Morris, T.C. v Wardley Australia Property Management Ltd

[1993] FCA 939

939   , 9 3

JUDGMENT No. ........ ........ .. ........ ....

IN THE FEDERAL COURT OF AUSTRALIA )

EANKRUPTCY DISTRICT	1	No. NP 1267 of 1993
OF THE STATE OF NEW SOUTH WALES	1

Between: THEODORE CONSTANTINE MORRIS and

DIANE RACHEL MORRIS

Debtors

RECEIVED	And: WARDLEY AUSTRALIA PROPERTY
17 DEC 1993	MANAGEMENT LIMITED
FEDERAL COURT OF	Creditor

AUSTRALIA

PRINCIPAL REGISTRY

EX TEMPORE JUDGMENT

EINFELD J SYDNEY 24 NOVEMBER 1993

These are two petitions for sequestration of the respective debtors' estates which are opposed by the debtors on the ground that there is in neither case a real debt to found the petition. The ground is sometimes described in terms that there is not in truth and reality a debt upon which sequestration can be pronounced. The debtors also argue that due to a miscarriage of justice or other sufficient cause a sequestration order ought not to be pronounced by reason of the provisions of section 52(2) of the Bankruptcy Act.

The matter commenced with proceedings against the debtors by summons on 12 November 1991 in the Supreme Court of New South Wales, Commercial Division, seeking an order that the creditor be paid a sum in excess of $70 million under the terms of an	summons was made returnable on 29 November and defences were	indemnity agreement or guarantee dated 28 December 1988. The
filed on 11 December. On 13 December Justice Brownie in the Supreme Court granted leave to the creditor to file amended summonses, and these were filed on 13 December 1991.
When no defences were filed to the amended summonses, the creditor then moved for summary judgment on 7 February 1992 and the application in each case was fixed for hearing on 2 March.
A few days prior to the hearing, the creditor filed a reply in
which it claimed to rely upon the terms of a deed of settlement dated August 1990 which was executed by the debtors. It is not entirely clear what this document was in the sense that there being no defences to the amended summonses there was arguably nothing to reply to. However, whether it be treated as a reply or an amendment to the summonses so as to provide another basis on which the creditor could succeed is not necessary to be determined. It will suffice to say that the contents of the reply were before the Supreme Court at the hearing of the applications for summary judgment.
hearing in the Supreme Court. Notwithstanding what he says and The debtors changed their solicitors a few days prior to the
I accept were strenuous efforts to prepare himself for the hearing, the new solicitor for the debtors was forced to apply at the hearing for an adjournment to enable him to have further time and for an amendment to his clientsr defences. The application to amend the defences had as its principal substance
a desire to raise a defence based upon the New South Wales
Contracts Review Act. It was also sought to file a cross-claim. Moreover, the debtors sought to challenge the efficacy of the deed of settlement which had been the subject of the so-called reply.
The matter was heard before Rogers J, then Chief Judge of the Commercial Division of the Supreme Court. He refused the adjournment application and the application to amend the defences, and proceeded with the hearing. On 4 March judgment was pronounced in favour of the creditor for some $72.5 million plus interest and costs. On 17 March 1992 bankruptcy notices were issued, and on 31 March appeals were lodged against Chief Judge Rogers' decisions to the Court of Appeal. The grounds of appeal were that his Honour had erred in his discretionary refusal of the application for an adjournment and in the various findings of law and fact which had been made in his judgment. Although not expressly mentioned in the notice of appeal, one of the matters brought to the attention of the Court of Appeal was the refusal by his Honour to permit the filing of the amended defences so that the debtors could rely upon the Contracts Review
Act.
At the trial before Rogers J there was a dispute between the parties concerning one or more conversations between an officer of the creditor and the debtors concerning the guarantee. The debtors alleged that they were told by this officer, Leslie John Plever, that the guarantee was an internal formality and that it or they would not be called upon. Accordingly, when the matter was taken to the Court of Appeal, the debtors as appellants attacked the judgment as failing to hold that the debtors believed or were entitled to assume that the creditor would not rely upon and enforce its guarantee or was unlikely to do so. Estoppel, presumably an estoppel by the conduct of Mr Plever, was also relied upon.
In the Court of Appeal the decision of Rogers J was upheld by majority. The principal judgment was given by Meagher JA -- with whom Mahoney JA agreed -- whose opinion was that the Contracts Review Act defence was, as his Honour described it, "hardly credible on the face of it". However, his Honour was of the opinion that the decision of Rogers J to prefer the evidence of Mr Plever to that of the debtors on the question of whether an assertion was ever made that reliance on the guarantee was unlikely finally disposed of this issue. Meagher JA said:

Thus , c o n f r o n t e d f a i r l y and s q u a r e l y w i t h the f i n d i n g

o f f a c t b a s e d on c r e d i b i l i t y , c o u n s e l for the

a p p e l l a n t	was	u n a b l e ,	d e s p i t e h is	c o n s i d e r a b l e	sk i l l ,
t o s h a k e h i s Honour 's	f i n d i n g and	the	appeal	on	the

s u b s t a n t i v e p o i n t m u s t therefore be d i s m i s s e d .

Meagher JA went on: 

I t was p e r h a p s b e c a u s e o f the weakness o f the

a p p e l l a n t ' s c a s e on the main p o i n t t h a t m o s t o f the

argument on the appeal was d i v e r t e d t o the q u e s t i o n o f

w h e t h e r h is Honour was correct i n r e f u s i n g the

adjournment wh ich the a p p e l l a n t s o u g h t a t the

commencement o f the h e a r i n g be low .

Although Kirby P, the President of the Court of Appeal, dissented in relation to the final result of the appeal, it seems from a close reading of his Honour's judgment that he did not disagree with the assessment of Meagher JA on this matter. In any event Mahoney JA certainly agreed with it.

The consequence of this finding and decision is that even had the Contracts Review Act defence been permitted by Rogers J to be filed, it would certainly have failed. So much, as is demonstrated by the part of Meagher JA's judgment which I have quoted, appears to have been conceded by counsel for the appellants, the present debtors, before the Court of Appeal. Indeed, were that not the case and were that not the determination of the Court of Appeal as apparently so conceded, the decision of the Court of Appeal could not possibly have gone the way it did.

An application for special leave to appeal against the decision

of the Court of Appeal was made to the High Court on 7 January

1993 but was refused on 9 August 1993. It is clear from the

transcript of the hearing before the High Court that their

were seeking to make but understandably they regarded the	Honours were acutely conscious of the point which the debtors	application as trifling with the High Court and as having not the slightest merit.
An application to set aside the bankruptcy notice was dismissed
on 25 August 1992 and an appeal against that dismissal was dismissed with costs on 12 February 1993. Time for compliance with the bankruptcy notices was successively extended up to 5 April 1993. It was necessary to obtain orders for substituted
service both of the bankruptcy notices and of the petitions but in due course the petitions which were filed on 19 April 1993 were brought on for hearing on 17 August 1993. When they came before Justice Hill on that date, his Honour was informed that the debtors wished to, as it is called, "go behind the judgment" and a timetable for the filing of evidence was set. The affidavits of the debtors were to be filed and served by 26 August 1993. Further directions for the filing of evidence were given on 13 September but, in fact, nothing has emerged to indicate the basis upon which the debtors seek to go behind the judgment.
The first submission made on behalf of the debtors is that the Court determine, as what is described as 'a preliminary question', whether to go behind the judgment debts upon which the petitions are founded in order to determine whether in truth and reality they are debts for the purposes of section 52 of the Bankruptcy Act. Accordingly, the hearing of the petitions are
determined. The scheme envisaged by the debtors is that in the sought to be adjourned until this preliminary matter was
event that this application is granted, namely that the Court agree to determine as a preliminary question the matter referred to, there would then be a hearing as to whether there was in each case a real debt upon which sequestration could be granted. In the case of the male debtor, this application was raised in submissions for the first time on 10 September. In the case of

the female debtor, it has been first raised by a formal
application which was filed in Court yesterday.

