Ferguson v Premier Plasterboard Pty Ltd

The application to set aside the bankruptcy notice 8 The principles which guide the exercise of the Court's power to set aside a bankruptcy notice founded on a judgment are established. The judgment is regarded as prima facie evidence of the debt: Corney v Brien (1951) 84 CLR 343; at 355. Nevertheless, the Court is able to "go behind" the judgment for the purposes of determining whether there was a good debt to support it: Corney v Brien at 347, 353-4. In Katter v Melhem (No 2) [2014] FCA 1176; (2014) 319 ALR 646, Wigney J summarised a number of the relevant principles: (a) the Court will not enquire into the consideration for a judgment as a matter of course: Wren v Mahoney (1972) 126 CLR 212 at 222-3l; (b) there is no inflexible rule as to the circumstances in which the Court will "go behind" the judgment and the categories of circumstances in which it will do so are not closed: Commonwealth Bank of Australia v Jeans [2005] FCA 978 at [15]; Re Wong; ex parte Kitson (1979) 27 ALR 405; (c) the Court will treat default judgments circumspectly and may be willing to go behind them when there is a bona fide allegation that there was no real debt behind the judgment: Corney v Brien at 357-8; (d) on the other hand, if the judgment in question followed a full investigation at a trial in which both parties participated, the Court will not reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out: Corney v Brien at 356-7; (e) when the judgment has been entered pursuant to a compromise, good grounds must be shown for challenging the compromise before the subject matter of a judgment will be reopened: Corney v Brien at 357. That is because it is the compromise, and not the claim which was compromised, which is the foundation of the judgment: Harrison v Charalambous [1999] FCA 902 at [9]; (f) when the judgment was entered on a compromise in respect of which the party had the advice of counsel, the Court is unlikely to allow a reopening: Corney v Brien at 357. However, even in this circumstance, a reopening may be permitted if it be shown that both parties knew that the original claim was not bona fide or if it be shown that the compromise was obtained by dishonesty known to both parties: Katter v Melhem (No 2) at [74]; (g) the circumstance that the debtor may have been pressured by his or her legal advisors to compromise the claim, despite the merits of the defence will not generally be sufficient to warrant going behind the judgment entered pursuant to that compromise: Harrison v Charalambous at [11]; (h) generally, the Court will not go behind a judgment when the grounds upon which it is challenged are such that, if accepted, they will result only in a reduction of the debt and not a finding that there was in truth no debt at all: Emmerson v Wreckair Pty Ltd (1992) 33 FCR 581 at 589; (i) when the judgment debtor seeks to go behind the judgment on particular grounds a relevant consideration will be whether those grounds could have been, but were not, raised in opposition to the judgment or in an application to set aside the judgment. That is because parties are ordinarily bound by the way in which they have chosen to conduct the litigation: Katter v Melhem (No 2) at [78]; (j) once the Court decides that it will go behind the judgment, "the whole [of the] matter is open": Corney v Brien at [358]; and (k) sometimes it will be appropriate for the Court to consider whether to go behind the judgment as a separate question: Katter v Melhem (No 2) at [79]. 9 The chronology of events giving rise to the present application is as follows: Date Event 6 October 2016 The Applicant provided the Respondents with a personal guarantee under a Deed of Settlement and Release in respect of a debt owed to the Respondents. That Deed required payments by the Applicant but he made one only, of $2,500, and that was on, or shortly after, the Deed was executed. In the hearing before me the Applicant disputed that he had provided a guarantee, saying that he had provided only a second mortgage. However, it is plain that the Deed contains, in cl 15, a guarantee by the Applicant. 13 January 2017 Considering that the Applicant was in default in his obligations under the Deed, the Respondents filed a claim in the Magistrates Court of South Australia seeking payment of $33,917.47 plus fees and costs. 21 January 2017 The Applicant was served with a copy of the Magistrates Court proceeding. The Applicant disputes that he was served and that dispute underpins the present application. 29 March 2017 As the Applicant did not file a defence, the Respondents entered judgment by default in the Magistrates Court for the sum of $35,411.47. With costs, the total judgment was $36,527.87. 19 May 2017 The Respondents served a bankruptcy notice on the Applicant. 6 June 2017 The Applicant filed in the Magistrates Court an application seeking the setting aside of the default judgment on the basis, amongst other things, that he had not been properly served with the proceedings and that the judgment had been entered for an incorrect amount. 9 June 2017 The Applicant filed proceedings in this Court seeking the setting aside of the bankruptcy notice. The Respondents consented to the setting aside of the notice and an order to that effect was made on 26 October 2017. 