Re Burton, G.J. Ex Parte Master International Ltd.
[1993] FCA 352
•01 JUNE 1993
Re: GABRIELLE JEAN BURTON
Ex Parte: MASTER INTERNATIONAL LTD. and VOLT AUSTRALIA LTD. trading as
AUSTRALIAN DIRECTORY SERVICES
No. 2498 of 1992
FED No. 352
Number of pages - 14
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
Cooper J(1)
CATCHWORDS
Bankruptcy - creditor's petition - judgment obtained in Magistrates Court - two applications to set aside judgment - applications dismissed - bankruptcy notice issued - failure to comply with provisions of the notice - act of bankruptcy - a debtor opposed the orders on grounds that she was not indebted to the petitioning creditors and not insolvent - whether court should exercise its discretion to go behind the judgment - relevant considerations - whether in truth and reality a debt owing to the creditor - whether debtor able to pay her debts - relevant considerations - whether other sufficient cause to dismiss the petition - sequestration order made.
Bankruptcy Act 1966 - Section 52(1)(a)(b) and (c), Section 52(2)(a), Section 52(2)(b)
Corney v. Brien (1951) 84 CLR 343
Re Frazer; Ex parte Central Bank of London (1892) 2 QB 633
Wren v. Mahoney (1972) 126 CLR 212
Simon v. O'Gorman Pty. Ltd. (1979) 27 ALR 619
Re David Ex parte Lahood (1979) 27 ALR 306
Petrie v. Redmond (1942) 13 ABC 44
Re Vojnovski (1970) ALR 355
Olivieri v. Stafford (1989) 24 FCR 413
National Mutual Life Association of Australasia Limited v. Oasis Developments Pty. Ltd. (1983) 2 QR 441
Re Sarina Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163
Sandell v. Porter (1966) 115 CLR 666
Trojan v. Corporation of Hindmarsh (1987) 16 FCR 37
Cain v. Whyte (1932) 48 CLR 639
Clyne v. Deputy Commissioner of Taxation (1985) 5 FCR 1
Dowling v. Colonial Mutual Life Assurance Society Ltd. (1915) 20 CLR 509
Rozenbes v. Kronhill (1956) 95 CLR 407
Clyne v. Deputy Commissioner of Taxation (1984) 154 CLR 589
McIntosh v. Sashona (1931) 46 CLR 494
In Re Gentry (1910) 1 KB 825
HEARING
BRISBANE, 19 May 1993
#DATE 1:6:1993
Counsel for the Applicant: Mr. Zillman
Solicitors for the Applicant: Bennett, Carroll and Gibbons
Respondent in Person: Ms. G. Burton
ORDER
THE COURT ORDERS:
1. That the debtor's applications for adjournment of the hearing of the petition are dismissed.
2. That a sequestration order be made against the estate of the debtor.
3.That the petitioning creditors' costs of and incidental to this petition (including reserved costs) be taxed and paid in accordance with the Bankruptcy Act 1966.
Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
COOPER J The petitioning creditors seek an order for sequestration of the estate of Gabrielle Jean Burton. The act of bankruptcy alleged is that the debtor failed to comply with the provisions of a bankruptcy notice served upon her on 10 June, 1992. The petitioning creditors obtained the issue of the bankruptcy notice on the basis of a final judgment, in the sum of $7,498.75, given in the Magistrates Court at Brisbane on 26 June, 1991.
The debtor appeared in person to argue in opposition to the orders sought in this petition. During her evidence she stated that she wished to have the proceedings adjourned for four weeks to take a scheme of arrangement to a meeting of her creditors. This course, she said, had been advised to her by her new accountant, a Mr. Johnson, and her new solicitor, whose name she was presently unable to recall. During her final submission the debtor asked for an adjournment to call evidence to show that she was solvent. There are therefore three applications for consideration: the applications for an adjournment and the petition for a sequestration order.
The History of the Judgment
3. The petitioning creditors' claim was for the cost of advertising placed in the Yellow Pages telephone directory by a written advertising contract dated 3 July, 1990.
On 26 June, 1991 the petitioning creditors obtained a judgment in default of appearance in the sum of $6,942.00 for claim and $556.75 for costs. An order for the oral examination of the debtor was obtained and set down for hearing on 28 October, 1991. On 23 October, 1991 the debtor filed an application to set aside the judgment. The application was dismissed by A.D. O'Donnell S.M. on 28 October, 1991 and the debtor ordered to pay costs fixed in the sum of $192.00.
On 30 November, 1992 the debtor made a further application to the Magistrates Court at Brisbane to set aside the judgment which application was dismissed.
Neither the original judgment nor the dismissal of the applications to set aside the judgment have been appealed by the debtor.
