National Australia Bank Limited v Pollak

Federal Court of Australia|2001-10-05|Before: Tamberlin J, Madgwick J

REASONS FOR JUDGMENT HIS HONOUR: 1 In this matter, the National Australia Bank Limited ("the Bank") as the petitioning creditor seeks a sequestration order under s 43 of the Bankruptcy Act 1966 (Cth) ("the Act") against the estate of Dr Joseph Pollak, in reliance on an alleged act of bankruptcy committed on 29 November 2000 upon the expiration of a 21 day bankruptcy notice.

A joint and several judgment debt and a Mareva injunction 2 The history of the proceedings surrounding and giving rise to this creditor's petition is somewhat tortuous. 3 In 1986 the Bank lent money in the USA to Mrs Pollak, Dr Pollak's mother. When Mrs Pollak died, Dr Pollak and his sister, Mrs Stern, after negotiations, agreed to assume liability for the debt. On 26 April 1996, the Bank obtained judgment in the Superior Court of the State of California for $US 3.8 million plus interest and costs against Dr Pollak and Mrs Stern. 4 On 23 February 1996, Dr Pollak and Mrs Stern brought an application under s 52 of the Trade Practices Act 1974 (Cth) alleging misleading and deceptive conduct by the Bank in relation to the agreement which bound them to make good the debt. The Bank applied to this Court on 29 November 1996 to enforce the Californian judgment. The two sets of proceedings were heard together. On 21 December 1998, Tamberlin J granted an interlocutory application by the Bank for a Mareva injunction preventing Dr Pollak and Mrs Stern, along with their spouses and the trustee of a Stern family trust, from disposing of any property or assets in which they had an interest without giving the Bank's solicitor at least 28 days notice: see National Australia Bank Limited v Stern [1998] FCA 1665. (These orders were varied on 4 August 2000 to reduce the period of notice from 28 days to 19 days.) 5 On 15 October 1999, Tamberlin J delivered his decision in the principal proceedings. His Honour dismissed the s 52 claim. On 19 November 1999, his Honour ordered, giving effect to his reasons, that judgment be entered in favour of the Bank against Dr Pollak and Mrs Stern jointly and severally in the sum of $US 4,910,562.76 and that interest accrue on the judgment at the rate of 10% p.a. from that date: see Stern v National Australia Bank [1999] FCA 1421. An appeal to the Full Court against Tamberlin J's decision was rejected on 27 March 2000. 6 On 14 August 2000, Dr Pollak filed an amended application with the High Court Registry for special leave to appeal against the decision of the Full Court. Mrs Stern was named as an applicant in the application. However, the evidence was that Mrs Stern had no interest in pursuing her rights on appeal, was committed to reaching a commercial settlement with the Bank, and had only agreed to being named so as not to prejudice Dr Pollak's application. Special leave to appeal was later refused by the High Court on 24 November 2000. 7 A bankruptcy notice was issued on 29 August 2000 at the behest of the Bank. It claimed $US 5,291,600.96, being the amount payable under Tamberlin J's orders, including the accrued interest. On 8 November 2000, Dr Pollak was served with a bankruptcy notice. The time for compliance with the bankruptcy notice was 29 November 2000. At the time of the expiry of the bankruptcy notice, no payment had been made by Dr Pollak on account of the judgment debt.

A jointly and severally liable judgment debtor compromises her liability with the judgment creditor 8 On 11 September 2000, the Bank and Mrs Stern had entered into "Heads of Agreement" ("the agreement") under which certain properties were to be sold and the proceeds, together with other funds, were to be paid to the Bank in satisfaction of Mrs Stern's share of the judgment debt. The principal dispute in these proceedings related to whether this agreement operated as a release of the entire judgment debt or only an amount equal to Mrs Stern's share. 9 On 21 February 2001, consummation of the agreement occurred, with Mrs Stern, her husband Dr Stern and Stern Nominees Pty Limited entering into Terms of Settlement as the agreement had contemplated. On 22 February 2001, the Terms of Settlement were filed in this Court. Those terms evidenced an agreement to release Mrs Stern from liability for the judgment debt and otherwise arising under the related orders made by Tamberlin J. 10 As at the hearing before me, the Bank's claim was that Dr Pollak's approximate total indebtedness to the bank was $A 5,417,958.80. This figure was reached by calculations showing that, with interest, the total debt due under the judgment was $A 9,894,541.81; credit was then given to Dr Pollak for $A 4,476,583.01 that had been paid by Mrs Stern, pursuant to her Terms of Settlement, in satisfaction of her share of the liability for the judgment debt. No objection was taken to the calculations or their methodology. It is in relation to the allegedly outstanding debt that the Bank seeks a sequestration order against Dr Pollak.

