Jordanou v Commonwealth Bank of Australia
[2019] FCA 1142
•26 July 2019
FEDERAL COURT OF AUSTRALIA
Jordanou v Commonwealth Bank of Australia [2019] FCA 1142
Appeal from: Commonwealth Bank of Australia Ltd v Jordanou [2018] FCCA 2972 File number: VID 1483 of 2018 Judge: MOSHINSKY J Date of judgment: 26 July 2019 Catchwords: BANKRUPTCY – appeal from Federal Circuit Court of Australia – application for review of sequestration order – where petitioning creditor obtained judgment against the appellant in the Supreme Court of Victoria – where the hearing before the primary judge was conducted by the parties on the basis that it was the first stage of the inquiry, that is, whether sufficient reason was shown for questioning whether behind the judgment debt there was in truth and reality a debt due to the petitioning creditor – whether the primary judge erred in his consideration of whether to go behind the judgment Legislation: Bankruptcy Act 1966 (Cth), 35A, 52 Cases cited: Corney v Brien (1951) 84 CLR 343
Garcia v National Australia Bank Ltd (1998) 194 CLR 395
Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132
Wren v Mahony (1972) 126 CLR 212
Yerkey v Jones (1939) 63 CLR 649
Date of hearing: 16 July 2019 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 50 Counsel for the Appellant: Mr MY Bearman with Mr D Connors Solicitor for the Appellant: Rothwell Lawyers Counsel for the Respondent: Mr B Carew Solicitor for the Respondent: HWL Ebsworth Lawyers ORDERS
VID 1483 of 2018 BETWEEN: SUZANNE JORDANOU
Appellant
AND: COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)
Respondent
JUDGE:
MOSHINSKY J
DATE OF ORDER:
26 JULY 2019
THE COURT ORDERS THAT:
1.Within 7 days, the parties provide any agreed minute of proposed orders to give effect to these reasons.
2.If the parties cannot agree on proposed orders, the matter be listed for mention on a date to be fixed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MOSHINSKY J:
Introduction
The issue raised by this appeal is whether the primary judge erred in his consideration of whether or not to ‘go behind’ a judgment of the Supreme Court of Victoria upon which a creditor’s petition was founded.
The background to the issue is, briefly, as follows. In 2007, the appellant (Ms Jordanou) gave guarantees to the respondent, the Commonwealth Bank of Australia (the Bank) to secure loan facilities provided by the Bank to a company, Watermark Developments Pty Ltd (Watermark). The Bank sued Ms Jordanou on the guarantees in the Supreme Court of Victoria. Ms Jordanou was represented at the trial before the Supreme Court, but ultimately did not give evidence in opposition to the Bank’s claim. The circumstances in which this occurred are described later in these reasons. Judgment was entered against Ms Jordanou for $4,510,777.96. The Bank served a bankruptcy notice on Ms Jordanou relying on the judgment debt. The Bank then issued a creditor’s petition against Ms Jordanou relying on her failure to satisfy the bankruptcy notice. A Registrar of the Federal Circuit Court made a sequestration order against Ms Jordanou’s estate on 14 March 2017. Ms Jordanou filed an application for review of the sequestration order. This was the proceeding before the primary judge.
The hearing before the primary judge was conducted by the parties on the basis that it was concerned with (what was described as) the first stage of the inquiry, that is, whether sufficient reason was shown for questioning whether behind the judgment debt there was, in truth and reality, a debt due to the petitioning creditor. Ms Jordanou advanced two principal contentions before the primary judge. The first concerned the circumstances of the trial before the Supreme Court; in particular, the circumstances in which Ms Jordanou did not give evidence in the Supreme Court proceeding. It was contended, in effect, that her solicitor had misrepresented her instructions. The second related to the circumstances in which Ms Jordanou gave the guarantees to the Bank. Ms Jordanou contended that the Bank had engaged in unconscionable conduct, relying on cases such as Yerkey v Jones (1939) 63 CLR 649 and Garcia v National Australia Bank Ltd (1998) 194 CLR 395.
