Wren v Mahony

[1972] HCA 5

HIGH COURT OF AUSTRALIA

Barwick C.J., Menzies, Windeyer, Owen and Walsh JJ.

WREN v. MAHONY

(1972) 126 CLR 212

1 February 1972

Bankruptcy

Bankruptcy—Sequestration order—Judgment debt—Power of Bankruptcy Court to go behind judgment—Indemnity—Whether liability before payment of principal debt—Bankruptcy Act 1966 (Cth), s. 52.

Decisions

1972, February 2.
The following written judgments were delivered :
BARWICK C.J. The appellant and a company, Celebrity Theatres Pty. Ltd. on 21st June 1957 entered into a deed to which the respondent and William Alexander Goodall Swann were parties which included the following joint and several covenant :

"2. Mr. Wren and the Company will at all times hereafter keep Mr. Mahony indemnified against all proceedings actions claims and demands made by the Commissioner of Taxation in connexion with any income tax payable which has or may become payable by Mr. Mahony alone or together with Mr. Swann and will indemnify Mr. Mahony against any claim for costs in respect of any such proceedings, action, claims and demands." (at p215)

2. In the course of time the respondent and William Alexander Goodall Swann became liable to pay the Commissioner of Taxation the sum of $60,000 for income tax, a sum which fell within the scope of the covenant to which I have just referred. The respondent before he had paid any part of the sum due to the Commissioner and indeed before the Commissioner had obtained judgment for the amount of the tax due and payable sued the appellant in the Supreme Court of New South Wales by a specially endorsed writ claiming the amount of the tax due and payable to the Commissioner as on a debt due by the appellant to the respondent. The appellant appeared in the action and pleaded to the respondent's declaration. However on 28th April the defendant's pleas were struck out by a judge of the Supreme Court (1970) 2 NSWR 8 and the respondent enabled to sign final judgment in debt for the sum of $68,896.40 that being the amount of tax and interest thereon due to the Income Tax Commissioner at that date. No part of this amount has yet been paid by the respondent. I shall refer later to the reasons given in the Supreme Court for striking out the pleas. (at p215)

3. This judgment debt not being met, the respondent caused a bankruptcy notice to be issued based on the judgment. The appellant did not comply with the notice. Thereafter the respondent issued a petition in bankruptcy. As required by the prescribed form (see s. 47 of the Bankruptcy Act 1966 (Cth.) and r. 12 and the 1st Sch. of the Bankruptcy Rules) the respondent alleged, amongst other things, that the appellant was indebted to him in the sum of $69,009.67. The petition in this respect was in the following terms omitting formal parts :

"2. The debtor is justly and truly indebted to me in the sum of Sixty nine thousand and nine dollars and sixty seven cents ($69,009.67) for debt for breach of covenant of indemnity entered into by deed made the Twenty fourth day of October 1962 which provided as follows - This deed made the 24th day of October 1962 between John Denis Mahony of Sydney Solicitor (hereinafter called 'Mr. Mahony'), Henry Orrell Wren of Sydney, company director (hereinafter called 'Mr. Wren') and Celebrity Theatres Pty. Limited a company incorporated in the State of New South Wales and having its registered office at Care Messrs. Grenfell and Hunter, Wales House, 66 Pitt Street Sydney (hereinafter called 'The Company') ; whereas 1. By a deed made on the 21st day of June 1957 between the Company (therein called 'the employer') of the one part and Mr. Mahony and William Alexander Goodall Swann of Glenelg in the State of South Australia Accountant (therein called 'the Trustees') of the other part, Mr. Mahony and the said William Alexander Goodall Swann (hereinafter called 'Mr. Swann') covenanted and agreed and thereby declared that they would hold the moneys and investments therein referred to upon and subject to the declaration terms provisos and agreements therein contained. 2. Certain moneys are to have been held upon and subject to the provisions of the said Deed by Mr. Mahony and Mr. Swann. 3. It has been agreed that Mr. Wren and the company shall give to Mr. Mahony the joint and several indemnities hereinafter referred to and that the parties hereto would enter into the obligations hereinafter set forth. Now this deed witnesseth 1. Mr. Wren and the company will at all times hereafter keep Mr. Mahony indemnified against all proceedings, actions and demands whatsoever by all persons alleging that they or any of them have any right of action against Mr. Mahony by reason of any breach of trust alleged to have been committed by Mr. Mahony or alleged to have been constituted by the omission of Mr. Mahony to do any act or thing through or under the said Deed. 2. Mr. Wren and the company will at all times hereafter keep Mr. Mahony indemnified against all proceedings actions claims and demands made by the Commissioner of Taxation in connection with any income tax payable which has or may become payable by Mr. Mahony alone or together with Mr. Swann and will indemnify Mr. Mahony against any claim for costs in respect of any such proceedings, actions, claims and demands. 3. Mr. Mahony shall not be under any obligation to defend any proceedings taken by any person in relation to income tax payable in respect of any act matter or thing done or arising under or in connexion with (or on account of) the said Deed or any amount received or which ought to have been received under or in connexion therewith or any act matter or thing done or omitted in connextion therewith. 4. If any such proceedings as are referred to in Clause 3 hereof are taken against Mr. Mahony either alone or together with Mr. Swann, Mr. Mahony shall, on request by Mr. Wren or the company, permit F.P. Donohue and Son, as solicitors for Mr. Wren and the company, to defend any such proceedings in his name. Provided however : (a) Mr. Mahony shall in addition to and notwithstanding anything hereinbefore referred to be indemnified by Mr. Wren and the company against all liability which may arise in respect of costs or expenses or otherwise howsoever in relation thereto : (b) Mr. Mahony shall be entitled at any time to inspect all documents in relation to any such proceedings and on request to be advised of all acts done or omitted in relation to such proceedings. 5. Mr. Mahony shall forward to Mr. Wren or the company all notices and documents received by him in relation to any such proceedings. 6. Mr. Mahony doth hereby agree that he will contemporaneously with the execution hereof retire from the office of Trustee under the said deed. 7. The obligations entered into by Mr. Wren and the company hereunder are entered into by them both jointly and by each of them severally. The obligations of Mr. Wren shall not be affected or in any way diminished by reason of the winding up or dissolution of the company or by any proceedings done by or in relation to the company and the obligations of the company shall not be affected or diminished by the death bankruptcy insolvency or otherwise by any act matter or thing of or done by Mr. Wren. and the sum of Sixty seven thousand two hundred and fifty four dollars and twenty five cents ($67,254.25) together with interest has become due and payable by me to the Commissioner of Taxation in respect of certain proceedings actions claims and demands made by the Commissioner of Taxation. Yet the debtor has neglected and failed to indemnify me in respect of the said sum of Sixty seven thousand two hundred and fifty four dollars and twenty five cents ($67,254.25) And thereafter after hearing Counsel for me and Counsel for the debtor an Order was made by His Honour Mr. Justice Collins in the Supreme Court of New South Wales in Action No. 8845 of 1969 on the Twenty eighth day of April 1970 striking out the Plea of the debtor and granting leave to me to sign Judgment against the debtor in respect of the claim brought by me against the debtor arising out of the covenant of indemnity aforesaid and whereby Judgment was entered in the Supreme Court of New South Wales in my favour against the debtor on the Twenty ninth day of May 1970 for the sum of Sixty eight thousand eight hundred and ninety six dollars and forty cents ($68,896.40) made up as to the amount of $67,254.25 debt (being amount of claim to date of issue of Writ) and interest from date of issue of writ (as claimed in the said Writ) to date of signing Judgment - 1,642.15 $68,896.40 An amount of $113.27 interest had accrued upon the

