Heinrich v Commonwealth Bank of Australia

10 As the primary judge in this matter explained, the shadow ledger was a record of the legal debt outstanding by the appellant to the respondent, as distinct from its 'mainframe computer ledger' which apparently recorded the taxation accounts of the respondent, having regard to its prospects of recovery from debtors including persons such as the appellant.

11 At the trial of the debt action, counsel then appearing for the appellant (not the same counsel as appeared for him at first instance in this matter) did not contest the arithmetical accuracy of the calculations of interest, or that the calculations of interest were made at the applicable rate as agreed in 1985 when the relationship of borrower and lender commenced. Nor did counsel for the appellant dispute that it was appropriate to 'write back' interest to 15 June 1998 as the shadow ledger disclosed had been done. In fact, each of Exhibits P114 and P115 was admitted by consent. Each of those exhibits was supported by an affidavit of Mr Hampton as to (a) the records to which he referred in identifying and producing the certificate and the shadow ledger, and (b) the accuracy of the material. Mr Hampton's affidavit was to meet the requirements of ss 46 and 59 of the Evidence Act 1929 (SA). Counsel for the respondent offered to tender Mr Hampton's affidavit (and to have him available for cross-examination) to establish those criteria for admissibility. Counsel for the appellant at the time said that he did not request that to be done, as it was not necessary. Consequently, neither the certificate nor the shadow ledger was admitted under the provisions of the Evidence Act because it was not necessary to do so. Each of those documents was admitted by consent of counsel for the appellant, in circumstances where there was no challenge to what they disclosed, or as to the authenticity of the shadow ledgers or as to the accuracy of the figures which they contained. 12 Her Honour found the respondent's claim in the debt action to have been proved. 13 The main dispute in the debt action arose from the appellant's defence and counterclaim. The appellant sought declaratory relief that he was not indebted to the respondent at all, and that any financial accommodation provided to him by the respondent and the agreement by which he had received that accommodation, including the mortgage, were either void ab initio or had been rescinded by him. In consequence, he claimed the sum of $388,213.55 by way of refund of interest paid by him from time to time up to 1992 on the accommodation said to have been actually provided by the respondent, together with amounts which he claimed to have lost from the sale of the two properties referred to above. The appellant alleged that the respondent had, without his consent, altered the mortgage and that the financial arrangements into which he had entered with the respondent (including the mortgage) had been procured through duress or undue influence and fraudulent misrepresentations by officers of the respondent. 14 The issues raised by way of defence also included challenges to the method of the respondent's accounting, the validity of certain bills of exchange upon which moneys had been advanced by the respondent to the appellant from time to time, or had continued to be made available as bills were rolled over. In effect, the appellant alleged that the respondent had engaged in criminal behaviour and avoidance of taxation in the way it maintained the shadow ledgers. 15 The appellant's allegations in the debt action against the respondent of unlawful behaviour relating to the maintenance of the shadow ledger were struck out by an interlocutory ruling made on 9 March 1999. By leave, the appellant appealed from that ruling to the Full Court of the Supreme Court of South Australia, which dismissed the appeal: Heinrich v Commonwealth Bank of Australia [1999] SASC 210. In his judgment, Perry J (with whom Prior and Mullighan JJ agreed) said that the proposed pleadings did not raise any facts which could give rise to a finding of fraud of a kind which could either extinguish the entitlement of the respondent to recover its loan with interest, or which otherwise could support a cause of action for damages on the part of the appellant. Perry J also made the point that, even if the appellant were to have been successful in obtaining rescission of the mortgage (an issue which, it transpired, was not necessary to address because the respondent did not rely on the mortgage as providing it with security over the farm property), such relief could only be granted on the condition that the appellant brought into account in the process, and paid, the money which was due following advances made to him by the respondent: see e.g. Bank of South Australia v Ferguson (1998) 151 ALR 729. 16 Her Honour rejected the allegations of fraudulent behaviour made against the respondent and its officers. This included rejecting various claims that the respondent had procured the execution of the mortgage through fraudulent behaviour, or had fraudulently charged or failed to disclose or had misled the appellant about the interest rates which would be charged from time to time on his account, or about the nature of the securities which he had given, or about the extent and nature of his indebtedness to the respondent, or about fees which it proposed to charge or did charge the appellant, or about the amount of the funds advanced pursuant to certain bills of exchange from time to time. Her Honour concluded in these terms: 'I have considerable sympathy for Mr Heinrich and the predicament in which he found himself. He, as did many others, borrowed money at a time of escalating interest rates which clearly exacerbated his overall financial situation and left him with the debt with which he is now confronted.' 17 Her Honour concluded that the indebtedness of the appellant as at October 1992 was accurately reflected in the respondent's accounts, and that neither the initial arrangements by which he had been provided with financial facilities nor the subsequent increase of those facilities from time to time up to October 1992 involved any duress or unconscionability on the part of the respondent. She rejected the matters raised in the appellant's defence, and dismissed his counterclaim. 18 There was no appeal by the appellant from the judgment in the debt action.