Although not expressed in these terms, the primary judge, in effect, declined to go behind the judgment of the Supreme Court of Victoria. Accordingly, he dismissed the application for review of the sequestration order.
Ms Jordanou appeals from the judgment of the primary judge. Ms Jordanou relies on five grounds of appeal in her notice of appeal. At the hearing of the appeal, Ms Jordanou abandoned ground 3. There is some overlap between the remaining grounds. In broad terms, Ms Jordanou contends that the primary judge erred by focussing on the forensic choices made by Ms Jordanou during the litigation before the Supreme Court and not on the requirement that there be satisfactory proof of the debt in making the sequestration order under s 52 of the Bankruptcy Act 1966 (Cth).
For the reasons set out below, in my view, the primary judge erred in his consideration of whether or not to go behind the judgment of the Supreme Court, by not considering whether Ms Jordanou’s contentions based on unconscionable conduct constituted sufficient reason for questioning whether, behind the judgment debt, there was, in truth and reality, a debt due to the Bank as the petitioning creditor. Accordingly, the appeal is to be allowed.
Background facts
The following summary of the background facts is substantially based on the reasons for judgment of the primary judge (the Reasons). I have also had regard to documents in the Appeal Book to which I was taken during the hearing of the appeal.
On 12 July 2007, Ms Jordanou gave three guarantees in favour of the Bank. These related to three loan facilities provided by the Bank to Watermark. Ms Jordanou’s signature appeared on the guarantees.
The Bank advanced the following sums to Watermark:
(a)$1.87 million pursuant to the first loan facility;
(b)$1,912,500 pursuant to the second loan facility; and
(c)$1.87 million pursuant to the third loan facility.
The Bank sued Ms Jordanou on the guarantees in the Supreme Court of Victoria (Proceeding No. SCI 2013 04082). In her further amended defence and further amended counterclaim, Ms Jordanou contended that: at no time did she appreciate that she may have been a director or secretary of Watermark and that she may have been a guarantor in respect of the facility agreements relied on by the Bank; even though she may have appeared on the records of the Australian Securities and Investments Commission as a director of Watermark, she took no actual part in the business of Watermark; at the time of entering into the guarantees, she suffered from special disabilities (namely lack of education; lack of financial sophistication; lack of experience in commerce and investments; unwavering reliance upon the advice of her husband within whom she placed her trust and confidence; a lack of independent advice or assistance at the time she signed the various loan and guarantee documents; trust and confidence reposed in Robert Zaia as her financial adviser and accountant; and trust and confidence in Brendan Epps (a senior lending manager of the Bank) as a close family friend and banker). Ms Jordanou contended that the Bank engaged in unconscionable conduct within the meaning of the general law and certain legislative provisions. Accordingly, Ms Jordanou contended that she had suffered loss and damage and that she was entitled to orders setting aside the guarantees.
On 21 November 2016, the trial of the Supreme Court proceeding came on for hearing before the Honourable Justice Kennedy. Ms Jordanou was represented by Mr Bradley, her solicitor. Immediately after appearances were announced, Mr Bradley informed her Honour that Ms Jordanou was at home and was not in Court. Her Honour invited the parties to consider converting the day to a judicial mediation. Eventually both parties accepted her Honour’s proposal for judicial mediation, albeit over the Bank’s initial protest.
The dispute did not resolve. The trial resumed the following day (22 November 2016) before her Honour. It seems that, at this time, criminal proceedings were pending against Ms Jordanou; her husband; and her husband’s business associate and accountant, Mr Zaia.
Counsel for the Bank (Mr Carew) opened to the effect that the three loans to Watermark and Ms Jordanou’s guarantees of those loans were admitted, as was the quantum of the debt. Counsel for the Bank opened on the law relating to unconscionable conduct, among other things.
