between the petitioning creditor as plaintiff and a number of defendants, including the respondent to these proceedings as the third defendant. On 6 February 2008 the Supreme Court ordered that the first, second, third, fourth, fifth and sixth defendants pay to the plaintiff $3,576,681.81. In the bankruptcy notice interest on the judgment debt was claimed pursuant to s.101 of the Civil Procedure Act 2005 (NSW) and after allowance for payments made and/or credits since the date of the judgment, the debt owing by the debtor to the creditor was said to be $1,848,389.74.
The creditor’s petition was listed for hearing on 3 October 2008. However at the start of the hearing Mr Spencer, counsel for the petitioning creditor, proposed that the Court deal with the issue of whether it should go behind the judgment on which the bankruptcy notice was based as a preliminary matter, on the basis that should the Court be persuaded that it was appropriate to do so the parties would then have the opportunity to put on further evidence on that issue. If the Court decided that it was not appropriate to go behind the judgment, the hearing of the creditor’s petition would proceed on the basis that the Court was satisfied with proof under s.52(1)(c) of the Bankruptcy Act 1966 (Cth) of the fact that the debt on which the petitioning creditor relied was owed (subject of course to up-to-date evidence as to whether the debt was still due).
In other words it was proposed that the Court should treat the inquiry as a two-stage process and at this stage limit the inquiry to the issue of whether there was sufficient reason to question the existence of a real debt behind the judgment (see Makhoul v Barnes (1995) 60 FCR 572). After some discussion to ensure that the solicitor for the debtor understood precisely what was being proposed, I was satisfied that both parties were aware of the basis on which the case was to proceed and consented to the two-stage procedure (see Makhoul v Barnes at 584 and Commonwealth Bank of Australia v Jeans (2005) 219 ALR 22 at [10] – [17]).
Notwithstanding the fact that this proposal was not raised until the start of the hearing and despite that fact that it would ordinarily not be appropriate “for the case to be split by a preliminary decision being made as to whether sufficient facts have been shown to suggest that an investigation into the judgment should be pursued” (Wolff v Donovan (1991) 29 FCR 480 at [17] per Lee and Hill JJ) (emphasis added), I considered, on balance, that it was appropriate to proceed in the manner suggested. I had regard to all the circumstances of this particular case, including the history of this matter and current state of proceedings in the Supreme Court (a matter to which I will return) and the fact that in the notice of intention to oppose the creditor’s petition filed on 20 August 2008 one of the grounds on which the debtor indicated an intention to oppose the creditor’s petition “relied” on s.52(1)(c) of the Bankruptcy Act 1966 (Cth) and asked the Court in general terms to “look behind the judgment relied on by the applicant.” Thus, even if the hearing of the creditor’s petition had proceeded, the issue of whether to go behind the judgment would have had to be determined.
In the notice of intention to oppose the respondent also denied owing the applicant the amount relied on in the creditor’s petition and in taking issue with the act of bankruptcy relied on in the creditor’s petition:
(a) says that at no stage did she execute documents for the applicant or any other entity or person did she have the benefit of an independent advice as to the nature of the document she was executing;
(b) says that at no stage prior to or after executing documents for the applicant or any other entity or person did she have the benefit of having the documents interpreted for her in the Arabic language;
(c) always acted in accordance with the wishes of her husband without exercising free will or having a say;
(d) says that the loan that the applicant advanced were for the benefit of companies associated with her husband and other individuals and entities;
(e) says that the loans advanced by the applicant to the respondent’s husband were advanced during a period when the applicant husband was undischarged bankrupt;
(f) says that the application to set aside the bankruptcy notice and supporting affidavit filed within proceedings was prepared by others who undertook to attend court but failed to do so;
(g) says that all defences and affidavits filed in the Supreme Court proceedings number 15326 of 2007 were prepared by others who undertook to attend court and follow up the matter on merits but failed to do so;
(h) says that the judgment in proceedings number 15326 of 2007 is a default judgment which the respondent did not become aware of until her husband asked her to sign documents to do with the sale of properties owned by the respondent;
(i) says that the respondent is one of a number of defendants in proceedings number 15326 of 2007.
(j) says that pursuant to and in satisfaction of the default judgment obtained in proceedings number 15326 of 2007 the applicant sold the following real estate properties belonging to and registered in the name of the respondent:
…
(k) The applicant failed to account to the responds (sic) for the proceeds of sales.
In these circumstances, as both parties consented to the Court treating the inquiry as a two-stage process, the hearing was limited to an inquiry into the preliminary question of whether there was sufficient reason to question the existence of a real debt behind the judgment.
Power to go behind a judgment
Under s.52(1) of the Bankruptcy Act the petitioning 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. The court in bankruptcy has the power to go behind a judgment and enquire 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 Mahony (1972) 126 CLR 212 at 224 - 225 per Barwick CJ (with whom Windeyer and Owen JJ agreed) as follows:
… the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that 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 [37] 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. [Emphasis added].
The Court will not go behind a judgment as a matter of course, but only if appropriate circumstances are shown to exist (see Re Flatau; Ex parte Scotch Whiskey Distillers Limited (1888) 22 QBD 83 at 85 – 6 per Lord Esher and Joossé v Commissioner of Taxation (2004) 137 FCR 576 at [3]). In Corney v Brien (1951) 84 CLR 343 Fullagar J made the point (at 355) that “No precise rules exist as to what circumstances call for an exercise of the power” and referred to the reluctance of a court to re-open a matter in the absence of a prima facie case of fraud, collusion or miscarriage of justice when the judgment in question had followed a trial at which both parties appeared. His Honour continued (at 357 – 358): “But, wherever the judgment in question is a judgment by default, it appears that the court will always "go behind" the judgment if there is what it regards as a bona-fide allegation that no real debt "lay behind" the judgment.”
