Khouzame G and J v The Leasing Centre (Aust) Pty Ltd
[2007] FMCA 1380
•3 August 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KHOUZAME G & J v THE LEASING CENTRE (AUST) PTY LTD | [2007] FMCA 1380 |
| BANKRUPTCY – Review of Registrar’s sequestration order – debt based on default judgment – whether reasons for doubting existence of debt – liability under rental agreement – signatures forged – no later ratification, estoppel or new agreement – whether orders should be set aside or annulled – appropriate costs order where debtor did not challenge debt in Local Court – sequestration order set aside with costs. |
Bankruptcy Act 1966 (Cth), ss.52(1)(a), 153B, 154
Evidence Act 1995 (Cth), ss.128(5), 132
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523
Fox v Percy (2003) 214 CLR 118
Pattison v Hadjimouratis [2006] FCAFC 153
Rowe v B & R Nominees Pty Ltd [1964] VR 477
Taylor v Smith (1926) 38 CLR 48
Wolff v Donovan (1991) 29 FCR 480
Wren v Mahony (1972) 126 CLR 212
| Applicant: | GEORGE KHOUZAME (ABN 35 826 532 261) |
| Respondent: | THE LEASING CENTRE (AUST) PTY LIMITED (ACN 057 766 551) |
| File Number: | SYG932 of 2007 |
| Judgment of: | Smith FM |
| Hearing dates: | 31 July 2007 & 2 August 2007 |
| Delivered at: | Sydney |
| Delivered on: | 3 August 2007 |
REPRESENTATION
| Counsel for the Applicant: | Applicant in person |
| Counsel for the Respondent: | Mr T Sperber |
| Solicitors for the Respondent: | Swaab Attorneys |
ORDERS
The application is allowed.
The sequestration order made on 19 June 2007 is set aside.
The petition is dismissed.
The respondent creditor must pay the applicant’s costs in the petition and in the application to set aside, including reserved costs, as agreed or taxed under the Bankruptcy Rules.
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KHOUZAME G & J v THE LEASING CENTRE (AUST) PTY LTD | [2007] FMCA 1380 |
| BANKRUPTCY – Review of Registrar’s sequestration order – debt based on default judgment – whether reasons for doubting existence of debt – liability under rental agreement – signatures forged – no later ratification, estoppel or new agreement – whether orders should be set aside or annulled – appropriate costs order where debtor did not challenge debt in Local Court – sequestration order set aside with costs. |
Bankruptcy Act 1966 (Cth), ss.52(1)(a), 153B, 154
Evidence Act 1995 (Cth), ss.128(5), 132
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523
Fox v Percy (2003) 214 CLR 118
Pattison v Hadjimouratis [2006] FCAFC 153
Rowe v B & R Nominees Pty Ltd [1964] VR 477
Taylor v Smith (1926) 38 CLR 48
Wolff v Donovan (1991) 29 FCR 480
Wren v Mahony (1972) 126 CLR 212
| Applicant: | JULIE KHOUZAME (ABN 35 826 532 261) |
| Respondent: | THE LEASING CENTRE (AUST) PTY LIMITED (ACN 057 766 551) |
| File Number: | SYG933 of 2007 |
| Judgment of: | Smith FM |
| Hearing dates: | 31 July 2007 & 2 August 2007 |
| Delivered at: | Sydney |
| Delivered on: | 3 August 2007 |
REPRESENTATION
| Counsel for the Applicant: | Applicant in person |
| Counsel for the Respondent: | Mr T Sperber |
| Solicitors for the Respondent: | Swaab Attorneys |
ORDERS
The application is allowed.
The sequestration order made on 19 June 2007 is set aside.
The petition is dismissed.
The respondent creditor must pay the applicant’s costs in the petition and in the application to set aside, including reserved costs, as agreed or taxed under the Bankruptcy Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG932 of 2007
| GEORGE KHOUZAME T/AS LEBANESE CATERING SERVICE (ABN 35 826 532 261) |
Applicant
And
| THE LEASING CENTRE (AUST) PTY LIMITED (ACN 057 766 551) |
Respondent
SYG933 of 2007
| JULIE KHOUZAME T/AS LEBANESE CATERING SERVICE (ABN 35 826 532 261) |
Applicant
And
| THE LEASING CENTRE (AUST) PTY LIMITED (ACN 057 766 551) |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
I have before me applications for review of orders made by a Registrar in two matters. They are brought by a husband and wife, Mr and Mrs Khouzame, each of whom seeks the setting aside of sequestration orders which were made on 19 June 2007 in relation to each of their estates. The matters have at all times proceeded together, and rely upon two default judgments obtained in the same Local Court proceedings based upon an alleged joint liability under a written contract.
