Re Crooks, Barbara Elizabeth Ex Parte Hamilton, William James
[1996] FCA 1034
•26 Nov 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
BANKRUPTCY DISTRICT OF THE ) NP 3535 of 1994
)
STATE OF NEW SOUTH WALES )
Re: BARBARA ELIZABETH
CROOKS
Debtor
Ex parte: WILLIAM JAMES HAMILTON
Petitioning Creditor
Coram: Whitlam J
Place: Sydney
Date:26 November 1996
MINUTES OF ORDER
THE COURT ORDERS THAT:
Note:Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
BANKRUPTCY DISTRICT OF THE ) NP 3535 of 1994
)
STATE OF NEW SOUTH WALES )
Re: BARBARA ELIZABETH
CROOKS
Debtor
Ex parte: WILLIAM JAMES HAMILTON
Petitioning Creditor
Coram: Whitlam J
Place: Sydney
Date:26 November 1996
REASONS FOR JUDGMENT
The petitioning creditor relies upon a judgment debt obtained against the debtor in the District Court of New South Wales. The debtor opposes the petition on several grounds. At the outset, however, she submits that the Court should go behind that judgment and hold that it was not founded on a real debt. The threshold issue is, therefore, whether I should go behind the judgment.
The background to that judgment may be quickly sketched. On 6 June 1988 in winding up proceedings in the Supreme Court of New South Wales (ED 2804 of 1988) the petitioning creditor was appointed provisional liquidator of OZ-US Film Productions Pty Ltd ("OZ-US"). Those proceedings had been brought by two shareholders in OZ-US, Butipa Pty Ltd and Dahozo Pty Ltd. The debtor was a director of both those companies and of OZ-US.
On 9 June 1988 she and another director of OZ-US, Herman LeVee, entered into an agreement with the petitioning creditor whereby they indemnified him in respect of his costs, expenses and remuneration as provisional liquidator of OZ-US.
The petitioning creditor commenced an action against the debtor and Mr LeVee for breach of this agreement in the District Court on 12 April 1989. The action was defended. The petitioning creditor applied for summary judgment. After several adjournments at the request of the defendants, they failed to appear at the hearing of the summary judgment application on 22 March 1990. The District Court gave judgment for the petitioning creditor against the debtor in the amount of $27,365.68. On 8 December 1994 the debtor filed notice of a motion to set aside the judgment. That notice of motion was dismissed with costs by the District Court on 3 March 1995.
The Court will not go behind a judgment as a matter of course but only if appropriate circumstances are shown to exist: Wolff v Donovan (1991) 29 FCR 480 at 486; Makhoul v Barnes (1995) 60 FCR 572 at 581, 584. The nature of the discretion to go behind a judgment was explained by Barwick CJ in Wren v Mahoney (1972) 126 CLR 212 at 224-225. The discretion will be exercised where the debtor can demonstrate that there is any substantial reason for questioning whether behind the judgment there was in truth and reality a debt due to the petitioning creditor: Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572 at 582, 584. The District Court judgment having been proved, this involves "a tactical onus on the debtor": Wolff v Donovan at 487.
The reasons advanced by the debtor for questioning whether there is a real debt are, in essence, two. First, it is said that the petitioning creditor failed to perform his duties as provisional liquidator of OZ-US in the manner contemplated by the agreement of 9 June 1988 so that there was a "failure of consideration" such as to disentitle him to claim on the indemnity. Secondly, it is said that he did not satisfy a condition precedent to the effect that, before claiming under the indemnity, he should initially have recourse against "any of the property of [OZ-US] to the extent available to [him]". The facts relied on by the debtor concern the discontinuance of proceedings ED 2584 of 1988 in the Supreme Court of New South Wales, the petitioning creditor's failure to commence other proceedings on behalf of OZ-US and the deregistration of OZ-US.
