Sanchez, M.A. v Smits, L.G

[1994] FCA 73

MICHAEL ANGEL SANCHEZ v. LEONARDUS GERARDUS SMITS AND JOHN ANTHONY LESLIE
trading in partnership as SMITS LESLIE BARWICK
No. B509 of 1992
FED No. 73/94
Number of pages - 14
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
EINFELD J

CATCHWORDS

Bankruptcy - application to set aside a bankruptcy notice - agreement to pay solicitor's fees - whether debt owed at time judgment debt obtained - whether certain payments made in satisfaction of judgment debt so that judgment debt paid in full - whether genuine dispute on substantial grounds - whether Court should go behind the judgment debt

Wren v Mahony (1972) 126 CLR 212

Oliveri v Stafford (1989) 24 FCR 413

Re David; Ex p Lahood (1979) 27 ALR 306

Re V and J Removals; Ex p Earl Pincus J, unreported 26 June 1985

HEARING

SYDNEY, 1 and 6 July 1993
#DATE 28:2:1994

Counsel and solicitor for J.S. Van Aalst instructed
for the debtor by Bryan Vaughan and Co

Counsel and solicitor for G.K. Burton instructed
the respondent by Smits Leslie Barwick

ORDER

1. The bankruptcy notice is set aside.

2. The creditors are to deliver submissions in relation to the question of indemnity costs by 4pm 7 March 1994.

3. Any submission in reply by the debtor are to be delivered by 4pm 10 March 1994.

Note: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules.

JUDGE1

Introduction
EINFELD J The procedural origin of this matter was a statement of liquidated claim issued out of Sydney's Central Local Court on 6 November 1991 by the creditors who are partners of Smits Leslie Barwick (SLB), a Sydney firm of solicitors, against the debtor Michael Angel Sanchez. A default judgment was pronounced on 31 December 1991 for $18,110 plus interest and a fourteen day bankruptcy notice was issued on 25 February 1992 and served on 23 May 1992. The notice claimed $18,444.80 which appears to include interest and costs. On 28 May 1992 Sanchez obtained a stay of the Local Court judgment ex parte but this was subsequently set aside by consent and a further hearing for a stay apparently awaits the result of these proceedings.

1. On 4 June 1992, Sanchez applied to this Court to set aside the bankruptcy notice. The ground of the application is that there is a genuine dispute about the debt on substantial grounds or that the amount of the judgment has been paid in full.
   

The facts
3. Andrew Gibbons had his real estate agent's licences withdrawn by the Real Estate Services Council in 1991 after he had become bankrupt. He appealed this decision to the District Court and the appeal was fixed for hearing on 19 to 23 August 1991. A stay in relation to the licences was obtained pending the appeal. His solicitors were SLB. Just prior to the hearing the question arose of how Gibbons was going to pay SLB's fees and disbursements for the appeal of $30,000 including counsel's fees. At this time Gibbons was a real estate salesman employed by Benchmark Project Marketing Pty Ltd trading as Century 21 Real Estate of Double Bay (Benchmark) of which Sanchez was a director and shareholder. On 14 or 15 August 1991 Sanchez agreed to fund these fees from commissions earned or to be earned by Gibbons. A meeting was arranged for 15 August at 3pm to finalise these arrangements. Present at the meeting were:

1. For SLB: Smits and Michelle Adams an employed solicitor

2. For Sanchez: Sanchez and Jim Monaghan (of Colin W. Love and Co) as his solicitor

3. For Gibbons: Gibbons and a solicitor

1. Smits was seeking SLB's fees for the appeal or assurances that they would be paid. According to Sanchez, the conversation was:
   

Smits: We have to have assurances that we will receive this money or else we will not be able to appoint the barrister we have on stand-by. We are lucky to have this barrister. He is prepared to put aside another case to do this one. However, I am obliged to tell him that I undertake to pay him, and that's why I need your assurances that you are going to pay me. Sanchez: I am prepared to give you those assurances. However, you must understand that I will not be able to pay you immediately. You will have to wait until commissions generated from sales made by Andrew settle. It depends on how many sales Andrew makes over the coming months. There is some money I can pay you almost straight away, because there is a settlement taking place in the near future.