The History of the Bankruptcy Proceedings
7. On 22 May, 1992 the petitioning creditors filed an application in the court for a bankruptcy notice to issue. On 2 June, 1992 a bankruptcy notice issued against the debtor requiring payment of the judgment debt in the sum of $7,498.75 within fourteen days of the date of service of the notice. The bankruptcy notice was served on 10 June, 1992. The debtor failed within the said period to comply with the provisions of the notice.
On 26 October, 1992 the petitioning creditors' petition was issued pleading the non-compliance with the bankruptcy notice as the act of bankruptcy relied upon.
On 3 November, 1992 the debtor was served with the bankruptcy petition.
On 20 November, 1992 the debtor filed a notice of intention to appear on the hearing of the petition and to oppose the making of the orders sought. The ground of opposition was that the debtor was not indebted to the petitioning creditors on the grounds contained in an affidavit filed with the notice. In the affidavit, the debtor deposed that steps had been taken to set aside the judgment and exhibited a copy of an affidavit filed in the Magistrates Court proceedings Plaint 9862 of 1991. The substance of her application was that the debt was contracted with a company Karlye Pty. Ltd., trading as Deon's Bridal Design Studio and not with the debtor personally. She further alleged that Mr. Norman Rose, the Queensland Sales Manager of the petitioning creditors had stated that he would "sort things out" in consideration of new business being placed with the petitioning creditors.
On 24 November, 1992 the petition was listed in the District Registrar's Bankruptcy List and was adjourned by consent to 8 December, 1992. At this time Mr. Egan of Egans, Solicitors, was acting for the debtor. On 4 December, 1992 the debtor filed an amended notice of intention to appear containing an additional ground of opposition, namely, that she was not insolvent.
On 8 December, 1992 the District Registrar gave directions for the filing of affidavit material intended to be relied upon by the debtor in opposition to the petition and adjourned the petition to the judge's list on 2 February, 1993. On 2 February, 1993 the District Registrar made the following consent order:-
"It is ordered by consent:
1. That the matter be adjourned until 9.30am on the 3rd day of February 1993 on the following conditions:
(a) That the Respondent debtor pay $10,814.75 by bank cheque at or before 3.30pm on the 2nd day of February 1993 to be delivered by the Respondent to the office of the solicitors for the Applicant, Messrs Bennett Carroll and Gibbson, 5th Floor, 14 Mt Gravatt-Capalaba Road, Upper Mt Gravatt;
(b) That both parties undertake not to publish either in writing or orally, directly or indirectly, any terms of this Agreement to settle or any statements in connection with these proceedings.
(c) That provided the cheque so delivered pursuant to paragraph (a), is cleared on or before the close of banking business on the 2nd day of February 1993, and subject to the undertaking of the parties in paragraph (b) hereof, on the 3rd day of February 1993, both parties will consent to an Order dismissing this Petition with no Order as to costs". The debtor was again represented by Mr. Egan.
The debtor was unable to comply with the conditions contained in the order of 2 February, 1993 and when the matter came on on 3 February, 1993 the petition was adjourned to a date to be fixed for a hearing before a Judge of the Court and further directions given as to the filing of any further affidavit material by the parties. On 3 February, 1993 the debtor was not represented by a solicitor and appeared herself.
The debtor filed further affidavit material on 9 February, 1993.
On 15 March, 1993 the debtor was advised by letter from the Queensland District Registry of the Court that the petition was listed for hearing at 10.15 a.m. on 19 May, 1993 for two days.
The Conduct of the Proceedings on Hearing
16. Affidavits were filed in the proceedings on behalf of the debtor from Mr. Egan (her solicitor), Mr. Anthony Young, an accountant, and Mr. John Horrigan, a valuer. By notice dated 21 January, 1993 the petitioning creditors required the attendance of the deponents for cross-examination. The deponents did not attend for cross-examination. In the circumstances I have not had regard to the contents of the affidavits of Mr. Egan, Mr. Young or Mr. Horrigan in coming to my decision. The debtor gave evidence and was cross-examined on affidavits which she had filed as to her solvency. She also tendered copies of correspondence sent by her to the petitioning creditors or their solicitors between 3 November, 1992 and 15 May, 1993 containing various offers to pay the judgment debt over time. She gave evidence that each of the offers was refused.
The debtor stated that she did not expect the matter to proceed as listed because she was engaged in negotiations with the petitioning creditors until 9.30 a.m. on the day of the hearing. In consequence she stated that she was not in a position to properly conduct the litigation because of the conduct of the petitioning creditors. There is nothing in the material before me to support a finding that the petitioning creditors did anything to induce in the mind of the debtor any expectation that the matter would not proceed. If she had any expectation that the hearing would not proceed as listed, it was based solely on her belief that she could broker a settlement before the hearing.
The Applications for an Adjournment
18. The debtor has had sufficient time to prepare her case and sufficient notice of the hearing dates. She has not made out any basis for an adjournment to further prepare her case. Nor has she shown that her case will be or can be further improved over that which appears in the material which she has filed. Having regard to the history of the matter and having heard the debtor, I am satisfied that the application to adjourn the hearing to enable her to prepare her case is simply to delay the inevitable in the hope that, given time, she can broker a settlement.