The sequestration orders were made in the absence of the two applicants, and notwithstanding that they had filed notices of intention to oppose the petitions with supporting evidence. They now rely only upon the ground which they raised below, in support of an application to set aside the sequestration orders. That ground denies the existence of any liability by either of them in relation to the debt alleged to underlie the Local Court judgments, by alleging that their purported signatures on the written agreement were forgeries.
The petition against Mrs Khouzame identified the debt relied upon by the respondent creditor as follows:
1.The respondent debtor owes the applicant creditor the amount of $20,744.35 pursuant to a default judgment in Local Court of New South Wales proceeding number 9839 of 2006 between The Leasing Centre (Aust) Pty Limited (ACN 057 766 551) and Julie Khouzame and George Khouzame, trading as Lebanese Catering Service (ABN 35 826 532 261) respectively; being a judgment in respect of monies owing by the respondent debtor under a rental agreement, dated 23 November 2005, between The Leasing Centre (Aust) Pty Limited (ACN 057 766 551) and Julie Khouzame and George Khouzame, trading as Lebanese Catering Service (ABN 35 826 532 261) respectively.
The petition in relation to Mr Khouzame is in identical terms, except that it identifies a judgment debt in the sum of $20,612.19 obtained in the same Local Court proceeding and in reliance upon the same rental agreement dated 23 November 2005.
The truth of the allegations in paragraph 1 of each petition was attested by affidavits by the financial controller of the respondent creditor, which said only:
2.The statements made in paragraphs 1 … are within my own knowledge true.
Subsequent affidavits of debt were made on information and belief by the respondent creditor’s solicitor. No evidence has been led by the respondent seeking to establish the debt by way of direct evidence, except by the tender of the alleged rental agreement and some other documents, which I shall consider below.
In this situation, the respondent petitioner principally invites the Court to exercise its discretion under s.52(1)(a) of the Bankruptcy Act 1966 (Cth) to be satisfied as to proof of debt by “accept[ing] the affidavit verifying the petition as sufficient”. Under well known authorities, the Court will rely upon such formal proof, unless “substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner” (see Wren v Mahony (1972) 126 CLR 212 (“Wren v Mahony”) at 225, and other authorities discussed in Wolff v Donovan (1991) 29 FCR 480 (“Wolff v Donovan”)).
In the present case, the applicants’ notices of opposition to the petitions invited the Court to go behind the judgments. As I shall explain below, I consider sufficient evidence was presented both to the Registrar and now to this Court “for questioning whether behind that judgment [debt relied upon] there was in truth and reality a debt due to the petitioner”. As I shall explain, I have not been satisfied on all the evidence that the applicants owe any debt to the petitioner which can support the making of a sequestration order.
Both of the petitions relied on judgments obtained in the same Local Court proceeding which is identified in paragraph 1 of the petitions. It seems that separate default judgments were entered against each of Mr and Mrs Khouzame for reasons that are obscure on the evidence. Although the same joint liability for unpaid instalments and interest under the identified rental agreement was alleged in the Local Court, the difference in the amounts of the two judgments is explained because judgment was first entered against Mr Khouzame on 27 November 2006, and judgment was then entered against Mrs Khouzame on 8 December 2006. No additional liability for interest is alleged in the petition beyond the amounts included in the original judgments. The two bankruptcy notices which were served on Mr and Mrs Khouzame relied upon those judgments also, and were therefore based upon the same alleged debts arising under the identified rental agreement.
The petition was returnable before a Registrar on 23 May 2007, where the applicants were represented by a solicitor. The petitions were adjourned by consent, without any reasons being noted by the Registrar.
On 12 June 2007, the Registrar’s notes indicate that the applicants were not represented, but attended in person. In each matter there are short minutes in the form which are commonly filled out in Court, signed by each of the applicants, and indicating the parties’ consent to an adjournment. However, I find that the short minutes probably did not show any adjournment date when they were signed by the applicants. It appears to me that the handwriting in the short minutes which inserted the adjournment date is that of the Registrar herself, when making the orders. I deduced that she inserted that date after identifying a suitable date for an adjournment.