The Heads of Agreement 11 The parties to the agreement, as listed in Schedule 1, were the Bank and "the Vendors". The latter were, as indicated above: Mrs Stern, Dr Harry Stern (Mrs Stern's husband) and Stern Nominees Pty Ltd (the trustee of the Stern Family Trust). 12 The recitals provided: "A. The parties hereto acknowledge that Ilana Stern is liable to the National Australia Bank ("the Bank") in the sum of US$4,910,563.00 plus costs and interests ("the debt"), pursuant to judgment and orders obtained against her by the Bank in [the Federal Court proceedings]. B. The parties now wish to avoid the necessity for the Bank to initiate and prosecute bankruptcy proceedings against Ilana Stern to enforce the debt and the foreshadowed reversal of various transactions that may arise therefrom." 13 The terms of agreement, relevantly, were: "1. The Vendors … shall cause the property known as and situated at 29 Manning Road, Double Bay … to be sold. The terms and conditions of such sale shall be discussed between the parties … provided that: … (d) The proceeds of such sale (above), are to be paid to the Bank in partial discharge of the debt. 2. The Vendors shall cause the property known as and situated at 442-448 New South Head Road, Double Bay … to be sold. The terms and conditions of such sale shall be discussed between the parties … provided that: … (d) The proceeds of such sale (above), are to be paid to the Bank in partial discharge of the debt. 3. The Vendors must pay to the Bank on or before 15 December 2000, a sum of AUD$950,000.00. … 4. As an alternative to paragraph 3, the Vendors may, within fourteen (14) days of execution of this agreement nominate one or more properties to be sold by them on the condition that the Bank agrees that such property or properties nominated have a sale value in excess of AUD$1million. The terms and conditions of such sale, shall be discussed by the parties … provided that: … (d) A sum of not less than AUD$950,000.00 shall be paid from the proceeds of any sale to the Bank. 5. The parties hereto agree and acknowledge that the Bank is, by virtue of execution of this agreement by the Vendors or any of them, granted an equitable interest in [certain named properties] as security against compliance with this agreement and in respect of the debt. The parties also warrant that they will do all things and take all necessary steps to enable the Bank to lodge a Caveat to protect such equitable interests. 6. In consideration of execution of this Agreement, Ilana Stern agrees to forego all rights to appeal in respect of the judgment in [the Federal Court proceedings]. 7. Should the Vendors or Ilana Stern, or any of them commit an act of default … in performing their obligations under this agreement, the Vendors and Ilana Stern and each of them hereby consent to the Bank taking all necessary steps to exercise and enforce its equitable interests. 8. Upon the matters in paragraphs 1 to 4 of this agreement being completed … the Bank will immediately execute Terms of Settlement with Ilana Stern and the Vendors and release Ilana Stern from the debt and any other related orders arising from the conduct of the Federal Court proceedings." 14 Following the execution of the agreement, the Bank by its solicitors sought, on 20 February 2001, to vary the agreement by adding the following clause: "Nothing in this Heads of Agreement affects the Bank's rights against Dr Pollak or Mrs Pollak [Dr Pollak's wife] and Ilana Stern, Harry Stern and Stern Nominees Pty Limited acknowledge that the Bank expressly reserves all of its rights against Dr Pollak and Mrs Pollak". This variation of the agreement was accepted by Mrs Stern, Dr Stern and Stern Nominees Pty Limited in writing by their solicitors on 21 February 2001, in consideration of an amendment to the proposed Terms of Settlement (the precise nature of which is not relevant to these proceedings).

The Terms of Settlement 15 The orders, relevantly made by Tamberlin J on 21 February 2001, by consent, were: "1. The injunction granted against the First [Mrs Stern] and Second [Dr Pollak] Respondents on 21 December 1998, and amended on 4 August 2000 be dissolved insofar as it relates to the First Respondent. 2. The injunction granted against the Third [Mr Stern], Fourth [Mrs Pollak] and Fifth [Stern Nominees] Respondents on 21 December 1998 be dissolved insofar as it relates to the Third and Fifth Respondents. 2. The First Respondent be released from any further compliance with Order 2 made by Justice Tamberlin on 31 March 2000. … The Court notes the following terms of settlement: Definitions … (b) Judgments means the judgments obtained by the Applicant against the First and Second Respondents in: (i) Proceedings no BC097824 in the Superior Court of California; and (ii) Proceedings no NG936 of 1996 in the Federal Court of Australia. (c) Parties means the Applicant, First Respondent, Third Respondent and Fifth Respondent; (d) Proceedings means: (i) Proceedings no BC097824 commenced by the Applicant on 1 February 1994 in the Superior Court of the state of California, United States of America; (ii) Proceedings no B104379 commenced by the First Respondent and Second Respondent on 8 July 1996 in the Court of Appeal of the state of California, United States of America; (iii) Proceedings no G149 of 1996 commenced by the First Respondent and Second Respondent on 23 February 1996 in the Federal Court of Australia; (iv) Proceedings no NG936 of 1996 commenced by the Applicant on 8 November 1996 in the Federal Court of Australia; (v) Proceedings no NG81 of 1998 commenced by the First Respondent and Second Respondent on 10 February 1998 in the Federal Court of Australia; (vi) Proceedings no N302 of 1999 commenced by the First Respondent and Second Respondent on 13 April 1999 in the Federal Court of Australia; and (vii) Proceedings no N1393 of 1999 commenced by the First Respondent and Second Respondent on 30 November 1999 in the Court of Appeal of the Federal Court of Australia. … Caveats 12 On execution of these Terms of Settlement, the solicitor for the Applicant will provide to the solicitor for the First, Third and Fifth Respondents withdrawals of caveat enabling the Third and Fifth Respondents to remove the Caveats lodged by the Applicant over the Properties. Enforcement of Judgments/Orders 13 The Applicant covenants not to take any step to enforce the Judgments against the First Respondent. 14 Each of the Parties covenants not to take any step to enforce any costs orders made in any of the Proceedings against any of the other Parties. Record of Satisfaction of Californian Judgment 15 In the event of the Applicant: (a) executing terms of settlement with the Second Respondent in respect of the Proceedings; or (b) deciding to take no further steps to recover the monies due to the Applicant from the Second Respondent, the Applicant will, within 7 days, execute the form at Annexure "A" and submit the executed form to the solicitor for the First Respondent. …

Retention of Rights 17. Nothing in these terms affects the Applicant's rights against the Second and Fourth Respondents."