The debtor has not placed before the Court any material in support of an adjournment for the purpose of calling a meeting of creditors to consider a scheme of arrangement. She states that she has been advised to follow this course by her new accountant and her new solicitor. However, no material has been filed by either of these gentlemen confirming their retainer, the giving of advice or the contents of any proposed scheme. The debtor did not give to the Court any details of a proposed scheme and I am satisfied that she does not understand what is involved in such a course. She also says that she is in the process of refinancing her debt and that an equity partner will inject $115,000.00 into a company Waralace Pty. Ltd., which now carries on the business of Deon's Bridal and Design Studio. None of these statements is supported by evidence from the proposed refinancier or the proposed equity partner.
The statements of the debtor have to be balanced against this background established by the evidence before the Court:-
(a) Proceedings have been filed in the Supreme Court of Queensland in Corporations Law Application 1040 of 1992 seeking the winding up of Waralace Pty. Ltd. for failing to comply with a notice under section 460 of the Corporations Law claiming unpaid rent. There is no material before this court as to the outcome or status of those proceedings.
(b) On 7 May, 1993 Justice White in the Supreme Court of Queensland ordered the debtor to deliver up possession of a house property at Dilkera Street, Balmoral to the first mortgagee within twenty-eight days. The debtor has defaulted under the first mortgage and is indebted to the first mortgagee in the sum of not less than $257,582.33.
(c) The debtor has defaulted under a second mortgage over the house property in favour of Custom Credit Limited. She is indebted to that company in an amount of $48,395.45.
(d) The debtor has defaulted under a third mortgage over the house property to Credit Union Australia Limited. She is indebted to that company in an amount of $39,332.63.
(e) AGC (Advances) Ltd. has repossessed a motor vehicle on 14 May, 1993 for default in payment of a lease payment due and payment of the residual sum required under the motor vehicle lease. The vehicle was listed as an asset of the debtor in affidavits filed by her as to her assets and liabilities. The lease of the vehicle was in the name of Karlye Pty. Ltd. The lessor had only become aware two months previously that the company was in liquidation.
(f) On 31 March, 1993 Egans, her former solicitors, obtained a judgment against her in the sum of $9,120.40 for legal fees.
(g) James Frizelle holds a judgment against the debtor in the sum of $24,208.61, obtained on 28 November, 1990, which remains unsatisfied. Mr. Frizelle intends to enforce the judgment by execution against the property of the debtor. With accrued interest and legal costs, Mr. Frizelle claims that the debtor is presently indebted to him in the sum of $29,482.26.
(h) There remains outstanding a judgment in favour of Beaux- Tissus Pty. Ltd. in the sum of $4,068.96 which was obtained on 13 November, 1990.
Having regard to the history of these proceedings, the level of indebtedness of the debtor, the loss of her single substantial asset and the failure to file any meaningful material as to what she proposes by way of a scheme of arrangement and whether or not her new advisers have agreed to act for her to that end, I am not satisfied that any adjournment will lead to the calling of a meeting of creditors. Having heard the debtor, I am satisfied that the debtor wishes to delay the final hearing of the petition in the hope that she can arrange a refinancing of her affairs to pay out her creditors. There is nothing in the material which would satisfy me that a refinancing within a reasonable period is a realistic possibility, even if some further time were given. The action taken by the secured creditors against her house property totally militates against such an outcome. I do not accept that the three mortgagees have acted to exercise rights under their securities because of the bankruptcy proceedings. Each has acted because there was default under the securities by failing to pay the monies secured under each in accordance with the terms of the security. That is, the debtor has defaulted under each security and so far as the second and third mortgagees are concerned, that default has been of long standing.
The debtor has filed two affidavits as to her solvency. Her statements as to wanting to call a meeting of creditors and the proven state of her indebtedness are totally against her being able to prove that she is solvent given time to call further evidence. Even accepting the values she ascribes to her assets, the fact that she has lost control of a major part of those assets is against her obtaining any fresh credible evidence to assist her.
For the above reasons I refuse each of the applications for adjournment.
The Debtor's Grounds of Opposition
24. The ground taken in the original notice of intention to appear and the material filed on 20 November, 1992 was directed to a submission that the Court ought to "go behind" the Magistrates Court judgment. The debtor did not, on the hearing, address any submission to this issue. However, in evidence she said she disputed the judgment debt. In those circumstances it is appropriate, in my view, that the court give consideration to whether or not it will exercise its discretion to go behind the judgment.
