Re Burgess, W.F. & Anor v Ex parte Octagon Enterprises Pty Ltd

[1987] FCA 271

"

C A T C H W O R D S

BANKRUPTCY - notice of intentlon to oppose creditor's petltion -

golng behind ludgment debt - no general rule for default

judgments - lack of evldence to dlsprove existence of debt - no

notlce of dispute under s.41(5) of the Act - possibillty of

judgment debt bemg too hlgh irrelevant.

Bankruptcy Act s.41(5)

Re: William Frederlck Burqess & Anor.

Ex parte: Octauon Enterprlses Pty. Ltd.

Qld. P1347 of 1986

PINCUS 3.

BR I S BANE

1 J U N E 1987

IN THE FEDERAL COURT	OF AUSTRALIA	)
G E N E R A L DIVISION	) QLD P1347 of 1986

BANKRUPTCY DISTRICT OF THE SOUTHERN	)
DISTRICT OF THE STATE OF QUEENSLAND	)

RE:

WILLIAM FREDERICK BURGESS and

GAIL MIGNION BURGESS

M PARTE: OCTAGON ENTERPRISES PTY. LTD.

(IN LIOUIDATION)

PINCUS J. 1 JUNE 1987

REASONS FOR ZUDGMENT

Thls 1 s a credltor's petltlon for a sequestratlon order

agalnst the estates of Wllllam Frederlck Burgess and hls wife Gall

Mlgnlon Burgess, based on a ~udgrnent debt. The ~udqment debtors

have flled a notlce of lntentlon to oppose the petltlon on the

ground that thls court should re-examlne the existence of the debt

on which the ludgment, glven In the Dlstrlct Court, was founded.

The petitlonlng creditor is a company, Octagon

Enterprlses Pty. Ltd., formerly controlled by the debtors.

Although no evidence was led dlrectly on this point, the case was

conducted on the assumptlon that the debtors were the sole

shareholders. The company's busmess was not successful and on 5

November 1984 llquidators were appointed.

2

The company's accounts for the flnancial year ended 30

June 1983 showed amongst its current assets a shareholders'

current account of $33,464.45; the shareholders in questlon were

the judgment debtors. These company accounts were prepared by

accountants, Messrs. Maynard Murtagh and Smith, on the

lnstructions of the debtors, were initialled and signed as correct

by the debtors, and were submltted to the Commlssloner of Taxatlon

as belnq the true and correct accounts of the company. The

accounts were adopted by the debtors as shareholders at the annual

general meeting of the company, while at a meetlng of directors

shortly before the general meetlng they resolved that "All current

Assets are likely to reallse thelr value as shoc;n In the

Accountlng Records of the Company In the ordinary course of

buslness.	"
On 25 January l985 the debtors sued Arthur Andersen and

Co., a flrm of accountants, for havlnq allegedly converted to

thelr own use a cheque for $9.936.74 payable to them as trustees

of the company's "director fund". It appears that the debtors

later came to the vlew that the firm origlnally named. should not

have been lolned and they contlnued the proceedlngs agalnst the

company's liquldators, Messrs. D.W. Knlght and R.A. Duus.

There was also lnstltuted an actlon by the company

against the debtors to recover the sum mentloned above shown as

due by them in the accounts. Both actions were defended.

The two actions were consolldated and the matter set

down for hearlng on 18 August 1986. The debtors say that prior to

3 .

the hearlnq date they experlenced lfflculty wlth their

sollcitors, the xact nature of whlch is unclear. Counsel

appeared for the debtors at the hearlnq and sought an adjournment

of both cases. This was refused and the debtors‘ action agalnst

Messrs. Knight and Duus, the liquldators, was dismlssed with

costs. Counsel for the debtors then sought leave to withdraw In

relation to the action by the llquldators, such leave belng

granted. Oral evldence was glven by one of the llquidators. The

debtors were then unrepresented and appear to have given no evldence; indeed, It does not seem that they were present at the hearlng. Judgment was qlven agalnst them for an amount of

$33,464.45, plus Interest assessed at $4,576.84, plus costs to be

taxed, bemg the amounts mentloned I n the Bankruptcy Notlce.

The credltor‘s petltlon was served on both debtors on 25

November 1986 and the notlce of lntentlon to oppose	was flled	on
10 December 1986.

At the hearlnq before ne, affldavlt and cral evldence

was glven by the male debtcr and the p tltlonmg credltor‘s former

accountant, Mr. Maynard, both of whom were cross-examlned. Mr.

Duus, the liquldator, was also called.

The debtors malntain that the company’s accounting

records were lncorrectly prepared and do not accurately reflect

the true state of the company’s flnanclal affalrs. The evidence

given by the male debtor is to the effect that he and hls wife borrowed various sums from a variety of flnanclal lnstltutions in

4 .

order to repay the shareholders' current account, and that these

monles were never credlted agalnst that account.

The male debtor's evldence 1s unsatisfactory. By hls

affidavit sworn on 12 December 1986, the debtor on behalf of

hlmself and his wife says that the reason for the Inaccuracy ln

the accounts 1 s that he wrongly advlsed the accountants that all

deposlts to the company account represented sales. He goes on

to

say that he made a number of deposlts to the company account

(belng the varlous sums borrowed) whlch dld not represent sales

but which were pald In reductlon of the shareholders' account.

Varlous mortgages were produced whlch tended LO supporr; the

obtalnlng of the loans, although the names of the flnanclal

lnstltutlons vary somewhat from those shown ln the affldavlt. A

deposlt book was produced whlch records some del;oslts, to an

unldentlfled account, of sums whlch colncrde wlth amounts drawn

down on a loan from Australian Guarantee Corporatlon Llmlted,

accordlnq to a letter from that company.