Judgment Debt from the Twenty ninth day of May 1970 to the date of issue of the Bankruptcy Notice No. 1119 of 1970 and such amount was included in the Bankruptcy Notice aforesaid whereby I claim to be entitled to the total sum of Sixty nine thousand and nine dollars and sixty seven cents ($69,009.67)." (at p218)

4. Section 52 of the Bankruptcy Act requires that the Bankruptcy Court should, amongst other things, be satisfied by proof of the debt of the petitioning creditor and that if and when satisfied of that proof the Court may make a sequestration order in pursuance of the petition. Rule 20 of the Bankruptcy Rules required the appellant as the respondent to the petition to state his grounds of opposition to it. This he did in the following form :

"1. The debt claimed by the petitioning creditor arises from an indemnity given by the defendant to the said petitioning creditor and the petitioning creditor has not yet paid the creditor in respect of the debt which is so indemnified.

2. The debt of the petitioning creditor which is indemnified by the debtor is a joint debt of the petitioning creditor and of William Alexander Goodall Swann and the petitioning creditor is entitled to a contribution by the said William Alexander Goodall Swann in respect of any sum paid by him in satisfaction of the said debt.

3. The present liability to pay the petitioning creditor is not yet ascertainable.

4. In the circumstances and in the exercise of its discretion this Honourable Court will not make a sequestration order against the debtor." (at p218)

5. The petition came on to be heard on 15th December 1970. After the hearing of the petition had proceeded for some time the appellant sought leave to amend his particulars of objection by adding the following :

"(i) The cause of action was for breach of contract of a contract of indemnity.
(ii) The plaintiff had not at the time of such judgment or since suffered any pecuniary damage or other loss arising

from the breach alleged.

(iii) There was no hearing of the action which gave rise to the said judgment for the assessment of the damages

suffered by the plaintiff.

(iv) That final judgment was improperly signed as the action was not one properly commenced by specially

indorsed writ." (at p219)

6. In supporting his application to amend the particulars of objection counsel for the appellant said :

"MR. DARVALL : I would have to seek leave to amend my notice of intention to oppose and ask Your Honour to go behind the judgment in that it was a miscarriage of justice. HIS HONOUR : Do you seek that? MR. DARVALL : Yes. HIS HONOUR : On what terms do you seek to add a ground? MR. DARVALL : That the judgment relied on by the petitioning creditor ought not to be accepted by this court, but should be reviewed and the liability of the debtor considered afresh. HIS HONOUR : Is that the whole ground that you seek? MR DARVALL : That would, I think, cover it. HIS HONOUR : Not a ground that should be particularised in any way? MR. DARVALL : I would not think so." (at p219)

7. However the learned Judge in Bankruptcy refused the application in the following terms :

"I make no particular point of the formalities involved in the various steps that are necessary under the rules nor upon the actual form of the rules themselves, but I propose to look at this matter on the merits of the application as they now appear before me. I have heard argument on the manner in which it would be sought to support the ground, if leave was given to add it. Assuming, without deciding, that this court has a power to go behind the judgment here under consideration, I do not consider that I should grant leave to the debtor to amend his grounds of intention. In view of the history of the litigation in the Supreme Court and in view of the course of the hearing in this court, I do not consider that the case is one in which as a matter of discretion the power to go behind a judgment, if it exists here, should be exercised in favour of the applicant. The application is therefore refused." (at p219)

8. It appeared in the evidence before the Bankruptcy Court that Mr. William Alexander Goodall Swann, one of the taxpayers liable along with the respondent for the said amount of tax and the appellant each made application pursuant to s. 265 of the Income Tax Assessment Act 1936-1970 (Cth) for relief from the payment of that tax. The application to the Board made by Mr. Swann was current at the time the order for sequestration was made. The appellant sought an adjournment of the petition for the reason, amongst other reasons, that the fate of the application to the Board for relief from payment of the amount of tax was not yet known and that complete relief might be afforded. However, after an adjournment for some time the Bankruptcy Court on 21st April 1971 made an order for sequestration. (at p220)

9. The appellant has appealed to this Court on grounds which are in terms wide enough to cover an objection to the making of the sequestration order for the reason that there was in truth no debt due by the appellant to the respondent either at the date of the petition or at the date of the making of the order for sequestration. As I have said, the Bankruptcy Act conditions the power to make an order of sequestration on a creditor's petition upon proof to the satisfaction of the Bankruptcy Court of the debt due to the petitioning creditor. The rules requiring the statement of grounds of objection to the petition cannot qualify this basic requirement of the Act. But, as I will mention later, the grounds of opposition as originally filed, were in my opinion sufficient to raise the question whether the petition and the affidavit verifying it did afford proof of a debt due to the petitioning creditor. (at p220)