The law in relation to going behind the judgment is by now well known and requires no repetition. It is argued in this particular case that a court would more readily go behind the judgment where the judgment was not the result of what was described by Fullagar J in cornev v Brien 1951 84 CLR 343 at 356-

7 as "a full investigation" of the issues raised. The debtors

say that Rogers J's refusal to permit them to amend their defences to rely upon the Contracts Review Act prevented a full investigation of the petitioning creditor's claim and therefore presents a case in which the Court would easily go behind the judgment without requiring the establishment of anything in the nature of a prima facie case or a miscarriage of justice. The rejection of the appeals to the Court of Appeal and the High Court are said by the debtors to add nothing to the problems for this argument.

accept the proposition that the request to go behind the judgment	In my opinion there is no justification at all for the Court to
be determined as a preliminary question. There are not two questions to be determined. There is only one. A bankruptcy court must in every case be satisfied that there is a true debt of the kind defined and required by the Bankruptcy Act before pronouncing a sequestration order. In an appropriate case the debt alleged by the petitioning creditor may be examined to ascertain whether it is, as the saying goes, in truth and reality a real debt. But there is no preliminary question to be determined in that context. Even if there were, no argument has been advanced as to why the matter would be divided in the way suggested and I would not favour that course. Indeed, having regard to the background of this matter, the suggestion that there is a preliminary question and that it should be given a separate hearing strikes me more as a means to delay sequestration without substantive merit than anything else.
What arises for determination on the question as to whether the Court would go behind this judgment debt is whether there is anything at all to argue that there is no real debt. Rogers J certainly found a debt and no defence to it. The Court of Appeal refused to overturn the finding, and even in the case of President Kirby in dissent, there was no suggestion that there was lurking somewhere in the papers or evidence a real defence on the merits to the claim that might if litigated have a chance of success. Kirby P's disagreement with the majority was on a discrete sociological question as to whether Rogers J had given
Mrs Morris adequate separate attention to her husband. For its part, the High Court was less than impressed, to say the least,
with the suggestion that there had been any error of principle either by the trial judge or by the Court of Appeal.
Yet the debtors maintain here that a procedure should be followed and findings should be made that would establish, notwithstanding the decisions of seven other judges, that there is somewhere such a defence on the merits as would cause either the adjournment of the petitions or their dismissal. For myself nothing evidenced in the proceedings makes out any such proposition. I decline the application that the question as to whether to go behind the judgment be determined as a preliminary question. I also decline the application for a declaration that there is no debt or for orders that would enable the existence of a debt to be determined.
There is in this regard quite a special additional conundrum. The Contracts Review Act (NSW) provides for a hearing and determination by the Supreme Court or the District Court. This Court is given no jurisdiction to determine the existence or otherwise of a defence based on that Act except perhaps by cross vesting which has not occurred. Hence, although the matter has not been spelt out, some procedure is inherent in the debtors' present applications to this Court that the creditor's petition be delayed, for this Court to direct, presumably request, the Supreme Court or District Court to hold some form of hearing to determine whether a defence is available to the debtors under
a hearing. that Act. I know of no power or procedure to bring about such
Moreover, the Court of Appeal and the High Court have both held, as did Rogers J, that there is no defence available under the Contracts Review Act. As a necessary consequence of Rogers J's finding that the evidence of Mr Plever was to be preferred to that of the debtors, it is impossible to suggest that the defence could have succeeded even if it had been permitted to be filed.

- l0 -

This was not only pointed out by Meagher JA in his judgment in the Court of Appeal, but his Honour noted that the point was apparently accepted by counsel for the appellants at the hearing in that Court.

The second basig upon which the debtors seek to avoid sequestration is by energising section 5 2 ( 2 ) of the Bankruptcy Act. They ask that I decline to make a sequestration order on the grounds of miscarriage of justice or other sufficient cause under that subsection. To all intents and purposes they rely upon the same arguments as on the first limb of the argument. It is said that Rogers J should not have refused the adjournment application and should have permitted the debtors to amend their defences. By not doing so, he deprived them of a reasonable opportunity to adduce evidence in support of their allegations as set out in the proposed amended defences and failed to allow them a reasonable opportunity of presenting their defences on the deed of settlement.