Her Honour, having heard from Counsel for the Bank, invited Mr Bradley to open on behalf of Ms Jordanou. Mr Bradley said he was only calling Ms Jordanou, who would give evidence of her special disadvantage that was exploited by the Bank. The matter was stood down to enable counsel to discuss the documents on which Ms Jordanou wished to rely. Upon the matter resuming, the following exchange took place:
HER HONOUR: Alright, I think that was about half an hour break, but I was told that you both wanted it.
MR CAREW: Yes. The position has changed fundamentally in regard to the running of this case. I’ll let Mr Bradley speak to it. Mr Bradley’s client’s position is that she will not be defending this proceeding.
…
MR BRADLEY: Thank you, Your Honour. I am instructed, Your Honour, that the matter is undefended. My client’s instructed that she just simply cannot take the stand. There’s other issues that are important to her that relate to her criminal matter and her husband’s matters, her illness as well, and she simply just cannot deal with those particular issues. And those other persons that – there are other people who are affected by a similar set of circumstances that could have otherwise given evidence, but the issue being is that she cannot go on, and those are my instructions.
The transcript of the proceeding before Kennedy J reveals that her Honour was at pains to ensure that Ms Jordanou was not in any way disadvantaged. Her Honour cautioned Mr Bradley against doing something that was not appropriate in respect of admitting proofs. The following further exchange took place:
HER HONOUR: … I’m trying to understand what exactly – what part you now wish to play in this matter. Are you wanting to be excused from here on, or are you content to sit there and let Mr Carew simply adduce evidence of the debt?
MR BRADLEY: I would – I would accept that I could stay and allow Mr Carew to adduce evidence of the debt.
HER HONOUR: All right. But you are not proposing to lead any positive unconscionability defence, is that what I’m noting?
MR BRADLEY: No. Without Ms Jordanou, that’s not possible, Your Honour, because she’s the central part of the case.
…
HER HONOUR: All right. So although we’ve had openings, is it correct for me to record that you are not proposing to call Ms Jordanou, and you are not proposing to lead any positive defensive unconscionability?
MR BRADLEY: Yes, Your Honour.
Mr Carew then formally proved the Bank’s case based on documentation that included a certificate of indebtedness. Mr Bradley remained at the bar table and even told her Honour that he did not challenge the arithmetic in respect of the debt alleged in relation to each guarantee. Her Honour repeated that she did not want to push Mr Bradley into anything. Her Honour then put to Mr Bradley that he would have to concede that the debt was proved. Mr Bradley agreed.
Her Honour then delivered reasons for judgment, giving judgment for the Bank in the sum of $4,510,777.96.
Immediately thereafter, Ms Jordanou protested. The transcript records the exchange in the following terms:
MS JORDANOU: Your Honour, I haven’t actually had a chance to say anything, and what I have discussed with Mr Bradley in the office is not what he came out and said. The reason why I can’t ---
HER HONOUR: Ms Jordanou, I’ve just pronounced judgment, I’m afraid, and I am a little troubled by this, but your solicitor has just given me a position which I’ve now taken and delivered judgment that you would not be leading evidence – that he would not lead evidence from you. Mr Bradley, I don’t know if you want to say something about this somewhat irregular state of affairs that’s going on here.
MR BRADLEY: Yes, Your Honour, and I apologise for that. What my client was attempting to elucidate to Your Honour was that her reason for not wishing to give evidence in the matter and conceding what we’ve gone through today was in relation to her issues with her criminal proceedings. And she was worried extensively in relation to those matters.
HER HONOUR: Well it troubles me that this is the reason, because I have not been asked for an adjournment, and I keep emphasising that, on the basis of the criminal proceeding. The only basis for the adjournment that was sought yesterday was on the basis of her health.
…
HER HONOUR: And I emphasised that – and I actually offered you an opportunity to make an application for an adjournment on that basis ---
Her Honour pointed out that judgment had been delivered and that the judgment therefore stood. Her Honour said that there would be judgment for $4,510,777.96 with costs on the standard basis. Her Honour’s orders were made the following day, 23 November 2016.