21 July 2017 Magistrate Gumpl in the Magistrates Court dismissed the Applicant's setting aside application. He found that the Applicant had been served on 21 January 2017 and that the default judgment had been properly entered given the Applicant's failure to file a defence. 1 September 2017 On the application of the Respondents, Magistrate Gumpl amended the amount of the default judgment to a total sum of $34,027.87 (to reflect the fact that $2,500 had been paid by the Applicant in October 2016). 23 January 2018 The Respondents issued a second bankruptcy notice against the Applicant, in the sum of $36,824.68 inclusive of accrued interest. 8 February 2018 The Applicant commenced (out of time) an appeal in the Supreme Court of South against the default judgment entered on 29 March 2017 and the judgment of 21 July 2017. The sole ground of appeal was the Applicant's challenge to the Magistrate's finding that he had been served with the proceedings in the Magistrates Court on or around 21 January 2017. 9 February 2018 The Applicant filed in this Court the application to set aside the bankruptcy notice or for an extension of time in which to comply with it, this being the application which was heard by the Registrar. 12 April 2018 Kourakis CJ in the Supreme Court dismissed the Applicant's appeal. 3 May 2018 The Applicant lodged a notice of appeal in the Supreme Court of South Australia against the judgment of Kourakis CJ. 31 May 2018 The Registrar in this Court dismissed the Applicant's set aside/extension of time application. 13 June 2018 The Applicant filed an interlocutory application in the Magistrates Court seeking the setting aside or amendment of the amended default judgment. This application is to be heard on 11 July 2018.

10 As noted in this chronology, the basis of the Applicant's claim is that the default judgment was not properly entered on 29 March 2017, because he had not been served with the Magistrates Court proceedings. 11 The chronology indicates that the question of whether the Applicant was served with the original Magistrates Court proceedings in January 2017 has been the subject of judicial consideration on two previous occasions: first, on the hearing by Magistrate Gumpl of the setting aside application in the Magistrates Court; and, secondly, on the hearing by Kourakis CJ in the Supreme Court of South Australia. At the first hearing, the Applicant had the opportunity to present all the evidence bearing on the question of proper service which he wished. After hearing the evidence presented by the Applicant and others, the Magistrate was satisfied that the Applicant had been properly served. The Magistrate's finding that he had been properly served was a finding of fact and involved a question of credit. 12 On the appeal in the Supreme Court, the Applicant had the decision of the Magistrate reviewed in accordance with appellate principles, but his appeal was unsuccessful. In addition, he had been able, if he was able to satisfy the requirements for doing so, to adduce further evidence bearing on the question of proper service. 13 In my opinion, that history mitigates strongly against the Court on the present application going behind the judgment of the Magistrates Court in order that the issue of service on 21 January 2017 may be investigated further. 14 The Applicant submitted that it was open to the Respondents to enforce the security provided under the Settlement Deed, namely, a second mortgage over the property. He said that it was contrary to the spirit of the Deed for the Respondents to be pursuing bankruptcy proceedings instead of enforcing that security. 15 In my opinion, that is not a reason to go behind the default judgment. The Respondents are entitled to pursue all the remedies available to them. There is no indication that the issue of the bankruptcy notice is preliminary to an abuse of the Court's process. 16 On the hearing before me, the Applicant acknowledged his underlying indebtedness to the Second Respondent, Insulation SA Pty Ltd. He indicated dissatisfaction with the work of the First Respondent, Premier Plasterboard Pty Ltd, and said that he had the basis for a counterclaim against it. However, the fact of the matter is that the Respondents sued on the Deed, and not on their underlying contracts with the Applicant and/or his company. That is to say, the Respondents sued on an indebtedness which the Applicant had acknowledged. That being so, this does not provide a basis for the setting aside of the notice. 