The parties' submissions 16 Mr Aldridge SC for the debtor submitted that the agreement and the payments thereunder constituted an accord and satisfaction of the sums owed to the Bank and that the release of one of a number of debtors jointly and severally liable releases all of them. Counsel sought to rely on the letter sent by the solicitors for the Bank, which varied the agreement by the addition of the clause referred to above, as an implicit admission that such a clause was required in the agreement to avoid its effecting a release of the liability of the debtor. However, counsel submitted, the letter was ineffective, because the release of the debtor had been effected on 11 September 2000 when the agreement was entered into and a subsequent amendment to the document could not nullify a release so granted. Accordingly, it was submitted that there was no debt to the Bank and the petition should be dismissed. 17 As an alternative, Mr Aldridge relied on the existence of the Mareva injunction. He submitted that regardless of whether it required 19 or 28 days' notice "in a practical business sense" it prevented Dr Pollak from complying with the bankruptcy notice. It was claimed that in a practical sense it would be impossible to sell assets and receive payments for them within two days after complying with the requirement to give 19 days notice. Therefore, this was an alternate ground upon which the petition should be dismissed. 18 For the Bank, Mr Reeves submitted that the agreement should be construed having regard to the surrounding circumstances and taking into account not only the express words used in the instrument but also any terms which can properly be implied. It was claimed that it is not necessary, for an agreement to constitute a covenant not to sue rather than a release, that there be an express reservation of rights. Further, it was submitted that an agreement will not be construed as a release as opposed to a covenant not to sue unless it is plain that the agreement was intended to so operate: courts generally construe a release as a covenant not to sue if it contains an indication of intention that the other debtors are not to be discharged and lean against other debtors being discharged; the agreement is usually construed either as a covenant not to sue the released debtor or as a release of that debtor but subject to an implied reservation of rights against the other debtors. Accordingly, it was submitted that the

agreement, properly construed, both prior to and after the variation, reserved the Bank's rights against Dr Pollak. 19 Addressing the agreement as varied, Mr Reeves submitted that, prior to the matters in clauses 1 to 4 of the agreement having been completed, the agreement was varied so as to include the express reservation of rights by the Bank against Dr Pollak. Clause 8 of the agreement makes clear that it was only once clauses 1 to 4 were complied with that the Bank would release Mrs Stern from the debt. In order to ascertain whether or not the agreement gave rise to a release in the strict sense as distinct from a covenant not to sue, it is necessary to construe the agreement as at the time the claimed alteration of rights arose, namely upon the matters in clauses 1 to 4 having been completed. At that time, it was submitted, the agreement contained the express reservation of the Bank's rights against Dr Pollak and accordingly the release should be construed as a covenant not to sue Mrs Stern. 20 In relation to the debtor's contention that the agreement constituted per se an accord and satisfaction of the sums owed to the Bank, Mr Reeves submitted that the agreement between Mrs Stern and the Bank was and remained an accord executory until satisfaction was provided, through completion of the matters in clauses 1 to 4. So long as the accord was executory, all the Bank's rights remained alive and unimpaired. The accord remained executory until after the agreement was varied by the inclusion of the express reservation of the Bank's rights. 21 In the alternative, looking at the agreement without any variation, it was submitted that it contained an implied reservation of rights against Dr Pollak: the agreement provided in clause 8 that the Bank would release Mrs Stern from the debt rather than indicating that the Bank would release the debt generally; and the agreement clearly only dealt with the position of Mrs Stern and not Dr Pollak. At the time the agreement was entered into, Mrs Stern was well aware that the dispute between Dr Pollak and the Bank was alive and that the Bank was seeking to enforce the judgment against Dr Pollak, which he was resisting. Accordingly, properly construed in the light of all the circumstances, the agreement should be regarded as not evidencing any intention by the Bank to release Dr Pollak. 22 If the Court should rule that, on its own terms, the agreement contemplated a release in the strict sense, the Bank contended that the agreement nevertheless contemplated that the parties would enter into a further instrument to give effect to the release: see clause 8. Terms of Settlement were in fact entered into by the parties pursuant to clause 11. The agreement should therefore be read in conjunction with the Terms of Settlement. Clause 12 of the Terms of Settlement, it was submitted, made clear that the Bank covenanted not to enforce the judgment against Mrs Stern and clause 16 expressed a clear reservation of the Bank's rights against Dr Pollak. 23 It was further submitted by the Bank, in the alternative, that the Bank's rights against both Dr Pollak and Mrs Stern arose from a judgment of this Court, which is a higher species of obligation than a debt arising under contract or deed, and a judgment remains valid and effective until set aside by the Court itself. The judgment against Dr Pollak which was at issue in these proceedings had never been set aside; nothing in the Terms of Settlement dealt with Tamberlin J's orders of 19 November 1999 as to the judgment debt, and therefore, it was claimed, it remained valid and effective against both judgment debtors. As a result insofar as the Bank purported to release Mrs Stern in the agreement, this could not cancel or rescind her obligation under the judgment which remains on foot. The agreement must be construed as merely an agreement on the part of the Bank not to enforce the judgment against her, which was indeed what the Terms of Settlement provided. 24 In relation to the Mareva injunction, it was submitted that the issue is whether, as a matter of ordinary fairness in business, it could be said that the order, in a practical business sense, really had prevented the debtor from making any payments in response to the bankruptcy notice. The Bank submitted that the onus lay with Dr Pollak to answer that in the affirmative. Dr Pollak had not proven that the order actually did prevent him from making the necessary payments and, in any case, if Dr Pollak was willing to make the required payments he could have acted promptly and given the required notice which would have expired prior to the time by which he had to comply with the bankruptcy notice.