The majority in Corney v Brien (Dixon, Williams, Webb and Kitto JJ) referred at 347 to the court’s undoubted jurisdiction “to go behind a judgment obtained by default or compromise or where fraud or collusion is alleged and inquire whether the judgment is founded on a real debt” and noted with approval the suggestion by Latham CJ in Petrie v Redmond (1942) 13 ABC 48 at 49 that “the court looks with suspicion on consent judgments and default judgments”.
Subsequent cases have focused on the issue identified by Barwick CJ in Wren v Mahony. Thus in Re Marshall; Ex parte James Hardie & Co Pty Ltd (8 July 1985, Federal Court, unreported) Pincus J considered the appropriate test to be applied in determining whether or not to go behind a judgment by reference to the question of whether there were “substantial reasons for questioning whether there is a debt in truth and reality”. His Honour suggested that while the court need not always go behind a default judgment “even if a bona fide allegation of no real debt is made”, it should “regard default judgments with more suspicion”.
In other words, as Lee and Hill JJ stated in Wolff v Donovan (at 488) where a judgment was 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.” In that context Lee and Hill JJ suggested at 487:
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.
In Commonwealth Bank of Australia v Jeans (2005) 219 ALR 22 Hely J also referred at [10] to the need for “reasons” to be shown “for questioning whether there really was a debt”, although his Honour described the case where judgment was entered by default as one of the “classic cases” in which a court may go behind a judgment “even though an application to set aside the judgment had been refused, and that refusal affirmed on appeal” (see In Re Fraser; Ex parte Central Bank of London [1892] 2 QB 633”). Relevantly Hely J reiterated at [13] that the issue was, as Barwick CJ indicated in Wren v Mahony at 224, whether “there appear to be substantial reasons for doubting whether there really was a debt due to the petitioning creditor.”
In Jeans Hely J decided to determine as a preliminary question whether to go behind the judgment on which the creditor’s petition was based. His Honour acknowledged that circumstances in a particular case may be such that the Court “must” exercise its power to look at what is behind the judgment, but found that the case before him (in which there had been a fully contested hearing prior to the judgment in issue) was not such a case (Commonwealth Bank of Australia v Jeans (No 2) [2005] FCA 978 at [21]).
In these preliminary proceedings, as Gilmore J stated in Richardson v Leonard Cohen & Co [2008] FCA 1392 at [14], it is not necessary for the debtor to prove that he is “not, in truth and reality, indebted to the petitioning creditor.” What is required is that the debtor show (in the sense considered in Wolff v Donovan) that there is “substantial reason for questioning whether there is ... a debt”: Joossé v Deputy Commissioner of Taxation at [6] per North and Finkelstein JJ. It is necessary to determine whether “sufficient facts have been shown to suggest that an investigation into the judgment should be pursued” (Wolff v Donovan at [17]).
Evidence before the Court
The petitioning creditor relied on affidavits sworn by Kylie Maree Britton on 29 August 2008 (and an exhibit which was tendered) and by Helen van Ravels on 29 August 2008 (and an exhibit which was tendered), and 16 September 2008 and 1 October 2008.
Mr McEncroe, the solicitor for the respondent debtor, disputed that there had been service of the two affidavits sworn on 29 August 2008. He acknowledged that he had received a letter dated 29 August 2008 from the solicitors for the creditor (a copy of which was tendered by the creditor) which stated that it enclosed by way of service copies of those affidavits including exhibits. However he stated that he did not himself have, nor had he seen, copies of those affidavits notwithstanding that he accepted that copies of the affidavits had been handed to counsel for the debtor (instructed by him) on 16 September 2008. I also note that the creditor tendered a copy of a letter from Mr McEncroe dated 1 September 2008 referring to the letter and enclosure of 29 August 2008 and enclosing a notice of appearance.
On the basis of the evidence before me I allowed the affidavits in question to be read in these proceedings. Mr McEncroe was provided with fresh copies of these documents. In addition at the conclusion of the hearing Mr McEncroe sought and was given the opportunity to file and serve any written submissions he wished to rely on in relation to the preliminary question beyond his oral submissions, on the basis that if he did so the creditor would have an opportunity to reply. However no written submissions have been filed for the debtor.
The debtor relied on the notice of opposition filed on 20 August 2008. The basis on which the debtor intended to oppose the creditor’s petition is described above. She relied on a supporting affidavit sworn by her on 19 August 2008 and filed on 20 August 2008. It bears no certification by a translator. Copies of notices of motion in two Supreme Court proceedings between the parties and two affidavits of Mrs Haddad filed in support of the motions were tendered. As discussed below, in those proceedings Mrs Haddad seeks orders to set aside the default judgment and to allow her to file an amended defence seeking relief under the Contracts Review Act 1980 (NSW) and equitable relief on the basis of undue influence.
Rule 15.27(2) of the Federal Magistrates Court Rules 2001 provides that:
If the person making an affidavit does not have an adequate command of English:
(a) a translation of the affidavit and oath or affirmation must be read or given in writing to the person in a language that the person understands; and
(b) the translator must certify in or below the jurat that he or she has done so.
