SHOULD WESTPAC BE SUBSTITUTED AS PETITIONING CREDITOR?
Westpac's application to be substituted as a petitioning creditor under s 49 is supported by Hume but opposed by Hughes. Section 49 provides:
"Where a creditor's petition is not prosecuted with due diligence or where for any other reason the Court considers it proper to do so, the Court may permit to be substituted as petitioner or petitioners another creditor or other creditors to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor, and the petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditor."
In addition to establishing a reason for the substitution the creditor who is substituted for the petitioning creditor must be a person whose debt was in existence at the time of the act of bankruptcy alleged in the petition: see McNamara v Langford (1931) 45 CLR 267. In Hyams v Elder Smith Goldsbrough Mort Ltd (1976) 133 CLR 637 at 639 Barwick CJ (with whom Gibbs and Mason JJ agreed) explained the decision in McNamara as follows:
"Although a creditor seeking an order of substitution must claim the existence of a debt of the required amount as at the date of the act of bankruptcy, it is not necessary, in my opinion, that that creditor should establish, as part of his application, that his debt was in fact in existence at that time. Of course, if it appears on the face of the material he produces in support of his application that his debt was not in existence at the appropriate time the Court should not order the substitution. McNamara v Langford, properly understood, decides no more than that. Whether or not the substituted petitioning creditor's debt is sufficient in point of time to support the petition will be decided when the petition is heard."
Section 44(1) requires, inter alia, that the petitioning creditor's debt be a liquidated sum payable immediately at the date of presentation of the petition or at a certain future time. As s 49 provides that upon substitution the petition may be proceeded with as if the substituted creditor had been the petitioning creditor, the substituted creditor must satisfy the requirements of s 44(1).
In that context I turn first to consider the question of whether Westpac has standing to be a substituted petitioner. In the present case that question involves determining whether as at 9 January 1997 (the date of the act of bankruptcy alleged in the petition) and as at 28 April 1997 (the date of the presentation of the petition), the judgment debt was due and owing by Hughes to Westpac. As at both dates:
· Westpac was a judgment creditor of Hughes in the sums of $4,668,210.94 and $20,671.35 which were due and payable under the judgment obtained by Westpac against Hughes on 11 October 1996;
· orders of the Court of Appeal of the Supreme Court of Victoria that execution on the judgment and orders made on 11 October 1996 be stayed pending the hearing and determination of Hughes' appeal, were still in effect.
The stay of execution appears to have been ordered under O 64, r 25 of the General Rules of Procedure in Civil Proceedings 1996 of the Supreme Court of Victoria. The legal processes available by way of enforcement, but stayed under the order, are those set out in Orders 66 to 76 inclusive. In my view, a distinction is to be drawn between a stay of execution of a judgment and a stay on the operation of the judgment. In principle, a stay of execution relates solely to a stay in respect of the legal processes of enforcement which are available in respect of the judgment but does not, of itself, suspend or otherwise affect the validity or operation of the judgment. A stay on the operation of the judgment, suspends the operation and the legal affect of, and the rights conferred under, the judgment.
The legal consequences of a stay of execution were stated succinctly by Denning J in Clifton Securities Ltd v Huntley and Others [1948] 2 All ER 283 at 284:
"A stay of execution only prevents the plaintiffs from putting into operation the machinery of law - the legal processes of warrants of execution and so forth - in order to regain possession. It does not take away any other rights which they have. It does not prevent their exercising any right or remedy which they have apart from the process of the court."
Although the statement of Denning J has been the subject of some doubt (see In the Marriage of Clemett (1980) 50 FLR 248 and Future Graphics Pty Ltd v Fullpoint Pty Ltd (1990) 8 ACLC 700 at 703) it seems to me that it is clearly correct.
In the context of a stay of execution under O 64, r 25 I can see no contextual or textual reason for taking a different view from that expressed by Denning J in respect of a court ordered stay of execution on a judgment. I would add that the view of Denning J is also supported by the majority judgments in Pollack v Commissioner of Taxation (1991) 32 FCR 40. Pincus J (at 51-52) and Gummow J (at 56-57) found that a "stay of enforcement" under Part 31A of the District Court Rules 1973 (NSW) pending the hearing of an application by a judgment debtor to pay the judgment by instalments did not, without more, deprive the judgment debt of its character as an obligation that is payable immediately. As was said by Pincus J at 51:
"the obligation subsists but enforcement of the judgment cannot take place;"
and by Gummow J at 56:
"The debt may be payable by the debtor although the means of enforcement are denied to the creditor."
Although Beaumont J (at 48) expressed a different view, the majority view in Pollack is authority which directly supports Westpac's contention that the stay of execution in the present case did not affect its status as a creditor to whom a judgment debt was immediately payable as at the date of the act of bankruptcy and for the purposes of s 44(1)(b)(ii) of the Act.
The distinction to which I have referred has been recognised and given effect to in numerous statutory provisions providing for orders staying execution or staying the operation of a judgment or decision. Indeed, Clemmett concerned reg 120(8A) of the Family Law Regulations under which the Court may make an order staying the execution or operation of a decree: see also for example s 41(2) of the Administrative Appeals Act 1975 (Cth)and s 15(1) of the Administrative Decisions (Judicial Review) Act 1977 (Cth).