Proceedings ED 2584 of 1988 were commenced on 20 May 1988 upon the instructions of the debtor and Mr LeVee by OZ-US as plaintiff against Hanline Pty Ltd ("Hanline"). In those proceedings OZ-US sought a declaration that Hanline held an agreement with Orion Pictures Corporation ("Orion") upon trust for it. Hanline was associated with one Simon Heath, who was also a director of OZ-US. On account of the conflict between the directors a provisional liquidator of OZ-US was appointed in the winding up proceedings to conduct those proceedings. On 10 June 1988 in proceedings ED 2584 of 1988, OZ-US was directed to file a statement of claim by 16 June 1988, and directions were also given for a summary dismissal application by Hanline to be returnable on 6 July 1988. Hanline's solicitors then wrote to the solicitors for OZ-US pointing out that their client had not entered into any agreement with Orion. The petitioning creditor sought the advice of counsel whom he saw in conference on 4 July 1988. Counsel advised that those proceedings should be discontinued. (The petitioning creditor says that the debtor and
Mr LeVee were present at the conference. The debtor says that she cannot recall attending such a conference. I am quite satisfied that she did attend since she wrote a letter to the petitioning creditor on 12 July 1988 referring to "our meeting ... at the barrister's chambers" and nothing in the evidence suggests that this is a reference to another occasion.) The petitioning creditor accordingly instructed OZ-US's solicitors to discontinue proceedings ED 2584 of 1988, which they did on 7 July 1988. He says that the debtor and Mr LeVee agreed with that course, and I accept his evidence.
Although no winding up order had been made, the debtor completed as a director a report dated 6 May 1988 as to the affairs of OZ-US in the form prescribed for the purposes of s 375(1) of the Companies Code ("the Code"). In Schedule B of that report particulars of sundry debtors showed Mr Heath as owing $34,225.86 and a Mr T.G. Whitbread and Regional Finance Pty Ltd as jointly and severally owing $19,893.80. A question mark was placed in the column "Amount Realizable" next to each of those debts, as it was too for the asset described as the "Orion Agreement".
Mr LeVee died on 12 September 1990. Hugh Charles Thomas was appointed trustee of Mr LeVee's bankrupt estate on 15 December 1992. Between October 1993 and March 1994 the debtor and Mr Thomas sought and received advice from counsel about the prospects of OZ-US successfully suing various persons. On the basis of his instructions counsel did advise that Mr Heath and Hanline might be sued for breach of fiduciary duty. On the other hand, counsel was very guarded about the prospects of recovering from the sundry debtors shown in the report as to affairs completed by the debtor on 6 May 1988. He declined to express a favourable opinion on the proofs of evidence made available to him.
The petitioning creditor declined to commence any proceedings against Mr Heath or Hanline on behalf of OZ-US. This position was discussed at a meeting of the creditors of Mr LeVee's bankrupt estate on 16 March 1994. At the meeting the debtor's solicitor apparently advised that Butipa Pty Ltd and Dahozo Pty Ltd could initiate proceedings against Mr Heath and Hanline. The debtor, who was the executor and a beneficiary of Mr LeVee's estate, sought to have the creditors finance such proceedings. Since the largest of the creditors represented also had a charge over the assets of Butipa Pty Ltd and Dahozo Pty Ltd to secure its debts, another creditor apparently agreed on the spot to purchase those debts in order to have the firstmentioned creditor abstain from voting on a resolution authorising the trustee to fund such proceedings out of the estate. The resolution was carried. The minutes of this meeting, which were tendered by the debtor, are truly bizarre.
Meanwhile, on 17 March 1993 the petitioning creditor had written to the Australian Securities Commission ("the ASC") requesting that OZ-US be deregistered as a defunct company. The letter referred to s 572(3) of the Corporations Law ("the Law") which authorizes the ASC to send a notice where "a company is being wound up". The ASC cancelled the registration of OZ-US on 17 September 1993. (OZ-US was not, in fact, being wound up. However, a notice sent by the ASC under subs 572(3) is in the same terms as that authorized by subs 572(2), when a company "is not carrying on business or is not in operation".)