Smits: Gibbons is a very capable salesman. He will be able to raise that money very quickly ..... We are a big firm. We act for big clients. We would be able to refer to you business worth billions of dollars.

Sanchez: I don't think we could handle billions of dollars of real estate ..... I want to discuss the terms of payment.

Smits: That is not necessary. As long as you undertake to pay it on behalf of Andrew. Sanchez: Of course I undertake it on behalf of Andrew, but I think we should discuss the terms of the payment anyway, so that we have no problems later if the income takes a bit longer to generate. You have got to understand the nature of the industry. If a sale was made by Andrew tomorrow, it would not settle for some time, and I would not be able to pay you until then. Smits: Are you in a position to pay some now? Sanchez: Yes, as soon as these matters that have exchanged settle.

1. This account was denied by Smits who had the following recollection of the conversation:
   

Smits: I appreciate that you agree to pay to us a fixed fee of $30,000. However, what we require is certainty of payment. When will we get our money? You have to appreciate that it will be necessary for us to engage counsel to appear on behalf of Gibbons at the hearing. To do so, we have to become personally liable to the barrister concerned. It is practically impossible to engage a barrister of any real competence and experience at such short notice. Fortunately, we do have a barrister on retainer in respect of another matter. However, he is engaged on a matter for a major insurance company and will not be available. As a special favour I could approach him on a personal basis to see if he could ask another barrister to handle that insurance case. Provided he agrees to do so, and I will use my best endeavours to ensure that he gives to us his time if it is possible for him to do so, we need to put in place acceptable arrangements for the payment of that $30,000.

Sanchez: We can pay the $30,000 out of commissions which are receivable by Andrew.

Smits: We accept the fact that you will be repaid by Andrew out of commissions; but, we cannot accept that assurance of payment as we have no control over when or whether Andrew will make any sales and what commissions might be realisable from those sales. That is a matter between you and Andrew. What do you expect to be the timetable for your receipts of the commissions? Sanchez: We expect the payment of the commissions to be received within the next eight weeks and we expect the payment of $8,000 within the next week or so.

Smits: That timetable is OK by us but we cannot accept payment out of commissions. That is too uncertain. You have to undertake to pay us personally agreed amounts on particular dates. As Andrew is insolvent and has been made bankrupt, we cannot rely on any personal undertakings from him. It is not open to you to make a payment "on behalf of" Andrew. We must receive your personal undertaking otherwise we would be obtaining an undue preference. That would not be acceptable to our practice especially where we are becoming liable to third parties in connection with these proceedings. Sanchez: The $30,000 will not increase will it? Smits: No. The $30,000 will be a fixed fee so as to include counsel's fees.

Sanchez: The important thing is that Andrew retains his auctioneer's licence as without it we cannot conduct the real estate business. Smits: What about the other licences which he holds? Sanchez: The auctioneer's licence is the important one.

1. Prior to the meeting but on the same day Smits had written to Gibbons about the case. Part of the letter was as follows:
   

3. With regard to the costs of the proceedings, this firm is able to accept your instructions on the basis that Mr Sanchez undertakes to pay to us a fixed fee in the sum of $30,000.00 in full satisfaction of our costs and disbursements herein; including Junior Counsel but not inclusive of Senior Counsel (for which a further sum would be payable), on the basis that the Appeal will run between 19-23 August 1991. This fee would be payable for that period on the basis of the cancellation of other matters which will need to be referred elsewhere to accommodate this matter, irrespective of whether the Appeal runs during the whole or any part of that time. Any extensions would be a separate matter. We would receive the fixed fee on the basis that we are entitled to apply it forthwith on the above terms.

Would you please provide a copy of this letter to Mr Sanchez and request that he countersign at the foot of each page to confirm his acknowledgment of the above terms.

1. On 16 August, the day following the meeting, Smits wrote to Sanchez in the following terms:
   

We refer to the meeting held at our offices on 15 August 1991 to discuss the conduct of the above proceedings and a letter to Mr Gibbons of the same date, a copy of which is enclosed herewith for your information.

We note your undertaking as provided to our Mr Smits at that meeting, to pay to us the sum of $30,000.00, on the basis referred to in the letter enclosed herewith. Further to your undertaking and your request to make the said payment by way of instalments, the partners would be prepared to accept such payment on the following terms:

1. By way of three cheques in the sum of $10,000.00 each.

2. The first cheque to be dated 15 August 1991.

3. The second cheque to be post-dated two weeks thereafter.

4. The final cheque to be post-dated two weeks after the date of the second cheque.

Please telephone our Mr Smits should you wish to clarify or vary any of the above terms.

1. On 20 August Sanchez and Smits had a telephone conversation after which Sanchez wrote to Smits on the letterhead of Century 21 Benchmark in these words:
   

Further to today's telephone discussion, we confirm that in consideration of your firm continuing with this matter I undertake to pay the agreed fee of $30,000 on the terms discussed.

1. When this letter was received on 21 August, Smits made some handwritten notes on the letter which he said reflected the conversation held at the meeting on 15 August and a further conversation with Sanchez on 20 August. The notes, and their explanation in the evidence, were: Terms -
   

1. payt ex AG "cm" -- meaning that payment of SLB's fees were to come out of Gibbons' commissions

2. expected w/i 8 wks -- meaning that the $30,000 for SLB's fees were expected within 8 weeks

3. 8k due next wk -- meaning that the first $8,000 towards the fees would be paid in the following week

4. but U undertake to pay fully (corrected in oral evidence to "personally") -- meaning that Sanchez guaranteed the $30,000.

I shall return to these notations later.

1. On 22 August, a letter was prepared by Michelle Adams for sending to Sanchez to confirm the fee arrangements but on Smits' instructions it was not sent because he did not consider it necessary. The draft letter stated (sic):
   

Thank you for your letter dated 20 August 1991. We now wish to confirm the terms of the telephone conversation, on that date, between our Mr Smits and yourself, as follows:

1. It is your intention to deduct the retainer in the sum of $30,000.00 from the commissions payable to Mr Gibbons.

2. You would expect Mr Gibbons to accumulate an entitlement to commissions in the sum of $30,000.00, on account of exchanged contracts, over the next eight week period.

3. The sum of $8,000.00 will be due and payable to Mr Gibbons next week, at which time the said sum will be forthwith forwarded to this firm, in lieu of Mr Gibbons.

Would you please acknowledge your acceptance of these terms, by return and further keep us fully appraised of Mr Gibbons entitlement to future commissions.

1. Finally on 27 August, Smits wrote to Sanchez setting out the timetable set by the District Court, presumably at the conclusion of the actual hearing of the appeal, for the filing of written submissions and for an additional hearing on 9 September for counsel to speak to their submissions. The final paragraph of the letter stated:
   

We now enclose herewith, as agreed, our Bill of Costs and Disbursements in respect of the proceedings. As Counsel has rendered his invoice to date to us, it will be appreciated if our Account can be settled as quickly as possible within the next 8 weeks or so as discussed by us last Tuesday. Please let us have the first instalment for $8,000 this week and provide me with a cash flow statement (linked to specific sales) as soon as possible showing how and when the balance will be paid.

1. The attached memorandum of fees was addressed to Messrs A.S. Gibbons and M. Sanchez and reads relevantly:
   

TO: Our professional costs and disbursements of and incidental to acting in the above proceedings for a fixed fee, inclusive of Counsel's fees As agreed between Mr Sanchez and Mr Smits on Tuesday, 20 August 1991 $30,000.00 TOTAL $30,000.00

1. Sanchez thereafter made the following payments to SLB:
   

30 August 1991 $5,000

5 November 1991 $5,000

18 November 1991 $2,500

1. On 24 October 1991, Benchmark sold the Century 21 real estate business to Bensafe Pty Ltd (Bensafe), a company controlled by Richard Stewart. Gibbons became an employee of Bensafe and Stewart thereafter made three further payments to SLB:
   

13 December 1991 $10,000

31 January 1992 $ 5,000 (bank cheque) 10 February 1992 $ 2,500 (bank cheque)

1. A further $749.97 was tendered on 2 June 1992 by Sanchez's solicitor to cover interest and costs on the Local Court judgment but was rejected. In addition a cheque from Stewart for $10,000 dated 31 December 1991 was dishonoured as was another of 7 April 1992 for $3,000. Subsequently Stewart appears to have made two other payments:
   

18 May 1992 $1,500 (probably cheque) 1 June 1992 $1,000 (cash)

1. If all these sums were paid in respect of Gibbons' appeal to the District Court and accorded with the agreement struck between Sanchez and Smits in August 1991, the $30,000 has been paid, perhaps overpaid.
   

The dispute
17. However, two separate disputes have been raised. Sanchez agreed that he undertook to pay SLB's fees but by instalments out of Gibbons' commissions as they became available. Smits' position was that he rejected Sanchez's proposition to this effect and insisted that Sanchez was to pay SLB the whole fee promptly even if by instalments, and that Sanchez was to reimburse himself from Gibbons' commissions. If Sanchez is correct, the debt was not owing on 31 December 1991 when default judgment was obtained.

1. There is a further dispute concerning the payments made by Stewart. Smits said that these were instalments on costs owing by a company named Hurlvend Pty Ltd owned by the Gibbons family which was involved in proceedings in the Court of Appeal in which SLB acted for the company. Stewart, who had apparently agreed to be responsible for both sets of fees, asserted that the payments he made were wholly or mainly moneys paid from commissions due to Gibbons and were in respect of Gibbons' costs of the licence appeal to the District Court, judgment in which was delivered in December 1991.

2. I heard oral testimony from Sanchez, Stewart and Smits. There were unsatisfactory features in the evidence of all three. Yet it is necessary to make a choice between conflicting aspects of their written and oral evidence in order to resolve the factual issues which arise. As often occurs, the contemporaneous and other written evidence supplies a more reliable basis for determining where the truth probably lies.
   

The Gibbons' appeal
20. Sanchez contended that Smits' affidavit and oral evidence on a number of matters was proved to be manifestly false by his letters of 15 and 16 August 1991 and by his handwritten notes on Sanchez's letter to him of 20 August made on 21 August. As these are the only objective contemporaneous evidence of the agreement concerning costs, they should be accepted and Smits' contrary or inconsistent evidence in the proceedings rejected. It is only necessary to deal expressly with one example of this conflict.

1. According to Smits, while Sanchez suggested that SLB be paid out of Gibbons' commissions, he rejected the proposition. It was put to Smits, I believe with some force, that had this been the fact, he would hardly have made the first note on Sanchez's 20 August letter. Smits' reply was that he put "point 4" which was consistent with his earlier insistence on direct liability. It should be recalled that Sanchez had undertaken in the letter to pay the $30,000 "on the terms discussed" and that Smits' notes were headed "terms". It is inconceivable to me that he would have noted, as the first term, that the payment was to come from Gibbons' commissions if that "term" had been rejected. None of the other "terms" had been rejected. Nothing was noted to suggest that that first "term" was rejected but the others accepted. It seems that "point 4" merely meant that Sanchez had agreed, in effect, to guarantee full payment from the commissions.

2. Smits' further answer to this stark inconsistency was that he did not write back to Sanchez. His evidence was: "The record is what it is." That a solicitor claiming considerable experience in insolvency and debt work who took the trouble to note the "terms" in handwriting would not have expressly confirmed by letter or required express written agreement that Sanchez was accepting personal liability for the fees is altogether too difficult to accept if it were the case. Although I accept Smits' assertion that the whole matter was quite urgent because the District Court appeal was fixed for the following week, I was unconvinced by his explanation that the time factor and technical problems caused him not to ask for a personal guarantee. His eventual concession that "a simple deed could have been put together" notwithstanding those matters was obviously necessary.

1. More significantly, a simple letter confirming the terms would have taken a few minutes. His letters of 15 and 16 August demonstrate Smits' very proper propensity to record the terms of verbal agreements. That the relevant oral agreement was not similarly confirmed to the contrary of his first note on Sanchez's letter of 20 August, coupled with the very unconvincing way he attempted to explain this away, leads me to the belief that his evidence that he rejected this "term" was not correct.

2. Although he agrees that he was made aware that a number of commissions were outstanding and others were expected, Smits submitted that Gibbons' undischarged bankruptcy, exposing SLB to the risk that the commissions may have been taken by the trustee in bankruptcy, was a major reason why his evidence that he did not accept this money as the source from which his fees were to be paid should be accepted. The additional possibilities of Gibbons taking ill, being sacked or making no sales were other reasons submitted as to why rejection should be concluded as probable. But all of these matters were merely the speculations of counsel and Smits gave no evidence that any of them entered his mind or influenced his thinking at all. I see no reason to proceed on supporting theories when there is express contrary evidence available and no evidence to support the theories though it would have been readily at hand if it existed.

3. Smits was on slightly stronger ground in submitting that the attack on his credit was the weaker for having first been made in the Bankruptcy Court rather than in the Local Court but I reject his claim that because the letters of 15, 16 and 27 August refer to a fixed lump sum fee and Sanchez's personal liability, they support his credibility on the crucial question. The fact is that the letters of 15 and 16 August do not contain the relevant agreement which it is common ground was concluded in the telephone conversation between Sanchez and Smits on 20 August and was confirmed by Sanchez's letter of that date on which Smits noted the four terms.

4. Moreover, the letter of 27 August, at worst equivocal, appears to me to be more supportive of Sanchez's position. First, it contained a reference to the 8 weeks "or so as discussed by us last Tuesday" (ie 20 August), the same period as mentioned in the second term noted by Smits on 21 August. It also referred to "the first instalment for $8,000 this week" mentioned in the third term noted by Smits. Most significantly, its call for "a cash flow statement (linked to specific sales) as soon as possible showing how and when the balance will be paid" makes no sense at all if the money was to come from Sanchez personally and not from the commissions. This is emphasised by the fact that the attached memorandum of fees was addressed to Gibbons and Sanchez jointly. The fact that it was for the whole lump sum of $30,000 is of no moment at all in the light of the letter's request for staged payments.

5. Whilst it is true that Adams' draft letter of 22 August was not sent, there was no true explanation of how it came to contain the reference to Gibbons' commissions as the source for SLB's fees when it was Smits, not Adams, who had had the conversation with Sanchez on 20 August. It could not have been composed alone from Smits' notes on 21 August because the letter is much more explicit. As I see it, Adams could only have obtained its contents from Smits. Significantly, Adams neither filed an affidavit nor gave oral evidence. On the other hand, Smits' criticism of Sanchez for not calling his solicitor Mr Monaghan or Mr Gibbons' solicitor both of whom were present at the meeting on 15 August was inappropriate because that was not when the relevant agreement was concluded.
   

The Hurlvend dispute
28. Once again the written material provides the key to the truth in relation to this matter. SLB wrote five letters to Gibbons or Stewart, or both, in January/February 1992, all of them apparently the work and style of Adams. The first, on 9 January, was addressed to The Secretary, Hurlvend Pty Ltd for the attention of a chartered accountant in Bligh Street Sydney. This was presumably the company's registered office. The letter advised the company that it should allow $20,000 for its costs and disbursements on the appeal to the Court of Appeal. Under the heading "Our Retainer", the letter said:

To enable us to accept instructions in relation to the filing of the Notice of Appeal by 31 January 1992, we require the deposit of cleared funds to our trust account in the sum of $8,000 by 3:00 pm Friday, 17 January 1992. Due to the substantial disbursements which will be incurred we must request the provision of such funds by you. As the conduct of the appeal proceeds we will also require the provision of further monies on account of our costs and disbursements. Should you require details of what we will require, we will be happy to discuss same with you.

1. The next letter was faxed to Gibbons and Stewart jointly at the Double Bay office of Century 21 on 21 January. Part of that letter stated:
   

It appears that there has been a misunderstanding on your part, arising out of a conversation between Mr Stewart and Mr Muir of our office, in relation to the retainer of this firm in the above proceedings.

Our position remains as stated in our letter dated 9 January

1992. That is, that we are unable to incur any costs or disbursements in the matter until the necessary cleared funds have been paid into our trust account. In relation to your query as to whether an initial retainer in the sum of $7,500.00 would suffice, we confirm that amount would be acceptable. However, we must reassert that no further costs such as transcript fees will be incurred until the funds are received. We appreciate that you are concerned to expedite the appeal but the history of the matter and the present economic climate means that the partners are simply unable to act as bankers.

