Re Hayes, John Robert Ex parte Hayes, John Robert
[1996] FCA 407
•14 MAY 1996
CATCHWORDS
BANKRUPTCY - bankruptcy notice - whether counter-claim, set-off or cross demand - judgment creditor a co-surety - payment of debt by another co-surety - judgment debtor obtaining right of contribution by assignment - whether right of contribution dependent on demand by creditor - whether counter-claim could have been set up in proceeding in which judgment obtained
Bankruptcy Act 1966 (Cth): ss 40(1)(g) and 41(7)
Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833
Ebert v The Union Trustee Company of Australia Ltd (1960) 104 LR 346
Green v Parr [1870] SALR 126
McLean v Discount and Finance Ltd (1939) 64 CLR 312
Moulton v Roberts [1977] Qd R 135
Re Brink (1980) 30 ALR 433
Re Daley (1992) 37 FCR 390
Thomas v Nottingham Incorporated Football Club Limited [1972] 1 Ch 596
re: John Robert Hayes; Ex parte: John Robert Hayes, Deborah Norwood Watts
(No. VN 1864 of 1995)
Judge: Heerey J
Date: 14 May 1996
Place: Melbourne
IN THE FEDERAL COURT OF AUSTRALIA )
)
GENERAL DIVISION )
)
BANKRUPTCY DISTRICT REGISTRY ) No. VN 1864 of 1995
)
OF VICTORIA )
RE: JOHN ROBERT HAYES
EX PARTE:JOHN ROBERT HAYES
DEBORAH NORWOOD WATTS
JUDGE: Heerey J
DATE: 14 May 1996
PLACE: Melbourne
MINUTES OF ORDER
The Court orders that:
Declare that the Court is satisfied that the applicant John Robert Hayes has a counter-claim, set-off or cross demand exceeding the amount of the judgment debt the subject of the bankruptcy notice dated 9 August 1995, being a counter-claim, set-off or cross demand that he could not have set up in the action or proceeding in which that judgment was obtained.
The respondent pay the applicant's costs, including reserved costs.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA )
)
GENERAL DIVISION )
)
BANKRUPTCY DISTRICT REGISTRY ) No. VN 1864 of 1995
)
OF VICTORIA )
RE: JOHN ROBERT HAYES
EX PARTE:JOHN ROBERT HAYES
DEBORAH NORWOOD WATTS
JUDGE: Heerey J
DATE: 14 May 1996
PLACE: Melbourne
REASONS FOR JUDGMENT
The applicant John Robert Hayes has been served with a bankruptcy notice issued at the request of Deborah Norwood Watts and based on a judgment debt obtained by Ms Watts against Mr Hayes in the Melbourne Magistrates' Court on 28 October 1994 for $17,755.30. Mr Hayes brings this application under s 40(1)(g) and s 41(7) of the Bankruptcy Act 1966 (Cth) (the Act) seeking to satisfy the Court that he has "a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt ... being a counter-claim, set-off or cross demand that he could not have set up in the action or proceeding in which the judgment or order was obtained".
The counter-claim, set-off or cross demand asserted by Mr Hayes is a claim against Ms Watts for contribution as a co-surety of a debt owed by a company called Nature's Source Pty Ltd to the ANZ Bank. Mr Hayes claims to have acquired that right of
contribution by way of assignment from another co-surety, Wensley Bray Pty Ltd.
The Facts
On 5 November 1990 Ms Watts executed a guarantee on behalf of Nature's Source in favour of the ANZ Bank. The guarantee was made jointly and severally with a Mr Peter Papas. The guarantee is expressed to be payable on service upon the guarantor by the Bank of a written request for payment of all sums of money whatsoever which should for the time being be owing or unpaid by the customer, Nature's Source, to the Bank
whether or not the customer shall for the time being be legally liable to pay the same to the Bank and whether or not default shall have been made by or on demand made from a customer in respect thereof.
On 13 November 1990 Wensley Bray executed a guarantee in identical terms of Nature's Source's debt.
On 8 September 1993 Ms Watts commenced proceedings in the Melbourne Magistrates' Court against Mr Hayes. On 13 April 1994 Wensley Bray was joined as a defendant.
On 28 October 1994, after a contested hearing, Ms Watts obtained judgment against Mr Hayes for the amount of $17,755.30. A judgment was obtained against Wensley Bray for $4,000, interest $262.17 and costs of $4,084.75. Although Ms Watts' particulars of claim sought an order that Mr Hayes and/or Wensley Bray "take all steps necessary to obtain her release from the personal
guarantees" and an order that Mr Hayes "indemnify the plaintiff in respect of the personal guarantees", it would seem that no such orders were made by the Magistrates' Court.