According to a copy of an affidavit sworn by the debtor on 17 August 1994, Dahozo Pty Ltd and Butipa Pty Ltd filed a statement of claim against Mr Heath, Hanline and others,
alleging breach of fiduciary duty, on 23 March 1994 in proceedings ED 1810 of 1994 in the Supreme Court of New South Wales. Those plaintiffs applied by notice of motion filed in those proceedings on 17 August 1994 to have OZ-US reinstated pursuant to s 574 of the Law. The petitioning creditor wrote to the Supreme Court on 1 September 1994, indicating that he had "no desire to once more be the Provisional Liquidator of [OZ-US]", pointing out that his remuneration remained unpaid, and requesting that, if OZ-US was reinstated and he was reinstated as provisional liquidator, security be provided to cover his remuneration and out-of-pocket expenses. The Supreme Court dismissed the application for reinstatement of OZ-US on 2 September 1994.
The debtor submits that the petitioning creditor's primary duty as provisional liquidator was to preserve the assets of OZ-US. Specifically, it is said that the petitioning creditor was under an obligation to pursue the pending claim against Hanline in proceedings ED 2584 of 1988. Further, it is submitted that he failed to act as provisional liquidator "as contemplated" by the indemnity agreement of 9 June 1988 in procuring the deregistration of OZ-US and, in the light of counsel's advice of March 1994, by not commencing proceedings such as ED 1810 of 1994 on behalf of OZ-US.
There are a number of difficulties with these submissions. However, the insuperable obstacle for the debtor is the absence of any such provision in the indemnity agreement. The obligation to indemnify is not qualified in any of the ways contended for by the debtor. Of course, the parties could have agreed that an indemnity would only be provided on the basis of some such entire contract. The failure of the petitioning creditor to undertake the agreed obligations might then preclude recovery on the indemnity. But that is not this case. None
of the matters raised by the debtor suggests that the petitioning creditor did not incur costs and expenses as provisional liquidator. Further, s 373(2) of the Code provides that a provisional liquidator is entitled to such remuneration as is determined by the Court. Such remuneration was determined by the Supreme Court in proceedings ED 2804 of 1988 on 29 August 1988, and a copy of the Court's order was sent to the debtor and Mr LeVee by the petitioning creditor on 5 September 1988.
Next, the debtor submits that these same matters, together with the failure to take steps to recover from the sundry debtors identified in the report as to affairs of OZ-US completed by the debtor on 6 May 1988, establish that the petitioning creditor did not satisfy the alleged condition precedent in the indemnity agreement. It is true that paragraph 4(c) of that agreement does provide for first recourse against property of OZ-US "to the extent available" to the petitioning creditor. The qualification is, of course, vital and perhaps expresses no more than what is inherently involved in the notion of an indemnity for a provisional liquidator. More importantly though, the condition precedent defence was raised in the District Court proceedings as the pleadings in evidence show. This defence was addressed in two affidavits by the petitioning creditor filed in the District Court, one made on 7 September 1989 in support of the summary judgment motion and a further one made on 22 November 1989 that dealt with a further refinement of the defence verified by the debtor and Mr LeVee on 6 October 1989. It is, of course, also difficult to see how those events relied upon by the debtors to the extent that they occurred after 12 April 1989 when action was commenced in the District Court could provide a defence to the petitioning creditor's cause of action for breach of contract.
The discretion to go behind a judgment will be more readily exercised in the case of a default judgment. The debtor submits that there is no relevant distinction between an ex parte summary judgment and a default judgment. I do not accept that submission. It all depends on the circumstances. In a particular case a review may be justified after a full hearing: Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 at 588. I respectfully agree with what Beaumont J said in Olivieri v Stafford (1989) 24 FCR 413 at 423-426 about accepting the process of adjudication in the District Court. Whilst the evidence on the hearing of this petition does not disclose what case was presented to Judge Bell in the District Court on 22 March 1990, there is in evidence the affidavit of the petitioning creditor's solicitor made on 9 February 1995 and filed in opposition to the debtor's application to set aside judgment. That affidavit comprehensively chronicles events before and after judgment. Importantly, it drew to the attention of the District Court the fact that the debtor's application to set aside judgment was made after the presentation of the petition herein relying on that judgment debt. In my opinion, there is no substantial reason for questioning whether behind the District Court judgment there was a real debt.