10. The petition recited the entry of judgment in the Supreme Court following an order striking out pleas in the action in that Court (1970) 2 NSWR 8 . But it alleged the debt to be due "for breach of the covenant of indemnity". The judgment was a judgment in default of a plea. The particular nature of the contest before the judge of the Supreme Court did not appear from the petition. So far as I can ascertain from the transcript of the proceedings in the Bankruptcy Court, the reasons which the Supreme Court judge gave for making the order striking out the pleas were not before that Court. In the course of the argument of this appeal however we were supplied with a copy of them. (at p220)

11. But the "consideration" for that judgment appeared on the face of the petition. It was clear that no contested fact had been decided in the Supreme Court, but that it must have been held that as a matter of law the deed between the parties had given rise in the undisputed circumstances recited in the petition to a debt due by the appellant to the respondent. One of those circumstances and that most relevant was that the petitioning creditor had not paid any part of the income tax due. Thus the question immediately appeared on the face of the petition whether the deed which was there set out was of a kind which could in law give rise to a debt due by the appellant to the respondent before the respondent had paid any part of the tax. In my opinion the first of the grounds of opposition originally filed by the appellant sufficiently raised that question. The proposed amended grounds clearly did so.(at p221)

12. In my opinion, the amendment ought to have been allowed and an examination made of the question whether or not the debt claimed to be due to the respondent was due. As I have already pointed out, that debt was claimed in the petition to arise out of the deed. It was not founded simply on the judgment. But I should first say something as to the place a judgment occupies in Bankruptcy proceedings. (at p221)

13. In Ex parte Lennox ; In re Lennox (1) an appeal was brought against the making of a receiving order. The appellant debtor had consented to judgment in debt at law. He had failed to comply with a bankruptcy notice founded on the judgment but on the hearing of the petition he disputed the existence of a debt due to the petitioning creditor and sought to lead evidence to show that no debt was really due. A registrar had held that, after what had taken place, the debtor was not entitled to go behind the order by which, by consent, pleadings in defence were withdrawn and judgment given for the petitioning creditor. The appeal was allowed and the matter remitted to the registrar. Lord Esher M.R. said (2) :

"It seems to me that the question is, not so much what is the right of the debtor, or what the conduct of the debtor or of the creditor has been, but rather whether the Court ought to exercise this great power, which deals not only with the particular debt of the petitioning creditor, but with the whole class of the creditors of the debtor, including the petitioning creditor, - whether the Court of Bankruptcy ought to exercise its power and authority when there are the strongest grounds for believing that there is no petitioning creditor's debt upon which it can be put in motion, and the whole foundation upon which the Court is authorized and empowered to do such a strong thing as to make a receiving order, or to declare a man a bankrupt, is that a petitioning creditor's debt exists."

On the following page his Lordship said (3) :

"It is not denied that Ex parte Kibble (4) is a direct decision of the Court of Appeal that, under some circumstances, a judgment debt may be inquired into, and the circumstances under which the judgment was given investigated, at the instance of the debtor himself, when he is disputing whether an adjudication ought to be made against him. And, for the reasons which I have endeavoured to express, not only do I think that that case is a binding authority upon us, but I think that it was rightly decided upon principle, the principle being that the Court of Bankruptcy is entitled to see that it is not put in motion without foundation, when there is no petitioning creditor's debt at all. The Court has that right independently of the conduct of the debtor or of the creditor or of anyone else."

In an appeal against a refusal to make a receiving order, the power of the Bankruptcy Court to "go behind a judgment and inquire into the validity of the debt" was affirmed : In re Fraser ; Ex parte Central Bank of London (1). There an application to set aside the judgment had failed as had an appeal against the refusal of the application. Lord Esher M.R. said (2) :

"The Court of Bankruptcy can go behind the judgment, and can inquire whether, notwithstanding the judgment, there was a good debt. In so doing, the Court of Bankruptcy does not set aside the judgment. If I may use the expression, the Court goes round the judgment, and inquires into the subject matter."

Referring to Ex parte Lennox ; In re Lennox (3) his Lordship said (4) :

"The decision is based upon the highest ground - viz., that in making a receiving order, the Court is not dealing simply between the petitioning creditor and the debtor, but it is interfering with the rights of his other creditors, who, if the order is made, will not be able to sue the debtor for their debts, and that the Court ought not to exercise this extraordinary power unless it is satisfied that there is a good debt due to the petitioning creditor. The existence of the judgment is no doubt prima facie evidence of a debt ; but still the Court of Bankruptcy is entitled to inquire whether there really is a debt due to the petitioning creditor."

Kay L.J. said (5) :

"In Ex parte Bryant (6) Lord Eldon said : 'Proof upon a judgment will not stand merely upon that, if there is not a debt due in "truth and reality", for which the consideration must be looked to.'"

But, it has been made clear that the Bankruptcy Court will not as a matter of course inquire into the validity of a judgment debt : In re Flatau ; Ex parte Scotch Whisky Distillers Ltd. (1). In that case the judgment followed a trial of an action with a jury. Circumstances tending to show fraud or collusion or miscarriage of justice or that a compromise was not a fair and reasonable one, in the sense that even if not fraudulent it was foolish, absurd and improper, or resulted from an unequal position of the parties (see In re Hawkins ; Ex parte Troup (2)) offer occasions for the exercise by the Court of Bankruptcy of its power to inquire into the consideration for the judgment. In giving judgment in the lastmentioned case Lord Esher, M.R. said (3) :

"We have said that the Court will go behind the judgment, and I think the cases show that the Court will go behind a judgment by consent. I am also of opinion that a judgment obtained by a compromise does not of itself stop the Court from going behind it. We have tried to say that the Court will go into the whole transaction, because the question is not one of a dispute between the two parties ; it is a matter which will affect, and materially affect, the rights of all the creditors who are not before the Court when it has to determine whether a receiving order should or should not be made, which will or may result in the debtor being made a bankrupt. The Court will go into the whole matter, and see whether upon the whole it is fair to the whole body of creditors that the man, on the particular transaction between himself and the petitioning

creditor, should have a receiving order made against him. In the same way, when a creditor comes to prove in bankruptcy the Court will go behind the judgment, and inquire into the whole transaction which preceded it. To make a man a bankrupt is obviously a strong interference with the rights of the general body of his creditors. Each creditor is materially affected to the extent that he cannot by his own diligence get the whole of his debt. From the moment of bankruptcy, though he be the most diligent of the creditors, he has to go into equal competition with the most idle."