Rule 15.27(3) provides that if an affidavit is made by a person who is incapable of reading it or incapable of signing it and a certificate under subr.1 or 2 does not appear on the affidavit, “it may not be used in a proceeding unless the Court or a Registrar is satisfied that:
(a) the affidavit was read, or if appropriate a translation read or given in writing, to the person; and
(b) the person seemed to understand the affidavit; and
(c) in the case of a person physically incapable of signing -- the person indicated that the contents were true.”
Mrs Haddad gave brief oral evidence (with the assistance of an Arabic interpreter) in which she adopted her affidavit. In cross-examination she conceded that she had not typed and could not recall whether she had seen Annexure A to her affidavit (an unsigned letter dated 11 August 2008 said to be from her to the solicitors for the creditor). She claimed her husband used to send everything and she was not aware of much, but then claimed she sent this letter through her husband. When questioned about her understanding of the content of the letter she conceded that she could not understand the meaning of expressions such as “financial benefit” and that she would rely on someone else to explain what those words meant.
When asked whether to the extent she swore an affidavit which used expressions such as “to defend all proceedings in which I am named as a party on the merits and the facts” she was able to understand the meaning of those words by herself in English, Mrs Haddad claimed that when she was “filling out the affidavit, those words were explained in Arabic, not in English”.
Mrs Haddad agreed in cross-examination that she would not be able to read or understand all of the affidavit in English. Although she could understand simple words such as numbers, Baulkham Hills, “I am” and the names of people, she would not understand much and not the whole affidavit. When asked if she would be able to say, without assistance, whether what was said was true or false, she replied that she “wouldn’t understand the content. I would usually ask my husband. He would help me to sign things”.
Mrs Haddad could not recall where she was when she signed the affidavit, but thought it was at the Supreme Court in the presence of a Justice of the Peace and her husband. Her evidence was that her husband did not read to her each paragraph of the affidavit. Initially she claimed that he explained each paragraph of the affidavit to her in Arabic before she swore it, but she then clarified that he had “not really” explained to her paragraph by paragraph what the affidavit said, but rather had told her why she should sign it.
Mr Spencer for the creditor submitted that, having regard to the evidence given by Mrs Haddad, there was no evidence whatsoever capable of persuading the Court that there was any reason to go behind the judgment because her oral evidence given in-chief and in cross-examination did not go to the merits of the matter and the Court could have no regard to the affidavit signed by her on 19 August 2008 as she had herself given evidence that she did not really understand the contents of the affidavit when she signed it. It was contended that to the extent that Mrs Haddad had adopted the affidavit, that was from a position in which she was unable to say whether the material in it was true or false. It was noted that she had also not been able to say that the words of the letter dated 11 August 2008 annexed to her affidavit were, in effect, words for which she was responsible. Hence it was submitted that there was nothing that Mrs Haddad had adopted in the witness box that provided any support for any of the matters contained in the notice of intention to oppose that were relevant to the preliminary question.
In particular, the creditor contended that from Mrs Haddad’s evidence it was clear that the affidavit had not been read to her and explained to her and that she did not understand it. Hence, to the extent to which she gave evidence that she had adopted the affidavit, it was nonetheless obvious that it was not in effect her evidence. It was submitted that not only did the affidavit not comply with Rule 15.27 but that in any event the evidence before it would not satisfy the Court that the affidavit was actually adopted by the person who signed it.
On the evidence before the Court I cannot be satisfied that the requirements of Rule 15.27(3) are met. On this basis it may not be used in these proceedings. Even if Rule 15.27 did not compel this approach, the evidence before the Court establishes that Mrs Haddad does not have an adequate command of English to be capable of understanding her affidavit, that it was not read and explained to her in Arabic at the time she signed it and that she did not really understand the contents of the affidavit when she signed it or in the witness box. In these circumstances I accept the submissions for the creditor that the affidavit evidence of Mrs Haddad filed in these proceedings is not capable of persuading me that there is a substantial reason for doubting whether there was a debt due to the petitioning creditor. Notwithstanding her adoption of her affidavit, it does not provide evidentiary support for any of the matters contained in the notice of intention to oppose the creditor’s petition relevant to the preliminary question. Her oral evidence is consistent with her claim in the notice of opposition that she did not have documents she signed interpreted for her in the Arabic language and that her affidavits were prepared by others, but did not address documents other than the affidavit sworn by her on 19 August 2008 and the letter in her name that is annexed to that affidavit.
Mr McEncroe sought in concluding submissions to re-open the debtor’s case to put on further evidence from Mrs Haddad addressing the issue of whether a translation of the affidavit was read or given to her in Arabic. However Mrs Haddad’s evidence that her husband (who was the person who gave her some explanation of the affidavit) did not explain to her paragraph by paragraph what the affidavit said was clear and was not addressed in re-examination. Importantly, her evidence was that she did not really understand the matters in the affidavit at the time she signed it or in the witness box. She was not given leave to put on further evidence contrary to her evidence in cross-examination. I note that while the affidavit in question was sworn and filed at a time when Mrs Haddad appears not to have had legal representation, she was given the opportunity to file and serve further affidavit evidence in these proceedings (and any further notice of opposition) before the hearing at a time when she was legally represented. She did not do so.
Chronology
In determining whether to go behind the default judgment that formed the basis for the bankruptcy notice I consider that it is relevant to have regard to such evidence as is before the Court, including evidence as to the history of proceedings between the parties (see Richardson v Leonard Cohen & Co at [49]). The background to these proceedings involves matters that are presently the subject of proceedings in the Supreme Court. It is apparent from the evidence that provides the basis for the chronology that Mrs Haddad was legally represented at critical times.
The judgment that forms the basis for the bankruptcy notice is a default judgment obtained by ING Bank on 6 February 2008 against Mrs Haddad and five other defendants which, according to the statement of claim issued on 18 October 2007 in proceedings 15326 of 2007 (the debt proceedings), represented the amount of a debt due to ING Bank in respect of amounts advanced by it in 2003 to Baulkham Hills Apartments Pty Ltd (and guaranteed by the other defendants including Mrs Haddad) to assist in certain construction works. Among other things, the statement of claim recited that the loan agreement was breached (as was another agreement in relation to a loan to Mr and Mrs Haddad) that demand had been made on the borrowers and also on the guarantors.
On 23 January 2008 ING commenced separate Supreme Court proceedings (no. 10271/2008) for possession of a property at Greystanes owned by Mr and Mrs Haddad (the possession proceedings).
No defence was filed by Mrs Haddad or by any other defendant to the statement of claim in the debt proceedings. On 6 February 2008 default judgment was entered in the debt proceedings.
On 15 February 2008 the bankruptcy notice in issue in these proceedings was issued. On 21 February 2008 Mrs Haddad filed a defence in the possession proceedings in which she claimed, inter alia, that she could not read or write English and that she had a limited ability to speak English. On 25 February 2008 she was served with the bankruptcy notice which she claimed she received on 27 February 2008.
Mrs Haddad swore an affidavit on 11 March 2008 in support of an intended application to the Federal Court to set aside the bankruptcy notice in which she stated that she had instructed her solicitor to have judgment in the debt proceedings set aside and to file a defence. A notice of appearance was signed by Mr Jurd of Sid Howach & Co, the then solicitors for Mrs Haddad.
On 12 March 2008 the debtor, through Sid Howach & Co, filed a notice of motion to set aside the default judgment in the debt proceedings. The notice of motion sought that she be permitted to file a defence to those proceedings. It was supported by an affidavit of Mrs Haddad in which she attested that she had known there were certain Supreme Court proceedings against her, that her husband attended to all business matters and that she had filed a defence in the possession proceedings prepared by Legal Aid solicitors instructed by her with the assistance of an Arabic interpreter. As far as she knew that covered the same matter as the debt proceedings. She claimed that she was not aware there were two separate proceedings until she received the bankruptcy notice and that she would have defended the debt proceedings had she known that they were separate. The proposed defence contended that the agreements specified in the statement of claim as relating to her were liable to be set aside in equity as unconscionable on the basis of “undue influence under Yerkey v Jones and Garcia or “Amadio principles” on the basis that she was in a position of special disability or disadvantage. She also sought relief under the Contracts Review Act 1980 (NSW).
On 13 March 2008 Mrs Haddad filed an application in the Federal Court to set aside the bankruptcy notice.
On 20 March 2008, on the first return date in the Supreme Court of Mrs Haddad’s motion to set aside the default judgment in the debt proceedings, Mr Martin of Counsel appeared for her and directions were made for the filing of evidence.
On 26 March 2008 the time for compliance with the bankruptcy notice was extended and the matter adjourned by consent to 23 April 2008. Mr Jurd of Sid Howach & Co appeared for the debtor.
On 27 March 2008 there was no appearance by or on behalf of the debtor at a status conference in the possession proceedings.
On 2 April 2008 Mr Jurd telephoned Ms Britton, a solicitor in the employ of the solicitors for the creditor who had the carriage of the bankruptcy proceedings, and advised that he was no longer acting for Mrs Haddad in any of the matters. On 14 April 2008 he provided the same advice to Helen van Ravels, a solicitor in the employ of the creditor’s solicitors who had the carriage of both Supreme Court proceedings.
On 15 April 2008 Mr Haddad, the husband of the debtor who was also a defendant in the debt proceedings and possession proceedings, appeared at a status conference in the possession proceedings. There was no appearance by the debtor.
On 23 April 2008 Mr Haddad sought to appear for Mrs Haddad in relation to her application to set aside the bankruptcy notice before the Federal Court. He was not granted leave and the proceedings were adjourned to 30 April 2008.
On 28 April 2008 Mrs Haddad’s notice of motion to set aside the default judgment in the Supreme Court debt proceedings was listed before a Registrar for directions. Mrs Haddad was once again legally represented. Mr Raffell of Counsel appeared for her. The application was set down for a half-day hearing on 19 June 2008. A notice of change of address for service was filed in court in which Ms Fontana of Forum Law was named as solicitor for the debtor.
On 30 April 2008 Mr Raffell appeared for Mrs Haddad in the Federal Court in relation to the application to set aside the bankruptcy notice. The proceedings were adjourned to 25 June 2008. The Registrar ordered that any notice of appearance be filed and served by 5 May 2008.
On 9 May 2008 a sequestration order was made against the estate of Mr Haddad, the debtor’s husband.
On 16 May 2008 Ms Britton received a telephone call from Ms Fontana of Forum Law in which Ms Fontana advised that she was instructed by Mr and Mrs Haddad, that her instructions were mainly from Mrs Haddad (emphasis added) and that she thought Mr Raffell had filed a notice of appearance in court. She asked what had happened in the creditor’s petition proceedings against Mr Haddad and confirmed that she acted for Mrs Haddad on her application to set aside the bankruptcy notice. Forum Law filed a notice of appearance in the Federal Court on 23 May 2008.
On 2 June 2008 there was no appearance by Mrs Haddad at a status conference in the Supreme Court possession proceedings.