An accord executory, accord and satisfaction, or accord and conditional satisfaction 25 The construction of the agreement is highly dependant on whether it is proper to have regard to the clause later added to the agreement, providing for an express reservation of the Bank's rights against Dr Pollak. This raises the question of whether the agreement was an accord and satisfaction, accord executory or something else. An accord executory and an

accord and satisfaction were distinguished by Dixon J (Starke and McTiernan JJ agreeing) in McDermott v Black (1940) 63 CLR 161 (at 183-184): "The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one." After referring to British Russian Gazette Ltd v Associated Newspapers Ltd (1939) 2 KB 616, Dixon J continued (at 184-185, citations omitted): "The case, therefore, provides no more than a late illustration of the doctrine, finally established perhaps by Flockton v Hall, that of accord and satisfaction there are two cases, one where the making of the agreement itself is what is stipulated for, and the other, where it is the doing of the things promised by the agreement. The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, things or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed." This distinction was reaffirmed by Gummow J, Gaudron J agreeing, in Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574 at 610. 26 However, since the decision in McDermott, a third species of agreement has been said to exist, an accord and conditional satisfaction. This was recognised by the Victorian Court of Appeal in Osborn v McDermott [1998] 3 VR 1. Phillips JA, with Winneke P and Charles JA agreeing, stated (at 10-11): "Thus there are three possibilities, not two. First, there is the mere accord executory which, on the authorities, does not constitute a contract and which is altogether unenforceable, giving rise to no new rights and obligations pending performance and under which, when there is performance (but only when there is performance), the plaintiff's existing cause of action is discharged. Secondly, at the other end of the scale is the accord and satisfaction, under which there is an immediate and enforceable agreement once the compromise is agreed upon, the parties agreeing that the plaintiff takes in satisfaction of his existing claim against the defendant the new promise by the defendant in substitution for any existing obligation. Somewhere between the two, there is the accord and conditional satisfaction, which exists were the compromise amounts to an existing and enforceable agreement between the parties for performance according to its tenor but which does not operate to discharge any existing cause of action unless and until there has been performance. Where there is a mere accord executory, no suit can be maintained upon the compromise unless and until there has been performance, and then suit is ordinarily unnecessary. Upon default in performance, the plaintiff's existing cause of action continues unaffected. With accord and satisfaction, either party may sue upon the compromise, but only on the compromise and for nothing else: the original cause of action has gone. Where there is accord and conditional satisfaction, the plaintiff is bound to await performance and accept it if tendered, but if there be no performance, then the plaintiff may proceed according to general principles called into play when any agreement is repudiated: the plaintiff may either treat the agreement (the accord) as at an end and proceed on his original cause of action; or he may, at his option, sue on the compromise agreement, in place of the original cause of action. Thus, the consequences should there be default in performance varies according to the case and…it would be surely in the best interests of the parties if their legal advisers saw to it, when settling litigation, that the intended consequence upon default was clearly expressed and not left to implication." Cooper J applied this approach in Bartlett v Mouncey [1998] FCA 418. I believe, with respect, that the analysis is both valid and serves commercial needs and convenience. 27 In my opinion, when the agreement was initially entered into on 11 September 2000 the agreement was an accord and conditional satisfaction rather than an accord and satisfaction as submitted by counsel for Dr Pollak or an accord executory as counsel for the Bank submitted. 28 The key part of the agreement which is fatal to the contention that the agreement is an accord and satisfaction is clause 8, which provides that "[u]pon the matters in paragraphs 1 to 4 of this agreement being completed, the Bank will immediately execute Terms of Settlement" (emphasis added) which, when accepted by the Court would have the effect of releasing Mrs Stern from the debt and any other orders of the Court. Thus, any variation of the legal rights between the Bank and Mrs Stern would come about only after (a) Mrs Stern had discharged her obligations under clauses 1 to 4 of the agreement, and (b) the parties had entered into a further document. There was no clause in the agreement which in any way either purported forthwith to release Mrs Stern from the judgment debt or that could, on the face of the agreement, be construed as a covenant not to sue. 29 On the other hand, the agreement was more than a mere accord executory. There were immediately imposed upon Mrs Stern, for valuable consideration, obligations sufficient to characterise the agreement as enforceable in itself, albeit that it did not thereupon discharge Mrs Stern's liability to the Bank. Pursuant to clause 6, the consideration Mrs Stern gave was her agreement to forego all rights to appeal in respect of the subject judgment. In addition, she granted the Bank an equitable interest in a number of properties by virtue of clause 5. To that extent, if Mrs Stern met her obligations under the agreement, she would, if the Bank failed then to enter into the Terms of Settlement, have remedies under the law of contract. Likewise, if Mrs Stern defaulted in her obligations under the agreement, the Bank could choose between enforcing its rights under the agreement or proceeding further in relation to the judgment debt it already had obtained. Further, clause 7 facilitated the Bank's enforcement of the equitable interest arising under the agreement, which as noted in Osborne, is a provision of the kind one would expect to find in an agreement which is an accord and conditional satisfaction. 30 Accordingly, at the time the agreement was entered into it was an accord and conditional satisfaction, resulting in the Bank's cause of action against both Mrs Stern and Dr Pollak not having been discharged. The agreement was varied on 21 February 2001. As at that date, Mrs Stern had still not complied with the requirements set out in clauses 1 to 4 of the agreement: at that time the agreement as varied was still an accord and conditional satisfaction but now subject to the Bank's express reservation of its position in relation to Dr Pollack. Therefore, when the Bank's capacity to pursue the judgment against Mrs Stern was actually extinguished, the agreement had in it the express reservation of the Bank's rights against Dr Pollak. It is at this time that it needs to be determined whether the agreement released Mrs Stern and, therefore also released Dr Pollak or whether it should be construed merely as a covenant not to sue Mrs Pollak.