Reference can also be made to the decision of this Court in Corney v. Brien (4) and the cases there cited. (at p223)

14. I have made these several quotations in order to emphasize the dominant place the mandatory words of s. 52 (1) occupy in relation to the making of a sequestration order and that the resolution of the question whether or not the proof of the petitioning creditor's debt is satisfactory does not concern only the immediate parties to the petition. Also in this case the learned judge in Bankruptcy appeared to have had some reservation as to the existence of the Court's power to examine the consideration for the judgment and seemed to think that whether or not he should consider whether or not there was a debt due to the petitioning creditor rested merely in discretion. (at p224)

15. Lord Esher in emphasizing that the Bankruptcy Court did not go behind a judgment as a matter of course but only if appropriate circumstances were shown to exist, said in Re Flatau ; Ex parte Scotch Whisky Distillers Ltd. (1888) 22 QBD, at pp 85-86 :

"There is no statute which imposes any such obligation on the Court of Bankruptcy. Section 7 (of which s. 52 (1) is a counterpart) does no more than give a discretion." (at p224)

16. His Lordship, in using this expression, was not intending, in my opinion, to weaken the emphasis he had always placed on the need for the Court of Bankruptcy to be satisfied of the existence of the petitioning creditor's debt. Rather, if one reads all his expressions in the several cases I have cited, he was pointing out that the Bankruptcy Court could in general accept a judgment debt as sufficient proof of that debt particularly where it resulted from a fully heard contest between parties but that it always had the power to go behind the judgment and if the case was a proper one, should do so. The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment : to what is its consideration. It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor's debt is a mere matter of its own discretion. Nothing in Corney v. Brien (1951) 84 CLR 343 lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor's debt. The Court's discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner. (at p225)

17. Although I have made reference to the general power of the Court of Bankruptcy to go behind a judgment and to some of the circumstances in which it will do so, in the instant case, as I have said, the consideration for the judgment was expressed in the petition itself and the debt claimed to be due was that said to arise on the breach of the promise of indemnity. The proof of the petitioning creditor's debt was thus to be found in the petition and the affidavit verifying it. The recital of the terms of the deed as the source of the debt and the non-payment of the tax in my opinion provided all that was necessary to call for an exercise of the Bankruptcy Court's duty to consider whether there was a debt in "truth and reality". So far as the recited judgment was concerned, the reasons for judgment of the Supreme Court in striking out the appellant's pleas in the common law action were not binding on the learned judge in Bankruptcy. There had been no more in the Supreme Court than a contest at the pleading stage of the action. No more could have been decided than a question of law. It was a case, in my opinion, in which the Bankruptcy Court was bound to consider for itself whether what was alleged in the petition could and did establish a debt due to the petitioning creditor. In my opinion the learned judge in Bankruptcy's reasons which I have quoted, did not justify his refusal to examine the fundamental question which the petition itself so clearly raised. (at p225)

18. It is now necessary to consider what ought to have been decided by the Bankruptcy Court as to the existence of the petitioning creditor's debt. The deed set out in the petition contained no express promise by the appellant in terms to pay the amount of any tax which had become or might become due by the respondent to the Commissioner of Taxation. Without such a promise, a cause of action could only arise against the appellant in my opinion when the respondent had paid an amount of tax. The position of a person with no more than a promise of indemnity is set out by Griffith C.J. in Rankin v. Palmer (1912) 16 CLR 285, at pp 289-290 :

"It is clear, however, that the plaintiff's only right is to indemnity, and the Court is bound to see that it does not prejudice the defendant by giving the plaintiff anything more. If the judgment stood in its present form, and the defendant paid the whole sum to the plaintiff, the plaintiff might not pay it to the creditors, in which event the defendant as principal might have to pay the money over again. Such a result would be manifestly unfair. An undertaking by the plaintiff would not obviate this difficulty. The principle governing such cases was fully discussed in the Court of Appeal in the recent case of In re Richardson ; Ex parte Governors of St. Thomas's Hospital (1911) 2 KB 705 . In that case Fletcher Moulton L.J., after pointing out that at common law a person entitled to an indemnity could not avail himself of his right until he had actually paid the money, said (1911) 2 KB, at p 712 : 'The rule in Chancery was somewhat different, and yet, to my mind, it emphasizes the fundamental principle that you must have paid before you have a right to indemnity, because the remedy which equity gave was a declaration of a right. You could file a bill against the principal debtor to make him pay the debt so that you would not be called upon to pay it, and then you obtained a declaration that you were entitled to an indemnity. You could in certain cases have a fund set aside in order that you might be indemnified, to avoid the necessity of your having to pay and then to sue for the money you had paid, which perhaps would not repair your loss and credit even if it discharged the debt. But I do not think that equity ever compelled a surety to pay money to the person to whom he was surety before the latter had actually paid. He might be ordered to set a fund aside, but I do not think that he could be ordered to pay.'" (at p226)

19. We are here not concerned with equitable rights which may become exercisable before payment is made by the person having the benefit of a promise of indemnity. (at p226)

20. On the other hand, and in contradistinction to the case of a promise of indemnity, a promisee having a promise by another to pay a debt due or to become due by the promisee may sue the promisor in damages for breach of that promise once it is broken, i.e., when the time has arisen for its performance by payment of the debt due by the promisee. In such a case it has been held that the damages for such breach are not limited to any incidental expense to which the promisee is put but may include the full amount of the debt which the promisor has promised to pay if the promisee is liable in the circumstances to pay it, e.g. Loosemore v. Radford (1842) 9 M &W 657 (152 ER 277) . But, even where there is such a promise to pay the debt, the breach of that promise will not create a debt due to the promisee ; it will only give rise to an action for damages against the promisor except in the case of a bond in a money sum conditioned on payment of the debt. Whilst it has been held that the damages for such a breach as I have said, may include the amount of the debt for which the promisee has become liable, they will not, in my opinion, necessarily do so. There may be circumstances, perhaps such as obtain in this case, in which a tribunal required to assess the damages for the breach of the promise to pay would not include the full amount of the debt in the award of damages. (at p227)

