National Australia Bank Limited v Carideo

[2000] FCA 688

FEDERAL COURT OF AUSTRALIA

National Australia Bank Limited v Carideo
[2000] FCA 688

BANKRUPTCY – judgment debt – power of court to go behind judgment – whether power should be exercised

GUARANTEE AND INDEMNITY – continuing guarantee – granted for fixed period – obligations of surety

Bankruptcy Act 1966 (Cth)

Bank of Credit and Commerce International SA v Simjee [1997] CLC 135, applied
Clayton’s Case (1816) 1 Mer 572, referred to
Corney vBrien (1951) 84 CLR 343, referred to
Emerson v Wreckair Pty Ltd (1992) 33 FCR 581, applied
In re Flatau; ex parte Scotch Whisky Distillers Limited (1889) 22 QBD 83, referred to
In re Fraser; ex parte Central Bank of London [1892] 2 QB 633, referred to
National Westminster Bank plc v French (unreported, English Court of Appeal, Robert Goff J, 20 October 1977), applied
National Westminster Bank plc v Hardman (unreported, English Court of Appeal, Lord Parker and Caulfield J, 11 November 1987), not followed
Re Quest (1985) BCLC 266, referred to
Re Riviere; Ex parte Original Mont de Piete Ltd (1919) 20 SR(NSW) 77, applied
Thomas v Nottingham Inc Football ClubLtd [1972] 1 Ch 596, applied
Westminster Bank Ltd v Sassoon The Times, 27 November 1926, applied
Wren v Mahony (1971-72) 126 CLR 212, referred to

NATIONAL AUSTRALIA BANK LIMITED  v  CARIDEO

V 7044 of 2000

JUDGE:         FINKELSTEIN J
DATE:           5 MAY 2000
PLACE:         MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V7044 of 2000

BETWEEN:	NATIONAL AUSTRALIA BANK LIMITED Applicant
AND:	TERESA MARIA CARIDEO Respondent
JUDGE:	FINKELSTEIN J
DATE OF ORDER:	5 MAY 2000
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.A sequestration order be made against the estate of the respondent, Teresa Maria Carideo.

2.The applicant’s costs of and incidental to the petition, including reserved costs, be taxed and paid in accordance with statute.

3.The date of the act of bankruptcy is 10 January 2000.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V7044 of 2000

BETWEEN:	NATIONAL AUSTRALIA BANK LIMITED Applicant
AND:	TERESA MARIA CARIDEO Respondent

JUDGE:	FINKELSTEIN J
DATE:	5 MAY 2000
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

1. The petitioner, National Australia Bank Limited, asks for a sequestration order against the estate of the debtor, Mrs Carideo.  The debt alleged in the petition is $218,353.29 being the amount obtained by judgment in the Supreme Court of Victoria.  The judgment was entered when the debtor failed to appear at the trial of an action claiming money due under guarantee. 

2. The bankruptcy notice based on the judgment debt was served on the debtor on 20 December 1999. The debtor failed to comply with the twenty-one day period specified in the notice. The debtor’s failure to comply resulted in her committing an act of bankruptcy on 10 January 2000: s 40(1)(g), Bankruptcy Act 1966 (Cth). It is in respect of this act of bankruptcy that the petitioner seeks the sequestration order. The order is opposed by the debtor. She asserts that she is not indebted to the petitioner in the sum of $218,353.29 or in any other sum.

3. The debtor acknowledges that in October 1996 she executed a guarantee and indemnity in favour of the petitioner as security for advances made to Cabe (Aust) Pty Ltd (Cabe), a company controlled by the debtor’s two children.  The limit of her liability under that guarantee was $15,000.  The duration of the guarantee was six months.  The debtor had a solicitor who provided her with advice about the guarantee.  A certificate to that effect appears on the guarantee. 

4. Upon the expiration of the term of the guarantee the customer’s indebtedness to the Bank exceeded $15,000.  The debtor was asked to give a further guarantee for the debt.  What precisely occurred is in dispute.  The debtor contends that she was requested, and indicated her willingness, to continue to provide a temporary guarantee for $15,000 for a further six months in support of additional accommodation to be provided to Cabe.  In fact the debtor signed a guarantee in which the limit to her liability was recorded as $181,100 and there was no limit to the duration of the guarantee. 

5. Although the debtor now concedes that she was requested to give a second guarantee, she made no such concession in the Supreme Court proceeding.  In her amended defence, filed by her former solicitors, the debtor alleged that she was not aware that she had executed an instrument of guarantee and that if she had executed such a document then it was by mistake.  She sought relief under the Trade Practices Act 1974 (Cth), s 87.