On 28 November 2016, the Bank served a bankruptcy notice based on the judgment debt on Ms Jordanou. The bankruptcy notice gave Ms Jordanou until 19 December 2016 to satisfy the notice. She did not do so.
On 10 January 2017, the Bank issued a creditor’s petition against Ms Jordanou.
On 14 March 2017, a sequestration order was made against Ms Jordanou’s estate.
The proceeding before the primary judge
The proceeding before the primary judge was an application filed by Ms Jordanou for review of the sequestration order.
Ms Jordanou contended before the primary judge that, at the time of the trial in the Supreme Court of Victoria, criminal proceedings were pending against Ms Jordanou, her husband, and Mr Zaia. Ms Jordanou contended that when the case came on for hearing in the Supreme Court she instructed her solicitor, Mr Bradley, to apply for an adjournment on the basis that she was unwell and on the additional basis that her husband and Mr Zaia were facing criminal charges. Ms Jordanou noted that Mr Bradley informed Kennedy J that:
(a)Ms Jordanou would not give evidence;
(b)Ms Jordanou no longer sought an adjournment; and
(c)the trial was to proceed on an undefended basis.
Ms Jordanou contended before the primary judge that those statements were untrue.
Ms Jordanou accepted that she needed to persuade the primary judge to go behind the judgment of the Supreme Court.
The bank opposed Ms Jordanou’s application for review of the sequestration order. The Bank contended (among other things) that the Court should not go behind the judgment of the Supreme Court in the circumstances of this case.
In the course of the hearing before the primary judge, counsel for the Bank made the following statement concerning the way in which both parties were approaching the hearing before the primary judge (T61):
There’s one more matter just before we proceed. The parties are agreed – and your Honour may remember that Mr Bigmore [former counsel for Ms Jordanou] and I appeared on a directions hearing before you on 8 August last year. The parties are agreed that the hearing [being] conducted currently is on the first stage of the inquiry, that is, whether there [are] substantial grounds which would incline the court to then go behind the judgment, and the reason for that is the parties have taken a position as to the way to approach the case. That’s simple. I don’t know if I should expand on that because we’ve already addressed your Honour on that, albeit some months ago.
Counsel for Ms Jordanou before the primary judge did not dispute the above statement. It may be accepted that it reflects the basis upon which both parties conducted the hearing before the primary judge. Thus, although no order was made for the determination of a separate question, the hearing before the primary judge was conducted on the basis that it was concerned with the first stage of the inquiry, that is, whether sufficient reason was shown for questioning whether, behind the judgment debt, there was, in truth and reality, a debt due to the petitioning creditor.
Ms Jordanou gave evidence during the hearing before the primary judge.
Mr Bradley also gave evidence during the hearing before the primary judge. Mr Bradley was cross-examined by counsel for Ms Jordanou.
Mr Bradley was asked about the events of 22 November 2016, particularly about the short adjournment that her Honour allowed. Mr Bradley said that he conferred jointly with Ms Jordanou, her husband and Mr Zaia during that adjournment. Mr Bradley said they discussed whether grounds existed to assert a privilege against self-incrimination. Mr Bradley said that during those discussions he provided advice and, based on that advice, Mr and Ms Jordanou provided Mr Bradley with instructions. Relevantly to Ms Jordanou, Mr Bradley said Ms Jordanou told him she did not want to give evidence as in doing so she may incriminate herself. Mr Bradley said he conveyed to Kennedy J that Ms Jordanou did not wish to give evidence. Thereafter, Mr Bradley remained at the bar table. Mr Bradley said he did not recall Ms Jordanou disagreeing with him as to what he said to Kennedy J. Mr Bradley also said that Ms Jordanou did not terminate his retainer because of any allegation about the events before Kennedy J on 22 November 2016.