21. The learned judge in the Supreme Court concluded that the question before him in relation to the appellant's pleas, of the nature of which we have not been informed, was -

"Whether the indemnity is given against the payment to a third party in which case the promisee cannot enforce the indemnity until he has first made the payment or whether the indemnity is against a liability to pay which can be enforced as soon as the event occurs which gives rise to the promisee's liability to pay. Each case, therefore, depends upon the true construction of the contract of indemnity." (1970) 2 NSWR, at p 12

He regarded the deed between the parties as affording "an instance of an indemnity under a special contract whose true construction is that the right to the indemnity could be enforced at law before actual loss has been sustained". He construed the deed as giving the respondent "an indemnity against liability to make payment". But even so, in my opinion no debt arose. So far as the Court of Bankruptcy was concerned, such a construction of the deed would not suffice to establish a debt due to the petitioning creditor. (at p227)

22. However, the distinction in my opinion is not between an indemnity against payment and an indemnity against a liability to pay. The distinction is between a promise to indemnify the promisee and a promise given to the promisee for the payment by the promisor of the debt in question. Both promises may be given by the same instrument. Further, a promise to pay the debt is a method of effecting an indemnity against a liability : but an indemnity against claims or demands though in a sense an indemnity against a liability does not necessarily, of itself, import a promise by the party giving the indemnity to the indemnified party, to pay the debt or demand direct to the creditor of the promisee. Whether or not there is such a promise to pay is of course a matter of construction of the language used in the circumstances in which it was used. (at p227)

23. The relevant case law is summarized, accurately in my opinion, in Halsbury's Laws of England, 3rd ed., vol. 18, par. 982. In the notes to that paragraph are to be found the references to the principal authorities each of which I have fully considered. It must be observed that in most of the cases cited, the defendant had given a bond in a money sum. Amongst these Penny v. Foy (1828) 8 B &C 11 (108 ER 947) is illustrative of the distinction between the two types of promise. There a bond had been given conditional not merely for indemnifying a party but for payment of a debt by the obligor. Bayley J. said (1828) 1 B &C, at p 14 (108 ER, at p 948) "If the bond had been a bond of indemnity only, the defendant" (the obligee) "must have proved actual damage. But as the condition was for payment of the annuity, the onus of proving payment was upon the plaintiffs" the obligors. See also Carr v. Roberts (1833) 5 B &Ad 78 (110 ER 721) particularly per Parke J. (1833) 5 B &Ad, at pp 84-85 (110 ER, at p 723) . Toussaint v. Martinnant (1787) 2 TR 100 (100 ER 55) is an express authority that where a bond is given to a surety conditional for payment of the money by the obligor, the surety may sue upon it as soon as the condition is broken, although he has not been called upon to pay. That case was overruled by Young v. Taylor (1818) 8 Taunt 315 (129 ER 404) so far as it decided that before payment, the obligee had a provable debt in bankruptcy. However such cases as Ashdown v. Ingamells (1880) 5 Ex D 280 and Lethbridge v. Mytton (1831) 2 B &Ad 772 (109 ER 1332) further illustrate the need for a promise to the person indemnified to pay the debt if a cause of action is to arise before payment by the person indemnified. (at p228)

23. The case of Spark v. Heslop (1859) 1 El 563 (120 ER 1020) was much pressed upon in argument by counsel for the respondent. The action in that case was for damages. The promise in suit was "I hereby agree to be answerable to you . . . for all costs damages and expenses which you may sustain by reason of . . . trying the said action . . . and . . . relating or incidental thereto". (1859) 1 El &El, at p 565 (120 ER, at p 1021) The promisee suffered a verdict in the action with costs, all of which he paid. However before action brought he had not paid the amount of his own attorney's bill of costs which had been duly delivered. He was held to be entitled to recover those costs as well as the amount of the verdict and costs, as damages for breach of the abovementioned promise. The Court of Queens Bench construed the "guarantee" as a promise by the defendant given to the plaintiff to pay the amount of the costs to the plaintiff's attorney. Lord Campbell (1859) 1 El &El, at p 571 (120 ER, at p 1023) said that the fair meaning of the document was that the defendant "was to be the paymaster ; at all events that he was to furnish the means of paying any costs incurred by the plaintiff". Wightman J. (1859) 1 El &El, at p 571 (120 ER, at p 1024) read the document as meaning "I will be answerable to you that the costs shall be paid by me". Crompton J. (1859) 1 El &El, at p 571 (120 ER, at p 1024) seems to have regarded the word "answerable" as equivalent to "pay" and that in consequence the plaintiff suffered damage by incurring a liability to pay costs. (at p229)

25. This case emphasizes in my opinion the proposition that the existence of a cause of action before the plaintiff has paid the debt, or part of it, depends upon the fact that the defendant has given his promise to pay the debt himself. For my own part, the expression "answerable to you", standing by itself, rather suggests to my mind the idea of payment to the plaintiff rather than payment direct to the plaintiff's creditor. However, there was in that case a particular context upon which the court placed considerable weight in construing the defendant's promise. Thus the case is significant in that a promise by the defendant to pay the debt to the creditor was discovered in the language used by the parties in the particular circumstances : and that in any case, breach of such a promise resulted only in a claim to damages and not in a debt. (at p229)