A release or a covenant not to sue 31 In Re EWA [1901] 2 KB 624 Collins LJ, Rigby LJ agreeing, held, in relation to a joint and several judgment debt arising from a guarantee given by two co-sureties, one of whom was released by agreement (at 648-9): "The question really turns on this, whether or not this document has the effect of accord and satisfaction in getting rid of the joint and several liability of B under the judgment. If it has that effect, it is not disputed that the rule of law applies, namely, that the release of one of two joint debtors has the effect of releasing the other. … It is clear that, although a document in terms purports to release one of two joint debtors, yet it may contain in terms a reservation of rights against the other joint debtor. Where you find these two propositions, you construe the document, not as a release, but merely as an undertaking not to sue a particular individual, and the result is that the right to proceed against the co-debtor is reserved and can be put in force against him." Collins LJ observed that the fact that a creditor giving a release to a co-debtor may not have been aware of the legal consequences is not a reason to construe the agreement as if it contained a reservation which it did not. However, Collins LJ acknowledged that surrounding circumstances could be such as to give rise to grounds for inferring an implied reservation of rights against other debtors. 32 In Deanplan Ltd v Mahmoud [1993] Ch 151 at 170 Judge Paul Baker QC said: "A covenant not to sue is not a release. It is merely a contract between the creditor and the joint debtor which does not affect the liabilities of the other joint contractors or their rights of contribution or indemnity against their co-contractor. It is a question of construction of the contract between the creditor and joint debtor in the light of surrounding circumstances whether the contract amounts to a release or merely a contract not to sue." 33 Re EWA was followed by McLelland CJ in Eq. in Dorgal v Buckley (1996) 22 ACSR 154. However, his Honour added a qualification to the principles espoused in the earlier case (at 167): "The rule is subject to a qualification, namely that if, on the true construction of the instrument in which it appears, that which purports to be a release of one of several joint (or joint and several) debtors was intended not to operate as a release of the whole obligation by reason that other debtors jointly (or jointly or severally) liable with the debtor purportedly released were intended to remain liable, then it will be treated not as a release in the strict sense, but as a covenant not to sue the debtor purportedly released". (emphasis added) I respectfully agree. The intention may be evidenced by an express term or by implication: Gardiner v Moore (No. 2) [1969] 1 QB 55 at 94, State of New South Wales v McCloy Hutcherson Pty Ltd (1993) 43 FCR 489 at 495, Murray-Oates v JJADD Pty Ltd (1999) 76 SASR 38 at 54. 34 These authorities make it clear that an agreement will not be construed as a release as opposed to a covenant not to sue unless it is plain that the agreement was intended to operate as a release. The inclusion of the clause providing for the reservation by the Bank of its rights against Dr Pollak and an acknowledgment of this by Mrs Stern, is a clear manifestation of an intention on the part of the parties to the agreement that there would not be a release of either Mrs Stern or Dr Pollak but rather that the Bank was, in substance, covenanting not to sue Mrs Stern. In addition to that specific clause there is a number of other factors which lend support to the conclusion that the agreement was a covenant not to sue. The agreement was between Mrs Stern and the Bank and the recitals made it clear that the purpose of the agreement was to avoid the necessity of the Bank initiating and prosecuting bankruptcy proceedings against Mrs Stern, that is to say, to sue in respect of its rights as a judgment creditor. 35 Furthermore, the surrounding circumstances which are relevant in the construction of such an agreement support construing the agreement as a covenant not to sue. Mrs Stern was well aware that the Bank was seeking to have a bankruptcy notice served upon Dr Pollak. The Bank's solicitors had inquired from her solicitor whether she was aware of his whereabouts, in order to serve him. Mrs Stern was also aware that Dr Pollak had initiated proceedings seeking special leave to appeal in the High Court against the judgment of the Full Court of this Court which affirmed the decision of Tamberlin J, and she had indicated that, although she had agreed to be named as an applicant this was only done so as not prejudice Dr Pollak's position, she herself being committed to reaching a commercial settlement with the Bank. Finally, the Terms of Settlement contemplated by the agreement provided in clause 13 that the Bank "covenants not to take any step to enforce the Judgments" against Mrs Stern. These various factors, viewed in the light of modern judicial authority which propounds a need for caution in construing an agreement with one debtor as a release where there are other jointly and severally liable debtors, point to the conclusion that the

agreement should be regarded not as a release in the strict sense but rather as a covenant not to sue. 36 Accordingly, this challenge to the creditor's petition is not made out and it is strictly unnecessary to deal with the other submissions raised by counsel for the Bank. 37 Although it need not be determined conclusively in these proceedings, I note but for clear Australian authority, I should as a matter of principle have been attracted to the proposition that a party's liability under a final judgment for payment of a money sum is not able to be discharged by mere agreement between the parties that that will be so. The obligation to pay the money has merged in the judgment, and has ceased to have a consensual source. In order not to frustrate the evident, joint wishes of the parties to an agreement speaking inaccurately of "release" from a judgment debt, the court would construe the agreement as a covenant not to enforce, or otherwise sue upon, the judgment. 38 Mr Aldridge relied upon Walker v Bowry (1924) 35 CLR 48. In that case a bank had obtained judgment against the appellant. He was one of only four sureties who, under a deed of guarantee, had contracted jointly and severally. The appellant who, after judgment against him, was "adjudged insolvent" on the bank's petition later paid about one-third of the payment debt to the bank, which then released him from the debt. He secured the annulment of his insolvency. The appellant then sued one of the co-sureties, the respondent, in substance for contribution. The respondent claimed that the bank's release of the appellant had also released him. Issacs ACJ, Rich J agreeing, quoted with approval the judgment of Lord Cairns LC in Kendall v Hamilton (1879) 4 App Cas 504 (at 55): "It is the right of persons jointly liable to pay a debt to insist on being sued together. If then there are three persons so liable and the creditor sues two of them, and those two make no objection, the creditor may recover judgment against those two. But should he afterwards bring a farther action against the third, that third may justly contend that the three should be sued together.… Nor is it an answer to him to say that whatever he pays on the judgment against himself he may have allowed in account with the others, because he may fairly require, with a view to his right of account or contribution, to have the identity and the amount of the debt constituted and declared in one and the same judgment with his co-contractors. If, therefore, when the third is sued, and required that the other two be joined as parties, the creditor has to admit that he cannot join the other two because he has already recovered a