Between 14 December 1992 and 2 December 1994 Wensley Bray as guarantor of the Nature's Source debt paid $123,607.23 to the ANZ Bank. The debt was finally discharged on 2 December 1994 with a payment of $78,007.23. Over the period during which the payments were made some correspondence took place between Nature's Source and the Bank. This was mainly concerned with requests by the Bank for financial data. The company was somewhat tardy in complying. The Bank at various times threatened "corrective action" (7 June 1993), the imposition of penalty interest rates (7 January 1994) and interest rate increases (10 February 1994). A letter of 8 June 1994 included the following:
Refinancing of the loan has not yet been completed, with last correspondence from the proposed financier being 2/3/94, more than three months ago.
The viability of the company has not been verified (as per numerous requests), therefore, the refinancing was your preferred option. This has not eventuated.
Please either attend to our original request to provide the specific financial information to support viability, or attend promptly to the refinancing of the borrowing held.
Please attend by no later than 30/6/94, to avoid the bank recommencing corrective action, which would include interest rate adjustments.
On 31 January 1996 the bankruptcy notice was served on Mr Hayes. On the same day Wensley Bray entered into an agreement under seal with Mr Hayes. The agreement recited, amongst other things, that the payment by Wensley Bray to the ANZ of $123,607.23 in
satisfaction of obligations of Nature's Source to the Bank and also the payment by Wensley Bray of $363,132.31 to creditors of Nature's Source other than the Bank. By the agreement it was provided that Wensley Bray
hereby absolutely and irrevocably assigns to Hayes the whole of its right title and interest (whether legal or equitable) in
1.1.1 the debt due from NS to Wensley Bray comprising the ANZ payments, the non-ANZ payments and interest thereon
1.1.2 the mortgage, the charge and the benefit of the guarantees of the co-guarantors (the "Securities")
1.1.3 the choses in action comprising rights of reimbursement and contribution from NS and the co-guarantors.
In consideration of the assignment Mr Hayes covenanted to pay to Wensley Bray the sum of $100 and to pay to Wensley Bray or allow as a set-off against monies owed by Wensley Bray 90 per cent of all monies received by way of recovery from Nature's Source or the co-guarantors or realised under the securities.
On the same day Mr Hayes gave notice of the assignment to Ms Watts and made a demand on her for contribution.
On 16 February 1996 Mr Hayes commenced proceedings in the County Court against Ms Watts claiming $41,252.41. The statement of claim pleaded the guarantees by Ms Watts, Mr Papas and Wensley Bray of the Nature's Source debt to the Bank, payment by Wensley Bray of $123,607.23 to the Bank, liability of Ms Watts as one of three co-sureties for the same monies to make contribution to Wensley Bray in the amount of $41,202.41, the assignment of that right to Mr Hayes and notice thereof to Ms Watts.
Degree of Satisfaction
Under s 41(7) of the Act the Court has to be satisfied that the debtor has a counter-claim, set-off or cross-demand of the kind referred to in s 40(1)(g). The debtor must show a prima facie case: Ebert v The Union Trustee Company of Australia Ltd (1960) 104 CLR 346 at 350. In Re Brink (1980) 30 ALR 433 at 439 Lockhart J said:
I do not understand Ebert's case as deciding that this court must undertake a preliminary trial of the counter claim, set-off or cross demand; rather this court must be satisfied that the debtor has a fair chance of success.
Usually a hearing under s 41(7) takes place when the debtor has commenced, or is about to commence, proceedings in a court of competent jurisdiction against the judgment creditor to establish his counter-claim, set-off or cross demand. Generally it is that court which should hear and determine the counter-claim, set-off or cross demand, not a court exercising jurisdiction in bankruptcy.
In the present case, the County Court is the relevant court of competent jurisdiction.
Necessity of Demand
The right of contribution given to one of several co-sureties who pays the creditor is not dependent upon demand being made by the creditor. The surety can "remove the cloud before it rains": Thomas v Nottingham Incorporated Football Club Limited [1972] 1 Ch 596 at 606. This principle was applied by Williams J in Moulton v Roberts [1977] Qd R 135. In that case the plaintiff had paid out a bank and was held entitled to recover contribution from a co-guarantor even though the bank had not made a formal demand.