None of those arguments can succeed. The High Court examined,	as reasonably closely as an application for special leave can
ever do, the issue of whether there was a substantial miscarriage of justice in this case. It seems clear that if their Honours had been impressed by the existence of such a miscarriage, they would have intervened in the matter. In the same way the Court of Appeal, pointing out that an application for adjournment is the quintessential discretionary exercise, was quite unable to find and remained unpersuaded that Rogers J had made any error of principle in his refusal of the adjournment.
Just as in those Courts, it is perfectly clear that if there appeared at any time to be a defence on the merits available to the debtors which had not been litigated up to the present time, a strong case would exist for the Court to find the procedure which would permit that case to be heard and determined. Nothing has been presented to establish that such a case exists. Indeed, even at this very moment, notwithstanding earnest argument on the part of the debtor's solicitor here, I do not know what the substantive matters are which the debtors wish to argue to support of their proposition that there is in truth and reality no debt such as to found a sequestration order. It is simply not possible to go on litigating the same matter in one court after another without giving a specific indication of what evidence exists to support the contentions presented by the debtors that have not already been agitated and determined in other proceedings. Were the debtors' argument to be accepted here, the
whole matter which was resolved by the Court of Appeal and the High Court would be re-opened without anyone knowing what
additional matters the debtors wished to put that were not put there. Such a result would be unthinkable.
The final aspect of this litigation concerns the debtors' allegation that they have a counter-claim against the petitioning creditor. The evidence before this Court relevant to this alleged counter-claim consists of nothing more than assertions unsupported by evidence. A draft of a counter-claim has been annexed to one of the affidavits filed in these proceedings but there is no way of my being able to judge whether there exists any evidence to support this counter-claim. Even if there were, all one can say is that it has always been open to the debtors to bring proceedings against the petitioning creditor in respect of the allegations made in this claim. It is possible, having regard to my understanding of what it says, that they may now be estopped from doing so, but that has not been the case for a large amount of the time since the subject matter of the claim is first said to have arisen. For example, when the extensions of time to comply with the bankruptcy notice were sought, it would have been open to the debtors to rely upon this counter claim. Yet no such application was made and the failure to do so has not been explained.
Although an adjournment has not, in express terms, actually been sought on this ground, in theory the proposed counter claim could provide grounds for an adjournment of the petition with a view
to enabling the debtors to commence and prosecute the claim, but it cannot provide any substantive grounds for an order dismissing
the petition. Having regard to the delays that have occurred to date, to the unexplained failure to commence proceedings, and to the failure to call any evidence at this hearing to permit a conclusion to be drawn that the counter claim had real substance, I cannot see any basis for the grant of an adjournment either. The solicitor for the debtors explained frankly and powerfully, as is his commendable custom, that the reason why the claim was not commenced at an earlier time was to conserve costs and that his clients have difficulty in funding the existing litigation without the problem of commencing any additional litigation. Naturally the Court is sympathetic to this type of situation, but it is hardly an answer in the present context. If the petition were adjourned, or even dismissed, on the grounds that a counter claim existed, the counter claim would have to be pursued in order to avoid bankruptcy. Hence the costs which it is desired to avoid would of necessity have to be incurred. Not only has no explanation has been given as to why this would now be possible but has not been possible in the past, it has positively been asserted that the debtors do not have the funds to pursue it.
For my part, I can see no substantive basis for believing that there is a counter claim which has such reasonable chances of success as to impede or destroy the creditor's right to seek a
dismissal or adjournment of the petition under section 5 2 ( 2 ) is sequestration order. For those reasons the application for a
refused.
The debtors finally challenge the petition on the grounds that the person who signed it, M r Bruce William Strang, said to be the duly authorised agent of the petitioning creditor, did not in fact have authority to sign the petition. The argument is in brief that Mr Strang could only have been authorised to sign the petition on the evidence if he was a director of the petitioning creditor at the time. In order to be a director of the petitioning creditor, it was necessary to have a share qualification as defined by Wardley's Articles of Association. The allegation is that he did not have a share qualification at the time of his appointment as a director on 18 July 1989 and that by operation of section 222 of the then New South Wales Companies Code, his office as a director was vacated and had not been corrected or resurrected on 11 February 1993 when he signed the petition against M r Morris, and on 19 April 1993 when he signed the petition against Mrs Morris. The argument is advanced that the purported ratification of Mr Strangts signature by a deed of 9 July 1993 whereby Wardleys acknowledged, confirmed and ratified his signature of the petitions, does not cure this defect as the petition was not signed by a duly authorised person on behalf of the petitioning creditor at the time when it was signed.
It is submitted that a defect of this kind is not formal within
the meaning of section 306 and that non-compliance with section 308 at the time of issue renders the petition invalid in a way
that cannot be retrospectively reinstated or validated. As I read the decision in Re Manias Ex Darte Edsill Ptv Limited,
[l9861 15 FCR 1 at 3, this submission must be rejected. The
argument that that decision is distinguishable on the facts is, in my opinion, not correct. The alternative argument that it ought not to be followed is not supported by any particular reason for its rejection. It seems to me that the decision is much more likely to be correct than incorrect.
The purpose of the Court requiring evidence of a creditor's authority to sign on its behalf a creditor's petition is based upon the simple principle that where the petition is not signed by the creditor directly the Court must be satisfied that it expresses the will and intent of the creditor. In other words, it must in truth be the creditor's petition and not someone else's petition. It is the creditor's debt which the petition seeks to rely upon in its quest for a sequestration order. It is the creditor who must assert and prove the debt and make the application to the Court for the sequestration order that it seeks. The evidence in this case leaves me in no doubt that the petitioning creditor has clearly stated that Mr Strang's signatures on the petitions were and are to be treated as having been affixed with the authority, knowledge and at the request of the petitioning creditor. The evidence is clear that the petitions are the emanations of the petitioning creditor. I
reject therefore the challenge to the authority of Mr Strang to sign the petitions.
In each case I am satisfied that the act of bankruptcy as alleged in the petition has been committed and with the other matters of which section 52(1) requires proof. In each case I pronounce a sequestration order against the estate of the debtor and order that the debtor pay the creditor's costs including any reserved costs. I appoint Mr Max Donnelly to be trustee of each of the estates. I order that a draft of these orders be presented to the registrar within seven days in accordance with rule 124(1).
[Af ter argument]
The debtors seek a stay of the sequestration orders to permit
them t9 consider the judgment just given, no doubt with a view
to app aling against it. There can be no doubt that they have

