NAND v Official Trustee in Bankruptcy - [2005] FMCA 789

FEDERAL MAGISTRATES COURT OF AUSTRALIA

NAND v OFFICIAL TRUSTEE IN BANKRUPTCY

[2005] FMCA 789

BANKRUPTCY – Application to review acceptance of petitioning creditor’s proof of debt by bankrupt – whether court should go behind judgment on which petitioner relied – whether bankrupt has made out a prima facie case of miscarriage of justice.

Bankruptcy Act 1966, s.104

Re Hawkins; Ex parte Troup [1895] 1QB 404
Wren v Mahony [1971–1972] 176 CLR 212
Corney v Brien (1951) 84 CLR 343
Tanning Research Laboratories Inc. v O’Brien (1990) 169 CLR 332
Commonwealth Bank of Australia v Jeans [2005] FCA 569

Applicant:

DAVENDRA NAND

Respondent:

OFFICIAL TRUSTEE IN BANKRUPTCY

File Number:

SYG836 of 2005

Judgment of:

Raphael FM

Hearing date:

6 June 2005

Date of Last Submission:

6 June 2005

Delivered at:

Sydney

Delivered on:

10 June 2005

REPRESENTATION

Counsel for the Applicant:

Mr M Rollinson

Solicitors for the Applicant:

Ramrakha Jenkins Solicitors

Solicitors for the Respondent:

Sally Nash & Co

Solicitor for the Petitioning
Creditor:

Mr Mitchelmore

ORDERS

Application dismissed.
Applicant debtor pay the costs of the Official Trustee and of the petitioning creditor, such costs to be taxed if not agreed pursuant to the Federal Court Act and Rules

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG836 of 2005

DAVENDRA NAND

Applicant

And

OFFICIAL TRUSTEE IN BANKRUPTCY

Respondent

REASONS FOR JUDGMENT

This is an application under s.104 of the Bankruptcy Act 1966 (Cth) (the “Act”) for review of a decision by the Official Trustee admitting a Proof of Debt submitted by the petitioning creditor in the sum of $99,764.00. Although the proceedings were initially brought against the Official Trustee in Bankruptcy at the hearing I allowed Mr Mitchelmore to represent the petitioning creditor.
It is the applicant bankrupt’s case that I should go behind the judgment upon which the proof of debt is founded and which was used to support the bankruptcy notice and then the petition and hold that there is in reality no debt due by the applicant to the petitioning creditor.