The relationship between a judgment and the pre-existing obligations which it seeks to enforce was explained by Fullagar J in Corney v. Brien (1951) 84 CLR 343 at 353-4, where he said:-
"Generally speaking, a judgment at law for a sum of money creates an obligation of its own force. The pre-existing obligation, which the judgment is intended to enforce, merges in the new obligation so created, and, for most purposes as between the parties, it is conclusive evidence of the existence of the obligation which it creates. It may in some circumstances be set aside by the court which entered it, but, unless and until it is set aside that is, generally speaking, its effect. It has, however, been well settled for very many years that in a court having jurisdiction in bankruptcy a judgment has no such conclusive effect. The court will in many cases, as it is commonly said, 'go behind' the judgment and inquire into the existence of the debt upon which it is said to be founded".
The existence of the judgment is prima facie evidence of a debt (Re Frazer; Ex parte Central Bank of London (1892) 2 QB 633 at 636).
In Corney v. Brien, Fullagar J said (at 357-358):-
"...wherever the judgment in question is a judgment by default it appears that the court will always 'go behind' the judgment if there is what is regarded as a bona fide allegation that no real debt 'lay behind' the judgment".
In Wren v. Mahoney (1972) 126 CLR 212, Barwick CJ, with whom Windeyer and Owen JJ agreed, said (at 224-225):-
"The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense the 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 petition".
The general principle is that before the court will exercise its discretion to go behind a judgment, there must be established substantial reasons for questioning whether there is in truth and reality a debt owing to the creditor; the court will not inquire into the validity of a judgment debt as a matter of course (Simon v. O'Gorman Pty. Ltd. (1979) 27 ALR 619 at 633; Re David Ex parte Lahood (1979) 27 ALR 306 at 307). The requirement may more easily be satisfied in the case of a default judgment (Corney v. Brien at 357-358; Petrie v. Redmond (1942) 13 ABC 44 at 49; Re Vojnovski (1970) ALR 355 at 359; Oliveri v. Stafford (1989) 24 FCR 413 at 422).
The question then is have substantial reasons been shown by the debtor for questioning whether there is in truth and reality a debt due to the petitioning creditors.
The judgment was obtained by default. However two applications were made to the Magistrates Court to set the judgment aside. Both were dismissed; neither dismissal was appealed. The decision of the majority of the Full Court in Olivieri v. Stafford establishes that proceedings in the court in which the judgment is obtained subsequent to the entering of a judgment are relevant to the exercise of the discretion of this court to go behind the judgment.
In Olivieri v. Stafford the debtor did not appear and contest the claim on trial. The trial proceeded in the absence of the debtor and the creditor proved up its claim. Judgment was entered by the trial judge, and subsequently an application to set aside the judgment was dismissed. A bankruptcy notice was issued and the debtor unsuccessfully sought to set aside the bankruptcy notice. In the Full Court, Beaumont J said (at 424):-
"For our purposes, the significance of the history of the litigation in the District Court is that the rejection of the appellant's application to set aside the judgment resolved the litigation in the District Court for all practical purposes. The final resolution of the proceedings in that Court must be taken to include an ultimate determination, adverse to the appellant, of first, any defence 'on the merits', and, secondly, any right to apply to amend the judgment so as to take into account his claim that, by an error in calculation the respondents' claim should have been reduced by $389.
...
As has been said, a court of bankruptcy is concerned to inquire into the 'reality' of the matter in hand. Here the 'reality' of the matter is that the merits of the respondents' claim have been demonstrated to the satisfaction of one judge of the District Court and another judge of that Court has declined to disturb the judgment. As a matter of substance, it is appropriate, in all the circumstances, for a court of bankruptcy to treat what happened in the two hearings in the District Court as a trial of the merits of the respondents' claim. That is to say, a court of bankruptcy should, I think, accept that a process of adjudication in the District Court has established that the underlying transactions created a true debt which could, in turn, provide a proper foundation for the entry of a judgment in respect of which a bankruptcy notice could properly issue".
Gummow J also observed in Olivieri v. Stafford (at 427-428):-
"What the appellant sought to have the Court do in the present case was to 'look behind' the District Court judgment debt at an earlier stage, namely to impugn a bankruptcy notice based on that judgment debt. This was sought in circumstances where under the provisions of the Act the time for compliance with the bankruptcy notice had been extended to permit an approach to be made to the District Court to set aside (or more appropriately on the facts of this case, to vary) the judgment in question, that application was made and was unsuccessful, and yet a further extension of time for compliance with the bankruptcy notice was in force. This is not a case where the sum specified in the bankruptcy notice as the amount due to the creditor exceeds the amount 'in fact' due under the judgment because, for example, there has been an error in computing the interest due under the judgment or there have been payments as to part of the judgment debt: Re a Debtor
(1908) 2 KB 684, is a case in this category. In the present case, in order to establish what 'in fact' was due, the appellant sought to impeach the judgment debt, a step of a very different character. And, as Beaumont J points out, the 'reality' is that the District Court has left the judgment standing".