7

the r ght to appeal against the pronouncement of the

sequestration orders. The question for determination is whether f

they should be permitted to do so whilst not under the threat that the sequestration orders have taken effect, and the trustee has commenced his statutory obligations.

The judgment of Rogers J, to which I referred in the judgment, and the facts outlined in my own judgment, indicate that this matter has a long history. The guarantee which forms the basis of the dispute was dated 28 December 1988. The litigation commenced with the filing of the summons in the Supreme Court in

determination by the debtors to take every point conceivably	November 1991. The history of the matter demonstrates a
available to them to resist both liability for the debt and its consequences. Obviously, bankruptcy is a very serious matter, and in general terms no-one can be criticised for attempting to pursue all available legal rights as would permit them to avoid bankruptcy. The question in each case, where a discretion of the kind required in relation to applications for stays is sought to be activated, is whether the steps taken have been reasonable, and the delays justified by the facts.
I pointed out in the course of the judgment the difficulties
facing the debtors in this regard. The issues raised in these proceedings have, in substance, re-litigated issues determined in the Supreme Court at first instance and on appeal, and the High Court. Indeed, the comment of Meagher JA in the Court of Appeal that counsel for the debtors there recognised the impossibility of his argument based upon the amended defences in the face of Rogers J's findings on credibility, seems to me to highlight this issue dramatically. The High Court's attitude to the application for special leave reinforces that situation. The debtors have had much more than what is traditionally called "their day in court". So far as I can see, they have had a large number of days in court and have yet to succeed in any one matter raised for determination. In all the proceedings up to and including today's, the only matter that could now even be subjected to any form of reasonably available argument on appeal
petition, a discrete and somewhat esoteric legal issue on which is the point concerning the authority of Mr Strang to sign the
minds could conceivably differ. As for the rest of the matter, it is inconceivable to me that a Full Court could uphold the other arguments advanced for a delay or dismissal of the creditor's petitions.
If there is an appeal and it should be successful for some reason, the debtors will be able to seek an annulment of the sequestration orders. In the special circumstances of this particular case, that seems to me to be a preferable way to correct any errors that may have accumulated in their treatment by the courts, including by this Court on these creditor's petitions.
A stay of the sequestration orders amounting to a further
adjournment of the enforcement proceedings on the debt, first drawn to the attention of any court two years ago, would open the legal system to still further criticism that it is unable to provide effective, efficient and prompt determination of issues. In the nature of things, any appeals filed from the sequestration orders will not be disposed of for some months. I can see no justification for delaying the sequestration orders for such a long period of time when the debt on which the petitions were issued is of such a large sum and no evidence has yet been presented to any court suggestive that at the end of the day that debt will be found either not to exist or not to be enforceable. For those reasons I refuse the applications for stays.

I certlfy that thls and the s e v ~ w

f preceding pages are a true copy of the

Reasons for

Justlce E~nfeld

Dated: 13 I ~ Q il