History

In 1998 and 1999 the debtor and the creditor were both working for the State Transit Authority at its Ryde depot. The debtor had previously borrowed some money from the creditor and had repaid it. Between 1998 and 1999 the creditor advanced approximately $63,389.00 to the debtor or to his order. The creditor argues that this money represented loans, some of which were of a personal nature and some of which were related to a business enterprise being conducted by the debtor whereby he brought into Australia a highly regarded Punjabi singer known as Hans Raj. Much of the money that was paid over was paid into an account of a business enterprise of which the debtor was a proprietor known as Sargam Entertainers. It is the debtor’s case that all the money was advanced for this purpose pursuant to an oral partnership or join venture arrangement whereby the creditor would put up the money and the debtor would use his expertise to find the talent, book the venues, arrange for the transportation of the talent, printing of programs and posters and publicity and otherwise make all necessary arrangements for a successful tour. The profits of the tour were to be split 50/50.
It is not in dispute that none of the money paid by the creditor to the debtor was repaid.
On 24 June 2002 the creditor commenced proceedings in the District Court of New South Wales under Matter No 5442 of 2002 seeking payment of $68,389.00 being money advanced by the plaintiff on behalf of the defendant. On 1 August 2002 the debtor filed a defence in the following form:
“1. The defendant denies that he is indebted to the plaintiff for the amount claimed or at all.
2. The defendant denies that the plaintiff paid to him the sums of moneys claimed.
3. The defendant asserts any moneys allegedly paid by the plaintiff or paid pursuant to an oral agreement made between the parties in or about July 1999.”
On 26 November 2002 the creditor sent a notice for discovery to the debtor. The debtor was represented by a firm of solicitors Harish Prasad & Associates. Several letters were written to that firm by the creditor’s solicitors requesting compliance with the notice for discovery. It was not complied with. On 6 February 2003 the creditor issued a notice of motion returnable on 21 March 2003 that the defendant’s defence be struck out and that the plaintiff have leave to enter judgment against the defendant for the amount claimed. The affidavit in support of that notice of motion relied on the non-compliance with the request for discovery and non response to a request for further and better and better particulars of the defence.
On 18 March 2003 the debtor filed his own notice of motion seeking that the proceedings brought against him be dismissed. That notice of motion was supported by an affidavit by the solicitor for the debtor in which he stated:
“The Plaintiff’s affidavit filed in these proceedings refers to an agreement (‘the agreement’) between the parties pursuant to which the Plaintiff would provide moneys for a certain business enterprise. The terms of the agreement pursuant to the Plaintiff’s filed evidence are stated to be ‘half and half.’
The Statement of Liquidated Claim alleges that the moneys advanced by the Plaintiff are owing to the Plaintiff as a debt.
I request this honourable Court to strike out the Amended Statement of Claim or dismiss the proceedings on the basis that having regard to the Plaintiff’s filed evidence, the Plaintiff’s claim has no prospects of success.”
That notice of motion came before Her Honour Balla DCJ on 11 April 2003 when the creditor was represented by Mr Mitchelmore and the debtor by Counsel Ms N Obrart. The note of the result or orders made on the District Court file is as follows:
“D’s Notice of Motion – refuse to make orders sought.
P’s Notice of Motion – D to comply with order for discovery by 4p.m. Tuesday 15.4.03.
Listed D/H before me 9.30 16.4.03. Listing can be vacated by parties if discovery completed. If D fails to comply with order required to show cause as to why defence should not be struck out. Show cause notice given to D.
D to pay P’s costs on both motions.
Arb 23/4/03 confirmed.”
On 16 April 2003 again in the presence of Mr Mitchelmore and Ms Obrart Her Honour made the following orders:
“1.Defence struck out pursuant to Part 18 Rule 3 (Failure to comply with orders for discovery).
2.Confirm arbitration on 23 April 2003.
3.Defendant to pay plaintiff’s costs of today.”
On 18 March 2003 the debtor had filed an amended defence. This is in exactly the same form as the previous defence recited in these reasons save that paragraph 3 which alluded to the agreement between the parties for a joint venture or partnership no longer appeared. On 15 April 2003 the debtor filed an affidavit for the purposes of resisting the orders that were made by Balla DCJ the next day. In the short affidavit he states that he telephoned his accountant and requested him to provide the accounts for the concert by Hans Raj. He stated in the affidavit that he was told that the accountant was away but that he intended to telephone him the day after the hearing. No accounts were filed before Balla DCJ and no discovery was ever given.
The proceedings were set down for arbitration on 23 April 2003. On that day the applicant was represented. Because the defence had been struck out the plaintiff was only required to prove his case and the quantum of his loss. The matter did not commence until late in the afternoon. The defendant was not present. The matter was adjourned part heard until July. The debtor had been having problems paying his solicitors. They were reluctant to continue to represent him as was his barrister. Copies of letters between the debtor and his solicitors are annexed to an affidavit sworn by him in these proceedings. The applicant stated that he had agreed with the barrister that he would pay her $2,000.00 on the first day of the hearing in April. He says that he attended the court with $2,000.00 in cash on him but he never saw Ms Obrart. On the day of the hearing Ms Obrart wrote to Mr Harish:
“Despite the fact that my accounts have not yet been paid and despite my correspondence indicating that I would not appear at the hearing today unless $2,000.00 was paid to you yesterday in relation to my accounts to avoid prejudice to the client’s matter I appeared at the arbitration this morning.
I applied for an adjournment on the basis that the client has not yet obtained documents and on the basis of the cross claim [an intimated cross claim against the debtor’s partner in the Sargam Entertainers business]. The adjournment application which was heard by Judge Bowden was refused.
