Section 52(2) of the Bankruptcy Act
43 By his notice of opposition, Mr Knight does not contend that he is able to pay his debts as per s 52(2)(a). Rather, Mr Knight contends that for "other sufficient cause a sequestration order ought not to be made" as per s 52(2)(b).
44 While Mr Knight's notice of opposition states six grounds of opposition, it was apparent from his written and oral submissions that there is a single ground: that the debt claimed by Mayart "is not in reality due and payable to it". As the debt claimed by Mayart is the Judgment Debt arising under a final judgment of the County Court, Mr Knight requests this Court to go behind the judgment "to ascertain the reality of the debt being owed to the petitioning creditor".
45 The applicable legal principles were not in dispute between the parties. In Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132 (Ramsay), the High Court majority (Kiefel CJ, Keane and Nettle JJ) affirmed the following principles:
(a) First, by reason of s 52 of the Act, a Bankruptcy Court must be satisfied with the proof of "the fact that the debt … on which the petitioning creditor relies is … still owing", if the court's power to make a sequestration order is to be enlivened (at [39]).
(b) Second, a Bankruptcy Court is not obligated to treat a judgment as satisfactory proof of the petitioning creditor's debt. A Bankruptcy Court exercising jurisdiction under s 52 of the Act may, in some circumstances, "go behind" a judgment in order to be satisfied that the debt relied upon by the petitioning creditor is truly owing. The Bankruptcy Court may take this course in order to satisfy itself that there is an extant petitioning creditor's debt as a necessary foundation for the making of a sequestration order (at [1]).
(c) Third, the circumstances in which a Bankruptcy Court may go behind a judgment are not limited to cases involving default judgments or cases involving fraud, collusion or miscarriage of justice (at [33], [39], [43]). A Bankruptcy Court may go behind a judgment, notwithstanding that the judgment was obtained after a contested hearing (at [44]).
(d) Fourth, scrutiny by a Bankruptcy Court of the debt propounded by a judgment creditor seeking a sequestration order does not involve an attempt to impeach the judgment; nor is a Bankruptcy Court concerned to prevent the judgment creditor from invoking the ordinary processes of execution available under the general law. Rather, a Bankruptcy Court is concerned only with the question whether the debt on which the application for a sequestration order is based is truly a basis for the making of the order (at [54]).
(e) Fifth, the scrutiny required by s 52 of the Act as to whether there is, in truth and reality, a debt owing to the petitioning creditor serves to protect the interests of third parties, particularly other creditors of the debtor. Their interest in being paid their debts in full should not be prejudiced by the making of a sequestration order in reliance on a judgment debt which does not reflect the true indebtedness of the debtor to the petitioning creditor (at [55]).
(f) Sixth, the principle that a party is bound by the conduct of their case at trial is not a sufficient reason for a Bankruptcy Court not to look behind a judgment. That is because a Bankruptcy Court is concerned, not to discipline litigants or to protect finality in the administration of justice as between parties to litigation, but to protect the interests of third parties who were not participants in the litigation which led to the judgment in question (at [67]).
46 As observed by the Full Federal Court in Doggett v Commonwealth Bank of Australia [2019] FCAFC 19 at [34], it is not the case that a debtor is entitled simply to re-litigate the judgment upon which the debt is founded. Sufficient reason must be shown to question the debt. As Lockhart J (with whom Fisher J agreed) stated in Simon v Vincent J O'Gorman Pty Ltd [1979] FCA 75; 41 FLR 95 at 111 (in a passage cited with apparent approval by the majority in Ramsay at [48]):
The courts are reluctant to exercise this jurisdiction where the judgment was entered after a full investigation of the issues at a trial where both parties appeared and had ample opportunity to put their case to the court.
47 In Ramsay, the majority explained (at [68], citations omitted):
For the purposes of s 52 of the Act, a judgment may usually be taken to be sufficient evidence of a debt in that a judgment against a debtor in favour of a creditor obtained after a trial is, generally speaking, a reliable indication of the true state of indebtedness as between creditor and debtor. Indeed, such a judgment can usually be expected to provide the most reliable statement of the debt humanly attainable because the ordinary processes of the adversarial system provide a practical guarantee of reliability. The testing of the relative merits of a claim and counterclaim under the rigours of adversarial litigation will usually establish the true state of accounts as between the parties to the proceedings. Accordingly, a Bankruptcy Court will usually have no occasion to investigate whether the judgment debt is a true reflection of the real debt. But where the merits of a claim and counterclaim have not been tested in adversarial litigation, a judgment debt will not have this practical guarantee of reliability.