The debtor submits that, even if there was a debt at the time of judgment, it has since been compromised. The way in which a judgment debt may be discharged by subsequent agreement is explained in Commissioner of Taxation v Hadidi (1994) 51 FCR 453 at 460-466. The first task for the debtor in support of her submission is to identify such an agreement.
Against the background of pending bankruptcy proceedings against the debtor by the petitioning creditor, there has been protracted correspondence between their respective
solicitors between August 1992 and September 1994. This correspondence has been analysed in exquisite detail in written submissions filed after the hearing of this petition by the parties' counsel. I do not propose to set out that correspondence. The debtor asserts that an agreement was reached either on 16 April 1993 or on 30 June 1993, on each of which dates the debtor's solicitor wrote accepting what is described as an "offer" by the petitioning creditor. It is sufficient to say that, for reasons cogently expressed in submissions by counsel for the petitioning creditor, I do not accept that any of this correspondence constitutes an agreement.
There is also an entirely inconsequential dispute about what was said the next year between two solicitors on 22 June 1994. The correct position is reflected in the letters from the debtor's solicitors to the petitioning creditor at the time of the attempt to reinstate OZ-US. In a letter dated 8 September 1994 those solicitors express the debtor's "intention that an agreement be reached" with regard to the payment of the petitioning creditor's outstanding costs and disbursements. Plainly no agreement had ever been reached. The debtor's submission that the judgment debt has been compromised accordingly fails.
Next, the debtor submits that the petitioning creditor is estopped from asserting that the debtor is indebted to him as alleged in the petition. Here the correspondence has not been subjected to such fine analysis by the debtor. This is not surprising. In the absence of a concluded agreement, the statements in the key letters are not capable of conveying the kind of representations set up by the debtor. In any event, the judgment debt remains "owing" for the purposes of s 52(1)(c) of the Bankruptcy Act 1966 ("the Act").
The estoppel agreement is repeated under the rubric "other sufficient cause" in s 52(2)(b) of the Act. This does not improve the argument which is again rejected.
This brings me to the further "other sufficient cause" relied upon by the debtor to dismiss the petition. The debtor filed on 9 April 1996 in the Supreme Court a "complaint" in proceedings ED 2804 of 1988. I am told that this is a complaint under s 420(1) of the Code. The debtor complains about the discontinuance of proceedings ED 2584 of 1988, the petitioning creditor's failure to institute proceedings against Hanline or Mr Heath, his failure to conduct an examination of Mr Heath and his role in the deregistration of OZ-US and in the application for its reinstatement. There is no evidence about the fate of any claim for an inquiry under s 420(1). If such a claim is pending in the Supreme Court, it is preferable that I should say as little as possible about its prospects. However, as I have described the evidence earlier, it may be seen that I certainly do not think there is much of a case against the petitioning creditor. In those circumstances, the mere fact such a claim may be pending affords no sufficient cause for the exercise of my discretion to dismiss the creditor's petition, whatever be the breadth of "action" open to the Supreme Court under s 420(1).
All grounds of opposition to the petition fail. The petitioning creditor proved at the hearing the matters required under s 52(1) of the Act. However, upon the matter being listed for judgment last Friday, I was informed that the petition has lapsed since the hearing. Accordingly, I was asked by the parties not to make a sequestration order at that time, but to stand the matter over to 4 December 1996, after publication of these reasons, for consideration of appropriate orders, including the question of costs.
I certify that the preceding 10 pages are a true copy of the reasons for judgment herein of the Hon. Justice A.P. Whitlam
Associate:
Date: 26 November 1996
Counsel for the petitioning creditor HK Insall
Solicitors for the petitioning creditor Corrs Chambers Westgarth
Counsel for the debtor PLG Brereton
Solicitors for the debtor Potts Latimer
Date of hearing: 28 June 1996
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