Toswell, D.A. v Kimberley N.Z.I. Finance Ltd

[1987] FCA 207

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C A T C H W O R D S

BANKRUPTCY - going behind judgment debt - failure of debtor to argue

counterclaim at trial - exercise of Court's discretion.

EVIDENCE - hearsay - whether permissible in bankruptcy jurisdiction -

application of general practice of courts.

Bankruptcy Act and Rules, r.l32(l)(c)

Re: Deborah Anne Toswell

Ex parte: Kimberley N.Z.I. Finance Limited

Qld. P159 of 1987

PINCUS J. BRISBANE 1 MAY 1987

IN THE FED= COURT OF AUSTRALIA )

GENERAL DIVISION	)	QLD PET 159 of 1987
BANKRUPTCY DISTRICT OF THE SOUTHERN	1
DISTRICT OF THE STATE OF OUEENSLAND	1

:

RE: DEBORAH ANNE TOSWELL

Debtor

M PARTE: KIMBERLEY N.Z.I. FINANCE LIMITED

!

Creditor

M I N U T E S OF ORDER

JUDGE MAKING ORDER:	PINCUS J.
DATE OF ORDER:	1 MAY 1987
WHERE MADE:	BRISBANE
THE COURT:

1.	Makes a sequestration order against the estate	of
the debtor.

2 . Orders that the petitioning creditor's costs of and incidental to the petition in this matter be taxed and paid in accordance with the Bankruptcy Act

1966.

E = : Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE! FFTIERAL COURT OF AUSTRALIA	)
GENERAL DIVISION	) QLD PET 159 of 1987
BANKRUPTCY DISTRICT OF THE SOUTHERN	)
DISTRICT OF THE STATE OF OUEENSLAND	)

RE: DEBORAH ANNE TOSWELL

Debtor

EX PARTE: KIMBERLEY N.Z.I. FINANCE LIMITED

Creditor

PINCUS J. 1 MAY 1987

REASONS FOR JUDGMENT

This is a creditor's petition for a sequestratlon order

under the Bankruptcy Act 1966. The debtor has given notlce of

intentlon to oppose the petition, and	affidavit material has been
filed.

Counsel for the petitionlng creditor objected that the

material is in large part hearsay, and so it is. The Bankruptcy

-	Act does not say in what circumstances the Court may act upon
hearsay, nor do the rules say so. It is my view that the intention probably was that the Court would apply the practice applicable in courts generally, namely that hearsay is receivable
in interlocutory proceedings only; r.132(1) (c) plainly implies
that in some circumstances, hearsay may be permitted.

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The hearsay evidence sought to be used by counsel for

the debtor is therefore inadmissible on the hearing of the

petition. That is, in this case, a just result because the

debtor's husband, the source of the information supplied in the

affidavits, was readily available and could have made the

affidavit himself. When called, the debtor proved to have very

little knowledge of the questions in issue, so that the story put

forward could not really be tested.

Counsel for the debtor contended, however, that the

material could be accepted as relevant to an application to have

the proceedings stayed temporarily to allow the taking of certain

proceedings in the Supreme Court, referred to below under par.(v)

of the summary of the notice of intention to oppose. That appears

to me to be correct; such an application would plainly be

interlocutory. But	the fact that the critical allegations made
are not sworn to by	a deponent having personal knowledge of them

considerably weakens their force and the application for a	stay
appears, in any event, to have no substance.

The judgment debt on which the bankruptcy petition is

founded was obtained in the Supreme Court of Queensland. The

petitioning creditor issued a writ for money claimed to	be due
application was adjourned once, and when it came before the

under a guarantee and then applied for summary judgment. That the debtor, and the Court entered judgment. The matters sought to

be raised in this Court and referred to below were not raised in

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the Supreme Court, nor	is any explanation advanced for the failure
to raise them there.

In an application to go behind a default judgment, which

is in substance what is sought to be done her , I have previously

acted on the view that it is necessary that there be substantial

reasons for questioning whether there is a debt in truth and

reality, following Wren v. Mahonev (1972) 126 C.L.R. 212 at

pp.224, 225 and propose to apply that test here.

The notice of intention to oppose sets up that the

debtor has a counter-claim, set-off or cross-demand. Counsel for

the creditor argued, on the basis of cases referred to by

McPherson J. at p.58 of his Honour's work "The Law of Company

Liquldation", that it is not enough to show that there is an

arguable set-off which might have been, but has not been, raised

in the proceedings in which judgment was obtained: see the

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authoritles in footnote 84. The more significant of those is &

L.H.F. Walls Ltd. E19707 Ch. 27; that case appears to be authority

for the propositlon that, in a petrtion to wind up, a claim that

there is a set-off or counter-claim gives rise to a discretion to

refuse a winding up order. I have not been referred to any

authority as to the relevance of an alleged counter-claim in an

attempt to go behind a judgment on which a bankruptcy notice has

been issued. If the judgment debtor can show the matters set out

in s.40(l)(g)(i) of the Bankruptcy Act - that the counter-claim

,	equals or exceeds the amount	of the debt and is one that he could
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not have set up in the action or proceeding in which the judgment

was obtained - that is a complete defence; there is then no act

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of bankruplcy. Here, Lhere is no such counter-claim. The matters

complained of could have been raised in the action, but were not.