The distinction has also been recognised in bankruptcy where it has been held that the issue of a bankruptcy notice is not, of itself, a form of execution: see Wallace v Trade Credits Ltd (1983) 72 FLR 252 at 254 per Bowen CJ, McGregor and Neaves JJ and In Re A Bankruptcy Notice [1898] 1 QB 383 at 387. Section 40(1)(g) of the Act is likely to have been enacted on the basis that a judgment, the execution of which has been stayed, can still result in the judgment debt being due and owing, that is, on the basis that the stay of execution does not affect the operation of the judgment. It seems to me that s 40(1)(g) supports Westpac's position on the basis that it takes into account a factor (a stay of execution) to which, apart from the statutory provision, the Court might not have been entitled to have regard on the issue of whether a judgment debt was due and payable; cf In Re Amalgamated Properties of Rhodesia (1913) Limited [1917] 2 Ch 115 at 123 per Sargant J.
In my view the stay of execution on the judgment and orders under which the judgment debt was payable did not suspend or stay the operation of the judgment or orders with the consequence that as at 9 January 1997 and 28 April 1997 Westpac was a creditor of Hughes and the judgment debt was a liquidated sum which was immediately payable by Hughes to Westpac. Accordingly, Westpac has the necessary standing to be substituted as the petitioning creditor in the present matter.
There is an additional basis for Westpac's standing to be a petitioning creditor under the Act. It is common ground that the judgment debt was founded upon Hughes' liability as a guarantor of the repayment of certain loans to Westpac. Accordingly, the contractual liability which gave rise to the judgment debt was in respect of a liquidated sum being the amount of the loans and interest thereon which was due and payable by Hughes under the guarantee. It is well established that in such circumstances the general rule that the original debt merges in the judgment does not apply in bankruptcy. In Re King & Beesley; Ex parte King & Beesley [1895] 1 QB 189 at 191 Vaughan Williams J expressed the principle as follows:
"I am of the opinion that this appeal should be dismissed. It is contended that the petitioning creditor's debt is a judgment debt, and that the effect of the judgment is that the original debt has been extinguished and has ceased to exist. I do not agree with that contention, and I think that the judgment has not extinguished the debt for bankruptcy purposes or for the purpose of supporting a bankruptcy petition. The authorities prior to the Act of 1883 seem to be conclusive against the contention of the debtors. It has been further urged that an alteration in the law has been effected by the Act of 1883, but I have entirely failed to discover what that alteration is."
See also Kennedy J at 193 and Bayne v Blake (1909) 9 CLR 360 at 363 per Griffith CJ. Vaughan Williams J at 192 in King & Beesley observed that the judgment is, prima facie, conclusive evidence of the underlying debt.
The above principles have been accepted as applicable to bankruptcy proceedings under the Act in Australia: see Re Agrillo; Ex parte the Bankrupt (1977) 29 FLR 484 at 489 and Pollack at 53 per Pincus J and at 58 per Gummow J.
Although in most cases s 40(1)(g) is likely to denude the principles to which I have referred above of extensive practical application, as the present case demonstrates, they can still have practical and legal significance. To the extent that the application of the principles can lead to anomalous or unintended outcomes in particular matters the Court has ample discretion under s 52(2)(b) to deal with such matters.
The next issue is whether the other requirements of s 49 are satisfied. In my view it is proper to permit Westpac to be substituted under s 49 of the Act as the petitioning creditor for the following reasons:
1. A bankruptcy petition is for the benefit of all creditors: see Davis v Holding [1836] 1 M & W 159 at 165 per Lord Arbinger. As Hughes is hopelessly insolvent it is in the interest of all creditors that the bankruptcy petition be heard and determined without further delay and unnecessary expense.
2. Section 49 helps avoid a multiplicity of petitions: see Dean v Q.U.F. Industries Ltd (1981) 51 FLR 317 at 321. Westpac has already served its own bankruptcy notice. A refusal to permit the substitution would result in a two day hearing before a judicial registrar with a possible review before the Court on the debt claimed by Hume. In the light of Hughes' insolvency, Hume is unlikely to recover the costs of that hearing if it succeeds. Further, as Westpac is undoubtedly a creditor in a substantial sum it is contrary to common sense and justice to put Hume, Hughes, Westpac and the Court through a lengthy, time-consuming and expensive process which sooner or later will almost inevitably lead to Hughes' bankruptcy on a petition by Hume or Westpac.
3. If a sequestration order is made there is evidence that the substitution can be in the interests of creditors, in relation to the relation back period under ss 115, 120, 122 and 123 of the Act in respect of any dealings with Hughes' assets.
4. Hume supports the substitution and Hughes has not put forward any justifiable countervailing reason why the substitution should not be permitted.
There has also been dilatoriness on the part of Hume in bringing this matter to finality. Its failure to comply with my directions in my view amount to a failure to prosecute the petition with due diligence for the purposes of s 49.
Accordingly, for the above reasons it is appropriate to make an order under s 49 of the Act substituting Westpac as the petitioning creditor.