6. It is well settled that in bankruptcy a judgment debt does not have conclusive effect.  The bankruptcy court can “go behind” a judgment and inquire as to the existence of the debt upon which the judgment is said to be founded:  Corney vBrien (1951) 84 CLR 343. In In re Fraser; ex parte Central Bank of London [1892] 2 QB 633 Lord Esher MR said (at 636-637):

   “The mere fact that there is a judgment for the debt does not prevent the registrar from saying that there is no good petitioning creditor’s debt.  The Court of Bankruptcy can go behind the judgment, and can inquire whether, notwithstanding the judgment, there was a good debt.  In so doing, the Court of Bankruptcy does not set aside the judgment.  If I may use the expression, the Court goes round the judgment, and inquires into the subject-matter. …The decision is based upon the highest ground – viz. that in making a receiving order, the Court is not dealing simply between the petitioning creditor and the debtor, but it is interfering with the rights of his other creditors, who, if the order is made, will not be able to sue the debtor for their debts, and that the Court ought not to exercise this extraordinary power unless it is satisfied that there is a good debt due to the petitioning creditor.  The existence of the judgment is no doubt prima facie evidence of a debt; but still the Court of Bankruptcy is entitled to inquire whether there really is a debt due to the petitioning creditor.”

   Kay LJ said (at 637):

   “It is old law in bankruptcy that, neither upon an attempt to prove a debt, nor upon a petition for an adjudication of bankruptcy or a receiving order against a debtor, is a judgment against him for the debt conclusive.”

7. However, the bankruptcy court will not, as a matter of course, inquire into the validity of the judgment:  Wren v Mahony (1971-72) 126 CLR 212 at 223. Usually it is necessary to show fraud or collusion or miscarriage of justice or some other sufficient cause. It will be easier to go behind a judgment which was obtained by default. In In re Flatau; ex parte Scotch Whisky Distillers Limited (1889) 22 QBD 83 at 86 Fry LJ said:

   “[But] this power has never, so far as I am aware, been extended to cases in which a judgment has been obtained after issues have been tried out before a Court.”

8. There are two reasons why here it is not appropriate to inquire into the validity of the judgment obtained by the petitioner.  First, the debtor’s allegations, even if they are made out, will not result in her proving that she was not indebted to the petitioner.  Let us assume for the moment, in the debtor’s favour, that she could persuade me that it had been represented to her that the second guarantee that she was requested to sign was limited in amount to $15,000 and also limited in time to six months. 

9. The debtor is of the opinion (and reasonably so, one might say for a lay person) that upon the expiration of six months and in the absence of a demand for payment, she was relieved of all obligations under the guarantee.  This is not, however, the way by which a guarantee for a fixed period operates. 

10. Although there are few reported cases that have considered this point, the position at law is clear.  In the case of a continuing guarantee (as in this case) for a fixed period the guarantor is liable for the obligation outstanding as at the date of the expiration of the guarantee although not for any further advances:  Thomas v Nottingham Inc Football ClubLtd [1972] 1 Ch 596; Westminster Bank Ltd v Sassoon The Times, 27 November 1926; Legal Decisions Affecting Bankers, vol 5, 19; National Westminster Bank plc v French (unreported, English Court of Appeal, Robert Goff J, 20 October 1977); Bank of Credit and Commerce International SA v Simjee [1997] CLC 135. National Westminster Bank plc v Hardman (unreported, English Court of Appeal, Lord Parker and Caulfield J, 11 November 1987) should not be regarded as good law. 

11. As to the debt outstanding at the expiration of the period of the guarantee, if the guarantee is in respect of a running account, the rule in Clayton’s Case (1816) 1 Mer 572, will apply (Re Quest (1985) BCLC 266, 270). Here the evidence is that even if the rule were applied, the indebtedness of Cabe would not have fallen below $15,000 so that the liability of the debtor could not be extinguished on that account.

12. When it appears that by going round a judgment there still exists a debt due to the petitioner, a sequestration order will be made:  Re Riviere; Ex parte Original Mont de Piete Ltd (1919) 20 SR(NSW) 77; Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 at 588-589. That is the position in which the debtor finds herself.

13. The second reason for not inquiring into the subsistence of the debt is the doubts I have concerning the veracity of the debtor’s allegations about the circumstances surrounding the execution of the second guarantee.  I have already referred to the debtor’s defence filed in the Supreme Court proceeding, which raises issues that are inconsistent with her present allegations.  Then there are the affidavits that the debtor has filed in support of her opposition to the petition.  There are a number of affidavits.  Although the debtor appears in person, it is apparent that she has had some assistance in preparing those affidavits.  Initially the debtor conceded that she owed the petitioner $15,000.  In her second affidavit the debtor said that she believed that her liability under the guarantee was limited to $15,000 but made no mention of the possibility that the guarantee was to expire after six months.  This issue was raised in her third affidavit.  Finally this morning, the debtor handed up an outline of submission in which she alleged that it had been agreed that the petitioner would release the debtor from all responsibilities at the expiration of six months.  All in all, I have the clear impression that the debtor is prepared to raise any issue, regardless of its veracity, to avoid bankruptcy.

14. The petitioner, having satisfied the requirements of s 52 of the Bankruptcy Act 1966 (Cth), is entitled to a sequestration order, there being no reason shown why such an order should not be made.

I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Associate:

Dated:             26 May 2000

Counsel for the Applicant:	Mr P Crutchfield
Solicitor for the Applicant:	Mallesons Stephen Jaques
Respondent in Person.
Date of Hearing:	5 May 2000
Date of Judgment:	5 May 2000