The issue of Ms Jordanou’s instructions to Mr Bradley was explored in depth before the primary judge. The following exchange occurred during the course of cross-examination of Ms Jordanou by counsel for the Bank:
Do you see at lines 16 to 17 – have a look at lines 16 to 17 on this page, when – Mr Bradley is speaking to her Honour. See that? --- Yes.
He’s communicating, your … giving very plain terms, isn’t he? --- Yes.
Yes. And you understood that at the time? --- Yes.
And you didn’t tap him on the shoulder to say that’s wrong; correct? --- Correct.
Didn’t do anything about it; correct? --- I didn’t know that I could.
You don’t think you can even tap your lawyer on the shoulder or pass him a note. Do you not think you can do that in a courtroom? --- At the time.
HIS HONOUR: Sorry, at the time what? --- At the time I wouldn’t have known what to do.
A lot of people have legal representation for that very reason. They don’t understand the subtleties of what goes on in court and they entrust their lawyers to speak the language that the judge speaks. They might not understand it precisely, but they trust their legal people to be faithful and convey what their wishes are. If we keep reading from page 105 and ’04 to the transcript there’s a lot of things that are exchanged between the judge and Mr Bradley which have your case going in a particular direction. Mr Carew is pursuing with you why you didn’t do something about it – anything, [to] somehow communicate with Mr Bradley or try to pass him a note, pull on his robe, do anything, but say, “You’re not conveying this properly. You’re sending me down the toilet. What are you doing?” But there’s no evidence of that. [T]hat’s the point that’s being made. Is there a reason for that, that you feel more comfortable telling me about now? --- Maybe because I was probably too scared to do it. I didn’t know what my rights were at the time. I didn’t realise – I’ve probably been to court a bit more now in the last few years, and I have a greater understanding of the whole situation. At that time I hadn’t been well leading up to that time going into court. I had made it very clear that I was happy to speak. I don’t know where he has got this information, where – why he thought we would go undefended.
The Reasons of the primary judge
In the Reasons, the primary judge outlined the issues raised by the application for review and described the background facts (which are largely set out above).
In relation to the instructions given by Ms Jordanou to Mr Bradley on 22 November 2016, the primary judge accepted the evidence of Mr Bradley and rejected the evidence of Ms Jordanou: see the Reasons at [27], [29]. Ms Jordanou does not seek to challenge the primary judge’s findings in this regard on appeal.
The primary judge referred in the Reasons to the issue of going behind the judgment of the Supreme Court. At [7] of the Reasons, his Honour noted that counsel for Ms Jordanou conceded that “Ms Jordanou needed to overcome the obstacles associated with attempts to go behind the judgment” as considered in Corney v Brien (1951) 84 CLR 343 and Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132 (Ramsay Health Care). At [8], the primary judge recorded the Bank’s submission that the Court should not go behind the judgment of the Supreme Court in the circumstances of this case.
The primary judge discussed the principles relating to going behind a judgment at [30]-[31] of the Reasons, referring to Ramsay Health Care and cases cited by the High Court in that judgment. Ms Jordanou does not take issue on appeal with the primary judge’s summary of the applicable principles.
The primary judge’s core reasoning on whether or not to go behind the Supreme Court judgment was at [33]-[37] of the Reasons. His Honour said that several issues emerged from the observations of the majority in Ramsay Health Care and continued as follows:
33.The first related to the real and true basis on which the sequestration order was made in this case. The question became whether the debt was owed in fact and in law, truly and in reality, tested in adversarial litigation. The Honourable Justice Kennedy concluded that the debt was proved. This was not a case of a default judgment. Her Honour required counsel for the bank to make good the bank’s proofs. Those proofs were mostly documentary as to both liability and quantum. The bank’s counsel took her Honour through the bank’s evidence. That evidence included the guarantee given by Ms Jordanou, notices of demand, a certificate of indebtedness and non-payment. Counsel for the bank explained the commercial setting of the borrowings and the purpose of the loan. It seemed to me that her Honour had proof of the fact and reality of the debt that Ms Jordanou guaranteed. The debt was very considerable. It was not paid. The bank was entitled to look to Ms Jordanou pursuant to the guarantee for payment of the amount owed. Ms Jordanou failed to pay that amount as guaranteed. The bank moved for judgment. It proved its entitlement. The judgment was unimpeachable.