judgment against them in the same cause of action, this is equivalent to saying that he has disabled himself from suing the third in the way in which the third has a right to be sued." Isaacs ACJ then applied this principle to the facts in that case and said (at 56): "True, Bowry had contracted to pay 'jointly and severally' and not 'jointly.' He had thereby consented to the Bank suing and recovering judgment against Walker severally or jointly, and, even if severely, he undertook to be liable to pay the creditor severally himself. Even if several judgments are obtained, all would be liable. But he did not undertake that Walker should be released and still be liable himself to pay as if he had contracted 'severally' only. So far as the Bank released Walker from his liability to pay the secured debt, the condition of 'joint and several' liability on the faith of which Bowry had entered into his obligation, would have been rendered impossible of observance." Starke J's judgment was to like effect. However, the court held that there had been no release of the respondent as to the amount paid by the appellant: it was only the excess that was released. In the result, the appellant was held entitled to contribution in respect of the amount he had paid. 39 The factual situation in that case was different from the present case. Here, the Bank did not sue only Mrs Stern. Had it done so then, as in Walker, an effectual release of Mrs Stern from liability would, no doubt, have released Dr Pollak also from what would have been merely his still extant contractual liability to the Bank. Dr Pollak was afforded his right to be sued at the same time as, and to preserve every available species of his joint and several liability with, Mrs Stern. Such rights as he had, and any helpful procedural nuances available to him, for contribution from her were completely unimpaired. 40 The capacity of an unwitting creditor inadvertently to release all jointly and severally liable debtors under a contract by releasing one of them should not lightly be held to apply to concurrent liability under a judgment of a court. No consideration of commercial practicality, nor any modern conception of commercial morality favours it. On the contrary, if the doctrine is extended to liability arising under a judgment, it will likely in practice only apply if a legal advisor has acted inadvertently. It will, in any case, tend to bring the courts into disrepute. Why should the delinquent debtors get a windfall when the court has decreed otherwise?

The effect of the Mareva injunction 41 Dr Pollak contended that the Mareva injunctions imposed by Tamberlin J had the effect of staying the judgment under which the Bank issued the bankruptcy notice and therefore the notice should never have been issued. Alternatively, it would not be just to make a sequestration order if the petitioning creditor had caused the debtor to be under a legal constraint that adversely affected his ability to comply with the bankruptcy notice. The former submission relied upon s 41(3)(b) of the Act which provides: "A bankruptcy notice shall not be issued in relation to a debtor if, at the time of the application for its issue, execution of the judgment or order to which it relates has been stayed." It is enough to consider the substance of the matter. 42 The onus of establishing that the Mareva injunction prevented Dr Pollak from complying with the bankruptcy notice and thereby effectively staying the judgment debt lies upon him: Boscolo v Botany Council [1996] FCA 897, Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572 at 586, Deputy Commissioner of Taxation v Stuart-Jones (2000) 45 ATR 33 at 41. 43 There is a large body of authority dealing with the matter. The majority of Australian authority on this issue draws upon the judgment of Lord Esher MR in Re Sedgwick; Ex parte Sedgwick (1888) 5 Morr 262 in which his Lordship held (at 263-264): "there is an equity laid down - a just equity which goes to the extent only that if a creditor gives a notice requiring payment in seven days and actually and in fact prevents the debtor from paying, such creditor cannot rely upon the notice and it will be set aside. The question is whether in the eyes of any person of ordinary fairness in business it will be said that the creditor has in a business sense prevented the debtor from paying. But the possibility that he may have prevented him is not sufficient. The question is whether the creditor has done something which prevents the debtor in fact from complying with the summons. He may do so in different ways. He may put a legal difficulty in the debtor's way, and although he puts no legal difficulty he may have done something which in fact may prevent payment. The question must be whether he has in fact prevented the debtor from complying. The fact that the creditor has made it more difficult for the debtor to pay than if the creditor had done nothing at all does not go to that extent."