26. Although what I have so far said would lead to the allowance of this appeal I should express my opinion on the meaning of the deed in this case. The promise is expressed as a promise to keep the respondent indemnified against all proceedings, actions claims or demands made by the Commissioner of Taxation for tax which has or may become payable. Does this amount to a promise by the appellant to pay the Commissioner of Taxation the amount of tax which may be levied upon the respondent, as or when the Commissioner may make an assessment? In my opinion it does not. It is as it says a promise to indemnify the respondent. That the indemnity is against claims and demands does not in my opinion involve the conclusion that the method of indemnity is the direct payment by the appellant to the Commissioner of Taxation of the amount of tax to which the respondent is or may be assessed. Nothing in the relationship of the parties in my opinion requires that conclusion, however sensible and convenient it might have been if the deed had been so expressed as to ensure such a result. The language of the bond in Warwick v. Richardson (1842) 10 M &W 284 (152 ER 477) was fundamentally different from that of the deed in the present case, though there may be some similarity in the circumstances of the two cases. The promise in this case is merely one of indemnity and in my opinion falls within the language of Griffith C.J. in Rankin v. Palmer (1912) 16 CLR 285 . I am of opinion therefore that the Bankruptcy Court ought not to have been satisfied that at the date of the lodgment of the petition the appellant owed a debt to the respondent for the sum stated in the petition or for any part thereof. Further I am of opinion that the relevant promise by the appellant to the respondent in the deed was no more than a mere indemnity which would not give rise to an action at law until an amount of tax had been paid by the respondent. Lastly, if contrary to my own opinion, the deed did on its proper construction contain a promise by the appellant to pay to the Commissioner of Taxation the amount of taxation assessed to be paid by the respondent, no debt arose on the breach of the promise : only a right to sue for damages. (at p230)

27. I am of opinion that the appeal should be allowed and the order for sequestration set aside. (at p230)

MENZIES J. This is an appeal from a judgment of the Federal Court of Bankruptcy. On 21st April 1971 that Court made a sequestration order against the appellant upon a creditor's petition by the respondent, and did so, after refusing the debtor a further adjournment of the hearing of the petition. The grounds of appeal are :

"1. That the Bankruptcy Act 1966 is ultra vires s. 51 of the

Commonwealth of Australia Constitution and in particular pl. (xvii.) thereof.

2. That His Honour was in error in making the said order. 3. That His Honour should have dismissed the petition of the abovenamed respondent.

4. That His Honour exercised wrong principles in refusing to grant an adjournment of the hearing of the said petition." (at p230)

2. The first ground was abandoned ; there is nothing in the fourth ground simply because the refusal to grant a further adjournment was a legitimate exercise of the court's discretion ; the matter for decision is, therefore, that covered by the second and third grounds. (at p230)

3. On 29th May 1970 the respondent entered judgment in the Supreme Court of New South Wales against the appellant for $68,896.40. The judgment was as follows :

"WHEREAS on the Twenty-eighth day of April 1970 an Order was made by His Honour Mr. Justice Collins striking out the Pleas of the Defendant Henry Orrell Wren and further granting leave to the abovenamed Plaintiff to sign Judgment against the abovenamed Defendant Henry Orrell Wren forthwith. THEREFORE it is adjudged that the said Plaintiff recover against the Defendant Henry Orrell Wren the sum of Sixty eight thousand eight hundred and ninety six dollars and forty cents ($68,896.40) and his costs." (at p231)

4. Although not part of the record of proceedings, we have before us the reasons for the judgment of Collins J. (1970) 2 NSWR 8 referred to in the Court's judgment. On 10th June 1970 a bankruptcy notice was issued for the amount of the judgment and interest thereon of $113.27, in all $69,009.67. The notice was served upon the appellant who failed to comply with it. This non-compliance was the act of bankruptcy relied upon in the petition dated 4th August 1970. The petition, however, went further and set out, inter alia, the deed upon which the respondent has sued the petitioner in the Supreme Court of New South Wales. The deed was one of indemnity "against all proceedings actions claims and demands made by the Commissioner of Taxation in connexion with any income tax payable which has or may become payable by Mr. Mahony alone or together with Mr. Swann and will indemnify Mr. Mahony against any claim for costs in respect of any such proceedings, actions, claims and demands." The judgment of Collins J. was based upon his interpretation of this provision as an indemnity against claims and demands in respect of income tax payable, rather than an indemnity against income tax paid. (at p231)

5. The appellant's case before Collins J. was that the action was premature because his liability to the plaintiff depended upon the plaintiff having paid the amounts claimed as tax by the Commissioner of Taxation. This issue was litigated and decided in favour of the plaintiff. The decision was not challenged upon appeal. During the hearing of the petition in the Court of Bankruptcy, however, the appellant gave notice of intention to oppose the petition upon a ground additional to those taken earlier. The additional ground was formulated as follows :

"1. The debt claimed by the petitioning creditor arises from an indemnity given by the defendant to the said petitioning creditor and the petitioning creditor has not yet paid the creditor in respect of the debt which is so indemnified.

2. The debt of the petitioning creditor which is indemnified by the debtor is a joint debt of the petitioning creditor and of William Alexander Goodall Swann and the petitioning creditor is entitled to a contribution by the said William Alexander Goodall Swann in respect of any sum paid by him in satisfaction of the said debt.

3. The present liability to pay the petitioning creditor is not yet ascertainable.

4. In the circumstances and in the exercise of its discretion this Honourable Court will not make a sequestration order against the debtor." (at p232)

6. As to this his Honour, having discussed procedural matters, said :

" . . . I propose to look at this matter on the merits of the application as they now appear before me. I have heard argument on the manner in which it would be sought to support the ground, if leave was given to add it. Assuming, without deciding, that this Court has a power to go behind the judgment here under consideration, I do not consider that I should grant leave to the debtor to amend his grounds of intention. In view of the history of the litigation in the Supreme Court and in view of the course of the hearing in this court, I do not consider that the case is one in which as a matter of discretion the power to go behind a judgment, if it exists here, should be exercised in favour of the applicant. The application is therefore refused." (at p232)

7. I propose to deal, not merely with the refusal to add to the grounds of objection, but, as his Honour did, with the merits of the submission that he should have gone behind the judgment of the Supreme Court to determine for himself whether the judgment debt proved arose from a judgment which, in law, ought not to have been entered. (at p232)

8. The power of the Court of Bankruptcy to go behind a judgment giving rise to a judgment debt arises under s. 52 (2) (b) of the Bankruptcy Act 1966. It is, I think, a power to determine whether a sequestration order should be made, notwithstanding the proof of a judgment debt. The power of the court is to dismiss a petition when it is satisfied "that . . . for . . . sufficient cause a sequestration order ought not to be made". As Vaughan Williams L.J. said in In re Beauchamp ; Ex parte Beauchamp (1904) 1 KB 572, at p 581 :