34.In Ramsay, the majority pointed out that a creditor should not be able to make a person bankrupt on a debt that is not provable. The debt on which the bank obtained judgment in this case was far from not provable. The majority also pointed out that the notion that a party is bound by the conduct of his or her case has never been a sufficient reason not to look behind a consent judgment or a default judgment. This observation addressed the suggestion that Mr Bradley conducted Ms Jordanou’s case by failing to lead evidence of her counterclaim in such a way that led to the entry of judgment against Ms Jordanou for a very considerable sum. I do not agree. On the evidence of Mr Bradley outlined above Ms Jordanou specifically instructed Mr Bradley that she did not wish to enter the witness box (erroneously described as “the stand”) to give evidence on the basis of the risk of her incriminating herself. It was readily apparent that Kennedy J did not wish to force Mr Bradley to take a step in the proceeding he had not considered or in respect of which he was not instructed to take or make. Ms Jordanou had sat in court listening to his submissions without protest.
35.I do not accept that Ms Jordanou’s unfamiliarity with the legal process provided an explanation for her silence while Mr Bradley informed her Honour that no evidence would be led on the counterclaim. In my view, Ms Jordanou’s decision not to lead evidence on the counterclaim was deliberate and it was made on the advice of Mr Bradley. In those circumstances I do not say in this case, as the primary judge said in Ramsay Health Care Australia Pty Ltd v Compton, that Ms Jordanou is bound by the way her defence was conducted. That is to invert the relevant enquiry. In my view, according to s 52 of the Bankruptcy Act I needed to be satisfied that there was in truth and reality a debt on which the sequestration order was based. I am so satisfied in this case. In reviewing the material that was before Kennedy J for satisfaction of the debt owed by Ms Jordanou, I am in no way seeking to impeach her Honour’s judgment. I was concerned in this case whether the debt on which the judgment was based was truly a basis for making the sequestration order. That is how the High Court in Ramsay analysed matter, following In re Fraser; Ex parte Central Bank of London. Having read the transcript of the proceeding before Kennedy J several times as well as the court book in this case that incorporated the transactional documentation, as well as having heard viva voce from Ms Jordanou and Mr Bradley, I am persuaded that the debt was genuine and that the judgment debt on which a sequestration order was based was in truth and reality a valid judgment debt.
36.It next became necessary to address Ms Jordanou’s assertion that she wished to set aside the judgment debt with a view to seeking leave to appeal out of time against the judgment and orders of Kennedy J. Naturally, it was a matter for the Court of Appeal of the Supreme Court of Victoria if I were to conclude that the judgment of Kennedy J should be impeached. It was not possible for me to gainsay what the Court of Appeal might have done on the hearing of any such application. But undoubtedly the Court of Appeal would examine the utility of making the order sought, especially having regard to the fact that Ms Jordanou chose not to advance the very counterclaim on which her contentions against the bank were premised. At one point, Ms Jordanou was advancing an argument about unconscionability in the form best understood against the High Court’s decision in Amadio. She was also advancing at one point an argument based on Garcia. She chose not to adduce evidence of those grounds, apparently fearing the risk of self-incrimination if she gave evidence. Of course, it is not up to me to presuppose how the Court of Appeal may deal with Ms Jordanou’s application. But undoubtedly, a relevant and possibly determinative factor relevant to the exercise of the Court of Appeal’s discretion to grant Ms Jordanou leave to appeal out of time would be her legal representative’s submissions before Kennedy J that Ms Jordanou’s counterclaim was not being advanced. The issue occupied quite a deal of time before me.