1. There is a contemporaneous diary note of the conversation between Muir and Stewart.

2. The third letter, of 29 January, was similarly addressed and faxed, with an additional faxed copy to the secretary of Hurlvend at the registered office. Its contents were:
   

As you are aware, the Notice of Appeal in the above proceedings must be filed by 31 January 1992 and will incur a filing fee of $1500.00.

In view of Mr Stuart's (sic) instructions to our Ms Brun that the cheque in the sum of $5,000 should not be presented to his bankers until Friday, 31 January 1992, it will not be possible to draw a cheque on account of the filing fee until Monday, 2 February 1992.

Accordingly, if you wish to instruct us to file the Notice of Appeal within the prescribed time, it will be necessary to deposit the sum of $1500, in the form of a bank cheque or by way of telegraphic transfer prior to 31 January 1992.

1. There were two letters on 12 February. One of them, to Hurlvend's registered office, had this to say about costs:
   

We enclose two memoranda of costs and disbursements:

(a) for the period 1 August 1991 to 20 January 1992 which totals $1,729.09; and

(b) for the period 21 January 1992 to 10 February 1992 which totals $5,654.40.

In relation to the future conduct of the proceedings, before doing any further work on account of the settling of an index for the appeal, we require the sum of $2,000.00 to be deposited into trust by way of retainer.

Also prior to 24 April 1992, we will require Hurlvend to pay into trust the sum of $3,000 on account of the preparation of the appeal books as referred to in our letter dated 9 January 1992.

1. In addition to the two memoranda of costs and disbursements, there was attached a trust statement for the period to 11 February 1992 showing two payments by Stewart, one of $5,000 on 31 January and another of $2,500 on 10 February. This meant that $7,500 had been applied to the payment of the two memoranda of costs and some photocopying and facsimile charges.

2. The second letter of 12 February was addressed to Stewart at Double Bay enclosing the letters to Hurlvend of 9 January and 12 February, the two memoranda of costs, and possibly the trust statement.

3. These letters make clear that there were discussions between Stewart and members of SLB. In the light of contents of the letters, Sanchez conceded that the two cheques totalling $7,500 in January/February could not have been intended by Stewart to go towards the costs of Gibbons' District Court appeal. But he submitted that the dishonoured cheque of $10,000 on 31 December 1991 was so intended.

4. Significant objective support for that submission comes from the fact that the first estimate of fees in respect of the Hurlvend appeal was not given until 9 January when an initial payment of $8,000 was required by 17 January to permit the notice of appeal to be filed by 31 January. These fees may also have been needed for an application to a registrar for a stay of execution of the first instance judgment in the Hurlvend matter before the court term commenced in February as had apparently been recommended by counsel. It seems impossible from the letter that a payment before 9 January could have been intended for the Hurlvend appeal despite Smits' evidence of earlier conversations with Stewart about it.

5. According to Sanchez, it would follow that despite his denials, Smits must have known before 31 December that Stewart had taken over Century 21 from Sanchez, that Gibbons was continuing to work for the agency, and that the agreement with Sanchez had been superseded or at least affected by the change of ownership. Certainly it seems that Smits must prior to 31 December have had an agreement with Stewart for the payment of further fees for Gibbons' District Court appeal.

6. On Sanchez's argument, if this Court makes such findings, the Local Court can and should conclude that the effect of this agreement was to release Sanchez from further liability to SLB and that SLB accepted Stewart as a replacement for Sanchez in this respect. That would, according to Sanchez's submissions, be sufficient to set aside the bankruptcy notice. Sanchez asserted that Stewart had told him that he had come to an agreement with Smits to pay the balance of the fees after agreeing with Sanchez to do so. But Stewart denied such an arrangement and any personal liability, and said that his payments were a "grace and favour" exercise for Gibbons whose services and licences he and the business needed. Smits' evidence was that he had a personal undertaking from Stewart to pay the balance of Gibbons' costs which Smits says was still $25,000 at the time of the change of ownership. Smits said that this agreement did not affect Sanchez's personal liability but that he offered to hold to Stewart's account any amounts paid by him which Sanchez later paid. Sanchez in fact paid $12,500 in all leaving a balance of $17,500.