On 5 June 2008 Ms van Ravels had a telephone conversation with Ms Fontana. Ms van Ravels’ unchallenged affidavit evidence is that Ms Fontana said “Mrs Haddad does not wish to proceed with her motion. She will discontinue the motion and the Federal Court application, provided there is no order as to costs. Can you prepare some orders to reflect this?” Ms van Ravels indicated that she needed to get instructions on the costs issue.
On 6 June 2008 Ms van Ravels forwarded draft consent orders to Ms Fontana which provided that Mrs Haddad’s notice of motion of 12 March 2008 to set aside the default judgment in the debt proceedings be dismissed and that there be no order as to costs. On the same day Ms Britton forwarded short minutes of order to Ms Fontana that the application to set aside the bankruptcy notice be dismissed by consent and that there be no order as to costs. Consent orders in each of these matters were executed by Mrs Haddad’s solicitor and returned to the solicitors for the creditor.
On 12 June 2008 the consent orders to dismiss the notice of motion to set aside the default judgment in the debt proceedings were filed in the Supreme Court registry.
On 13 June 2008 the creditor filed a notice of motion in the Supreme Court that Mrs Haddad’s defence to the possession proceedings be struck out on the basis that she was not conducting her defence with due dispatch. On 18 June 2008 Mr Owens of Forum Law had a conversation with Ms van Ravels indicating that Mrs Haddad had sent over a copy of the notice of motion filed by the creditor in the possession proceedings but that the solicitor did not think that Mrs Haddad would attend or that she would consent to the orders sought.
On 19 June 2008 a Registrar of the Federal Court made an order by consent that the Federal Court proceedings to set aside the bankruptcy notice be dismissed with no order as to costs.
On 23 June 2008 the motion to strike out Mrs Haddad’s defence in the possession proceedings was adjourned to 7 July 2008. On 24 June 2008 the solicitors for ING notified Mrs Haddad by letter that the Supreme Court had directed them to notify her that the hearing in relation to the notice of motion in the possession proceedings would proceed on 7 July 2008 and that if she did not appear her defence would be struck out and judgment entered against her. It was suggested that if she had any concerns about her legal position she obtain independent legal advice.
On 2 July 2008 the creditor’s petition was presented.
On 7 July 2008 the Supreme Court made orders in the absence of Mrs Haddad that the defence she had filed in the possession proceedings be struck out.
On 18 July 2008 orders were made for substituted service of the creditor’s petition. The matter was adjourned until 22 August 2008.
On 7 August 2008 ING obtained judgment for possession of the Greystanes property in the possession proceedings. It was not in possession of the property at the time of the hearing in these proceedings.
On 19 August 2008 Mrs Haddad swore the affidavit in support of the notice of opposition which was filed in these proceedings on 20 August 2008.
On 22 August 2008 the creditor’s petition was adjourned until 16 September 2008. Mr McEncroe appeared as solicitor for Mrs Haddad.
Ms van Ravels’ affidavit evidence is that she was aware as at 29 August 2008 that Westpac Banking Corporation, the first mortgagee of the Greystanes property, had commenced proceedings for possession of the property in the Supreme Court of New South Wales.
On 3 September 2008 Mrs Haddad filed a notice of motion in the Supreme Court seeking that the default judgment in the possession proceedings be set aside and, inter alia, that she be granted leave to file an amended defence.
On 8 September 2008 Mrs Haddad filed a notice of motion in the Supreme Court in the debt proceedings seeking that the default judgment of 6 February 2008 be set aside and that she be granted leave to file an amended defence. A copy of the proposed amended defence is annexed to the affidavit Mrs Haddad filed in support of the motion. In addition to responding to matters pleaded in the statement of claim, the proposed amended defence states generally that at no stage was Mrs Haddad a party to any negotiations with the plaintiff or aware of the financial feasibility of the development prospects undertaken by the defendants, that all documents bearing her signature were never explained to her and that she signed them in situations where she had no realistic choice but to do so at the request of her husband (who was the fourth defendant) and in circumstances where she was only shown the page on which to place her signature. Consistent with the grounds in the original proposed defence, the amended defence seeks relief under sections 7(1) and 9(2) of the Contracts Review Act 1980 (NSW) and claims equitable relief setting aside the loan agreement, guarantees and any other document the plaintiff may seek to rely upon, on the basis that Mrs Haddad was unduly influenced by her husband and others based on the principle in Yerkey and Another v Jones (1939) 63 CLR 649. The proposed amended defence also seeks compensation for the value of properties sold by the creditor in reliance on the default judgment or any loan, guarantee or mortgage.
The proposed amended defence in the possession proceedings relies on these and additional associated grounds. Mrs Haddad has filed affidavits in support of each of the notices of motion in the Supreme Court. Copies of these documents were tendered by her in these proceedings.
By affidavit of 16 September 2008 Ms van Ravels attested to what had occurred in relation to the notices of motion filed by the debtor in the Supreme Court in September 2008.
The notice of motion in the possession proceedings was returnable before the Supreme Court on 11 September 2008. On that day Mr McEncroe, the present solicitor for Mrs Haddad, appeared on her behalf having had a discussion with Ms van Ravels in which she informed him that her instructions were “to seek to have this matter stood over for two weeks to allow time for the creditor’s petition to be determined”. He said words to the effect: “So we are going to have it stood over to a day after the 16th”. The notice of motion in the possession proceedings was stood over by consent to 25 September 2008. A stay on the writ of execution was extended up to and including that date.