" . . . the Court of Bankruptcy has the power on the hearing of a bankruptcy petition to go behind the judgment and to inquire into the consideration for the judgment debt, not only at the instance of the trustee, but also at the instance of the judgment debtor himself. This power is founded on s. 7, sub-s. 3, of the Bankruptcy Act, 1883, which gives the Court of Bankruptcy, on the hearing of a Bankruptcy petition, a discretion for 'any sufficient cause' to dismiss the petition." (at p232)

9. The matter was explained thus by Sir W. M. James L.J. in Ex parte Kibble ; In re Onslow (1875) 10 Ch App 373, at pp 376-377 :

"It is the settled rule of the Court of Bankruptcy, on which we have always acted, that the Court of Bankruptcy can inquire into the consideration for a judgment debt. There are obviously strong reasons for this, because the object of the bankruptcy laws is to procure the distribution of a debtor's goods among his just creditors. If a judgment were conclusive, a man might allow any number of judgments to be obtained by default against him by his friends or relations without any debt being due on them at all ; it is therefore necessary that the consideration of the judgment should be liable to investigation."

This rule is applied most readily where judgment has gone by default : Petrie v. Redmond (1942) 13 ABC 44 . It can, no doubt, be applied in other circumstances but it has been repeatedly said that, when a judgment has been given in open court against a person who is represented, it is only in exceptional cases that the Court of Bankruptcy should exercise its discretionary power. See for instance In re Flatau ; Ex parte Scotch Whisky Distillers Ltd. (1888) 22 QBD 83 and In re Howell (1915) 84 LJKB 1399 . In the former case Lord Esher M.R. said (1888) 22 QBD, at p 85 :

"It is not necessary now to repeat that, when an issue has been determined in any other court, if evidence is brought before the Court of Bankruptcy of circumstances tending to show that there has been fraud, or collusion, or miscarriage of justice, the Court of Bankruptcy has power to go behind the judgment and to inquire into the validity of the debt. But that the Court of Bankruptcy is bound in every case as a matter of course to go behind a judgment is a preposterous proposition."

Fry L.J. said (1888) 22 QBD, at p 86 :

"The second ground is, that there is a 'sufficient cause' within sub-s. 3 why a receiving order should not be made. It is suggested that some of the issues which were tried before Mathew J., were wrongly decided, and that the registrar was bound to try them over again. In my opinion there was no such obligation. It is true that in some cases the Court of Bankruptcy has gone behind a judgment, when it has been obtained by fraud, collusion, or mistake. But this power has never, so far as I am aware, been extended to cases in which a judgment has been obtained after issues have been tried out before a court." (at p233)

10. The exercise of the power to go behind a judgment to see whether it is founded on a real debt has been considered twice by this Court : Corney v. Brien (1951) 84 CLR 343 and Ross-Ireland v. Tour Finance Ltd. (1965) 39 ALJR 49 . In the former case the judgment under consideration was a judgment of the Supreme Court of New South Wales obtained in default of appearance. In a majority judgment, it is said (1) :

"Section 56 (2) (a) of the Bankruptcy Act 1924-1950 (Cth) provides that the court at the hearing shall require proof of the debt of the petitioning creditor. Under this provision the Court of Bankruptcy has undoubted jurisdiction to go behind a judgment obtained by default or compromise or where fraud or collusion is alleged and inquire whether the judgment is founded on a real debt."

In that case it was decided that it was clear that there was no consideration for a judgment debt. Fullagar J., in a separate concurring judgment, stated the rule and considered the various English authorities relating to it. The starting point of his Honour's judgment was that "a judgment at law for a sum of money creates an obligation of its own force" (2). His Honour went on to point out that it had been well settled for many years "that in a court having jurisdiction in bankruptcy a judgment has no such conclusive effect" (2). Later his Honour quoted (3) Lord Esher M.R. in In re Fraser; Ex parte Central Bank of London (4), referring to Ex parte Lennox ; In re Lennox (5), as follows :

"The decision is based upon the highest ground - viz., that in making a receiving order, the court is not dealing simply between the petitioning creditor and the debtor, but it is interfering with the rights of his other creditors, who, if the order is made, will not be able to sue the debtor for their debts, and that the court ought not to exercise this extraordinary power unless it is satisfied that there is a good debt due to the petitioning creditor. The existence of the judgment is no doubt prima facie evidence of a debt ; but still the Court of Bankruptcy is entitled to inquire whether there really is a debt due to the petitioning creditor."

His Honour added that " . . . an enquiry into what lies behind a judgment may be undertaken either on the petition for sequestration or when, after sequestration, a judgment creditor comes in to prove a debt : see, e.g. Ex parte Revell ; In re Tollemache (6)." In In re Fraser ; Ex parte Central Bank of London (7) the "debtor" had entered an appearance to a specially endorsed writ but did not appear and judgment was given against him. He applied to have the judgment set aside but his application was dismissed. He appealed to the Court of Appeal but his appeal was dismissed. His Honour said (8) :

"It was nevertheless held by the Court of Appeal that a creditor's petition for sequestration was rightly dismissed because, on a reopening of the matter, it appeared that the 'debtor' was not in law indebted and the judgment was not soundly based in law."