The Registrar’s notes of what happened on 12 June 2007 are not entirely legible, and unfortunately the practice in the Registrar’s Court is for no transcript to be available. Her notes indicate that the applicants presented to her a statutory declaration which was marked for identification. It seems probable that this was the statutory declaration of the applicants’ son to which I shall refer below, and that it was presented in support of a contention that their purported signatures on the rental agreement were forged. This is confirmed by the Registrar’s notes, which suggest that the applicants informed her of this contention. The short minutes of orders made on 12 June 2007 confirm the applicants’ recollections that they were told by the Registrar to file and serve notices of opposition and affidavits in support by Friday 15th.
It is clear that the Registrar also adjourned the matter to the Registrar’s list on 19 June 2007. However, there is no evidence before me that any written confirmation of that adjournment date was ever given to the applicants, either by the Court itself or by the solicitor for the respondent petitioner. In the busy circumstances of the Registrar’s lists it is quite possible that the applicants might not have fully appreciated her oral orders.
On 15 June 2007, the applicants sent to the Court two affidavits which are in similar terms, and which attached documents giving substance to their ground of opposition to the petitions. In a joint affidavit sworn on 14 June 2007, the applicants attached the rental agreement relied upon by the respondent, and attached “documents to substantiate that the signatures at paragraph 2 are not ours”. These were copies of the signatures appearing on their driver’s licences and other similar modes of identification. The affidavit alleged that the signatures were visibly different. It continued:
7.The signatures at paragraph 2 has being forged by our son Chady was unknown to us until he declared it to us in his declaration marked on 22.5.07.
8.On 22.5.07 our son told us that he forge our signatures to obtain items mentioned at “B” equipments of the rental agreement to be placed at his shop “Beat city entertainment” within Westfield Parramatta. I have never use these equipment in my catering business. They were returned to the Leasing Centre.
Ultimately, a full copy of the rental agreement was tendered before me by the respondent, and the applicants tendered the originals of their identification cards. I am unaided by expert evidence led from either side in relation to the signatures on the rental agreement. However, it appears to me that there are some visible differences between the admitted signatures and the disputed signatures, and that the latter show some indications of a laboured writing manner. I consider that my comparison of the signatures lends some support to the applicants’ suggestion that they were not their signatures but were forged by someone else. However, I would not make a firm finding upon that fact, merely from inspecting the signatures.
Among the documents sent to the Court on 15 June 2007 by the applicants, was a statutory declaration by their son Chady. As I shall narrate below, ultimately the applicants did not rely upon that statutory declaration before me, nor upon any evidence led from their son. However, it was before the Registrar on 19 June 2007 when she made the sequestration orders, and I think that it did provide at that time prima facie corroborative evidence of their allegation of forgery by Chady.
On 19 June 2007, the Registrar’s notes of the proceedings indicate that there was no appearance by either of the applicants nor by a legal representative on their behalf. It is difficult to decipher the brief notes written by the Registrar, explaining her decision to proceed to make sequestration orders, but there is no other evidence before me as to what happened. Plainly, the solicitor for the respondent petitioner sought to proceed with the petition in their absence, and this was acceded to by the Registrar. According to her notes, she was satisfied they were on notice of the adjournment, and she gave no weight to the documents they had filed due to their unavailability for cross‑examination. She appears therefore to have discounted the material filed by them, and to have relied upon the formal affidavit verifying the debt.
There is no evidence before me that either the Court or the solicitor for the respondent petitioner considered whether it was possible that the applicants had misunderstood the date of the adjournment, and might have had reasonable explanations for being absent on that occasion. A deliberate absence in the circumstances narrated above might have appeared surprising, given their recently indicated desire to oppose the petition with material which appeared to present an arguable case.
In her sequestration orders, the Registrar appointed the same trustee in both estates, being a trustee nominated by the respondent petitioner.
A report by the trustee to this Court in the course of the present proceeding indicates that the trustee advised the bankrupts of his appointment, and presumably of the sequestration orders, by letter dated 21 June 2007. He records:
On 26 June 2007, Mr Khouzame called my office and advised that an appeal would be lodged regarding his and Mrs Khouzame’s bankrupt estates. Further, Mr Khouzame advised that subject to his appeal, the SOAs [Statement of Affairs] would not be lodged as he did not wish to disclose his and Mrs Khouzame’s financial position to the Trustee. My office advised that if an appeal is lodged, the SOAs are still required to be lodged within a prescribed period.
The trustee appears to have then proceeded with some inquiries and searches, notwithstanding his knowledge of the applicants’ intention to apply to set aside the sequestration orders. It is reasonable to assume that he had available to him from the petitioning creditor documents which would have shown to him the nature of their objection.