The notice of motion in the debt proceedings was returnable before the Supreme Court on 12 September 2008. On that day Mr McEncroe appeared on behalf of the debtor, having had a conversation with Ms van Ravels in which he raised the issue of whether the debt proceedings should also be stood over to 25 September 2008. Ms van Ravels advised that her instructions were to have the notice of motion dismissed on the basis that the previous application to have the judgment set aside brought by Mrs Haddad had been dismissed by consent after it had been listed for hearing. Mr McEncroe advised the Supreme Court that he had just received instructions and that he needed more time to obtain the files from previous solicitors and sought an adjournment. The Supreme Court did not dismiss the motion, but stood it over until 25 September 2008. According to Ms van Ravels, it was drawn to the attention of the Court that this date was after the date on which the creditor’s petition was listed for hearing in this Court.
On 16 September 2008 a Registrar of this Court refused a contested adjournment application by the debtor in relation to the creditor’s petition and referred the matter to me for hearing. The matter was listed for hearing on 1 October 2008. Orders were made for the creditor to file and serve a foreshadowed amended creditor’s petition and for the debtor to file and serve any further notice of intention to oppose the creditor’s petition and affidavit evidence on or before 23 September 2008. However no amended creditor’s petition, further notice of intention to oppose the creditor’s petition or any further affidavit evidence was filed and served in accordance with these orders.
On 1 October 2008 the hearing was adjourned until 3 October 2008 in the absence of Mrs Haddad on the application of Mr McEncroe. The hearing proceeded on 3 October 2008. I was informed that the debtor’s notice of motion to set aside the default judgment in the debt proceedings had been adjourned again by the Supreme Court, until 9 October 2008.
On 1 October 2008 Mr McEncroe had explained that while he was not asking the Court to adjourn the hearing of the creditor’s petition on the basis of the existence of the notice of motion in the Supreme Court to set aside the default judgment in the debt proceedings, it was nonetheless going to be contended at the hearing that even if the Court was satisfied that the requirements of s.52(1) of the Bankruptcy Act were met the Court should not make a sequestration order, but should at that point adjourn the matter until the Supreme Court had dealt with the notice of motion in the debt proceedings.
It was in the context of that background that on the date listed for hearing of the creditor’s petition the parties consented to this Court determining as a preliminary question the issue of whether it should go behind the default judgment.
Under s.52(1) of the Bankruptcy Act the creditor is obliged to prove that the debt on which it relies is still owing. The Court has a discretion to accept a judgment as proof of the debt relied on to found the creditor’s petition. The creditor in this instance relies on the default judgment of the Supreme Court entered on 6 February 2008. The issue before the Court is whether a substantial reason has been shown to go behind the judgment.
Mr McEncroe for the debtor contended that the material before the Court, in particular the chronology prepared by counsel for the petitioning creditor as an aide memoire and the affidavit evidence referred to therein, was such as to indicate that at times the debtor had not been represented or not properly represented, that she claimed that she had given instructions to people who she said did not turn up or did not do certain things and that the significance of matters was not made clear to her as she relied on her husband and other people (such as solicitors) who she said did things for her.
There is no evidence before the Court about the debtor’s representation before the default judgment was obtained. If these submissions are intended to refer to subsequent events, the evidence is to the contrary. In particular, Mrs Haddad was represented both when she filed the notice of motion to set aside the default judgment and when she withdrew it. The evidence before the Court neither establishes nor raises an arguable claim that she was not properly represented or not made aware of the significance of matters.
The debtor also placed reliance on the recital of events in the statement of claim in the debt proceedings. It was suggested that it was apparent that a deed of guarantee was entered into in relation to the terms of a loan that was not entered into until some 11 months later that was for a very short term and that it appeared that a guarantee entered into by parties including the debtor had been entered into at a time when previous loans were not longer in effect. Transactions including guarantees and loans had occurred which were said to have meant that all the parties became heavily indebted to ING Bank over a very short time with many of the documents being signed by the parties, in particular Mrs Haddad, on a particular day. Hence it was contended that the Court should go behind the judgment. The solicitor for the debtor went on to suggest that in fact this was the type of case that should go back to the Supreme Court so that the circumstances in which these documents were signed and the consequence of their signing and the chronology of events could be “assessed”. Such general contentions do not establish that the grounds in the proposed amended defence are arguable or that there is a bona fide allegation that no debt is due, let alone that it is appropriate for this Court to go behind the judgment to see if there was in truth and reality a debt.
It was also submitted that such evidence from Mrs Haddad as there was before the Court indicated that she had very limited work experience. She was not cross-examined as to her business capability or experience and reliance on her husband. It was contended that these issues were raised in the proposed amended defences which had been filed in the possession and debt proceedings in the Supreme Court. It was pointed out that the proposed defence had not been raised at the last minute. Such submissions were not related to the grounds intended to be relied on to challenge the default judgment.
It was submitted that there was nothing in the evidence of Mrs Haddad that suggested that she should not have an opportunity to re-open these matters, but the absence of “disentitling” conduct does not assist the debtor if substantial reasons to go behind the judgment are not established.
Mr McEncroe did not otherwise address the legal basis on which Mrs Haddad takes issue with the default judgment, in particular whether there is an arguable basis for such grounds. The debtor’s central contention in relation to the default judgment is not so much that there was no debt due, but rather that there should be an investigation as to whether she is entitled to relief from an unjust contract under the Contracts Review Act or to equitable relief on the basis of undue influence. It is difficult in such circumstances to be satisfied that these are bona fide, arguable allegations, let alone that in such circumstances there is in fact a reason for questioning whether there really was a debt.