It does however appear from the facts of Moulton that it was likely in the circumstances that the bank would have very shortly made a demand as soon as it learned of the decision of the debtor company to cease trading. Also Williams J found on the evidence that there was an express agreement between plaintiff and defendant that the defendant would pay his appropriate share of the amount paid by the plaintiff to the bank.
In the present case counsel for Mr Hayes did not contend that the evidence showed an express agreement by Ms Watts to the payments by Wensley Bray. Nor perhaps was there that degree of practical likelihood of demand by the Bank on the debtor that there was in Moulton, albeit that there was some degree of pressure, if not a formal demand. However such possible grounds for dis- tinguishing Moulton do not in my opinion compel a conclusion against Wensley Bray having acquired a right of contribution from Ms Watts, at least for the purposes of s 41(7). Counsel for Mr Hayes cited a decision of the Full Court of the Supreme Court of South Australia which is in point. In Green v Parr [1870] SALR 126 the plaintiff sued to recover money paid under a continuing guarantee of the defendant's debt with a bank. At the trial it was proved that the bank had never called upon the plaintiff to pay the sum guaranteed. According to the report,
the Manager, on the contrary, said he had endeavoured to dissuade the plaintiff from doing so, and it appeared that a dispute between the parties was the cause of the plaintiff wishing to terminate his guarantee. The bank had, however, before payment by the plaintiff, given him notice that the defendant had drawn the amount guaranteed, and they would in future hold him liable for interest thereon.
It would thus seem that, in contrast to Moulton, there was no suggestion of any agreement between the plaintiff and the defendant for the payment to the bank. The judgment of the Full Court was given by Hanson CJ who said (at 127):
The surety was under a legal liability to pay, which might be converted into an obligation at any moment at the will of a third person. We think that he was not bound - there are many circumstances under which it might be most injurious to him - to allow the liability to continue, simply because the person who had a right to change it into an immediate obligation chooses not to exercise that. We think the plaintiff was not bound to wait until called upon. The liability for the debt on his part was complete, and it could only be discharged by payment by himself or the principal. Therefore we think he was entitled to pay whenever he pleased, and paying in that way his right of acquiring the money from the principal would immediately arise, because he did not in any way accelerate the liability of the principal.
No relevant distinction can be drawn between the case of contribution from the principal debtor and, as in the present case, contribution from a co-surety.
Counsel for Ms Watts referred to the statement of Latham CJ in McLean v Discount and Finance Ltd (1939) 64 CLR 312 at 335 that a "surety cannot claim contribution against a co-surety if he has paid before he was under any liability to do so". But as counsel himself fairly pointed out, his Honour's was a dissenting judgment.
Counsel also referred to Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 at 844 where it was held that for the purpose of a limitation defence the cause of action of a creditor against a guarantor did not accrue until the creditor made demand on the guarantor. However, the whole point of cases like Green and
Moulton is that the guarantor can pay before becoming legally liable to the creditor, so as to "remove the cloud". In any case, I do not have to resolve these issues finally. It is sufficient that Mr Hayes makes out a "fair chance of success" for his claim in the County Court. I am satisfied that he has.
Assignment
The assignment of Wensley Bray's right of contribution to Mr Hayes was valid: see Re Daley (1992) 37 FCR 390.
Could Mr Hayes have set up the Counter-Claim in the Magistrates' Court?
For a number of reasons the answer is no. First, the indebtedness of Nature's Source to the Bank had not been fully repaid at the time the Magistrates' Court judgment was obtained on 28 October 1994. There was at least the amount of $78,000.23 which was not paid until 2 December. Ms Watts' one-third share of that amount is in excess of the judgment debt. In any case, Mr Hayes at the time of the Magistrates' Court judgment did not have any right to claim contribution at all because the right of contribution had not yet been assigned to him.
Orders
There will be a declaration that the Court is satisfied that Mr Hayes has a counter-claim, set-off or cross demand exceeding the amount of the judgment debt the subject of the bankruptcy notice dated 9 August 1995, being a counter-claim, set-off or cross demand that he could not have set up in the action or proceeding
in which that judgment was obtained. There will be an order that Ms Watts pay Mr Hayes' costs of this application including reserved costs.
I certify that this and the preceding eight (8) pages are a true copy of the reasons for judgment of his Honour Justice Heerey.
Dated:
Associate
Appearances
Counsel for the applicant: Mr P G Cawthorn
Solicitor for the applicant: Andrew Cox
Counsel for the respondent: Mr P W Lithgow
Solicitor for the respondent: Winneke Sinclair
Date of hearing: 24 April 1996
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