In the instant case the reality is that the Magistrates Court has determined adversely to the debtor that there exists no defence on the merits such that the default judgment ought to be set aside. At least, on the application made in 1991, there has been a judicial adjudication on the merits of the debtor's defence. The discretion to set aside a default judgment is vested in a Stipendiary Magistrate under Rule 157(7) of the Magistrates Courts Rule 1960 (Qld.). Where the judgment has been regularly entered the discretion under the rule to set aside the judgment takes as its central issue whether a miscarriage of justice has occurred and ordinarily involves a consideration of the reasons for failing to appear, any delay in making the application and whether the defendant had a prima facie defence on the merits. As to the last consideration, McPherson J said in National Mutual Life Association of Australasia Limited v. Oasis Developments Pty. Ltd. (1983) 2 QdR 441 at 449:-
"Speaking generally, it may be said that it is the last of these considerations that is most cogent. It is not often that a defendant who has an apparently good ground of defence would be refused the opportunity of defending, even though a lengthy interval of time had elapsed provided that no irreparable prejudice is thereby done to the plaintiff".
In this case, after the bankruptcy notice and petition had been served, a further application was made to set aside the judgment. This was dismissed and not appealed.
In all of the circumstances I am satisfied that the processes available in the Magistrates Court have been fully utilised to establish whether the debtor had a defence on the merits.
On the hearing of the petition, the debtor did not seek to advance any argument directed to the exercise of a discretion to go behind the judgment. Nor did she file any material relating to the judgment debt additional to that which was before the Magistrates Court. The debtor has made no attempt to show that there are substantial, or any, reasons for questioning whether there was in truth and reality a debt due to the petitioning creditors such as to provide a consideration for the judgment. Merely to say that she disputes the judgment debt is in itself insufficient to ground the exercise of the discretion to go behind the judgment.
In the exercise of my discretion, I determine not to go behind the judgment. Being of that view, the judgment debt is sufficient to support the bankruptcy notice. The debtor has committed an act of bankruptcy by failing to comply with the terms of the notice.
The power of the Court to make a sequestration order is contained in section 52 of the Bankruptcy Act 1966. The section, so far as is presently relevant, provides:-
"S.52(1) At the hearing of a creditor's petition, the Court shall require proof of -
(a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);
(b) service of the petition; and
(c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing, and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.
(2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor -
(a) that he is able to pay his debts; or
(b) that for other sufficient cause a sequestration order ought not to be made,
it may dismiss the petition".
I am satisfied of the matters specified in section 52(1)(a), (b) and (c).
The debtor submits that she comes within the terms of section 52(2)(a) of the Bankruptcy Act in that she contends that she is able to pay her debts. She further contends that for other sufficient cause within the terms of section 52(2)(b) a sequestration order ought not be made.
The Debtor's Ability to Pay her Debts
41. A debtor is in a position to pay his or her debts within the meaning of the section when he or she can "Pay immediately in the sense of a reasonable time all the debts which he or she owes" (Re Sarina Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163 at 165). The inquiry will involve a consideration of the ability of the debtor to "command" cash resources "through the use of his assets" (Sandell v. Porter (1966) 115 CLR 666 at 670; cited with approval in a consideration of section 52(2)(a) by the Full Court in Trojan v. Corporation of Hindmarsh (1987) 16 FCR 37 at 47).
The debtor's present financial position is not merely a temporary lack of liquidity. She stated from the bar table that the debt due to the first mortgagee fell due for payment in February, 1993, the advance being for twelve months only. The balance due under the mortgage as at 16 December, 1992 was $257,582.33. There is no evidence as to the present sum due to the first mortgagee. However, there is no suggestion that it is less than this amount. The debtor clearly has not been able to discharge the mortgage when it fell due and this has led to the mortgagee obtaining an order for possession to enable it to exercise its power of sale.
The debt to Custom Credit Limited is due under a debt reduction program agreed by deed on 28 February, 1992. The debt was secured by a second mortgage over the debtor's home at Balmoral. By January, 1993 the debtor was $4,000.00 in arrears in payments. I find that it was the existence of the arrears which caused the creditor to send the notice of demand and not as the debtor contends the existence of the bankruptcy proceedings. Since January the default has not been remedied and no further funds of the debtor have been paid to reduce the debt. The debt now stands at $48,395.45.
The debt to Credit Union Australia Limited is the capitalisation and securing of rent due to the Credit Union. The debtor entered into an agreement to reduce the debt by periodic payments. The payments were $1,000.00 per month. The indebtedness was secured by a third mortgage over the house property. In December, 1992 the debtor was seven months in arrears and notice of default was given, I find, because of the default under the third mortgage. Since that time the debtor has failed to remedy the default and has failed to make any further payment to Credit Union Australia Ltd. The debt stands at $39,332.62. When asked as to her ability to pay the debt, the debtor said:-
"I see. Well, could you pay it out today? Could you pay out the $39,332.63?---Obviously not, sir. I wouldn't be here if I could."