The applicants did file their applications to set aside sequestration orders on 2 July 2007. They did not file additional affidavits in support of their applications, but the application of Mrs Khouzame said:
On 12‑6‑07 I attended Court before Registrar, I was asked to lodge Affidavit by 1 pm on 15‑6‑07 which I did by fax. I received acknowledgement from the Court, no one asked to attend on 19‑6‑07 for hearing, that was done in my absence.
Mr Khouzame made similar statements in his application to set aside.
Although it was suggested to them in cross‑examination that they deliberately absented themselves from Court on 19 June 2007, I do not accept that they did so. I consider it highly improbable that they would not have appeared to oppose the petition if they had actually comprehended the adjournment date appointed by the Registrar on 12 June 2007. I make that finding particularly in the light of their active and very prompt resistance to the sequestration orders when they were brought to their attention by the trustee.
The application to set aside was returnable on 31 July 2007 in the Registrar’s list, and it was then referred to me for hearing that afternoon. The hearing commenced at 2 pm. The applicants and their son were present in Court without legal representation, and all of them showed a desire to give evidence and to be cross‑examined.
However, the contents of the son’s statutory declaration which was on the file as a foreshadowed piece of evidence, caused me serious concerns whether the son should receive independent legal advice in relation to his right to claim privilege on the ground of self‑incrimination before admitting to forgery of his parents’ signatures, and that he needed to be advised upon his right to apply for a certificate under s.128(5) of the Evidence Act 1995 (Cth). It is the Court’s duty under s.132 of the Evidence Act to “satisfy itself … that the witness or party is aware of the effect” of a provision entitling such an application. I endeavoured to explain the difficulty to the applicants and their son, but retained serious concerns whether they understood the situation. In the circumstances, I deferred receiving any evidence from the son on that day, and the hearing proceeded with the cross‑examination of Mr Khouzame.
Under cross‑examination, Mr Khouzame maintained the claims made in his affidavit and, in my opinion, was not shaken at all in relation to his claim that the signatures on the agreement were forgeries. Indeed, it appeared to me that cross‑examination to that effect was not seriously pressed, but rather sought to pursue an alternative basis for alleging a liability for a debt owed by Mr and Mrs Khouzame arising from his subsequent conduct.
As I understood Mr Khouzame’s evidence, and would find, he was not aware that such an agreement had purported to be entered into by him and his wife when it was executed by its purported signatories on 11 November 2005 and was accepted on behalf of the respondent petitioner to commence on 23 November 2005. It was not suggested to him, and nothing in his evidence suggests to me, that he had earlier given approval or authority to any person to insert the names of Mr and Mrs Khouzame as the “renters” under the agreement and to execute the agreement as an agent on their behalf. I accept his evidence that he became aware of its existence only after the agreement had been executed and had commenced. I accept that this happened at a time when his son’s business, a music shop at a Westfield shopping centre, was in financial difficulty, and when Mr Khouzame then started to receive communications from the respondent’s employees alleging that he had liabilities under the rental agreement.
The exact identity of the music shop and its proprietorship was not a matter that any party presented clear evidence about. Indeed, there was a notable absence from the respondent petitioner’s evidence of any evidence explaining the commercial background to the rental agreement, including the representations and negotiations that led to its making, how it came to be executed, the source of the supply of the goods, the location to which they were supplied, and the circumstances of their intended use. Nothing was put to the applicants to show that they were involved in those matters.
I accept Mr Khouzame’s evidence that his son suffered some sort of mental breakdown as well as a financial breakdown during 2006, that the shop closed, and that the contents of the shop were eventually stored in the family home or other premises owned by the family. I also accept, and he admitted, that Mr Khouzame received communications during 2006 which made demands on him to make payments under the rental agreement, and that he conducted discussions with employees of the respondent petitioner about this. Other similar discussions occurred with other members of his family, including a brother of Chady called Najee or Naji and a sister called Priscilla. I find that following these discussions some further payments were made to the respondent petitioner, and that the goods were eventually returned to an address in accordance with a request by the respondent petitioner. Many details of these events are, however, left obscure on the evidence.
The only part of any relevant written correspondence which is in evidence is a letter which was tendered by the applicants. This is from the respondent’s solicitor and is dated 18 September 2006, before the judgments in the Local Court and probably before that proceeding was commenced. It refers to a letter which had been sent to them by his client, and says:
We note in response to that letter you have advised us that you believe that the signatures appearing on the rental agreement are not those of yourself or Julie Khouzame but rather are forgeries.
