Watson, L.A. v Bottoms English

[1995] FCA 157

IN THE FEDERAL COURT OF AUSTRALIA   )No QP 561 of 1994
GENERAL DIVISION                   )
BANKRUPTCY DISTRICT OF             )
THE STATE OF QUEENSLAND            )

RE:LAURENCE ARTHUR WATSON

EX PARTE:BOTTOMS ENGLISH

MINUTES OF ORDER

JUDGE MAKING ORDER:                Drummond J
DATE OF ORDER:  16 March, 1995
WHERE MADE:  Brisbane

THE COURT ORDERS THAT:

1. A sequestration order be made against the estate of the debtor, Laurence Arthur Watson.

1. Trevor John Schmierer be appointed trustee of the estate of Laurence Arthur Watson.

1. The petitioning creditor's costs of and incidental to the petition in this matter, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth).

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

IN THE FEDERAL COURT OF AUSTRALIA   )    No. QP 561 of 1994
GENERAL DIVISION                   )
BANKRUPTCY DISTRICT OF             )
THE STATE OF QUEENSLAND            )

RE:LAURENCE ARTHUR WATSON

EX PARTE:BOTTOMS ENGLISH

CORAM:    Drummond J
PLACE:    Brisbane
DATE:     16 March, 1995

REASONS FOR JUDGMENT

This is a contested creditor's petition.  The debtor appears on his own behalf.

In the mid 1980s the debtor identified what was likely to be a profitable business of procuring exotic palm seeds in Malaysia and importing them to Australia for sale.  However, he needed someone to finance him in this activity.  He eventually entered into an arrangement with two people, Gummow and Pregno, who were to provide the necessary finance and to receive and care for the seeds while he was in Malaysia until he could sell them.  For this, Gummow and Pregno were to receive a share of the profits.  On the evidence before me from the debtor, Gummow and Pregno breached these arrangements.
         This resulted in the debtor retaining the creditor as his solicitor to pursue his claims against them.  The litigation quickly became complicated and it also became very protracted.  The litigation and the sequel to it, arising out of the debtor's termination of the creditor's retainer, has come to dominate a large part of the debtor's life.  It is clear he feels very much the victim of events beyond his control.

The act of bankruptcy relied on is non-compliance with a bankruptcy notice that demanded payment of a Magistrates Court judgment debt.  This debt of $2,104.20 was for professional fees and outlays claimed as due to the petitioning creditor for the services he rendered to the debtor as the latter's solicitor.

The only ground the debtor has raised which might be an answer to the creditor's claim for a sequestration order is that he has a cross demand of the kind referred to in s. 40(1)(g) the Bankruptcy Act 1966 (Cth) against the creditor's claim on which the creditor's judgment was founded, i.e., that there is no debt in truth in existence in respect of which the judgment was given.  The debtor's core allegation against the creditor is that the creditor failed properly to carry out the duties he owed the debtor when acting as the latter's solicitor between March and December 1988 in relation to the dispute between the debtor and Gummow and Pregno.  It was for
this reason that the debtor terminated the creditor's retainer on 1 December, 1988 saying, among other things:

"My situation has been made worse by your inability to understand my instructions."

The debtor says, in effect, that the work done in respect of which fees were claimed by the creditor was of no, or of only limited, value to him because the creditor failed to pursue the entirety of the claim the debtor has against Gummow and Pregno.

The judgment was given in contested proceedings in which the debtor failed to make out a number of defences to the petitioning creditor's claim, which include the matters I have outlined.  The same matters were also relied on by the debtor in an unsuccessful attempt to have the creditor's bankruptcy notice set aside in November 1993.  In these proceedings, the debtor asserted that:

"...The [creditor] chose to ignore the facts of this matter and did in fact use his professional abilities to the disadvantage of the respondent and to the advantage of the defendants."

The debtor, in those proceedings, also asserted:

"It was the professional opinion of the creditor that [$23,452] was owing to the respondent.

The respondent, while not in agreement with that figure, was aware that upon discovery of evidence by
the legal process, his true and correct claim would be substantiated!

The respondent alleges that upon discovery of further evidence to support his true claim the practitioner chose to ignore his request to update and amend his claim."

The reference by the debtor, at that stage, to the sum of $23,452 said to be owing to him by Gummow and Pregno is the amount of the District Court plaint which the creditor issued against Gummow and Pregno on the debtor's instructions in July 1988.  The work associated with this forms part of the work in respect of which the creditor obtained his judgment.  In rejecting the debtor's challenge to the bankruptcy notice, Wilcox J said:

"At the end of the hearing, the Magistrate found the claim proved, and gave the judgment which is the foundation of the bankruptcy notice.  The Magistrate was not, of course, concerned with any question of a counter-claim for negligence but it is relevant to note that he thought that the claim that was made was properly founded.