37.In the end, I was not persuaded that the judgment debt ordered by Kennedy J was anything but valid and regular.
(Footnotes omitted.)
The primary judge therefore dismissed the application to review the sequestration order. The order dismissing the application for review was made on 24 October 2018. On 15 November 2018, the primary judge made an order as to costs.
The appeal
Ms Jordanou appeals from the judgment of the Federal Circuit Court. Her grounds of appeal (apart from ground 3, which is abandoned) are as follows:
1.The learned Trial Judge, in finding that he should not go behind the judgment debt of the Supreme Court of Victoria in favour of the Respondent against the Appellant, erred by focusing on the forensic choices of the applicant during the litigation before the Supreme Court and not on the requirement that there be satisfactory proof of the respondent’s debt in making the sequestration order under s. 52 of the Bankruptcy Act 1966, and thereby by misdirecting himself.
2.The learned Trial Judge, in so finding, erred by failing to consider the uncontradicted evidence led before him:
(a)establishing, or alternatively, tending to establish, by way of defence that the Appellant was not truly indebted to Respondent; and
(b)explaining why that defence was not relied upon before the Supreme Court.
…
4.Alternatively, if on a proper reading and construction of the learned Primary Judge’s reasons, he decided to go behind the judgment debt, the learned Primary Judge erred by failing to find that there was a substantial question whether the debt was owed, and by failing to investigate that question.
5.The learned Primary Judge should have found that there was such a substantial question, and on investigation of that question, should have found the proof of the Respondent’s debt was not satisfactory for the purposes of a bankruptcy court making a sequestration order.
Consideration
There is a degree of overlap between the grounds of appeal. It is therefore convenient to consider them together.
The principles relating to going behind a judgment were recently considered by the High Court in Ramsay Health Care. At [37]-[38], Kiefel CJ, Keane and Nettle JJ summarised, and then accepted, the submissions of Mr Compton as follows:
37.Mr Compton submitted that, by reason of s 52(1)(c) of the Act, and as Wren v Mahony concluded, the question for the Bankruptcy Court was whether the judge was persuaded that there was a debt truly owing to the petitioning creditor. It was said that the Bankruptcy Court should go behind a judgment where sufficient reason is shown for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor, and that sufficient reason was shown in this case.
38.An examination of the competing arguments shows that, both in point of authority and in point of principle, Ramsay’s contentions should be rejected and those advanced for Mr Compton accepted.
(Emphasis added; footnote omitted.)
At [47], Kiefel CJ, Keane and Nettle JJ said that, in point of authority, the decision of the majority in Wren v Mahony (1972) 126 CLR 212 “stands as a rejection of Ramsay’s proposition that the circumstance that a judgment of the Supreme Court was obtained without collusion or fraud after a contested hearing precludes the possibility of sufficient reason for questioning whether behind that judgment there was, in truth and reality, a debt due to the petitioner”.
On the facts before the Court in Ramsay Health Care, Kiefel CJ, Keane and Nettle JJ held that “there were, in the words of Barwick CJ in Wren v Mahony, ‘substantial reasons … for questioning whether behind [the] judgment there was in truth and reality a debt due to the petitioner’”: Ramsay Health Care at [65] (footnote omitted). Their Honours said, at [66], that, while the failure of Mr Compton to rely on certain evidence at trial was unexplained, “there was on the face of things a real question as to whether Mr Compton had failed to present his case on its merits at the trial in the Supreme Court”. Their Honours continued at [67]-[68]:
67It is no answer to the latter point for Ramsay to say, as the primary judge did, that Mr Compton is bound by the conduct of his case on his behalf at the trial in the Supreme Court. As has been seen, the notion that a party is bound by the conduct of his or her case has never been a sufficient reason not to look behind a consent judgment or a default judgment. That is because a Bankruptcy Court is concerned, not to discipline litigants or to protect finality in the administration of justice as between parties to litigation, but to protect the interests of third parties who were not participants in the litigation which led to the judgment in question.