When questioned as to the judgment obtained by her former solicitors, Egans, she said:-
"Oh, I see. Well, he obtained a judgment for some $9120.40. Is that correct?---Yes. And that judgment remains unsatisfied, at the moment?---Yes, but the legal fees on - - - Are you able to pay that judgment today?---The legal fees on here are his legal fees. Ms. Burton, can you just listen to my question?- --Sir, obviously, if I am sitting in here, going through this, I can't pay it today, because you're asking me for money".
The debtor further stated in evidence:-
"I see. So you say that given time you can sort all of these things out. Is that what you are telling us?---At the moment, I am refinancing my home. At the moment, most of the problems that you are honing in on are being resolved, and I'd like to ask the court - - -
No. Perhaps just answer the question?--- - - - to review the offers, and I think it's fairly relevant to - - -
HIS HONOUR: Well, if you want to tender the letters, this is probably a convenient point to do it, Mr. Zillman.
MR ZILLMAN: I do not even know what the letters are.
HIS HONOUR: Well, hand me the letters?---I'd ask the court to review the offers, including the most recent one. One of them actually isn't there. That was one I made to them this morning where I offered them $4000 and jewellery".
A perusal of the offers made between January and May, 1993 to the petitioning creditors shows that save for the agreement made on 2 March, 1993 to pay an entire sum, the offers made were for part payment immediately and payment of further sums over time. These offers were in some cases to be supported by a pledge of jewellery or share script.
It is clear that the debtor has made no effort to pay the judgment held by Mr. Frizelle and Beaux-Tissus Pty. Ltd.
When asked why she wanted a four week adjournment, the debtor gave the following evidence:-
"HIS HONOUR: Now, why do you want it adjourned for four weeks, Mrs Burton: to call a meeting of creditors?
MS BURTON: Well, as I said, I have a new accountant and a new solicitor who have just been briefed and they both believe that the problem can be solved under a Part 10 arrangement."
The evidence does not establish that the debtor is able to pay her debts within the meaning of section 52(2)(a) of the Bankruptcy Act. It is all the other way. If the debtor had the capacity to re-finance and clear all her debts, I am satisfied that she would not have allowed the first mortgagee to obtain an order for possession of her family home. If the application for an adjournment to call a meeting of creditors was bona fide then the calling of such a meeting is tantamount to an acknowledgment that she cannot pay all her debts.
Irrespective of what the true value of the debtor's assets is, she has failed to demonstrate to the court that she has the ability to command cash resources through the use of her assets to pay immediately, in the sense of a reasonable time, all the debts which she owes.
Other Sufficient Cause
50. The approach to be taken by the Court when a debtor seeks to have the petition dismissed for other sufficient cause was laid down by the High Court in Cain v. Whyte (1932) 48 CLR 639. The High Court agreed with the formulation of Henchman J at first instance where he said (48 CLR at 645-646):-
"I approach that question with the full appreciation that, prima facie, on proof of the matters mentioned in sec. 56(2), the Court will proceed to make an order for sequestration, and that it is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order".
The Full Court in Clyne v. Deputy Commissioner of Taxation (1985) 5 FCR 1 at 5 in applying Cain v. Whyte observed:-
"The circumstances which may constitute 'other sufficient cause' for dismissing a bankruptcy petition are extremely variable. It is not appropriate to attempt to catalogue or circumscribe them: see Cain v. Whyte (1933) 48 CLR 639 at 645".
The circumstances put forward by the debtor are:-
(a) That the proceedings are not bona fide brought for the recovery of the debt, but are brought to drive her out of business because she has made public statements against the petitioning creditors;
(b) That she has made reasonable offers of payment which have been refused by the petitioning creditors;
(b) That economic circumstances are difficult for small business and that to put her out of business will be to the predjudice of her employees and customers;
The judgment was obtained by the petitioning creditors on 26 June, 1991. Thereafter an application was made for oral examination of the debtor. The application to set aside the judgment was dismissed on 28 October, 1991. The petitioning creditors applied for a bankruptcy notice on 22 May, 1992. On 3 June, 1992 the bankruptcy notice issued and it was served on the debtor on 10 June, 1992. By a letter dated 11 June, 1991 to the Chief Executive Officer of the petitioning creditors the debtor, inter alia, wrote:-
"My appeal against the claim for judgment against me was dismissed reluctantly by the presiding Magistrate who commented pointedly on the furtive way in which the damming clause was inserted into the contract. (I have now received further legal advice that it can be argued that your document does not constitute a personal guarantee).
I turned then to your Mr Rose who discussed the matter with me in my office. He left me with the impression that there would be some conciliatory action on your company's behalf. He then left on one of the overseas jaunts your sales staff enjoy at the advertisers' expense. Nothing was heard from that point in time until the Australian Small Business Association, of which I am Queensland President started a public protest against your company over the enormous price hikes in your advertising rates which have no apparent justification other than greed. It is a strange coincidence that I have now been hit with a Bankruptcy Notice to extract the money in dispute.