At the end of the day I have to ask myself whether I am satisfied, on the evidence before me, that the debtor has a prima facie case in respect of a counterclaim, set-off or cross-demand.  There is certainly no prima facie case on the material which is strictly evidentiary; that is to say the affidavits.  Even if I took account of everything that has been said from the bar table by Mr Watson, I would still not be satisfied that there is a prima facie case of liability in damages.  It is not clear to me that the matter was negligently conducted; but, even if it was, there is no material before me to indicate that Mr Watson suffered any financial loss as a result of any act or omission of the solicitors.  Under those circumstances, it seems to me that I have no option other than to dismiss the application and I take that course."

His Honour was prepared to assume that the matters the debtor relied on to defeat the bankruptcy notice could not have been raised by the debtor by way of set-off or counter-claim in the creditor's action in the Magistrates Court.  His Honour may well have made an assumption here that was too favourable to the debtor, in view of the issue raised by the debtor in his entry of appearance and defence in the Magistrates Court proceedings to the effect that the creditor had failed to perform the professional services requested by the debtor.

Ms. English, the creditor's partner, who appeared for him in the Magistrates Court proceedings says:

"The matters of which the applicant complains in his various affidavits were fully ventilated before the Magistrate with the Applicant giving sworn evidence as to his complaints."

This is not disputed, in the proceedings before, me by the debtor.

The Bankruptcy Court's power to go behind a judgment on which a petition is founded is well established but, as appears from McDonald, Henry & Meek, Australian Bankruptcy Law & Practice, 5th ed., paragraph 265:

".. there must be substantial reasons for questioning whether or not there is a debt in truth and reality ...

...

If the judgment followed a full investigation at a trial on which both parties appeared, the court will not re-open the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out."

It is not automatic that the Bankruptcy Court will go behind a judgment in respect of which a sequestration order is sought to be obtained.  I doubt the propriety of acceding to the debtor's request to do that here but, in any event, the debtor has failed to satisfy me that there is, in truth, no debt of a kind on which the judgment was based owing by him to the creditor.  It is true that, when a person sues on a quantum meruit for services rendered, as in effect the creditor did here, the defendant can defend the claim by showing that the services performed were worth less than the amount claimed and he is entitled to a reduction of the plaintiff's claim to that extent.  See Mondel v Steel (1841) 8 M. & W. 858. This is a defence in the nature of a set-off rather than a matter that can only be raised as a counter-claim. If a Mondel v Steel defence could be made out here, it would go to show that there is no debt supporting the judgment.  The question is whether the debtor has shown that the services rendered by the creditor in respect of which the Magistrates Court judgment was given were worth less than the amount for which the judgment was given and, in view of s. 44(1) the Bankruptcy Act 1966 (Cth), less than $1,500, the minimum amount for which a creditor's petition can be presented.  If the debtor could show either of these matters, he would be entitled to succeed on the basis that there is no sufficient debt behind the judgment to justify the making of a sequestration order.

The dealings between the debtor and Gummow and Pregno, out of which the dispute arose, and in respect of which the debtor retained the creditor as his solicitor, are, on the debtor's own evidence, quite complex.  It is no easy matter to identify just what is the likely amount of the debtor's entitlements against Gummow and Pregno.  The creditor initially advised the debtor that the debtor should sue for an account.  It is his failure to pursue that course and, instead, his advising the debtor to institute the District Court proceedings that I have referred to which is at the centre of the debtor's complaints.  The explanation from the creditor for changing direction is contained in Ms. English's affidavit:

"Whilst we were retained by the Applicant, the firm had a great deal of trouble in obtaining instructions from the Applicant.  His instructions changed on a number of occasions and in fact, Counsel whom we had retained in this matter had ultimately insisted that the District Court Plaint to be issued in these proceedings be drafted in the presence of the Applicant and signed in his presence.  The applicant also initialled his acceptance of Counsel's Advice and the facts upon which it was based."

Ms. English then exhibits copies of counsel's draft plaint and his memorandum of advice, both of which bear the debtor's initials.  Despite the debtor's submission that he agreed to this course under duress, financial and otherwise, the debtor in the affidavit he filed in the proceedings before Wilcox J confirms in substantial part what Ms. English says about the circumstances in which the District Court plaint was issued.

I accept that it was done against a background of difficulty encountered by the creditor in getting comprehensible and consistent instructions from the debtor.  Odd though it appears at first glance for the creditor to change course from advising the debtor to sue for an account, and to sue instead for a liquidated sum with the attendant risk that that course might result in the debtor being shut out of claiming additional amounts from Gummow and Pregno, in reliance on other causes of action, I do not think it can be said to be unjustifiable in the circumstances in which the creditor found himself, to have acted on counsel's advice and to have followed the new course.  Nor am I satisfied that if the debtor had pursued Gummow and Pregno for an account he would have recovered more than a sum of the same order as that claimed in a District Court proceedings.  I therefore propose to make a sequestration order.

I certify that this and the preceding
seven pages are a true copy of the
reasons for judgment herein of the
Honourable Justice Drummond.

Associate:

Date:             16 March, 1995