While Pincus J stated in Re Marshall that the court need not always go behind a default judgment, even if a bona fide allegation of no real debt is made, I have had regard to the fact that the judgment is a default judgment (and hence to be regarded with more suspicion) and that the evidence about the debtor’s knowledge and understanding of her own affidavit evidence could be seen as consistent with the claims she seeks to make in the Supreme Court in relation to the default judgment.
It is clear that the fact of failure of an application to set aside such a judgment does not preclude the Court in Bankruptcy from going behind the judgment (Re Johnson and Another; Ex parte Greendale Engineering and Cables Pty Ltd (1967) 11 FLR 335 at 341). Hence the same must be said for the fact of withdrawal of the debtor’s first application to set aside the default judgment.
The creditor submitted that there had been a complete failure on the part of the respondent to establish substantial reasons for doubting whether there really is a debt due to the creditor.
Mr Spencer submitted that even if the Court would ordinarily at least entertain some concern (given that the judgment relied on was a default judgment), this was a case somewhat removed from that of a simple default judgment. This argument was based not on the circumstances preceding or the nature of the default judgment but rather on what occurred thereafter. It is appropriate to have regard to such events, in particular the debtor’s conduct (see Richardson v Leonard Cohen & Co at [49]).
In March 2008 the debtor (while legally represented) moved to set aside the judgment in the debt proceedings. On 28 April 2008 the debtor was represented both by counsel and a solicitor in the Supreme Court in relation to the debt proceedings when her notice of motion to set aside the default judgment was listed for hearing. She was also represented when her application to set aside the bankruptcy notice was before the Federal Court. Ms Fontana, who asserted she acted on instructions mainly from Mrs Haddad, told Ms van Ravels on 5 June 2008 that Mrs Haddad did not wish to proceed with the motion or with the Federal Court application provided there was no order as to costs. Consent orders were made by the Federal Court in relation to the application to set aside the bankruptcy notice and by the Supreme Court in relation to the notice of motion to set aside the default judgment in the debt proceedings. The solicitor for the debtor indicated on 18 June 2008 that Mrs Haddad was not intending to oppose the motion to strike out her defence in the possession proceedings.
The creditor’s petition was presented on 2 July 2008. Orders were made for substituted service. On 19 August 2008 Mrs Haddad swore the affidavit in support of her notice of opposition filed on 20 August 2008 but it was not until 3 September 2003 that a further application was made to set aside the judgment in the possession proceedings and 8 September 2008 that the further notice of motion was filed in the Supreme Court to set aside the default judgment in the debt proceedings. While at times she was unrepresented, Mrs Haddad was represented at critical times. The evidence in relation to the circumstances of the withdrawal of the notice of motion and the filing of the fresh notice is not such as to provide an explanation for these events consistent with the debtor’s contentions.
The creditor submitted that the conduct of the parties in the proceedings in the Supreme Court had been pursuant to an agreement which, in effect, allowed for the creditor’s petition to be determined before the other proceedings. This appears to be so in relation to the possession proceedings and I accept that this is what the creditor sought. It is not clear that it is so in relation to the debt proceedings from the perspective of the debtor. It appears Mrs Haddad’s solicitor sought the adjournment on 12 September 2008 because he required further time to prepare the case, although this must be seen in light of his representation of Mrs Haddad from at least 22 August 2008. On 25 September 2008 Mr McEncroe sought a further adjournment in the Supreme Court on the basis that his client was unwell and had been unable to provide him with instructions. I am not satisfied that there was an agreement that the creditor’s petition be determined before the notice of motion in relation to the default judgment in the debt proceedings, albeit the debtor’s solicitor must have been aware of this possibility if the adjournments he sought on other bases were granted.
The creditor also submitted that the circumstances in this case were analogous to those in Harrison v Charalambous [1999] FCA 902 in which Finkelstein J considered the circumstances in which the Court would go behind a judgment obtained by consent as a consequence of settlement of a claim brought by the petitioning creditor against the debtor who had agreed to compromise the claim. The debtor had failed to pay the agreed sum to the petitioning creditor. Thereafter judgment was entered in accordance with terms of settlement. The debtor had contended that the Federal Court should go behind the judgment and inquire whether there was in truth and reality a debt owed to the petitioning creditor on the basis that he was not indebted because work he had performed on the creditor’s boat (the claim brought by the creditor had related to faulty workmanship) had been properly carried out.
Finkelstein J acknowledged (at [8]) that if a judgment had been obtained without any adjudication on the merits, for example in the case of a default judgment, a court would “more readily” go behind that judgment to inquire whether there is a “good debt”. However, his Honour continued at [9]:
However, where a judgment has been entered under a compromise the position is not so straightforward. In Corney v Brien, Fullagar J said (supra at 357) that it must be shown that there exists grounds for challenging the compromise before the judgment will be reopened. This is, no doubt, because it is the compromise and not the claim that was compromised that is the foundation of the judgment. Moreover, as his Honour pointed out, where a party challenges a judgment entered on a compromise and that party has acted on the advice of counsel, the judgment will not generally be reopened. The presumption is that in such circumstances it is difficult, although not impossible, to impune (sic) the compromise.
His Honour referred to In re Blythe; Ex parte Banner (1881) 17 Ch D 480 in which the English Court of Appeal considered the circumstances in which a Court would go behind a judgment based on a compromise, stating that if the original claim was not made bona fide but for the purposes of extortion, the claimant knowing that he had no legal claim, then that would be sufficient. Brett LJ pointed out (at 489) that if a judgment or compromise was obtained by dishonesty known to both parties it would be “monstrous” if the Court could not go behind that judgment.