The letter sought particulars of the allegation of forgery, and concluded:
Please also be aware that in either circumstance, whether the signatures on the agreement are a forgery or not, the goods the subject of the agreement are required to be returned to our client.
It directed an address and time for this to happen. There is no evidence of any earlier demand made on anyone for the return of goods the subject of the rental agreement. The evidence suggests that the goods were returned within a reasonable time after this demand.
Mr Khouzame’s evidence about his conducting negotiations in relation to the making of some payments under the rental agreement was not entirely consistent. I think that he, when giving evidence, suffered from uncertainty as to the extent to which references that he might make in his sworn evidence to his son’s forgeries might incriminate his son. However, I accept that a desire to obtain and consider the evidence of the respondent’s claims against him explains some of his conversations with its employees. The explanation for his discussions with employees of the respondent during 2006 which I consider is most probable, is that he became involved in the making of some payments and in the return of the goods in his capacity as a parent of a son in financial and mental difficulties. As I shall explain, I do not consider his involvement carried any admission or offer of personal liability intended to carry legal consequences, either under the written agreement itself or under any subsequent oral agreement.
Before reaching the above conclusions I have considered the submissions made by the solicitor for the respondent petitioner as to the unsatisfactory nature of much of the oral evidence of Mr Khouzame, and the possible significance of his failure to defend the proceedings in the Local Court. Mr Khouzame gave excitable responses to a cross‑examination which was, at times, not well conducted. I accept that at times Mr Khouzame contradicted himself, or evaded questions in relation to the content of communications with employees of the respondent petitioner. Overall, I considered that it would be unreliable to rely on his evidence alone, except to the extent that it was confirmed by other evidence, or appeared not to be contested by the respondent petitioner, or was consistent with “the apparent logic of events” (cf. Fox v Percy (2003) 214 CLR 118 at [31]).
At the end of Mr Khouzame’s cross‑examination, which occurred at 4.45 pm on the first day of the hearing, the applications were adjourned for further hearing two days later.
At the commencement of the adjourned hearing, the applicants indicated that they did not wish to present any evidence from their son. Mr Khouzame was recalled to address a document which the respondent petitioner tendered, being a direct debit request which the solicitor for the respondent petitioner said was found on the files of the respondent. It authorised the respondent creditor to debit from an account identified in a schedule. It is in the name of Lebanese Catering Service, but shows an address at a shop at Westfield Parramatta.
I accept Mr Khouzame’s evidence that this in fact is not an address where he conducts his own business, which he explained to the Court is a catering business for social functions. Prima facie the business which he described would not have needed a shop in a Westfield shopping centre, nor the shop equipment which was the subject of the rental agreement.
The direct debit form has two signatures purporting to be those of Mr and Mrs Khouzame and carries a date which is the same as the date on the rental agreement. There is a close similarity between the signatures on this document and those on the rental agreement. As were those signatures, they were similarly denied by Mr and Mrs Khouzame under oath before me. They claimed that the person that forged their names on the rental agreement also forged a direct debit request for the payment of the instalments. In my opinion, this is probably true.
The account to which the direct debit relates is a “Lebanese Catering Service No 2 Account” at Roselands, New South Wales. There is no evidence before me as to the signatories on that account, although Mr Khouzame appears to be the addressee of an account statement for a period preceding the entry of the rental agreement. There is no evidence led by the respondent petitioner, explaining how it received or dealt with the direct debit request, nor establishing the actual source or sources of the instalments recorded in its internal account which is in evidence before me.
Mr Khouzame said that this account was one to which his sons had access, and disclaimed knowledge of it as a source from which payments were made to the respondent petitioner. I have difficulty accepting his evidence in that respect. I think it likely that he did become aware that payments were being made from an account which he and other members of his family accessed. However, this does not necessarily imply that he himself had entered the rental agreement or ever incurred legal liabilities under it. As I shall explain, after considering all the evidence before me, I would not draw that inference.
Mrs Khouzame was called as a witness, and was cross‑examined on her signatures, which she denied. She also denied any involvement in the matter of the rental agreement at any stage, whether before it was made or subsequently. Nothing was put to her, and there is no evidence before me other than her two purported signatures, to contradict her evidence. I accept it as probably true.