From this has grown a body of jurisprudence to the effect that conduct of a judgment creditor which prevents a debtor from being able to pay the debt may operate to prevent the creditor from proceeding to immediate execution or the issuance of a bankruptcy notice. 44 In Re Solomon; Ex parte Reid (1986) 10 FCR 423 Beaumont J expanded the principle in s 41(3)(b) beyond an actual stay order of the Court to include other orders which could be taken by their operation to stay the judgment debt. In that case, a receiver was appointed by the Supreme Court of New South Wales to deal with the debtor's property and, subsequent to that, a creditor's petition was filed in this Court. Beaumont J held (at 425-428, citations omitted): "It is well established that, for the purposes of s 41(3)(b), execution is deemed to have been stayed where a judgment creditor is not 'in a position to issue immediate execution upon it'. It is also trite law that a judgment creditor may not, without leave of the court which appointed the receiver, levy execution against the property comprised in the appointment of the receiver. … Since, at the time of the issue of the bankruptcy notice, no leave has been obtained from the Supreme Court permitting the petitioning creditor to levy execution against any of the debtor's property it must follow that the prohibition contained in s 41(3)(b) applies with the consequence that the bankruptcy notice was bad. … A similar approach had earlier been taken by Lord Esher in Re Sedgwick; Ex parte Sedgwick. It was held that a judgment creditor who had obtained a charging order on certain shares belonging to the debtor was entitled to issue a bankruptcy notice. Lord Esher said (at 264): 'If all that the creditor has done is to make it more difficult but not to prevent the payment it does not come within the equity.' … There is no reason, of logic or otherwise, to limit the operation of s 41(3)(b) to cases where the debtor can establish an 'equity'. In my opinion, the existence of any relevant circumstance sufficient to disentitle a judgment creditor from proceeding immediately to execution falls within the implied prohibition contained in s 41(3)(b)". This approach was applied by a Full Court of this Court in Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568. There, it was held that an order of the Court, at the instigation of a petitioner, appointing a Registered Trustee to take control of the debtor's property was deemed to have stayed the execution on the judgment at the time of issue of the bankruptcy notice by another creditor. 45 The effect of a Mareva injunction was specifically dealt with by Heerey J in Re Ousley; Ex parte Commissioner of Taxation (1994) 48 FCR 131. In that case, the creditor obtained in the Supreme Court of Victoria a Mareva injunction against the debtor and, whilst that injunction was in place, a warrant of seizure and sale was issued out of the Supreme Court at the request of the petitioning creditor. This warrant was returned unsatisfied and pursuant to s 40(1)(d) this was the act of bankruptcy upon which the petitioning creditor relied. Heerey J, noting the difference between the failure to comply with a bankruptcy notice and the return of process unsatisfied, held that the "existence of a Mareva injunction does not … impose similar restrictions on execution". His Honour noted that the principle underlying a Mareva injunction is to prevent an abuse of the court's processes by the disposition of assets preventing the enforcement of the court's orders and that the purpose of such injunctions was to aid in execution. 46 The issue was again raised in Wiltshire-Smith, also in the context of the appointment of a receiver by a court over some of the property of the debtor. A Full Court of this Court, after referring to the authorities mentioned above, held (at 586-590): "Once it is recognised that a petitioning creditor may be disqualified from issuing a bankruptcy notice by reason of a restraint imposed by order of a court on all the property of the judgment debtor thereby removing his ability to make payment, there is no reason why a court order imposed on some only of the property of the judgment debtor which has the same practical effect should not be recognised as a relevant circumstance sufficient to disentitle a judgment creditor from proceeding immediately to execution. In our opinion such an order will have this consequence where in practical reality, although not strictly in law, the order 'in any way prevent(s) the debtor from paying his debt' (In re Bond; Ex parte Capital and Countries Bank, Ltd at 991) or where it 'deprives or may well deprive the judgment debtor of assets which he could otherwise use to pay the judgment creditor and thus comply with the bankruptcy notice' (Wallace v Trade Credits Ltd at 254). To adapt the test proposed by Lord Esher MR in In re Sedgwick; ex parte Sedgwick … the factual enquiry to determine the practical effect of the order is whether in the eyes of ordinary fairness in business it will be said that the order has in a business sense prevented the debtor from paying." … [The] principle is invoked where the practical effect of the Court order is to deprive the judgment debtor of access to assets that could otherwise be used to pay the judgment creditor. The principle assumes that there are assets in existence at the relevant time which would, but for the order, be available to the debtor for use to pay the debt. In its broad form, the appellant's argument asserts that the Family Court order had the effect of depriving him of all assets long before the bankruptcy notice was issued. If he were at that date without assets over which the order continued to impose a restraint, his inability to pay the debt would be due not to the continuing effect of the order but to his lack of means." (emphasis added) 47 A similar approach was followed by another Full Court in Boscolo, dealing with an order by the Family Court preventing disposition of the debtor's assets. Jenkinson J (with whom O'Loughlin J agreed) confirmed that the factual inquiry needed, was to determine whether the practical effect of the court's order, in "the eyes of ordinary fairness in business" had in a business sense prevented the debtor from being able to pay the debt. Sackville J drew a possible distinction in the application of the law where an order affects only part of a debtor's property. However, that matter is not presently relevant as the Mareva injunction related to all of Dr Pollak's property. 48 Finally, in Re Ling; Ex parte Enrobook Pty Ltd (1996) 142 ALR 87 Lehane J concluded that a Mareva injunction did not constitute a stay of execution invalidating a bankruptcy notice. His Honour noted the difference between the authorities as to court appointed receivers and trustees and a Mareva injunction and stated (at 92-93, citations omitted): "[A Mareva injunction] deprives the party subject to its restraint neither of title to nor of possession of the property to which it extends. It does not create a security interest, confer priority or in any sense rewrite insolvency law; it is an order in personam restraining the party to whom it is directed from disposing of assets or removing them from the reach of creditors. The administration of the property is not placed in the hands of a receiver, trustee or other officer of the court, nor is it assumed by the court itself. For those reasons, to speak of a Mareva injunction as "freezing" assets may, with respect, be somewhat misleading: it operates as a personal restraint against the party to whom it is directed. It is perhaps not insignificant that in Wiltshire‑Smith, a case where a receiver had been appointed, the Court's observations were directed to orders which imposed 'a restraint ... on ... property of the judgment debtor'. … More importantly, however, the purpose of a Mareva injunction is to prevent a defendant from dissipating assets, or putting them beyond the reach of creditors, in circumstances where there is a real fear that, unless restrained, the defendant will do so. Its purpose is not to prevent creditors from exercising their rights. And the way in which such an injunction is commonly framed … reflects the limited purpose: all it does in terms is restrain, [a person] from dealing with assets." 