48 To understand Mr Knight's contentions on this application, it is necessary to traverse the issues and findings in the County Court proceeding. In that proceeding, there were four plaintiffs at the time of trial: Mayart, Lincoln Daley, Leanne Daley and Dalle Australia Pty Ltd. There were originally three defendants: Mr Knight's then wife, Philippa Knight, Residential Villages (Aust) Pty Ltd and Mr Knight. However, prior to trial Mrs Knight became bankrupt and the proceeding was dismissed as against Residential Villages (Aust) Pty Ltd, leaving Mr Knight as the only defendant.
49 Judge Macnamara made the following factual findings:
(a) On 16 April 2009, Mr Knight's then wife, Philippa Knight, became the sole registered proprietor of a property at 39 Parkers Road, Parkdale, Victoria which was to be a development site (at [2]).
(b) Mr Knight arranged for the preparation of plans for a 12-apartment development on the Parkers Road property and a planning permit issued around 2012 (at [3]).
(c) Mrs Knight entered into a building contract with J G King Projects Pty Ltd (at [4]). However, the parties fell into dispute with the builder claiming payment of some $491,000. The builder sued for that amount and Mrs Knight consented to judgment in that amount. The judgment remained unsatisfied and by August 2014 Mrs Knight had been served with a bankruptcy notice. J G King presented a bankruptcy creditor's petition, the hearing of which had been adjourned a number of times. It became essential to raise money to settle the bankruptcy proceeding, failing which the Knights would lose control of 39 Parkers Road and the development (at [5]).
(d) A proposal was developed for two of the apartments in the proposed development to be sold to raise funds to satisfy the debt due to J G King. The two apartments were numbered 10 and 11. The proposed purchaser of apartment 11 were Lincoln and Leanne Daley (whose family trustee company was Dalle Australia Pty Ltd) and the proposed purchaser of apartment 10 was Mr Daley's father in law, Mr Cox, through his family trustee company Mayart) (at [5] to [8]).
(e) In pursuance of those arrangements, a number of documents were executed (at [9]). Two loan agreements were entered into on 18 August 2014. Under each agreement, the borrower was Mrs Knight and the guarantor of the borrowing was Mr Knight. The first loan agreement was for an amount of $225,000 and the lender was stated to be Lincoln and Leanne Daley (at [10]). The second loan agreement was for an amount of $400,000 and the lender was stated to be Mayart (at [17]). The provisions of the loans were otherwise identical (at [18]). The purpose of each loan was stated to be "To assist in the discharge of existing debts in relation to the Property and develop the Property" (at [11]). The "Property" was stated to be the Parkers Road property. Each loan obliged the borrower to enter into a contract of sale in respect of apartment 10 (for Mayart) and 11 (for the Daleys) (at [11]). Each loan also provided that the loan would be deemed to have been repaid upon settlement of the contracts of sale of the apartments (at [12]). However, the loans also become due and payable at specified times, including if the contracts of sale were rescinded (at [10]).
(f) Also executed were two contracts of sale for apartments 10 and 11 respectively. The purchaser in respect of apartment 10 was Mayart and the purchaser in respect of apartment 11 was the Daleys (at [19]). The contract of sale for apartment 10 was executed by Mayart's solicitor on 20 August 2014 and had a purchase price of $400,000 (at [19] and [21]). The contract of sale for apartment 11 was executed on 18 August 2014 and had a purchase price of $225,000 (at [20] and [21]).
(g) On or about 20 September 2018, the contracts of sale were rescinded (at [28]).
50 Judge Macnamara recorded that, in the proceeding, the plaintiffs sought recovery against Mr Knight as guarantor of his former wife's obligations under the two loan agreements (at [35]). His Honour noted that counsel for the plaintiffs opened the case in that manner, which were claims by Mayart on the one hand and by the Daleys on the other. Given that, it was unclear why Dalle Australia Pty Ltd had been joined as fourth plaintiff (at [35]). His Honour also noted that the last version of the statement of claim alleged that the loan agreement between Mayart and the Knights had been entered into by Mayart "as nominee or transferee of the Fourth Plaintiff" (ie Dalle Australia Pty Ltd) (see at [38]). Despite the joinder of Dalle Australia Pty Ltd and the aforementioned allegations, Judge Macnamara concluded as follows:
40 … Despite seeking and obtaining leave to amend the prayer for relief in the course of his opening statement, Dr Wolff presented the plaintiffs' case entirely according to the two loan agreements as they appear on their face, without reference to the fourth plaintiff or any transfer at all.
41 This seemed to me to be an appropriate mode of proceeding, so far as I could apprehend the evidence which was to be given and which was ultimately given. A transfer assignment or nomination would, as I understand the law, presuppose the existence, before the alleged nomination, transfer, or assignment, of some bundle of rights which could be, in the case of an assignment or transfer, made over from one natural or legal person to another, or an existing bundle of rights which could be made over in favour of some party other than their initial holder by the exercise of a power of nomination by an identified party, presumably such power being of the same character as a power of appointment under a trustee.
