Harrison v Charalambous

REASONS FOR JUDGMENT 1 The petitioning creditor, Robert Harrison, seeks an order sequestrating the estate of the debtor, Harry Charalambous. The debt alleged in the petition is the sum of $7,622.10 together with interest of $4,199.88 due under a final judgment obtained in the Magistrates' Court at Frankston on 12 September 1994. 2 The judgment was obtained in consequence of the settlement of a claim brought by the petitioning creditor for faulty workmanship to a boat owned by him. The petitioning creditor had commenced proceedings to recover damages for the alleged faulty workmanship. The case came on for hearing on 18 July 1994. During the course of the hearing the debtor sought to tender evidence from an expert to the effect that his workmanship had been carried out properly. The magistrate refused to receive that evidence, because no notice of it had been given to the complainant. This left the debtor in the position where he had to either seek to adjourn the hearing, with the likely consequence that he could be ordered to pay the petitioning creditor's costs; or agree to compromise the claim. The debtor contends that he was pressured by his solicitors to compromise his claim. Presumably he was advised that it would be in his financial interest to reach a compromise rather than to adjourn the case and carry the costs of the adjournment. The costs that the debtor was likely to incur were not only the petitioning creditor's costs of the day, but his own costs as well. 3 As a result the debtor entered into an agreement pursuant to which he promised to pay to the petitioning creditor the sum of $3,500 inclusive of costs by 18 August 1994. The terms of settlement provided that if payment was made by the due date the complaint would be struck out. The terms of settlement went on to recite that if the debtor made default in the payment of the sum of $3,500 by 18 August 1994 the petitioning creditor would be at liberty to enter judgment against him in the sum of $5,432 plus costs on the appropriate scale. The terms of settlement were signed by the parties or by their counsel. 4 The debtor failed to pay the agreed sum to the petitioning creditor by 18 August 1994. Thereafter judgment was entered in accordance with the terms of settlement. 5 The debtor contends that I should go behind the Magistrates' Court judgment and inquire whether there is in truth and reality a debt owed by him to the petitioning creditor. He has put forward material, including the report from the expert that he sought to tender in the Magistrates' Court proceeding, to show that he was not indebted to the petitioning creditor for the reason that all of the work that he performed on the petitioning creditor's boat was properly carried out. Thus he says no sequestration order should be made. 6 It is accepted that a court does have jurisdiction to go behind a judgment to determine whether there is a debt owed to the petitioner: Wren v Mahony (1972) 126 CLR 212; Corney v Brien (1951) 84 CLR 343. That is to say, in bankruptcy proceedings the existence of a judgment is only prima facie evidence of a debt, it is not conclusive evidence. 7 However, before a court will exercise its discretion to go behind a judgment debt, it must be established that there are substantial reasons for questioning whether there is in truth and reality a debt owed to the creditor: Re Longo: Ex parte Longo (1995) 57 FCR 523. 8 It is well established that if judgment is obtained by fraud or collusion or there has been some miscarriage of justice, a court can inquire whether the judgment debt is a good debt. If a judgment has been obtained without any adjudication on the merits, for example in the case of a default judgment a court will more readily go behind that judgment to inquire whether there is a good debt. 9 However, where a judgment has been entered under a compromise the position is not so straightforward. In Corney v Brien, Fullagar J said (supra at 357) that it must be shown that there exists grounds for challenging the compromise before the judgment will be reopened. This is, no doubt, because it is the compromise and not the claim that was compromised that is the foundation of the judgment. Moreover, as his Honour pointed out, where a party challenges a judgment entered on a compromise and that party has acted on the advice of counsel, the judgment will not generally be reopened. The presumption is that in such circumstances it is difficult, although not impossible, to impune the compromise. 10 In Ex parte Banner; In re Blythe (1881) 17 ChD 480 the Court of Appeal dealt with circumstances in which a court would go behind a judgment based on a compromise. The court said that if the original claim was not bona fide, but was made for the purposes of extortion, the claimant knowing that he had no legal claim, then that would be sufficient. As Brett LJ said (at 489) if a judgment or compromise is obtained by dishonesty known to both parties it would be monstrous if the court could not go behind that judgment. 11 In this case the debtor alleges that he was pressured by his legal advisers to compromise the claim notwithstanding that he had a good defence to it. However, the evidence does not implicate the petitioning creditor or his legal advisers in the allegedly undue pressure that the debtor was placed under to compromise the claim. On the contrary, the evidence suggests that the petitioning creditor was not in any way implicated in what occurred between the debtor and his lawyers. That being the case neither the compromise nor the Magistrates' Court judgment is liable to be set aside: see Tresize v National Australia Bank Ltd (1994) 122 ALR 185. 12 To my mind, what has occurred in this case is not a sufficient basis to go behind the judgment based on the compromise. Although the debtor may have been placed under undue pressure to enter into the compromise, I cannot discern any unfairness or impropriety of such a kind as would justify me in looking behind the judgment. The reality is that the debtor, perhaps through no fault of his own, was placed in a position where his commercial interests necessitated a compromise and he agreed to it in accordance with those interests. In one sense the position the debtor found himself in is not very different to the circumstances which other litigants have often had to confront. I do not doubt that litigants regularly compromise actions otherwise than in accordance with the true merits of the claims made, but that is not a sufficient reason to deny efficacy to the agreements to compromise that these litigants reach. It is certainly not a sufficient reason in this case. 13 I am satisfied that the petitioning creditor has established each of the matters which section 52 of the Bankruptcy Act 1966 (Cth) requires to be established before a sequestration order is made. Accordingly I will make the usual orders. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.