68For the purposes of s 52 of the Act, a judgment may usually be taken to be sufficient evidence of a debt in that a judgment against a debtor in favour of a creditor obtained after a trial is, generally speaking, a reliable indication of the true state of indebtedness as between creditor and debtor. Indeed, such a judgment can usually be expected to provide the most reliable statement of the debt humanly attainable because the ordinary processes of the adversarial system provide a practical guarantee of reliability. The testing of the relative merits of a claim and counterclaim under the rigours of adversarial litigation will usually establish the true state of accounts as between the parties to the proceedings. Accordingly, a Bankruptcy Court will usually have no occasion to investigate whether the judgment debt is a true reflection of the real debt. But where the merits of a claim and counterclaim have not been tested in adversarial litigation, a judgment debt will not have this practical guarantee of reliability.
(Footnote omitted.)
See also Ramsay Health Care at [97], [110]-[111], per Edelman J.
In the present case, the primary judge examined in detail the circumstances in which the Bank obtained judgment in the Supreme Court proceeding, in particular whether Mr Bradley’s statements to Kennedy J (to the effect that Ms Jordanou would not be giving evidence, she no longer sought an adjournment and the matter was, therefore, effectively undefended) reflected Ms Jordanou’s instructions to Mr Bradley. The primary judge accepted Mr Bradley’s evidence and rejected Ms Jordanou’s evidence on these matters. As has been noted, no issue is taken with the primary judge’s findings on this part of the case.
However, the Reasons do not contain any substantive consideration of Ms Jordanou’s evidence regarding unconscionable conduct or whether, on the basis of this evidence, sufficient reason was shown for questioning whether behind the judgment there was, in truth and reality, a debt due to the Bank as the petitioning creditor (to use the language of Ramsay Health Care at [37]). Although Ms Jordanou provided both evidence and submissions in support of her unconscionability contention, the primary judge does not appear to have considered whether these provided “sufficient reason” to go behind the judgment.
It is true that the primary judge referred to Ms Jordanou’s unconscionability contentions at [7] and [36] of the Reasons. Those paragraphs do not, however, amount to a substantive consideration of whether this aspect of Ms Jordanou’s case provided “sufficient reason” for questioning whether there was, in truth and reality, a debt due to the petitioning creditor. His Honour did not refer, for example, to the evidence in Ms Jordanou’s affidavit affirmed on 4 April 2017 or the cross-examination of Ms Jordanou on the unconscionability case. His Honour did not refer to Ms Jordanou’s submissions relating to unconscionability (see, eg, Ms Jordanou’s final written submissions at [8]-[23]).
For these reasons, I consider that the primary judge erred in his consideration of whether or not to go behind the judgment of the Supreme Court.
Conclusion
It follows that the appeal is to be allowed. It is appropriate in the circumstances for the matter to be remitted to the Federal Circuit Court for determination according to law. (I note, but do not accept, the Bank’s submission to the effect that, in the event the appeal is allowed, the matter should be transferred to the Family Court of Australia, pursuant to s 35A(1) of the Bankruptcy Act. Although the primary judge is now a member of that Court, the proceeding is not of a kind that would ordinarily be dealt with by that Court.) Upon remittal to the Federal Circuit Court, it will be for the judge hearing the matter to determine whether or not to hear the first stage of the inquiry as a separate question. It may be that there would be little difference in hearing duration between hearing the first stage of the inquiry as a separate question and simply hearing and determining Ms Jordanou’s unconscionable conduct case.
The parties requested an opportunity to make submissions on the form of orders. Accordingly, at this stage, I will make orders that:
(a)Within 7 days, the parties provide any agreed minute of proposed orders to give effect to these reasons.
(b)If the parties cannot agree on proposed orders, the matter be listed for mention on a date to be fixed.
I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moshinsky. Associate:
Dated: 26 July 2019
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