His Honour's comment was "This case perhaps goes as far as any". His Honour's conclusion was that :

" . . . wherever the judgment in question is a judgment by default, it appears that the court will always 'go behind' the judgment if there is what it regards as a bona-fide allegation that no real debt 'lay behind' the judgment." (1) (at p235)

11. The second case in this Court was different (Ross-Ireland v. Tour Finance Ltd. (2)). There it was alleged that a judgment of a single Judge of the Supreme Court of Victoria, following an earlier Full Court decision, was in error and that the debt sued for had been invalidated by the Money Lenders Act. The Court of Bankruptcy refused to consider the correctness of the judgment of the Supreme Court. This Court, in rejecting the contention that this refusal was wrong said (2) :

"In support of this contention we were referred to a number of cases including Corney v. Brien (3), where the relevant authorities were considered in this Court, but, it is, we think, clear that this was not a case in which the judge in bankruptcy should have proceeded to reconsider the decision of the Full Court for the purpose of determining whether the judgment upon which the bankruptcy notice was founded, was, in truth, based upon a 'real' debt. Such a course, we think, would not have been justified upon the principles enunciated in Corney v. Brien (3) and, that being so, we are of the opinion that his discretion in relation to this matter was correctly exercised." (at p235)

12. It seems to me that if the Court of Bankruptcy here had acceded to the contention of the present appellant and had proceeded to determine for itself whether the judgment of the Supreme Court of New South Wales was correct, it would have been going beyond any of the decided cases and would have opened the door to review by any judge exercising bankruptcy jurisdiction of any decision of any Supreme Court upon the submission that the judgment establishing the debt was clearly wrong. Here there was a judgment of the Supreme Court of New South Wales based upon leave granted after a contested application in which the very point that is now raised was considered and decided. An appeal could have been taken to the Court of Appeal or to this Court. There was no such appeal but the Court of Bankruptcy was invited to disagree with the Supreme Court. I cannot accept the contention that, in refusing to do so, there was a wrongful exercise of discretion by the Court. See Lovell v. Lovell (1950) 81 CLR 513 . Accordingly, in my view the result of this appeal cannot be made to depend upon whether or not this Court comes to the conclusion that Collins J. was in error in deciding as he did. What may appear to this Court as a wrong decision of the Supreme Court may not have that aspect to a judge sitting in Bankruptcy who is invited to exercise what I regard as a delicate discretion. The discretion, however, is his, not ours. The decision of the Court of Bankruptcy not to go behind the judgment of the Supreme Court in a contested proceeding is not invalidated because this Court considers that the judgment was in error. The real problem is whether or not it was open to the Court of Bankruptcy to decline to review the judgment of the Supreme Court obtained in the circumstances stated. I think it was. I do not go so far as to say that s. 118 of the Constitution precludes the Federal Bankruptcy Court from examining a judgment of a Supreme Court of a State, not to ascertain whether it creates a debt, but, whether a sequestration order should be made upon the debt to which the judgment unquestionably gives rise. In the case of a judgment debt, inquiry is not as to the existence of a debt but as to the consideration for it. It would, I think, be unconstitutional for a federal court to decide that the judgment of the Supreme Court of a State did not create a judgment debt. (at p236)

13. It seems to me that, when the Court of Bankruptcy is faced with a judgment of the Supreme Court of one of the States, fairly obtained without collusion or fraud after a contested hearing, it would normally be a wise exercise of discretion on its part not to embark upon a reconsideration of the case. A considered refusal to do so on discretionary grounds should not, I think, be set aside by this Court as a wrongful exercise of discretion. For my own part I consider that the learned judge exercised his discretion wisely, but that is beside the point. (at p236)

14. His Honour the learned judge of the Court of Bankruptcy, as I think rightly, did not canvass the correctness of the decision of Collins J. I propose to adopt the same course and rest my judgment solely upon my view that it was within the discretion of the judge of the Court of Bankruptcy not to reconsider the judgement of the Supreme Court of New South Wales obtained in the circumstances stated. (at p236)

15. For the foregoing reasons I would dismiss this appeal. (at p236)

WINDEYER J. In my opinion this appeal should be allowed for the reasons that the Chief Justice has given in his judgment, which I have had the benefit of reading. (at p237)

OWEN J. I agree with the Chief Justice and would therefore allow the appeal. (at p237)

WALSH J. In my opinion this appeal should be dismissed. I agree with the reasons given by Menzies J. for concluding that this Court should not interfere with the decision of the Court of Bankruptcy declining to review the judgment of the Supreme Court of New South Wales which the respondent had obtained against the appellant. (at p237)

2. I am of opinion that that conclusion is in conformity with the principles stated by this Court in Corney v. Brien (1951) 84 CLR 343 and in Ross Ireland v. Tour Finance Ltd. (1965) 39 ALJR 49 . In the latter case, as in this case, there was a judgment of a Supreme Court, given after a question of law had been raised and had been decided in favour of the party who became subsequently the petitioning creditor in bankruptcy. In that case, as in this, the judgment did not depend upon any decision upon contested facts. The learned Judge who heard the bankruptcy petition declined to review the decision of the Supreme Court in order to determine for himself whether or not the judgment upon which the bankruptcy notice was founded was in truth based upon a "real" debt. This Court held that the case was not one in which in the exercise of his discretion the learned Judge should have gone behind the judgment. In my opinion that decision of this Court is not rendered inapplicable to the present case by the circumstances that the learned judge who gave leave in the Supreme Court to enter final judgment was bound by an earlier decision of a Full Court of that Court, relating to the material question of law. (at p237)

3. In Ross-Ireland v. Tour Finance Ltd. (1965) 39 ALJR 49 , this Court said also that the learned judge in the Court of Bankruptcy was wrong in thinking that this Court "was invested with a wider discretion than that which he himself had". But it was held that that did not effect the validity of the orders which he made. As to this point, it is true no doubt that this Court has not a wider discretion than that which the Court of Bankruptcy has to go behind a judgment or to decline to do so. But I do not wish to exclude the possibility that, in deciding how that discretion should have been exercised, there could be a case in which it appeared clearly to this Court that the decision of the court in which a judgment had been obtained was wrong and in which the Court would hold that a sequestration order, which depended upon that judgement, ought not to be allowed to stand. But that would be an exceptional case. In general, the correctness of a judgment of a Supreme Court, obtained after a contested hearing, ought to be challenged by the exercise of any available right of appeal against that judgment and not by inviting the Court of Bankruptcy to reconsider the case, in subsequent proceedings founded on the judgment debt. The power of that Court to go behind a judgment is not in doubt, nor would it be right, in my opinion, to seek to lay down inflexible rules as to the circumstances in which the exercise of the power would be proper. But in my opinion this is not a case in which it should be held that the Court of Bankruptcy was bound to exercise that power. (at p238)

Orders

Appeal allowed with costs. Order of the Court of Bankruptcy set aside and in lieu thereof order that the petition be dismissed with costs.