In Harrison v Charalambous the debtor alleged that he was pressured by his legal adviser to compromise the claim, notwithstanding that he had a good defence to it. However Finkelstein J found that the evidence did not implicate the petitioning creditor or his legal advisors in the allegedly undue pressure that he claimed he was placed under to compromise the claim. On the contrary, it suggested that the creditor was not in any way implicated in what occurred between the debtor and his lawyers. On that basis his Honour concluded that neither the compromise nor the Magistrates Court judgment was liable to be set aside.
Mr Spencer submitted that while Harrison v Charalambous was a case in which there was compromise of the ordinary sort, nonetheless the principles were applicable in the present case because, whatever the merits of the original default judgment to which the creditor was entitled, Mrs Hadddad had taken advantage of the opportunity to have that judgment examined by legal advisers (including both counsel and solicitors). She initially gave instructions to seek to set the judgment aside, but for whatever reason, came to the view that it was appropriate to withdraw the application to set aside the default judgment and also the application to set aside the bankruptcy notice and to “make a deal” with the creditor in relation to costs. While great significance could not be put on the quantum of the discount she might have received as a result of not having to pay the creditor’s costs, it was submitted that this could not be overlooked.
Mr Spencer contended that what the debtor had done, properly advised (in the absence of evidence to the contrary), was to withdraw her applications and chose not to pursue them. It was submitted that the Court should be very slow, absent any suggestion of fraud, undue influence or disentitling conduct on the part of the creditor, or ameliorating circumstances demonstrated by the debtor, to allow someone who had taken a step freely and upon legal advice to resile from that step at this stage in the proceedings. On that basis it was submitted that this was not a case in which the Court would go behind the judgment as there had not been sufficient facts established to warrant the exercise of the discretion involved in going behind the judgment.
It was said also that notwithstanding the scepticism with which the Court might treat default judgments, there was a competing parallel policy that where judgments were obtained in relation to persons who then had the benefit of advice about steps available to them but took considered decisions not to avail themselves of those steps, then there must come a time when such persons should be bound by such decisions.
The authorities in relation to re-opening a judgment based on a compromise are not directly in point. In this case it cannot be said that the compromise was the foundation of the judgment (cf Harrison at [9]). However what is apparent from such authorities is the relevance of and need for an explanation in these proceedings of the withdrawal of the original notice of motion. The debtor has not provided this Court with admissible evidence in that respect. She has filed and tendered copies of affidavit evidence in support of her fresh notice of motion in the Supreme Court. While such affidavits are not read in these proceedings (not having been filed in accordance with the directions made on 16 September 2008) it can at least be said that Mrs Haddad has filed affidavit material in support of her fresh notice of motion and an application to file an amended defence in the debt proceedings which raise a number of issues, including the application of the Contracts Review Act 1980 (NSW). However the evidence before this Court does not satisfactorily explain why these issues were not pursued when the first notice of motion was on foot. The mere existence of such a proposed defence is not such as to establish that there are substantial reasons for doubting whether there really is a debt due to the creditor (Corney v Brien per Fullager J at 353 – 358).
Notwithstanding the absence of affidavit evidence from the debtor that establishes reasons to go behind the judgment, there is other material before the Court, including a copy of the statement of claim in the debt proceedings, the present notice of motion to set aside the default judgment and the proposed amended defence and other documents filed in relation to that motion. I have had regard to all the material before the Court. However it has not been shown that there is substantial reason for doubting whether there really was a debt due. The very general assertion of the need to “investigate” the transactions between the parties does not, in the circumstances of this case, having regard to the history of the matter (including the debtor’s withdrawal of her first notice of motion to set aside the default judgment which relied on very similar grounds to those in the proposed amended defence) suffice.
The evidence before the Court is not such as to establish that the default judgment was obtained by fraud, collusion or a miscarriage of justice or that the notice of motion to set aside the default judgment was withdrawn in circumstances for which there is a relevant explanation. Nor is the evidence before the Court in these proceedings such as to establish that there was anything akin to an “unfair compromise” in relation to the debtor’s agreement to discontinue the March 2008 notice of motion to set aside the default judgment in the debt proceedings.
I bear in mind that in dealing with the preliminary question before the Court I am not determining whether there is in truth and reality a debt due to the creditor but only whether there are substantial reasons to go behind the judgment and investigate that issue. I am also not determining whether there should be an adjournment of the hearing of the creditor’s petition to enable the notice of motion to set aside the default judgment in the debt proceedings to be determined by the Supreme Court.
The fact that the proposed amended defence lists proposed grounds on which relief is intended to be sought does not establish a bona fide arguable claim, whether under the Contracts Review Act, based on undue influence or otherwise, let alone substantial reason for questioning whether behind the default judgment there was in truth and reality a debt due to the petitioner. The law on which such an investigation would be based has not been addressed. Insufficient facts have been shown on the evidence before the Court to establish that the Court should go behind the judgment. (See Wolff v Donovan). The evidence before this Court is not such as to “create the requisite doubt as to the existence of the debt” (Joossé v Deputy Commissioner of Taxation (2004) 137 FCR 576 at [6] per North and Finkelstein JJ).
On the evidence before the Court, having regard to the grounds asserted, the history of the proceedings, the notices of motion and the submissions of both parties I am not persuaded that it has been established that I should go behind the judgment of the Supreme Court entered on 6 February 2008. Hence the preliminary question should be answered in the negative.
I certify that the preceding one hundred (100) paragraphs are a true copy of the reasons for judgment of Barnes FM
Associate:
Date: 23 December 2008
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