There have been a number of media comments and features on the Yellow Pages way of doing business and before I unfold the latest chapter to the media I would like your comments in the matter should you wish to intercede".
The events recorded in the letter occurred after 11 June, 1991 and on the balance of probabilities, I find that the letter was written on 11 June, 1992 the day after service of the bankruptcy notice. Attached to the letter was a press release from the debtor in her capacity as president of the Queensland Branch of the Australian Small Business Association. It is sufficient to say that the press release was highly critical of the petitioning creditors. On 1 July, 1992 the Chief Executive Officer replied to the debtor. He records that the facsimile from the debtor was received by the petitioning creditors on 23 June, 1992. His letter stated, in part,:-
"You stated that nothing was heard from us until after the Australian Small Business Association commenced its public protest. Our records indicate that we spoke to your representative Mr George Dubiel-Smith (in relation to your outstanding account) when he visited our Brisbane office on 1 May 1992. We advised him that we were only prepared to wait a further seven days for payment, after which we would be pursuing all legal avenues open to us. As we did not hear from you within the seven days, we instructed our solicitors to commence bankruptcy proceedings on 15 May 1992. Both of these dates precede the commencement of the media campaign which as far as we can ascertain was on the 16 May 1992.
Based on the above facts, it appears that our company has followed normal and commercially accepted practices in recovering monies outstanding to us. I have not been able to find any impropriety in relation to our dealings with you.
With regard to your document entitled 'Small Business To Opt For Optus', we have noted its contents and take this opportunity to advise you that the document contains material inaccuracies.
Ms Burton, we genuinely value you as a customer and wish to extend to you every opportunity to clear your accounts. I am asking our senior manager in Queensland, Mr Norman Rose, to contact you in this regard. I have authorised Mr Rose to work out a reasonable agreement which will satisfy the outstanding issues".
The debtor has not challenged the facts asserted in the letter. The question of the payment of the judgment debt was not resolved between the debtor and Mr. Rose. On 3 November, 1992 the debtor was served with the bankruptcy petition. On that date she wrote to the Chief Executive Officer of the petitioning creditors a letter which contained the following:-
"Once again your bullies have begun har(r)assing me over the matter I thought had been cleared up last year following my letter of June 11, 1991. Your Mr Mike Young seems obsessed with victimising me (and others) in a most abhorrent way. I intend to broadcast the ruthless greed of your company (which is no secret among small businesses) through as many media outlets and business organisations as possible. The cowardly reaction of your Mr Rose (who is off on yet another holiday) is typical of the disgraceful disregard you and your employees have for your customers.
When I raised this current matter with Mr. Rose, he said he would 'look into it'. Soon after, I received an officious phone call from your solicitor warning me that it was useless for me to complain and ordering me to direct any further correspondence through him. I have sent all the relevant details to Telecom, Austel, the Trade Practices Commission, The Department of Consumer Affairs, and The Federal Minister for Communications. My story and the stories of other 'victims' of Telecom will be circulated to as many Queensland small businesses as possible.
There is something sick and pathetic about anyone who takes such delight in hounding and destroying people lives and there is something even more sick and sorry about an employer who condones such action.
What has been particularly offensive in this instance is that your sales staff, duped me into believing that all was reconciled between your company and mine and I then parted with $7,000 to pay in advance your horrendously high advertising bill. As soon as I had paid, I was then issued with a Creditor's Petition threatening bankruptcy if I did not pay the bill which was the subject of the previous Bankruptcy Petition in 1991.
The way in which your 'Personal Guarantee' is surreptitiously obtained, without being properly explained has already been queried by a number of legal people. We intend to take this matter further to see if we can expose, what in our business could be deemed misleading and at worst fraudulent".
On 30 January, 1993 the debtor sent the following facsimile to the petitioning creditors:-
"I would like to make one last offer in response to your most recent demands. I hereby offer to pay you $5,000 in monthly payments of $1,000 commencing on February 1.
Considering that, technically speaking the debt is a debt of Karlye Pty Ltd and not that of Waralace, this should be seen as a generous offer. You should also keep in mind that I am also paying for current advertising. You have already pointed out that I have been conciliatory in this matter. You, however have not. In fact, over recent days the amount you are demanding has almost doubled. The sudden claims for interest on the debt smack of the worst form of greed. If your ploy is in response to the Application for Winding Up of Waralace, you need to be reassure(d) that the claim has been set aside and settlement of the matter is in progress.
Since you flatly refuse to communicate with me and since not only have you been decidedly uncompr(ising) but also dishonest with me I shall have no other recourse than to take the matter to the media, (Brisbane Extra, Hinch and others) who have been pressing me for a follow up story to the previous one they ran. I can also assure you that whatever funds you manage to force out of me, you shall lose more than tenfold due to loss of advertisers from amongst my many small business associates, I await your reply.