the legal framework 19 Section 153B relevantly provides that if the Court is satisfied that a sequestration order ought not to have been made, it may make an order annulling the bankruptcy. 20 The Court must first consider whether the sequestration order ought not to have been made. If it so finds, then the Court must consider whether, in the exercise of its discretion, the bankruptcy should be annulled: Re Deriu (1970) 16 FLR 420. Later evidence of previously unknown facts may disclose matters which show that the sequestration order ought not to have been made. That is, the Court is entitled to consider not only the case as disclosed at the time when the sequestration order was made, but also those facts now known then to have existed. The Court excludes those facts which have occurred since the order was made. Later evidence of previously unknown facts may disclose matters which show that the sequestration order ought not to have been made: Re Frank; Ex parte Piliszky (1987) 16 FCR 396; Stankiewicz v Plata [2000] FCA 1185 at [19]; Re Williams (1968) 13 FLR 10 at 23; Re Ditfort; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347. These authorities, all of which were cited by the learned primary judge in his judgment, were accepted at first instance as reflecting the relevant law.

the proceedings at first instance 21 At the hearing of the application at first instance the appellant contended that the sequestration order ought not to have been made because: (a) he was not, and at no material time had been, indebted to the respondent as it claimed; and (b) the judgment had been wrongly procured, based upon the certificate, when in fact he was not so indebted to the respondent. 22 The certificate certified the amounts due and allowing by the appellant to the respondent at 1 November 1999 as $660,643.08. The increase in that sum to 11 January 2000 reflected interest accrued for the period between 1 November 1999 and 11 January 2000. The shadow ledger showed: Balance at 15 June 1998 $322,352.24 Interest written back on 15 June 1998 $253,648.06 Interest calculated monthly thereafter to 1 November 1999 $ 84,642.78 23 At first instance in this matter, counsel for the appellant submitted that the consent given in the debt action was of no significance because it was uninformed due to a failure on the part of the respondent to have given proper discovery, and because the shadow ledger and hence the certificate were fraudulent. 24 The appellant's contention at first instance was that the evidence before his Honour showed that the sequestration order ought not to have been made because:

• the judgment was based upon inadmissible evidence; namely the certificate, because it reflected fraudulently false evidence as to the appellant's indebtedness to the respondent; and
• the appellant was not insolvent because he had assets sufficient to have paid the amount of his actual indebtedness to the respondent at the time of the sequestration order. 25 Counsel for the appellant did not dispute that the appellant had some ongoing indebtedness to the respondent, but was unable to quantify the debt. He asserted nevertheless that the appellant had sufficient assets to pay whatever real indebtedness he may have had to the respondent. 26 The learned primary judge in this matter examined the items of evidence which the appellant had tendered to demonstrate that the judgment in the debt action was fraudulently procured. 27 In our view, it is not necessary to give details of the various pieces of evidence (about 7 items in total) which his Honour examined. They included a diary note from the respondent's records, a letter dated 9 January 1992 from the respondent to the appellant, a paragraph in a further letter, dated 24 July 2002, from the respondent's solicitors to the appellant, an assertion in a letter, dated 14 July 1997 from the appellant to the respondent's solicitors that its discovery in the debt action was inadequate, an affidavit sworn by the appellant on 3 October 2002 and two parts of the outline of argument for the respondent in a separate action brought by the appellant in the Supreme Court of South Australia (Action 1266 of 1998) in which the appellant alleged that the respondent had breached its taxation and statutory obligations as a banker and thus was not entitled to rely upon the shadow ledger in its claim against the appellant. In those proceedings the appellant sought interlocutory relief, in effect to restrain the respondent from accruing any further debt against him in its ledgers. 28 His Honour said this: 'In this matter, I have carefully considered each of the items of evidence relied upon and identified by counsel for Mr Heinrich as demonstrating, or as said to demonstrate, that the judgment in the debt action was procured in some way by fraudulent conduct on the part of the CBA. In my view the evidence gets nowhere near such a conclusion. In a number of respects, I simply do not see how the allegation can be maintained.' 29 His Honour then turned to the appellant's alternative claim that, in any event, he was at the time of the sequestration order able to meet his debts as and when they fell due from his assets. This was based on the proposition that the extent of his indebtedness to the respondent was nil. His Honour observed that the appellant did not really seek to discharge the onus of demonstrating that, at the time of the sequestration order, his financial affairs were such that he had sufficient assets to enable him to meet his liabilities at that time. 30 One particular submission which his Honour considered was that the appellant's solvency at October 1992 could be shown by reference to the value of the farm property. The evidence did not include any expert valuation of the farm property either at 1992 or at the time of the trial at first instance in this matter. Nor did the evidence address the appellant's present capacity to realise the farm property. His Honour observed that there was in fact no attempt in any coherent way to demonstrate the appellant's assets and liabilities as at the date of the sequestration order.