Ir. cross-examlnatlon the male debtor stated that at

least some of the moneys were not banked to the company's account,

as he swore in hls affldavlt, but Into the debtors' personal

accounts. Thls was done, accordlng to the male debtor, on hls

accountant's instructlons, and at a time when at least some of the

company's banklngs were belng effected through the debtors'

accounts. The debtors have never made available to the

liquidators the bank statements relating to the personal accounts

during this period and, indeed, had not informed the liquidator

prior to the hearing that such transactions had allegedly taken

5.

place. The company's former accountant did not avert to thls

unorthodox practlce, either in his affidavit or in oral evidence.

I am not asked finally to determine the question whether

the judgment debt was truly due. The Issue 1s whether I should

give leave to go behind the judgment debt. Nevertheless, In the clrcumstances It was In my oplnion Incumbent upon the ludqment

debtors to glve a careful and accurate account of the deallngs in

question; that they have plalnly falled to do. A number of the

payments alleged to have been mdde are confirmed by the deposlt

book, but there 1s no clear evidence as to the ldentlty of the

account to whlch they were credlted. The debtor namtalns that

the deposlt book recorded only company transactlons. However, hls

understandlng of what 1s a "company" transactlon was shown to be

somewhat hazy. Although the recelvlng bank has stamped each

deposit butt, no bank statements for the relevant perlod were

produced to the llquldators, or to the court. Indeed, there 1 s

apparently a gap In the bank statements upplled to the

llquidators from 30 June 1982 to 28 August 1933, a period lncludlng that durlng whlch the amounts recorded In the deposlt

book are sald to have been pald to the company's account.

Whether or not the monles were paid Into the company's

bank account or to personal accounts, the male debtor malntains

that they were all intended to dlmlnlsh the shareholders' current

indebtedness to the company.

The reason he gives for borrowing monies at interest in

order to pay back hls own company is that he did not want to let

6.

the account mount up. I flnd that unconvlnclng. Usually those In

control of a company would not be concerned by the amount shown In

their loan account, considered in lsolatlon. If the company were

short of funds, then one mlght expect those ln control to relleve

the shortage, If they saw it as belng In thelr Interests to do so,

but it appears unlikely that the state	of the loan account would,
in Itself, be a reason for concern.

Some evldence was also glven by the current llquldator, $9936.74 whlch the debtors allege was mlsapplled, there 1 s a llkellhood that the debtors wlll be entltled to some credlt from that amount to be set off agalnst the current account, after legal

Mr. Duus, to the effect that In relatlon to the cheque f o r

costs have been ascertalned. Counsel sought to make something of

thls evldence, but ~t appears to me clear er.ough that nilreljr

showlng that the ludgment debt 1 s too hlgh cannot avall the

~udgment debtors, no notlce of dlspute hdvlng been glven under

s . 4 1 ( 5 ) of the Bankruptcy Act.

The law In relatlon to t h l s Court's power to go hehlnd a

~udgment has been consldered by the Hlgh Court In the leadlng

cases of Cornev v. Brlen (1951) 84 C.L.R. 343 and Wren v. Mahoney (1972) 126 C.L.R. 212. These cases and others are discussed by

Mr. Colvin in hls article "Assalllng a Judgment Relied Upon In a

Bankruptcy Notice" In the August 1986 Issue of the Australian Bar

Revlew. I agree wlth the learned author's vlew, expressed at

pp.172 and 173, to the effect that there 1s no general rule that the Court must go behind a judgment entered by reason of default.

7.

The present judgment should, at least In a practical sense, be

regarded as one obtained In default of appearance at the trial.

It 1s not easy to understand why, as has sometlmes been

suggested, a default ludgment should arouse suspiclon - at least

where there is no suggestion of any sharp practice or lrregularlty

in the entry of judgment. Very many judgments are entered In

default, In proceedings alleglng the exlstence of the debt. The

reason for the default is, no doubt, commonly that the defendant

flnds it difflcult to raise funds to meet the costs of litigation,

but It would appear to be lmpractlcal to adopt a policy of

routlnely examlnlng the correctness of such ~udgrnents In detall In

this Court. The present case 1 s a good example of the dlfficulty

to whlch such practlce would glve rise. I prefer to adhere to the

test whlch I have applled In other cases, of enqulrlng whether

there are substantlal reasons for questionmg wkLether there 1 s a

debt In truth and reallty; I do not conslder that the fact that

the ~udgment here was (In substance) one glven ln default should

necessarlly advantage the ~udgment debtors.

Here, on the whole, and not without doubt, I have come

to the concluslon that it would not be rlght to go behlnd the

judgment debt. Although some documentary evldence has been

produced, In the end the ~udgment debtors' case rests upon oral evidence belng, as I have polnted out above, inconslstent wlth the

affidavlt evldence adduced on their behalf. One could not

rationally deny the possibility that, If the issue were fully

fought out, the judgment debtors could succeed, but he

probability of their doing so seems low; the challenge to the

. 8 .

accounts whlch the judgment debtors had approved appears to have

been made for the flrst tlme towards the end of 1984, not long

before the company went Into llquldation. Documents necessary to

establish that the accounts approved by the	~udgment	debtors were
wrong have not been produced.

I have not overlooked that, in the actlon in whlch

~udgment was obtalned, the debtors ralsed the questlon of the

accuracy of the accounting records, but am not satlsfled that the

evldence is strong enough to justlfy conductlng In thls Court the

contest whlch would (had the debtors pursued thelr defence)	have
been determlned elsewhere.

I therefore propose to make a sequestratlon order, but in all the clrcumstances wlll delay formally dolnq so untll the

~udgment debtors	have	had	an opportunlty to	conslder thelr
posltion.