Re King; Ex parte Gallagher Ryan & Maloney v King

[1994] FCA 1066

RE: JOHN ALLEN KING
EX PARTE: GALLAGHER, RYAN AND MALONEY v JOHN ALLEN KING
No. VP646 of 1994
FED No. 1066/94
Number of pages - 5
Bankruptcy
(1994) 54 FCR 493

COURT

IN THE FEDERAL COURT OF AUSTRALIA
EXERCISING FEDERAL JURISDICTION IN BANKRUPTCY
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
NORTHROP J

CATCHWORDS

Bankruptcy - bankruptcy notice - going behind judgment - non-compliance with s 61 of the Supreme Court Act 1986 (Vic)

Supreme Court Act 1986 (Vic) s 61

HEARING

MELBOURNE
#DATE 2:11:1994
#ADD 9:3:1995

Counsel for the Petitioning Creditor: Mr J. Nolan

Solicitor for the Petitioning Creditor: Gallagher Ryan and Maloney

Counsel for the Debtor: Mr Zigouras

Solicitor for the Debtor: J.N. Zigouras and Co

JUDGE1

NORTHROP J This is the hearing of a petition brought by a firm of solicitors, Gallagher Ryan and Moloney, as judgment creditors, against John Allen King, a former client and the judgment debtor. Acting on the certificate given by a Registrar in Bankruptcy under Bankruptcy Rule 22, I am satisfied that the petition, as amended, should be granted and a sequestration order made, but the judgment debtor has raised an issue, orally, that in this case there has been a non-compliance by the petitioner with the requirements of section 61 of the Supreme Court Act 1986 (Vic) and therefore the petition should not be granted but should be dismissed.

1. At the outset I should say that the evidence before the Court is in a most confusing state. One can only express dismay at the fact that the petitioner, being a firm of solicitors, has not taken greater care to ensure compliance with section 61 of the Supreme Court Act and to ensure evidence be given in a clear and unambiguous form that there has been compliance with that section. There are a large number of affidavits on file but an examination of them merely adds to the general confusion and uncertainty. In the result I find there is almost nothing to rely on to support the facts sought to be relied upon by counsel for the judgment creditor.

2. In brief form it appears that the petitioner acted as the solicitor for Mr King in an action brought by a finance company against Mr King. The solicitors negotiated with the Legal Aid Commission to fund that action. The normal arrangements, apparently, were entered into for the Commission to pay 80 per cent of the costs of the solicitor. The Commission thereafter was required to obtain reimbursement of what it could from Mr King. To enforce that reimbursement provision, the Commission lodged a caveat against land owned by Mr King. The action was compromised with the agreement of Mr King. The amount of costs incurred by the solicitors were accepted by the Commission, but because of other transactions then being undertaken by Mr King, who wanted to sell the land the subject of the caveat and to purchase other land, Mr King did not want to pay any fees to the Commission until after the land transactions had been completed, a course which was not agreed to by the Commission. Apparently there was an arrangement made in the form of a novation whereby Mr King was to pay the solicitors costs direct, the Commission was not to pay the costs, and the solicitors agreed to accept its costs as their costs from Mr King. That arrangement was entered into, and I accept, for present purposes the general outline of the arrangement. In addition, the solicitors acted for Mr King in the conveyancing transactions. Eventually there were two sets of costs incurred by Mr King, the costs for the litigation and the conveyancing costs. The total amount owing was something over $6000. These costs were owed but not paid by Mr King.

3. Subsection 61(1) of the Supreme Court Act provides:
   

"61(1) Except where there is a solicitor-client agreement, a solicitor must not commence any proceedings to recover costs due to the solicitor until after the solicitor has complied with this section."

1. The section then prescribes a procedure relevant for present purposes as follows:
   

"(2) A solicitor may draw and serve on the party to be charged a bill of costs ... drawn

(a) in taxable form; or

(b) in a lump sum.

(3) If a solicitor serves a bill of costs drawn in lump sum, the party to be charged may, within one month after that service, request the solicitor to serve a bill of costs drawn in taxable form."

1. In the present case there is no evidence given by or on behalf of the judgment creditor of the service on the debtor of a claim for the total amount of the costs of the litigation and of the conveyancing. There is evidence to suggest that the debtor knew that the costs for the conveyancing were of the order of $1700. One can infer that the debtor knew of the approximate amount of the costs of the litigation although there is no evidence stating that such an account had been served on him for the amount of the costs so incurred. One would have expected the solicitors themselves to have complied with section 61, at least before action was commenced, by serving a letter of demand specifying the amount demanded covering both costs of the litigation and of the conveyancing. There must have been some discussions between the solicitors and Mr King because some amounts were paid by the debtor to the solicitors, an amount of some $700, but a summons was issued and at a preliminary conference an arrangement was entered into for payment by instalments of $100 a month of those costs. Some payments were made and then ceased. The matter came back before the court for a further preliminary conference. There was no appearance by the debtor and eventually judgment was entered. That is the amount upon which the bankruptcy notice is based.

2. In the present case, it appears to me that where subsection 61(1) of the Supreme Court Act refers to "except where there is a solicitor client agreement" the agreement must refer to an agreement to pay a specific amount. If the agreement was to pay a reasonable amount or costs to be taxed or anything of that kind, there would be nothing for the rest of the subsection to operate upon. It follows, in my opinion, that section 61 applies in all cases where no specific amount has been agreed to between the parties. The mere fact of a solicitor doing work for a client gives rise to an implied undertaking for the client to pay costs, a quantum meruit is the way it is often referred to. In the absence of any agreement, the amount of the costs are to be determined, if necessary, by taxation.

3. It may well be that in this case there was evidence to support a verbal agreement to pay the amount of these costs but on the material before the Court, I am not prepared to make that finding. Therefore I find that section 61 has not been complied with. There has been a non compliance with the requirements of the section. At the same time I am satisfied that the debtor, who says he never received any account for the full amount, did know of the existence of the debt and of the amount of the debt. He made some payments towards satisfying the debt both initially by the $700 from the proceeds of sale of fruit and then by making payment of a number of instalments. In these circumstances, it is necessary to determine what is the legal effect of the non compliance with section 61.

4. In my opinion, and in the absence of reference to authority, it seems that a non compliance with section 61 merely makes a claim for costs unenforceable. Non compliance does not go to the validity of the claim. In the present case, judgment was entered. Subsequently there was an application to have the matter relisted for hearing and judgment set aside. That application came on for hearing before the Magistrate on 5 October of this year. The application was refused. The Magistrate, refusing to set aside the judgment, said:
   

"Having regard to the affidavits of L. Anderson, sworn on certain dates and filed in the Federal Court of Australia and having heard the sworn evidence of the defendant (that is the debtor) I do not accept him as a reliable witness. His version of significant events is unsatisfactory and I do not accept his testimony. He has delayed for so long in taking steps to have this judgment set aside. I believe this action to set aside was taken as a delaying tactic."

1. As a result, the Magistrates Court refused to set aside the judgment upon which the judgment creditor is presently relying.

2. Authorities of both the Federal Court of Bankruptcy and the Federal Court of Australia, support the proposition that a provision such as section 61 of the Supreme Court Act does not prevent a petition being granted provided the debt is in fact in existence. The first authority is that of Re Ferguson ex parte F.N. Thorne and Co Pty Limited (in Liq) (1969) 14 FLR 311, a decision of Gibbs J sitting in the Federal Court of Bankruptcy. In that case money was being sought under an agreement which by a statute was illegal, not merely unenforceable. At page 320 Gibbs J referred to this aspect of the matter that even if illegality prevented the company from recovering money lent, nevertheless the judgment was in existence and the debt was owing and therefore could be used as the basis for the making of a sequestration order. I incorporate that passage:
   

"Even if the illegality prevented the company from recovering the money as money lent, and the company's only right against the debtor were based on the breach of a fiduciary duty recognized by courts of equity, it would not follow that the present petition against the debtor must fail. The reason why a court having jurisdiction in bankruptcy will go behind a judgment has been discussed in a number of cases, of which Corney V Brien (1951) 84 CLR 343 is perhaps the most important. The court will go behind the judgment for the purpose of considering whether it was founded on a real debt. The fact that the judgment may be irregular or wrong in form is no sufficient reason for dismissing the petition (see In re Beauchamp (1904) 1 KB 572 at p581, and see also Re Bedford; Ex parte H.C. Sleigh (Queensland) Pty Ltd (1967) 9 FLR 497 at p 499). The object of going behind a judgment is not to inquire whether the proper procedure was followed to obtain it, but to determine whether the debtor in reality owed the credit the moneys which the judgment held that he owed. Once it is found that the debtor was really indebted to the petitioning credit in the amount for which judgment was given, any irregularities or procedure, however important they may have been had they been relied upon in the proceedings in which the judgment was obtained, cease to be of importance. I say nothing as to the case in which, although the existence of a real debt is established, it is shown that the court which gave the judgment had nor jurisdiction to pronounce it. The Supreme Court of New South Wales had jurisdiction to give judgment for the company for the amount which it claimed, even if the form of the action and the form of the judgment should have been different. However, once the existence of the debt is found, it cannot be sufficient cause for refusing to make a sequestration order that a judgment for the correct amount, given by a court having jurisdiction, was obtained by the wrong procedure or given in the wrong form. It therefore does not become necessary finally to decide whether the debtor was liable at common law as well as in equity. The important thing is that he was and remains indebted to the company in the amount for which judgment was given."

1. The other authority referred to is Re Skaff Ex parte Farrow Mortgage Services Pty Limited (1993) 113 ALR 715 and, in particular, per Drummond J at 719-720 where his Honour expressed the view that provided the debt is there and is owed, that is sufficient and the Court should not rely upon any procedural defects that might have arisen in the proceedings in the court in which the judgment was given.

2. In these circumstances, in my opinion, the non compliance by the judgment creditor with the provisions of section 61 of the Supreme Court Act does not affect the validity of the judgment. The debt is owed. There is evidence of its existence. It is sufficient to support the bankruptcy notice and the making of the sequestration order. In those circumstances, the ground of opposition as stated on behalf of the judgment debtor is refused.

3. Therefore, acting on the certification of the Registrar I am satisfied that the debtor, on 27 June 1994, committed the act of bankruptcy alleged in the petition as amended. I am satisfied with the proof of the other matters of which subsection 52(1) of the Bankruptcy Act requires proof. I note that James Albert Huppatz, a registered trustee, has consented to act as a trustee of the estate of the debtor. I make a sequestration order against the estate of the debtor and I order that costs, including reserved costs, be taxed and paid according to the Act. I direct that a draft of this order be delivered to the Registrar within seven days in accordance with rule 124(2) of the Bankruptcy Rules.