As I have indicated, the respondent petitioner’s evidence to the Court was notably lacking in any witness employed by the respondent or otherwise involved in any of the negotiations or dealings with any members of the Khouzame family, either before the entry of the rental agreement or subsequent. The respondent petitioner essentially relied only upon the signatures on the two documents, without leading extrinsic evidence confirming their authorship. Its alternative case, as I shall explain, sought to establish a different source of contractual obligations on Mr and Mrs Khouzame, arising from Mr Khouzame’s dealings subsequent to its execution and completion on the part of the respondent petitioner. However, this case also was sought to be drawn by seeking admissions from Mr and Mrs Khouzame, and without the calling of any witness involved in the respondent’s business.
Very few documents from the file of the respondent petitioner were tendered in evidence. No documents relating to the making of the agreement were tendered, other than the agreement itself and the direct debit document to which I have referred. The one document upon which the respondent petitioner’s solicitor sought to build his case was a computer print‑out recording the subsequent history of the account opened in the name of the purported “customers” under the rental agreement, Mr and Mrs Khouzame. It records some instalments being made from late 2005, a dishonoured payment in March 2006, and then an erratic course of further payments and dishonouring through to the end of August 2006.
The print‑out also contains brief file notes, which purport to record actions taken by employees of the respondent petitioner in relation to this account. Entries from the commencement of the agreement until March 2006 reveal communications being conducted only with “Chady” concerning arrears and concerning direct debits apparently under the control of Chady. I find that this was Mr Khouzame’s son whom they allege forged his parent’s signatures on the agreement, and for whose benefit they suggest the goods, the subject of the agreement, were obtained for the use in his music shop.
The nature of the goods supports this, since they are electronic items, including computer equipment and Eftpos interfaces and a customer display, all relating to what seems to be referred to as a “systems store operations package”. The items obtained under the rental agreement would not seem to be items required by somebody who would not be operating a business from a shop in a Westfield shopping centre.
The respondent creditor’s own evidence, therefore, gives strong corroboration to the claims by Mr and Mrs Khouzame that the rental transaction was not negotiated by them nor obtained for their benefit, but was negotiated by and for the benefit of their son Chady. It also corroborates their claim that their son was the person with whom the respondent creditor dealt with in the initial months subsequent to the making of the agreement, and to whom it looked for payment. It therefore shows that he was probably responsible for presenting the executed lease agreement and the direct debit form. It therefore supports their claim that he forged their signatures to obtain the finance for these items of equipment to assist his shop.
In the light of my above conclusions on the evidence before me, in my opinion, the evidence clearly satisfies the Wren v Mahony test as to whether the Bankruptcy Court should look behind the judgment debt, and should also decline to accept the affidavit verifying the petition as to the existence of debt. I consider that the evidence gives clear substance to the claim by Mr and Mrs Khouzame that the rental agreement, which is the source of the debt relied upon in the petition, is a forgery and therefore a nullity incapable of giving rise to legal obligations on the purported signatories. I therefore decline to accept formal proof of this debt by way of the affidavit verifying the debt.
The possibility that I might arrive at this conclusion, which requires the respondent petitioner to establish actual proof of the debt relied upon, was suggested by me to the respondent’s solicitor at the commencement of the hearing on 31 July 2007. I therefore consider that the hearing proceeded on a clear basis that, in the event that I did not accept that there was no reason to go behind the judgment debt,
I would then proceed to make findings on the evidence presented during the course of the hearing as to whether in fact the debt alleged truly exists to support the making of a sequestration order (cf. Wolff v Donovan (supra) at 485‑487).
I have above summarised the evidence and made findings about its effect as it stood at the end of the hearing. I find on the balance of probabilities that the signatures on the rental agreement were forged by Mr and Mrs Khouzame’s son without their knowledge or authority, as they have alleged. The petition is therefore unable to be supported by reliance on the debt arising under the rental agreement described in paragraph 1 of either of the petitions.
That finding is probably sufficient to lead to the dismissal of the petition. However, the respondent’s solicitor presented an alternative case which implicitly sought to amend the petition so as to identify a different source of legal obligations on Mr and Mrs Khouzame to make the same payments as would have been required under the invalid rental agreement.
No contention of such obligations under principles of ratification or estoppel were made, and I can explain shortly why I consider that this was properly conceded.
The difficulties facing an argument of ratification of an agreement purportedly entered into by a forged signature were discussed by Gillard J in Rowe v B & R Nominees Pty Ltd [1964] VR 477 (“Rowe”) at 481 and following. He cites authority suggesting that a forged document is necessarily incapable of being ratified by the purported signatory. The logical difficulty is that principles of ratification require the agreement to have been entered into by an agent purporting to act as such, and a person who presents a forged document is not presenting himself as an agent of the signatory authorised to make the contract, but is presenting the document as independently operative by action of the purported signatory.