17 It is of course not appropriate for this Court to speculate as to the outcome of the Applicant's further appeal to the Full Court of the Supreme Court of South Australia. It is, however, appropriate to take into account that the appeal is subject to the grant of permission (see s 50(4)(a)(ii) of the Supreme Court Act 1935 (SA)) and that the Applicant did not commence his appeal to the Full Court until the 21st day after the decision of Kourakis CJ. 18 The Court should consider the interests not only of the Respondents but of the public. Branson and Stone JJ referred to those interests in Australian Securities and Investments Commission v Forge [2003] FCAFC 274; (2003) 133 FCR 487: [4] The Act as a whole reflects legislative recognition of the public interest, as well as private interests, in the management of personal insolvency. It seeks to achieve a balance between the public interest in creditors of an insolvent being paid rateably from the property of the insolvent and the public interest, as well as the private interest of the debtor, in the debtor not being reduced to a mendicant. It also reflects a balance between the public interest in limiting the capacity of insolvent persons to incur debts that they will not be able to satisfy and the public and private interest in eventually allowing insolvent persons to be free from the burden of past debts to start financially afresh. 19 Later, at [9], Branson and Stone JJ said: … an act of bankruptcy is more than a mere trigger for the presentation of a creditor's petition. The earliest act of bankruptcy within the period of six months immediately before the date on which a sequestration order is made will ordinarily be critical in the identification of the property of the debtor that will be available to pay creditors rateably. By relating the bankruptcy back in this way to an act which prima facie demonstrates insolvency, unfair advantage to the better informed or more resolute of the debtor's creditors is minimised. 20 The Applicant's dispute as to the amount of the judgment debt (evidenced in part by his recent interlocutory application to the Magistrates Court) does not warrant the setting aside of the bankruptcy notice. The Respondents accept that the judgment debt may be overstated by a small amount (approximately $34). The Applicant seeks a reduction of a greater amount, namely, $1,116.40. For present purposes, it does not matter who is correct because s 41(5) indicates that an error in the statement of the amount owing does not invalidate a bankruptcy notice. It provides: (5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement. The Applicant did not give any such notice. The matter on which he relies for his dispute emerged only during the hearing of the appeal by Kourakis CJ on 12 April 2018. 21 Having regard to all these circumstances, I am not satisfied that the bankruptcy notice should be set aside. That part of the application is dismissed.

The application for the extension of time 22 The Court is empowered to extend the time fixed for compliance with the requirements of a bankruptcy notice (s 41(6A)). The exercise of that power is governed by s 41(6C), which provides: (6C) Where: (a) a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and (b) the Court is of the opinion that the proceedings to set aside the judgment or order: (i) have not been instituted bona fide; or (ii) are not being prosecuted with due diligence; the Court shall not extend the time for compliance with the bankruptcy notice. 23 As can be seen, s 41(6C) precludes the Court from the extending the time for compliance with the bankruptcy notice when the Court considers that the Applicant's proceedings to set aside the judgment or order giving rise to the bankruptcy notice have not been instituted bona fide or are not being prosecuted with due diligence. 24 The Registrar considered that the Applicant had not prosecuted his appeals against the default judgment of 29 March 2017 and the judgment of 21 July 2017 with due diligence. I note in this respect that the Applicant did not commence his appeal to the Supreme Court of South Australia until 8 February 2018. That was a long time after Magistrate Gumpl's decision of 21 July 2017 and well outside the period specified for the bringing of such appeals. 25 It is appropriate to take into account that the Applicant had brought an application seeking the setting aside of an earlier bankruptcy notice based on the default judgement of 29 March 2017 and that, ultimately, the Respondents had consented to the setting aside of that notice on 26 October 2017. Nevertheless, the default judgment of the Magistrates Court remained in place and the Applicant's application to have that judgment set aside was refused. It is apparent that the Applicant was prompted to appeal to the Supreme Court only by his receipt of the second bankruptcy notice on 23 January 2018. In these circumstances, I do not think that it can be said that the Applicant prosecuted the appeal in the Supreme Court (these being the proceedings on which he now relies) with due diligence. Had he done so, it is reasonable to suppose that all appeals in the Supreme Court of South Australia would have been concluded 6-9 months ago. 26 That finding is sufficient to enliven the obligation imposed on the Court by s 41(6C). That being so, it is not necessary to consider the alternative limb, namely, whether the Applicant was bona fide in commencing the proceedings for the setting aside of the default judgment, including his appeals in the Supreme Court. 27 My satisfaction that the Applicant did not prosecute the proceedings in the Supreme Court of South Australia with due diligence precludes the Court then from extending the time for compliance. That part of the application must also be dismissed. 28 Accordingly, the Applicant's application of 21 June 2018 is dismissed. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.