42 The evidence which was placed before the court indicated to me that the documents sued upon were the source of all relevant rights and obligations, whatever they might be. They did not purport to act upon, dispose of, or otherwise modify any pre-existing contractual rights. This was the basis upon which the trial was conducted. Accordingly, I propose disregarding the references in the Statement of Claim to nomination and assignment.
43 From there, the Statement of Claim alleged a failure on the part of Mrs Knight as borrower and Mr Knight as guarantor to repay the loans made under the two loan agreements, followed by a claim as against Mr Knight as guarantor for default interest at the rate specified in the loan agreements. Ultimately, these were the only operative provisions of the 81-paragraph document which call for consideration in the court's determination.
51 Judge Macnamara made the following further findings based on the case that was conducted at trial:
(a) Mr Knight admitted signing the two loan agreements (at [50]).
(b) While Mrs Knight did not distinctly admit signing, his Honour inferred that she signed the loan agreements (at [50]-[53]).
(c) Relevantly, the execution of the Mayart loan agreement by Mayart was established (at [54]).
(d) The plaintiffs' primary case was established (ie, the loan amounts were owing under the loan agreements) (at [61]).
52 Judge Macnamara rejected all of the defences raised by Mr Knight (see at [65], [84], [97], and [104]). Relevantly, Mr Knight sought to raise as a further defence the issue now agitated on this application. Relying (as a factual premise) on the plaintiffs' allegations in the statement of claim that there had been an assignment or transfer of the loan from Dalle Australia Pty Ltd to (relevantly) Mayart, Mr Knight argued that the requirements of s 134 of the Property Law Act 1958 (Vic) (Property Law Act) had not been complied with. It followed, on Mr Knight's submission, that Mayart had no right to sue upon the loan obligations (see at [105]). Judge Macnamara also rejected that defence fundamentally on the basis that "the case pressed at trial did not depend upon any finding of assignment at all" (at [106]).
53 As noted earlier, Mr Knight's application to the Victorian Court of Appeal for leave to appeal from the County Court judgment was refused. It is significant that, by his proposed appeal ground 2, Mr Knight sought to re-agitate his argument concerning the application of s 134 of the Property Law Act. The basis of the argument was materially the same as advanced before the County Court and took as its factual premise the plaintiffs' pleading of an assignment or transfer of the loan from Dalle Australia Pty Ltd to (relevantly) Mayart. The judgment of the Court of Appeal records (at footnote 3) that Mr Knight did not pursue appeal ground 2 on the application for leave to appeal.
54 On this application, Mr Knight sought to go behind the County Court judgment and advance the same contention. Mr Knight submitted that the evidence shows that the first loan agreement for $400,000 was entered into between Dalle Australia Pty Ltd as lender and Mrs Knight as borrower and Mr Knight as guarantor, and that that loan agreement was subsequently assigned to Mayart. Mr Knight submitted that the assignment was necessary because Mayart had entered into the contract of sale to purchase apartment 10 and the parties wished to ensure that the lender under the loan agreement was the same entity as the purchaser under the contract of sale.
55 The primary evidence relied upon by Mr Knight was a document which purported to be a loan agreement dated 18 August 2014 between Dalle Australia Pty Ltd as lender and Mrs Knight as borrower and Mr Knight as guarantor in the amount of $400,000. Mr Knight also relied on the allegations made by the plaintiffs in the County Court proceeding to the effect that there was an assignment or transfer of such a loan to Mayart.
56 I am not satisfied by those matters that there is a sufficient reason for questioning whether in truth and reality there is a debt due to the petitioning creditor. The evidence adduced on this application also showed that:
(a) a loan agreement was entered into on 18 August 2014 between Mayart as lender and Mrs Knight as borrower and Mr Knight as guarantor in the amount of $400,000; and
(b) a contract of sale was entered into on 20 August 2014 between Mayart as purchaser and Mrs Knight as seller of apartment 10 for a sale price of $400,000.
57 Mr Knight's argument that the loan agreement was originally entered into by Dalle Australia Pty Ltd, and then assigned to Mayart because Mayart was the purchaser of apartment 10, does not accord with the above documents that were in evidence. First, there was no instrument of assignment in evidence. Second, the loan document with Mayart as lender was entered into on the same day as the loan document with Dalle Australia Pty Ltd as lender. Third, the contract of sale with Mayart as purchaser post-dates both documents.
58 Given the state of the evidence, I am unable to make any finding about the validity or purpose of the loan document with Dalle Australia Pty Ltd as lender. It is clear from the County Court judgment that the Mayart loan agreement and contract of sale were tendered in evidence and accepted as valid documents by his Honour. On the evidence before me, there is insufficient reason to doubt the judgment reached by the County Court. That view is strengthened by the fact that Mr Knight abandoned any reliance on his argument under s 134 of the Property Law Act in his application for leave to appeal to the Court of Appeal.