Although counsel contended that the allegation of a

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counter-claim is an insufficient basis in law on which to go

behind a judgment, it is my view that that 1s not necessarily so.

A cross-claim for damages may, in some circumstances, be raised by

way of equitable set-off: see e.g. per Woodward S. in D. Galambos

and Son Pty. Ltd v. McIntvre (1975) 5 A.C.T.R. 10 at pp.25, 26.

Presumably such a set-off may be raised in bankruptcy jurisdiction

to attack the existence, as a matter of "truth and reality", of

the debt on which judgment has been obtained. But I have not

found it necessary to attempt to determine the limits within which

it is permissible to raise a cross-claim by way of attack on the

judgment debt. That is so because, quite apart from the legal

argument just mentioned, the matters relied on do not seem to me

sufficient to justify going behind the judgment.

The notice of intention to oppose petition filed on 22

April says in substance that:

(i) The receivers and managers of a company called Twinego Pty.

Ltd. acted in conjunction with the petitioning creditor "to

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prejudice the (debtor's) position in respect o the

realisation of assets" which could have extinguished the

debtor's liability.

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(ii) The petitionjng crt=rlitor, Twinego, and others agreed to act

so as to injure the debtor and certain companies in which

she holds an interest.

(iii) Securities held by the petitioning creditor could pay the

whole debt.

(iv)The prlncipal debtor (the debtor's liability being under a

guarantee) is solvent and able to repay the money.

(v) The judgment debtor is entitled to indemnity from Twinego

and proposes to bring proceedings in the Supreme Court to

establish that right.

(vi) If a sequestratlon order were made, it would give the

petitioning creditor a certain advantage.

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Not all of these natters warrant detailed consideration;

as to most of then there is no relevant evidence.

The principal affidavit of the debtor is, as I have

said, hearsay in large part. In summary, its contents are as

follows. In March 1985 the judgment debtor guaranteed a loan from

the petitioning creditor to Twinego which was secured by, inter

alia, a bill of sale over certain assets of Twinego. About the

same time, the debtor and her husband agreed to sell a 50%

interest in Twinego to people called Ryan, and the petitioning

creditor leased certain chattels to Twinego.

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In August 1985, so the affidavit says, the debtor and

her husband agreed to sell the rest of Twinego to the Ryans, the

company then having four shops, each of which had substantial

turnover. In January 1986 Fanego and another company sued the

debtor and her husband in the Supreme Court claiming, inter alia,

that there were breaches of the agreements for sale already

referred to and seeklng damages for those breaches. About the

same time, Twinego defaulted In respect of its liabllities to the

petitioning creditor and receivers and managers were appointed.

A

little later the petitioning creditor sued the debtor and her

husband in the Supreme Court on the guarantee.

The affidavit suggests that the assets of Twinego are

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substantial and that its buslness at the date of appointment of

receivers and managers was worth between $300,000 and5400.000.

The affidavit says that the receivers managed the assets

subject to the blll of sale by closlng down the store whereupon

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assets "disappeared". They also acted irresponslbly, it is said,

in falling to agree to sales of property at a good prlce, selllng

later at a lower price-. -

The affldavit also attacks the conduct of the

petitioning creditor in respect of realisation of securities, relying in particular upon an alleged sale of a property at

Surfers Paradise at a gross undervalue and the sale at an

undervalue of a certain boat.

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The investigation of the questions thus hriefly outlined

would be a considerable undertaking, involving (counsel conceded)

discovery and consideration of a number of transactions and

potential transactions, questions of valuation and the like.	I
think this Court is entitled to take into account against the

debtor that (as is admitted) no reliance was placed on any of

these matters in the proceedings in which judgment was obtained,

although the debtor was there initially represented by solicitors

and counsel. It is by no means a matter of routine that this

Court will undertake the task of determining in bankruptcy

jurisdiction questions which should have been raised in the

Supreme Court; such a policy would damage the Court's prospects

of properly carrying out its primary functions under federal law.

Counsel for the petitioning creditor said that, insofar

as the debtor relied upon the alleged mlsdeeds of the receivers

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and managers, the contentions raised were not open; that was s o ,

counsel argued, because the receivers and managers were agents of

Twinego and not of the petitioning creditor. But the notice of

intention to oppose indicates that the case which was sought to be

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raised would connect the petitioning creditor directly with the

actions of the receivers and managers;	so	the answer made by
counsel is not conclusive.

The debtor gave evidence that she had substantial debts,

apart from that currently in issue. She said she owed hundreds of

thousands of dollars to a company called Rothwells, about $100,000

to the A.N.Z. Bank and that those companies were pursuing their

rights. She was unsure about the extent of her liabilities to the

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petitioniny creditor (other than the debt discussed above) but

thought she owed it at least $200,000.

In my opinion, the case is one in which the Court's

discretion to go behind the judgment should not be exercised. If

the matters I have mentioned had substance, one would have

expected then to have been set up in the Supreme Court. Secondly,

a number of the questions raised in the notice of intention to

I object are, as I have pointed out, completely untouched by the

evidence. Thirdly, there is no direct evidence in support of any

of the assertions made. I propose to make a sequestration order.

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