the appeal 31 The appellant represented himself in the appeal. The notice of appeal was not a concise document. It listed, sometimes in a repetitious way, numerous errors alleged to have been made by the primary judge. The appellant made both oral and written submissions. There were nearly a thousand pages of documents in the appeal books. 32 From all of the foregoing it is possible to distil the appellant's claims to the following matters:

• the judgment debt was based upon a false certificate;
• he had only one account with the respondent, with the result that the shadow account had no validity;
• the respondent had (in the debt action) wilfully failed to disclose pages 16, 17, 18 and 19 of the statements of account showing a balance of $322,352.24 as the debit balance and the interest rate as zero;
• the respondent had written off an amount of $100,000 in 1993, but this was not disclosed in the certificate. The same applied to an amount of interest written back on 15 June 1998; and
• the respondent had allegedly refused to mediate pursuant to certain Guidelines for Mediation. 33 At the hearing of the appeal the appellant agreed that these five points constituted the essence of his case. 34 The appellant contended that the respondent had obtained the judgment debt by deception. The alleged deception was the respondent's failure to disclose the four pages of statements of account referred to above, and concealing the details of his account recorded on its mainframe computer ledger (including the writing off of amounts and non-accrual of interest). The appellant submitted that the respondent was not entitled to treat its mainframe computer ledger as being irrelevant to the question of his legal indebtedness to it. 35 In our view, there is no substance to the appellant's complaints. It is only necessary to refer to a few matters. They are as follows. 36 In its statement of claim in the debt action, filed on 15 February 1996 the respondent sued the appellant for $348,393.01 plus interest calculated at a daily rate of $106.59. By the time the trial commenced in February 1999 the arrears said to be due had risen to $612,448.62 and the daily rate of interest accruing on that amount was said to be $162.76. 37 On 25 September 1998 the respondent's solicitor wrote to the appellant: 'I am instructed that the Bank has made provision for and paid appropriate income tax upon interest, fees and charges paid and/or payable by you as appropriate under the relevant Income Tax Legislation. The Bank, for its income tax accounting purposes only, on 15 June 1998 wrote off as at 1 June 1998 the amount of $253,648-06 from your loan account and assessed the account as a deferred interest account, also from that date. It nevertheless maintains that you are legally liable to pay the whole of the debt to it, including the said amount written off and interest accrued in its shadow ledger from 1 June 1998. The bank had already instituted court action against you for sums which it recognised on 15 June 1998 were likely to exceed the assets recoverable from you personally. Accordingly, it made appropriate provision in respect of your debt to it as stated above. . . . To ensure that there is no misunderstanding I am instructed to advise you that the Bank intends to pursue:

1. Its claims for its full legal entitlement against you;
2. Its defence of your claims against it; and 3. The recovery of any amounts to which it is entitled from you and/or from any entities associated with you. . . . My client is conscious that you do not have legal representation and that you may have misconceived the legal position and/or ramifications of the matters which you now seek to raise in action 1266 of 1998. [Proceedings which the appellant issued against the respondent in the Supreme Court of South Australia seeking a declaration that the respondent had engaged in misleading or deceptive conduct by not bringing accrued interest income into account for the purposes of the Income Tax Assessment Act, and in which he sought an injunction restraining the respondent from accruing any further debit against him which were accrued in the shadow ledger. Those proceedings were dismissed by consent on 12 February 1999.] I urge you to urgently obtain legal advice and representation which will avoid a waste of costs and resources. There is still more than 4 months in which to deal with any procedural matters.' 38 It will be remembered that the appellant's counsel in the debt action consented to the admission of Exhibits P114 and P115, being the certificate of indebtedness and the shadow ledger. 39 The first figure in the shadow ledger was $322,352.24 shown as a balance as at 15 June 1998. The next figure, with the same date, was a debit of $253,648.06 described in the document as "Int Written Back", clearly indicating interest written back. The new balance shown was $576,000.30. It must have been obvious to the appellant and his legal advisers (bearing in mind the contents of the letter of 25 September 1998 referred to above) that that figure ($576,000.30) was the balance recorded in the respondent's mainframe computer ledger at the start of business on 15 June 1998 as owing by the appellant to it. 40 The appellant exhibited the four pages of statements of account referred to above to an affidavit in support of a notice of motion which he filed shortly before the hearing of the appeal. In that motion he sought further discovery of documents from the respondent. All that those four pages of statements of account show is a constant debit balance of $322,352.24 to which interest (described as "debit rate") was shown as being 0.000% per annum. That figure is identical to the first figure in the shadow ledger. 41 It seems to be common ground that those four pages were not discovered by the respondent in the debt action. But, in our opinion, there is no substance in the appellant's assertions that the respondent misled him, his advisers or the Court in that action. We refer first to the respondent's letter of 25 September 1998. The appellant attacked the respondent's use of the shadow ledger in the debt action by bringing the collateral proceedings (Action 1266 of 1998) which were dismissed by consent. The same matter (the respondent's use of the shadow ledger) formed part of the allegations in the defence and counterclaim in the debt action. The striking out of the relevant paragraphs and the appeal from that decision is referred to at paragraph [15] above. 42 We think that it is useful, bearing in mind the nature of the bankruptcy jurisdiction which we are exercising, to turn for a moment to the appellant's records of his indebtedness to the respondent. 43 Exhibit P51 in the debt action was a copy of the appellant's taxation documents for the year ended 30 June 1992. A balance sheet, which was included in those documents, showed an overdraft with the respondent of $7,965.52 as a current liability plus deferred liabilities totalling $484,203.85 made up as follows: 'CBA - Commercial Bill #1 350,000.00 Loan - Commonwealth Dev Bank 66,166.96 Farm Development Loan - CDB 8,993.37 CBA - Commercial Bill #2 59,043.52' 44 The total of the debts so shown was $492,169.37. In those documents the interest payable to the respondent on the loans was claimed as a deduction. Nyland J, in her reasons for judgment in the debt action, noted that there were similar entries in the financial statements of the appellant for the preceding years. She observed that the appellant's taxation records thus tended to support the evidence produced by the respondent as to the quantum of the debt at the relevant time. 45 It is clear that her Honour did not rely solely on the respondent's certificate and shadow ledger when assessing the amount of the judgment debt. 46 The appellant contended that the respondent had, as a matter of law, elected to write off the various amounts referred to above and not to charge any further interest in respect of moneys owing by him. In particular, he contended that the respondent had elected to "hold" the balance owing by him as at 14 July 1998 (the opening date shown on the first of the four statements of account referred to above) at the sum of $322,352.24 and thereafter not to accrue interest. He challenged the respondent's entitlement to maintain two separate sets of records in relation to its dealings with him i.e. the shadow ledger on the one hand and the mainframe computer ledger on the other hand. 47 The appellant's case does not rest on any allegation which might give rise to an estoppel, for example that he acted to his detriment in reliance upon the matters recorded in the respondent's mainframe computer ledger. On the contrary, an essential part of his case is that the respondent never disclosed these statements to him. 48 We cannot see anything in the large volume of documents which the appellant put before us, or in his oral submissions, which would justify this Court, exercising its bankruptcy jurisdiction, in going behind the judgment debt. It is also useful to bear in mind, as the primary judge observed, that the petition was granted on the ground of non-compliance with a bankruptcy notice, although it should be acknowledged that the bankruptcy notice was issued on the basis of the judgment debt. 49 In our view, the first four of the matters referred to at paragraph [32] above were, with respect, dealt with most adequately by the primary judge. The appellant has not demonstrated any appellable error in relation to any of those matters. 50 The fifth assertion, that the respondent has refused to mediate in accordance with certain Guidelines for Mediation, is a new matter which, in our view, is irrelevant to the issues either in the application or in the appeal. 51 The respondent filed a motion in the appeal to strike the appeal out on the basis that it was an abuse of process i.e. an attempt to re-litigate the debt action. In our opinion, that is precisely what the appellant seeks to do. We decided, given that the appellant was not legally represented, that it would be a fairer and more efficient use of the Court's time to hear the appeal rather than that motion. 52 We will dismiss the appeal with costs. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court .

Solicitor for the Respondent: Mr Andrew Burdett

Date of Hearing: 20 November 2003

Date of Judgment: 22 December 2003