The arbitration list clerk also informed me that the arbitration fee of $260.00 has not been paid by the defendant and the matter cannot be heard without that fee being paid.
The matter is last in the arbitration list so I am in my chambers and the arbitration list clerk will call me when the matter is ready to be heard.
The plaintiff indicated that since there is no defence on that it will move for judgment at the arbitration.
The plaintiff also indicated it did not require the defendant for cross examination.”
On 15 May 2003 Ms Obrart wrote again to Mr Prasad, the relevant parts of which are as follows:
“I again request that my outstanding account be paid. I enclose copies of my three previously rendered fee notes and my latest fee note. … I require at least substantial payment of this amount by 3 June 2003 and the balance shortly thereafter. If my account is not paid up to date by the arbitration I will not appear on that date. … Further, at present we are still in default of an order for discovery and on that basis I am unable to apply for leave to file our amended defence as it was struck out for failing to comply with an order for discovery. I again repeat that not having a defence for this matter means that our only avenue at the arbitration is to defend the plaintiff’s application for summary judgment. This position is obviously manifestly disadvantageous. I again advise that the client should provide the discoverable documents in order that I may make an application for leave to file our defence at the resumed arbitration hearing.”
Ms Obrart was not paid. Harish Prasad were not paid and a notice of ceasing to act was filed. The debtor says that he attended the adjourned hearing of the arbitration on 3 July and waited for Ms Obrart but she did not appear. He says that he had $2,000.00 cash in his pocket from the last hearing that he was ready to give her. When she did not appear he left the court. The proceedings were called before the Arbitrator. The debtor was called but he did not appear. The creditor sought to establish his debt by evidence and judgment was given in his favour. This was not a default judgment. There is an absolute right of a party against whom judgment has been awarded in an arbitration to apply to the District Court for a rehearing. In this case the notice of the judgment that was sent to the debtor indicated that the last day for filing a rehearing application was 1 August 2003. The debtor did not file such an application.
The bankruptcy notice was issued against the debtor in late 2003 and on 2 December 2003 he applied by notice of motion to set aside the judgment. That notice of motion was heard by Cooper DCJ and it was dismissed with costs. By that time the applicant was represented by another firm of solicitors, Messrs Shaw McDonald, some of whose correspondence is also exhibited to the debtor’s affidavit. A relevant letter dated 19 December 2003 was sent to the debtor. It is in the following form:
“We regret to advise that your Notice of Motion to set aside the Judgment was dismissed today by His Honour, Judge Cooper, in the Sydney District Court.
His Honour was concerned that the Court file contained absolutely no indication that you have an arguable defence to the liquidated claim upon which Sodhi Singh obtained the Judgment.
His Honour noted that your Defence to the action was struck out by Her Honour Judge Balla on 16 April 2003 and that your subsequent Application for Vacation of the arbitration date was refused.
In the circumstances, we are unable to provide any further assistance. This matter is next before the Federal Magistrates Court on Tuesday, 23 December 2003 at 10.00am for further consideration of your Application to Dismiss the Bankruptcy Notice which has very little prospect of success.”
The application to set aside the bankruptcy notice was also dismissed by a Registrar of this court. The creditor then proceeded with a creditor’s petition and a sequestration order was made on 2 June 2004. The debtor did not attend the hearing of the application for a sequestration order.
It is against this background that the debtor seeks to persuade me that a miscarriage of justice occurred in the obtaining of the creditor’s judgment against the debtor and I should take into account the words of Lord Esher in Re Hawkins; Ex parte Troup [1895] 1QB 404 at [409] quoted by Barwick CJ in Wren v Mahony [1971–1972] 176 CLR 212 at [223]. The relevant quotation from Lord Esher is:
“We have said that the Court will go behind the judgment, and I think the cases show that the Court will go behind a judgment by consent. … We have tried to say that the Court will go into the whole transaction, because the question is not one of a dispute between the two parties; it is a matter which will affect, and materially affect, the rights of all the creditors who are not before the Court when it has to determine whether a receiving order should or should not be made, which will or may result in the debtor being made a bankrupt. The Court will go into the whole matter, and see whether upon the whole it is fair to the whole body of creditors that the man, on the particular transaction between himself and the petitioning creditor, should have a receiving order made against him. In the same way, when a creditor comes to prove in bankruptcy the Court will go behind the judgment, and inquire into the whole transaction which preceded it.” (emphasis added).
In Wren Barwick CJ discussed whether a court was bound to accept a previous judgment. At [224] he said:
“But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor’s debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration. It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor’s debt is a mere matter of its own discretion. Nothing in Corney v Brien (1951) 84 CLR 343 lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor’s debt. The Court’s discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner.”
The power to go behind a judgment when making a decision as to a liquidator or trustee’s decision on a proof of debt was reconsidered by the High Court in Tanning Research Laboratories Inc. v O’Brien (1990) 169 CLR 332 but nothing said in that judgment cast any doubt on the views of Barwick CJ as expressed in Wren which was quoted with approval by Brennan and Dawson JJ at [8].
The method of dealing with cases such as this was considered by Hely J in Commonwealth Bank of Australia v Jeans [2005] FCA 569 where His Honour suggested a two step approach. First there should be a decision as to whether or not the court should exercise its discretion to go behind the judgment and only then would the court “retry the whole question of whether the debtor is indebted to the creditor; Corney v Brien (supra)” I would adopt the same approach in this case.