Moreover, in the present case, no evidence has been led, or can be pointed to, which establishes acts of ratification by Mr and Mrs Khouzame, even if the principle were capable of applying. To do this, it would be necessary to establish that the person sought to be bound had, at the time of the act of ratification, “full knowledge of all the material circumstances” in which the contract was originally made (see Taylor v Smith (1926) 38 CLR 48 at 54, 59 and 60). No attempt to lead evidence to this effect was made by the respondent petitioner.
In relation to principles of estoppel, it was not contended that the applicants were bound by the forged signature by reason of subsequent conduct on their part upon which the respondent had relied to its detriment. There would be difficulties facing such a contention both in identifying clear representations in words or conduct and, more significantly, in identifying any induced response on the part of the respondent petitioner amounting to detriment under principles of estoppel. In my opinion, it is plain from the computer print‑out of the respondent’s management of the account derived from the rental agreement, that at all times the respondent maintained the legal validity and effectiveness of the rental agreement on its face. By the date of any established involvement of Mr Khouzame in the account, the respondent had already performed all its obligations under the rental agreement, and there is no evidence that it undertook any additional obligations or detriments in reliance on any of his conduct.
In effect, the recorded actions of the respondent’s employees show no more than endeavours to extract money from any of the family members of Chady with whom they had contact, based upon an assertion of obligations arising under the original agreement. The evidence as to their communications with Chady, Mr and Mrs Khouzame and other members of his family, suggests that they never admitted nor accepted that the contract itself was invalid legally, nor suggested that there was a need for any further obligation to be entered into on the part of any of the members of that family. It does not establish that any leniency or variation or departure from the terms of the purported rental agreement was ever given on the part of the respondent, in reliance upon any promises or undertakings on the part of Mr or Mrs Khouzame. No conduct by Mr Khouzame has been shown to make it just that he should be held to all the obligations of the renter under the rental agreement, notwithstanding that he was not contractually bound to perform all those obligations.
This brings me to the basis upon which the claim of debt was sought to be argued by the respondent petitioner. In Rowe’s case (supra) Gillard J found a source of obligations on the person whose signature had been forged on a mortgage to become liable to the beneficiary of that mortgage. This was through a course of subsequent dealing, in which further instruments had been negotiated and executed by the purported mortgagor. The transactions which Gillard J addressed at page 485 were described as amounting to an “adoption” of the forged instrument. At 485, he said: “for Mr. Murray’s submission to succeed it must be shown that there was a new agreement between the plaintiff and the defendant which was enforceable in law …”. In effect, this approach would require me in this case to identify statements by Mr and Mrs Khouzame by which they offered, upon the giving of new consideration by the respondent, to incur the obligations on the renter which had previously been set out in the rental agreement carrying their forged signatures. It would also require me to identify statements or conduct by the respondent revealing an intention to enter a new contractual relationship with Mr and Mrs Khouzame.
The burden of proof of such an informal contract rests on the petitioning creditor in the present situation, and in my opinion the evidence led by it falls far short of establishing such a contract.
In effect, all that is relied upon is some notes of conversations in which the respondent sought to enforce the previous agreement against Mr Khouzame on the basis that it was legally binding upon him when it was made. They do not show its employees attempting to negotiate and arrive at a new agreement with the parents of Chady, arising from his presentation of forged documents. They do not show the incurring of legal obligations by Chady’s parents arising from those circumstances. In my opinion, they show no more than parents attempting to assist their son by making voluntary payments and attempting to assist the winding up of his affairs in relation to the forged rental agreement.
The solicitor for the respondent petitioner relied upon Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 (“Empirnall Holdings”). In that case, members of the Court of Appeal explored the circumstances in which acceptance of an offer of an agreement could be inferred from subsequent conduct between the negotiating parties, notwithstanding the fact that a proposed written contract was never executed.
The situation in the present case is manifestly different. I would not draw any of the inferences which the Court of Appeal is prepared to draw in Empirnall Holdings based on the evidence presented to me in this case. The communications recorded in the computer record of the respondent petitioner give no support for any contention that Mrs Khouzame intended or was understood to have incurred new legal obligations in the course of those communications. The evidence does not cause me to conclude, in the terms of McHugh J in Empirnall Holdings at 535, that: “a reasonable bystander would regard the conduct of the offeree, including his silence, as signalling to the offeror that his offer has been accepted”.
In fact, in this case there is no evidence of any offer of a new contract by the respondent to Mr Khouzame or Mrs Khouzame or to them jointly, which they were invited to accept. There is no evidence of any intention by the respondent to enter into a new contract. All the evidence is that they were insisting upon the enforcement of an invalid and forged contract. I therefore do not accept the alternative basis upon which a debt in support of the petition was put to the Court.
I therefore uphold the notice of opposition to the petition which was filed, and which was before the Registrar at the time the sequestration order was made in relation to both Mr and Mrs Khouzame. I find that the petitioner has not established the debt relied upon in the petition, nor any other debt which could be relied upon by amendment to the petition. The sequestration orders should therefore not have been made.
Upon that finding, I must decide whether to set aside the sequestration order in exercise of my powers on review of an order of a Registrar, or to exercise alternative powers under s.153B of the Bankruptcy Act to annul the sequestration order on the basis that it ought not to have been made (see Pattison v Hadjimouratis [2006] FCAFC 153 (“Pattison”)). The effect of the former order, if made unconditionally, would discharge the applicants’ estates from any monetary obligations in relation to the trustee’s period of administration, and the latter order would leave their estates liable for the trustee’s expenses under s.154.
The judgments of the majority in Pattison (supra) indicate that all the circumstances in which the sequestration order came to be made, and in which the application to set aside was made, should be considered, as well as the nature of the grounds of opposition which have been upheld. They also indicate that the Court should consider the justice of requiring the persons who were incorrectly made bankrupt to pay the expenses of the trustee or whether the trustee should be left to look to some other source.
In the present case I have given careful consideration to the relevant principles and all the circumstances of the matter. I have arrived at a firm conclusion that the interests of justice in this case require that the sequestration order should be set aside unconditionally. I do not think that Mr and Mrs Khouzame should have been made bankrupt on 19 June 2007. I accept that this conclusion uses hindsight assisted by the evidence that has been presented to me in the current applications. However, the ground of opposition which I have accepted, and the gist of the evidence in support, was also before the Registrar. Since I consider that the applicants are blameless for the proceedings being conducted in their absence on 19 June 2007, I can see no proper reason why they should be made liable for the costs of the administration conducted by the trustee in this case. The trustee was put on notice very soon after his appointment that the present challenge was being brought, and it appears to me that most of his expenses were incurred on the risk that it might succeed. I therefore propose to allow the application for review and to dismiss the petition.
[Further submissions recorded but not transcribed]
Both parties in these proceedings have sought costs. The respondent/petitioning creditor seeks costs both of the petition and of the review application. It does so, not on the basis that there has been any unreasonable failure to settle a disputed debt, but that the applicants should have contested their liability under the rental agreement by way of defence in the Local Court, and should not have left their defence until they were brought into the Bankruptcy Court.
It was submitted that they had “chosen not to” defend the matter in the Local Court, either prior to the entry of the default judgment or by application to set aside and further contest the matter in that Court. This conduct should provide an exception to the normal rule that costs should follow the event.
There is some substance to the complaint that the applicants were very slow to pursue their challenge to the rental agreement. However, at the end of the day, the petitioning creditor’s allegation of a debt has been rejected by me in the Bankruptcy Court upon a notice of opposition which the respondent has chosen to contest. The Khouzame’s contention of forgery may never have been properly raised in the litigation until the present proceedings, but it was open to the petitioning creditor to review at every stage in its litigation the enforceability of the rental agreement, and presumably it has done so from at least the middle of 2006 when the allegation of forgery was raised with it.
By leaving the matter until the Bankruptcy Court, Mr and Mrs Khouzame have made their task much more difficult, since they have had to overcome the Wren v Mahony hurdle, and have had other impediments as a result of their unwise decision to delay presenting their legal defences. However, they had a right to raise the points they have raised in the Bankruptcy Court. They have entirely succeeded. The points on which they succeeded were well known to the respondent creditor even before the bankruptcy proceedings were commenced, and in my opinion costs should follow the event in this case.
I propose therefore to order the respondent petitioner to pay such legal expenses of the applicants as may be admissible on taxation. I refuse the respondent’s application for costs.
I certify that the preceding sixty‑five (65) paragraphs are a true copy of the reasons for judgment of Smith FM
Associate: Lilian Khaw
Date: 22 August 2007
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