49 In dismissing the appeal from the judgment of Lehane J the Full Court (in Ling v Enrobook Pty Ltd (1997) 74 FCR 19 said (at 28, citations omitted): "Counsel for the appellant submitted that [a passage from Wiltshire-Smith] established a 'new jurisprudence' and that it was sufficient for a debtor, in answer to a claim based upon a bankruptcy notice, to show that a circumstance had arisen which had deprived the debtor of assets which he could otherwise have used to pay the judgment creditor. However, the comments of their Honours should be read in the context with which their Honours were dealing. Their Honours were considering a receivership. This had been brought about by a creditor other than the judgment creditor. Thus, no 'equity' arose by reason of the conduct of the judgment creditor. However, as their Honours pointed out, once the receiver had been appointed, the judgment creditor could not levy execution upon the assets which were in the receiver's hands. The particular point with which their Honours dealt, in the passage we have cited, is that, although the receiver had not been appointed to take control of all the assets of the debtor, the receivership covered sufficient of the debtor's assets to prevent payment of the judgment debt. … The 'restraint imposed by an order of a court' relied upon by the present appellant is the effect of Lockhart J's orders of 2 December 1993… They are in the nature of a Mareva injunction. In considering this matter, Lehane J referred to the decision of Heerey J in Re Ousley …. In that case his Honour expressed the opinion that a Mareva injunction does not impose on execution similar restrictions to those imposed by the appointment of a receiver or a trustee to control the debtor's property… We find the analysis of Heerey J in Re Ousley persuasive. We do not need to consider whether there is any conflict between the approach of the Full Court in the passage set out above from the Wiltshire-Smith Case and the views expressed by Heerey J in Re Ousley. The passage from Wiltshire-Smith on which the appellant placed reliance speaks of a court order which has 'the same practical effect' as a court order 'removing his ability to make payment' of the judgment debt. It thus assumes an ability to pay the debt absent the court order; or, put another way and in the language of the Full Court, that 'the practical reality' is the 'the order in any way prevent(s) the debtor from paying his debt'. In this case there is no evidence that the Mareva injunction removed the appellant's capacity to pay the judgment debt and the appellant's counsel conceded that it could not be assumed that it did so." 50 Thus a distinction is made between an order which removes the debtor's capacity to pay the judgment debt, as by providing for the pro tem transfer of the control of property to a third party, and an order such as a Mareva injunction, which merely prevents a debtor from dealing with his or her property without giving the requisite notice. Counsel for Dr Pollak urged that, if there is any difference in the reasoning in the decisions of Full Courts of this Court, I should follow the approach in Wiltshire-Smith and Boscolo rather than Ling. However, in my opinion the authorities are not in conflict. 51 There is a clear difference between an order of the Court that vests control of property previously owned by a debtor in a receiver or trustee and one which prevents dealings by the debtor with such property unless the debtor complies with a notice requirement. Property which goes into the hands of a trustee or receiver as in Wiltshire-Smith and Solomon can no longer be dealt with by the debtor. The trustee or receiver is to deal with the property as required either with, as in the case of Solomon, or without leave of the court. Although in Solomon the order was of the Mareva type, a receiver was appointed. That is an unusual course. In such circumstances, had the debtor been able to pay the judgment debt claimed in the bankruptcy notice but for the receivership order, such an order may well be treated as constructively staying execution of the judgment debt. However, the more usual kinds of Mareva injunction, as Lehane and Heerey JJ both noted, are of a very different character. The property the subject of the injunction remains at all times within the debtor's ultimate control and can be dealt with by the debtor once the required notice, 19 days in this case, is given to the party who obtained the injunction. There is also nothing preventing the parties approaching the Court to vary or expunge the notice requirement where the debtor wishes to deal with the property so as to meet debt obligations. 52 The order made by consent by Tamberlin J was that: "Until further order, Dr Pollak be restrained from selling, disposing of or dealing with any interest in any assets whatsoever and wheresoever situated in which he has any interest without giving the solicitor for NAB at least 19 days prior notice." What was said in Ling, Ousley and Boscolo is to be applied. In my opinion, seen through the eyes of ordinary fairness in business, there is nothing in this order that in a business sense practically prevented Dr Pollak from paying the debt he owed to the Bank within 21 days of the bankruptcy notice being served upon him. I do not doubt that the existence of the Mareva injunction would have tended to make compliance with the bankruptcy notice more difficult. However, as the authorities make clear, this in itself does not provide a basis to say that execution of the judgment should be deemed to have been stayed. The mere existence of a Mareva injunction obtained by the judgment creditor is not conduct of such a nature by the Bank that it should be regarded as having prevented Dr Pollak from paying the debt he owed. 53 Further, Dr Pollak has not satisfied the onus he bears of proving that, in fact, in the way matters transpired, the Bank should be deemed by its conduct, in a practical business sense, to have prevented him from, or even to have materially hindered him in, paying the debt. There was no evidence that Dr Pollak had assets which he could have used to satisfy the debt. On the contrary, the transcript of his examination before a Registrar of this Court, which was admitted into evidence, indicated that he had no asset of any substantial value whilst owing, in addition to the debt owed to the Bank, over $1,400,000 to other creditors. There was also no evidence to suggest that Dr Pollak would have been able to raise funds to meet the debt, subject to his dealing with his property in a certain manner, or that he had approached the Bank with a plan which would allow him to meet the debt, or that he had approached the Court to vary the notice requirement. Accordingly, this challenge to the validity of the bankruptcy notice, and/or to the justice of acceding to the petition founded upon that notice, fails.

Disposition 54 For the reasons given, I am satisfied that the debtor, Dr Pollak, committed the act of bankruptcy alleged in the creditor's petition. I am also satisfied with the proof of the other matters required by s 52 of the Act (which were not in issue). Accordingly, a sequestration order will be made against the estate of Dr Pollak, and there will be an order that applicant creditor's costs be taxed and paid from the estate of Dr Pollak in accordance with the Act. I note that the date of the Act of bankruptcy was 29 November 2000. Pursuant to the Bankruptcy Regulations a copy of the sequestration order will need to be given to the Official Receiver in Sydney within two days. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick.

Solicitor for the Applicant: Mallesons Stephen Jaques

Trade Practices Act 1974(Cth)

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