7. There was nothing in writing from either Stewart or Sanchez in this respect. Nor is there any evidence of Sanchez having agreed with Smits that any payments by Stewart to SLB were to be applied towards Gibbons' costs. Thus this aspect of the case turns on the direct confrontation between the testimonies of Stewart and Smits.

8. Following SLB's request to Hurlvend of 12 February 1992 for $2,000 immediately and $3,000 prior to 24 April, Stewart tendered three amounts to SLB -- a cheque for $3,000 on 7 April which was dishonoured and two amounts totalling $2,500 in May and June. Stewart's evidence was that he did not know of the existence of Hurlvend until February or March 1992. By that time he had paid $17,500 supposedly towards the Gibbons' appeal (apparently the balance owing) and had actually tendered an extra $10,000 cheque on 31 December which could hardly have been intended for the Hurlvend appeal.
   

Conclusions
41. However, the concession by Sanchez that $7,500 of the $17,500 must have been for the Hurlvend matter and the dishonouring of the 31 December cheque lead to the conclusion that by the time Stewart became involved with Hurlvend he had lost his resolve to support Gibbons with his appeal costs. In my opinion, the only payment actually made by Stewart towards these costs was the $10,000 paid on 13 December 1991.

1. That raises for consideration the effect of SLB's acceptance of this cheque on any continuing liability of Sanchez to forward the balance of $7,500 from Gibbons' commission cheques. As I have found that Smits and Sanchez only agreed that SLB's fees would come out of Gibbons' commissions as they accrued, it follows that the transfer by Benchmark/Sanchez of the business and of Gibbons' employment to Bensafe/Stewart meant that Sanchez lost access to the commissions and the right to appropriate them to SLB. His agreement with Smits implied that he remain in a position to honour it. I accept Smits' evidence that Stewart agreed with him to take over responsibility for doing so and find that Stewart has failed to pay at least $7,500 of the fees due to SLB for the Gibbons' appeal. But this means that the correct defendant in the Local Court was, and remains, Stewart or Bensafe, not Sanchez.
   

This application
43. Where the ground for an application to this Court to set aside a bankruptcy notice is that the debt has been paid in full, the Court can simply inquire into the facts and make its own determination without having to conclude whether the judgment debt is itself attended by any doubt. However, where the application is made on the ground that there is a genuine dispute about the debt, the Court potentially becomes involved in an exercise of what has come to be called "going behind the judgment", here a judgment by default, to inquire whether there is a true or real debt. There is clear authority for such a process to be undertaken in an appropriate case: eg Wren v Mahony (1972) 126 CLR 212; Re David; Ex p Lahood (1979) 27 ALR 306; Oliveri v Stafford (1989) 24 FCR 413. There must be a substantial reason for questioning whether there is a debt in truth and reality: Re V and J Removals; Ex p Earl (Pincus J, unreported 26 June 1985).

1. My finding that Sanchez's only undertaking was to appropriate Gibbons' commissions to the payment of SLB's fees, and to guarantee that they would be so appropriated, while he was in a position to do so, coupled with the absence of any evidence that before Benchmark sold out to Bensafe he did not pay to SLB any commissions earned by Gibbons, means that Sanchez satisfied all his legal and personal obligations to SLB. As this all occurred prior to 31 December 1991, no money was owing by Sanchez personally when the default judgment was obtained. But Sanchez's intention is apparently to leave it to the Local Court to determine whether the effect of the payment by Stewart on 13 December 1991 was to release Sanchez from any further obligation for any unpaid balance of the fees owed by Gibbons to SLB.

2. To me this seems a very clumsy and costly way of dealing with the matter. I am of the opinion that this is a proper case to go behind the judgment. Having done so, I conclude that there is in truth and reality no debt owing by Sanchez to SLB under the bankruptcy notice. The bankruptcy notice must be set aside.
   

Costs
46. Sanchez has sought indemnity costs from SLB which has asked to put its submissions on costs after this judgment has been delivered. Those submissions may be put in writing within seven days of the delivery of judgment with a further three days for any reply by Sanchez.