Gai J. Burton
Waralace Pty Ltd
PLEASE READ THIS WEEKS BULLETIN PAGES 14, 15, 'BANKRUPTS TURN TO CANBERRA'"
The material establishes to my satisfaction that it is more probable than not that the petitioning creditors determined to institute bankruptcy proceedings in early May, 1992 before a media campaign was initiated against the petitioning creditors. It is implicit in the debtor arguing this ground that she was in some was involved in the media campaign which was initiated in May, 1992. I also consider that a fair view of the correspondence is that the debtor was using the threat of adverse media coverage initiated by her as a bargaining tool to attempt to avoid paying the judgment debt and later to defeat the bankruptcy proceedings or to settle the proceedings to her advantage.
To establish that the bankruptcy proceedings are an abuse of process, the debtor must show that the petitioning creditors in pursuing bankruptcy proceedings are not bona fide intending to pursue the proceedings to a recognised lawful end - whatever their motive may be for attaining that lawful end - but for the real purpose of attaining some other and improper end, such as extorting money (Dowling v. Colonial Mutual Life Assurance Society Ltd. (1915) 20 CLR 509 at 522 per Isaacs J; at 525 per Power J; Rozenbes v. Kronhill (1956) 95 CLR 407 at 448; Clyne v. Deputy Commissioner of Taxation (1984) 154 CLR 589 at 599).
There is no evidence to support the assertion of the debtor that the petitioning creditors are waging a personal vendetta in maintaining the bankruptcy proceedings against her for speaking out publicly against them. Further, no officer of the petitioning creditors who swore an affidavit was cross-examined to obtain evidence of such a motive. There is nothing in the material to suggest that the petitioning creditors have sought other than to have the judgment debt paid and in the absence of payment of the debt to bona fide seek the making of a sequestration order. The terms of the consent order made on 2 February, 1993 show that the petitioning creditors were prepared to consent to the dismissal of the petition if the judgment debt and agreed costs were paid.
The debtor fails to make out a ground for dismissing the petition on the basis of fraud or abuse of process.
The debtor next argues that the petitioning creditors acted unreasonably in refusing her offers to pay. On the evidence before the court the first offer was made on 28 January, 1993 to pay $4,000.00 in full and final satisfaction of the judgment debt at $500.00 per month. This was rejected. On 31 January, 1993 the debtor offered to pay the judgment debt of $7,498.75 by ten monthly payments of $750.00. The offer made no provision for the costs of the bankruptcy proceedings and was rejected. There were further negotiations which led to the consent order of 2 February, 1993.
When the conditions attaching to the consent order were not fulfilled, a further offer was made by the debtor to pay the agreed sum of $10,814.75 by two payments. The first of $5,000.00 forthwith, and the second of $5,814.73 supported by a pledge of jewellery, by 9 February, 1993. This was rejected. On 14 May, 1993 the debtor offered to pay the judgment debt of $7,498.75 by an initial payment of $1,000.00 and monthly payments thereafter of $725.00. This offer was rejected. Finally, the debtor, on 15 May, 1993, offered to pay the judgment debt by an initial payment of $2,000.00 with monthly payments thereafter of $1,374.68. The monthly payments were to be secured by a pledge of jewellery and a lien over company stock owned by the debtor and over lay-by debtors of Waralace Pty. Ltd. This offer was rejected.
Two things need to be said as to the debtor's offers of payment. The first is that, on the evidence, they have all come after the presentation of the petition. The second is that, save for the consent order, all offers were for payment over time.
A petitioning creditor after presentation of the petition is entitled to accept or reject tender of the whole or part of the judgment debt (McIntosh v. Shashona (1931) 46 CLR 494 at 505, 508; In Re Gentry (1910) 1 KB 825 at 830-831, 836, 839). The reason underlying the rule is that the court will not require the judgment creditor to run the risk of having to repay the money in the event of the debtor being made bankrupt by another creditor. Whether or not a judgment creditor is prepared to run that risk is left solely to the judgment creditor. A refusal to accept tender of the whole or part of the judgment debt after presentation of the petition is not reason to dismiss the petition for "other cause" under section 52(2)(b) of the Bankruptcy Act.
It was further submitted by the debtor that it was against the public interest to put the business in which the debtor is engaged, the sale and hire of bridal gowns, out of business. It was submitted that it would cause brides and their families to suffer and cause jobs to be lost. The short answer to the submission is that on the evidence that business is being conducted by Waralace Pty. Ltd. Whether or not it remains in business will depend upon its solvency and the outcome of the proceedings to wind up the company in the Supreme Court of Queensland.
The debtor has failed to establish grounds to justify the dismissal of the petition under section 52(2)(b) of the Act.
Conclusion
66. The petitioning creditors have established the matters required by section 52(1) of the Bankruptcy Act and are thus prima facie entitled to an order for sequestration. The debtor has failed to establish grounds under either section 52(2)(a) or (b) to enliven the discretion to dismiss the petition.
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