Reasoning

I am not satisfied that the debtor has made out a prima facie case that there was no debt due from him to the creditor on the basis claimed. The debtor swore an affidavit in which he deposed to the partnership or joint arrangement. He was cross examined by Mr Mitchelmore and by Ms Nash. He did not appear to be an impressive witness. He sought to blame his solicitors for almost every occurrence when it was quite clear from the correspondence that he exhibited to his affidavit that the fault lay not so much with them but with him for not keeping them in funds. He sought to bolster his inadequate evidence of the alleged agreement with what he claimed to be an admission found at paragraph 9 of the creditor’s statement to the District Court which is in the following form:
“Apparently Ladi did this because subsequently at the Depot the defendant said to me, “Look he’s a good singer and he’s not asking much money. Why don’t we go half and half and we can make some money?”
I replied, “Look, I’m not in this sort of business. I’m a worker.”
The Defendant replied, “Don’t worry, I know everything about this game.”
I then said, “Well don’t let me down.”
He replied, “We’re friends and we’ll be friends after this.”
I then said, “Alright, half and half.”
What the applicant has failed to convince me of is that “half and half” constituted an offer by the creditor to advance all the moneys for the tour on the basis of half the profit and all of the losses. “Half and half” may have meant that but it may have meant “You will get 50% of the profits plus your money back” or it may have meant many other things.
I am also concerned that the history of the litigation between the parties indicates clearly that the allegation of partnership or joint venture is not a new one. It was clearly raised in correspondence between the debtor’s solicitors and those of the creditor. It was the sole subject of the application by the debtor to strike out the statement of claim. The argument did not succeed before Judge Balla. The applicant was given a chance to defend even on that basis if he provided some discovery. Discovery should have been a simple matter if there was a joint venture or partnership arrangement concerning the tour. The proceeds of the tour should have been properly accounted for. In evidence before me the debtor indicated that such accounts had been drawn up some considerable time before his affidavit of 15 April 2003. He told me that the accountant had the accounts “on his computer” but he did not produce them and never has produced them since. Likewise, although he agreed in cross examination that some of the proceeds of the concerts had gone to the creditor he had never sought to raise that as a set off against the alleged debt. As Mr Mitchelmore argues, no evidence has been bought to this court to show that any of the money paid by the creditor to the debtor was actually used to finance the tour. Not one single invoice has been produced. Again, there is the very peculiar submission of the amended defence in which the one paragraph which alluded to the arguments raised by the debtor was deleted. Finally, these matters were all raised before Judge Cooper in the application to set aside the judgment and his views about them were clearly reported to the debtor in the letter from his solicitors previously referred to.

In these circumstances it cannot possibly be said that I have before me a prima facie case of miscarriage of justice in that the debt allegedly sued upon to judgment cannot be sustained. I dimiss this application. I order that the applicant debtor pay the costs of the Public Trustee and of the petitioning creditor, such costs to be taxed if not agreed pursuant to the Federal Court Act and Rules.

I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: